Q1 2018 10Q

Index

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 10-Q



   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2018



OR



   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





 

 

 

 

For the transition period from  

 

  To  

 

 



Commission file number:  1-3247



CORNING INCORPORATED

(Exact name of registrant as specified in its charter)





 

 

 

 



New York

 

16-0393470

 



(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 



 

 

 

 



One Riverfront Plaza, Corning, New York

 

14831

 



(Address of principal executive offices)

 

(Zip Code)

 



607-974-9000

(Registrant’s telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.



 

 

 

 

 

 



Yes

 

No

 



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



 

 

 

 

 

 



Yes

 

No

 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



 

 

 

 

 

 



Large accelerated filer

 

Accelerated filer

 



Non‑accelerated filer

(Do not check if a smaller reporting company)

 

 



Smaller reporting company

 

Emerging growth company

 



If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.



 

 

 

 

 

 



Yes

 

No

 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



 

 

 

 

 

 



Yes

 

No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.





 

 

 

 



Class

 

Outstanding as of April 13, 2018

 



Corning’s Common Stock, $0.50 par value per share

 

830,348,853 shares

 

 

© 2018 Corning Incorporated. All Rights Reserved.

1


 

Index

 

 

INDEX





 

 

PART I – FINANCIAL INFORMATION



 

Page

Item 1. Financial Statements

 

 



 

 

Consolidated Statements of (Loss) Income (Unaudited) for the three months ended March 31, 2018 and 2017

 

3



 

 

Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the three months ended March 31, 2018 and 2017

 

4



 

 

Consolidated Balance Sheets (Unaudited) at March 31, 2018 and December 31, 2017

 

5



 

 

Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2018 and 2017

 

6



 

 

Notes to Consolidated Financial Statements (Unaudited)

 

7



 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23



 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

40



 

 

Item 4. Controls and Procedures

 

40



 

 

PART II – OTHER INFORMATION

 

 



 

 

Item 1. Legal Proceedings

 

41



 

 

Item 1A.  Risk Factors

 

41



 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

42



 

 

Item 6. Exhibits

 

43



 

 

Signatures

 

44

 

© 2018 Corning Incorporated. All Rights Reserved.

2

 


 

Index

 

CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(Unaudited; in millions, except per share amounts)









 

 

 

 

 

 



 

 

 

 

 

 

   

 

Three Months Ended



 

March 31,

   

 

2018

 

2017

Net sales

 

$

2,500 

 

$

2,375 

Cost of sales

 

 

1,545 

 

 

1,424 



 

 

 

 

 

 

Gross margin

 

 

955 

 

 

951 



 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

501 

 

 

319 

Research, development and engineering expenses

 

 

241 

 

 

202 

Amortization of purchased intangibles

 

 

19 

 

 

17 



 

 

 

 

 

 

Operating income

 

 

194 

 

 

413 



 

 

 

 

 

 

Equity in earnings of affiliated companies

 

 

39 

 

 

80 

Interest income

 

 

13 

 

 

12 

Interest expense

 

 

(52)

 

 

(37)

Translated earnings contract loss, net

 

 

(622)

 

 

(438)

Other expense, net

 

 

(37)

 

 

(10)



 

 

 

 

 

 

(Loss) income before income taxes

 

 

(465)

 

 

20 

(Provision) benefit for income taxes (Note 5)

 

 

(124)

 

 

66 



 

 

 

 

 

 

Net (loss) income attributable to Corning Incorporated

 

$

(589)

 

$

86 



 

 

 

 

 

 

(Loss) earnings per common share attributable to
Corning Incorporated:

 

 

 

 

 

 

Basic (Note 6)

 

$

(0.72)

 

$

0.07 

Diluted (Note 6)

 

$

(0.72)

 

$

0.07 



 

 

 

 

 

 

Dividends declared per common share 

 

$

0.18 

 

$

0.155 



The accompanying notes are an integral part of these consolidated financial statements.

 

© 2018 Corning Incorporated. All Rights Reserved.

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Index

 

 

CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited; in millions)









 

 

 

 

 

 



 

 

 

 

 

 

   

 

Three Months Ended

   

 

March 31,

   

 

2018

 

2017

   

 

 

 

 

 

 

Net (loss) income attributable to Corning Incorporated

 

$

(589)

 

$

86 



 

 

 

 

 

 

Foreign currency translation adjustments and other

 

 

264 

 

 

450 

Net unrealized gains on investments

 

 

 

 

 

Unamortized gains (losses) and prior service credits
  for postretirement benefit plans

 

 

 

 

Net unrealized gains on designated hedges

 

 

 

 

 

26 

Other comprehensive income, net of tax (Note 13)

 

 

265 

 

 

480 



 

 

 

 

 

 

Comprehensive (loss) income attributable to Corning Incorporated

 

$

(324)

 

$

566 



The accompanying notes are an integral part of these consolidated financial statements.

 

© 2018 Corning Incorporated. All Rights Reserved.

4

 


 

Index

 

CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited; in millions, except share and per share amounts)







 

 

 

 

 

 

   

 

March 31,

 

December 31,



 

2018

 

2017

Assets

 

 

 

 

 

 



 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,096 

 

$

4,317 

Trade accounts receivable, net of doubtful accounts and allowances - $61 and $60

 

 

1,747 

 

 

1,807 

Inventories, net of inventory reserves - $161 and $169 (Note 7)

 

 

1,834 

 

 

1,712 

Other current assets

 

 

986 

 

 

991 

Total current assets

 

 

7,663 

 

 

8,827 



 

 

 

 

 

 

Investments

 

 

345 

 

 

340 

Property, plant and equipment, net of accumulated depreciation - $11,265 and $10,809

 

 

14,416 

 

 

14,017 

Goodwill, net (Note 8)

 

 

1,698 

 

 

1,694 

Other intangible assets, net (Note 8)

 

 

851 

 

 

869 

Deferred income taxes (Note 5)

 

 

909 

 

 

813 

Other assets

 

 

952 

 

 

934 



 

 

 

 

 

 

Total Assets

 

$

26,834 

 

$

27,494 

   

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 



 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt and short-term borrowings

 

$

380 

 

$

379 

Accounts payable

 

 

1,164 

 

 

1,439 

Other accrued liabilities (Note 3 and Note 10)

 

 

1,451 

 

 

1,391 

Total current liabilities

 

 

2,995 

 

 

3,209 



 

 

 

 

 

 

Long-term debt (Note 4)

 

 

4,808 

 

 

4,749 

Postretirement benefits other than pensions (Note 9)

 

 

746 

 

 

749 

Other liabilities (Note 3 and Note 10)

 

 

3,797 

 

 

3,017 

Total liabilities

 

 

12,346 

 

 

11,724 



 

 

 

 

 

 

Commitments, contingencies and guarantees (Note 3)

 

 

 

 

 

 

Shareholders’ equity (Note 13):

 

 

 

 

 

 

Convertible preferred stock, Series A – Par value $100 per share;
  Shares authorized 3,100; Shares issued: 2,300

 

 

2,300 

 

 

2,300 

Common stock – Par value $0.50 per share; Shares authorized 3.8 billion;
  Shares issued: 1,709 million and 1,708 million

 

 

854 

 

 

854 

Additional paid-in capital – common stock

 

 

14,119 

 

 

14,089 

Retained earnings

 

 

15,166 

 

 

15,930 

Treasury stock, at cost; Shares held: 877 million and 850 million

 

 

(17,449)

 

 

(16,633)

Accumulated other comprehensive loss

 

 

(577)

 

 

(842)

Total Corning Incorporated shareholders’ equity

 

 

14,413 

 

 

15,698 

Noncontrolling interests

 

 

75 

 

 

72 

Total equity

 

 

14,488 

 

 

15,770 



 

 

 

 

 

 

Total Liabilities and Equity

 

$

26,834 

 

$

27,494 



The accompanying notes are an integral part of these consolidated financial statements. 

© 2018 Corning Incorporated. All Rights Reserved.

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Index

 

 

CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in millions)







 

 

 

 

 

 



 

 

 

 

 

 

   

 

Three Months Ended



 

March 31,

   

 

2018

 

2017

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net (loss) income

 

$

(589)

 

$

86 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation

 

 

304 

 

 

260 

Amortization of purchased intangibles

 

 

19 

 

 

17 

Equity in earnings of affiliated companies

 

 

(39)

 

 

(80)

Dividends received from affiliated companies

 

 

 

 

 

34 

Deferred tax provision (benefit)

 

 

16 

 

 

(121)

Customer incentives and deposits

 

 

276 

 

 

 

Translated earnings contract loss

 

 

622 

 

 

438 

Unrealized translation gains on transactions

 

 

(63)

 

 

(67)

Changes in certain working capital items:

 

 

 

 

 

 

Trade accounts receivable

 

 

94 

 

 

(54)

Inventories

 

 

(98)

 

 

(49)

Other current assets

 

 

(92)

 

 

(60)

Accounts payable and other current liabilities

 

 

(162)

 

 

(230)

Other, net

 

 

32 

 

 

17 

Net cash provided by operating activities

 

 

320 

 

 

191 



 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Capital expenditures

 

 

(655)

 

 

(364)

Acquisition of business, net of cash received

 

 

 

 

 

(35)

Realized gains on translated earnings contracts

 

 

13 

 

 

80 

Other, net

 

 

(2)

 

 

(7)

Net cash used in investing activities

 

 

(644)

 

 

(326)



 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

Principal payments under capital lease obligations

 

 

(1)

 

 

 

Payments of employee withholding tax on stock awards

 

 

(2)

 

 

(2)

Proceeds from the exercise of stock options

 

 

21 

 

 

182 

Repurchases of common stock for treasury

 

 

(800)

 

 

(400)

Dividends paid

 

 

(177)

 

 

(168)

Net cash used in financing activities

 

 

(959)

 

 

(388)

Effect of exchange rates on cash

 

 

62 

 

 

76 

Net decrease in cash and cash equivalents

 

 

(1,221)

 

 

(447)

Cash and cash equivalents at beginning of period

 

 

4,317 

 

 

5,291 

Cash and cash equivalents at end of period

 

$

3,096 

 

$

4,844 





The accompanying notes are an integral part of these consolidated financial statements. 

© 2018 Corning Incorporated. All Rights Reserved.

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CORNING INCORPORATED AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.   Significant Accounting Policies



Basis of Presentation



In these notes, the terms “Corning,” “Company,” “we,” “us,” or “our” mean Corning Incorporated and its subsidiary companies.



The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information.  Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been omitted or condensed.  These interim consolidated financial statements should be read in conjunction with Corning’s consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Form 10-K”).



The unaudited consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows for the interim periods presented.  All such adjustments are of a normal recurring nature.  The results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.



On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09 ASC (Topic 606), Revenue from Contracts with Customers, and applied the modified retrospective method of accounting to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605 “Revenue Recognition”.  Because the impact of adopting the standard on Corning’s financial statements was immaterial, we have not made an adjustment to opening retained earnings.



One of Corning’s equity affiliates is currently assessing the potential impact of adopting ASU 2014-09 on its financial statements and will adopt the standard on January 1, 2019.  Preliminary analysis indicates that the impact of adoption will not have a material impact on Corning’s financial statements.



On January 1, 2018, Corning adopted ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which refines the classification of certain aspects of the cash flow statement in regards to debt prepayment, settlement of debt instruments, contingent consideration payments, proceeds from insurance claims and life insurance policies, distribution from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows.  The impact of adopting the standard on Corning’s financial statements was not material.  



On January 1, 2018, we adopted ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The service cost component of net periodic pension and postretirement benefit cost is presented with other current compensation costs in operating income.  The remaining components are included in the line item Other expense, net, in the consolidated statements of (loss) income.  Corning has applied the practical expedient which permits it to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirementsThe impact of adopting the standard on Corning’s financial statements was not material.  



Certain prior year amounts have been reclassified to conform to the current-year presentation.  These reclassifications had no impact on our results of operations, financial position, or changes in shareholders’ equity. 



New Accounting Standards



In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes all existing guidance on accounting for leases in ASC Topic 840.  ASU 2016-02 will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income.  This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  ASU 2016-02 is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients.  We are currently assessing the potential impact of adopting this standard on our financial statements and related disclosures.

© 2018 Corning Incorporated. All Rights Reserved.

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Index

 

 

One of Corning’s equity affiliates is currently assessing the potential impact of adopting this standard on its financial statements and elected to adopt the standard on January 1, 2020.



In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income, which allows for reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.  ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods.  Early adoption is permitted. We are currently assessing the potential impact of adopting ASU 2018-02 on our financial statements.



2.   Revenue



On January 1, 2018, we adopted ASC Topic 606 “Revenue from Contracts with Customer”, and all related amendments, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.  Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605 “Revenue Recognition”. 



We have determined that the impact of transition to the new standard is immaterial to our revenue recognition model since the vast majority of our recognition is based on point in time transfer of control.  Accordingly, we have not made any adjustment to opening retained earnings.



Product Revenue (Point in Time)



The majority of our revenues are generated by delivery of products to our customers and recognized at a point in time based on our evaluation of when the customer obtains control of the products.  Revenue is recognized when all performance obligations under the terms of a contract with our customer are satisfied, and control of the product has been transferred to the customer.  If customer acceptance clauses are present and it cannot be objectively determined that control has been transferred, revenue is only recorded when customer acceptance is received and all performance obligations have been satisfied.  Sales of goods typically do not include multiple product and/or service elements.



Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales tax, value-added tax, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.  Incidental contract costs that are not material in the context of the delivery of goods and services are recognized as expense.



At the time revenue is recognized, allowances are recorded, with the related reduction to revenue, for estimated product returns, allowances and price discounts based upon historical experience and related terms of customer arrangements.  Where we have offered product warranties, we also establish liabilities for estimated warranty costs based upon historical experience and specific warranty provisions.  Warranty liabilities are adjusted when experience indicates the expected outcome will differ from initial estimates of the liability.  Product warranty liabilities are not material at March 31, 2018 and December 31, 2017.



Other Revenue (Over Time)



Corning’s over time revenues are mainly related to Telecommunications products, and are comprised of design, install, training and software maintenance services.    The performance obligations under these contracts generally require services to be performed over time, resulting in either a straight-line amortization method or an input method using incurred and forecasted expense to predict revenue recognition patterns which follows satisfaction of the performance obligation.  Corning’s other revenue is inconsequential to our results.



© 2018 Corning Incorporated. All Rights Reserved.

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Index

 

Revenue Disaggregation Table



The following table shows revenues by major product categories, similar to our reportable segment disclosure.  Within each product category, contract terms, conditions and economic factors affecting the nature, amount, timing and uncertainty around revenue recognition and cash flows are substantially similar.  The commercial markets and selling channels are also similar. With the exception of an inconsequential amount of Telecommunications products, our product category revenues are recognized at point in time when control transfers to the customer.  Prior year amounts are presented under the ASC 605 basis of revenue recognition. 







 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,

Revenues by Product Category

 

2018

 

2017

Display products

 

$

732 

 

$

736 



 

 

 

 

 

 

Telecommunication products

 

 

886 

 

 

818 



 

 

 

 

 

 

Specialty glass products

 

 

278 

 

 

300 



 

 

 

 

 

 

Environmental substrate and filter products

 

 

322 

 

 

275 



 

 

 

 

 

 

Life science products

 

 

232 

 

 

210 



 

 

 

 

 

 

All Other

 

 

50 

 

 

36 



 

$

2,500 

 

$

2,375 



 

 

 

 

 

 





Contract Assets and Liabilities



Contract assets, such as costs to obtain or fulfill contracts, are an insignificant component of Corning’s revenue recognition process.  The majority of Corning’s cost of fulfillment as a manufacturer of products is classified as inventory, fixed assets and intangible assets, which are accounted for under the respective guidance for those asset types.  Other costs of contract fulfillment are immaterial due to the nature of our products and their respective manufacturing processes.  



Contract liabilities include deferred revenues, other advanced payments and customer deposits. Deferred revenue and other advanced payments are not significant to our operations and are classified as part of other current liabilities in our financial statements.  Customer deposits are predominately related to Display products and are classified as part of other current liabilities and other long term liabilities as appropriate, and are disclosed below. 



Customer Deposits



As of March 31, 2018, Corning has customer deposits of $682 million, of which $276 million was received in the first quarter of 2018.  These represent non-refundable cash deposits for customers to secure rights to an amount of glass produced by Corning under long-term supply agreements.  The duration of these long term supply agreements range up to ten years. As glass is shipped to customers, Corning will recognize revenue and issue credit memoranda to reduce the amount of the customer deposit liability, which are applied against customer receivables resulting from the sale of glass.  In 2018, 2017 and 2016, no credit memoranda were issued.


Practical Expedients and Exemptions



We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.



We treat shipping and handling fees as a fulfillment cost and not as a separate performance obligation under the terms of our revenue contracts due to the perfunctory nature of the shipping and handling obligations. 

© 2018 Corning Incorporated. All Rights Reserved.

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Index

 

 



3.   Commitments, Contingencies and Guarantees



Asbestos Claims



Corning and PPG Industries, Inc. each owned 50% of the capital stock of Pittsburgh Corning Corporation (“PCC”).  PCC filed for Chapter 11 reorganization in 2000 and the Modified Third Amended Plan of Reorganization for PCC (the “Plan”) became effective in April 2016.  At December 31, 2016, this estimated liability was $290 million, due to the Company’s contribution, in the second quarter of 2016, of its equity interests in PCC and Pittsburgh Corning Europe N.V. (“PCE”) in the total amount of $238 million, as required by the Plan.  A payment of $70 million was made in June 2017.  At March 31, 2018, the total amount of payments due in years 2018 through 2022 is $220 million.  A $35 million payment is due in the second quarter of 2018 and is classified as a current liability.  The remaining $185 million is classified as a non-current liability.



Non-PCC Asbestos Claims Insurance Litigation



Corning is a defendant in certain cases alleging injuries from asbestos unrelated to PCC (the “non-PCC asbestos claims”) which had been stayed pending the confirmation of the Plan.  The stay was lifted on August 25, 2016.  Corning previously established a $150 million reserve for these non-PCC asbestos claims.  The estimated reserve represents the undiscounted projection of claims and related legal fees over the next 20 years.  The amount may need to be adjusted in future periods as more data becomes available; however, we cannot estimate any lesser or greater liabilities at this time.  At March 31, 2018 and December 31, 2017, the amount of the reserve for these non-PCC asbestos claims was $147 million.



Several of Corning’s insurers have commenced litigation in state courts for a declaration of the rights and obligations of the parties under insurance policies related to Corning’s asbestos claims.  Corning has resolved these issues with a majority of its relevant insurers, and is vigorously contesting these cases with the remaining relevant insurers.  Management is unable to predict the outcome of the litigation with these remaining insurers.



Dow Corning Chapter 11 Related Matters



Until June 1, 2016, Corning and The Dow Chemical Company (“Dow”) each owned 50% of the common stock of Dow Corning Corporation (“Dow Corning”). On May 31, 2016, Corning and Dow realigned their ownership interest in Dow Corning.  In connection with the realignment, Corning retained its indirect ownership interest in the Hemlock Semiconductor Group and acquired HS Upstate, Inc. (now known as Corning Research & Development Corporation) which had been capitalized by Dow Corning with $4.8 billion.  Following the realignment, Corning no longer owns any interest in Dow Corning.  In connection with the realignment, Corning  agreed to indemnify Dow Corning for  50% of Dow Corning’s non-ordinary course, pre-closing liabilities to the extent such liabilities exceed the amounts reserved for them by Dow Corning as of May 31, 2016, including two legacy Dow Corning matters: the Dow Corning Breast Implant Litigation, and the Dow Corning Bankruptcy Pendency Interest Claims.



Dow Corning Breast Implant Litigation



In May 1995, Dow Corning filed for bankruptcy protection to address pending and claimed liabilities arising from many thousands of breast implant product lawsuits.  On June 1, 2004, Dow Corning emerged from Chapter 11 with a Plan of Reorganization (the “Plan”) which provided for the settlement or other resolution of implant claims.  The Plan also includes releases for Corning and Dow as shareholders in exchange for contributions to the Plan.



Under the terms of the Plan, Dow Corning has established and is funding a Settlement Trust and a Litigation Facility to provide a means for tort claimants to settle or litigate their claims.  Inclusive of insurance, Dow Corning has paid approximately $1.8 billion to the Settlement Trust.  As of May 31, 2016, Dow Corning had recorded a reserve for breast implant litigation of $290 million.  In the event Dow Corning’s total liability for these claims exceeds such amount, Corning may be required to indemnify Dow Corning for up 50% of the excess liability.

© 2018 Corning Incorporated. All Rights Reserved.

10

 


 

Index

 

Dow Corning Bankruptcy Pendency Interest Claims



As a separate matter arising from the bankruptcy proceedings, Dow Corning is defending claims asserted by a number of commercial creditors who claim additional interest at default rates and enforcement costs, during the period from May 1995 through June 2004.  At March 31, 2018 and December 31, 2017, Dow Corning estimated the liability to commercial creditors to be within the range of $77 million to $260 million.  As of May 31, 2016, Dow Corning had recorded a reserve for these claims of $107 million.  In the event Dow Corning’s liability for these claims exceeds such amount, Corning may be required to indemnify Dow Corning for up 50% of the excess liability, subject to certain conditions and limits. 





Other Commitments and Contingencies



Corning is a defendant in various lawsuits, including environmental and product-related suits, and is subject to various claims that arise in the normal course of business.  In the opinion of management, the likelihood that the ultimate disposition of these matters will have a material adverse effect on Corning’s consolidated financial position, liquidity, or results of operations, is remote.  Other than certain asbestos related claims, there are no other material loss contingencies related to litigation.



Corning has been named by the Environmental Protection Agency (“the Agency”) under the Superfund Act, or by state governments under similar state laws, as a potentially responsible party for 15 active hazardous waste sites.  Under the Superfund Act, all parties who may have contributed any waste to a hazardous waste site, identified by the Agency, are jointly and severally liable for the cost of cleanup unless the Agency agrees otherwise.  It is Corning’s policy to accrue for its estimated liability related to Superfund sites and other environmental liabilities related to property owned by Corning based on expert analysis and continual monitoring by both internal and external consultants.  At March 31, 2018 and December 31, 2017, Corning had accrued approximately $38 million (undiscounted) for the estimated liability for environmental cleanup and related litigation.  Based upon the information developed to date, management believes that the accrued reserve is a reasonable estimate of the Company’s liability and that the risk of an additional loss in an amount materially higher than that accrued is remote.



The ability of certain subsidiaries and affiliated companies to transfer funds is limited by provisions of foreign government regulations, affiliate agreements and certain loan agreements.  At March 31, 2018, the amount of equity subject to such restrictions for consolidated subsidiaries and affiliated companies was not significant.  While this amount is legally restricted, it does not result in operational difficulties since we have generally permitted subsidiaries to retain a majority of equity to support their growth programs.

 

4.   Debt



Based on borrowing rates currently available to us for loans with similar terms and maturities, the fair value of long-term debt was $5.1 billion at March 31, 2018 and December 31, 2017, compared to recorded book values of $4.8 billion at March 31, 2018 and $4.7 billion at December 31, 2017.  The Company measures the fair value of its long-term debt using Level 2 inputs based primarily on current market yields for its existing debt traded in the secondary market.



Corning did not have outstanding commercial paper at March 31, 2018 and December 31, 2017.



© 2018 Corning Incorporated. All Rights Reserved.

11


 

Index

 

 

5.   Income Taxes



Our (provision) benefit for income taxes and the related effective income tax rates were as follows (in millions):





 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2018

 

2017



 

 

 

 

 

 

(Provision) benefit for income taxes

 

$

(124)

 

$

66 

Effective tax rate (benefit)

 

 

26.7% 

 

 

(330.0%)



For the three months ended March 31, 2018, the effective income tax rate differed from the U.S. statutory rate of 21% primarily due to the following:



·

Additional tax expense of $172 million related to a preliminary agreement with the Internal Revenue Service (“IRS”) to settle the income tax audit of years 2013 and 2014; and

·

A reduction in the tax benefit of $37 million from domestic losses attributable to foreign exchange and losses on translated earnings contracts due to the impacts of the base erosion and anti-deferral tax (“BEAT”).



For the three months ended March 31, 2017, the effective income tax benefit differed from the U.S. statutory rate of 35% primarily due to the following benefits:



·

Rate differences on income (loss) of consolidated foreign companies, including the benefit of excess foreign tax credits resulting from the inclusion of foreign earnings in U.S. income; and

·

The impact from domestic losses attributable to foreign exchange and losses on translated earnings contracts.



The Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted on December 22, 2017.  The 2017 Tax Act reduces the U.S. federal corporate income tax rate from 35% to 21%, and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.  We are applying the guidance in SAB 118 when accounting for the enactment-date effects of the Act.  At March 31, 2018, we have not completed our accounting for all of the tax effects of the 2017 Tax Act.  We have made a reasonable estimate of certain effects of the 2017 Tax Act.  However, in other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment.  In all cases, we will continue to make and refine our calculations as additional analysis is completed.  Our estimates may also be affected as we gain a more thorough understanding of the tax law.  These changes could be material to income tax expense.



At year end December 31, 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%.  We recorded a provisional amount of $347 million at that time.  At December 31, 2017, we recorded a one-time toll charge based on our unrepatriated earnings of certain foreign subsidiaries that were previously deferred.  This charge resulted in a provisional tax expense amount of $1.1 billion.  We will continue to analyze and refine our calculations related to the measurement of these balances.



As of March 31, 2018, Corning has not made sufficient progress on estimating the impact of tax reform on its assertion regarding its indefinitely reinvested foreign earnings; therefore, the Company will continue to follow its historic position while it continues to analyze this issue.  While Corning is not changing its assertion at this time, the Company distributed approximately $2 billion in January 2018 from two of its foreign subsidiaries to the U.S. parent of those subsidiaries.  There are no incremental taxes beyond the toll charge due with respect to this distribution of cash.



Under its historic policy, Corning will continue to indefinitely reinvest substantially all of its foreign earnings, with the exception of an immaterial amount of current earnings that have very low or no tax cost associated with their repatriation.  Our current analysis indicates that we have sufficient U.S. liquidity, including borrowing capacity, to fund foreseeable U.S. cash needs without requiring the repatriation of foreign cash.



Under new guidance, a company can make a policy election to account for tax on global intangible low-taxed income (“GILTI”) as a period cost only or to also recognize deferred tax assets and liabilities when basis differences exist that are expected to affect the amount of GILTI inclusion upon reversalCorning’s accounting for the impact of the GILTI provisions of the 2017 Tax Act is incomplete and, as a result, it has not yet elected a policy to account for the GILTI provisions.

© 2018 Corning Incorporated. All Rights Reserved.

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Index

 

We will continue to monitor future guidance and to assess the impacts of the 2017 Tax Act.

Corning has reached a preliminary agreement with the IRS Exam team to resolve the 2013 and 2014 audits.  This agreement resulted in $172 million of additional tax expense in the first quarter of 2018, of which $12 million relates to interest expense, net of tax benefit.  Corning will use tax attributes to cover most of the tax expense. 



6.   (Loss) Earnings per Common Share



The following table sets forth the computation of basic and diluted (loss) earnings per common share (in millions, except per share amounts):







 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2018

 

2017

Net (loss) income attributable to Corning Incorporated

 

$

(589)

 

$

86 

Less:  Series A convertible preferred stock dividend

 

 

24 

 

 

24 

Net (loss) income available to common stockholders – basic

 

 

(613)

 

 

62 

Net (loss) income available to common stockholders – diluted

 

$

(613)

 

$

62 



 

 

 

 

 

 

Weighted-average common shares outstanding – basic

 

 

848 

 

 

925 

Effect of dilutive securities:

 

 

 

 

 

 

Stock options and other dilutive securities

 

 

 

 

 

11 

Weighted-average common shares outstanding – diluted

 

 

848 

 

 

936 

Basic (loss) earnings per common share

 

$

(0.72)

 

$

0.07 

Diluted (loss) earnings per common share

 

$

(0.72)

 

$

0.07 



 

 

 

 

 

 

Antidilutive potential shares excluded from
  diluted earnings per common share:

 

 

 

 

 

 

Series A convertible preferred stock (1)

 

 

115 

 

 

115 

Employee stock options and awards

 

 

11 

 

 

Total

 

 

126 

 

 

117 



 

 

 

 

 

 

(1)

In the three months ended March 31, 2018 and 2017, the Series A convertible preferred stock was anti-dilutive and therefore was excluded from the calculation of diluted earnings per share.



 

7.   Inventories, Net of Inventory Reserves



Inventories, net of inventory reserves comprise the following (in millions):





 

 

 

 

 



 

 

 

 

 



 

March 31,

December 31,



 

2018

2017

Finished goods

 

$

786 

$

739 

Work in process

 

 

340 

 

322 

Raw materials and accessories

 

 

350 

 

306 

Supplies and packing materials

 

 

358 

 

345 

Total inventories, net of inventory reserves

 

$

1,834 

$

1,712 



© 2018 Corning Incorporated. All Rights Reserved.

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Index

 

 

8.  Goodwill and Other Intangible Assets



The carrying amount of goodwill by segment for the periods ended March 31, 2018 and December 31, 2017 is as follows (in millions):



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

Display

 

Optical

 

Specialty

 

Life

 

All

 

 

 



 

Technologies

 

Communications

 

Materials

 

Sciences

 

Other

 

Total

Balance at December 31, 2017

 

$

136 

 

$

671 

 

$

150 

 

$

623 

 

$

114 

 

$

1,694 

Foreign currency translation
   adjustment

 

 

 

 

 

(2)

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

$

136 

 

$

669 

 

$

150 

 

$

627 

 

$

116 

 

$

1,698 



Corning’s gross goodwill balances for the periods ended March 31, 2018 and December 31, 2017 each were $8.2 billion, respectively. Accumulated impairment losses were $6.5 billion for the periods ended March 31, 2018 and December 31, 2017, and were generated primarily through goodwill impairments related to the Optical Communications segment.



Other intangible assets are as follows (in millions):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2018

 

December 31, 2017



 

 

 

 

Accumulated

 

 

 

 

 

 

 

Accumulated

 

 

 



 

Gross

 

amortization

 

Net

 

Gross

 

amortization

 

Net

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents, trademarks, and
   trade names 

 

$

380 

 

$

191 

 

$

189 

 

$

382 

 

$

188 

 

$

194 

Customer lists and other 

 

 

886 

 

 

224 

 

 

662 

 

 

884 

 

 

209 

 

 

675 

Total

 

$

1,266 

 

$

415 

 

$

851 

 

$

1,266 

 

$

397 

 

$

869 



Corning’s amortized intangible assets are primarily related to the Optical Communications and Life Sciences segments.  The net carrying amount of intangible assets decreased in the first quarter of 2018, primarily due to amortization of $19 million, offset by foreign currency translation adjustments of $1 million.



Amortization expense related to these intangible assets is estimated to be $72 million annually for 2019, $71 million annually from 2020 to 2022, and $70 million annually for 2023.

 

9.  Employee Retirement Plans



The following table summarizes the components of net periodic benefit cost for Corning’s defined benefit pension and postretirement health care and life insurance plans (in millions):



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Pension Benefits

 

Postretirement benefits



 

Three months ended

 

Three months ended



 

March 31,

 

March 31,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

25 

 

$

24 

 

$

 

$

Interest cost

 

 

32 

 

 

31 

 

 

 

 

Expected return on plan assets 

 

 

(47)

 

 

(43)

 

 

 

 

 

 

Amortization of prior service
   cost (credit)

 

 

 

 

 

 

(1)

 

 

(1)

Total pension and postretirement
   benefit expense

 

$

12 

 

$

13 

 

$

 

$



The components of net period benefit cost other than the service cost component are included in the line item “Other expense, net” in the consolidated statements of (loss) income.



On January 1, 2018, we adopted Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The service cost component of net periodic pension and postretirement benefit cost is presented with other current compensation costs in operating income.  The remaining components are included in the line item Other expense, net, in the consolidated statements of (loss) income. 

© 2018 Corning Incorporated. All Rights Reserved.

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Index

 



Corning has applied the practical expedient which permits it to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirementsSee Note 1 (Significant Accounting Policies) for additional information.



10.  Other Liabilities



Other liabilities follow (in millions):





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017

Current liabilities:

 

 

 

 

 

 

Wages and employee benefits

 

$

374 

 

$

620 

Income taxes

 

 

192 

 

 

148 

Derivative instruments

 

 

122 

 

 

42 

Asbestos and other litigation (Note 3)

 

 

179 

 

 

41 

Other current liabilities

 

 

584 

 

 

540 

Other accrued liabilities

 

$

1,451 

 

$

1,391 



 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

 

Defined benefit pension plan liabilities

 

$

724 

 

$

713 

Derivative instruments

 

 

830 

 

 

333 

Asbestos and other litigation (Note 3)

 

 

330 

 

 

338 

Investment in Hemlock Semiconductor Group ("HSG") (1)

 

 

66 

 

 

105 

Customer deposits (Note 2)

 

 

682 

 

 

382 

Deferred tax liabilities

 

 

514 

 

 

451 

Other non-current liabilities

 

 

651 

 

 

695 

Other liabilities

 

$

3,797 

 

$

3,017 



(1)

The negative carrying value resulted from a one-time charge to this entity in 2014 for the permanent abandonment of certain assets.

 

11.  Hedging Activities



Undesignated Hedges

The table below includes a total gross notional value for translated earnings contracts of $14.3 billion at March 31, 2018 and December 31, 2017.  The translated earnings contracts include average rate forwards of $13.1 billion and $13.0 billion and zero-cost collars of $1.2 billion and $1.3 billion at March 31, 2018 and December 31, 2017, respectively.  The majority of the average rate forward contracts hedge a significant portion of the Company’s exposure to the Japanese yen with maturities spanning the years 2017-2022 and with gross notional values of $11.0 billion and $11.7 billion at March 31, 2018 and December 31, 2017, respectively.  The average rate forward contracts also partially hedge the impacts of the South Korean won, New Taiwan dollar, Chinese yuan, Euro and British pound translation on the Company’s projected net income.  With respect to the zero-cost collars, the gross notional amount includes the value of both the put and call options.  However, due to the nature of the zero-cost collars, only the put or the call option can be exercised at maturity. 



© 2018 Corning Incorporated. All Rights Reserved.

15


 

Index

 

 

The following tables summarize the notional amounts and respective fair values of Corning’s derivative financial instruments on a gross basis for March 31, 2018 and December 31, 2017 (in millions):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Asset derivatives

 

Liability derivatives



Gross notional amount

 

Balance

 

Fair value

 

Balance

 

Fair value



March 31,

 

Dec. 31,

 

sheet

 

March 31,

 

Dec. 31,

 

sheet

 

March 31,

 

Dec. 31,



2018

 

2017

 

location

 

2018

 

2017

 

location

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives
  designated as
  hedging
  instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange
  contracts (1)

$

313 

 

$

294 

 

Other current
assets

 

$

16 

 

$

20 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate
  contracts

 

550 

 

 

550 

 

 

 

 

 

 

 

 

 

Other liabilities

 

$

(11)

 

$

(8)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not
  designated as
  hedging
  instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange
  contracts, other

 

1,431 

 

 

599 

 

Other current
assets

 

 

 

 

 

Other accrued
liabilities

 

 

(14)

 

 

(7)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translated earnings
  contracts

 

14,280 

 

 

14,275 

 

Other current
assets

 

 

106 

 

 

176 

 

Other accrued
liabilities

 

 

(108)

 

 

(34)



 

 

 

 

 

 

Other assets

 

 

69 

 

 

66 

 

Other liabilities

 

 

(819)

 

 

(325)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

$

16,574 

 

$

15,718 

 

 

 

$

197 

 

$

265 

 

 

 

$

(952)

 

$

(374)



(1)

Cash flow hedges with a typical duration of 24 months or less.

© 2018 Corning Incorporated. All Rights Reserved.

16

 


 

Index

 



The following table summarizes the effect of derivative financial instruments on Corning’s consolidated financial statements for the three months ended March 31, 2018 and 2017 (in millions):





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Effect of  derivative instruments on the consolidated financial statements



 

for the three months ended March 31,



 

Gain recognized in other

 

Location of gain/(loss)

 

Gain/(loss) reclassified from



 

comprehensive income

 

reclassified from

 

accumulated OCI into

Derivatives in hedging

 

(OCI)

 

accumulated OCI into

 

income (effective) (1)

relationships

 

2018

 

2017

 

income (effective)

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Cost of sales

 

$

 

$

(6)

Foreign exchange contracts

 

$

 

$

23 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash flow hedges

 

$

 

$

23 

 

 

 

$

 

$

(6)





 

(1)

The amount of hedge ineffectiveness at March 31, 2018 and 2017 was insignificant.



The following table summarizes the effect on the consolidated financial statements relating to Corning’s derivative financial instruments (in millions):





 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

Gain (loss) recognized in income



 

 

Three months ended



Location of gain/(loss)

 

March 31,

Undesignated derivatives

recognized in income

 

2018

 

2017



 

 

 

 

 

 

 

Foreign exchange contracts
  – balance sheet and loans

Other expense, net

 

$

(19)

 

$

Foreign currency hedges
  related to translated earnings

Translated earnings
  contract loss, net

 

 

(622)

 

 

(438)



 

 

 

 

 

 

 

Total undesignated

 

 

$

(641)

 

$

(436)

 

12.  Fair Value Measurements



Fair value standards under U.S. GAAP define fair value, establish a framework for measuring fair value in applying generally accepted accounting principles, and require disclosures about fair value measurements.  The standards also identify two kinds of inputs that are used to determine the fair value of assets and liabilities: observable and unobservable.  Observable inputs are based on market data or independent sources while unobservable inputs are based on the Company’s own market assumptions.  Once inputs have been characterized, the inputs are prioritized into one of three broad levels (provided in the table below) used to measure fair value.  Fair value standards apply whenever an entity is measuring fair value under other accounting pronouncements that require or permit fair value measurement and require the use of observable market data when available. 



© 2018 Corning Incorporated. All Rights Reserved.

17


 

Index

 

 

The following tables provide fair value measurement information for the Company’s major categories of financial assets and liabilities measured on a recurring basis (in millions):





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Fair value measurements at reporting date using



 

 

 

 

Quoted prices in