Q3 2018 10Q_Taxonomy2017

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 September 30, 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 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 such files).



 

 

 

 

 

 



Yes

 

No

 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

 

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 October 19, 2018

 



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

 

800,399,090 shares

 

 

© 2018 Corning Incorporated. All Rights Reserved.

1


 

Index

 

 

INDEX





 

 

PART I – FINANCIAL INFORMATION



 

Page

Item 1. Financial Statements

 

 



 

 

Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2018 and 2017

 

3



 

 

Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2018 and 2017

 

4



 

 

Consolidated Balance Sheets (Unaudited) at September 30, 2018 and December 31, 2017

 

5



 

 

Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 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

 

24



 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

44



 

 

Item 4. Controls and Procedures

 

44



 

 

PART II – OTHER INFORMATION

 

 



 

 

Item 1. Legal Proceedings

 

45



 

 

Item 1A.  Risk Factors

 

45



 

 

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

 

46



 

 

Item 6. Exhibits

 

47



 

 

Signatures

 

48

 

© 2018 Corning Incorporated. All Rights Reserved.

2


 

Index

 

CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited; in millions, except per share amounts)









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

   

 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,

   

 

2018

 

2017

 

2018

 

2017

Net sales

 

$

3,008 

 

$

2,607 

 

$

8,255 

 

$

7,479 

Cost of sales

 

 

1,776 

 

 

1,557 

 

 

4,996 

 

 

4,491 



 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

1,232 

 

 

1,050 

 

 

3,259 

 

 

2,988 



 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

439 

 

 

375 

 

 

1,352 

 

 

1,072 

Research, development and engineering expenses

 

 

244 

 

 

215 

 

 

728 

 

 

623 

Amortization of purchased intangibles

 

 

27 

 

 

18 

 

 

68 

 

 

53 



 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

522 

 

 

442 

 

 

1,111 

 

 

1,240 



 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of affiliated companies

 

 

32 

 

 

31 

 

 

102 

 

 

148 

Interest income

 

 

 

 

10 

 

 

29 

 

 

33 

Interest expense

 

 

(45)

 

 

(37)

 

 

(140)

 

 

(112)

Translated earnings contract gain (loss), net

 

 

230 

 

 

26 

 

 

66 

 

 

(193)

Other income (expense), net

 

 

12 

 

 

 

 

(11)

 

 

(25)



 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

758 

 

 

479 

 

 

1,157 

 

 

1,091 

Provision for income taxes (Note 5)

 

 

(133)

 

 

(89)

 

 

(383)

 

 

(176)



 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Corning Incorporated

 

$

625 

 

$

390 

 

$

774 

 

$

915 



 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share attributable to
Corning Incorporated:

 

 

 

 

 

 

 

 

 

 

 

 

Basic (Note 6)

 

$

0.75 

 

$

0.41 

 

$

0.85 

 

$

0.93 

Diluted (Note 6)

 

$

0.67 

 

$

0.39 

 

$

0.82 

 

$

0.89 



 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share 

 

$

0.18 

 

$

0.155 

 

$

0.54 

 

$

0.465 



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 INCOME

(Unaudited; in millions)









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

   

 

Three Months Ended

 

Nine Months Ended

   

 

September 30,

 

September 30,

   

 

2018

 

2017

 

2018

 

2017

   

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Corning Incorporated

 

$

625 

 

$

390 

 

$

774 

 

$

915 



 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments and other
  (Note 14)

 

 

(128)

 

 

53 

 

 

(292)

 

 

457 

Net unrealized (losses) gains on investments

 

 

 

 

 

(2)

 

 

 

 

 

14 

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

 

 

 

 

 

 

 

 

(6)

 

 

17 

Net unrealized gains on designated hedges

 

 

27 

 

 

 

 

 

 

42 

Other comprehensive (loss) income, net of tax

 

 

(101)

 

 

55 

 

 

(294)

 

 

530 



 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Corning Incorporated

 

$

524 

 

$

445 

 

$

480 

 

$

1,445 



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)







 

 

 

 

 

 

   

 

September 30,

 

December 31,



 

2018

 

2017

Assets

 

 

 

 

 

 



 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,903 

 

$

4,317 

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

 

 

1,973 

 

 

1,807 

Inventories, net of inventory reserves - $173 and $169 (Note 7)

 

 

1,921 

 

 

1,712 

Other current assets

 

 

835 

 

 

991 

Total current assets

 

 

6,632 

 

 

8,827 



 

 

 

 

 

 

Investments

 

 

322 

 

 

340 

Property, plant and equipment, net of accumulated depreciation - $11,368 and $10,809

 

 

14,345 

 

 

14,017 

Goodwill, net (Note 9)

 

 

1,930 

 

 

1,694 

Other intangible assets, net (Note 9)

 

 

1,309 

 

 

869 

Deferred income taxes (Note 5)

 

 

831 

 

 

813 

Other assets

 

 

1,023 

 

 

934 



 

 

 

 

 

 

Total Assets

 

$

26,392 

 

$

27,494 

   

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 



 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

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

 

$

252 

 

$

379 

Accounts payable

 

 

1,092 

 

 

1,439 

Other accrued liabilities (Note 3 and Note 11)

 

 

1,768 

 

 

1,391 

Total current liabilities

 

 

3,112 

 

 

3,209 



 

 

 

 

 

 

Long-term debt (Note 4)

 

 

5,056 

 

 

4,749 

Postretirement benefits other than pensions (Note 10)

 

 

701 

 

 

749 

Other liabilities (Note 3 and Note 11)

 

 

3,545 

 

 

3,017 

Total liabilities

 

 

12,414 

 

 

11,724 



 

 

 

 

 

 

Commitments, contingencies and guarantees (Note 3)

 

 

 

 

 

 

Shareholders’ equity (Note 14):

 

 

 

 

 

 

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: 1.7 billion and 1.7 billion

 

 

856 

 

 

854 

Additional paid-in capital – common stock

 

 

14,201 

 

 

14,089 

Retained earnings

 

 

16,186 

 

 

15,930 

Treasury stock, at cost; Shares held: 914 million and 850 million

 

 

(18,517)

 

 

(16,633)

Accumulated other comprehensive loss

 

 

(1,136)

 

 

(842)

Total Corning Incorporated shareholders’ equity

 

 

13,890 

 

 

15,698 

Noncontrolling interests

 

 

88 

 

 

72 

Total equity

 

 

13,978 

 

 

15,770 



 

 

 

 

 

 

Total Liabilities and Equity

 

$

26,392 

 

$

27,494 



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

© 2018 Corning Incorporated. All Rights Reserved.

5


 

Index

 

 

CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in millions)







 

 

 

 

 

 



 

 

 

 

 

 

   

 

Nine Months Ended



 

September 30,

   

 

2018

 

2017

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income

 

$

774 

 

$

915 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation

 

 

895 

 

 

799 

Amortization of purchased intangibles

 

 

68 

 

 

53 

Equity in earnings of affiliated companies

 

 

(102)

 

 

(148)

Dividends received from affiliated companies

 

 

106 

 

 

101 

Deferred tax expense (benefit) provision

 

 

53 

 

 

(62)

Incentives and customer deposits

 

 

691 

 

 

 

Translated earnings contract (gain) loss

 

 

(66)

 

 

193 

Unrealized translation losses (gains) on transactions

 

 

52 

 

 

(264)

Changes in certain working capital items:

 

 

 

 

 

 

Trade accounts receivable

 

 

(197)

 

 

(190)

Inventories

 

 

(235)

 

 

(166)

Other current assets

 

 

(36)

 

 

(109)

Accounts payable and other current liabilities

 

 

94 

 

 

(123)

Other, net

 

 

(119)

 

 

117 

Net cash provided by operating activities

 

 

1,978 

 

 

1,116 



 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Capital expenditures

 

 

(1,629)

 

 

(1,247)

Purchase of equipment for related party

 

 

(63)

 

 

 

Acquisition of businesses, net of cash received

 

 

(804)

 

 

(171)

Proceeds from settlement of initial contingent consideration asset

 

 

196 

 

 

 

Realized gains on translated earnings contracts

 

 

62 

 

 

199 

Other, net

 

 

(28)

 

 

Net cash used in investing activities

 

 

(2,266)

 

 

(1,218)



 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

Net repayments of short-term borrowings and current portion of long-term debt

 

 

(375)

 

 

 

Proceeds from issuance of long-term debt, net

 

 

596 

 

 

702 

Principal payments under capital lease obligations

 

 

(2)

 

 

(1)

Payments of employee withholding tax on stock awards

 

 

(12)

 

 

(14)

Proceeds from the exercise of stock options

 

 

74 

 

 

275 

Repurchases of common stock for treasury

 

 

(1,880)

 

 

(2,064)

Dividends paid

 

 

(517)

 

 

(493)

Net cash used in financing activities

 

 

(2,116)

 

 

(1,595)

Effect of exchange rates on cash

 

 

(10)

 

 

271 

Net decrease in cash and cash equivalents

 

 

(2,414)

 

 

(1,426)

Cash and cash equivalents at beginning of period

 

 

4,317 

 

 

5,291 

Cash and cash equivalents at end of period

 

$

1,903 

 

$

3,865 



 

 

 

 

 

 



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

© 2018 Corning Incorporated. All Rights Reserved.

6


 

Index

 

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.  Our 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 income (expense), net, in the Consolidated Statements of 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 financing 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 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 2017 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.  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 September 30, 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. Except for 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. 



Our revenues by product category are as follows (in millions):





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

Display products

 

$

815 

 

$

767 

 

$

2,315 

 

$

2,250 



 

 

 

 

 

 

 

 

 

 

 

 

Telecommunication products

 

 

1,117 

 

 

917 

 

 

3,026 

 

 

2,617 



 

 

 

 

 

 

 

 

 

 

 

 

Specialty glass products

 

 

459 

 

 

373 

 

 

1,080 

 

 

1,010 



 

 

 

 

 

 

 

 

 

 

 

 

Environmental substrate and filter products

 

 

331 

 

 

277 

 

 

970 

 

 

815 



 

 

 

 

 

 

 

 

 

 

 

 

Life science products

 

 

231 

 

 

223 

 

 

708 

 

 

654 



 

 

 

 

 

 

 

 

 

 

 

 

All Other

 

 

55 

 

 

50 

 

 

156 

 

 

133 



 

$

3,008 

 

$

2,607 

 

$

8,255 

 

$

7,479 



 

 

 

 

 

 

 

 

 

 

 

 





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 September 30, 2018, Corning has customer deposits of approximately $1.0 billion.  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 ranges 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 and 2017, 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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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, the Company’s liability under the Plan was $290 million, which is required to be paid through a series of fixed payments beginning in the second quarter of 2017.  Payments of $35 million and $70 million were made in June 2018 and June 2017, respectivelyAt September 30, 2018, the total amount of payments due in years 2019 through 2022 is $185 million, of which $50 million is due in the second quarter of 2019 and is classified as a current liability.  The remaining $135 million is classified as a non-current liability.



Non-PCC Asbestos Claims and 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 liability at this time.  At September 30, 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 interests 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 funded a Settlement Trust and a Litigation Facility, referred to above, 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 to 50% of the excess liability.  At September 30, 2018, Dow Corning had recorded a reserve for breast implant litigation of $263 million.  

© 2018 Corning Incorporated. All Rights Reserved.

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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 compounded interest at default and state statutory judgment rates as well as attorneys’ fees and other enforcement costs, during the period from May 1995 through June 2004.  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 to 50% of the excess liability, subject to certain conditions and limits.  At  September 30, 2018, Dow Corning estimated the liability to commercial creditors to be within the range of $81 million to $260 million. As of September 30, 2018, Dow Corning had recorded a reserve for these claims of $81 million.

 

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 September 30, 2018 and December 31, 2017, Corning had accrued approximately $33 million and $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 September 30, 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 September 30, 2018 and December 31, 2017, respectively, compared to recorded book values of $5.1 billion and $4.7 billion at September 30, 2018 and December 31, 2017, respectively.  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 September 30, 2018 and December 31, 2017.



In the third quarter of 2018, Corning amended and restated its revolving credit agreement (the “Revolving Credit Agreement”).  The Revolving Credit Agreement provides a $1.5 billion unsecured multi-currency line of credit and expires August 15, 2023.  At September 30, 2018, there were no outstanding amounts under the Revolving Credit Agreement. 



Debt Issuances



2018

In the second quarter of 2018, Corning issued three Japanese yen-denominated debt securities (the “Notes”), as follows:



·

¥10 billion 0.722% senior unsecured notes with a maturity of 7 years;

·

¥30.5 billion 1.043% senior unsecured notes with a maturity of 10 years; and

·

¥25 billion 1.219% senior unsecured notes with a maturity of 12 years.



The proceeds from the Notes were received in Japanese yen and converted to U.S. dollars on the date of issuance.  The net proceeds received in U.S. dollars, after deducting offering expenses, were $596 million.  Payments of principle and interest on the Notes will be in Japanese yen, or should yen be unavailable due to circumstances beyond Corning’s control, a U.S. dollar equivalent.



© 2018 Corning Incorporated. All Rights Reserved.

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On a quarterly basis, Corning will recognize the transaction gains and losses resulting from changes in the JPY/USD exchange rate in the Other expense, net line of the Consolidated Statements of Income.  Cash proceeds from the offerings and payments for debt issuance costs are disclosed as financing activities, and cash payments to bondholders for interest will be disclosed as operating activities, in the Consolidated Statements of Cash Flows.



5.   Income Taxes



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







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

$

(133)

 

$

(89)

 

$

(383)

 

$

(176)

Effective tax rate

 

 

17.5% 

 

 

18.6% 

 

 

33.1% 

 

 

16.1% 



For the three months ended September 30, 2018, the effective income tax rate differed from the U.S. statutory rate of 21% primarily due to the following:



·

Additional tax amounts related to global intangible low-taxed income (“GILTI”);

·

Benefits related to foreign derived intangible income (“FDII”);

·

An increase in the estimated annual impact of the base erosion and anti-deferral tax (“BEAT”); and

·

A  $48 million benefit related to an adjustment to the provisional estimate of the one-time Toll Charge recorded in 2017.  



For the nine months ended September 30, 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 for the years 2013 and 2014;

·

Additional tax amounts related to global intangible low-taxed income (“GILTI”);

·

Benefits related to foreign derived intangible income (“FDII”);

·

An increase in the estimated annual impact of the base erosion and anti-deferral tax (“BEAT”);

·

A  $28 million benefit from the release of a valuation allowance on deferred tax assets that are now considered realizable; and

·

A  $48 million benefit related to an adjustment to the provisional estimate of the one-time Toll Charge recorded in 2017.  



For the three and nine months ended September 30, 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; and

·

The benefit of excess foreign tax credits resulting from the inclusion of foreign earnings in U.S. income.



The Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted on December 22, 2017.  The 2017 Tax Act reduced the U.S. federal corporate income tax rate from 35% to 21%, and requires companies to pay a one-time transition tax, (the “Toll Charge”), 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.  As of September 30, 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 2017 Tax Act, including recently issued and anticipated proposed guidance, between now and December 31, 2018.  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.  At September 30, 2018, we have reduced our estimate of the one-time Toll Charge recorded in 2017 by $48 million in conjunction with filing our Federal income tax return.  We will continue to analyze and refine our calculations related to the measurement of these balances.



© 2018 Corning Incorporated. All Rights Reserved.

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As of September 30, 2018, Corning has not yet completed its analysis 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 $2.2 billion during 2018 from its foreign subsidiaries to the U.S. parent of those subsidiaries.  There are no incremental taxes beyond the Toll Charge recorded in 2017 due with respect to this distribution of 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 reversal.  Corning’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.



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 its 2013 and 2014 audits.  This preliminary 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.



Corning Display Technologies Taiwan (“CDTT”) is currently under audit by the Ministry of Finance for the 2015 tax year.  We expect this audit to take up to 2 years to complete.



Corning Precision Materials (“CPM”) is involved in several income and withholding tax disputes with South Korea.  The tax amounts in dispute are on deposit with the South Korean tax authorities and CPM has booked receivables for the amounts on deposit.  Corning believes that its tax positions are appropriate and is vigorously defending such positions.



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.  



6.   Earnings per Common Share



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





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

Net income attributable to Corning Incorporated

 

$

625 

 

$

390 

 

$

774 

 

$

915 

Less:  Series A convertible preferred stock dividend

 

 

24 

 

 

24 

 

 

73 

 

 

73 

Net income available to common stockholders – basic

 

 

601 

 

 

366 

 

 

701 

 

 

842 

Plus:  Series A convertible preferred stock dividend 

 

 

24 

 

 

24 

 

 

73 

 

 

73 

Net income available to common stockholders – diluted

 

$

625 

 

$

390 

 

$

774 

 

$

915 



 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding – basic

 

 

805 

 

 

883 

 

 

824 

 

 

905 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock options and other dilutive securities

 

 

10 

 

 

11 

 

 

 

 

11 

Series A convertible preferred stock 

 

 

115 

 

 

115 

 

 

115 

 

 

115 

Weighted-average common shares outstanding – diluted

 

 

930 

 

 

1,009 

 

 

948 

 

 

1,031 

Basic earnings per common share

 

$

0.75 

 

$

0.41 

 

$

0.85 

 

$

0.93 

Diluted earnings per common share

 

$

0.67 

 

$

0.39 

 

$

0.82 

 

$

0.89 



 

 

 

 

 

 

 

 

 

 

 

 

Antidilutive potential shares excluded from
  diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock options and awards

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



© 2018 Corning Incorporated. All Rights Reserved.

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7.   Inventories, Net of Inventory Reserves



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













 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2018

 

2017

Finished goods

 

$

801 

 

$

739 

Work in process

 

 

367 

 

 

322 

Raw materials and accessories

 

 

380 

 

 

306 

Supplies and packing materials

 

 

373 

 

 

345 

Total inventories, net of inventory reserves

 

$

1,921 

 

$

1,712 









8.   Acquisition



On June 1, 2018, Corning acquired substantially all of The 3M Company’s Communications Market Division including a manufacturing facility and certain other assets (collectively referred to as “Purchased Assets”) for approximately $801 million.  The Purchased Assets constitute a business, which designs, manufactures and markets high bandwidth and optical fiber products. The acquisition was accounted for as a business combination.



A summary of the preliminary allocation of the total purchase price to the net tangible and other intangible assets acquired, with the remainder recorded as goodwill based on fair value is as follows (1) (in millions):





 

 

 



 

 

 

Fixed assets

 

$

32 

Other net assets

 

 

Other intangible assets

 

 

511 

Net tangible and intangible assets

 

$

548 

Purchase price

 

 

801 

Goodwill (2)

 

$

253 



(1)Amounts reflect measurement period adjustments.

(2)The goodwill recognized is deductible for U.S. income tax purposes.  The goodwill was allocated to the Optical Communications segment.



Goodwill is related to the value of 3M’s Communications Market Division product and customer portfolio and its combination with Corning’s existing optical communications platform, as well as synergies and other intangibles that do not qualify for separate recognition.  Other intangible assets consist of customer relationships, trade names and developed technology and are amortized over various useful lives ranging from 3 to 14 years.  Acquisition-related costs of $16 million in the nine months ended September 30, 2018, included costs for legal, accounting, valuation and other professional services and were included in selling, general and administrative expense in the Consolidated Statements of Income.  Supplemental pro forma information was not provided because the Purchased Assets are not material to Corning’s consolidated financial statements.



9.  Goodwill and Other Intangible Assets



The carrying amount of goodwill by segment for the periods ended September 30, 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 

Acquired goodwill (1)

 

 

 

 

 

242 

 

 

 

 

 

 

 

 

 

 

244 

Measurement period
   adjustment 

 

 

 

 

 

11 

 

 

 

 

 

 

 

 

 

 

 

11 

Foreign currency translation
   adjustment

 

 

(4)

 

 

(7)

 

 

 

 

 

(6)

 

 

(2)

 

 

(19)

Balance at September 30, 2018

 

$

132 

 

$

917 

 

$

150 

 

$

619 

 

$

112 

 

$

1,930 



(1)The Company completed the acquisition of 3M’s Communications Market Division in the Optical Communications segment during the second quarter of 2018.  Refer to Note 8 (Acquisitions) to the Consolidated Financial Statements for additional information on this acquisition.



© 2018 Corning Incorporated. All Rights Reserved.

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Corning’s gross goodwill balances for the periods ended September 30, 2018 and December 31, 2017 were $8.4 and $8.2 billion, respectively.  Accumulated impairment losses were $6.5 billion for the periods ended September 30, 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):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

September 30, 2018

 

December 31, 2017



 

 

 

 

Accumulated

 

 

 

 

 

 

 

Accumulated

 

 

 



 

Gross

 

amortization

 

Net

 

Gross

 

amortization

 

Net

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents, trademarks, and
   trade names 

 

$

465 

 

$

198 

 

$

267 

 

$

382 

 

$

188 

 

$

194 

Customer lists and other 

 

 

1,299 

 

 

257 

 

 

1,042 

 

 

884 

 

 

209 

 

 

675 

Total

 

$

1,764 

 

$

455 

 

$

1,309 

 

$

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 increased during the first nine months of 2018, primarily due to the acquisition of 3M’s Communications Market Division of $511 million and other acquisition of $7 million of other intangible assets, offset by amortization of $68 million and foreign currency translation adjustments of $10 million.



Amortization expense related to all intangible assets is estimated to be $112 million annually for 2019, $111 million annually for 2020, $110 million annually for 2021 and 2022, and $109 million annually for 2023.

 

10.  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

 

Nine months ended

 

Three months ended

 

Nine months ended



 

September 30,

 

September 30,

 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

26 

 

$

22 

 

$

77 

 

$

69 

 

$

 

$

 

$

 

$

Interest cost

 

 

32 

 

 

32 

 

 

97 

 

 

94 

 

 

 

 

 

 

18 

 

 

20 

Expected return on plan assets 

 

 

(47)

 

 

(43)

 

 

(142)

 

 

(130)

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service
   cost (credit)

 

 

 

 

 

 

 

 

 

 

(2)

 

 

(1)

 

 

(5)

 

 

(2)

Recognition of actuarial loss

 

 

 

 

 

 

 

 

 

 

15 

 

 

 

 

 

 

 

 

 

 

 

 

Total pension and postretirement
   benefit expense

 

$

13 

 

$

12 

 

$

39 

 

$

52 

 

$

 

$

 

$

22 

 

$

25 



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 income.



On January 1, 2018, we adopted Compensation—Retirement Benefits: 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 income (expense), net, in the consolidated statements of 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 requirementsSee Note 1 (Significant Accounting Policies) for additional information.



© 2018 Corning Incorporated. All Rights Reserved.

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11.  Other Liabilities



Other liabilities follow (in millions):





 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2018

 

2017

Current liabilities:

 

 

 

 

 

 

Wages and employee benefits

 

$

533 

 

$

620 

Income taxes

 

 

252 

 

 

148 

Derivative instruments

 

 

50