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 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. GAAP for interim financial information. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. 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, 2012 (2012 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.
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.
Employee Retirement Plans
In the first quarter of 2013, we elected to change our method of recognizing actuarial gains and losses for our defined benefit pension plans. Previously, we recognized the actuarial gains and losses as a component of Stockholders’ Equity on our consolidated balance sheets on an annual basis. These amounts were amortized into our operating results over the average remaining service period of employees expected to receive benefits under the plan, to the extent such gains and losses were outside of the corridor, where the corridor is equal to 10% of the greater of the benefit obligation or the market-related value of plan assets at the beginning of the year. In addition, we used a calculated market-related value of plan assets for purposes of calculating the expected return on plan assets that spread asset gains and losses over a 3-year period. We have elected to recognize the change in the fair value of plan assets in full and net actuarial gains and losses outside of the corridor annually in the fourth quarter of each year and whenever the plan is remeasured or valuation estimates are finalized. The remaining components of pension expense will be recorded on a quarterly basis. While the historical policy of recognizing pension expense was considered acceptable, we believe that the new policy is preferable as it recognizes the change in the fair value of plan assets in full and eliminates the delay in recognition of net actuarial gains and losses outside of the corridor. We have applied these changes retrospectively, adjusting all prior periods, as if the new accounting methodology was in effect during those periods.
Following are the changes to financial statement line items as a result of the accounting methodology change for the periods presented in the accompanying unaudited consolidated financial statements:
Consolidated Statements of Income
|
Three months ended June 30, 2013
|
|
Previous
accounting
method
|
|
Reported
|
|
Effect of
accounting
change
|
Cost of sales
|
$
|
1,112
|
|
$
|
1,099
|
|
$
|
(13)
|
Gross margin
|
|
870
|
|
|
883
|
|
|
13
|
Selling, general and administrative expenses
|
|
273
|
|
|
266
|
|
|
(7)
|
Research, development and engineering expenses
|
|
183
|
|
|
179
|
|
|
(4)
|
Operating income
|
|
400
|
|
|
424
|
|
|
24
|
Income before income taxes
|
|
805
|
|
|
829
|
|
|
24
|
Provision for income taxes
|
|
(182)
|
|
|
(191)
|
|
|
(9)
|
Net income attributable to Corning Incorporated
|
$
|
623
|
|
$
|
638
|
|
$
|
15
|
Earnings per common share attributable to Corning Incorporated – Basic
|
$
|
0.42
|
|
$
|
0.43
|
|
$
|
0.01
|
Earnings per common share attributable to Corning Incorporated – Diluted
|
$
|
0.42
|
|
$
|
0.43
|
|
$
|
0.01
|
|
Three months ended June 30, 2012
|
|
Previously
reported
(before
accounting
change)
|
|
Revised
(after
accounting
change)
|
|
Effect of
accounting
change
|
Cost of sales
|
$
|
1,111
|
|
$
|
1,100
|
|
$
|
(11)
|
Gross margin
|
|
797
|
|
|
808
|
|
|
11
|
Selling, general and administrative expenses
|
|
291
|
|
|
286
|
|
|
(5)
|
Research, development and engineering expenses
|
|
188
|
|
|
185
|
|
|
(3)
|
Operating income
|
|
309
|
|
|
328
|
|
|
19
|
Income before income taxes
|
|
555
|
|
|
574
|
|
|
19
|
Provision for income taxes
|
|
(93)
|
|
|
(100)
|
|
|
(7)
|
Net income attributable to Corning Incorporated
|
$
|
462
|
|
$
|
474
|
|
$
|
12
|
Earnings per common share attributable to Corning Incorporated – Basic
|
$
|
0.31
|
|
$
|
0.31
|
|
|
|
Earnings per common share attributable to Corning Incorporated – Diluted
|
$
|
0.30
|
|
$
|
0.31
|
|
$
|
0.01
|
|
Six months ended June 30, 2013
|
|
Previous
accounting
method
|
|
Reported
|
|
Effect of
accounting
change
|
Cost of sales
|
$
|
2,169
|
|
$
|
2,143
|
|
$
|
(26)
|
Gross margin
|
|
1,627
|
|
|
1,653
|
|
|
26
|
Selling, general and administrative expenses
|
|
539
|
|
|
525
|
|
|
(14)
|
Research, development and engineering expenses
|
|
365
|
|
|
357
|
|
|
(8)
|
Operating income
|
|
700
|
|
|
748
|
|
|
48
|
Income before income taxes
|
|
1,309
|
|
|
1,357
|
|
|
48
|
Provision for income taxes
|
|
(208)
|
|
|
(225)
|
|
|
(17)
|
Net income attributable to Corning Incorporated
|
$
|
1,101
|
|
$
|
1,132
|
|
$
|
31
|
Earnings per common share attributable to Corning Incorporated – Basic
|
$
|
0.75
|
|
$
|
0.77
|
|
$
|
0.02
|
Earnings per common share attributable to Corning Incorporated – Diluted
|
$
|
0.74
|
|
$
|
0.76
|
|
$
|
0.02
|
|
Six months ended June 30, 2012
|
|
Previously
reported
(before
accounting
change)
|
|
Revised
(after
accounting
change)
|
|
Effect of
accounting
change
|
Cost of sales
|
$
|
2,217
|
|
$
|
2,196
|
|
$
|
(21)
|
Gross margin
|
|
1,611
|
|
|
1,632
|
|
|
21
|
Selling, general and administrative expenses
|
|
570
|
|
|
559
|
|
|
(11)
|
Research, development and engineering expenses
|
|
375
|
|
|
369
|
|
|
(6)
|
Operating income
|
|
651
|
|
|
689
|
|
|
38
|
Income before income taxes
|
|
1,128
|
|
|
1,166
|
|
|
38
|
Provision for income taxes
|
|
(204)
|
|
|
(218)
|
|
|
(14)
|
Net income attributable to Corning Incorporated
|
$
|
924
|
|
$
|
948
|
|
$
|
24
|
Earnings per common share attributable to Corning Incorporated – Basic
|
$
|
0.61
|
|
$
|
0.63
|
|
$
|
0.02
|
Earnings per common share attributable to Corning Incorporated – Diluted
|
$
|
0.61
|
|
$
|
0.62
|
|
$
|
0.01
|
Consolidated Statements of Comprehensive Income
|
Three months ended June 30, 2013
|
|
Previous
accounting
method
|
|
Reported
|
|
Effect of
accounting
change
|
Net income attributable to Corning Incorporated
|
$
|
623
|
|
$
|
638
|
|
$
|
15
|
Other comprehensive loss, net of tax
|
|
(241)
|
|
|
(256)
|
|
|
(15)
|
Comprehensive income attributable to Corning Incorporated
|
$
|
382
|
|
$
|
382
|
|
$
|
0
|
|
Three months ended June 30, 2012
|
|
Previously
reported
(before
accounting
change)
|
|
Revised
(after
accounting
change)
|
|
Effect of
accounting
change
|
Net income attributable to Corning Incorporated
|
$
|
462
|
|
$
|
474
|
|
$
|
12
|
Other comprehensive income, net of tax
|
|
4
|
|
|
13
|
|
|
9
|
Comprehensive income attributable to Corning Incorporated
|
$
|
466
|
|
$
|
487
|
|
$
|
21
|
|
Six months ended June 30, 2013
|
|
Previous
accounting
method
|
|
Reported
|
|
Effect of
accounting
change
|
Net income attributable to Corning Incorporated
|
$
|
1,101
|
|
$
|
1,132
|
|
$
|
31
|
Other comprehensive loss, net of tax
|
|
(716)
|
|
|
(744)
|
|
|
(28)
|
Comprehensive income attributable to Corning Incorporated
|
$
|
385
|
|
$
|
388
|
|
$
|
3
|
|
Six months ended June 30, 2012
|
|
Previously
reported
(before
accounting
change)
|
|
Revised
(after
accounting
change)
|
|
Effect of
accounting
change
|
Net income attributable to Corning Incorporated
|
$
|
924
|
|
$
|
948
|
|
$
|
24
|
Other comprehensive loss, net of tax
|
|
(47)
|
|
|
(48)
|
|
|
(1)
|
Comprehensive income attributable to Corning Incorporated
|
$
|
877
|
|
$
|
900
|
|
$
|
23
|
Consolidated Balance Sheets
|
June 30, 2013
|
|
Previous
accounting
method
|
|
Reported
|
|
Effect of
accounting
change
|
Retained earnings
|
$
|
11,382
|
|
$
|
10,754
|
|
$
|
(628)
|
Accumulated other comprehensive (loss) income
|
$
|
(1,016)
|
|
$
|
(388)
|
|
$
|
628
|
|
December 31, 2012
|
|
Previously
reported
(before
accounting
change)
|
|
Revised
(after
accounting
change)
|
|
Effect of
accounting
change
|
Retained earnings
|
$
|
10,588
|
|
$
|
9,932
|
|
$
|
(656)
|
Accumulated other comprehensive (loss) income
|
$
|
(300)
|
|
$
|
356
|
|
$
|
656
|
Consolidated Statements of Cash Flows
|
Six months ended June 30, 2013
|
|
Previous
accounting
method
|
|
Reported
|
|
Effect of
accounting
change
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
1,101
|
|
$
|
1,132
|
|
$
|
31
|
Deferred tax provision
|
$
|
102
|
|
$
|
119
|
|
$
|
17
|
Employee benefit payments less than expense
|
$
|
74
|
|
$
|
26
|
|
$
|
(48)
|
|
Six months ended June 30, 2012
|
|
Previously
reported
(before
accounting
change)
|
|
Revised
(after
accounting
change)
|
|
Effect of
accounting
change
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
924
|
|
$
|
948
|
|
$
|
24
|
Deferred tax provision
|
$
|
21
|
|
$
|
35
|
|
$
|
14
|
Employee benefit payments in excess of expense
|
$
|
(33)
|
|
$
|
(71)
|
|
$
|
(38)
|
Other Income, Net
“Other income, net” in Corning’s consolidated statements of income includes the following (in millions):
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Royalty income from Samsung Corning Precision
|
$
|
14
|
|
$
|
21
|
|
$
|
29
|
|
$
|
43
|
Foreign currency exchange and hedge gains (losses), net
|
|
251
|
|
|
(1)
|
|
|
282
|
|
|
5
|
Net loss attributable to noncontrolling interests
|
|
1
|
|
|
1
|
|
|
2
|
|
|
3
|
Other, net
|
|
(1)
|
|
|
(13)
|
|
|
17
|
|
|
(14)
|
Total
|
$
|
265
|
|
$
|
8
|
|
$
|
330
|
|
$
|
37
|
New Accounting Standards
In March 2013, the FASB issued Accounting Standards Update No. 2013-05 Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. ASU 2013-05 requires a parent company that ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. The amendments are required to be applied prospectively for annual periods for fiscal years beginning on or after December 15, 2013, and interim periods within those annual fiscal years. Corning does not expect adoption of this standard to have a material impact on its consolidated results of operations and financial condition.
2. Restructuring, Impairment and Other Charges (Credits)
2013 Activity
The following table summarizes the restructuring reserve activity for the six months ended June 30, 2013 (in millions):
|
Reserve at
January 1,
2013
|
|
Net
charges/
reversals
|
|
Cash
payments
|
|
Reserve at
June 30,
2013
|
Restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
Employee-related costs
|
$
|
38
|
|
$
|
(1)
|
|
$
|
(22)
|
|
$
|
15
|
Other charges (credits)
|
|
4
|
|
|
|
|
|
(2)
|
|
|
2
|
Total restructuring activity
|
$
|
42
|
|
$
|
(1)
|
|
$
|
(24)
|
|
$
|
17
|
Cash payments for employee-related costs related to the 2012 corporate-wide restructuring plan are expected to be completed in 2013. Cash payments for exit activities were substantially completed in 2012.
2012 Activity
For the first six months of 2012, there was no significant restructuring activity.
3. Commitments, Contingencies, and Guarantees
Asbestos Litigation
Pittsburgh Corning Corporation.
Corning and PPG Industries, Inc. (PPG) each own 50% of the capital stock of Pittsburgh Corning Corporation (PCC). Over a period of more than two decades, PCC and several other defendants have been named in numerous lawsuits involving claims alleging personal injury from exposure to asbestos. On April 16, 2000, PCC filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Western District of Pennsylvania. Corning, with other relevant parties, has been involved in ongoing efforts to develop a Plan of Reorganization that would resolve the concerns and objections of the relevant parties. A proposed PCC plan of reorganization (Amended PCC Plan) filed in the U.S. Bankruptcy Court for the Western District of Pennsylvania was confirmed by a final order in May 2013; however, a motion for reconsideration has been filed. Corning also has an equity interest in Pittsburgh Corning Europe N.V. (PCE), a Belgian corporation, that is a component of the Company’s proposed resolution of the PCC asbestos litigation. At June 30, 2013 and December 31, 2012, the fair value of PCE exceeded its carrying value of $151 million and $149 million, respectively.
The Amended PCC Plan does not include certain other non-PCC asbestos claims that may be or have been raised against Corning. Corning has recorded in its estimated asbestos litigation liability an additional $150 million for the approximately 9,800 current non-PCC cases alleging injuries from asbestos, and for any future non-PCC cases. Corning’s liability under the Amended PCC Plan and the non-PCC asbestos claims was estimated to be $680 million at June 30, 2013, compared with an estimate of the liability of $671 million at December 31, 2012. In the three and six months ended June 30, 2013, Corning recorded asbestos litigation expense of $6 million and $8 million, respectively. In the three and six months ended June 30, 2012, Corning recorded asbestos litigation expense of $5 million and $6 million, respectively. Corning’s estimated aggregate asbestos litigation liability is classified as a non-current liability as installment payments for the cash portion of the obligation are not planned to commence until more than 12 months after the Amended PCC Plan becomes effective and the PCE portion of the obligation will be fulfilled through the direct contribution of Corning’s investment in PCE (currently recorded as a non-current other equity method investment).
On May 16, 2013, the Bankruptcy Court issued an opinion and order confirming, on an interim basis, the Amended PCC Plan. On May 23, 2013, the Bankruptcy Court held a hearing to review motions for reconsideration of its interim order and, on May 24, 2013, it issued a revised opinion and final order confirming the Amended PCC Plan. On June 6, 2013, one party filed a motion for reconsideration of that final order which is scheduled for hearing on September 9, 2013. A different party, on June 7, 2013, filed a notice of an appeal of that final order to the U.S. District Court for the Western District of Pennsylvania, and this appeal has been stayed pending resolution of the other party’s motion for reconsideration.
Other Commitments and Contingencies
In the normal course of our business, we do not routinely provide significant third-party guarantees. Generally, any third-party guarantees provided by Corning are limited to certain financial guarantees including stand-by letters of credit and performance bonds, and the incurrence of contingent liabilities in the form of purchase price adjustments related to attainment of milestones. When provided, these guarantees have various terms, and none of these guarantees are individually significant.
We have agreed to provide a credit facility to Dow Corning Corporation (Dow Corning). The funding of the Dow Corning credit facility will be required only if Dow Corning is not otherwise able to meet its scheduled funding obligations in its confirmed Bankruptcy Plan. We believe a significant majority of these guarantees and contingent liabilities will expire without being funded.
As of June 30, 2013 and December 31, 2012, contingent guarantees totaled a notional value of $138 million and $142 million, respectively. We believe a significant majority of these contingent guarantees will expire without being funded. We also were contingently liable for purchase obligations of $110 million and $89 million, at June 30, 2013 and December 31, 2012, respectively.
Product warranty liability accruals were considered insignificant at June 30, 2013 and December 31, 2012.
Corning is a defendant in various lawsuits, including environmental litigation, product-related suits, and the Dow Corning and PCC matters, and is subject to various claims which 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.
In March of 2012, Corning received a grand jury subpoena issued in the United States District Court for the Eastern District of Michigan from the U.S. Department of Justice in connection with an investigation into conduct relating to possible antitrust law violations involving certain automotive products, including catalytic converters, diesel particulate filters, substrates and monoliths. Antitrust investigations can result in significant penalties being imposed by the antitrust authorities. Currently, Corning cannot estimate the ultimate financial impact, if any, resulting from the investigation, which is ongoing. Such potential impact, if an antitrust violation by Corning is found, could however, be material to the results of operations of Corning in a particular period.
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 16 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. Corning accrues 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 June 30, 2013, and December 31, 2012, Corning had accrued approximately $17 million (undiscounted) and $21 million (undiscounted), respectively, 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.
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 $3.0 billion at June 30, 2013 and $3.7 billion at December 31, 2012. 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.
2013
In the second quarter of 2013, the Company established a commercial paper program on a private placement basis, pursuant to which we may issue short-term, unsecured commercial paper notes up to a maximum aggregate principal amount outstanding at any time of $1 billion. Under this program, the Company may issue the notes from time to time and will use the proceeds for general corporate purposes. The maturities of the notes will vary, but may not exceed 390 days from the date of issue. The interest rates will vary based on market conditions and the ratings assigned to the notes by credit rating agencies at the time of issuance. The Company’s $1 billion revolving credit facility is available to support obligations under the commercial paper program, if needed.
In the first quarter of 2013, we amended and restated our existing revolving credit facility. The amended facility provides a $1.0 billion unsecured multi-currency line of credit that expires in March 2018. The facility includes a leverage test (debt to capital ratio) financial covenant. The proceeds of this credit facility may be used for general corporate purposes, including support for our commercial paper program. As of June 30, 2013, we were in compliance with this covenant.
In the first quarter of 2013, Corning repaid the aggregate principal amount and accrued interest outstanding on the credit facility entered into in the second quarter of 2011 that allowed Corning to borrow up to Chinese Renminbi (RMB) 4.0 billion. The total amount repaid was approximately $500 million. Upon repayment, this facility was terminated.
2012
In the first quarter of 2012, we issued $250 million of 4.70% senior unsecured notes and $500 million of 4.75% senior unsecured notes for net proceeds of approximately $247 million and $495 million, respectively. The 4.70% notes mature on March 15, 2037 and the 4.75% notes mature on March 15, 2042.
5. Income Taxes
Our provision for income taxes and the related effective income tax rates were as follows (in millions):
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
$
|
(191)
|
|
$
|
(100)
|
|
$
|
(225)
|
|
$
|
(218)
|
Effective tax rate
(1)
|
|
23.0%
|
|
|
17.4%
|
|
|
16.6%
|
|
|
18.7%
|
(1)
|
As revised for the change in our method of recognizing pension expense. See Note 1 of Notes to Consolidated Financial Statements for a discussion of the change and the impacts of the change for the three and six months ended June 30, 2012.
|
For the three and six months ended June 30, 2013, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:
·
|
Rate differences on income (loss) of consolidated foreign companies;
|
·
|
The impact of equity in earnings of nonconsolidated affiliates reported in the financials, net of tax; and
|
·
|
The benefit of tax incentives in foreign jurisdictions, primarily Taiwan.
|
In addition to the items noted above, the tax provision for the three months ended June 30, 2013 reflected the U.S. tax expense associated with the realized and unrealized gains on the translated earnings contracts. Refer to Note 14 Hedging Activities for further information. The tax provision for the six months ended June 30, 2013, reflects a $54 million tax benefit to record the impact of the American Taxpayer Relief Act enacted on January 3, 2013 and made retroactive to 2012.
For the three and six months ended June 30, 2012, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:
·
|
Rate differences on income (loss) of consolidated foreign companies;
|
·
|
The impact of equity in earnings of nonconsolidated affiliates reported in the financials, net of tax;
|
·
|
The expiration of favorable U.S. tax provisions; and
|
·
|
The benefit of tax incentives in foreign jurisdictions, primarily Taiwan.
|
Corning’s subsidiary in Taiwan is operating under tax holiday arrangements. The benefit of the arrangement phases out through 2018. The impact of the tax holiday on our effective tax rate is a reduction in the rate of 1.0 and 1.4 percentage points for the three months ended June 30, 2013 and 2012, respectively. The impact of the tax holiday on our effective tax rate is a reduction in the rate of 0.9 and 1.4 percentage points for the six months ended June 30, 2013 and 2012, respectively.
Corning continues to indefinitely reinvest substantially all of its foreign earnings. 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. One time or unusual items that may impact our ability or intent to keep our foreign earnings and cash indefinitely reinvested include significant U.S. acquisitions, stock repurchases, shareholder dividends, changes in tax laws and/or a change in our circumstances or economic conditions that negatively impact our ability to borrow or otherwise fund U.S. needs from existing U.S. sources. While it remains impracticable to calculate the tax cost of repatriating our total unremitted foreign earnings, such cost could be material to the results of operations of Corning in a particular period.
While we expect the amount of unrecognized tax benefits to change in the next 12 months, we do not expect the change to have a significant impact on the results of operations or our financial position.
6. Earnings per Common Share
The reconciliation of the amounts used in the basic and diluted earnings per common share computations follows (in millions, except per share amounts):
|
Three months ended June 30,
|
|
2013
|
|
2012
|
|
Net
income
attributable
to Corning
Incorporated
|
|
Weighted-
average
shares
|
|
Per
share
amount
|
|
Net
income
attributable
to Corning
Incorporated
|
|
Weighted-
average
shares
|
|
Per
share
amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
$638
|
|
1,469
|
|
$0.43
|
|
$474
|
|
1,506
|
|
$0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and other dilutive securities
|
|
|
9
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
$638
|
|
1,478
|
|
$0.43
|
|
$474
|
|
1,518
|
|
$0.31
|
|
Six months ended June 30,
|
|
2013
|
|
2012
|
|
Net
income
attributable
to Corning
Incorporated
|
|
Weighted-
average
shares
|
|
Per
share
amount
|
|
Net
income
attributable
to Corning
Incorporated
|
|
Weighted-
average
shares
|
|
Per
share
amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
$1,132
|
|
1,471
|
|
$0.77
|
|
$948
|
|
1,511
|
|
$0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and other dilutive securities
|
|
|
9
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
$1,132
|
|
1,480
|
|
$0.76
|
|
$948
|
|
1,524
|
|
$0.62
|
The following potential common shares were excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive (in millions):
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Stock options and other dilutive securities excluded from the calculation of diluted earnings per common share
|
38
|
|
42
|
|
43
|
|
42
|
7. Available-for-Sale Investments
The following is a summary of the fair value of available-for-sale investments (in millions):
|
Amortized cost
|
|
Fair value
|
|
June 30,
2013
|
|
December 31,
2012
|
|
June 30,
2013
|
|
December 31,
2012
|
Bonds, notes and other securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
$
|
868
|
|
$
|
1,153
|
|
$
|
870
|
|
$
|
1,156
|
Total short-term investments
|
$
|
868
|
|
$
|
1,153
|
|
$
|
870
|
|
$
|
1,156
|
Asset-backed securities
|
$
|
48
|
|
$
|
51
|
|
$
|
41
|
|
$
|
40
|
Total long-term investments
|
$
|
48
|
|
$
|
51
|
|
$
|
41
|
|
$
|
40
|
We do not intend to sell, nor do we believe it is more likely than not that we would be required to sell, the long-term investment asset-backed securities (which are collateralized by mortgages) before recovery of their amortized cost basis. It is possible that a significant degradation in the delinquency or foreclosure rates in the underlying assets could cause further temporary or other-than-temporary impairments in the future.
The following table summarizes the maturities at market value of available-for-sale securities at June 30, 2013 (in millions):
Less than one year
|
$626
|
Due in 1-5 years
|
244
|
Due in 5-10 years
|
|
Due after 10 years
(1)
|
41
|
Total
|
$911
|
(1)
|
Includes $41 million of asset-backed securities that mature over time and are being reported at their final maturity dates.
|
Unrealized gains and losses, net of tax, are computed on a specific identification basis and are reported as a separate component of accumulated other comprehensive (loss) income in shareholders’ equity until realized.
The following tables provide the fair value and gross unrealized losses of the Company’s investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012 (in millions):
|
|
|
June 30, 2013
|
|
|
|
12 months or greater
|
|
Total
|
|
Number of
securities
in a loss
position
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
(1)
|
Asset-backed securities
|
20
|
|
$
|
40
|
|
$
|
(8)
|
|
$
|
40
|
|
$
|
(8)
|
Total long-term investments
|
20
|
|
$
|
40
|
|
$
|
(8)
|
|
$
|
40
|
|
$
|
(8)
|
(1)
|
Unrealized losses in securities less than 12 months were not significant.
|
|
|
|
December 31, 2012
|
|
|
|
12 months or greater
|
|
Total
|
|
Number of
securities
in a loss
position
|
|
Fair
value
|
|
Unrealized
losses
(1)
|
|
Fair
value
|
|
Unrealized
losses
|
Asset-backed securities
|
22
|
|
$
|
40
|
|
$
|
(11)
|
|
$
|
40
|
|
$
|
(11)
|
Total long-term investments
|
22
|
|
$
|
40
|
|
$
|
(11)
|
|
$
|
40
|
|
$
|
(11)
|
(1)
|
Unrealized losses in securities less than 12 months were not significant.
|
As of June 30, 2013 and December 31, 2012, for securities that have credit losses, an other than temporary impairment loss of $6 million and $9 million, respectively, is recognized in accumulated other comprehensive (loss) income.
Proceeds from sales and maturities of short-term investments totaled approximately $1.0 billion for both the six months ended June 30, 2013 and 2012.
8. Inventories
Inventories comprise the following (in millions):
|
June 30,
2013
|
|
December 31,
2012
|
Finished goods
|
$
|
364
|
|
$
|
392
|
Work in process
|
|
222
|
|
|
168
|
Raw materials and accessories
|
|
423
|
|
|
271
|
Supplies and packing materials
|
|
231
|
|
|
220
|
Total inventories
|
$
|
1,240
|
|
$
|
1,051
|
9. Investments
Investments comprise the following (in millions):
|
Ownership
interest
(1)
|
|
June 30,
2013
|
|
December 31,
2012
|
Affiliated companies accounted for by the equity method
|
|
|
|
|
|
|
|
|
|
Samsung Corning Precision Materials Co., Ltd.
|
|
50%
|
|
|
$
|
3,224
|
|
$
|
3,346
|
Dow Corning Corporation
|
|
50%
|
|
|
|
1,204
|
|
|
1,191
|
All other
|
20%
|
to
|
50%
|
|
|
363
|
|
|
375
|
|
|
|
|
|
|
4,791
|
|
|
4,912
|
Other investments
|
|
|
|
|
|
18
|
|
|
3
|
Total
|
|
|
|
|
$
|
4,809
|
|
$
|
4,915
|
(1)
|
Amounts reflect Corning’s direct ownership interests in the respective affiliated companies. Corning does not exercise voting control nor control the operations of any of these entities.
|
Related party information for these investments in affiliates follows (in millions):
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Related Party Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
Corning sales to affiliated companies
|
$
|
3
|
|
$
|
15
|
|
$
|
6
|
|
$
|
28
|
Corning purchases from affiliated companies
|
$
|
68
|
|
$
|
50
|
|
$
|
137
|
|
$
|
68
|
Corning transfers of assets, at cost, to affiliated companies
|
$
|
7
|
|
$
|
16
|
|
$
|
13
|
|
$
|
25
|
Dividends received from affiliated companies
|
$
|
21
|
|
$
|
3
|
|
$
|
182
|
|
$
|
521
|
Royalty income from affiliated companies
|
$
|
14
|
|
$
|
22
|
|
$
|
30
|
|
$
|
44
|
Corning services to affiliates
|
|
|
|
$
|
6
|
|
$
|
2
|
|
$
|
16
|
As of June 30, 2013, balances due to and due from affiliates were $86 million and $47 million, respectively. As of December 31, 2012, balances due to and due from affiliates were $37 million and $61 million, respectively.
We have contractual agreements with several of our equity affiliates, including sales, purchasing, and licensing and technology agreements.
Summarized results of operations for our two significant investments accounted for by the equity method follow:
Samsung Corning Precision Materials Co. Ltd. (Samsung Corning Precision)
Samsung Corning Precision is a South Korea-based manufacturer primarily of liquid crystal display (LCD) glass for flat panel displays. Samsung Corning Precision’s results of operations follow (in millions):
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
592
|
|
$
|
785
|
|
$
|
1,250
|
|
$
|
1,569
|
Gross profit
|
$
|
350
|
|
$
|
540
|
|
$
|
748
|
|
$
|
1,064
|
Net income attributable to Samsung Corning Precision
|
$
|
224
|
|
$
|
402
|
|
$
|
496
|
|
$
|
773
|
Corning’s equity in earnings of Samsung Corning Precision
|
$
|
111
|
|
$
|
193
|
|
$
|
244
|
|
$
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
Related Party Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
Corning purchases from Samsung Corning Precision
|
$
|
63
|
|
$
|
42
|
|
$
|
123
|
|
$
|
52
|
Dividends received from Samsung Corning Precision
|
|
|
|
|
|
|
$
|
143
|
|
$
|
518
|
Royalty income from Samsung Corning Precision
|
$
|
14
|
|
$
|
21
|
|
$
|
29
|
|
$
|
43
|
Corning transfers of machinery and equipment to Samsung Corning Precision at cost
(1)
|
$
|
7
|
|
$
|
16
|
|
$
|
13
|
|
$
|
25
|
(1)
|
Corning purchases machinery and equipment on behalf of Samsung Corning Precision to support its capital expansion initiatives. The machinery and equipment are transferred to Samsung Corning Precision at our cost basis.
|
In the three and six months ended June 30, 2013, Corning’s equity earnings were negatively impacted by $14 million and $27 million, respectively, when compared to the same periods in the prior year, as a result of higher taxes due to the partial expiration of tax holidays in Korea.
As of June 30, 2013, balances due from Samsung Corning Precision were $14 million and balances due to Samsung Corning Precision were $84 million. As of December 31, 2012, balances due from Samsung Corning Precision were $15 million and balances due to Samsung Corning Precision were $34 million.
Corning owns 50% of Samsung Corning Precision. Samsung Display Co., Ltd. owns 43% and other shareholders own the remaining 7%.
In April 2011, Korean tax authorities completed a tax audit of Samsung Corning Precision. As a result, the tax authorities issued a pre-assessment of approximately $46 million for an asserted underpayment of withholding tax on dividends paid from September 2006 through March 2009. Our first level of appeal was denied on October 5, 2011 and a formal assessment was issued. The assessment was paid in full in the fourth quarter of 2011, which will allow us to continue the appeal process. Samsung Corning Precision and Corning believe we will maintain our position when all available appeal remedies have been exhausted.
Dow Corning Corporation (Dow Corning)
Dow Corning is a U.S.-based manufacturer of silicon products. Dow Corning’s results of operations follow (in millions):
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,430
|
|
$
|
1,571
|
|
$
|
2,694
|
|
$
|
3,093
|
Gross profit
(1)
|
$
|
385
|
|
$
|
395
|
|
$
|
602
|
|
$
|
732
|
Net income attributable to Dow Corning
|
$
|
87
|
|
$
|
121
|
|
$
|
149
|
|
$
|
192
|
Corning’s equity in earnings of Dow Corning
|
$
|
45
|
|
$
|
61
|
|
$
|
80
|
|
$
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
Related Party Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
Corning purchases from Dow Corning
|
$
|
5
|
|
$
|
6
|
|
$
|
11
|
|
$
|
12
|
(1)
|
Gross profit for the three months ended June 30, 2013 includes R&D cost of $62 million (2012: $69 million) and selling expenses of $2 million (2012: $3 million). Gross profit for the six months ended June 30, 2013 includes R&D cost of $127 million (2012: $138 million) and selling expenses of $6 million (2012: $7 million).
|
At June 30, 2013 and December 31, 2012, amounts owed to Dow Corning were not significant.
At June 30, 2013, Dow Corning’s marketable securities included approximately $76 million of auction rate securities, net of a temporary impairment of an insignificant amount.
Corning and The Dow Chemical Company (Dow Chemical) each own 50% of the common stock of Dow Corning. 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. 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 $1.7 billion to the settlement trust. As of June 30, 2013, Dow Corning had recorded a reserve for breast implant litigation of $1.6 billion.
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. As of June 30, 2013, Dow Corning has estimated the liability to commercial creditors to be within the range of $92 million to $301 million. As Dow Corning management believes no single amount within the range appears to be a better estimate than any other amount within the range, Dow Corning has recorded the minimum liability within the range. Should Dow Corning not prevail in this matter, Corning’s equity earnings would be reduced by its 50% share of the amount in excess of $92 million, net of applicable tax benefits.
On July 20, 2012, the Chinese Ministry of Commerce (“MOFCOM”) initiated anti-dumping and countervailing duty investigations of imports of solar-grade polycrystalline silicon products from the U.S. and Korea, based on a petition filed by Chinese solar-grade polycrystalline silicon producers. The petition alleges that producers within these countries, including a consolidated subsidiary of Dow Corning, exported solar-grade polycrystalline silicon to China at less than normal value, and that production of solar-grade polycrystalline silicon in the U.S. has been subsidized by the U.S. government. On July 18, 2013, MOFCOM announced its preliminary determination that China’s solar-grade polycrystalline silicon industry suffered material damage because of dumping by producers in the U.S. and Korea. The Chinese authorities imposed provisional antidumping duties on producers in the U.S. and Korea ranging from 2.4% to 57.0%, including duties of 53.3% on future imports of solar-grade polycrystalline silicon products from Dow Corning and its consolidated subsidiaries into China. No decision on subsidies has been announced. Although subject to a final review process by MOFCOM, the requirement for solar-grade polycrystalline silicon producers to pay provisional duties on imports became effective July 24, 2013. The duties do not apply to past imports. Dow Corning and its consolidated subsidiaries will continue to cooperate with MOFCOM in the investigations and are contesting the determination.
As discussed in our 2012 Form 10-K, during the fourth quarter of 2012, negative events and circumstances at Dow Corning indicated that assets of Dow Corning’s polycrystalline silicon business might be impaired. In accordance with accounting guidance for impairment of long-lived assets, Dow Corning compared estimated undiscounted cash flows to the assets’ carrying value and determined that the asset group was recoverable as of December 31, 2012. Dow Corning is evaluating the impact of the preliminary determination notice received from MOFCOM in July 2013. Based on current expectations, Dow Corning believes its estimate of future undiscounted cash flows will continue to indicate the assets are recoverable. However, it is reasonably possible that the estimate of undiscounted cash flows may change in the near term resulting in the need to write down those assets to fair value. Dow Corning’s estimate of cash flows might change as a result of continued pricing deterioration, ongoing oversupply in the market, or other adverse market conditions that result in non-performance by customers under long-term contracts. Corning’s share of the carrying value of this asset group is approximately $800 million, after tax.
10. Acquisition
On October 31, 2012, Corning acquired all of the shares of Discovery Labware, Inc. and Plasso Technology Limited and certain other assets (collectively referred to as “Purchased Assets”) from Becton Dickinson and Company for approximately $739 million. The Purchased Assets constitute a business; therefore, the acquisition was accounted for as a business combination. The business, referred to as Discovery Labware, designs, manufactures, markets and supplies cell culture, other laboratory reagents, core and advanced consumables for basic and applied research for life scientists, clinical researchers, and laboratory professionals globally.
The purchase price of the acquisition was allocated to the net tangible and other intangible assets acquired, with the remainder recorded as goodwill on the basis of fair value as follows (in millions):
Inventory and other current assets
|
$
|
74
|
Fixed Assets
|
|
81
|
Other intangible assets
|
|
279
|
Net tangible and intangible assets
|
$
|
434
|
Purchase price
|
|
739
|
Goodwill
(1)
|
$
|
305
|
(1)
|
The goodwill recognized is partly deductible for U.S. income tax purposes. The goodwill was allocated to the Life Sciences segment.
|
Goodwill is primarily related to the value of the Discovery Labware product portfolio and distribution network and its combination with Corning’s existing life sciences platform, as well as synergies and other intangibles that do not qualify for separate recognition. Other intangible assets consist mainly of distributor relationships, trademark and trade names and are amortized over a useful life of 20 years. Acquisition-related costs of $22 million in the twelve months ended December 31, 2012 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.
11. Property, Net of Accumulated Depreciation
Property, net follows (in millions):
|
June 30,
2013
|
|
December 31,
2012
|
Land
|
$
|
114
|
|
$
|
112
|
Buildings
|
|
4,180
|
|
|
4,324
|
Equipment
|
|
12,261
|
|
|
12,571
|
Construction in progress
|
|
1,082
|
|
|
1,270
|
|
|
17,637
|
|
|
18,277
|
Accumulated depreciation
|
|
(7,683)
|
|
|
(7,652)
|
Total
|
$
|
9,954
|
|
$
|
10,625
|
In the three months ended June 30, 2013 and 2012, interest costs capitalized as part of property, net, were $8 million and $22 million, respectively. In the six months ended June 30, 2013 and 2012, interest costs capitalized as part of property, net, were $17 million and $43 million, respectively
Manufacturing equipment includes certain components of production equipment that are constructed of precious metals. At June 30, 2013 and December 31, 2012, the recorded value of precious metals each totaled $2.3 billion and $2.4 billion, respectively. Depletion expense for precious metals in the three months ended June 30, 2013 and 2012 totaled $5 million and $5 million, respectively. Depletion expense for precious metals in the six months ended June 30, 2013 and 2012 totaled $11 million and $10 million, respectively.
12. Goodwill and Other Intangible Assets
The carrying amount of goodwill by segment for the periods ended June 30, 2013 and December 31, 2012 is as follows (in millions):
|
Telecom-
munications
|
|
Display
Technologies
|
|
Specialty
Materials
|
|
Life
Sciences
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
$
|
209
|
|
$
|
9
|
|
$
|
150
|
|
$
|
606
|
|
$
|
974
|
Acquired goodwill
(1)
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
32
|
Measurement period adjustment
(2)
|
|
|
|
|
|
|
|
|
|
|
(4)
|
|
|
(4)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
(1)
|
Balance at June 30, 2013
|
$
|
241
|
|
$
|
9
|
|
$
|
150
|
|
$
|
601
|
|
$
|
1,001
|
(1)
|
The company recorded a small acquisition and consolidated an equity company due to a change in control in the second quarter of 2013.
|
(2)
|
The Company recorded the acquisition of the Discovery Labware business of Becton Dickinson and Company in the fourth quarter of 2012. In the second quarter of 2013, Corning recorded measurement period adjustments of $4 million.
|
Corning’s gross goodwill balances were $7.5 billion and $7.4 billion for the periods ended June 30, 2013 and December 31, 2012, respectively. Accumulated impairment losses were $6.5 billion for the periods ended June 30, 2013 and December 31, 2012, and were generated entirely through goodwill impairments related to the Telecommunications segment recorded primarily in 2001.
Other intangible assets are as follows (in millions):
|
June 30, 2013
|
|
December 31, 2012
|
|
Gross
|
|
Accumulated
amortization
|
|
Net
|
|
Gross
|
|
Accumulated
amortization
|
|
Net
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents, trademarks, and trade names
|
$
|
290
|
|
$
|
(133)
|
|
$
|
157
|
|
$
|
282
|
|
$
|
(128)
|
|
$
|
154
|
Customer lists and other
|
|
437
|
|
|
(36)
|
|
|
401
|
|
|
394
|
|
|
(26)
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
727
|
|
$
|
(169)
|
|
$
|
558
|
|
$
|
676
|
|
$
|
(154)
|
|
$
|
522
|
Amortized intangible assets are primarily related to the Telecommunications and Life Sciences segments. The net carrying amount of intangible assets increased $36 million during the first six months of 2013, primarily due to a small acquisition completed in the second quarter of 2013, and the consolidation of an equity company due to a change in control. This was offset by amortization of $15 million and foreign currency translation adjustments of $5 million.
Amortization expense related to these intangible assets is estimated to be $32 million for 2013, and approximately $32 million for 2014 through 2018.
13. Employee Retirement Plans
As discussed in Note 1 to the financial statements, in the first quarter of 2013, we elected to change our method of recognizing actuarial gains and losses for our defined benefit pension plans. In the second quarter of 2013, we recorded a pre-tax gain in the amount of $41 million which represented the impact to income for the finalization of the valuation of our defined benefit pension plan obligation dated December 31, 2012.
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
June 30,
|
|
Six months ended
June 30,
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
18
|
|
$
|
15
|
|
$
|
37
|
|
$
|
30
|
|
$
|
3
|
|
$
|
3
|
|
$
|
7
|
|
$
|
6
|
Interest cost
|
|
32
|
|
|
38
|
|
|
66
|
|
|
76
|
|
|
9
|
|
|
11
|
|
|
19
|
|
|
22
|
Expected return on plan assets
(1)
|
|
(42)
|
|
|
(41)
|
|
|
(84)
|
|
|
(82)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
4
|
|
|
8
|
|
|
8
|
Amortization of prior service cost
|
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
|
(1)
|
|
|
(1)
|
|
|
(3)
|
|
|
(2)
|
Recognition of actuarial gain
(1)
|
|
(41)
|
|
|
|
|
|
(41)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pension and postretirement benefit expense
(1)
|
$
|
(32)
|
|
$
|
13
|
|
$
|
(20)
|
|
$
|
26
|
|
$
|
15
|
|
$
|
17
|
|
$
|
31
|
|
$
|
34
|
(1)
|
As revised for the change in our method of recognizing pension expense. See Note 1 of Notes to Consolidated Financial Statements for a discussion of the change and the impacts of the change for the three and six months ended June 30, 2012.
|
Corning offers postretirement plans that provide health care and life insurance benefits for retirees and eligible dependents. Certain employees may become eligible for such postretirement benefits upon reaching retirement age and service requirements. For current retirees (including surviving spouses) and active employees eligible for the salaried retiree medical program, we placed a “cap” on the amount we will contribute toward retiree medical coverage in the future. The cap is equal to 120% of our 2005 contributions toward retiree medical benefits. Once our contributions toward salaried retiree medical costs reach this cap, impacted retirees will have to pay the excess amount in addition to their regular contributions for coverage. This cap was attained for post-65 retirees in 2008 and has impacted their contribution rate in 2009 and going forward. The pre-65 retirees triggered the cap in 2010, which has impacted their contribution rate in 2011 and going forward. Furthermore, employees hired or rehired on or after January 1, 2007 will be eligible for Corning retiree medical upon retirement; however, these employees will pay 100% of the cost.
14. Hedging Activities
Corning is exposed to interest rate and foreign currency risks due to the movement of these rates.
The areas in which exchange rate fluctuations affect us include:
·
|
Financial instruments and transactions denominated in foreign currencies, which impact earnings; and
|
·
|
The translation of net assets in foreign subsidiaries for which the functional currency is not the U.S. dollar, which impacts our net equity.
|
Our most significant foreign currency exposures relate to the Japanese yen, Korean won, New Taiwan dollar, and the Euro. We seek to mitigate the impact of exchange rate movements on our operating results by using over-the-counter (OTC) derivative instruments including foreign exchange forward and option contracts typically with durations of 36 months or less. In general, these hedges expire coincident with the timing of the underlying foreign currency commitments and transactions.
While we transact these derivative contracts with a diverse group of highly-rated major global financial institutions, we are exposed to potential losses in the event of non-performance by these counterparties. However, we minimize this risk by limiting the counterparties to a diverse group of highly-rated major international financial institutions with which we have other financial relationships. We do not expect to record any losses as a result of such counterparty default. Neither we nor our counterparties are required to post collateral for these financial instruments. In July, the Finance Committee of the Board of Directors approved the election to use end-user exception to the mandatory swap clearing requirement of the Dodd-Frank Act.
Cash Flow Hedges
Our cash flow hedging activities utilize OTC foreign exchange forward contracts to reduce the risk that movements in exchange rates will adversely affect the net cash flows resulting from the sale of products to foreign customers and purchases from foreign suppliers. Our cash flow hedging activity also uses interest rate swaps to reduce the risk of increases in benchmark interest rates on the probable issuance of debt and associated interest payments. Corning uses a regression analysis to monitor the effectiveness of its cash flow hedges both prospectively and retrospectively. Through June 30, 2013, the hedge ineffectiveness related to these instruments is not material. Corning defers net gains and losses related to effective portion of cash flow hedges into accumulated other comprehensive income on the consolidated balance sheet until such time as the hedged item impacts earnings. At June 30, 2013, the amount of net gain expected to be reclassified into earnings within the next 12 months is $55 million.
Fair Value Hedges
In October of 2012, we entered into two interest rate swaps that are designated as fair value hedges and economically exchange a notional amount of $550 million of previously issued fixed rate long-term debt to floating rate debt. Under the terms of the swap agreements, we pay the counterparty a floating rate that is indexed to the one-month LIBOR rate.
Each fair value hedge (swap) was entered into subsequent to the initial recognition of the hedged item; therefore these swaps do not meet the criteria to qualify for the shortcut method. Therefore, Corning utilizes the long haul method for effectiveness analysis, both retrospectively and prospectively. The analysis excludes the impact of credit risk from the assessment of hedge effectiveness. The amount recorded in current period earnings in the other income, net component, relative to ineffectiveness, is nominal for the three and six months ended June 30, 2013. There were no outstanding fair value hedges in the three and six months ended June 30, 2012.
Net gains and losses from fair value hedges and the effects of the corresponding hedged item are recorded on the same line item of the consolidated statement of operations.
Undesignated Hedges
Corning also uses OTC foreign exchange forward and option contracts that are not designated as hedging instruments for accounting purposes. The undesignated hedges limit exposures to foreign functional currency fluctuations related to certain subsidiaries’ monetary assets, monetary liabilities and net earnings in foreign currencies.
A significant portion of the Company’s non-U.S. revenues are denominated in Japanese yen. When these revenues are translated back to U.S. dollars, the Company is exposed to foreign exchange rate movements in the Japanese yen. To protect translated earnings against movements in the Japanese yen, the Company has entered into a series of purchased collars and average rate forwards.
The Company also uses these types of contracts to reduce the potential for unfavorable changes in foreign exchange rates to decrease the U.S. dollar value of translated earnings. With a purchased collar structure, the Company writes a local currency call option and purchases a local currency put option. The purchased collars offset the impact of translated earnings above the put price and below the call strike price and that offset is reported in other income, net. The Company entered into a series of purchased collars, settling quarterly, to hedge the effect of translation impact for each respective quarter, and span up to the fourth quarter of 2014. Due to the nature of the instruments, only either the put option or the call option can be exercised at maturity. As of June 30, 2013, the U.S. dollar net notional value of the purchased collars is $4.3 billion. The Company entered into a series of average rate forwards with no associated premium, which will partially hedge the impact of Japanese yen translation on the Company’s projected 2015 net income. These forwards settle net without obligation to deliver Japanese yen.
The Company benefits from the increase in the U.S. dollar equivalent value of its foreign currency earnings in translation. The purchased collar, within other income, would cap the benefit at the strike price of the written call or offset the decline from translation above the strike price of the purchased put.
The fair value of these derivative contracts are recorded as either assets (gain position) or liabilities (loss position) on the Consolidated Balance Sheet. Changes in the fair value of the derivative contracts are recorded currently in earnings in the other income line of the Consolidated Statement of operations.
The following table summarizes the notional amounts and respective fair values of Corning’s derivative financial instruments on a gross basis for June 30, 2013 and December 31, 2012 (in millions):
|
U.S. Dollar
|
|
Asset derivatives
|
|
Liability derivatives
|
|
Gross notional amount
|
|
Balance
sheet location
|
|
Fair value
|
|
Balance
sheet location
|
|
Fair value
|
|
2013
|
|
2012
|
|
|
2013
|
|
2012
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$ 377
|
|
$ 719
|
|
Other current assets
|
|
$ 56
|
|
$ 57
|
|
Other accrued liabilities
|
|
$ (1)
|
|
$ (3)
|
Interest rate contracts
|
$ 1,300
|
|
$ 550
|
|
Other assets
|
|
$ 37
|
|
|
|
Other liabilities
|
|
$(24)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$ 559
|
|
$1,939
|
|
Other current assets
|
|
$ 15
|
|
$109
|
|
Other accrued liabilities
|
|
$ (4)
|
|
$(10)
|
Translated earnings contracts
|
$ 9,479
|
|
|
|
Other current assets
|
|
$198
|
|
|
|
Other accrued liabilities
|
|
$(20)
|
|
|
|
|
|
|
|
Other assets
|
|
$176
|
|
|
|
Other liabilities
|
|
$(30)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
$11,715
|
|
$3,208
|
|
|
|
$482
|
|
$166
|
|
|
|
$(79)
|
|
$(13)
|
The following table summarizes the effect of derivative financial instruments on Corning’s consolidated financial statements for the three months ended June 30, 2013 and 2012 (in millions):
|
Effect of derivative instruments on the consolidated financial statements
for the three months ended June 30
(2)
|
Derivatives in hedging relationships
|
Gain/(loss)
recognized in other
comprehensive income
(OCI)
|
|
Location of gain/(loss)
reclassified from
accumulated OCI into
income (effective)
|
|
Gain reclassified from
accumulated OCI into
income (effective)
(1)
|
2013
|
|
2012
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
$37
|
|
|
|
Cost of sales
|
|
$11
|
|
$3
|
Foreign exchange contracts
|
15
|
|
$(8)
|
|
Royalties
|
|
18
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total cash flow hedges
|
$52
|
|
$(8)
|
|
|
|
$29
|
|
$6
|
(1)
|
The amount of hedge ineffectiveness for the three months ended June 30, 2013 and 2012 was insignificant.
|
(2)
|
Certain amounts for prior periods were reclassified to conform to the current year presentation.
|
The following table summarizes the effect of derivative financial instruments on Corning’s consolidated financial statements for the six months ended June 30, 2013 and 2012 (in millions):
|
Effect of derivative instruments on the consolidated financial statements
for the six months ended June 30
(2)
|
Derivatives in hedging relationships
|
Gain recognized in other
comprehensive income
(OCI)
|
|
Location of gain
reclassified from
accumulated OCI into
income (effective)
|
|
Gain reclassified from
accumulated OCI into
income (effective)
(1)
|
2013
|
|
2012
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
$37
|
|
$15
|
|
Cost of sales
|
|
$19
|
|
$ 6
|
Foreign exchange contracts
|
52
|
|
32
|
|
Royalties
|
|
31
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Total cash flow hedges
|
$89
|
|
$47
|
|
|
|
$50
|
|
$12
|
(1)
|
The amount of hedge ineffectiveness for the six months ended June 30, 2013 and 2012 was insignificant.
|
(2)
|
Certain amounts for prior periods were reclassified to conform to the current year presentation.
|
The following table summarizes the effect on the consolidated financial statements relating to Corning’s derivative financial instruments (in millions):
Undesignated derivatives
|
Location of gain/(loss)
recognized in income
|
|
Gain/(loss) recognized in income
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other income, net
|
|
$ 52
|
|
$(41)
|
|
$205
|
|
$97
|
Translated earnings contracts
|
Other income, net
|
|
227
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
Total undesignated
|
|
|
$279
|
|
$(41)
|
|
$456
|
|
$97
|
15. 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 accounting pronouncements that require or permit fair value measurement and require the use of observable market data when available. As of June 30, 2013 and December 31, 2012, the Company did not have any financial assets or liabilities that were measured on a recurring basis using unobservable (or Level 3) inputs.
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
|
|
June 30,
2013
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
Significant other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
$
|
870
|
|
$
|
870
|
|
|
|
|
|
|
Other current assets
(1)
|
$
|
269
|
|
|
|
|
$
|
269
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
(1)(2)
|
$
|
254
|
|
|
|
|
$
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
(1)
|
$
|
25
|
|
|
|
|
$
|
25
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
(1)
|
$
|
54
|
|
|
|
|
$
|
54
|
|
|
|
(1)
|
Derivative assets and liabilities include foreign exchange contracts, interest rate contracts, and translated earnings contracts which are measured using observable quoted prices for similar assets and liabilities.
|
(2)
|
Other assets include asset-backed securities which are measured using observable quoted prices for similar assets.
|
|
|
|
Fair value measurements at reporting date using
|
|
December 31,
2012
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
Significant other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
$
|
1,156
|
|
$
|
1,156
|
|
|
|
|
|
Other current assets
(1)
|
$
|
166
|
|
|
|
|
$
|
166
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
Other assets
(2)
|
$
|
40
|
|
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
(1)
|
$
|
13
|
|
|
|
|
$
|
13
|
|
|
(1)
|
Derivative assets and liabilities include foreign exchange contracts which are measured using observable quoted prices for similar assets and liabilities.
|
(2)
|
Other assets include asset-backed securities which are measured using observable quoted prices for similar assets.
|
16. Accumulated Other Comprehensive Income
A summary of changes in the components of accumulated other comprehensive income (loss), including our proportionate share of equity method investee’s accumulated other comprehensive income (loss), is as follows (in millions):
|
Changes in Accumulated Other Comprehensive Income by Component
(1)
for the three months ended June 30, 2013
|
|
Foreign
currency
translation
adjustment
and other
|
|
Unamortized
actuarial
losses and
prior service
costs
|
|
Net
unrealized
gains
(losses) on
investments
|
|
Net
unrealized
gains
(losses) on
designated
hedges
|
|
Accumulated
other
comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
669
|
|
$
|
(813)
|
|
$
|
(17)
|
|
$
|
29
|
|
$
|
(132)
|
Other comprehensive (loss) income before reclassifications
(2)
|
|
(224)
|
|
|
14
|
|
|
2
|
|
|
32
|
|
|
(176)
|
Amounts reclassified from accumulated other comprehensive loss
(3)
|
|
|
|
|
4
|
|
|
|
|
|
(18)
|
|
|
(14)
|
Equity method affiliates
(4)
|
|
(72)
|
|
|
5
|
|
|
1
|
|
|
|
|
|
(66)
|
Net current-period other comprehensive income
|
|
(296)
|
|
|
23
|
|
|
3
|
|
|
14
|
|
|
(256)
|
Ending balance
|
$
|
373
|
|
$
|
(790)
|
|
$
|
(14)
|
|
$
|
43
|
|
$
|
(388)
|
(1)
|
All amounts are after tax. Amounts in parentheses indicate debits to accumulated other comprehensive income.
|
(2)
|
Amounts are net of total tax expense of $(27) million, including $(20) million related to the hedges component, $(8) million related to the retirement plans component and $1 million related to the investments component.
|
(3)
|
Amounts are net of total tax benefit of $11 million related to the hedges component.
|
(4)
|
Tax effects related to equity method affiliates are not significant.
|
|
Changes in Accumulated Other Comprehensive Income by Component
(1)
for the six months ended June 30, 2013
|
|
Foreign
currency
translation
adjustment
and other
|
|
Unamortized
actuarial
losses and
prior service
costs
|
|
Net
unrealized
gains
(losses) on
investments
|
|
Net
unrealized
gains
(losses) on
designated
hedges
|
|
Accumulated
other
comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
1,174
|
|
$
|
(820)
|
|
$
|
(16)
|
|
$
|
18
|
|
$
|
356
|
Other comprehensive (loss) income before reclassifications
(2)
|
|
(553)
|
|
|
14
|
|
|
|
|
|
56
|
|
|
(483)
|
Amounts reclassified from accumulated other comprehensive loss
(3)
|
|
|
|
|
5
|
|
|
|
|
|
(32)
|
|
|
(27)
|
Equity method affiliates
(4)
|
|
(248)
|
|
|
11
|
|
|
2
|
|
|
1
|
|
|
(234)
|
Net current-period other comprehensive income
|
|
(801)
|
|
|
30
|
|
|
2
|
|
|
25
|
|
|
(744)
|
Ending balance
|
$
|
373
|
|
$
|
(790)
|
|
$
|
(14)
|
|
$
|
43
|
|
$
|
(388)
|
(1)
|
All amounts are after tax. Amounts in parentheses indicate debits to accumulated other comprehensive income.
|
(2)
|
Amounts are net of total tax expense of $(42) million, including $(33) million related to the hedges component, $(8) million related to the retirement plans component and $(1) million related to the investments component.
|
(3)
|
Amounts are net of total tax benefit of $16 million, including $18 million related to the hedges component and $(2) million related to the retirement plans component.
|
(4)
|
Tax effects related to equity method affiliates are not significant.
|
|
Changes in Accumulated Other Comprehensive Income by Component
(1)
for the three months ended June 30, 2012
|
|
Foreign
currency
translation
adjustment
and other
|
|
Unamortized
actuarial
losses and
prior service
costs
|
|
Net
unrealized
gains
(losses) on
investments
|
|
Net
unrealized
gains
(losses) on
designated
hedges
|
|
Accumulated
other
comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
1,254
|
|
$
|
(817)
|
|
$
|
(23)
|
|
$
|
1
|
|
$
|
415
|
Other comprehensive income (loss) before reclassifications
(2)
|
|
70
|
|
|
1
|
|
|
|
|
|
(5)
|
|
|
66
|
Amounts reclassified from accumulated other comprehensive income
(3)
|
|
|
|
|
2
|
|
|
|
|
|
(4)
|
|
|
(2)
|
Equity method affiliates
(4)
|
|
(56)
|
|
|
5
|
|
|
(1)
|
|
|
1
|
|
|
(51)
|
Net current-period other comprehensive income
|
|
14
|
|
|
8
|
|
|
(1)
|
|
|
(8)
|
|
|
13
|
Ending balance
|
$
|
1,268
|
|
$
|
(809)
|
|
$
|
(24)
|
|
$
|
(7)
|
|
$
|
428
|
(1)
|
All amounts are after tax. Amounts in parentheses indicate debits to accumulated other comprehensive income.
|
(2)
|
Amounts are net of total tax benefit of $3 million related to the hedges component.
|
(3)
|
Amounts are net of total tax benefit of $1 million, including $2 million related to the hedges component and $(1) million related to the retirement plans component.
|
(4)
|
Tax effects related to equity method affiliates are not significant.
|
|
Changes in Accumulated Other Comprehensive Income by Component
(1)
for the six months ended June 30, 2012
|
|
Foreign
currency
translation
adjustment
and other
|
|
Unamortized
actuarial
losses and
prior service
costs
|
|
Net
unrealized
gains
(losses) on
investments
|
|
Net
unrealized
gains
(losses) on
designated
hedges
|
|
Accumulated
other
comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
1,353
|
|
$
|
(819)
|
|
$
|
(29)
|
|
$
|
(29)
|
|
$
|
476
|
Other comprehensive (loss) income before reclassifications
(2)
|
|
(143)
|
|
|
1
|
|
|
6
|
|
|
30
|
|
|
(106)
|
Amounts reclassified from accumulated other comprehensive income
(3)
|
|
|
|
|
4
|
|
|
(7)
|
|
|
(8)
|
|
|
(11)
|
Equity method affiliates
(4)
|
|
58
|
|
|
5
|
|
|
6
|
|
|
|
|
|
69
|
Net current-period other comprehensive income
|
|
(85)
|
|
|
10
|
|
|
5
|
|
|
22
|
|
|
(48)
|
Ending balance
|
$
|
1,268
|
|
$
|
(809)
|
|
$
|
(24)
|
|
$
|
(7)
|
|
$
|
428
|
(1)
|
All amounts are after tax. Amounts in parentheses indicate debits to accumulated other comprehensive income.
|
(2)
|
Amounts are net of total tax expense of $(20) million, including $(17) million related to the hedges component and $(3) million related to the investments component.
|
(3)
|
Amounts are net of total tax benefit of $4 million, including $4 million related to the hedges component, $3 million related to the investments component and $(3) million related to the retirement plans component.
|
(4)
|
Tax effects related to equity method affiliates are not significant.
|
Reclassifications Out of Accumulated Other Comprehensive (Loss) Income (AOCI) by Component
(1)
|
Details about AOCI Components
|
Amount reclassified from AOCI
|
|
Affected line item
in the consolidated
statements of income
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
$
|
(4)
|
|
$
|
(3)
|
|
$
|
(8)
|
|
$
|
(7)
|
|
(2)
|
Amortization of prior service cost
|
|
|
|
|
|
|
|
1
|
|
|
|
|
(2)
|
|
|
(4)
|
|
|
(3)
|
|
|
(7)
|
|
|
(7)
|
|
Total before tax
|
|
|
|
|
|
1
|
|
|
2
|
|
|
3
|
|
Tax benefit
|
|
$
|
(4)
|
|
$
|
(2)
|
|
$
|
(5)
|
|
$
|
(4)
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains on investments
|
|
|
|
|
|
|
|
|
|
$
|
10
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains on designated hedges
|
$
|
11
|
|
$
|
3
|
|
$
|
19
|
|
$
|
6
|
|
Cost of sales
|
|
|
18
|
|
|
3
|
|
|
31
|
|
|
6
|
|
Royalties
|
|
|
29
|
|
|
6
|
|
|
50
|
|
|
12
|
|
Total before tax
|
|
|
(11)
|
|
|
(2)
|
|
|
(18)
|
|
|
(4)
|
|
Tax expense
|
|
|
18
|
|
|
4
|
|
|
32
|
|
|
8
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
$
|
14
|
|
$
|
2
|
|
$
|
27
|
|
$
|
11
|
|
Net of tax
|
(1)
|
Amounts in parentheses indicate debits to the statement of income.
|
(2)
|
These accumulated other comprehensive income components are included in net periodic pension cost. See Note 13 – Employee Retirement Plans for additional details.
|
17. Share-based Compensation
Stock Compensation Plans
The Company measures and recognizes compensation cost for all share-based payment awards made to employees and directors based on estimated fair values. Fair values for stock options were estimated using a multiple-point Black-Scholes valuation model. Share-based compensation cost was approximately $14 million and $16 million for the three months ended June 30, 2013 and 2012, respectively, and approximately $25 million and $40 million for the six months ended June 30, 2013 and 2012, respectively. Amounts for all periods presented included compensation expense for employee stock options and time-based restricted stock and restricted stock units. Performance-based restricted stock and restricted stock units fully vested in the first quarter of 2012. Compensation expense for performance-based restricted stock and restricted stock units is included in periods ended prior to April 1, 2012.
Stock Options
Our Stock Option Plans provide non-qualified and incentive stock options to purchase authorized but unissued shares, or treasury shares, at the market price on the grant date and generally become exercisable in installments from one to five years from the grant date. The maximum term of non-qualified and incentive stock options is 10 years from the grant date.
The following table summarizes information concerning stock options outstanding including the related transactions under the Stock Option Plans for the six months ended June 30, 2013:
|
Number
of Shares
(in thousands)
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term in
Years
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Options Outstanding as of December 31, 2012
|
64,061
|
|
$16.63
|
|
|
|
|
Granted
|
4,339
|
|
14.34
|
|
|
|
|
Exercised
|
(5,134)
|
|
7.64
|
|
|
|
|
Forfeited and Expired
|
(1,307)
|
|
13.48
|
|
|
|
|
Options Outstanding as of June 30, 2013
|
61,959
|
|
17.28
|
|
5.12
|
|
76,514
|
Options Expected to Vest as of June 30, 2013
|
61,780
|
|
17.29
|
|
5.12
|
|
76,327
|
Options Exercisable as of June 30, 2013
|
48,268
|
|
18.08
|
|
4.07
|
|
64,810
|
The aggregate intrinsic value (market value of stock less option exercise price) in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price on June 30, 2013, which would have been received by the option holders had all option holders exercised their “in-the-money” options as of that date.
As of June 30, 2013, there was approximately $33 million of unrecognized compensation cost related to stock options granted under the Plans. The cost is expected to be recognized over a weighted-average period of 1.5 years. Compensation cost related to stock options was approximately $6 million and $9 million for the three months ended June 30, 2013 and 2012, respectively, and approximately $11 million and $21 million for the six months ended June 30, 2013 and 2012, respectively.
Proceeds received from the exercise of stock options were $39 million and $19 million for the six months ended June 30, 2013 and 2012, respectively. Proceeds received from the exercise of stock options were included in financing activities on the Company’s Consolidated Statements of Cash Flows. The total intrinsic value of options exercised for the six months ended June 30, 2013 and 2012 was approximately $30 million and $20 million, respectively, which is currently deductible for tax purposes. However, these tax benefits were not fully recognized due to net operating loss carryforwards available to the Company. Refer to Note 5 (Income Taxes) to the consolidated financial statements.
The following inputs were used for the valuation of option grants under our Stock Option Plans:
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Expected volatility
|
46.9
|
-
|
47.1%
|
|
48.1
|
-
|
48.3%
|
|
46.9
|
-
|
47.4%
|
|
48.1
|
-
|
48.9%
|
Weighted-average volatility
|
47.1
|
-
|
47.1%
|
|
48.3
|
-
|
48.3%
|
|
47.1
|
-
|
47.3%
|
|
48.3
|
-
|
48.5%
|
Expected dividends
|
2.79
|
-
|
2.79%
|
|
2.28
|
-
|
2.28%
|
|
2.79
|
-
|
3.02%
|
|
2.28
|
-
|
2.33%
|
Risk-free rate
|
0.8
|
-
|
1.1%
|
|
0.9
|
-
|
1.2%
|
|
0.8
|
-
|
1.5%
|
|
0.9
|
-
|
1.3%
|
Average risk-free rate
|
1.1
|
-
|
1.1%
|
|
1.2
|
-
|
1.2%
|
|
1.1
|
-
|
1.4%
|
|
1.2
|
-
|
1.3%
|
Expected term (in years)
|
5.8
|
-
|
7.2
|
|
5.7
|
-
|
7.1
|
|
5.8
|
-
|
7.2
|
|
5.7
|
-
|
7.1
|
Pre-vesting departure rate
|
0.4
|
-
|
4.1%
|
|
0.4
|
-
|
4.2%
|
|
0.4
|
-
|
4.1%
|
|
0.4
|
-
|
4.2%
|
Expected volatility is based on a blended approach defined as the weighted average of the short-term implied volatility, the most recent volatility for the period equal to the expected term, and the most recent 15-year historical volatility. The expected term assumption is the period of time the options are expected to be outstanding, and is calculated using a combination of historical exercise experience adjusted to reflect the current vesting period of options being valued, and partial life cycles of outstanding options. The risk-free rate assumption is the implied rate for a zero-coupon U.S. Treasury bond with a term equal to the option’s expected term. The ranges in the table above reflect results from separate groups of employees exhibiting different exercise behavior.
Incentive Stock Plans
The Corning Incentive Stock Plan permits restricted stock and restricted stock unit grants, either determined by specific performance goals or issued directly, in most instances, subject to the possibility of forfeiture and without cash consideration. Restricted stock and restricted stock units under the Incentive Stock Plan are granted at the closing market price on the grant date, contingently vest over a period of generally one to ten years, and generally have contractual lives of one to ten years. The fair value of each restricted stock grant or restricted stock unit awarded under the Incentive Stock Plans was estimated on the date of grant.
Time-Based Restricted Stock and Restricted Stock Units:
Time-based restricted stock and restricted stock units are issued by the Company on a discretionary basis, and are payable in shares of the Company’s common stock upon vesting. The fair value is based on the closing market price of the Company’s stock on the grant date. Compensation cost is recognized over the requisite vesting period and adjusted for actual forfeitures before vesting.
The following table represents a summary of the status of the Company’s non-vested time-based restricted stock and restricted stock units as of December 31, 2012, and changes which occurred during the six months ended June 30, 2013:
|
Shares
(000’s)
|
|
Weighted
Average
Grant-Date
Fair Value
|
Non-vested shares and share units at December 31, 2012
|
5,363
|
|
$
|
15.97
|
Granted
|
2,041
|
|
|
13.18
|
Vested
|
(1,398)
|
|
|
18.13
|
Forfeited
|
(64)
|
|
|
15.98
|
Non-vested shares and share units at June 30, 2013
|
5,942
|
|
$
|
14.50
|
As of June 30, 2013, there was approximately $35 million of unrecognized compensation cost related to non-vested time-based restricted stock and restricted stock units compensation arrangements granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.8 years. Compensation cost related to time-based restricted stock and restricted stock units was approximately $8 million and $7 million for the three months ended June 30, 2013 and 2012, respectively, and approximately $14 million and $17 million for the six months ended June 30, 2013 and 2012, respectively.
Performance-Based Restricted Stock and Restricted Stock Units:
The performance-based restricted stock and restricted stock unit compensation program was terminated in 2010. All performance-based restricted stock and restricted stock units were fully vested in the first quarter of 2012.
Performance-based restricted stock and restricted stock units were earned upon the achievement of certain targets, and were payable in shares of the Company’s common stock upon vesting, typically over a three-year period. The fair value was based on the closing market price of the Company’s stock on the grant date and assumed that the target payout level would be achieved. Compensation cost was recognized over the requisite vesting period and adjusted for actual forfeitures before vesting. During the performance period, compensation cost was adjusted based on changes in the expected outcome of the performance-related target.
As of June 30, 2013, there is no unrecognized compensation cost related to non-vested performance-based restricted stock and restricted stock units compensation arrangements granted under the Plan. Compensation cost related to performance-based restricted stock and restricted stock units was approximately $2 million for the six months ended June 30, 2012.
18. Significant Customers
For the three and six months ended June 30, 2013 and 2012, Corning had no customers that individually accounted for 10% or more of the Company’s consolidated net sales.
19. Reportable Segments
Our reportable segments are as follows:
·
|
Display Technologies – manufactures liquid crystal display (LCD) glass for flat panel displays.
|
·
|
Telecommunications – manufactures optical fiber and cable, and hardware and equipment components for the telecommunications industry.
|
·
|
Environmental Technologies – manufactures ceramic substrates and filters for automotive and diesel applications. This reportable segment is an aggregation of our Automotive and Diesel operating segments as these two segments share similar economic characteristics, products, customer types, production processes and distribution methods.
|
·
|
Specialty Materials – manufactures products that provide more than 150 material formulations for glass, glass ceramics and fluoride crystals to meet demand for unique customer needs.
|
·
|
Life Sciences – manufactures glass and plastic labware, equipment, media and reagents to provide workflow solutions for scientific applications.
|
All other segments that do not meet the quantitative threshold for separate reporting are grouped as “All Other.” This group is primarily comprised of development projects and results for new product lines.
We prepared the financial results for our reportable segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We included the earnings of equity affiliates that are closely associated with our reportable segments in the respective segment’s net income. We have allocated certain common expenses among segments differently than we would for stand-alone financial information prepared in accordance with U.S. GAAP. Segment net income may not be consistent with measures used by other companies. The accounting policies of our reportable segments are the same as those applied in the consolidated financial statements.
Reportable Segments
(in millions)
|
Display
Technologies
|
|
Telecom-
munications
|
|
Environmental
Technologies
|
|
Specialty
Materials
|
|
Life
Sciences
|
|
All
Other
|
|
Total
|
Three months ended
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
631
|
|
$
|
601
|
|
$
|
228
|
|
$
|
301
|
|
$
|
219
|
|
$
|
2
|
|
$
|
1,982
|
Depreciation
(1)
|
$
|
117
|
|
$
|
38
|
|
$
|
30
|
|
$
|
35
|
|
$
|
14
|
|
$
|
5
|
|
$
|
239
|
Amortization of purchased intangibles
|
|
|
|
$
|
2
|
|
|
|
|
|
|
|
$
|
6
|
|
|
|
|
$
|
8
|
Research, development and engineering expenses
(2)
|
$
|
18
|
|
$
|
31
|
|
$
|
22
|
|
$
|
40
|
|
$
|
5
|
|
$
|
35
|
|
$
|
151
|
Equity in earnings of affiliated companies
|
$
|
108
|
|
$
|
1
|
|
|
1
|
|
$
|
3
|
|
|
|
|
$
|
4
|
|
$
|
117
|
Income tax (provision) benefit
|
$
|
(84)
|
|
$
|
(38)
|
|
$
|
(18)
|
|
$
|
(28)
|
|
$
|
(13)
|
|
$
|
15
|
|
$
|
(166)
|
Net income (loss)
(3)
|
$
|
337
|
|
$
|
76
|
|
$
|
36
|
|
$
|
58
|
|
$
|
25
|
|
$
|
(31)
|
|
$
|
501
|
|
Display
Technologies
|
|
Telecom-
munications
|
|
Environmental
Technologies
|
|
Specialty
Materials
|
|
Life
Sciences
|
|
All
Other
|
|
Total
|
Three months ended
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
641
|
|
$
|
559
|
|
$
|
249
|
|
$
|
296
|
|
$
|
162
|
|
$
|
1
|
|
$
|
1,908
|
Depreciation
(1)
|
$
|
125
|
|
$
|
34
|
|
$
|
29
|
|
$
|
36
|
|
$
|
10
|
|
$
|
3
|
|
$
|
237
|
Amortization of purchased intangibles
|
|
|
|
$
|
2
|
|
|
|
|
|
|
|
$
|
2
|
|
|
|
|
$
|
4
|
Research, development and engineering expenses
(2)(4)
|
$
|
26
|
|
$
|
35
|
|
$
|
26
|
|
$
|
37
|
|
$
|
5
|
|
$
|
29
|
|
$
|
158
|
Equity in earnings of affiliated companies
|
$
|
184
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
$
|
9
|
|
$
|
195
|
Income tax (provision) benefit
(4)
|
$
|
(78)
|
|
$
|
(17)
|
|
$
|
(17)
|
|
$
|
(17)
|
|
$
|
(5)
|
|
$
|
12
|
|
$
|
(122)
|
Net income (loss)
(3)(4)
|
$
|
372
|
|
$
|
37
|
|
$
|
34
|
|
$
|
34
|
|
$
|
11
|
|
$
|
(16)
|
|
$
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,281
|
|
$
|
1,071
|
|
$
|
456
|
|
$
|
559
|
|
$
|
426
|
|
$
|
3
|
|
$
|
3,796
|
Depreciation
(1)
|
$
|
241
|
|
$
|
72
|
|
$
|
61
|
|
$
|
74
|
|
$
|
28
|
|
$
|
9
|
|
$
|
485
|
Amortization of purchased intangibles
|
|
|
|
$
|
4
|
|
|
|
|
|
|
|
$
|
11
|
|
|
|
|
$
|
15
|
Research, development and engineering expenses
(2)
|
$
|
37
|
|
$
|
66
|
|
$
|
45
|
|
$
|
75
|
|
$
|
10
|
|
$
|
71
|
|
$
|
304
|
Equity in earnings of affiliated companies
|
$
|
241
|
|
$
|
2
|
|
$
|
1
|
|
$
|
3
|
|
|
|
|
$
|
9
|
|
$
|
256
|
Income tax (provision) benefit
|
$
|
(164)
|
|
$
|
(55)
|
|
$
|
(31)
|
|
$
|
(47)
|
|
$
|
(18)
|
|
$
|
30
|
|
$
|
(285)
|
Net income (loss)
(3)
|
$
|
686
|
|
$
|
111
|
|
$
|
63
|
|
$
|
97
|
|
$
|
37
|
|
$
|
(59)
|
|
$
|
935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
J
une 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,346
|
|
$
|
1,067
|
|
$
|
512
|
|
$
|
584
|
|
$
|
317
|
|
$
|
2
|
|
$
|
3,828
|
Depreciation
(1)
|
$
|
254
|
|
$
|
64
|
|
$
|
57
|
|
$
|
70
|
|
$
|
20
|
|
$
|
6
|
|
$
|
471
|
Amortization of purchased intangibles
|
|
|
|
$
|
5
|
|
|
|
|
|
|
|
$
|
4
|
|
|
|
|
$
|
9
|
Research, development and engineering expenses
(2)(4)
|
$
|
53
|
|
$
|
70
|
|
$
|
52
|
|
$
|
74
|
|
$
|
11
|
|
$
|
56
|
|
$
|
316
|
Equity in earnings of affiliated companies
|
$
|
366
|
|
$
|
(2)
|
|
$
|
1
|
|
|
|
|
|
|
|
$
|
13
|
|
$
|
378
|
Income tax (provision) benefit
(4)
|
$
|
(174)
|
|
$
|
(29)
|
|
$
|
(37)
|
|
$
|
(28)
|
|
$
|
(11)
|
|
$
|
23
|
|
$
|
(256)
|
Net income (loss)
(3)(4)
|
$
|
794
|
|
$
|
58
|
|
$
|
75
|
|
$
|
56
|
|
$
|
23
|
|
$
|
(36)
|
|
$
|
970
|
(1)
|
Depreciation expense for Corning’s reportable segments includes an allocation of depreciation of corporate property not specifically identifiable to a segment.
|
(2)
|
Research, development, and engineering expenses include direct project spending that is identifiable to a segment.
|
(3)
|
Many of Corning’s administrative and staff functions are performed on a centralized basis. Where practicable, Corning charges these expenses to segments based upon the extent to which each business uses a centralized function. Other staff functions, such as corporate finance, human resources and legal, are allocated to segments, primarily as a percentage of sales.
|
(4)
|
As revised for the change in our method of recognizing pension expense. See Note 1 of Notes to Consolidated Financial Statements for a discussion of the change and the impacts of the change for the three and six months ended June 30, 2012.
|
A reconciliation of reportable segment net income to consolidated net income follows (in millions):
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Net income of reportable segments
(4)
|
$
|
532
|
|
$
|
488
|
|
$
|
994
|
|
$
|
1,006
|
Non-reportable segments
|
|
(31)
|
|
|
(16)
|
|
|
(59)
|
|
|
(36)
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
Net financing costs
(1)
|
|
(28)
|
|
|
(44)
|
|
|
(62)
|
|
|
(84)
|
Stock-based compensation expense
|
|
(14)
|
|
|
(16)
|
|
|
(25)
|
|
|
(40)
|
Exploratory research
|
|
(27)
|
|
|
(24)
|
|
|
(51)
|
|
|
(47)
|
Corporate contributions
|
|
(12)
|
|
|
(10)
|
|
|
(25)
|
|
|
(23)
|
Equity in earnings of affiliated companies, net of impairments
(2)
|
|
49
|
|
|
64
|
|
|
83
|
|
|
99
|
Asbestos settlement
(3)
|
|
(6)
|
|
|
(5)
|
|
|
(8)
|
|
|
(6)
|
Purchased collars and average rate forward contracts
(6)
|
|
227
|
|
|
|
|
|
251
|
|
|
|
Other corporate items
(4)(5)
|
|
(52)
|
|
|
37
|
|
|
34
|
|
|
79
|
Net income
(4)
|
$
|
638
|
|
$
|
474
|
|
$
|
1,132
|
|
$
|
948
|
(1)
|
Net financing costs include interest income, interest expense, and interest costs and investment gains associated with benefit plans.
|
(2)
|
Primarily represents the equity earnings of Dow Corning Corporation, which includes a $9 million and $11 million restructuring charge for our share of costs for the three and six months ended June 30, 2013.
|
(3)
|
In the three and six months ended June 30, 2013, Corning recorded a charge of $6 million and $8 million, respectively, to adjust the asbestos liability for the change in value of components of the Amended PCC Plan. In the three and six month ended June 30, 2012, Corning recorded a charge of $5 million and $6 million, respectively, to adjust the asbestos liability for the change in value of components of the Amended PCC Plan.
|
(4)
|
As revised for the change in our method of recognizing pension expense. See Note 1 of Notes to Consolidated Financial Statements for a discussion of the change and the impacts of the change for the three and six months ended June 30, 2012.
|
(5)
|
For the six months ended June 30, 2013, Corning recorded a $54 million tax benefit for the impact of the American Taxpayer Relief Act enacted on January 3, 2013 and made retroactive to 2012.
|
(6)
|
For the three and six months ended June 30, 2013, Corning recorded a net gain of $227 million and $251 million, respectively, related to its purchased collars and average rate forward contracts.
|
In the Specialty Materials operating segment, assets decreased from $1.7 billion at December 31, 2012 to $1.4 billion at June 30, 2013. The decrease is due primarily to the decrease in accounts receivables from lower sales in the second quarter of 2013, when compared to the fourth quarter of 2012 and the impact of translating fixed assets held in foreign locations. In the Telecommunications segment, assets increased from $1.4 billion at December 31, 2012, to $1.6 billion at June 30, 2013. The increase is due primarily to an increase in inventory driven by our fiber-to-the-home initiative in Australia, and the impacts of the consolidation of an equity company due to change in control and a small acquisition completed in the second quarter of 2013.
The sales of each of our reportable segments are concentrated across a relatively small number of customers. In the second quarter of 2013, the following number of customers, which individually accounted for 10% or more of each segment’s sales, represented the following concentration of segment sales:
·
|
In the Display Technologies segment, four customers accounted for 95% of total segment sales.
|
·
|
In the Telecommunications segment, one customer accounted for 11% of total segment sales.
|
·
|
In the Environmental Technologies segment, three customers accounted for 88% of total segment sales.
|
·
|
In the Specialty Materials segment, two customers accounted for 31% of total segment sales.
|
·
|
In the Life Sciences segment, two customers accounted for 42% of total segment sales.
|
In the first six months of 2013, the following number of customers, which individually accounted for 10% or more of each segment’s sales, represented the following concentration of segment sales:
·
|
In the Display Technologies segment, four customers accounted for 93% of total segment sales.
|
·
|
In the Telecommunications segment, one customer accounted for 11% of total segment sales.
|
·
|
In the Environmental Technologies segment, three customers accounted for 86% of total segment sales.
|
·
|
In the Specialty Materials segment, two customers accounted for 35% of total segment sales.
|
·
|
In the Life Sciences segment, two customers accounted for 42% of total segment sales.
|
A significant amount of specialized manufacturing capacity for our Display Technologies segment is concentrated in Asia. It is at least reasonably possible that the operation of a facility could be disrupted. Due to the specialized nature of the assets, it would not be possible to find replacement capacity quickly. Accordingly, loss of these facilities could produce a near-term severe impact on our display business and the Company as a whole.