Corning Incorporated
One Riverfront Plaza
Corning, NY 14831-0001
U.S.A.
www.corning.com
02AR40014EN
For more facts on Corning, visit www.corning.com/FactCentral
© Corning Incorporated 2015. All Rights Reserved.
2014 Annual Report
Corning is one of the world’s leading innovators
in materials science. For more than 160 years,
Corning has applied its unparalleled expertise
in specialty glass, ceramics, and optical physics
to develop products that have created new industries
and transformed people’s lives.
Madison Dearborn Partners, LLC
Chancellor
Board of Directors
Donald W. Blair
Executive Vice President
& Chief Financial Officer
NIKE, Inc.
Beaverton, OR
(1) (3)
Stephanie A. Burns
Retired Chairman
& Chief Executive Officer
Dow Corning Corporation
Sunset, SC
(1) (3)
John A. Canning, Jr.
Co-Founder & Chairman
Chicago, IL
(4) (5) (6)
Richard T. Clark
Retired Chairman, President
& Chief Executive Officer
Merck & Co., Inc.
Whitehouse Station, NJ
(2) (5) (6)
Robert F. Cummings, Jr.
Vice Chairman
of Investment Banking
JPMorgan Chase & Co.
New York, NY
(4) (5) (6)
James B. Flaws
Vice Chairman
& Chief Financial Officer
Corning Incorporated
Corning, NY
(2) (6)
Deborah A. Henretta
Group President E-Business
Proctor & Gamble
Cincinnati, OH
(1) (3)
Daniel P. Huttenlocher
Dean and Vice Provost
Cornell University
New York City Tech Campus
New York, NY
(1) (4)
Kurt M. Landgraf
Retired President
& Chief Executive Officer
Educational Testing Service
Princeton, NJ
(1) (2) (6)
Kevin J. Martin
Consultant
Squire Patton Boggs, LLP
Washington, DC
(3) (5)
Deborah D. Rieman
Executive Chairman
MetaMarkets Group
Woodside, CA
(1) (2)
Gary S. Calabrese
Senior Vice President —
Global Research
Stephen P. Miller
Vice President —
Strategy
Hansel E. Tookes II
Retired Chairman
& Chief Executive Officer
Raytheon Aircraft Company
Palm Beach Gardens, FL
(2) (5) (6)
Wendell P. Weeks
Chairman of the Board,
Chief Executive Officer
& President
Corning Incorporated
Corning, NY
(6)
Mark S. Wrighton
& Professor of Chemistry
Washington University
in St. Louis
St. Louis, MO
(1) (4)
Corporate Officers
Wendell P. Weeks
Chairman of the Board,
Chief Executive Officer
& President
James B. Flaws
Vice Chairman
& Chief Financial Officer
Kirk P. Gregg
Executive Vice President
& Chief Administrative Officer
Lawrence D. McRae
Executive Vice President —
Strategy & Corporate
Development
David L. Morse
Executive Vice President
& Chief Technology Officer
Lewis A. Steverson
Senior Vice President
& General Counsel
Jeffrey W. Evenson
Senior Vice President
& Operations Chief of Staff
Mark S. Rogus
Senior Vice President
& Treasurer
R. Tony Tripeny
Senior Vice President
& Corporate Controller
Linda E. Jolly
Vice President
& Corporate Secretary
Other Officers
James P. Clappin
President —
Corning Glass Technologies
Martin J. Curran
Executive Vice President
& Innovation Officer
Clark S. Kinlin
Executive Vice President —
Optical Communications
Eric S. Musser
Executive Vice President —
Corning Technologies
& International
Christine M. Pambianchi
Senior Vice President —
Human Resources
Thomas Appelt
President —
Corning International
Emerging Markets
Madapusi K. Badrinarayan
Vice President
& Research Director —
Inorganic & Broad-based
Technologies
John P. Bayne, Jr.
Vice President
& General Manager —
High Performance Displays
Thomas R. Beall
Vice President
& Lead Intellectual
Property Counsel
Thomas G. Capek
Vice President
& Chief Engineer
Cheryl C. Capps
Vice President —
Global Supply Management
Jack H. Cleland
Senior Vice President
& Deputy General Counsel
Charles R. Craig
Senior Vice President —
Science & Technology
Michael W. Donnelly
Vice President —
Business Services
Richard M. Eglen
Vice President
& General Manager —
Life Sciences
Li Fang
President
& General Manager —
Corning Greater China
Lisa Ferrero
General Manager —
Display Technologies
Susan L. Ford
Vice President — Tax
Vivian L. Gernand
Vice President
& Chief Information
Security Officer
Clifford L. Hund
General Manager
& President —
Corning East Asia
John R. Igel
Vice President
& General Manager —
Corning Optical Communications
Wilfred M. Kenan, Jr.
Vice President
& Manufacturing Manager —
Environmental Technologies
John P. MacMahon
Senior Vice President —
Global Compensation
& Benefits
Jean-Pierre Mazeau
Senior Vice President —
Corporate Product
& Process Development
Kevin J. McManus
Senior Vice President
& Chief Information Officer
Corning Optical Communications
& Corporate Development
Avery H. Nelson III
Vice President
& General Manager —
Environmental Technologies
Timothy J. Regan
Senior Vice President —
Worldwide Government Affairs
Robert J. Ritchie
Vice President —
Technology Exchange
James R. Steiner
Senior Vice President
& General Manager —
Specialty Materials
Lydia Kenton Walsh
Vice President —
Commercial Operations
Life Sciences
Curt Weinstein
Vice President
& General Manager —
Advanced Optics
Mariam O. Wright
Senior Vice President —
Global Manufacturing & Quality
(1) Audit; (2) Compensation; (3) Corporate Relations; (4) Finance; (5) Nominating & Corporate Governance; (6) Executive
Board Committees
© Corning Incorporated 2015. All Rights Reserved.
Wendell P. Weeks
Chairman of the Board,
Chief Executive Officer,
and President
To Our Shareholders,
Corning has certainly come a long way since January 2012 when we declared our
mandate to “March Up” in response to a decline in net income that began the prior year.
In 2014, we delivered our ninth consecutive quarter of core year-over-year earnings-
per-share growth, along with the highest sales in Corning’s history. We successfully
completed the acquisition of Samsung Corning Precision Materials (now Corning Precision
Materials). We launched new products and advanced innovation programs across our
businesses. And we returned cash to shareholders through dividend increases and share
repurchases.
Thanks to outstanding execution by our 35,000 employees across the globe, Corning
has entered 2015 as a bigger, stronger, and more agile company. We are financially healthy,
we have multiple businesses driving our growth, and we are capturing exciting new
opportunities to apply our materials and process expertise to solve tough technology
challenges.
Corning’s 2014 performance proves once again that this company is built to survive difficult
times and emerge as a better version of itself. Our results also demonstrate that you can
count on us to do what we say we’re going to do.
Strong Financial and Operational Performance
In last year’s letter, I said that after effectively stabilizing the company, we would shift
our focus to growth. We honored that commitment. In 2014, we delivered record core sales
of more than $10 billion; we increased sales in all our businesses; we grew core earnings
per share each quarter; and we generated strong free cash flow. Along the way, we
maintained a strong balance sheet, which helps ensure we have the stability to weather
difficult times when they come.
Bringing A Day Made of Glass to Life
Corning’s products and markets have changed many times over the years, but our innovations share fundamental ingredients: a really
tough problem; a combination of materials and process innovation; and a solution that makes a real difference in people’s lives. This
formula has led to more than 160 years of life-changing innovations, and we continue to apply it today.
Four years ago, we shared Corning’s vision for the future in our video, A Day Made of Glass. People were excited by the idea of living
in the world we depicted — a world of ubiquitous displays, intuitive interfaces, seamless delivery of real-time information, and
everyday surfaces with extraordinary capabilities. In four short years, we’ve made significant progress bringing this world to life.
High-Performance Displays
We depicted lifelike displays that dissolve the boundaries
between the physical and the virtual world. Since then, Corning
has developed new glass compositions, such as the Corning Lotus
Glass family, to enable next-generation mobile and IT displays
that provide unprecedented picture quality, sleek form factors,
and lower power consumption.
Of course, the numbers alone don’t give you the full
volume, and outstanding operational performance
Value for Shareholders
picture. While Corning’s performance has historically
contributed to higher profits. Meanwhile, the supply
been driven by a primary business, we now have multiple
chain maintained healthy inventory levels, and price
business segments that are contributing materially to
declines returned to moderate levels in the second
the company’s growth. Display Technologies remains
half of the year.
a revenue, profit, and cash-generation powerhouse
for us, despite a maturing LCD market. At the same
time, aggregate sales in our four other major business
segments grew more than 10 percent from 2013, driven
by exceptional results in Optical Communications and
Environmental Technologies.
In addition, it is worth noting that we achieved Corning’s
earnings growth not only by capturing market oppor-
tunities, but also by reducing costs. Several businesses
significantly increased manufacturing efficiencies, while
our staff groups did a terrific job setting priorities and
controlling spending. Last year I observed that our
employees are united in their determination to preserve
this great institution. That dedication was certainly evident
in 2014, as every part of the company contributed to
Corning’s improvement.
Here’s a closer look at how each of our major
businesses performed:
n Sales in Display Technologies increased dramatically
from 2013, driven by the consolidation of Corning
Precision Materials, strong TV retail sales, and the shift
to larger screen sizes. It was a record year for LCD glass
n In Optical Communications, strong demand for fiber
to the home, data centers, and wireless technologies
drove double-digit sales growth. We also increased
profitability through tight control of operational
expenses.
n In Environmental Technologies, new emissions-control
regulations in China and Europe created strong demand
for our diesel products, propelling the business to more
than $1 billion in sales. Profits were also up significantly
from last year, thanks to higher volume and greater
manufacturing efficiencies.
n In Specialty Materials, sales and Gorilla® Glass volume
were up from 2013. However, results were lower than
expected due primarily to a weak tablet market.
n In Life Sciences, we continue to realize synergies from
the integration of Discovery Labware (acquired in 2012),
but lower spending levels by the National Institutes of
Health negatively impacted the segment’s growth.
Although we are navigating some market challenges,
the diversity of Corning’s business portfolio remains a key
advantage, evidenced by the company’s strong performance
overall.
As our earnings improved, the stock market responded in
kind. Corning’s stock price was up 30 percent for the year,
our second consecutive year of outperforming the major
market indices.
In the fourth quarter, Corning announced a 20 percent
increase in the company’s quarterly common stock dividend
and a new $1.5 billion share-repurchase program, honoring
our commitment to return cash to shareholders. These
actions mark our fourth dividend increase and fourth
share-repurchase program since October 2011.
New Growth Drivers
As part of our commitment to growth, we are actively
creating new revenue and profit drivers through a
combination of strategic acquisitions and new business
development.
The integration of Corning Precision Materials was one of
our stated priorities for the year, and I’m pleased to report
that this effort has been incredibly successful. We realized
$100 million in pre-tax synergies in 2014 and expect to
achieve even greater synergies in the coming years. This
transaction is also delivering many strategic benefits. We
increased the flexibility of our fusion assets and our ability
to serve our global customers. We added 3,500 talented
employees. And we gained access to low-cost manufac-
turing platforms that we can leverage to develop new
fusion-glass products with smaller capital expenditures.
Corning’s products and markets have changed many times over the years, but our innovations share fundamental ingredients: a really
tough problem; a combination of materials and process innovation; and a solution that makes a real difference in people’s lives. This
formula has led to more than 160 years of life-changing innovations, and we continue to apply it today.
Four years ago, we shared Corning’s vision for the future in our video, A Day Made of Glass. People were excited by the idea of living
in the world we depicted — a world of ubiquitous displays, intuitive interfaces, seamless delivery of real-time information, and
everyday surfaces with extraordinary capabilities. In four short years, we’ve made significant progress bringing this world to life.
High-Performance Displays
Always-On Information
We depicted lifelike displays that dissolve the boundaries
between the physical and the virtual world. Since then, Corning
has developed new glass compositions, such as the Corning Lotus
Glass family, to enable next-generation mobile and IT displays
that provide unprecedented picture quality, sleek form factors,
and lower power consumption.
Our video portrayed an always-on world, with massive amounts
of data that you can access anytime, anywhere. In 2014, Corning
began rolling out an all-optical distributed antenna system called
ONE™ Wireless. This technology enables clear signals and
maximum bandwidth — even in really tough indoor environments
like convention centers and sports stadiums where thousands
of people are connecting at once.
volume, and outstanding operational performance
Value for Shareholders
As our earnings improved, the stock market responded in
kind. Corning’s stock price was up 30 percent for the year,
our second consecutive year of outperforming the major
market indices.
We also announced two acquisitions in December to
increase Corning’s strength in Optical Communications.
The integration of Samsung Electronics’ optical fiber
business will help us capture growth in Asia, while the
addition of TR Manufacturing, Inc. increases our market
access and enhances our ability to offer comprehensive
In the fourth quarter, Corning announced a 20 percent
optical solutions to our enterprise customers.
increase in the company’s quarterly common stock dividend
and a new $1.5 billion share-repurchase program, honoring
our commitment to return cash to shareholders. These
Of course, the primary way Corning grows is through
innovation. Here are a few success stories from 2014:
actions mark our fourth dividend increase and fourth
n In November, we announced the highly anticipated
share-repurchase program since October 2011.
New Growth Drivers
launch of Corning® Gorilla® Glass 4. This new composition
is up to twice as tough as competitive cover glasses and
specifically formulated to reduce screen breakage when
As part of our commitment to growth, we are actively
users drop their mobile devices.
creating new revenue and profit drivers through a
combination of strategic acquisitions and new business
development.
n We made good progress extending Gorilla Glass into
adjacent markets. We secured new automotive and
architectural customers, and earned BMW’s supplier
The integration of Corning Precision Materials was one of
innovation award for our lightweight automotive
our stated priorities for the year, and I’m pleased to report
Gorilla Glass.
that this effort has been incredibly successful. We realized
$100 million in pre-tax synergies in 2014 and expect to
achieve even greater synergies in the coming years. This
transaction is also delivering many strategic benefits. We
increased the flexibility of our fusion assets and our ability
to serve our global customers. We added 3,500 talented
employees. And we gained access to low-cost manufac-
turing platforms that we can leverage to develop new
fusion-glass products with smaller capital expenditures.
n In a colorful twist on our prior fiber inventions, we
launched Corning® Fibrance™ light-diffusing fiber,
which is designed to provide thin, multi-colored,
aesthetic lighting. Fibrance allows designers to
enhance a product’s functionality and appeal
by adding light how and where they want it.
contributed to higher profits. Meanwhile, the supply
chain maintained healthy inventory levels, and price
declines returned to moderate levels in the second
half of the year.
n In Optical Communications, strong demand for fiber
to the home, data centers, and wireless technologies
drove double-digit sales growth. We also increased
profitability through tight control of operational
expenses.
n In Environmental Technologies, new emissions-control
regulations in China and Europe created strong demand
for our diesel products, propelling the business to more
than $1 billion in sales. Profits were also up significantly
from last year, thanks to higher volume and greater
manufacturing efficiencies.
n In Specialty Materials, sales and Gorilla® Glass volume
were up from 2013. However, results were lower than
expected due primarily to a weak tablet market.
n In Life Sciences, we continue to realize synergies from
the integration of Discovery Labware (acquired in 2012),
but lower spending levels by the National Institutes of
Health negatively impacted the segment’s growth.
Although we are navigating some market challenges,
the diversity of Corning’s business portfolio remains a key
advantage, evidenced by the company’s strong performance
overall.
Ultra-Slim, Flexible Display Devices
Dynamic Windows
Digital Fitting Rooms
We imagined futuristic displays that combine the flexibility
of plastic with the superior transparency, stability, and optical
quality of glass. In 2013, Corning rolled out ultra-slim Willow®
Glass, which is thinner than a dollar bill, and our scientists
continue to increase its flexibility. This remarkable glass could
help bring exciting new technologies to life, including rollable
displays and wearable technologies.
We envisioned electrochromic windows that transition
automatically from transparent to opaque, to increase people’s
comfort and reduce energy consumption. Today, Corning
is working with a company called View to develop dynamic
architectural glass. We think dynamic windows could capture
a significant portion of the commercial window market
opportunity — and may even be part of your home someday soon.
n We rolled out Corning’s ONE™ Wireless technology,
which is delivering robust, reliable optical connections
few years, we have generated approximately two-and-a-half
times the profit per dollar of revenue versus competitors
in venues such as Texas A&M University’s Kyle Field.
in our major market segments. When you consider the
n We continued Corning’s track record of clean-air
innovations with the introduction of Corning FLORA™
technology. This revolutionary system addresses the
critical problem of cold-start emissions, which occur
in the first 30 seconds of starting an engine and are
responsible for 70 percent of a car’s total emissions.
impact Corning’s inventions have had on the world and
the competitive advantage we create through R&D, you
can understand why our commitment to innovation
is unwavering.
Looking Ahead
Corning’s 2015 focus is to sustain momentum in all major
Our diverse innovation portfolio includes products at all
businesses while leveraging our innovation engine to drive
stages of development to drive both near-term and future
both near-term and long-term growth. We expect to grow
growth. And while our new business opportunities under-
core sales and earnings, while increasing efficiencies across
standably generate a lot of excitement, there is another
the company. And, of course, we will always live our values
important part of our research and development efforts
to preserve the trust of all of our stakeholders.
that stakeholders often overlook. More than half of
Corning’s R&D investment is devoted to innovating for
existing businesses. Our ability to innovate throughout
a product and industry’s life cycle is one of the primary
reasons for Corning’s long-term competitive advantage in
the markets where we compete. For example, Corning has
increased its leadership position in LCD glass, despite slower
growth in the industry overall, through product innovations
such as new compositions that enable thinner displays and
process improvements that increase yields. Our ongoing
innovations allow us to capture a significant share of the
market, achieve the lowest-cost manufacturing position,
gain the trust and loyalty of our customers, and earn a
higher share of the industry’s profits. In fact, over the past
Here are a few key focus areas:
n We will realize even greater financial synergies from
Corning Precision Materials.
n We believe we can capture new opportunities in
Display Technologies. Sales of ultra-high-definition
televisions are expected to double in 2015. Moreover,
we’ve developed a new glass composition called Iris™
that enables thinner form factors for advanced displays
by replacing plastic and metal structural components.
278540-Corning_AR_NARR_R7.indd 4
2/27/15 5:35 PM
Our video portrayed sophisticated shopping experiences that
blended digital and physical environments. Today, we’re working
with eBay Enterprise to take interactive shopping to the next
level by creating digital fitting rooms that allow customers
to experiment virtually.
The technology would create a more efficient experience for
consumers, while providing retailers the opportunity to target
customers more precisely.
n We expect to make significant progress on several
initiatives in our new product portfolio. We have
identified more than 200 different uses for Corning®
Willow® Glass and are currently prototyping the most
promising ones, which range from laminates for
architectural applications to roll-to-roll components
for enhancing display devices. We are also pursuing
a very exciting opportunity in Life Sciences. Although
it is too early to discuss publicly, we believe it has
the opportunity to be a significant new business
for Corning, while continuing our track record
of life-enhancing technologies.
n Finally, we will continue working with other innovators
to bring our vision for A Day Made of Glass to life.
We’re proud of the progress we’ve made in a few short
years, and know that we have only scratched the
surface. As Corning extends the capabilities of glass,
more and more customers from a broad range of
industries are turning to us to solve tough problems,
and we are excited about the opportunity to apply
our skills to tackle new challenges.
We envisioned electrochromic windows that transition
automatically from transparent to opaque, to increase people’s
comfort and reduce energy consumption. Today, Corning
is working with a company called View to develop dynamic
architectural glass. We think dynamic windows could capture
a significant portion of the commercial window market
opportunity — and may even be part of your home someday soon.
few years, we have generated approximately two-and-a-half
times the profit per dollar of revenue versus competitors
in our major market segments. When you consider the
impact Corning’s inventions have had on the world and
the competitive advantage we create through R&D, you
can understand why our commitment to innovation
is unwavering.
Looking Ahead
Corning’s 2015 focus is to sustain momentum in all major
businesses while leveraging our innovation engine to drive
both near-term and long-term growth. We expect to grow
core sales and earnings, while increasing efficiencies across
the company. And, of course, we will always live our values
to preserve the trust of all of our stakeholders.
n We will realize even greater financial synergies from
Corning Precision Materials.
n We believe we can capture new opportunities in
Display Technologies. Sales of ultra-high-definition
television sales are expected to double in 2015.
Moreover, we’ve developed a new glass composition
called Iris™ that enables thinner form factors for
advanced displays by replacing plastic and metal
structural components.
Digital Fitting Rooms
Our video portrayed sophisticated shopping experiences that
blended digital and physical environments. Today, we’re working
with eBay Enterprise to take interactive shopping to the next
level by creating digital fitting rooms that allow customers
to experiment virtually.
These are just a few of the ways we are bringing our vision
to life. As more designers and technology developers discover
the remarkable technical and aesthetic properties of glass,
we continue to expand our vision of what glass can do. In fact,
we believe we’ve entered “the Glass Age.”
The technology would create a more efficient experience for
consumers, while providing retailers the opportunity to target
customers more precisely.
To learn more about how glass is inspiring a new generation
of artists, designers, and engineers, visit TheGlassAge.com.
n We expect to make significant progress on several
initiatives in our new product portfolio. We have
identified more than 200 different uses for Corning®
Willow® Glass and are currently prototyping the most
Closing Thoughts
I’ll close by reminding you of the kind of company you are
investing in when you put your faith in Corning.
promising ones, which range from laminates for
This is a company that is built to last. This is a company
architectural applications to roll-to-roll components
that continually produces innovations that enhance people’s
for enhancing display devices. We are also pursuing
lives and transform industries. This is a company that
a very exciting opportunity in Life Sciences. Although
rewards its shareholders with stability, a reliable dividend,
it is too early to discuss publicly, we believe it has
and the opportunity for explosive growth from successful
the opportunity to be a significant new business
new products. But most importantly, this is a company
for Corning, while continuing our track record
that makes a real difference in the world.
of life-enhancing technologies.
n Finally, we will continue working with other innovators
to bring our vision for A Day Made of Glass to life.
We’re proud of the progress we’ve made in a few short
I said earlier that all of us at Corning are united in our
desire to preserve this great institution. That’s because
we take pride in being part of something that will outlast
us — a company that invents and manufactures things
Here are a few key focus areas:
years, and know that we have only scratched the
that matter.
surface. As Corning extends the capabilities of glass,
more and more customers from a broad range of
industries are turning to us to solve tough problems,
and we are excited about the opportunity to apply
our skills to tackle new challenges.
We understand that, ultimately, your investment is based
on Corning’s performance, and we are committed to
earning your confidence with our continued growth. But
we also hope you share our pride in being part of this very
special company.
Thank you for being on this journey with us.
Sincerely,
Wendell P. Weeks
Chairman of the Board, Chief Executive Officer, and President
Financial Highlights: In millions, except per share amounts 2014 2013 2012 2011 2010 Net Sales $ 9,715 $ 7,819 $ 8,012 $ 7,890 $ 6,632Net income attributable to Corning Incorporated 2,472 1,961 1,636 2,817 3,574Diluted earnings per common share attributable to Corning Incorporated $ 1.73 $ 1.34 $ 1.09 $ 1.78 $ 2.26 Corning Incorporated 2014 Annual Report
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Business Description �����������������������������������������������������������������������������������������������������������������������������������������������������
Risk Factors ���������������������������������������������������������������������������������������������������������������������������������������������������������������������
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Legal Proceedings ����������������������������������������������������������������������������������������������������������������������������������������������������������
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Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities �������������������������������������������������������������������������������������������������������������������������
Selected Financial Data (Unaudited) �������������������������������������������������������������������������������������������������������������������������
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Management’s Discussion and Analysis of Financial Condition and Results of Operations �����������������������������
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Quantitative and Qualitative Disclosures About Market Risks ����������������������������������������������������������������������������� 52
Management’s Annual Report on Internal Control Over Financial Reporting ���������������������������������������������������� 53
Report of Independent Registered Public Accounting Firm ����������������������������������������������������������������������������������� 54
Consolidated Statements of Income �������������������������������������������������������������������������������������������������������������������������� 55
Consolidated Statements of Comprehensive Income ��������������������������������������������������������������������������������������������� 56
Consolidated Balance Sheets �������������������������������������������������������������������������������������������������������������������������������������� 57
Consolidated Statements of Cash Flows ������������������������������������������������������������������������������������������������������������������� 58
Consolidated Statements of Changes in Shareholders’ Equity ������������������������������������������������������������������������������ 59
Notes to Consolidated Financial Statements
1� Summary of Significant Accounting Policies ����������������������������������������������������������������������������������������������������������������������������������������������� 60
2. Restructuring, Impairment and Other Charges ������������������������������������������������������������������������������������������������������������������������������������������� 65
3. Available-for-Sale Investments ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� 66
4. Significant Customers �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 67
5.
Inventories, Net of Inventory Reserves ���������������������������������������������������������������������������������������������������������������������������������������������������������� 67
6.
Income Taxes ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 67
7�
Investments ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 70
8� Acquisition ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 74
9� Property, Plant and Equipment, Net of Accumulated Depreciation ��������������������������������������������������������������������������������������������������������� 78
10� Goodwill and Other Intangible Assets ���������������������������������������������������������������������������������������������������������������������������������������������������������� 78
11� Other Assets and Other Liabilities ����������������������������������������������������������������������������������������������������������������������������������������������������������������� 79
12� Debt �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 80
13� Employee Retirement Plans ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 81
14� Commitments, Contingencies, and Guarantees ������������������������������������������������������������������������������������������������������������������������������������������ 89
15� Hedging Activities �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 90
16� Fair Value Measurements �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 92
17� Shareholders’ Equity ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 93
18� Earnings Per Common Share ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 96
19� Share-based Compensation ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 97
20� Reportable Segments ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 98
Valuation Accounts and Reserves ������������������������������������������������������������������������������������������������������������������������������� 103
Quarterly Operating Results ���������������������������������������������������������������������������������������������������������������������������������������� 104
This page intentionally left blank. Corning Incorporated and its consolidated subsidiaries are hereinafter sometimes referred to as the “Company,” the “Registrant,” “Corning,” or “we.”
This report contains forward-looking statements that involve a number of risks and uncertainties. These statements relate to our future plans,
objectives, expectations and estimates and may contain words such as “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” or similar expressions.
Our actual results could differ materially from what is expressed or forecasted in our forward-looking statements. Some of the factors that could
contribute to these differences include those discussed under “Forward-Looking Statements,” “Risk Factors,” “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” and elsewhere in this report.
Business Description
General
Corning traces its origins to a glass business established in 1851. The
present corporation was incorporated in the State of New York in
December 1936. The Company’s name was changed from Corning Glass
Works to Corning Incorporated on April 28, 1989.
Corning Incorporated is a world leader in the manufacture of specialty
glass and ceramics. Drawing on more than 160 years of materials
science and process engineering knowledge, Corning creates and
makes keystone components that enable high-technology systems for
consumer electronics, mobile emissions control, optical communications
and life sciences. Corning operates in five reportable segments: Display
Technologies, Optical Communications, Environmental Technologies,
Specialty Materials and Life Sciences. Corning manufactures and
processes products at approximately 90 plants in 17 countries.
Display Technologies Segment
Corning’s Display Technologies segment manufactures glass substrates
for active matrix liquid crystal displays (“LCDs”) that are used primarily
in LCD televisions, notebook computers and flat panel desktop monitors.
This segment develops, manufactures and supplies high quality
glass substrates using technology expertise and a proprietary fusion
manufacturing process, which Corning invented and is the cornerstone
of the Company’s technology leadership in the LCD industry. The
automated process yields high quality glass substrates with excellent
dimensional stability and uniformity – essential attributes for the
production of large, high performance active matrix LCDs. Corning’s
fusion process is scalable and is thought to be the most effective process
in producing large size substrates. We are recognized for providing
product innovations that help our customers produce larger, lighter,
thinner and higher-resolution displays more affordably. In 2006, Corning
launched EAGLE XG®, the industry’s first LCD glass substrate that is
free of heavy metals. In 2010, leveraging the EAGLE XG® composition,
Corning introduced EAGLE XG® Slim glass, a line of slim glass substrates
which enables lighter-weight portable devices and thinner televisions
and monitors. In 2011, Corning launched Corning Lotus™ Glass, a
high-performance display glass developed to enable cutting-edge
technologies, including organic light-emitting diode (“OLED”) displays
and next generation LCDs. Corning Lotus Glass helps support the
demanding manufacturing processes of both OLED and liquid crystal
displays for high performance, portable devices such as smart phones,
tablets, and notebook computers. In 2012, Corning introduced Corning®
Willow™ Glass, our ultra-slim flexible glass for use in next-generation
consumer electronic technologies. Not only does this technology support
thinner backplanes for both OLED and LCD displays, it also allows for
curved displays for immersive viewing or mounting on non-flat surfaces.
In 2013, Corning announced the commercial launch of Corning Lotus™
XT Glass, a second-generation glass substrate specially formulated for
high-performance displays. The Corning Lotus Glass platform offers an
energy-efficient, immersive display device that features high resolution,
fast response times, and bright picture quality. In January 2015, Corning
introduced Corning Iris™ Glass, a substrate that can significantly reduce
the thickness of a liquid crystal display television set, making it as thin
as a smartphone, as well as providing outstanding transmission quality.
Through the end of 2013, the Display Technologies segment also included
the equity affiliate Samsung Corning Precision Materials Co., Ltd.
(“Samsung Corning Precision Materials”), of which Corning owned 57.5%
and Samsung Display Co., Ltd. (“Samsung Display”) owned 42.5%. To
extend Corning’s leadership in specialty glass and drive earnings growth,
Corning entered into a series of strategic and financial agreements
with Samsung Display intended to strengthen product and technology
collaborations between the two companies (“Acquisition”). Corning
completed this transaction on January 15, 2014.
The following is a summary of the series of transactions, and the impacts
to the Display Technologies segment:
• Corning obtained full ownership of Samsung Corning Precision
Materials. This organization, named Corning Precision Materials, was
integrated into Corning’s Display Technologies segment during 2014.
• Corning and Samsung Display extended their long-term LCD display
glass supply agreement through 2023.
• The two companies’ strengthened their technology collaborations on
strategic product development and commercialization initiatives.
In connection with these agreements, in the fourth quarter of 2013,
Corning acquired the minority interests of three shareholders in
Samsung Corning Precision Materials for $506 million, which included
payment for the transfer of non-operating assets and the pro-rata
portion of cash on Samsung Corning Precision Materials’ balance sheet
at September 30, 2013. The resulting transfer of shares to Corning
increased Corning’s ownership percentage of Samsung Corning
Precision Materials from 50% to 57.5%. Because this transaction did not
result in a change in control based on the governing documents of this
entity, Corning did not consolidate this entity as of December 31, 2013.
The remaining transactions were completed on January 15, 2014, which
increased Corning’s ownership to 100% and resulted in consolidation of
the entity beginning in the first quarter of 2014.
LCD glass manufacturing is a capital intensive business. Important
attributes for success include efficient manufacturing, access to capital,
technology know-how, and patents. As a result of the transactions with
Samsung Display, Corning expects to realize increased flexibility in
glass-melting capabilities, which will allow the company to re-evaluate
the need for major capital expenditures for additional fusion glass
manufacturing assets.
1
CORNING INCORPORATED - 2014 Annual Report Business Description
Corning has LCD glass manufacturing operations in the United States,
South Korea, Japan, Taiwan and China. Following the Acquisition, Corning
services all specialty glass customers in all regions directly, utilizing its
manufacturing facilities throughout Asia.
Patent protection and proprietary trade secrets are important to the
Display Technologies segment’s operations. Corning has a growing
portfolio of patents relating to
its products, technologies and
manufacturing processes. Corning licenses certain of its patents to third
parties and generates royalty income from these licenses. Refer to the
material under the heading “Patents and Trademarks” for information
relating to patents and trademarks.
The Display Technologies segment represented 40% of Corning’s sales
in 2014.
Optical Communications Segment
Corning invented the world’s first low-loss optical fiber in 1970. Since
that milestone, we have continued to pioneer optical fiber, cable and
connectivity solutions. As global bandwidth demand driven by video
usage grows exponentially, networks continue to migrate from copper
to optical-based systems that can deliver the required cost-effective
bandwidth-carrying capacity. Our unrivaled experience puts us in a
unique position to design and deliver optical solutions that reach every
edge of the communications network.
Our Optical Communications segment has recently evolved from
being a manufacturer of optical fiber and cable, hardware and
equipment to being a comprehensive provider of industry-leading
optical solutions across the broader communications industry. This
segment is classified into two main product groupings – carrier network
and enterprise network. The carrier network product group consists
primarily of products and solutions for optical-based communications
infrastructure for services such as video, data and voice communications.
The enterprise network product group consists primarily of optical-
based communication networks sold to businesses, governments and
individuals for their own use.
Our carrier network product portfolio begins with optical fiber products,
including Vascade® submarine optical fibers for use in submarine
networks; LEAF® optical fiber for long-haul, regional and metropolitan
networks; SMF-28® ULL fiber for more scalable long-haul and regional
networks; SMF-28e+™ single-mode optical fiber that provides additional
transmission wavelengths
in metropolitan and access networks;
ClearCurve® ultra-bendable single-mode fiber for use in multiple-
dwelling units and fiber-to-the-home applications; and Corning®
SMF-28® Ultra Fiber, designed for high performance across the range of
long-haul, metro, access, and fiber-to-the-home network applications,
combining the benefits of industry-leading attenuation and improved
macrobend performance in one fiber. Our optical fiber is sold directly to
end users or third-party cablers around the world. Corning’s remaining
fiber production is cabled internally and sold to end users as either bulk
cable or as part of an integrated optical solution. Corning’s cable products
support various outdoor, indoor/outdoor and indoor applications and
include a broad range of loose tube, ribbon and drop cable designs with
flame-retardant versions available for indoor and indoor/outdoor use.
In addition to optical fiber and cable, our carrier network product
portfolio also includes hardware and equipment products, including
cable assemblies, fiber optic hardware, fiber optic connectors, optical
components and couplers, closures, network
interface devices,
and other accessories. These products may be sold as individual
components or as part of integrated optical connectivity solutions
designed for various carrier network applications. Examples of these
solutions include our FlexNAP™ terminal distribution system, which
provides pre-connectorized distribution and drop cable assemblies for
cost-effectively deploying Fiber-to-the-Home (“FTTH”) networks; and the
Centrix™ platform, which provides a high-density fiber management
system with industry-leading density and innovative jumper routing
that can be deployed in a wide variety of carrier switching centers.
To keep pace with surging demand for mobile bandwidth, Corning has a
full complement of operator-grade distributed antenna systems (“DAS”),
including the recently developed Optical Network Evolution (“ONE”)
wireless platform. ONE is the first all-optical converged cellular and
Wi-Fi® solution built on an all-optical backbone with modular service
support. The ONE™ Wireless Platform provides virtually unlimited
bandwidth, and meets all of the wireless service needs of large-scale
enterprises at a lower cost than the typical DAS solution.
In addition to our optical-based portfolio, Corning’s carrier network
portfolio also contains select copper-based products including subscriber
demarcation, connection and protection devices, xDSL (different
variations of digital subscriber lines) passive solutions and outside plant
enclosures. In addition, Corning offers coaxial RF interconnects for the
cable television industry as well as for microwave applications for GPS,
radars, satellites, manned and unmanned military vehicles, and wireless
and telecommunications systems.
Our enterprise network product portfolio also includes optical fiber
products, including ClearCurve® ultra-bendable multimode fiber for
data centers and other enterprise network applications; InfiniCor®
fibers for local area networks; and more recently ClearCurve® VSDN®
ultra-bendable optical fiber designed to support emerging high-speed
interconnects between computers and other consumer electronics
devices. The remainder of Corning’s fiber production is cabled internally
and sold to end users as either bulk cable or as part of an integrated
optical solution. Corning’s cable products include a broad range of tight-
buffered, loose tube and ribbon cable designs with flame-retardant
versions available for indoor and indoor/outdoor applications that meet
local building code requirements.
Corning’s hardware and equipment products for enterprise network
applications include cable assemblies, fiber optic hardware, fiber optic
connectors, optical components and couplers, closures and other
accessories. These products may be sold as individual components
or as part of integrated optical connectivity solutions designed for
various network applications. Examples of enterprise network solutions
include the Pretium EDGE® platform, which provides high-density
pre-connectorized solutions for data center applications, and continues
to evolve with recent updates for upgrading to 40/100G applications
and port tap modules for network monitoring; the previously mentioned
ONE Wireless platform, which spans both carrier and enterprise network
applications; and our recently introduced optical connectivity solutions
to support customer initiatives.
In 2014, we introduced Corning® Fibrance™ Light-Diffusing Fiber, a glass
optical fiber optimized for thin, colorful, aesthetic lighting. Fibrance Light-
Diffusing Fiber enables decorative lighting to be designed or embedded
into tight or small places where other bulky lighting elements cannot fit,
thereby enhancing a product’s overall aesthetics and user experience,
and opening up new design possibilities for a variety of markets such as
automotive, architecture, consumer electronics or appliances.
Corning operates manufacturing facilities worldwide. Our optical
fiber manufacturing facilities are located in North Carolina, China and
India. Cabling operations include facilities in North Carolina, Germany,
Poland, China and smaller regional locations and equity affiliates. Our
manufacturing operations for hardware and equipment products
are located in North Carolina, Texas, Arizona, Mexico, Brazil, Denmark,
Germany, Poland, Israel, Australia and China.
2
CORNING INCORPORATED - 2014 Annual Report Patent protection is important to the segment’s operations. The
segment has an extensive portfolio of patents relating to its products,
technologies and manufacturing processes. The segment licenses certain
of its patents to third parties and generates revenue from these licenses,
although the royalty income is not currently material to this segment’s
operating results. Corning is licensed to use certain patents owned by
others, which are considered important to the segment’s operations.
Refer to the material under the heading “Patents and Trademarks” for
information relating to the Company’s patents and trademarks.
The Optical Communications segment represented 27% of Corning’s
sales for 2014.
Environmental Technologies Segment
Corning’s Environmental Technologies segment manufactures ceramic
substrates and filter products for emissions control in mobile and
stationary applications around the world. In the early 1970s, Corning
developed an economical, high-performance cellular ceramic substrate
that is now the standard for catalytic converters in vehicles worldwide.
As global emissions control regulations tighten, Corning has continued
to develop more effective and durable ceramic substrate and filter
products for gasoline and diesel applications. Corning manufactures
substrate and filter products in New York, Virginia, China, Germany and
South Africa. Corning sells its ceramic substrate and filter products
worldwide to catalyzers and manufacturers of emission control systems
who then sell to automotive and diesel vehicle or engine manufacturers.
Although most sales are made to the emission control systems
manufacturers, the use of Corning substrates and filters is generally
required by the specifications of the automotive and diesel vehicle or
engine manufacturers.
Patent protection is important to the segment’s operations. The
segment has an extensive portfolio of patents relating to its products,
technologies and manufacturing processes. Corning is licensed to use
certain patents owned by others, which are also considered important
to the segment’s operations. Refer to the material under the heading
“Patents and Trademarks” for information relating to the Company’s
patents and trademarks.
The Environmental Technologies segment represented 11% of Corning’s
sales for 2014.
Specialty Materials Segment
The Specialty Materials segment manufactures products
that
provide more than 150 material formulations for glass, glass ceramics
and fluoride crystals to meet demand for unique customer needs.
Consequently, this segment operates in a wide variety of commercial
and industrial markets that include display optics and components,
semiconductor optics components, aerospace and defense, astronomy,
ophthalmic products, telecommunications components and cover glass
that is optimized for portable display devices.
Our cover glass, known as Corning® Gorilla® Glass, is a thin sheet glass
designed specifically to function as a cover glass for display devices such
as tablets, notebook PCs and mobile phones. Elegant and lightweight,
Corning Gorilla Glass is durable enough to resist many real-world events
that commonly cause glass failure, enabling exciting new applications
in technology and design. Early in 2012, Corning launched Corning®
Gorilla® Glass 2, the next generation in our Corning Gorilla Glass suite of
products. Corning Gorilla Glass 2 enables up to a 20% reduction in glass
thickness, while maintaining the industry-leading damage resistance,
toughness and scratch-resistance. In 2013, we introduced Corning®
Gorilla® Glass 3 with Native Damage Resistance and Corning® Gorilla®
Glass NBT™, designed to help protect touch notebook displays from
scratches and other forms of damage that come from everyday handling
and use. And in the fourth quarter of 2014, Corning announced its latest
breakthrough innovation in consumer electronics material design,
Business Description
Corning® Gorilla® Glass 4, which delivers the highest damage resistance
performance versus all alternative compositions, and has the capability
to significantly improve device drop performance.
Corning Gorilla Glass is manufactured in Kentucky, South Korea, Japan
and Taiwan.
Semiconductor optics manufactured by Corning
includes high-
performance optical material products, optical-based metrology
instruments, and optical assemblies for applications in the global
semiconductor industry. Corning’s semiconductor optics products are
manufactured in New York.
Other specialty glass products
lens and window
components and assemblies and are made in New York, New Hampshire,
Kentucky and France or sourced from China.
include glass
Patent protection is important to the segment’s operations. The segment
has a growing portfolio of patents relating to its products, technologies
and manufacturing processes. Brand recognition and loyalty, through
well-known trademarks, are important to the segment. Refer to the
material under the heading “Patents and Trademarks” for information
relating to the Company’s patents and trademarks.
The Specialty Materials segment represented approximately 12% of
Corning’s sales for 2014.
Life Sciences Segment
As a leading developer, manufacturer and global supplier of scientific
laboratory products for 100 years, Corning’s Life Sciences segment
collaborates with researchers seeking new approaches to increase
efficiencies, reduce costs and compress timelines in the drug discovery
process. Using unique expertise in the fields of materials science,
surface science, optics, biochemistry and biology, the segment
provides innovative solutions that improve productivity and enable
breakthrough discoveries.
include general
laboratory products
Life Sciences
labware and
equipment, as well as specialty surfaces, media and reagents that are
used for cell culture research, bioprocessing, genomics, drug discovery,
microbiology and chemistry. Corning sells life science products under
these primary brands: Corning, Falcon, PYREX, Axygen, and Gosselin. The
products are marketed worldwide, primarily through distributors to
pharmaceutical and biotechnology companies, academic institutions,
hospitals, government entities, and other research facilities. Corning
manufactures these products in the United States in Maine, New York,
New Jersey, California, Utah, Virginia, Massachusetts and North Carolina,
and outside of the U.S. in Mexico, France, Poland, and China.
In addition to being a global leader in consumable glass and plastic
laboratory tools for life science research, Corning continues to develop
and produce unique technologies aimed at simplifying customer lab
processes, or “workflows”, through three key categories:
• Vessels – Corning® HYPER platform of vessels for increased cell
yields; Corning® Microcarriers for cell scale-up, therapy and
vaccine applications;
• Surfaces – Corning® CellBIND® Surface; Corning®Matrigel®;
Corning®BioCoat™; Corning Synthemax® II Surface;
• Media – Corning® stemgro®
Patent protection is important to the segment’s operations. The segment
has a growing portfolio of patents relating to its products, technologies
and manufacturing processes. Brand recognition and loyalty, through
well-known trademarks, are important to the segment. Refer to the
material under the heading “Patents and Trademarks” for information
relating to the Company’s patents and trademarks.
The Life Sciences segment represented approximately 9% of Corning’s
sales for 2014.
3
CORNING INCORPORATED - 2014 Annual Report Business Description
All Other
All other segments that do not meet the quantitative threshold for
separate reporting have been grouped as “All Other.” This group is
primarily comprised of the results of Corning Precision Materials’ non-
LCD business and new product lines and development projects such
as advanced flow reactors and adjacency businesses in pursuit of thin,
strong glass. This segment also includes certain corporate investments
such as Eurokera and Keraglass equity affiliates, which manufacture
smooth cooktop glass/ceramic products.
Corporate Investments
The All Other segment represented less than 1% of Corning’s sales
for 2014.
Additional explanation regarding Corning and its five reportable
segments is presented in Management’s Discussion and Analysis of
Financial Condition and Results of Operations and Note 20 (Reportable
Segments) to the Consolidated Financial Statements.
Corning and The Dow Chemical Company (“Dow Chemical”) each own
half of Dow Corning Corporation (“Dow Corning”), an equity company
headquartered
in Michigan that manufactures silicone products
worldwide. Dow Corning is a leader in silicon-based technology and
innovation, offering more than 7,000 products and services. Dow Corning
is the majority-owner of Hemlock Semiconductor Group (“Hemlock”), a
market leader in the production of high purity polycrystalline silicon for
the semiconductor and solar energy industries. Dow Corning’s sales were
$6,221 million in 2014. Additional discussion about Dow Corning appears
in the Legal Proceedings section. Dow Corning’s financial statements are
attached in Item 15, Exhibits and Financial Statement Schedules.
(“PCC”), an equity company
Corning and PPG Industries, Inc. each own half of Pittsburgh Corning
Corporation
in Pennsylvania that
manufactures glass products for architectural and industrial uses. PCC
filed for Chapter 11 bankruptcy reorganization in April 2000. Corning
also owns half of Pittsburgh Corning Europe N.V. (“PCE”), a Belgian
corporation that manufactures glass products for industrial uses
primarily in Europe. Additional discussion about PCC and PCE appears in
the Legal Proceedings section.
Additional information about corporate investments is presented in
Note 7 (Investments) to the Consolidated Financial Statements.
Competition
Corning competes across all of its product lines with many large and varied manufacturers, both domestic and foreign. Some of these competitors are
larger than Corning, and some have broader product lines. Corning strives to sustain and improve its market position through technology and product
innovation. For the future, Corning believes its competitive advantage lies in its commitment to research and development, and its commitment to
quality. There is no assurance that Corning will be able to maintain or improve its market position or competitive advantage.
Display Technologies Segment
We believe Corning is the largest worldwide producer of glass substrates
for active matrix LCD displays. The environment for LCD glass substrate
products is very competitive and Corning believes it has sustained
its competitive advantages by investing in new products, providing
a consistent and reliable supply, and using its proprietary fusion
manufacturing process. This process allows us to deliver glass that is
larger, thinner and lighter, with exceptional surface quality and without
heavy metals. Asahi Glass Co. Ltd. and Nippon Electric Glass Co. Ltd. are
Corning’s principal competitors in display glass substrates.
Environmental Technologies Segment
For worldwide automotive ceramic substrate products, Corning has
a major market position that has remained relatively stable over the
past year. Corning has also established a strong presence in the heavy
duty and light duty diesel vehicle market and believes its competitive
advantage in automotive ceramic substrate products for catalytic
converters and diesel filter products for exhaust systems is based upon
global presence, customer service, engineering design services and
product innovation. Corning’s Environmental Technologies products
face principal competition from NGK Insulators, Ltd. and Ibiden Co. Ltd.
Optical Communications Segment
Competition within the communications equipment industry is intense
among several significant companies. Corning is a leading competitor in
the segment’s principal product groups, which include carrier network
and enterprise network. The competitive landscape includes industry
consolidation, price pressure and competition for the innovation
of new products. These competitive conditions are likely to persist.
Corning believes its large scale manufacturing experience, fiber process,
technology leadership and intellectual property yield cost advantages
relative to several of its competitors.
The primary competing producers of the Optical Communications
segment are TE Connectivity Ltd. and Prysmian Group.
Specialty Materials Segment
Corning is one of very few manufacturers with deep capabilities in
materials science, optical design, shaping, coating, finishing, metrology,
and system assembly. Additionally, we are addressing emerging needs of
the consumer electronics industry with the development of chemically
strengthened glass. Corning Gorilla Glass is a thin-sheet glass that is
better able to survive events that most commonly cause glass failure. Its
advanced composition allows a deeper layer of chemical strengthening
than is possible with most other chemically strengthened glasses, making
it both durable and damage resistant. Our products and capabilities
in this segment position the Company to meet the needs of a broad
array of markets including display, semiconductor, aerospace/defense,
astronomy, vision care, industrial/commercial, and telecommunications.
For this segment, Schott, Asahi Glass Co. Ltd., Nippon Electric Glass Co.
Ltd. and Heraeus are the main competitors.
4
CORNING INCORPORATED - 2014 Annual Report Business Description
Life Sciences Segment
Corning seeks to maintain a competitive advantage by emphasizing
product quality, product availability, supply chain efficiency, a wide
product line and superior product attributes. Our principle worldwide
competitors include Thermo Fisher Scientific, Inc. and Perkin Elmer.
Corning also faces increasing competition from large distributors that
have pursued backward integration or introduced private label products.
Raw Materials
Corning’s production of specialty glasses, ceramics, and related materials
requires significant quantities of energy, uninterrupted power sources,
certain precious metals, and various batch materials.
Although energy shortages have not been a problem recently, the cost
of energy remains volatile. Corning has achieved flexibility through
engineering changes to take advantage of low-cost energy sources
in most significant processes. Specifically, many of Corning’s principal
manufacturing processes can be operated with natural gas, propane, oil
or electricity, or a combination of these energy sources.
(ores, minerals, polymers, helium and
Availability of resources
processed chemicals) required in manufacturing operations, appears
to be adequate. Corning’s suppliers, from time to time, may experience
capacity limitations in their own operations, or may eliminate certain
product lines. Corning believes it has adequate programs to ensure
a reliable supply of batch materials and precious metals. For many
products, Corning has alternate glass compositions that would allow
operations to continue without interruption in the event of specific
materials shortages.
Certain key materials and proprietary equipment used
in the
manufacturing of products are currently sole-sourced or available only
from a limited number of suppliers. Any future difficulty in obtaining
sufficient and timely delivery of components could result in lost sales
due to delays or reductions in product shipments, or reductions in
Corning’s gross margins.
Patents and Trademarks
Inventions by members of Corning’s research and engineering staff
have been, and continue to be, important to the Company’s growth.
Patents have been granted on many of these inventions in the United
States and other countries. Some of these patents have been licensed to
other manufacturers, including companies in which Corning has equity
investments. Many of our earlier patents have now expired, but Corning
continues to seek and obtain patents protecting its innovations. In 2014,
Corning was granted about 400 patents in the U.S. and over 750 patents
in countries outside the U.S.
Each business segment possesses a patent portfolio that provides
certain competitive advantages in protecting Corning’s innovations.
Corning has historically enforced, and will continue to enforce, its
intellectual property rights. At the end of 2014, Corning and its wholly-
owned subsidiaries owned over 8,000 unexpired patents in various
countries of which over 3,300 were U.S. patents. Between 2015 and
2016, approximately 7% of these patents will expire, while at the same
time Corning intends to seek patents protecting its newer innovations.
Worldwide, Corning has about 7,000 patent applications in process,
with about 2,200 in process in the U.S. Corning believes that its patent
portfolio will continue to provide a competitive advantage in protecting
Corning’s innovation, although Corning’s competitors in each of its
businesses are actively seeking patent protection as well.
The Display Technologies segment has over 1,200 patents in various
countries, of which about 300 are U.S. patents. No one patent is
considered material to this business segment. Some of the important
U.S.-issued patents in this segment include patents relating to glass
compositions and methods for the use and manufacture of glass
substrates for display applications. There is no group of important
Display Technologies segment patents set to expire between 2015
and 2017.
The Optical Communications segment has over 3,100 patents in
various countries, of which over 1,200 are U.S. patents. No one patent is
considered material to this business segment. Some of the important
U.S.-issued patents in this segment include: (i) patents relating to optical
fiber products including low loss optical fiber, high data rate optical fiber,
and dispersion compensating fiber, and processes and equipment for
manufacturing optical fiber, including methods for making optical fiber
preforms and methods for drawing, cooling and winding optical fiber;
(ii) patents relating to optical fiber ribbons and methods for making
such ribbon, fiber optic cable designs and methods for installing optical
fiber cable; (iii) patents relating to optical fiber connectors, termination
and storage and associated methods of manufacture; and (iv) patents
related to distributed communication systems. There is no group of
important Optical Communications segment patents set to expire
between 2015 and 2017.
The Environmental Technologies segment has over 600 patents in
various countries, of which over 250 are U.S. patents. No one patent is
considered material to this business segment. Some of the important
U.S.-issued patents in this segment include patents relating to cellular
ceramic honeycomb products, together with ceramic batch and binder
system compositions, honeycomb extrusion and firing processes,
and honeycomb extrusion dies and equipment for the high-volume,
low-cost manufacture of such products. There is no group of important
Environmental Technologies segment patents set to expire between
2015 and 2017.
The Specialty Materials segment has over 700 patents in various
countries, of which over 350 are U.S. patents. No one patent is considered
material to this business segment. Some of the important U.S.-issued
patents in this segment include patents relating to protective cover
glass, ophthalmic glasses and polarizing dyes, and semiconductor/
microlithography optics and blanks, metrology instrumentation and
laser/precision optics, glass polarizers, specialty fiber, and refractories.
There is no group of important Specialty Materials segment patents set
to expire between 2015 and 2017.
The Life Sciences segment has over 650 patents in various countries, of
which about 250 are U.S. patents. No one patent is considered material
to this business segment. Some of the important U.S.-issued patents
in this segment include patents relating to methods and apparatus for
the manufacture and use of scientific laboratory equipment including
multiwell plates and cell culture products, as well as equipment and
processes for label independent drug discovery. There is no group of
important Life Sciences segment patents set to expire between 2015
and 2017.
Products reported in All Other include development projects, new
product lines, and other businesses or investments that do not meet the
threshold for separate reporting.
5
CORNING INCORPORATED - 2014 Annual Report Business Description
Many of the Company’s patents are used in operations or are licensed for
use by others, and Corning is licensed to use patents owned by others.
Corning has entered into cross-licensing arrangements with some major
competitors, but the scope of such licenses has been limited to specific
product areas or technologies.
Corning’s principal trademarks include the following: Axygen, Corning,
Celcor, ClearCurve, DuraTrap, Eagle XG, Epic, Evolant, Gosselin, Gorilla,
HPFS, Lanscape, Pretium, Pyrex, Steuben, Falcon, SMF-28e, and Willow.
Protection of the Environment
Corning has a program to ensure that its facilities are in compliance with
state, federal and foreign pollution-control regulations. This program
has resulted in capital and operating expenditures each year. In order
to maintain compliance with such regulations, capital expenditures
for pollution control in continuing operations were approximately
$10 million in 2014 and are estimated to be $13 million in 2015.
Corning’s 2014 consolidated operating results were charged with
approximately $49 million for depreciation, maintenance, waste
disposal and other operating expenses associated with pollution
control. Corning believes that its compliance program will not place it at
a competitive disadvantage.
Employees
At December 31, 2014, Corning had approximately 34,600 full-time employees, including approximately 11,500 employees in the United States. From
time to time, Corning also retains consultants, independent contractors, temporary and part-time workers. Unions are certified as bargaining agents
for approximately 24.1% of Corning’s U.S. employees.
Executive Officers
James P� Clappin President, Corning Glass Technologies
Kirk P� Gregg Executive Vice President and Chief Administrative Officer
Mr. Clappin joined Corning in 1980 as a process engineer. He transitioned
to GTE Corporation in 1983 when the Central Falls facility was sold and
returned to Corning in 1988. He began working in the display business
in 1994. Mr. Clappin relocated to Japan in 1996, as plant manager at
Corning Display Technologies (CDT) Shizuoka facility. In 2002, he was
appointed as general manager of CDT worldwide business. He served
as president of CDT from September 2005 through July 2010. He was
appointed president, Corning Glass Technologies, in 2010. Age 57.
Jeffrey W� Evenson Senior Vice President and Operations Chief of Staff
Dr. Evenson joined Corning in June 2011 and was elected to his current
position at that time. He serves on the Management Committee and
oversees a variety of strategic programs and growth initiatives. Prior to
joining Corning, Dr. Evenson was a senior vice president with Sanford
C. Bernstein, where he served as a senior analyst since 2004. Before
that, Dr. Evenson was a partner at McKinsey & Company, where he led
technology and market assessment for early-stage technologies. Age 49.
James B� Flaws Vice Chairman and Chief Financial Officer
Mr. Flaws joined Corning in 1973 and served in a variety of controller
and business management positions. Mr. Flaws was elected assistant
treasurer of Corning in 1993, vice president and controller in 1997, vice
president of finance and treasurer in May 1997, senior vice president
and chief financial officer in December 1997, executive vice president
and chief financial officer in 1999 and to his current position in 2002.
Mr. Flaws is a director of Dow Corning Corporation. Mr. Flaws has been a
member of Corning’s Board of Directors since 2000. Age 66.
Mr. Gregg joined Corning in 1993 as director of Executive Compensation.
He was named vice president of Executive Resources and Employee
Benefits in 1994, senior vice president, Administration in December
1997 and to his current position in 2002. He is responsible for Human
Resources, Information Technology, Procurement and Transportation,
Aviation, Community Affairs, Government Affairs, Business Services and
Corporate Security. Prior to joining Corning, Mr. Gregg was with General
Dynamics Corporation as corporate director, Key Management Programs,
and was responsible for executive compensation and benefits, executive
development and recruiting. Age 55.
Clark S� Kinlin Executive Vice President, Corning Optical Communications
Mr. Kinlin joined Corning in 1981 in the Specialty Materials division.
From 1985 to 1995 he worked in the Optical Fiber division. In 1995, he
joined Corning Consumer Products (CCP). In 2000, Mr. Kinlin was named
president, Corning International Corporation and, in 2003, he was
appointed as general manager for Greater China. From April 2007 to
March 2008, he was chief operating officer, Corning Cable Systems (now
Corning Optical Communications) and was named president and chief
executive officer in 2008. He was appointed executive vice president in
2012. Age 55.
Lawrence D� McRae Executive Vice President,
Corporate Development
Strategy and
Mr. McRae joined Corning in 1985 and served in various financial, sales
and marketing positions. He was elected vice president Corporate
Development in 2000, senior vice president Corporate Development in
2003, and senior vice president Strategy and Corporate Development in
October 2005. He was elected to his present position in October 2010.
Mr. McRae is on the board of directors of Dow Corning Corporation.
Age 56.
6
CORNING INCORPORATED - 2014 Annual Report David L� Morse Executive Vice President and Chief Technology Officer
Lewis A� Steverson Senior Vice President and General Counsel
Risk Factors
Dr. Morse joined Corning in 1976 in glass research and worked as
a composition scientist in developing and patenting several major
products. He served in a variety of product and materials research and
technology director roles and was appointed division vice president
and technology director for photonic technology groups beginning
in March 1999. He became director of corporate research, science and
technology in December 2001. He was elected vice president in January
2003, becoming senior vice president and director of corporate research
in 2006. Dr. Morse was elected to his current position in May 2012. He is
on the board of Dow Corning Corporation and a member of the National
Academy of Engineering and the National Chemistry Board. Age 62.
Eric S� Musser Executive Vice President, Corning Technologies
and International
Mr. Musser joined Corning in 1986 and served in a variety of
manufacturing positions at fiber plants in Wilmington, N.C. and
Melbourne, Australia, before becoming manufacturing strategist for
the Optical Fiber business in 1996. Mr. Musser joined Corning Lasertron
in 2000 and became president later that year. He was named director,
manufacturing operations for Photonic Technologies in 2002. In 2003,
he returned to Optical Fiber as division vice president, development and
engineering and was named vice president and general manager in
2005. In 2007, he was appointed general manager of Corning Greater
China and was named president of Corning International in 2012.
Mr. Musser was appointed executive vice president in 2014. Age 55.
Christine M� Pambianchi Senior Vice President, Human Resources
Ms. Pambianchi joined Corning in 2000 as division human resource
manager, Corning Optical Fiber, and later was named director, Human
Resources, Corning Optical Communications. She has led the Human
Resources function since January 2008 when she was named vice
president, Human Resources. Ms. Pambianchi was appointed to senior
vice president, Human Resources, in 2010, and is responsible for leading
Corning’s global human resource function. Age 46.
Document Availability
Mr. Steverson joined Corning in June 2013 as Senior Vice President and
General Counsel. Prior to joining Corning, Mr. Steverson served as senior
vice president, general counsel, and secretary of Motorola Solutions, Inc.
During his 18 years with Motorola, he held a variety of legal leadership
roles across the company’s numerous business units. Prior to Motorola,
Mr. Steverson was in private practice at the law firm of Arnold & Porter.
Age 51.
R� Tony Tripeny Senior Vice President, Corporate Controller and Principal
Accounting Officer
Mr. Tripeny joined Corning in 1985 as the corporate accounting
manager of Corning Cable Systems, and became the Keller, Texas
facility’s plant controller in 1989. In 1993, he was appointed equipment
division controller of Corning Cable Systems and, in 1996 corporate
controller. Mr. Tripeny was appointed chief financial officer of Corning
Cable Systems in July 2000. In 2003, he took on the additional role of
Telecommunications group controller. He was appointed division vice
president, operations controller in August 2004, and vice president,
corporate controller in October 2005. Mr. Tripeny was elected to his
current position in April 2009. He is on the board of directors of Hardinge
Inc. Age 55.
Wendell P� Weeks Chairman, Chief Executive Officer and President
Mr. Weeks joined Corning in 1983. He was named vice president
and general manager of the Optical Fiber business in 1996, senior
vice president in 1997, senior vice president of Opto-Electronics in
1998, executive vice president in 1999, and president, Corning Optical
Communications in 2001. Mr. Weeks was named president and chief
operating officer of Corning in 2002, president and chief executive
officer in 2005 and chairman and chief executive officer on April 26,
2007. He added the title of president in December 2010. Mr. Weeks is a
director of Merck & Co. Inc. Mr. Weeks has been a member of Corning’s
Board of Directors since 2000. Age 55.
A copy of Corning’s 2014 Annual Report on Form 10-K filed with the
Securities and Exchange Commission is available upon written request
to Corporate Secretary, Corning Incorporated, Corning, NY 14831. The
Annual Report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments pursuant to Section 13(a) or
15(d) of the Exchange Act of 1934 and other filings are available as
soon as reasonably practicable after such material is electronically
filed or furnished to the SEC, and can be accessed electronically free
of charge, through the Investor Relations page on Corning’s web site
at www.corning.com. The information contained on the Company’s
website is not included in, or incorporated by reference into, this Annual
Report on Form 10-K.
Risk Factors
in
We operate
rapidly changing economic and technological
environments that present numerous risks, many of which are driven by
factors that we cannot control or predict. Our operations and financial
results are subject to various risks and uncertainties, including those
described below, that could adversely affect our business, financial
condition, results of operations, cash flows, and the trading price of
our common stock or debt. The following discussion of “risk factors”
identifies the most significant factors that may adversely affect our
business, operations, financial position or future financial performance.
This information should be read in conjunction with MD&A and the
consolidated financial statements and related notes incorporated by
reference into this report. The following discussion of risks is not all
inclusive but is designed to highlight what we believe are important
factors to consider, as these factors could cause our future results
to differ from those in the forward-looking statements and from
historical trends.
7
CORNING INCORPORATED - 2014 Annual Report Risk Factors
As a global company, we face many risks which could adversely impact
our ongoing operations and reported financial results
We operate in over 100 countries and derive a substantial portion of our
revenues from, and have significant operations, outside of the United
States. Our international operations include manufacturing, assembly,
sales, customer support, and shared administrative service centers.
Compliance with laws and regulations increases our cost of doing
business. These laws and regulations include U.S. laws and local laws
which include data privacy requirements, employment and labor laws,
tax laws, anti-competition regulations, prohibitions on payments
to governmental officials, import and trade restrictions and export
requirements. Non-compliance or violations could result in fines,
criminal sanctions against us, our officers or our employees, and
prohibitions on the conduct of our business. Such violations could result
in prohibitions on our ability to offer our products and services in one
or more countries and could also materially damage our reputation,
our brand, our international expansion efforts, our ability to attract and
retain employees, our business and our operating results. Our success
depends, in part, on our ability to anticipate and manage these risks.
We are also subject to a variety of other risks in managing a global
organization, including those related to:
• General economic conditions in each country or region;
• Many complex regulatory requirements affecting international trade
and investment, including anti-dumping laws, export controls, the
Foreign Corrupt Practices Act and local laws prohibiting improper
payments. Our operations may be adversely affected by changes in the
substance or enforcement of these regulatory requirements, and by
actual or alleged violations of them;
• Fluctuations in currency exchange rates, convertibility of currencies and
restrictions involving the movement of funds between jurisdictions
and countries;
• Sovereign and political risks that may adversely affect Corning’s
profitability and assets;
• Geographical concentration of our factories and operations and
regional shifts in our customer base;
• Periodic health epidemic concerns;
• Political unrest, confiscation or expropriation of our assets by foreign
governments, terrorism and the potential for other hostilities;
• Difficulty in protecting intellectual property, sensitive commercial and
operations data, and information technology systems generally;
• Differing legal systems, including protection and treatment of
intellectual property and patents;
• Complex or unclear tax regimes;
• Complex tariffs, trade duties and other trade barriers including anti-
dumping duties;
• Difficulty
in
collecting obligations owed
to us
such as
accounts receivable;
• Natural disasters such as floods, earthquakes, tsunamis and
windstorms; and
• Potential power loss or disruption affecting manufacturing.
Our sales could be negatively impacted by the actions of one or more
key customers, or the circumstances to which they are subject, leading
to the substantial reduction in orders for our products
In 2014, Corning’s ten largest customers accounted for 48% of our sales.
In addition, a relatively small number of customers accounted for a
high percentage of net sales in our reportable segments. For 2014, three
customers of the Display Technologies segment accounted for 61% of
total segment net sales when combined. In the Optical Communications
segment, one customer accounted for 11% of segment net sales. In the
Environmental Technologies segment, three customers accounted for
88% of total segment sales in aggregate. In the Specialty Materials
segment, three customers accounted for 51% of segment sales in 2014. In
the Life Sciences segment, two customers accounted for 45% of segment
sales in 2014. As a result of mergers and consolidations between
customers, Corning’s customer base could become more concentrated.
Our Optical Communications segment customers’ purchases of our
products are affected by their capital expansion plans, general market
and economic uncertainty and regulatory changes, including broadband
policy. Sales in the Optical Communications segment are expected to be
impacted by the pace of fiber-to-the-premises deployments. Our sales
will be dependent on planned targets for homes passed and connected.
Changes in our customers’ deployment plans could adversely affect
future sales.
In the Environmental Technologies segment, sales of our ceramic
substrate and filter products for automotive and diesel emissions tend
to fluctuate with vehicle production. Changes in laws and regulations
for air quality and emission controls may also influence future sales.
Sales in our Environmental Technologies segment are mainly to three
catalyzers and emission system control manufacturers. Our customers
sell these systems to automobile and diesel engine original equipment
manufacturers. Sales in this segment may be affected by adverse
developments in the global vehicle or freight hauling industries or
by such factors as higher fuel prices that may affect vehicle sales or
downturns in freight traffic.
Certain sales in our Specialty Materials segment track worldwide
economic cycles and our customers’ responses to those cycles. In
addition, any positive trends in prior years in the sales of strengthened
glass may not continue. We may experience losses relating to our
inability to supply contracted quantities of this glass and processes
planned to produce new versions of this glass may not be successful.
Sales in our Life Sciences segment are concentrated with two large
distributors who are also competitors, and the balance is to a variety
of pharmaceutical and biotechnology companies, hospitals, universities,
and other research facilities. In 2014, our two largest distributors
accounted for 45% of Life Sciences’ segment sales. Changes in our
distribution arrangements in this segment may adversely affect this
segment’s financial results.
Our operations and financial performance could be negatively
impacted, if the markets for our products do not develop and expand
as we anticipate
The markets for our products are characterized by rapidly changing
technologies, evolving industry or regulatory standards and new product
introductions. Our success is dependent on the successful introduction
of new products, or upgrades of current products, and our ability to
compete with new technologies. The following factors related to our
products and markets, if they do not continue as in the recent past, could
have an adverse impact on our operations:
• our ability to introduce advantaged products such as glass substrates
for liquid crystal displays, optical fiber and cable and hardware and
equipment, and environmental substrate and filter products at
competitive prices;
• our ability to manufacture glass substrates and strengthened glass,
to satisfy our customers’ technical requirements and our contractual
obligations; and
• our ability to develop new products in response to government
regulations and laws.
8
CORNING INCORPORATED - 2014 Annual Report Risk Factors
We face pricing pressures in each of our businesses that could adversely
affect our financial performance
The success of our business depends on our ability to develop and
produce advantaged products that meet our customers’ needs
We face pricing pressure in each of our businesses as a result of intense
competition, emerging technologies, or over-capacity. While we work
consistently toward reducing our costs to offset pricing pressures, we
may not be able to achieve proportionate reductions in costs or sustain
our current rate of cost reduction. We anticipate pricing pressures will
continue in the future in all our businesses.
Any of these items could cause our sales, profitability and cash flows to
be significantly reduced.
We face risks due to foreign currency fluctuations
Because we have significant customers and operations outside the
U.S., fluctuations in foreign currencies, especially the Japanese yen,
New Taiwan dollar, Korean won, and Euro, will significantly impact
our sales, profit and cash flows. Foreign exchange rates may make our
products less competitive in countries where local currencies decline
in value relative to the US dollar and Japanese yen. Sales in our Display
Technologies segment, representing 40% of Corning’s sales in 2014, are
denominated in Japanese yen. Corning hedges significant translation,
transaction and balance sheet currency exposures and uses a variety
of derivative instruments to reduce the impact of foreign currency
fluctuations associated with certain monetary assets and liabilities as
well as operating results including our net profits.
A large portion of our sales, profit and cash flows are transacted in
non-US dollar currencies and we expect that we will continue to realize
gains or losses with respect to these exposures, net of gains or losses
from our hedging programs. For example, we will experience foreign
currency gains and losses in certain instances if it is not possible or cost
effective to hedge our foreign currency exposures or should we elect
not to hedge certain foreign currency exposures. Alternatively, we may
experience gains or losses if the underlying exposure which we have
hedged change (increases or decreases) and we are unable to reverse,
unwind, or terminate the hedges concurrent with the change in the
underlying notional exposure. The objective of our hedging activities is
to mitigate the risk associated with foreign currency exposures. We are
also exposed to potential losses in the event of non-performance by our
counterparties to these derivative contracts. However, we minimize this
risk by maintaining a diverse group of highly-rated major international
financial institutions with which we have other financial relationships
as our counterparties. 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. Our ultimate
realized loss or gain with respect to currency fluctuations will generally
depend on the size and type of cross-currency exposures that we enter
into, the currency exchange rates associated with these exposures
and changes in those rates, whether we have entered into foreign
currency forward contracts to offset these exposures and other factors.
All of these factors could materially impact our results of operations,
anticipated future results, financial position and cash flows, the timing
of which is variable and generally outside of our control.
If the financial condition of our customers declines, our credit risks
could increase
Although we have a rigorous process to administer credit and believe
our bad debt reserve is adequate, we have experienced, and in the
future may experience, losses as a result of our inability to collect our
accounts receivable. If our customers or our indirect customers fail to
meet their payment obligations for our products, we could experience
reduced cash flows and losses in excess of amounts reserved. Many
customers of our Display Technologies and Specialty Materials
segments are thinly capitalized and/or unprofitable. In our Optical
Communications segment, certain large infrastructure projects are
subject to governmental funding, which, if terminated, could adversely
impact the financial strength of our customers. These factors may result
in an inability to collect receivables or a possible loss in business.
Our business relies on continued global demand for our brands and
products. To achieve business goals, we must develop and sell products
that appeal to our customers, original equipment manufacturers and
distributors. This is dependent on a number of factors, including our
ability to manage and maintain key customer relationships, our ability
to produce products that meet the quality, performance and price
expectations of our customers. The manufacturing of our products
involves complex and precise processes. In some cases, existing
manufacturing may be insufficient to achieve the requirements of our
customers. We will need to develop new manufacturing processes and
techniques to maintain profitable operations. While we continue to
fund projects to improve our manufacturing techniques and processes
and lower our costs, we may not achieve satisfactory manufacturing
costs that will fully enable us to meet our profitability targets.
In addition, our continued success in selling products that appeal to our
customers is dependent on our ability to innovate, with respect to both
products and operations, and on the availability and effectiveness of
legal protection for our innovations. Failure to continue to deliver quality
and competitive products to the marketplace, to adequately protect our
intellectual property rights, to supply products that meet applicable
regulatory requirements or to predict market demands for, or gain
market acceptance of, our products, could have a negative impact on our
business, results of operations and financial condition.
Our future financial performance depends on our ability to purchase
a sufficient amount of materials, precious metals, parts, and
manufacturing equipment to meet the demands of our customers
Our ability to meet customer demand depends, in part, on our ability to
obtain timely and adequate delivery of materials, precious metals, parts
and components from our suppliers. We may experience shortages that
could adversely affect our operations. Although we work closely with our
suppliers to avoid shortages, there can be no assurances that we will not
encounter problems in the future. Furthermore, certain manufacturing
equipment, raw materials or components are available only from a
single source or limited sources. We may not be able to find alternate
sources in a timely manner. A reduction, interruption or delay of supply,
or a significant increase in the price for supplies, such as manufacturing
equipment, precious metals, raw materials or energy, could have a
material adverse effect on our businesses.
If our products, including materials purchased from our suppliers,
experience performance issues, our business will suffer
Our business depends on the production of products of consistently
high quality. Our products, components and materials purchased from
our suppliers, are typically tested for quality. These testing procedures
are limited to evaluating our products under likely and foreseeable
failure scenarios. For various reasons, our products, including materials
purchased from our suppliers, may fail to perform as a customer
expected. In some cases, product redesigns or additional expense may
be required to address such issues. A significant or systemic quality issue
could result in customer relations problems, lost sales, reduced volumes,
product recalls and financial damages and penalties.
We have incurred, and may in the future incur, goodwill and other
intangible asset impairment charges
At December 31, 2014, Corning had goodwill and other intangible assets
of $1,647 million. While we believe the estimates and judgments about
future cash flows used in the goodwill impairment tests are reasonable,
we cannot provide assurance that future impairment charges will
not be required if the expected cash flow estimates as projected by
management do not occur, especially if an economic recession occurs
and continues for a lengthy period or becomes severe, or if acquisitions
and investments made by the Company fail to achieve expected returns.
9
CORNING INCORPORATED - 2014 Annual Report Risk Factors
We operate in a highly competitive environment
We operate in a highly competitive environment, and our outlook
depends on the company’s share of industry sales based on our ability
to compete with others in the marketplace. The Company competes
on the basis of product attributes, customer service, quality and price.
There can be no assurance that our products will be able to compete
successfully with other companies’ products. Our share of industry
sales could be reduced due to aggressive pricing or product strategies
pursued by competitors, unanticipated product or manufacturing
difficulties, product performance failures, our failure to price our
products competitively, our failure to produce our products at a
competitive cost or unexpected, emerging technologies or products.
We expect that we will face continuous competition from existing
competitors, low cost manufacturers and new entrants. We believe we
must invest in research and development, engineering, manufacturing
and marketing capabilities, and continue to improve customer service in
order to remain competitive. We cannot provide assurance that we will
be able to maintain or improve our competitive position.
We may need to change our pricing models to compete successfully
We face intense competition in all of our businesses, particularly LCD
glass, and general economic and business conditions can put pressure
on us to change our prices. If our competitors offer significant discounts
on certain products or develop products that the marketplace considers
more valuable, we may need to lower prices or offer other favorable
terms in order to retain our customers and market positions. Any such
changes may reduce our profitability and cash flow. Any broad-based
change to our prices and pricing policies could cause our revenues to
decline or be delayed as we implement and our customers adjust to the
new pricing policies. If we do not adapt our pricing models to reflect
changes in customer use of our products or changes in customer
demand, our revenues could decrease.
LCD glass generates a significant amount of the Company’s profits
and cash flow, and any events that adversely affect the market for
LCD glass substrates could have a material and negative impact on our
financial results
Corning’s ability to generate profits and operating cash flow depends
largely upon the level of profitability of our LCD glass business. As a
result, any event that adversely affects our Display business could have
a significant impact on our consolidated financial results. These events
could include loss of patent protection, increased costs associated with
manufacturing, and increased competition from the introduction of
new, and more desirable products. If any of these events had a material
adverse effect on the sales of our LCD glass, such an event could result in
material charges and a significant reduction in profitability.
Additionally, emerging material technologies could replace our glass
substrates for certain applications, including display glass, cover glass
and others, resulting in a decline in demand for our products. Existing or
new production capacity for glass substrates may exceed the demand
for them. Technologies for displays, cover glass and other applications
in competition with our glass may reduce or eliminate the need for
our glass substrates. New process technologies developed by our
competitors may also place us at a cost or quality disadvantage. Our
own process technologies may be acquired or used unlawfully by others,
enabling them to compete with us. Our inability to manufacture glass
substrates to the specifications required by our customers may result
in loss of revenue, margins and profits or liabilities for failure to supply.
A scarcity of resources, limitations on technology, personnel or other
factors resulting in a failure to produce commercial quantities of glass
substrates could have adverse financial consequences to us.
Changes in our effective tax rate or tax liability may have an adverse
effect on our results of operations
Our effective tax rate could be adversely
factors, including:
impacted by several
• changes in the relative amounts of income before taxes in the various
jurisdictions in which we operate that have differing statutory
tax rates;
• changes in tax treaties and regulations or the interpretation of them;
• changes to our assessments about the realizability of our deferred tax
assets that are based on estimates of our future results, the prudence
and feasibility of possible tax planning strategies, and the economic
environments in which we do business;
• the outcome of current and future tax audits, examinations, or
administrative appeals;
• changes in generally accepted accounting principles that affect the
accounting for taxes; and
• limitations or adverse findings regarding our ability to do business in
some jurisdictions.
We may have additional tax liabilities
We are subject to income taxes in the U.S. and many foreign jurisdictions
and are commonly audited by various tax authorities. In the ordinary
course of our business, there are many transactions and calculations
where the ultimate tax determination
is uncertain. Significant
judgment is required in determining our worldwide provision for
income taxes. Although we believe our tax estimates are reasonable,
the final determination of tax audits and any related litigation could
be materially different from our historical income tax provisions and
accruals. The results of an audit or litigation could have a material effect
on our financial statements in the period or periods for which that
determination is made.
A significant amount of our net profits and cash flows are generated
from outside the U.S., and certain repatriation of funds currently held
in foreign jurisdictions may result in higher effective tax rates for the
company. In addition, there have been proposals to change U.S. tax laws
that could significantly impact how U.S. global corporations are taxed on
foreign earnings. Although we cannot predict whether or in what form
proposed legislation may pass, if enacted certain anti-deferral proposals
could have a material adverse impact on our tax expense and cash flow.
Our business depends on our ability to attract and retain
talented employees
The loss of the services of any member of our senior management
team or key research and development or engineering personnel
without adequate replacement, or the inability to attract new qualified
personnel, could have a material adverse effect on our operations and
financial performance.
We are subject to strict environmental regulations and regulatory
changes that could result in fines or restrictions that interrupt
our operations
Some of our manufacturing processes generate chemical waste, waste
water, other industrial waste or greenhouse gases, and we are subject to
numerous laws and regulations relating to the use, storage, discharge
and disposal of such substances. We have installed anti-pollution
equipment for the treatment of chemical waste and waste water at
our facilities. We have taken steps to control the amount of greenhouse
gases created by our manufacturing operations. However, we cannot
provide assurance that environmental claims will not be brought
against us or that government regulators will not take steps toward
adopting more stringent environmental standards.
10
CORNING INCORPORATED - 2014 Annual Report Risk Factors
Any failure on our part to comply with any present or future
environmental regulations could result in the assessment of damages or
imposition of fines against us, or the suspension/cessation of production
or operations. In addition, environmental regulations could require us to
acquire costly equipment, incur other significant compliance expenses
or limit or restrict production or operations and thus materially and
negatively affect our financial condition and results of operations.
in research and development and related product opportunities.
Accelerated product introductions and short product life cycles require
high levels of expenditures for research and development that could
adversely affect our operating results if not offset by increases in our
gross margin. We believe that we must continue to dedicate a significant
amount of resources to our research and development efforts to
maintain our competitive position.
Changes in regulations and the regulatory environment in the U.S. and
other countries, such as those resulting from the regulation and impact
of global warming and CO2 abatement, may affect our businesses
and their results in adverse ways by, among other things, substantially
increasing manufacturing costs, limiting availability of scarce resources,
especially energy, or requiring limitations on production and sale of our
products or those of our customers.
We may experience difficulties in enforcing our intellectual property
rights and we may be subject to claims of infringement of the
intellectual property rights of others
We rely on patent and trade secret laws, copyright, trademark,
confidentiality procedures, controls and contractual commitments
to protect our intellectual property rights. Despite our efforts, these
protections may be limited and we may encounter difficulties in
protecting our intellectual property rights or obtaining rights to
additional intellectual property necessary to permit us to continue or
expand our businesses. We cannot provide assurance that the patents
that we hold or may obtain will provide meaningful protection against
our competitors. Changes in or enforcement of laws concerning
intellectual property, worldwide, may affect our ability to prevent
or address the misappropriation of, or the unauthorized use of, our
intellectual property. Litigation may be necessary to enforce our
intellectual property rights. Litigation is inherently uncertain and
outcomes are often unpredictable. If we cannot protect our intellectual
property rights against unauthorized copying or use, or other
misappropriation, we may not remain competitive.
The intellectual property rights of others could inhibit our ability to
introduce new products. Other companies hold patents on technologies
used in our industries and are aggressively seeking to expand, enforce
and license their patent portfolios. We periodically receive notices from,
or have lawsuits filed against us by third parties claiming infringement,
misappropriation or other misuse of their intellectual property rights
and/or breach of our agreements with them. These third parties often
include entities that do not have the capabilities to design, manufacture,
or distribute products or that acquire intellectual property like patents
for the sole purpose of monetizing their acquired intellectual property
through asserting claims of infringement and misuse. Such claims
of infringement or misappropriation may result in loss of revenue,
substantial costs, or lead to monetary damages or injunctive relief
against us.
Current or future litigation or regulatory investigations may harm our
financial condition or results of operations
As described in Legal Proceedings in this Form 10-K, we are engaged in
litigation and regulatory matters. Litigation and regulatory proceedings
may be uncertain, and adverse rulings could occur, resulting in significant
liabilities, penalties or damages. Such current or future substantial legal
liabilities or regulatory actions could have a material adverse effect on
our business, financial condition, cash flows and reputation.
We may not capture significant revenues from our current research and
development efforts for several years, if at all
Developing our products through research and development is expensive
and the investment often involves a long return on investment cycle.
We have made and expect to continue to make significant investments
Business disruptions could affect our operating results
A significant portion of our manufacturing, research and development
activities and certain other critical business operations are concentrated
in a few geographic areas. A major earthquake, fire or other catastrophic
event that results in the destruction or disruption of any of our critical
facilities could severely affect our ability to conduct normal business
operations and, as a result, our future financial results could be materially
and adversely affected.
Additionally, a significant amount of the specialized manufacturing
capacity for our Display Technologies segment is concentrated in three
overseas countries and it is reasonably possible that the operations of
one or more such facilities could be disrupted. Due to the specialized
nature of the assets and the customers’ locations, it may not be possible
to find replacement capacity quickly or substitute production from
facilities in other countries. Accordingly, loss of these facilities could
produce a near-term severe impact on our Display business and the
Company as a whole.
We face risks through equity affiliates that we do not control
Corning’s net income includes equity earnings from affiliated companies.
For the year ended December 31, 2014, we recognized $266 million of
equity earnings, of which approximately 95% came from Dow Corning
(which makes silicone and high purity polycrystalline products).
Our equity investments may not continue to perform at the same levels
as in recent years. Dow Corning emerged from Chapter 11 bankruptcy
in 2004 and has certain obligations under its Plan of Reorganization to
resolve and fund claims of its creditors and personal injury claimants.
Dow Corning may incur further bankruptcy charges in the future, which
may adversely affect its operations or assets. Dow Corning also could
be adversely impacted by diminished performance at their consolidated
subsidiary, Hemlock Semiconductor Group. In addition, we rely on the
internal controls and financial reporting controls of these entities
and their failure to maintain effectiveness or comply with applicable
standards may adversely affect us.
We may not have adequate insurance coverage for claims against us
We face the risk of loss resulting from product liability, asbestos,
securities, fiduciary liability, intellectual property, antitrust, contractual,
warranty, environmental, fraud and other lawsuits, whether or not such
claims are valid. In addition, our product liability, fiduciary, directors
and officers, property policies including business interruption, natural
catastrophe and comprehensive general liability insurance may not be
adequate to cover such claims or may not be available to the extent we
expect in the future. A successful claim that exceeds or is not covered by
our policies could require us to make substantial unplanned payments.
Some of the carriers in our historical primary and excess insurance
programs are in liquidation and may not be able to respond if we should
have claims reaching their policies. The financial health of other insurers
may deteriorate. Several of our insurance carriers are litigating with us
the extent, if any, of their obligation to provide insurance coverage for
asbestos liabilities asserted against us. The results of that litigation may
adversely affect our insurance coverage for those risks. In addition, we
may not be able to obtain adequate insurance coverage for certain types
of risk such as political risks, terrorism or war.
11
CORNING INCORPORATED - 2014 Annual Report Risk Factors
Our global operations are subject to extensive trade and anti-corruption
laws and regulations
Significant macroeconomic events, changes in regulations, or a crisis in
the financial markets could limit our access to capital
Due to the international scope of our operations, we are subject to a
complex system of import- and export-related laws and regulations,
including U.S. regulations issued by Customs and Border Protection, the
Bureau of Industry and Security, the Office of Antiboycott Compliance,
the Directorate of Defense Trade Controls and the Office of Foreign
Assets Control, as well as the counterparts of these agencies in other
countries. Any alleged or actual violations may subject us to government
scrutiny, investigation and civil and criminal penalties, and may limit our
ability to import or export our products or to provide services outside
the United States. We cannot predict the nature, scope or effect of future
regulatory requirements to which our operations might be subject or
the manner in which existing laws might be administered or interpreted.
In addition, the U.S. Foreign Corrupt Practices Act and similar foreign anti-
corruption laws generally prohibit companies and their intermediaries
from making improper payments or providing anything of value to
improperly influence foreign government officials for the purpose
of obtaining or retaining business, or obtaining an unfair advantage.
Recent years have seen a substantial increase in the global enforcement
of anti-corruption laws. Our continued operation and expansion outside
the United States, including in developing countries, could increase the
risk of alleged violations. Violations of these laws may result in severe
criminal or civil sanctions, could disrupt our business, and result in an
adverse effect on our reputation, business and results of operations or
financial condition.
Moreover, several of our related partners are domiciled in areas of the
world with laws, rules and business practices that differ from those
in the United States. Although we strive to select equity partners
and affiliates who share our values and understand our reporting
requirements as a U.S.-domiciled company and to ensure that an
appropriate business culture exists within these ventures to minimize
and mitigate our risk, we nonetheless face the reputational and legal
risk that our equity partners and affiliates may violate applicable laws,
rules and business practices.
Acquisitions, equity investments and strategic alliances may have an
adverse effect on our business
We expect to continue making acquisitions and entering into equity
investments and strategic alliances as part of our business strategy.
These transactions involve significant challenges and risks including
that a transaction may not advance our business strategy, that we do
not realize a satisfactory return on our investment, or that we experience
difficulty integrating new employees, business systems, and technology,
or diversion of management’s attention from our other businesses.
It may take longer than expected to realize the full benefits, such as
increased revenue and cash flow, enhanced efficiencies, or market
share, or those benefits may ultimately be smaller than anticipated, or
may not be realized. These events could harm our operating results or
financial condition.
Improper disclosure of personal data could result in liability and harm
our reputation
We store and process personally-identifiable information of our
employees and, in some case, our customers. At the same time, the
continued occurrence of high-profile data breaches provides evidence
of the increasingly hostile information security environment. This
environment demands that we continuously improve our design
and coordination of security controls across our business groups and
geographies. Despite these efforts, it is possible our security controls
over personal data, our training of employees and vendors on data
security, and other practices we follow may not prevent the improper
disclosure of personally identifiable information. Improper disclosure
of this information could harm our reputation or subject us to liability
under laws that protect personal data, resulting in increased costs or
loss of revenue.
We utilize credit in both the capital markets and from banks to facilitate
company borrowings, hedging transactions, leases and other financial
transactions. We maintain a $2 billion revolving credit agreement to
fund potential liquidity needs and to backstop certain transactions. An
adverse macroeconomic event or changes in bank regulations could
limit our ability to gain access to credit or to renew the revolving credit
agreement upon expiration. Additionally, a financial markets crisis may
limit our ability to access liquidity.
Adverse economic conditions may adversely affect our cash investments
We maintain an investment portfolio of various types of securities with
varying maturities and credit quality. These investments are subject
to general credit, liquidity, market, and interest rate risks, which may
be exacerbated by unusual events that have affected global financial
markets. We also make significant investments in U.S. government
securities, either directly, or through investment in money market
funds. If global credit and equity markets experience prolonged periods
of decline, or if the U.S. defaults on its debt obligations or its debt is
downgraded, our investment portfolio may be adversely impacted and
we could determine that more of our investments have experienced
an other-than-temporary decline in fair value, requiring impairment
charges that could adversely impact our financial results.
Information technology dependency and security vulnerabilities could
lead to reduced revenue, liability claims, or competitive harm
The Company is increasingly dependent on sophisticated information
technology and infrastructure. Any significant breakdown, intrusion,
interruption or corruption of these systems or data breaches could have a
material adverse effect on our business. Like other global companies, we
have, from time to time, experienced incidents related to our information
technology (“IT”) systems, and expect that such incidents will continue,
including malware and computer virus attacks, unauthorized access,
systems failures and disruptions. We have measures and defenses in
place against unauthorized access, but we may not be able to prevent,
immediately detect, or remediate such events.
We use electronic IT in our manufacturing processes and operations and
other aspects of our business. Despite our implementation of security
measures, our IT systems are vulnerable to disruptions from computer
viruses, natural disasters, unauthorized access, cyber-attack and other
similar disruptions. A material breach in the security of our IT systems
could include the theft of our intellectual property or trade secrets. Such
disruptions or security breaches could result in the theft, unauthorized
use or publication of our intellectual property and/or confidential
business information, harm our competitive position, reduce the value
of our investment in research and development and other strategic
initiatives, or otherwise adversely affect our business.
Additionally, utilities and other operators of critical energy infrastructure
that serve our facilities face heightened security risks, including cyber-
attack. In the event of such an attack, disruption in service from our
utility providers could disrupt our manufacturing operations which rely
on a continuous source of power (electrical, gas, etc.).
International trade policies may impact demand for our products and
our competitive position
Government policies on international trade and investment such as
import quotas, capital controls or tariffs, whether adopted by individual
governments or addressed by regional trade blocs, can affect the
demand for our products and services, impact the competitive position
of our products or prevent us (including our equity affiliates/joint
ventures) from being able to sell products in certain countries. The
implementation of more restrictive trade policies, such as higher tariffs
or new barriers to entry, in countries in which we sell large quantities
of products and services could negatively impact our business, results
of operations and financial condition. For example, a government’s
adoption of “buy national” policies or retaliation by another government
against such policies could have a negative impact on our results of
operations. These policies also affect our equity companies.
12
CORNING INCORPORATED - 2014 Annual Report Legal Proceedings
Dow Corning Corporation� Corning and The Dow Chemical Company
(“Dow”) each own 50% of the common stock of Dow Corning Corporation
(“Dow Corning”).
Dow Corning Breast Implant Litigation
In May 1995, Dow Corning filed for bankruptcy protection to address
pending and claimed liabilities arising from many thousands of breast
implant product lawsuits. On June 1, 2004, Dow Corning emerged from
Chapter 11 with a Plan of Reorganization (the “Plan”) which provided
for the settlement or other resolution of implant claims. The Plan also
includes releases for Corning and Dow as shareholders in exchange for
contributions to the Plan.
Under the terms of the Plan, Dow Corning has established and is
funding a Settlement Trust and a Litigation Facility to provide a means
for tort claimants to settle or litigate their claims. Inclusive of insurance,
Dow Corning has paid approximately $1.8 billion to the Settlement
Trust. As of December 31, 2014, Dow Corning had recorded a reserve for
breast implant litigation of $400 million. See Note 7 (Investments) for
additional detail.
Other Dow Corning Claims Arising From Bankruptcy Proceedings
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 December 31,
2014, Dow Corning has estimated the liability to commercial creditors
to be within the range of $99 million to $324 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 $99 million, net
of applicable tax benefits. There are a number of other claims in the
bankruptcy proceedings against Dow Corning awaiting resolution by
the U.S. District Court, and it is reasonably possible that Dow Corning
may record bankruptcy-related charges in the future. The remaining
tort claims against Dow Corning are expected to be channeled by the
Plan into facilities established by the Plan or otherwise defended by the
Litigation Facility.
lawsuits
involving claims alleging personal
Pittsburgh Corning Corporation and Asbestos Litigation� 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
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. At the time PCC filed for bankruptcy protection, there
were approximately 11,800 claims pending against Corning in state
court lawsuits alleging various theories of liability based on exposure
to PCC’s asbestos products and typically requesting monetary damages
in excess of one million dollars per claim. Corning has defended those
claims on the basis of the separate corporate status of PCC and the
absence of any facts supporting claims of direct liability arising from
PCC’s asbestos products.
Legal Proceedings
PCC Plan of Reorganization
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 courts and parties. On November 12, 2013,
the Bankruptcy Court issued a decision finally confirming an Amended
PCC Plan of Reorganization (the “Amended PCC Plan” or the “Plan”). On
September 30, 2014, the United States District Court for the Western
District of Pennsylvania (the “District Court”) affirmed the Bankruptcy
Court’s decision confirming the Amended PCC Plan. On October 30, 2014,
one of the objectors to the Plan appealed the District Court’s affirmation
of the Plan to the United States Court of Appeals for the Third Circuit
(the “Third Circuit Court of Appeals”), and that appeal is currently being
scheduled for briefing. It will likely take many months for the Third
Circuit Court of Appeals to render its decision.
Under the Plan as affirmed by the Bankruptcy Court and affirmed by the
District Court, Corning is required to contribute its equity interests in
PCC and Pittsburgh Corning Europe N.V. (“PCE”), a Belgian corporation,
and to contribute $290 million in a fixed series of payments, recorded
at present value. Corning has the option to use its shares rather than
cash to make these payments, but the liability is fixed by dollar value
and not the number of shares. The Plan requires Corning to make:
(1) one payment of $70 million one year from the date the Plan becomes
effective and certain conditions are met; and (2) five additional payments
of $35 million, $50 million, $35 million, $50 million, and $50 million,
respectively, on each of the five subsequent anniversaries of the first
payment, the final payment of which is subject to reduction based on
the application of credits under certain circumstances.
Non-PCC Asbestos Litigation
In addition to the claims against Corning related to its ownership
interest in PCC, Corning is also the defendant in approximately 9,700
other cases (approximately 37,300 claims) alleging injuries from
asbestos related to its Corhart business and similar amounts of
monetary damages per case. When PCC filed for bankruptcy protection,
the Court granted a preliminary injunction to suspend all asbestos cases
against PCC, PPG and Corning – including these non-PCC asbestos cases
(the “stay”). The stay remains in place as of the date of this filing. Under
the Bankruptcy Court’s order confirming the Amended PCC Plan, the stay
will remain in place until the Amended PCC Plan is finally affirmed by
the District Court and the Third Circuit Court of Appeals. These non-PCC
asbestos cases have been covered by insurance without material impact
to Corning to date. As of December 31, 2014, Corning had received for
these cases approximately $19 million in insurance payments related to
those claims. If and when the Bankruptcy Court’s confirmation of the
Amended PCC Plan is finally affirmed, these non-PCC asbestos claims
would be allowed to proceed against Corning. Corning has recorded in
its estimated asbestos litigation liability an additional $150 million for
these and any future non-PCC asbestos cases.
13
CORNING INCORPORATED - 2014 Annual Report Legal Proceedings
Total Estimated Liability for the Amended PCC Plan and the Non-PCC
Asbestos Claims
The liability for the Amended PCC Plan and the non-PCC asbestos claims
was estimated to be $681 million at December 31, 2014, compared
with an estimate of liability of $690 million at December 31, 2013. The
$681 million liability is comprised of $241 million of the fair value of PCE,
$290 million for the fixed series of payments, and $150 million for the
non-PCC asbestos litigation, all referenced in the preceding paragraphs.
With respect to the PCE liability, at December 31, 2014 and 2013, the fair
value of $241 million and $250 million of our interest in PCE significantly
exceeded its carrying value of $162 million and $167 million, respectively.
There have been no impairment indicators for our investment in PCE
and we continue to recognize equity earnings of this affiliate. At the
time Corning recorded this liability, it determined it lacked the ability to
recover the carrying amount of its investment in PCC and its investment
was other than temporarily impaired. As a result, we reduced our
investment in PCC to zero. As the fair value in PCE is significantly higher
than book value, management believes that the risk of an additional
loss in an amount materially higher than the fair value of the liability
is remote. With respect to the liability for other asbestos litigation, the
liability for non-PCC claims was estimated based upon industry data for
asbestos claims since Corning does not have recent claim history due to
the injunction issued by the Bankruptcy Court. The estimated liability
represents the undiscounted projection of claims and related legal fees
over the next 20 years. The amount may need to be adjusted in future
periods as more data becomes available; however, we cannot estimate
any additional losses at this time. For the years ended December 31, 2014
and 2013, Corning recorded asbestos litigation income of $9 million and
expense of $19 million, respectively. The entire obligation 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).
Non-PCC Asbestos Cases Insurance Litigation
Several of Corning’s insurers have commenced litigation in state
courts for a declaration of the rights and obligations of the parties
under insurance policies, including rights that may be affected by the
potential resolutions described above. Corning is vigorously contesting
these cases, and management is unable to predict the outcome of
the litigation.
Environmental Litigation� Corning has been named by the United States
Environmental Protection Agency (the “EPA”) under the Superfund
Act or by state governments under similar state laws, as a potentially
responsible party for 15 active hazardous waste sites. Under the
Superfund Act, all parties who may have contributed any waste to a
hazardous waste site, identified by the EPA, are jointly and severally liable
for the cost of cleanup unless the EPA agrees otherwise. It is Corning’s
policy to accrue for its estimated liability related to Superfund sites and
other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal
and external consultants. At December 31, 2014 and 2013, Corning had
accrued approximately $42.5 million (undiscounted) and $15 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.
initiated an anti-dumping proceeding
Chinese Anti-dumping Investigation Involving Single-Mode Optical
Fiber Produced in India� In August 2013, China’s Ministry of Commerce
(“MOFCOM”)
involving
single-mode optical fiber produced in India and exported to China. On
August 13, 2014, MOFCOM announced its final determination in this
investigation assessing a 24.5% dumping margin on Corning’s Indian
affiliate, CTIPL’s, exports to China. The dumping margins will remain in
effect until August 13, 2019 unless lowered, eliminated, or increased on
interim review or extended by sunset review.
Chinese Anti-Dumping Investigation Involving Optical Fiber Preforms
Produced in the United States� On March 19, 2014, China’s MOFCOM
initiated an anti-dumping investigation involving optical fiber preforms
originating in the United States and Japan. The petition was submitted
by China’s domestic industry who is seeking to have anti-dumping
duties in the range of 15-24% assessed against subject merchandise.
On September 10, 2014, MOFCOM held an injury hearing, in which
Corning participated and presented strong evidence of non-injury.
We subsequently submitted a detailed non-injury brief and economic
report further supporting the absence of threat of injury to the Chinese
industry. We expect a final determination sometime in the first quarter
of 2015.
Trade Secret Misappropriation Suits Concerning LCD Glass Technology�
On July 18, 2011, in China, Corning Incorporated filed suit in the Beijing
Second Intermediate People’s Court against Hebei Dongxu Investment
Group Co., Ltd., which changed its name to Dongxu Group Co., Ltd.
(“Dongxu”) for misappropriation of certain trade secrets related to the
fusion draw process for manufacturing glass substrates used in active
matrix liquid crystal displays (“LCDs”). On July 18, 2011, in South Korea,
Corning Incorporated and Samsung Corning Precision Materials filed
suits in the Daejeon District Court against Dongxu, one of its officers, and
two other named individuals, for related trade secret misappropriation.
On November 15, 2013, these cases were settled with Dongxu taking a
license to the misappropriated technology for a royalty, broken up into
two payments. Dongxu made the first payment in December 2013, and
the second payment in November 2014.
Department of Justice Grand Jury Subpoena� In March 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. The subpoena required Corning to produce to the
Department of Justice certain documents from the period January 1999
to March 2012. In November 2012, Corning received another subpoena
from the Department of Justice, with the same scope, but extending the
time frame for the documents to be produced back to January 1, 1988.
Corning’s policy is to comply with all laws and regulations, including all
antitrust and competition laws. Antitrust investigations can result in
substantial liability for the Company. Currently, Corning cannot estimate
the ultimate financial impact, if any, resulting from the investigation.
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.
14
CORNING INCORPORATED - 2014 Annual Report Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases
of Equity Securities
(a)
Corning Incorporated common stock is listed on the New York Stock Exchange. In addition, it is traded on the Boston, Midwest, Pacific and
Philadelphia stock exchanges. Common stock options are traded on the Chicago Board Options Exchange. The ticker symbol for Corning
Incorporated is “GLW.”
The following table sets forth the high and low sales price of Corning’s common stock as reported on the Composite Tape.
2014
Price range
High
Low
2013
Price range
High
Low
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
$
$
20.99
16.55
13.35
11.75
$
$
$
$
22.20
20.17
16.43
12.64
$
$
$
$
22.37
19.23
15.51
13.84
$
$
$
$
23.52
17.03
18.07
13.82
As of December 31, 2014, there were approximately 17,819 record holders of common stock and approximately 501,928 beneficial shareholders.
On October 3, 2012, Corning’s Board of Directors declared a 20% increase in the Company’s quarterly common stock dividend, increasing Corning’s
quarterly dividend to $0.09 per share of common stock. On April 24, 2013, Corning’s Board of Directors declared an 11% increase in the Company’s
quarterly common stock dividend, increasing Corning’s quarterly dividend to $0.10 per share of common stock. And on December 3, 2014, Corning’s
Board of Directors declared a 20% increase in the Company’s quarterly common stock dividend, increasing Corning’s quarterly dividend to $0.12 per share
of common stock.
Equity Compensation Plan Information
The following table shows the total number of outstanding options and shares available for other future issuances of options under our existing equity
compensation plans as of December 31, 2014, including the 2010 Equity Plan for Non-Employee Directors and 2012 Long-Term Incentive Plan:
A
B
C
Number of securities to be issued
upon exercise of outstanding
options, warrants and rights
Weighted-average exercise price
of outstanding options, warrants
and rights
Number of securities
remaining available for future
issuance under equity compensation
plans (excluding securities reflected
in column A)
48,724,000
0
48,724,000
$
$
18.94
0
18.94
75,235,046
0
75,235,046
Plan category
Equity compensation plans
approved by security holders(1)
Equity compensation plans not
approved by security holders
Total
(1) Shares indicated are total grants under the most recent shareholder approved plans as well as any shares remaining outstanding from any prior
shareholder approved plans.
15
CORNING INCORPORATED - 2014 Annual Report Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Performance Graph
The following graph illustrates the cumulative total shareholder return over the last five years of Corning’s common stock, the S&P 500 and the S&P
Communications Equipment Companies (in which Corning is currently included). The graph includes the capital weighted performance results of
those companies in the communications equipment company classification that are also included in the S&P 500.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG CORNING INCORPORATED, S&P 500 AND S&P COMMUNICATIONS EQUIPMENT
(Fiscal Years Ended December 31)
Indexed to 100
$250
$200
$150
$100
$50
$0
2009
2010
2011
2012
2013
2014
Corning incorporated
S&P Communications Equipment
S&P 500
(b) Not applicable.
(c) The following table provides information about our purchases of our common stock during the fiscal fourth quarter of 2014:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
October 1-31, 2014
November 1-30, 2014
December 1-31, 2014
Total at December 31, 2014
Number of shares
purchased(1)
Average price paid
per share(1)
Number of shares purchased as
part of publicly announced
plans or programs(2)
Approximate dollar value of shares that
may yet be purchased under the plans
or programs(2)(3)
4,374,592
4,985,050
29,601
9,389,243
$
$
$
$
18.33
20.63
21.21
19.56
4,364,700
4,984,411
0
9,349,111
$
$
$
$
102,845,099
0
1,500,000,000
1,500,000,000
(1) This column reflects the following transactions during the fiscal fourth quarter of 2014: (i) the deemed surrender to us of 878 shares of common stock
to satisfy tax withholding obligations in connection with the vesting of employee restricted stock units; (ii) the surrender to us of 39,254 shares of
common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees; and (iii) the purchase of
9,349,111 shares of common stock in conjunction with the repurchase program made effective concurrent with the closing of Corning’s Acquisition
of Samsung Corning Precision Materials on January 15, 2014.
(2) On October 22, 2013, we announced authorization to repurchase up to $2 billion of our common stock by December 31, 2015, through a repurchase
program made effective on January 15, 2014. This program was finalized in the fourth quarter of 2014.
(3) On December 3, 2014, Corning’s Board of Directors authorized the repurchase of up to $1.5 billion of our common stock between the date of
announcement and December 31, 2016.
16
CORNING INCORPORATED - 2014 Annual Report Selected Financial Data (Unaudited)
(In millions, except per share amounts and number
of employees)
Results of operations
Net sales
Research, development and engineering expenses
Equity in earnings of affiliated companies
Net income attributable to Corning Incorporated
Earnings per common share attributable to
Corning Incorporated:
Basic
Diluted
Cash dividends declared per common share
Shares used in computing per share amounts:
Basic earnings per common share
Diluted earnings per common share
Financial position
Working capital
Total assets
Long-term debt
Total Corning Incorporated shareholders’ equity
Selected data
Capital expenditures
Depreciation and amortization
Number of employees
2014
2013
2012
2011
2010
Years ended December 31,
$
$
$
$
$
$
$
9,715
815
266
2,472
1.82
1.73
0.52
1,305
1,427
$
7,914
$ 30,063
$
$
$
$
3,227
21,579
1,076
1,167
34,600
$
$
$
$
$
$
$
$
$
$
$
$
$
7,819
710
547
1,961
1.35
1.34
0.39
1,452
1,462
7,145
28,478
3,272
21,162
1,019
1,002
30,400
$
$
$
$
$
$
$
$
$
$
$
$
$
8,012
769
810
1,636
1.10
1.09
0.32
1,494
1,506
7,739
29,375
3,382
21,486
1,801
997
28,700
$
$
$
$
$
$
$
$
$
$
$
$
$
7,890
668
1,471
2,817
1.80
1.78
0.23
1,562
1,583
6,580
27,848
2,364
21,078
2,432
957
28,800
$
$
$
$
$
$
$
$
$
$
$
$
$
6,632
599
1,958
3,574
2.29
2.26
0.20
1,558
1,581
6,873
25,833
2,262
19,375
1,007
854
26,200
Reference should be made to the Notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
17
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Organization of Information
Management’s Discussion and Analysis provides a historical and prospective narrative on the Company’s financial condition and results of operations.
This discussion includes the following sections:
• Liquidity and Capital Resources
• Environment
• Critical Accounting Estimates
• New Accounting Standards
• An increase of $173 million in the Environmental Technologies
segment, due mainly to an increase in demand for our heavy duty
diesel products, driven by new governmental regulations in Europe
and China and increased demand for Class 8 vehicles in North America.
For the year ended December 31, 2014, we generated net income of
$2.5 billion or $1.73 per share compared to net income of $2 billion or
$1.34 per share for 2013. When compared to last year, the increase in net
income was due to the following items (amounts presented after tax):
• The positive net impact of our yen-denominated hedge programs,
driven by the weakening of the Japanese yen in 2014, in the amount of
$560 million;
• The impact of the consolidation of Corning Precision Materials, as well
as cost reductions and efficiencies gained through synergies;
• The change in the contingent consideration fair value resulting from
the Acquisition in the amount of $194 million;
• An increase of $56 million in equity earnings from Dow Corning,
driven by Corning’s share of a gain in the amount of $393 million
from the reduction in the implant liability, favorable tax adjustments
of $46 million and an increase in business results in both the silicone
and polysilicon segments, offset by Corning’s share of a charge taken
related to the abandonment of a polycrystalline silicon facility in the
amount of $465 million; and
• A $50 million
in the Environmental
Technologies segment, driven by an increase in demand for our diesel
and automotive products and improved manufacturing efficiency.
increase
income
in net
The increase in net income for the year ended December 31, 2014 was
offset somewhat by the following items (amounts presented after-tax):
• The impact of several tax-related items in the amount of $231 million,
including changes in deferred tax valuation allowances of $150 million,
$46 million of tax expense related to out-of-period transfer pricing
adjustments and the absence of a tax benefit in the amount of $54 million
recorded in the first quarter of 2013 related to the impact of the American
Taxpayer Relief Act enacted on January 3, 2013 retroactive to 2012;
• Overview
• Results of Operations
• Core Performance Measures
• Reportable Segments
Overview
The impact of the Acquisition of the remaining equity interests in our
affiliate Samsung Corning Precision Materials, now known as Corning
Precision Materials, combined with strong business performance in the
Environmental Technologies and Optical Communications segments,
drove an increase in sales of 24% in the year ended December 31, 2014,
when compared to the same period last year. Net income increased
significantly in 2014, up 26%, driven by the net gain on our yen-
denominated hedging program, the consolidation of Corning Precision
Materials, the positive impact of the change in the contingent
consideration fair value resulting from the Acquisition, an increase
in equity earnings from Dow Corning and higher net income in the
Environmental Technologies and Optical Communications segments.
The increase was offset somewhat by price declines outpacing volume
increases in the Display Technologies segment, the negative impact of
the depreciation of the Japanese yen against the U.S. dollar, several tax-
related items and the net loss on several Acquisition-related items.
Net sales in the year ended December 31, 2014 were $9,715 million,
compared to $7,819 million in the year ended December 31, 2013.
When compared to 2013, the change in net sales was driven by the
following items:
• An increase of $1.3 billion in the Display Technologies segment, driven
by the consolidation of Corning Precision Materials, which increased
sales by $1.8 billion, and an increase in volume that was slightly more
than 10% in percentage terms, offset somewhat by price declines in
the mid-teens in percentage terms and the negative impact of the
Japanese yen versus the U.S. dollar exchange rate in the amount of
$373 million;
• An increase in net sales in the Optical Communications segment in the
amount of $326 million, driven by an increase in sales of carrier network
products in the amount of $254 million, largely due to growth in North
America and Europe, the $53 million impact of a small acquisition and
the consolidation of an investment due to a change in control which
occurred at the end of the second quarter of 2013 and an increase of
$72 million in enterprise network products. These increases were offset
slightly by a $52 million decrease in optical fiber sales in China; and
18
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
• The net impact of several Acquisition-related items in the amount of
$72 million;
• The negative impact from the Japanese yen versus the U.S. dollar
exchange rate in the amount of $210 million; and
• In the Display Technologies segment, price declines in the mid-teens
in percentage terms outpacing an increase in volume slightly higher
than 10%.
Corning remains committed to a strategy of growing through global
innovation. This strategy has served us well. Our key priorities for 2014
were similar to those in prior years: protect our financial health and
invest in the future. During 2014, we made the following progress on
these priorities:
Protecting Financial Health
Our financial position remained sound and we delivered strong cash
flows from operating activities. Significant items in 2014 included
the following:
• We ended the year with $6.1 billion of cash, cash equivalents and short-
term investments, an increase from the December 31, 2013 balance
of $5.2 billion, well above our debt balance at December 31, 2014 of
$3.3 billion. The increase in cash was driven by the consolidation of
Corning Precision Materials, the cash received from Samsung Display
for the additional issuance of Preferred Stock in connection with the
Acquisition and strong operating cash flow, offset by the cash paid for
our share repurchases.
• Our debt to capital ratio of 13% at December 31, 2014 was consistent
with our ratio at December 31, 2013.
• Operating cash flow for the year was $4.7 billion, an increase of
$1.9 billion when compared to December 31, 2013, driven by a dividend
in the amount of approximately $1.6 billion from Samsung Corning
Precision Materials distributed subsequent to the Acquisition of the
remaining equity interests of the affiliate.
Investing in our Future
Corning is one of the world’s leading innovators in materials science. For
more than 160 years, Corning has applied its unparalleled expertise in
specialty glass, ceramics, and optical physics to develop products that
have created new industries and transformed people’s lives. Although
our spending level for research, development and engineering decreased
slightly from 9% of sales in 2013 to 8% of sales in 2014, we maintained
our innovation strategy focused on growing our existing businesses,
developing opportunities adjacent or closely related to our existing
technical and manufacturing capabilities, and investing in long-range
opportunities in each of our market segments. We continue to work on
new products, including glass substrates for high performance displays
and LCD applications, precision glass for advanced displays, emissions
control products for cars, trucks, and off-road vehicles, products that
accelerate drug discovery and manufacturing and the optical fiber,
cable and hardware and equipment that enable fiber-to-the-premises,
and next generation data centers. In addition, we are focusing on
wireless solutions for diverse venue applications, such as distributed
antenna systems, fiber-to-the cell site and fiber-to-the antenna. We
have focused our research, development and engineering spending to
support the advancement of new product attributes for our Corning®
Gorilla® Glass suite of products. We will continue to focus on adjacent
glass opportunities which leverage existing materials or manufacturing
processes, including Corning® Willow™ Glass, our ultra-slim flexible glass
substrate for use in next-generation consumer electronic technologies.
Capital spending totaled $1.1 billion in 2014, slightly above the amount
spent in 2013. Spending in 2014 was driven primarily by the Display
Technologies segment, and focused on finishing line optimization
and tank rebuilds. We expect our 2015 capital expenditures to be
approximately $1.3 billion to $1.4 billion. We anticipate approximately
$650 million will be allocated to our Display Technologies segment.
Corporate Outlook
We expect 2015 to produce another year of sales increases in our Optical
Communications, Life Sciences, Specialty Materials and Environmental
Technologies segments, and for the LCD retail glass market and Corning’s
glass volume to grow. We believe the overall LCD glass retail market in
2015 will increase in the high-single digits, driven by the combination
of an increase in retail sales of LCD televisions and the demand for
larger television screen sizes. We anticipate a rise in global demand for
Corning’s carrier network products, combined with growth of enterprise
network products, will increase sales in our Optical Communications
segment. We believe sales of Corning Gorilla Glass will improve in 2015,
as we expect price declines to be moderate and volume to improve
in line with the increase in the handheld market. And we expect
another strong year of manufacturing process improvements and cost
reductions, which, in combination with sales growth, will deliver overall
earnings growth for Corning. We remain confident that our strategy to
grow through global innovation, while preserving our financial stability,
will enable our continued long-term success.
19
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Selected highlights from our continuing operations follow (in millions):
2014
2013
2012
14 vs. 13
13 vs. 12
% change
Net sales
Gross margin
(gross margin %)
Selling, general and administrative expense
(as a % of net sales)
Research, development and engineering
expenses
(as a % of net sales)
Restructuring, impairment and other charges
(as a % of net sales)
Equity in earnings of affiliated companies
(as a % of net sales)
Transaction-related gain, net
(as a % of net sales)
Other income, net
(as a % of net sales)
Income before income taxes
(as a % of net sales)
Provision for income taxes
(as a % of net sales)
Net income attributable to Corning
Incorporated
(as a % of net sales)
* Percent change not meaningful.
$
$
$
$
$
$
$
$
$
$
$
9,715
4,052
42%
1,211
12%
815
8%
71
1%
266
3%
74
1%
1,394
14%
3,568
37%
(1,096)
(11)%
2,472
25%
$
$
$
$
$
$
$
$
$
$
7,819
3,324
43%
1,126
14%
710
9%
67
1%
547
7%
667
9%
2,473
32%
(512 )
(7)%
1,961
25%
$
$
$
$
$
$
$
$
$
$
8,012
3,319
41%
1,205
15%
769
10%
133
2%
810
10%
83
1%
1,975
25%
(339)
(4)%
1,636
20%
(2)
*
(7)
(8)
(50)
(32)
24
22
8
15
6
(51)
*
109
704
44
114
26
25
51
20
Net Sales
Corning’s net sales in the year ended December 31, 2014 improved in all
of our segments, increasing by $1,896 million to $9,715 million, when
compared to the same period in 2013, driven by the following events:
• Display Technologies increased by $1.3 billion, due to the consolidation
of Corning Precision Materials, which increased sales by $1.8 billion, and
an increase in volume that was slightly more than 10% in percentage
terms, offset somewhat by price declines in the mid-teens and the
negative impact of the Japanese yen versus the U.S. dollar exchange
rate in the amount of $373 million;
• Optical Communications increased by $326 million, driven by an
increase in sales of carrier network products in the amount of
$254 million, largely due to growth in North America and Europe, up
$113 million and $46 million, respectively, the impact of a full year of
sales from a small acquisition and the consolidation of an investment
due to a change in control that occurred at the end of the second
quarter of 2013, which added $53 million, and an increase of $72 million
in enterprise network products. These increases were offset slightly by
a $52 million decrease in optical fiber sales in China;
• An increase of $173 million in the Environmental Technologies segment,
due mainly to an increase in demand for our heavy duty diesel
products, driven by new governmental regulations in Europe and
China, and increased demand for Class 8 vehicles in North America.
Automotive substrate sales were also strong, increasing 9%, due to
increased demand in Europe and China;
• Specialty Materials improved by $35 million, driven by an increase
in sales of advanced optics products. Corning Gorilla Glass sales
remained consistent with the prior year, with volume increases offset
by an unfavorable shift in product mix and price declines; and
• Life Science increased by $11 million, driven by growth in North America
and China, up $12 million and $5 million, respectively.
For the year ended December 31, 2013, net sales remained relatively
consistent when compared to the year ended December 31, 2012,
with higher sales in the Optical Communications and Life Sciences
segments offset by declines in the Display Technologies, Environmental
Technologies and Specialty Materials segments. The change in net sales
was largely driven by the following:
• Optical Communications sales increased by $196 million, driven by an
increase in sales of our carrier products in the amount of $163 million,
largely due to the ramp-up of the fiber-to-the-premises initiative in
Australia, which increased by $28 million, an increase of $23 million in
sales of wireless products and higher sales of fiber and cable products
in North America, China and Europe, up $52 million, $33 million and
$26 million, respectively. Also included in the increase in sales of carrier
products is the impact of a small acquisition completed in the second
quarter of 2013 and the consolidation of an investment due to a
change in control, which added approximately $53 million in 2013;
• Net sales increased by $194 million in the Life Sciences segment, driven
by the impact of the acquisition of the Discovery Labware business in
the fourth quarter of 2012;
20
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
• Display Technologies segment sales were lower, driven by price
declines in the mid-teens and the impact of the depreciation of the
Japanese yen versus the U.S. dollar offsetting volume increases in the
mid-twenties in percentage terms;
• Environmental Technologies segment sales decreased, driven by a
decline of 9% for diesel products;
• Net sales declined by $176 million in the Specialty Materials segment,
driven by a 17% decline in sales of Corning Gorilla Glass.
In 2014, 2013 and 2012, sales into international markets accounted for
77%, 74% and 77%, respectively, of total net sales.
Cost of Sales
The types of expenses included in the cost of sales line item are: raw
materials consumption, including direct and indirect materials; salaries,
wages and benefits; depreciation and amortization; production utilities;
production-related purchasing; warehousing (including receiving and
inspection); repairs and maintenance; inter-location inventory transfer
costs; production and warehousing facility property insurance; rent for
production facilities; and other production overhead.
Gross Margin
For 2014, gross margin dollars increased by $728 million when
compared to 2013, driven largely by the consolidation of Corning
Precision Materials, combined with an increase of $102 million in the
Environmental Technologies segment from higher volume and improved
manufacturing efficiencies. Gross margin as a percentage of net sales
decreased when compared to the same period last year, due primarily
to the impact of the depreciation of the Japanese yen versus the U.S.
dollar in the amount of $333 million, price declines in the mid-teens in
percentage terms in our Display Technologies segment, higher pension
expense of approximately $50 million and the impact of inventory
builds in 2013 in the Optical Communications and Specialty Materials
segments that did not repeat in 2014.
For 2013, gross margin dollars and as a percentage of sales increased
when compared to 2012, led by a decrease in pension expense in the
amount of $150 million driven by a 100 basis point increase in the
discount rate used to value our U.S. pension liability and an increase of
6% in the Specialty Materials segment, resulting from improvements in
manufacturing efficiency and cost reduction programs. The depreciation
of the Japanese yen versus the U.S. dollar and price declines in the
Display Technologies segment partially offset the increase.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses for the year ended
December 31, 2014 increased by $85 million when compared to 2013.
The increase was largely driven by the consolidation of Corning
Precision Materials, which added $90 million, an increase in pension
expense of approximately $27 million, an increase of $38 million in
share-based and performance-based compensation expenses and
an increase of approximately $90 million in acquisition-related costs,
including $72 million of post-combination compensation expense, offset
somewhat by the positive impact of a contingent consideration fair
value adjustment of $249 million. As a percentage of net sales, selling,
general and administrative expenses were 12%, considerably lower than
the same period in 2013, largely due to the contingent consideration fair
value adjustment more than offsetting the increase in Selling, general,
and administrative expenses resulting from the Acquisition.
Selling, general, and administrative expenses for 2013 decreased by
$79 million when compared to 2012. This decrease was largely driven
by a decrease in pension expense in the amount of $76 million driven
by a 100 basis point increase in the discount rate used to value our U.S.
pension liability, cost control measures implemented in our segments
and a decline in variable compensation in the amount of $27 million,
offset somewhat by an increase in costs in the Optical Communications,
Specialty Materials and Life Sciences segments. As a percentage of net
sales, these expenses decreased when compared to the same period
last year.
The types of expenses included in the selling, general and administrative
expenses line item are: salaries, wages and benefits; travel; professional
fees; and depreciation and amortization, utilities, and rent for
administrative facilities.
Research, Development and Engineering
Expenses
For the year ended December 31, 2014, research, development, and
engineering expenses increased by $105 million when compared to the
same period last year, driven by the consolidation of Corning Precision
Materials, which added $69 million, an increase of approximately
$30 million in new business development spending and $20 million
of additional pension expense. We continue to focus on new product
development in areas such as glass substrates for high performance
displays in our Display Technologies segment, wireless solutions for
diverse venue applications in the Optical Communications segment and
advancement of new product attributes for our Corning Gorilla Glass
suite of products in our Specialty Materials segment. As a percentage
of net sales, research, development and engineering expenses declined
slightly, from 9% in 2013 to 8% in 2014, reflecting cost control measures
implemented in 2014.
For the year ended December 31, 2013, research, development, and
engineering expenses decreased by $59 million when compared to
the same period last year, driven by a decrease in pension expense in
the amount of $47 million driven by a 100 basis point increase in the
discount rate used to value our U.S. pension liability and declines in
our Display Technologies and Environmental Technologies segments of
$19 million and $11 million, respectively, offset slightly by higher costs
in the Optical Communications, Specialty Materials and Life Sciences
segments. As a percentage of net sales, research, development and
engineering expenses declined slightly in the year ended December 31,
2013, when compared to the same period in 2012.
Restructuring, Impairment, and Other Charges
and Credits
Corning recorded restructuring, impairment, and other charges and
credits in 2014, 2013 and 2012, which affect the comparability of our
results for the periods presented. Additional information on restructuring
and asset impairment is found in Note 2 (Restructuring, Impairment and
Other Charges) to the Consolidated Financial Statements. A description
of those charges and credits follows:
2014 Activity
For the year ended December 31, 2014, we recorded charges of $71 million
for workforce reductions, asset disposals and write-offs, and exit costs
for restructuring activities with total cash expenditures estimated to
be $51 million. Annualized savings from these actions are estimated
to be approximately $94 million and will be reflected largely in selling,
general, and administrative expenses.
21
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
2013 Activity
To better align our 2014 cost position in several of our businesses, Corning
implemented a global restructuring plan within several of our segments
in the fourth quarter of 2013, consisting of workforce reductions, asset
disposals and write-offs, and exit costs.
We recorded charges of $67 million, before tax, associated with these
actions, with total cash expenditures expected to be approximately
$40 million.
in 2012 than our expectations, demand for larger-sized cover glass was
declining, and the market for this type of glass was instead targeting
smaller gen size products. Additionally, in the fourth quarter of 2012, our
primary customer of large cover glass notified Corning of its decision
to exit from this display market. Based on these events, we recorded
an additional impairment charge in the fourth quarter of 2012 in the
amount of $44 million, before tax. This impairment charge represents
a write-down of assets specific to the glass-strengthening process for
large size cover glass to their fair market values, and includes machinery
and equipment used in the ion exchange process.
2012 Activity
In response to uncertain global economic conditions, and the
potential for slower growth in many of our businesses in 2013, Corning
implemented a corporate-wide restructuring plan in the fourth quarter
of 2012. We recorded charges of $89 million, before tax, which included
costs for workforce reductions, asset write-offs and exit costs. Total
cash expenditures associated with these actions were approximately
$49 million, and spending for employee-related costs was completed
in 2013.
The Specialty Materials segment recorded an impairment charge in
the fourth quarter of 2011 in the amount of $130 million, before tax,
related to certain assets used in the production of large cover glass due
to sales that were significantly below our expectations. In the fourth
quarter of 2012, after reassessing the large cover glass business, Corning
concluded that the large cover glass market was developing differently
Asbestos Litigation
In 2014, we recorded a decrease to our asbestos litigation liability of
$9 million compared to an increase of $19 million in 2013 and $14 million
in 2012.
Our asbestos litigation liability was estimated to be $681 million at
December 31, 2014, compared with an estimate of $690 million at
December 31, 2013. The entire obligation 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
proposed Amended PCC Plan is ultimately effective, and a 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).
See Legal Proceedings for additional information about this matter.
Equity in Earnings of Affiliated Companies
The following provides a summary of equity earnings of affiliated companies (in millions):
Samsung Corning Precision Materials
Dow Corning
All other
Total equity earnings
Years ended December 31,
2014
2013
2012
$
$
252
14
266
$
$
320
196
31
547
$
$
699
90
21
810
Equity earnings of affiliated companies decreased in the twelve months ended December 31, 2014, when compared to the same period last year,
reflecting the Acquisition and consolidation of Samsung Corning Precision Materials, offset somewhat by an increase in equity earnings from
Dow Corning.
Dow Corning
The following table provides a summary of equity earnings from Dow Corning, by component (in millions):
Silicones
Polysilicon (Hemlock Semiconductor Group)
Total Dow Corning
Year ended December 31,
2014
2013
2012
$
$
653
(401)
252
$
$
166
30
196
$
$
122
(32)
90
Beginning in the latter half of 2011, and continuing into 2012, Dow Corning
began experiencing unfavorable industry conditions at its consolidated
subsidiary Hemlock, a producer of high purity polycrystalline silicon
for the semiconductor and solar industries, driven by over-capacity at
all levels of the solar industry supply chain. This over-capacity led to
significant declines in polycrystalline spot prices in the fourth quarter of
2011, and prices remained depressed throughout 2012. In 2013, markets
stabilized, but prices remain significantly below historical levels.
Corning determined that a polycrystalline silicon plant expansion
previously delayed since the fourth quarter of 2011 would no longer be
economically viable and made the decision to abandon this expansion
activity. The abandonment resulted in an impairment charge of
$57 million, before tax, for Corning’s share of the write down in the value
of these construction-in-progress assets. Further, the startup of another
polycrystalline silicon plant expansion that was expected to begin
production in 2013 was delayed and its assets were idled.
Due to the conditions and uncertainties during 2012 described above,
sales volume declined and production levels of certain operating
assets were reduced. As a result, in the fourth quarter of 2012, Dow
22
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
In July 2012, the MOFCOM initiated antidumping and countervailing duty
investigations of imports of solar-grade polycrystalline silicon products
from the U.S. and South Korea based on a petition filed by Chinese
solar-grade polycrystalline silicon producers. The petition alleged that
producers within these countries exported solar-grade polycrystalline
silicon to China at less than fair 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 product from the Dow Corning subsidiary
into China. On September 16, 2013, the Chinese authorities imposed
provisional countervailing duties of 6.5% on solar grade polycrystalline
silicon products from the Dow Corning subsidiary. On January 20,
2014, MOFCOM issued a final determination. The final determination
resulted in no change to the antidumping duties, and the countervailing
duties were reduced to 2.1%. The requirement for customers to pay
provisional duties on imports from solar-grade polycrystalline silicon
producers became effective on July 24, 2013 for the antidumping duties
and on September 20, 2013 for the countervailing duties, adjusted for
the final determination. Dow Corning will not be subject to duties for
previous sales.
In December 2014, Dow Corning determined its polycrystalline silicon
plant expansion which was delayed in the fourth quarter of 2012, would
not be economically viable and made the decision to permanently
abandon the assets. This decision was made after review of sustained
adverse market conditions and continued oversupply, the cost of
operating the facility and the ongoing impact of tariffs on polycrystalline
silicon imported into China. The decision to permanently cease use
of these assets resulted in Dow Corning taking a pre-tax charge of
approximately $1.5 billion in the fourth quarter of 2014 (Corning’s share
after-tax: $465 million). As a result of the significant change in the use
of this asset, Dow Corning assessed whether the carrying value of all
polycrystalline silicon assets might be impaired. Dow Corning’s estimates
of future undiscounted cash flows indicated the polycrystalline silicon
asset group was recoverable.
In May 1995, Dow Corning filed for bankruptcy protection to address
pending and claimed liabilities arising from 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 Plan, Dow Corning
established and agreed to fund a products liability settlement program
(the “Settlement Facility”). The Plan contains a cap on the amount of
payments required from Dow Corning to fund the Settlement Facility.
Inclusive of insurance, Dow Corning has paid approximately $1.8 billion
to the Settlement Facility, and approximately $1.3 billion has been paid to
claimants out of the Settlement Facility. Dow Corning’s recorded liability
related to implant matters (“Implant Liability”) was approximately
$1.7 billion at September 30, 2014, representing Dow Corning’s estimated
remaining obligation for future funding of the Settlement Facility.
During the fourth quarter of 2014, Dow Corning, with the assistance of a
third-party advisor, developed an estimate of the future Implant Liability
based on evidence that the actual funding required for the Settlement
Facility is expected to be lower than the full funding cap set forth in the
Plan. On December 12, 2014, Dow Corning reduced its Implant Liability
by approximately $1.3 billion (Corning’s share after-tax: $393 million).
Previously, the Implant Liability was based on the full funding cap set
forth in the Plan. The revised Implant Liability reflects Dow Corning’s
best estimate of its remaining obligations under the Plan. Should events
or circumstances occur in the future which change Dow Corning’s
estimate of the remaining funding obligations, the Implant Liability will
be revised. This adjustment does not affect Dow Corning’s commitment
or ability to fulfill its obligations under the settlement, and all claims
that qualify under the settlement will be paid according to the terms
of the Plan.
2014 vs. 2013
Equity earnings from Dow Corning increased by $56 million in the twelve
months ended December 31, 2014, when compared to the same period in
2013, driven by the following items:
• An increase in equity earnings of $487 million in the silicones segment,
driven by the gain resulting from the reduction of the Implant Liability
in the amount of $393 million, favorable tax adjustments in the
amount of $46 million and a decrease in tax expense, offset somewhat
by a $5 million decrease in the amount of gains recorded on the mark-
to-market of a derivative instrument; and
• An decrease in equity earnings of $431 million in the polysilicon
segment, driven by Corning’s share of Dow Corning’s charge for the
abandonment of a polycrystalline silicon plant expansion in the
amount of $465, offset slightly by higher volume, the absence of
$11 million in restructuring charges incurred in the first half of 2013, a
gain in the amount of $6 million related to energy tax credits and the
settlement of a long-term sales agreement in the first quarter of 2014
in the amount of $9 million.
2013 vs. 2012
Equity earnings from Dow Corning increased by 118% in the twelve
months ended December 31, 2013 when compared to the same period in
2012, due to the following items:
• In the silicones segment, a gain of $20 million associated with the
termination of a long-term sales agreement, the positive impact of the
recognition of a derivative instrument in the amount of $16 million,
the absence of the 2012 restructuring charge of $30 million, coupled
with cost reduction resulting from these actions, and lower variable
compensation costs. The increase in earnings was partially offset by
the negative impact of price declines and weaker demand in Asia and
the Americas; and
• In the polysilicon segment, the absence of the impairment charge
of $57 million recorded in 2012 related to the abandonment of a
polycrystalline silicon plant expansion, offset by Corning’s share of
restructuring charges at Hemlock in the amount of $11 million and the
absence of the gain of $10 million associated with the resolution of a
contract dispute.
23
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Other Income, Net
“Other income, net” in Corning’s consolidated statements of income includes the following (in millions):
Royalty income from Samsung Corning Precision Materials
Foreign currency transaction and hedge gains, net
Loss on retirement of debt
Foreign government subsidy
Other, net
Total
Years ended December 31,
2014
$
1,352
2013
$
3
39
$
1,394
$
56
500
55
56
667
2012
$
$
83
8
(26)
18
83
Beginning in the first quarter of 2014, due to the Acquisition and
consolidation of Samsung Corning Precision Materials (now Corning
Precision Materials), royalty income from Corning Precision Materials
is no longer recognized in Corning’s consolidated statement of income.
Included in the line item Foreign currency transaction and hedge gains,
net, for the years ended December 31, 2014 and 2013 is the impact of
purchased collars and average forward contracts which hedge our
translation exposure resulting from movements in the Japanese
yen against the U.S. dollar and its impact on our net earnings. In the
years ended December 31, 2014 and 2013, we recorded net pre-tax
gains on our yen-denominated hedging programs in the amount of
$1,406 million and $435 million, respectively, which included $344 million
and $110 million of realized gains, respectively. These gains were driven
by the mark-to-market valuation of the purchased collars and average
forward contracts, and occurred due to the depreciation in the 2014
and 2013 exchange rates for the Japanese yen versus the U.S. dollar of
14% and 22%, respectively. The gross notional value outstanding for
purchased collars and average rate forward contracts was $9.8 billion
at December 31, 2014 and $6.8 billion at December 31, 2013. Refer to
Item 7A Quantitative and Qualitative Disclosures About Market Risks for
additional details.
In the second quarter of 2014, following the Acquisition, we entered
into a portfolio of zero cost collars to hedge our exposure to movements
in the Korean won and its impact on our net earnings. These zero cost
collars have a gross notional value outstanding at December 31, 2014
of $2.3 billion, and began settling quarterly in the third quarter of 2014
and will conclude at the end of 2015. The net pre-tax loss on these zero
cost collars, which is also included in the line item Foreign currency
transaction and hedge gains, net, was $37 million for the twelve months
ended December 31, 2014, and included $6 million of realized losses.
Income Before Income Taxes
Income before income taxes for the year ended December 31, 2014, was negatively impacted by the depreciation of the Japanese yen versus the U.S.
dollar in the amount of $297 million.
Provision for Income Taxes
Our provision for income taxes and the related effective income tax rates were as follows (dollars in millions):
Provision for income taxes
Effective tax rate
The effective income tax rate for 2014 differed from the U.S. statutory
rate of 35% primarily due to the following items:
• Rate differences on income (loss) of consolidated foreign companies,
including the benefit of excess foreign tax credits attributable to a
taxable intercompany loan made to the U.S., and
• The impact of equity in earnings of nonconsolidated affiliates reported
in the financials, net of tax.
Partially offsetting the benefits above is a $177 million charge attributable
to a change in judgment on the realizability of certain foreign deferred
taxes assets in Germany and Japan.
The effective income tax rate for 2013 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;
Years ended December 31,
2014
$
1,096
30.7%
2013
$
512
20.7%
2012
$
339
17.2%
• The benefit of tax incentives in foreign jurisdictions, primarily
Taiwan; and
• Tax benefit of $54 million for the impact of the American Taxpayer
Relieve Act enacted on January 3, 2013 and made retroactive to 2012.
Partially offsetting the benefits above is a $48 million charge attributable
to a change in the judgment regarding the realizability of certain foreign
and state deferred tax assets.
Corning has valuation allowances on certain shorter-lived deferred
tax assets such as those represented by capital loss and state tax net
operating loss carry forwards, as well as other foreign net operating loss
carryforwards, because we cannot conclude that it is more likely than not
that we will earn income of the character or amount required to utilize
these assets before they expire. The amount of U.S. and foreign deferred
tax assets that have remaining valuation allowances at December 31,
2014 and 2013 was $298 million and $286 million, respectively.
24
CORNING INCORPORATED - 2014 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Corning continues to indefinitely reinvest substantially all of its foreign
earnings, with the exception of approximately $10 million of current
earnings that have very low or no tax cost associated with their
repatriation. Our current analysis indicates that we have sufficient U.S.
liquidity, including borrowing capacity, to fund foreseeable U.S. cash
needs without requiring the repatriation of foreign cash. 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, derivative contract settlements or the development of tax
planning ideas that allow us to repatriate earnings at minimal or no
tax cost, 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. As of December 31, 2014, taxes have
not been provided on approximately $10.3 billion of accumulated foreign
unremitted earnings that are expected to remain invested indefinitely.
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.
Our foreign subsidiary in Taiwan operates under various tax holiday
arrangements. The nature and extent of such arrangements vary, and
the benefits of such arrangements phase out through 2018. The impact
of the tax holidays on our effective rate is a reduction in the rate of 0.4,
1.2 and 1.7 percentage points for 2014, 2013 and 2012, respectively.
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.
Refer to Note 6 (Income Taxes) to the Consolidated Financial Statements
for further details regarding income tax matters.
Net Income Attributable to Corning Incorporated
As a result of the items discussed above, net income and per share data was as follows (in millions, except per share amounts):
Net income attributable to Corning Incorporated
Basic earnings per common share
Diluted earnings per common share
Shares used in computing per share amounts
Basic earnings per common share
Diluted earnings per common share
Comprehensive Income
Years ended December 31,
2014
$
$
$
2,472
1.82
1.73
1,305
1,427
2013
$
$
$
1,961
1.35
1.34
1,452
1,462
Years ended December 31,
(In millions)
Net income attributable to Corning Incorporated
Foreign currency translation adjustments and other
Net unrealized (losses) gains on investments
Unamortized (losses) gains and prior service costs for postretirement
benefit plans
Net unrealized gains (losses) on designated hedges
Other comprehensive loss, net of tax (Note 17)
2014
$
Comprehensive income attributable to Corning Incorporated
$
2,472
(1,073)
(1)
(281)
4
(1,351)
1,121
2013
$
1,961
(682)
2
392
(24)
(312)
$
1,649
$
2012
$
$
$
1,636
1.10
1.09
1,494
1,506
2012
$
1,636
(179)
13
(1)
47
(120)
1,516
2014 vs� 2013
For the year ended December 31, 2014, comprehensive income decreased
by $528 million when compared to the same period in 2013, driven by
an increase in unamortized losses for postretirement benefit plans
and the negative impact of the change in foreign currency translation
adjustments, offset by an increase of $511 million in net income
attributable to Corning Incorporated.
The increase in unamortized losses for postretirement benefit plans
in the amount of $673 million is driven mainly by changes to the
discount rate and mortality assumptions used to value Corning’s U.S.
pension and postretirement medical and life benefit plan (“OPEB”)
obligations and the benefit plan obligations of our equity affiliate
Dow Corning at December 31, 2014. Corning and Dow Corning adopted
the Society of Actuaries mortality table RP-2014 published in October,
2014, along with an updated improvement scale, and the discount rate
for our U.S. benefit plans decreased between 75 and 100 basis points.
At December 31, 2014, the decrease in discount rates and the change in
the mortality assumption for our U.S. plans led to an actuarial after-tax
loss of approximately $281 million versus a gain in 2013 of $392 million.
The loss of $281 million occurring in 2014 included the impact to our U.S.
pension and OPEB plans from the mortality table change in the amount
of $88 million, the impact of $89 million from changes in other actuarial
assumptions and $124 million from our equity affiliate Dow Corning,
offset by reclassifications to the income statement of $20 million
after-tax related to U.S. non-qualified and international pension plans.
Because the actuarial loss for our U.S qualified pension plan did not fall
outside of the corridor, which is defined as equal to 10% of the greater
of the benefit obligation or the market-related value of plan assets
at the beginning of the year, it was recorded in accumulated other
comprehensive income (“AOCI”) and did not impact net income for the
year ended December 31, 2014.
25
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
The increase in the loss on foreign currency translation adjustments for
the year ended December 31, 2014 in the amount of $391 million was
driven by the following items: 1) the increase in the loss in the translation
of Corning’s consolidated subsidiaries in the amount of $65 million,
which resulted primarily from the depreciation of the Japanese yen to
U.S. dollar translation rate during 2014; 2) the increase in the loss in the
translation of Corning’s equity method investments in the amount of
$190 million; and 3) the reclassification of a gain to net income in the
amount of $136 million related to the Acquisition of Samsung Corning
Precision Materials.
2013 vs� 2012
For the year ended December 31, 2013, comprehensive income increased
by $133 million, when compared to the same period in 2012, driven
by an increase in net income attributable to Corning Incorporated
and an increase in unamortized gains for postretirement benefit
plans, offset partially by the increase in the loss on foreign currency
translation adjustments.
The increase in the amount of unamortized gains for postretirement
benefit plans is due to an increase of between 75 and 100 basis
points in the discount rates used to value Corning’s U.S. pension and
postretirement medical and life benefit plan (“OPEB”) obligations and
the benefit plan obligations of our equity affiliate Dow Corning. At
December 31, 2013, the increase in discount rates led to an actuarial after-
tax gain of $392 million. Because this gain did not fall outside of the
corridor, which is defined as equal to 10% of the greater of the benefit
obligation or the market-related value of plan assets at the beginning of
the year, the gain was recorded in AOCI and did not impact net income
for the year ended December 31, 2013.
The increase in the loss on foreign currency translation adjustments for
the year ended December 31, 2013 in the amount of $503 million was
driven by the following items: 1) the increase in the loss in the translation
of Corning’s consolidated subsidiaries in the amount of $317 million,
which resulted primarily from the depreciation of the Japanese yen to
U.S. dollar translation rate during 2013; 2) the increase in the loss in the
translation of Corning’s equity method investments in the amount of
$238 million, which is attributed to the change in the Korean won to U.S.
dollar translation rate during 2013, which impacted our equity affiliate
Samsung Corning Precision Materials; and 3) the absence of the 2012
reclassification of a gain to net income in the amount of $52 million
related to the gain on the liquidation of a foreign subsidiary.
See Note 13 (Employee Retirement Plans) and Note 17 (Shareholders’
Equity) for additional details.
Core Performance Measures
In managing the Company and assessing our financial performance, we
supplement certain measures provided by our consolidated financial
statements with measures adjusted to exclude certain items, to arrive
at Core Performance measures. We believe reporting Core Performance
measures provides investors greater transparency to the information
used by our management team to make financial and operational
decisions. Net sales, equity in earnings of affiliated companies, and net
income are adjusted to exclude the impacts of changes in the Japanese
yen and Korean won, the impact of the purchased and zero cost
collars, average forward contracts and other yen-related transactions,
acquisition-related costs, the 2013 results of the polysilicon business
of our equity affiliate Dow Corning Corporation, discrete tax items,
restructuring and restructuring-related charges, certain litigation and
regulatory expenses, pension mark-to-market adjustments, and other
items which do not reflect on-going operating results of the Company
or our equity affiliates. Management discussion and analysis on our
reportable segments has also been adjusted for these items. These
measures are not prepared in accordance with U.S. Generally Accepted
Accounting Principles (“GAAP”). We believe investors should consider
these non-GAAP measures in evaluating our results as they are more
indicative of our core operating performance and how management
evaluates our operational results and trends. These measures are
not, and should not be viewed as a substitute for U.S. GAAP reporting
measures. For a reconciliation of non-GAAP performance measures and
a further discussion of the measures, please see “Reconciliation of Non-
GAAP Measures” below.
Results of Operations – Core Performance Measures
Selected highlights from our continuing operations follow (in millions):
Core net sales
Core equity in earnings of affiliated companies
Core earnings attributable to Corning Incorporated
$
$
$
10,217
311
2,185
$
$
$
7,948
595
1,797
$
$
$
7,605
713
1,595
29
48
22
5
(17)
13
2014
2013
2012
14 vs. 13
13 vs. 12
% change
Core Net Sales
Corning’s core net sales in the year ended December 31, 2014 improved in
all of our segments, increasing by $2,269 million to $10,217 million, when
compared to the same period in 2013. Driving the growth in core net
sales are the following items:
• Display Technologies increased by $1.7 billion, due to the consolidation
of Corning Precision Materials, which increased sales by $1.9 billion, and
an increase in volume that was slightly more than 10% in percentage
terms, offset somewhat by price declines in the mid-teens;
• Optical Communications increased by $326 million, driven by an
increase in sales of carrier network products in the amount of
$254 million, largely due to growth in North America and Europe, up
$113 million and $46 million, respectively, the impact of a full year of
sales from a small acquisition and the consolidation of an investment
due to a change in control that occurred at the end of the second
quarter of 2013, which added $53 million, and an increase of $72 million
in enterprise network products. These increases were offset slightly by
a $52 million decrease in optical fiber sales in China;
26
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
• An increase of $173 million in the Environmental Technologies segment,
due mainly to an increase in demand for our heavy duty diesel products,
driven by new governmental regulations in Europe and China, and
increased demand for Class 8 vehicles in North America. Automotive
substrate sales were also strong, increasing 9%, on increased demand
in Europe and China;
• Specialty Materials improved by $35 million, driven by an increase
in sales of advanced optics products. Corning Gorilla Glass sales
remained consistent with the prior year, with volume increases offset
by an unfavorable shift in product mix and price declines; and
• Life Sciences increased by $11 million, driven by growth in North
America and China, up $12 million and $5 million, respectively.
For the year ended December 31, 2013, core net sales increased by 5%
when compared to the same period in 2012. Higher net core sales in
the Display Technologies, Optical Communications and Life Sciences
segments were offset slightly by declines in the Environmental
Technologies and Specialty Materials segments. The change in core net
sales was driven by the following events:
• In the Display Technologies segment, volume increases in the mid-
twenties in percentage terms more than offset price declines in the
mid-teens, which drove an increase in core sales of $173 million, or 7%;
• Optical Communications increased by $196 million, driven by an
increase in sales of our carrier products in the amount of $163 million,
largely due to the ramp-up of the fiber-to-the-premises initiative in
Australia, which increased by $28 million, an increase of $23 million in
sales of wireless products and higher sales of cable products in North
America, China and Europe, up $52 million, $33 million and $26 million,
respectively;
• An increase in the Life Sciences segment of $194 million, driven by the
impact of the acquisition of the Discovery Labware business in the
fourth quarter of 2012;
• In the Environmental Technologies segment, while automotive
product sales remained relatively consistent with the prior year, core
sales of our diesel products declined by 9%; and
• A decline of $176 million in the Specialty Materials segment, due to a
17% decline in Corning Gorilla Glass sales.
Core Equity in Earnings of Affiliated Companies
The following provides a summary of core equity in earnings of affiliated companies (in millions):
2014
2013
2012
14 vs. 13
13 vs. 12
% change
Samsung Corning Precision Materials
Dow Corning*
All other
Total core equity earnings
$
$
$
287
24
311
$
$
$
$
419
145
31
595
$
$
$
$
549
143
21
713
98
(23)
(48)
(24)
1
48
(17)
*
In 2013 and 2012, we excluded the operating results of Dow Corning’s consolidated subsidiary Hemlock Semiconductor, a producer of polycrystalline
silicon, to remove the impact of the severe unpredictability and instability in the polysilicon market.
Core equity earnings of affiliated companies decreased in the twelve months ended December 31, 2014, when compared to the same period last
year, reflecting the Acquisition and consolidation of Samsung Corning Precision Materials, offset somewhat by an increase in equity earnings from
Dow Corning.
Dow Corning
The following table provides a summary of core equity earnings from Dow Corning, by component (in millions):
Silicones
Polysilicon (Hemlock Semiconductor Group)
Total Dow Corning
Year ended December 31,
2014
2013
2012
$
$
197
90
287
$
$
145
31
176
$
$
143
25
168
The following table reconciles the non-GAAP financial measure of equity earnings from Dow Corning to its most directly comparable GAAP
financial measure:
As reported
Hemlock Semiconductor operating results(3)
Hemlock Semiconductor non-operating results(3)
Equity in earnings of affiliated companies(9)
Core Performance measures
2014
$
252
2013
$
35
287
$
$
196
(31)
(1)
(19)
145
2012
$
$
90
(25)
77
1
143
See Part 1, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance
Measures, “Items which we exclude from GAAP measures to arrive at Core Performance measures” for the descriptions of the footnoted reconciling items.
27
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
2014 vs. 2013
Core equity earnings from Dow Corning increased in the twelve months
ended December 31, 2014, when compared to the same period in 2013,
driven by higher earnings in both the silicones and polysilicon segments.
Driving the increase was a decrease in tax expense in the silicones
segment and higher volume and improved manufacturing performance
in the polysilicon segment.
2013 vs. 2012
Core equity earnings of affiliated companies declined by 17% in the year
ended December 31, 2013, when compared to the same period in 2012.
Equity earnings from Samsung Corning Precision Materials decreased
by $130 million, or 24%, driven primarily by price declines in the mid-
teens in percentage terms and higher taxes due to the expiration of
tax holidays in the amount of $54 million. Slightly offsetting the decline
were manufacturing improvements in the amount of $28 million.
Core equity earnings from Dow Corning were relatively consistent in
the twelve months ended December 31, 2013, when compared to the
same period in 2012, with lower prices and weaker demand for silicone
products in Europe and China and higher interest expense offset by a
reduction in costs as a result of restructuring actions implemented in
the fourth quarter of 2012.
Core Earnings
When compared to the same period last year, core earnings increased
in the twelve months ended December 31, 2014 by $388 million, or 22%,
driven by the following items (amounts presented after-tax):
• The impact of the consolidation of Corning Precision Materials and the
resulting cost reductions and efficiencies gained through synergies;
• An increase in core equity earnings from Dow Corning, driven by a
decrease in tax expense, improved manufacturing efficiency and an
increase in volume;
• An increase of $57 million in the Environmental Technologies segment,
driven by an increase in demand for our diesel products and improved
manufacturing efficiency; and
• An increase of $35 million in the Optical Communications segment, driven
by higher sales of carrier network and enterprise network products.
The increase in core earnings for the year ended December 31, 2014 was
offset somewhat by price declines in the mid-teens in percentage terms
outpacing an increase in volume slightly higher than 10% in our Display
Technologies segment.
When compared to the same period last year, core earnings increased
in the twelve months ended December 31, 2013 by $202 million, or 13%,
driven by the following items:
• Higher core earnings in the Optical Communications, Life Sciences,
Environmental Technologies and Display Technologies segments in
the amounts of $59 million, $44 million, $11 million and $7 million,
respectively; and
• Lower operating expenses in the amount of $49 million, driven by
a decrease in variable compensation and cost control measures
implemented by our segments.
Included in core earnings for the years ended December 31, 2014, 2013
and 2012 is net periodic pension expense in the amount of $74 million,
$37 million and $63 million, respectively, which excludes the annual
pension mark-to-market adjustments. In 2014, 2013 and 2012, the mark-
to-market adjustments were a pre-tax loss in the amount of $29 million,
a gain in the amount of $30 million and a loss in the amount of
$217 million, respectively. Refer to Note 13 (Employee Retirement Plans)
to the Consolidated Financial Statements for additional information.
Core Earnings per Common Share
The following table sets forth the computation of core basic and core diluted earnings per common share (in millions, except per share amounts):
Core earnings attributable to Corning Incorporated
Less: Series A convertible preferred stock dividend
Core earnings available to common stockholders - basic
Add: Series A convertible preferred stock dividend
Core earnings available to common stockholders - diluted
Weighted-average common shares outstanding - basic
Effect of dilutive securities:
Stock options and other dilutive securities
Series A convertible preferred stock
Weighted-average common shares outstanding - diluted
Core basic earnings per common share
Core diluted earnings per common share
2014
$
$
$
$
2,185
94
2,091
94
2,185
1,305
12
110
1,427
1.60
1.53
2013
$
$
$
$
1,797
1,797
1,797
1,452
10
1,462
1.24
1.23
2012
$
$
$
$
1,595
1,595
1,595
1,494
12
1,506
1.07
1.06
28
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Reconciliation of Non-GAAP Measures
We utilize certain financial measures and key performance indicators
that are not calculated in accordance with GAAP to assess our financial
and operating performance. A non-GAAP financial measure is defined
as a numerical measure of a company’s financial performance that
(i) excludes amounts, or is subject to adjustments that have the effect
of excluding amounts, that are included in the comparable measure
calculated and presented in accordance with GAAP in the statement
of income or statement of cash flows, or (ii) includes amounts, or is
subject to adjustments that have the effect of including amounts, that
are excluded from the comparable measure as calculated and presented
in accordance with GAAP in the statement of income or statement of
cash flows.
Core net sales, core equity earnings of affiliated companies and core
earnings are non-GAAP financial measures utilized by our management
to analyze financial performance without the impact of items that are
driven by general economic conditions and events that do not reflect
the underlying fundamentals and trends in the Company’s operations.
The following tables reconcile our non-GAAP financial measures to their most directly comparable GAAP financial measure.
Net sales
Equity
earnings
Income before
income taxes
Net
income
Effective
tax rate
Earnings
per share
Year ended December 31, 2014
As reported
Constant-yen(1)
Constant-won(1)
Purchased collars and average forward
contracts(2)
Acquisition-related costs(4)
Discrete tax items and other tax-related
adjustments(5)
Litigation, regulatory and other legal
matters(6)
Restructuring, impairment and other
charges(7)
Liquidation of subsidiary(8)
Equity in earnings of affiliated
companies(9)
Gain on previously held equity
investment(10)
Settlement of pre-existing contract(10)
Contingent consideration fair value
adjustment(10)
Post-combination expenses(10)
Other items related to the Acquisition of
Samsung Corning Precision Materials(10)
Pension mark-to-market adjustment(11)
$
9,715
$
266
$
3,568
$
2,472
30.7%
$
502
2
43
419
37
(1,369)
74
(1)
86
43
(394)
320
(249)
72
(10)
29
306
26
(916)
57
240
(2)
66
(3)
38
(292)
320
(194)
55
(12)
24
Core performance measures
$
10,217
$
311
$
2,625
$
2,185
16.8%
$
1.73
0.22
0.02
(0.64)
0.04
0.17
0.05
0.03
(0.20)
0.22
(0.14)
0.04
(0.01)
0.02
1.53
29
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
(in millions)
As reported
Constant-yen(1)
Purchased collars and average rate
forwards(2)
Other yen-related transactions(2)
Hemlock Semiconductor operating
results(3)
Hemlock Semiconductor non-operating
results(3)
Acquisition-related costs(4)
Discrete tax items and other tax-related
adjustments(5)
Certain litigation-related charges and
credits(6)
Restructuring, impairment and other
charges(7)
Equity in earnings of affiliated
companies(9)
Pension mark-to-market adjustment(11)
Gain on change in control of equity
investment(12)
Other
Net sales
Equity
earnings
Income before
income taxes
Net
income
Effective
tax rate
Per share
Year ended December 31, 2013
$
7,819
$
129
547
36
(31)
1
42
$
2,473
$
1,961
20.7%
$
122
(435)
(99)
(31)
1
54
19
67
42
(30)
(17)
4
96
(287)
(69)
(30)
1
40
9
13
46
44
(17)
(12)
2
1.34
0.07
(0.20)
(0.05)
(0.02)
0.03
0.01
0.01
0.03
0.02
(0.01)
(0.01)
Core performance measures
$
7,948
$
595
$
2,170
$
1,797
17.2%
$
1.23
(in millions)
As reported
Constant-yen(1)
Other yen-related transactions(2)
Hemlock Semiconductor operating
results(3)
Hemlock Semiconductor non-operating
results(3)
Acquisition-related costs(4)
Discrete tax items and other tax-related
adjustments(5)
Certain litigation-related charges and
credits(6)
Restructuring, impairment and other
charges(7)
Pension mark-to-market adjustment(11)
Equity in earnings of affiliated
companies(9)
Loss on repurchase of debt(13)
Accumulated other comprehensive
income(14)
Net sales
Equity
earnings
Income before
income taxes
Net
income
Effective
tax rate
Per share
Year ended December 31, 2012
$
8,012
$
(407)
810
(167)
(25)
77
18
$
1,975
$
1,636
17.2%
$
(434)
(22)
(25)
77
24
14
133
217
18
26
(52)
(353)
(16)
(23)
72
16
41
9
91
140
17
17
(52)
1.09
(0.23)
(0.01)
(0.02)
0.05
0.01
0.03
0.01
0.06
0.09
0.01
0.01
(0.03)
Core performance measures
$
7,605
$
713
$
1,951
$
1,595
18.2%
$
1.06
30
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Items which we exclude from GAAP measures to arrive at Core performance measures are as follows:
(1) Constant-currency adjustments:
Constant-yen: Because a significant portion of Corning’s LCD glass business revenues and manufacturing costs are denominated in Japanese
yen, management believes it is important to understand the impact on core earnings of translating yen into dollars. Presenting results on a
constant-yen basis mitigates the translation impact of the Japanese yen, and allows management to evaluate performance period over period,
analyze underlying trends in our businesses, and establish operational goals and forecasts. As of December 31, 2014, we used an internally derived
management rate of ¥93, which is aligned to our yen portfolio of purchased collars and average rate forwards, and have recast all periods presented
based on this rate in order to effectively remove the impact of changes in the Japanese yen.
Constant-won: Following the Acquisition of Samsung Corning Precision Materials and because a significant portion of Samsung Corning Precision
Materials’(now Corning Precision Materials) costs are denominated in Korean won, management believes it is important to understand the impact
on core earnings from translating won into dollars. Presenting results on a constant-won basis mitigates the translation impact of the Korean
won, and allows management to evaluate performance period over period, analyze underlying trends in our businesses, and establish operational
goals and forecasts without the variability caused by the fluctuations caused by changes in the rate of this currency. We use an internally derived
management rate of 1,100, which is consistent with historical prior period averages of the won. We have not recast prior periods presented as the
impact is not material to Corning in those periods.
(2) Purchased and zero cost collars, average forward contracts and other yen-related transactions: We have excluded the impact of our
yen-denominated purchased collars, average forward contracts, and other yen-related transactions for each period presented. Additionally, we
are also excluding the impact of our portfolio of Korean won-denominated zero cost collars which we entered into in the second quarter of 2014.
By aligning an internally derived rate with our portfolio of purchased collars and average forward contracts, and excluding other yen-related
transactions and the constant-currency adjustments, we have materially mitigated the impact of changes in the Japanese yen and Korean won.
(3) Results of Dow Corning’s consolidated subsidiary, Hemlock Semiconductor: In 2013, we excluded the results of Dow Corning’s consolidated
subsidiary, Hemlock Semiconductor, a producer of polycrystalline silicon, to remove the operating and non-operating items and events which
have caused severe unpredictability and instability in earnings beginning in 2012. These events were primarily driven by the macro-economic
environment. Specifically, the negative impact of the determination by the Chinese Ministry of Commerce (“MOFCOM”), which imposed
provisional anti-dumping duties on solar-grade polysilicon imports from the United States, and the impact of asset write-offs, offset by the benefit
of large payments required under Hemlock Semiconductor customers’ “take-or-pay” contracts, are events that are unrelated to Dow Corning’s
core operations, and that have, or could have, significant impacts to this business. Beginning in 2014, due to the stabilization of the polycrystalline
silicon industry, we will no longer exclude the operating results of Hemlock Semiconductor from core performance measures.
(4) Acquisition-related costs: These expenses include intangible amortization, inventory valuation adjustments and external acquisition-related
deal costs.
(5) Discrete tax items and other tax-related adjustments: This represents the removal of discrete adjustments attributable to changes in tax law and
changes in judgment about the realizability of certain deferred tax assets, as well as other non-operational tax-related adjustments, including the
tax effect of a transfer pricing out of period adjustment in 2014. This item also includes the income tax effects of adjusting from GAAP earnings to
core earnings.
(6) Litigation, regulatory and other legal matters: Includes amounts related to the Pittsburgh Corning Corporation (PCC) asbestos litigation,
adjustments to our estimated liability for environmental-related items and the settlement of litigation related to a small acquisition.
(7) Restructuring, impairment and other charges. This amount includes restructuring, impairment and other charges, as well as other expenses and
disposal costs not classified as restructuring expense.
(8) Liquidation of subsidiary: The partial impact of non-restructuring related items due to the decision to liquidate a consolidated subsidiary that is
not significant.
(9) Equity in earnings of affiliated companies: These adjustments relate to items which do not reflect expected on-going operating results of our
affiliated companies, such as restructuring, impairment and other charges and settlements under “take-or-pay” contracts.
(10) Impacts from the Acquisition of Samsung Corning Precision Materials: Pre-acquisition gains and losses on previously held equity investment and
other gains and losses related to the Acquisition, including post-combination expenses, fair value adjustments to the indemnity asset related to
contingent consideration and the impact of the withholding tax on a dividend from Samsung Corning Precision Materials.
(11) Pension mark-to-market adjustment: Mark-to-market pension gains and losses, which arise from changes in actuarial assumptions and the
difference between actual and expected returns on plan assets and discount rates. Management believes that pension actuarial gains and
losses are primarily financing activities that are more reflective of changes in current conditions in global financial markets, and are not directly
related to the underlying performance of our businesses. For further information on the actuarial assumptions and plan assets referenced above,
see Management’s Discussion and Analysis of Financial Condition and Results of Operations, under Critical Accounting Estimates - Employee
Retirement Plans, and Note 13, Employee Retirement Plans, of Notes to the Consolidated Financial Statements.
(12) Gain on change in control of equity investment: Gain as a result of certain changes to the shareholder agreement of an equity company, resulting
in Corning having a controlling interest that requires consolidation of this investment.
(13) Loss on repurchase of debt: In 2012, Corning recorded a loss on the repurchase of $13 million of our 8.875% senior unsecured notes due 2021,
$11 million of our 8.875% senior unsecured notes due 2016, and $51 million of our 6.75% senior unsecured notes due 2013.
(14) Accumulated other comprehensive income: In 2012, Corning recorded a translation capital gain on the liquidation of a foreign subsidiary.
31
CORNING INCORPORATED - 2014 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Reportable Segments
Our reportable segments are as follows:
• Display Technologies – manufactures glass substrates for flat panel
liquid crystal displays.
• Optical Communications – manufactures carrier network and
enterprise network components for the telecommunications industry.
• Environmental Technologies – manufactures ceramic substrates and
filters for automotive and diesel applications.
• 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 reportable segments that do not meet the quantitative
threshold for separate reporting have been 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 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 our reportable
segments differently than we would for stand-alone financial
information prepared in accordance with U.S. GAAP. The Display
Technologies, Optical Communications, Environmental Technologies,
Specialty Materials and Life Sciences segments include non-GAAP
measures which are not prepared in accordance with GAAP. We believe
investors should consider these non-GAAP measures in evaluating our
results as they are more indicative of our core operating performance
and with how management evaluates our operational results and trends.
These measures are not, and should not be viewed as a substitute for
GAAP reporting measures. For a reconciliation of non-GAAP performance
measures to the most directly comparable GAAP financial measure,
please see “Reconciliation of non-GAAP Measures” below. 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.
Display Technologies
As Reported (in millions)
Net sales
Equity earnings of affiliated companies
Net income
2014
2013
2012
14 vs. 13
13 vs. 12
% change
$
$
$
3,851
(20)
1,369
$
$
$
2,545
357
1,267
$
$
$
2,909
692
1,589
51
(106)
8
% change
Core Performance (in millions)
2014
2013
2012
14 vs. 13
13 vs. 12
Net sales
Equity earnings of affiliated companies
Net income
$
$
$
4,354
(10)
1,390
$
$
$
2,674
420
1,253
$
$
$
2,501
544
1,246
63
(102)
11
(13)
(48)
(20)
7
(23)
1
32
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table reconciles the non-GAAP financial measures for the Display Technologies segment with our financial statements presented in
accordance with GAAP (in millions).
(in millions)
As reported
Constant-yen(1)
Constant-won(1)
Purchased collars
and average forward
contracts(2)
Other yen-related
transactions(2)
Acquisition-related
costs(4)
Discrete tax items(5)
Restructuring,
impairment, and
other charges(7)
Equity in earnings of
affiliated companies(9)
Contingent
consideration fair
value adjustment(10)
Other items related
to the Acquisition of
Samsung Corning
Precision Materials(10)
Pension mark-to-
market(11)
Year ended December 31, 2014
Year ended December 31, 2013
Year ended December 31, 2012
Sales
Equity
earnings
Net
income
Sales
Equity
earnings
Net
income
Sales
Equity
earnings
Net
income
$
3,851
$
(20)
$ 1,369
$
2,545
$
129
502
3
7
1
316
27
(290)
37
4
40
6
(194)
73
2
357
35
$
1,267
$
2,909
$
99
(408)
692
(166)
$
1,589
(380)
(90)
(67)
8
10
6
28
(8)
28
18
(15)
17
18
17
Core performance
$
4,354
$
(10)
$ 1,390
$
2,674
$
420
$
1,253
$
2,501
$
544
$
1,246
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance
Measures, “Items which we exclude from GAAP measures to arrive at Core Performance measures” for an explanation of the reconciling items.
As Reported
2014 vs. 2013
When compared to the same period last year, the increase of
$1,306 million in net sales in the year ended December 31, 2014, was
due to the Acquisition of the remaining equity interests of our affiliate
Samsung Corning Precision Materials, and the consolidation of this
entity, which added $1.8 billion in net sales. This impact was somewhat
offset by price declines in the mid-teens in percentage terms, which
more than offset an increase in volume that was slightly more than 10%
in percentage terms, and the depreciation of the Japanese yen versus
the U.S. dollar, which adversely impacted net sales by $373 million.
income
Net
increased by
in the Display Technologies segment
$102 million, or 8%, in the year ended December 31, 2014, when
compared to the same period last year. This increase was driven by the
following items:
• The impact of the Acquisition of Corning Precision Materials and the
resulting cost reductions gained through synergies;
• The fair value adjustment of the contingent consideration resulting
from the Acquisition of Corning Precision Materials in the amount of
$194 million; and
• Improvements in manufacturing efficiency of $46 million.
The increase in net income was partially offset by the following items:
• The impact of price declines in the mid-teens in percentage terms that
more than offset the increase in volume;
• The absence of the $67 million gain from our yen-denominated cash
flow hedging program;
• The increase in transaction and acquisition-related costs related to
the Acquisition of Corning Precision Materials in the amounts of
$73 million and $29 million, respectively; and
• An
increase of $34 million
in restructuring,
impairment and
other charges.
2013 vs. 2012
In 2013, net sales in the Display Technologies segment declined in the
amount of $364 million when compared to 2012, primarily due to the
impact of the depreciation of the Japanese yen versus the U.S. dollar in the
amount of $537 million and price declines in the mid-teens in percentage
terms, offset somewhat by an increase in volume in the mid-twenties.
The increase in volume was driven by higher sales of larger-sized LCD
televisions, defined as greater than 40 inches, which increased by nearly
100% in 2013, and higher sales in mobile computing products, including
tablets and smart phones. Additionally, during the fourth quarter of 2013,
we renewed the agreements with key customers that we had announced
in the fourth quarter of 2012, which stabilize Corning’s share at each of
the customers and maintain a fixed relationship between Corning’s
pricing and competitive pricing at that customer.
33
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
When compared to 2012, the $335 million decrease in equity earnings
from Samsung Corning Precision Materials in 2013 reflected the impact
of the depreciation of the Japanese yen versus the U.S. dollar in the
amount of $201 million and price declines in the mid-teens in percentage
terms. Volume remained relatively consistent in 2013 when compared
to the levels in 2012. Manufacturing improvements in the amount of
$28 million were more than offset by higher taxes in the amount of
$54 million, driven by the partial expiration of a Korean tax holiday and
$28 million of asset write-offs and disposals.
When compared to 2012, the decrease in net income of $322 million
in the Display Technologies segment in 2013 reflects the impact of the
depreciation of the Japanese yen versus the U.S. dollar in the amount
of $479 million and the impact of price declines in the mid-teens in
percentage terms. These declines were partially offset by an increase in
volume in the mid-twenties in percentage terms, the impact of gains
realized on our purchased collars and average rate forwards in the
amount of $90 million and cost reduction programs.
Core Performance
2014 vs. 2013
When compared to the same period last year, the increase in core net
sales of $1,680 million, or 63%, in the year ended December 31, 2014,
was due to the Acquisition of the remaining equity interests of our
affiliate Corning Precision Materials, and the consolidation of this entity,
which added $1.9 billion in net sales. This impact was somewhat offset
by price declines in the mid-teens in percentage terms, which more
than offset an increase in volume that was slightly more than 10% in
percentage terms.
Core earnings in the Display Technologies segment increased by
$137 million, or 11%, in the year ended December 31, 2014, when
compared to the same period last year. The increase was driven by the
positive impact of the Acquisition of Corning Precision Materials and
the resulting cost reductions gained through synergies, coupled with
improvements in manufacturing efficiency of $46 million, partially
offset by the impact of price declines in the mid-teens in percentage
terms that more than offset the increase in volume.
2013 vs. 2012
In 2013, our Display Technologies segment regained positive momentum,
as demonstrated by the increase in core net sales of 7%, when compared
to core net sales in 2012, which declined by 7% when compared to 2011.
During 2013, volume improvements in the mid-twenties in percentage
terms more than outpaced price declines in the mid-teens. The increase
in volume was driven by higher sales of larger-sized LCD televisions,
defined as greater than 40 inches, which increased by nearly 100% in
2013, and higher sales in mobile computing products, including tablets
and smart phones. Additionally, during the fourth quarter of 2013, we
renewed the agreements with key customers that we had announced in
the fourth quarter of 2012, which stabilize Corning’s share at each of the
customers and maintain a fixed relationship between Corning’s pricing
and competitive pricing at that customer.
When compared to 2012, the decrease in core equity earnings from
Samsung Corning Precision Materials in 2013 reflected relatively
consistent volume and price declines in the mid-teens in percentage
terms. Manufacturing improvements in the amount of $28 million were
more than offset by higher taxes in the amount of $54 million, driven by
the partial expiration of a Korean tax holiday.
When compared to 2012, the increase in core earnings in the Display
Technologies segment in 2013 reflects an increase in volume in the mid-
twenties in percentage terms and the impact of cost reduction programs,
partially offset by price declines in the mid-teens in percentage terms
and the impact of lower equity earnings.
Other Information
The Display Technologies segment has a concentrated customer base
comprised of LCD panel and color filter makers primarily located in
Japan, South Korea, China and Taiwan. In 2014, three customers of the
Display Technologies segment, which individually accounted for more
than 10% of segment net sales, accounted for a combined 61% of total
segment sales. In 2013, four customers of the Display Technologies
segment, which individually accounted for more than 10% of segment
net sales, accounted for a combined 94% of total segment sales. In 2012,
three customers of the Display Technologies segment, which individually
accounted for more than 10% of segment net sales, accounted for a
combined 63% of total segment sales. Our customers face the same
global economic dynamics as we do in this market. Our near-term sales
and profitability would be impacted if any of these significant customers
were unable to continue to purchase our products.
In addition, prior to consolidation, Samsung Corning Precision Materials’
sales were concentrated across a small number of its customers. In
2013 and 2012, sales to two LCD panel makers located in South Korea
accounted for approximately 93% of Samsung Corning Precision
Materials sales in each of those two years.
Corning has invested to expand capacity to meet the projected demand
for LCD glass substrates. In 2014, 2013 and 2012, capital spending in this
segment was approximately $400 million, $350 million and $850 million,
respectively. We expect capital spending for 2015 to be approximately
$650 million.
Outlook:
Corning anticipates another year of growth in the LCD glass market
in 2015, with retail demand up high-single digits in percentage terms,
as measured in square feet. We believe that supply chain inventory
levels remain healthy and industry glass supply appears aligned with
overall demand.
In the first quarter of 2015, Corning anticipates LCD glass volume in its
Display Technologies segment will be consistent to down slightly on a
sequential basis, following a very strong fourth quarter performance.
This is in line with normal seasonality in the business. Quarterly glass
price declines are expected to be moderate again.
The end market demand for LCD televisions, monitors and notebooks is
dependent on consumer retail spending, among other factors. We are
cautious about the potential negative impact that economic conditions,
particularly a global economic recession, excess market capacity and
world political tensions could have on consumer demand. While the LCD
industry has grown, economic volatility along with consumer preferences
for panels of differing sizes, prices, or other factors may lead to pauses in
market growth. Therefore, it is possible that glass manufacturing capacity
may exceed demand from time to time but we believe that we have
sufficient manufacturing flexibility to adjust to fluctuations in demand.
We may incur further charges in this segment to reduce our workforce
and consolidate capacity. In addition, changes in foreign exchange
rates, principally the Japanese yen, will continue to impact the sales
and profitability of this segment. In order to mitigate this risk, Corning
entered into a series of foreign exchange contracts to hedge our exposure
to movements in the Japanese yen and its impact on our earnings.
34
CORNING INCORPORATED - 2014 Annual Report Optical Communications
As Reported (in millions)
Net sales:
Carrier network
Enterprise network
Total net sales
Net income
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2014
2013
2012
14 vs. 13
13 vs. 12
% change
$
$
$
2,036
616
2,652
205
$
$
$
1,782
544
2,326
199
$
$
$
1,619
511
2,130
146
14
13
14
3
10
6
9
36
% change
Core Performance (in millions)
2014
2013
2012
14 vs. 13
13 vs. 12
Net sales:
Carrier network
Enterprise network
Total net sales
Net income
$
$
$
2,036
616
2,652
231
$
$
$
1,782
544
2,326
196
$
$
$
1,619
511
2,130
137
14
13
14
18
10
6
9
43
The following table reconciles the non-GAAP financial measures for the Optical Communications segment with our financial statements presented in
accordance with GAAP (in millions).
(in millions)
As reported
Acquisition-related costs(4)
Restructuring, impairment, and other charges(7)
Pension mark-to-market(11)
Gain on change in control(12)
Accumulated other comprehensive income(14)
Liquidation of subsidiary(8)
Year ended
December 31, 2014
Year ended
December 31, 2013
Year ended
December 31, 2012
Sales
Net
income
Sales
Net
income
Sales
Net
income
$
2,652 $
205
$
2,326 $
199
$
2,130 $
146
(2)
17
13
(2)
9
8
(9)
(11)
1
31
11
(52)
Core performance
$
2,652 $
231
$
2,326 $
196
$
2,130 $
137
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance
Measures, “Items which we exclude from GAAP measures to arrive at Core Performance measures” for an explanation of the reconciling items.
As Reported
2014 vs. 2013
In the twelve months ended December 31, 2014, net sales of the Optical
Communications segment increased by $326 million, or 14%, when
compared to the same period in 2013, driven by a $254 million increase
in sales of our carrier network products. Specifically, the following items
impacted sales within the carrier network products group in the year
ended December 31, 2014:
• Higher sales of cable and hardware and equipment products primarily
used in fiber-to-the-home solutions in North America and Europe, up
$113 million and $46 million, respectively;
• The impact of a full year of sales from a small acquisition and the
consolidation of an investment due to a change in control which
occurred at the end of the second quarter of 2013, which added
approximately $53 million; and
• An increase of $11 million in sales of optical fiber, driven by higher sales
in North America and Europe, partially offset by a decrease in China.
Sales of enterprise network products also increased in the twelve
months ended December 31, 2014, up $72 million, when compared to the
same period in 2013, due to strong sales in all regions of the world, led by
an increase in sales of data center and LAN products in Europe and North
America, up $21 million and $20 million, respectively, and an increase of
$16 million in wireless products sales.
Net income increased by $6 million, or 3%, in 2014, when compared to
2013. The significant increase in volume for carrier network products
in North America and Europe and an increase in worldwide enterprise
network product volume were somewhat offset by price declines in fiber
and cable products, $17 million of additional operating expenses driven
by two small acquisitions and the absence of the inventory build we
experienced in the first half of 2013. An increase in restructuring charges
of $9 million, an increase of $22 million in the amount of the pension
mark-to-market adjustment and the absence of the $11 million gain on
change in control of an equity company that occurred in the second
quarter of 2013 also negatively impacted the results of this segment.
35
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
2013 vs. 2012
In 2013, net sales of the Optical Communications segment increased
when compared to 2012, driven by an increase of $163 million in the
carrier network market. Driving the growth in carrier network products
are the following items:
• The ramp-up of the fiber-to-the-premises initiative in Australia, which
increased sales by $28 million;
• An increase of $23 million in sales of wireless products;
• Higher sales of cable products in North America, China and Europe, up
$52 million, $33 million and $26 million, respectively;
• The impact of a small acquisition and the consolidation of an
investment due to a change in control, which added approximately
$53 million in 2013; and
• Offsetting the increase in sales of carrier network products in 2013 was
a decline in sales of optical fiber, driven by lower demand for single-
mode fiber in China, Europe and North America.
Sales in the enterprise network market increased by $33 million in the
year ended 2013, when compared to 2012, driven by higher sales of data
center products in North America.
The increase in net income in 2013 when compared to 2012 reflects an
increase in volume in carrier and enterprise network products, improved
manufacturing performance and the implementation of strong spending
controls and cost reduction initiatives, combined with an increase of
$20 million on the gain in 2013 versus a loss in 2012 on the mark-to-
market of our defined benefit pension plans, a reduction of $23 million in
restructuring charges and a gain of $11 million on the change in control of
an equity company. This increase was somewhat offset by an increase in
acquisition-related costs of $8 million and lower volume in optical fiber,
lower price and a less favorable mix of products sales in 2013.
Movements in foreign exchange rates did not significantly impact the
results of this segment in the years ended December 31, 2014 and 2013.
Environmental Technologies
Core Performance
2014 vs. 2013
When compared to the same period last year, core earnings in the twelve
months ended December 31, 2014 increased by $35 million, or 18%, when
compared to 2013. The significant increase in volume for carrier network
products in North America and Europe and an increase in worldwide
enterprise network product volume were somewhat offset by price
declines in fiber and cable products, $17 million of additional operating
expenses driven by two small acquisitions and the absence of the
inventory build we experienced in the first half of 2013.
2013 vs. 2012
The increase in core earnings in 2013 when compared to 2012 reflects an
increase in volume in carrier and enterprise network products, improved
implementation of strong
manufacturing performance and the
spending controls and cost reduction initiatives, offset by lower volume
in optical fiber, lower price and a less favorable mix of products sales in
2013. Movements in foreign exchange rates did not significantly impact
the results of this segment.
The Optical Communications segment has a concentrated customer
base. In the years ended December 31, 2014, 2013 and 2012, one customer,
which individually accounted for more than 10% of segment net sales,
accounted for 11%, 10% and 12%, respectively, of total segment net sales.
Outlook:
Optical Communications segment sales in the first quarter of 2015 are
expected to increase by more than 10 percent when compared to the first
quarter of 2014, as the segment continues its strong overall performance.
As Reported (in millions)
2014
2013
2012
14 vs. 13
13 vs. 12
% change
Net sales:
Automotive
Diesel
Total net sales
Net income
$
$
$
528
564
1,092
182
$
$
$
485
434
919
132
$
$
$
486
478
964
112
9
30
19
38
% change
Core Performance (in millions)
2014
2013
2012
14 vs. 13
13 vs. 12
$
$
$
528
564
1,092
187
$
$
$
485
434
919
130
$
$
$
486
478
964
119
9
30
19
44
Net sales:
Automotive
Diesel
Total net sales
Net income
36
(9)
(5)
18
(9)
(5)
9
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table reconciles the non-GAAP financial measures for the Environmental Technologies segment with our financial statements presented
in accordance with GAAP (in millions).
(in millions)
As reported
Restructuring, impairment, and other charges(7)
Pension mark-to-market(11)
Core performance
Year ended
December 31, 2014
Year ended
December 31, 2013
Year ended
December 31, 2012
Sales
Net
income
Sales
Net
income
Sales
Net
income
$
1,092 $
182
$
919 $
132 $
964 $
112
5
1
(3)
2
5
$
1,092 $
187
$
919 $
130 $
964 $
119
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance
Measures, “Items which we exclude from GAAP measures to arrive at Core Performance measures” for an explanation of the reconciling items.
As Reported
Core Performance
2014 vs. 2013
In the twelve months ended December 31, 2014, net sales of this segment
increased by $173 million, or 19%, when compared to the same period in
2013, driven by higher sales across all product lines. Driving the increase
was higher demand for our heavy duty diesel products propelled by new
governmental regulations in Europe and China and increased demand
for Class 8 vehicles in North America. Sales of light-duty diesel products
also improved due to higher volume in Europe. Automotive substrate
product sales increased due to higher demand in Europe and China.
When compared to the same period last year, net income in the twelve
months ended December 31, 2014 improved significantly, up $50 million,
or 38%, driven by improvements in manufacturing efficiency and
strong volume gains across both automotive and diesel product lines.
Improving market conditions for heavy-duty diesel products in Europe,
China and North America and higher European sales of light-duty diesel
products, combined with an increase in automotive vehicle builds, drove
the increase. Higher costs associated with facility expansion projects
and an increase in the pension mark-to-market adjustment somewhat
offset the increase in net income.
2013 vs. 2012
When compared to 2012, net sales in the Environmental Technologies
segment decreased in 2013, due to lower sales of light-duty diesel filters
and heavy-duty diesel products. Demand for light-duty diesel vehicles
which use our filters declined due to weak economic conditions in
Europe. Heavy-duty diesel product sales were lower due to the decline
in the production of Class 8 vehicles in North America. Net sales of this
segment in 2013 were not materially impacted by movements in foreign
exchange rates when compared to 2012.
Although net sales declined in 2013 when compared to 2012, net income
increased by 18%, driven by significantly improved manufacturing
performance for our automotive and heavy-duty diesel products, and
lower operating expenses. Net income also included an increase of
$8 million due to the positive change in the mark-to-market of our
defined benefit pension plans.
Movements in foreign exchange rates did not significantly impact the
results of this segment in the years ended December 31, 2014 and 2013.
2014 vs. 2013
When compared to the same period last year, core earnings in the
twelve months ended December 31, 2014 increased by $57 million,
or 44%, driven by improvements in manufacturing efficiency and
strong volume gains across both automotive and diesel product lines.
Improving market conditions for heavy-duty diesel products in Europe,
China and North America and higher European sales of light-duty diesel
products, combined with an increase in automotive vehicle builds, drove
the increase. Higher costs associated with facility expansion projects
somewhat offset the increase in net income
2013 vs. 2012
Although net sales declined in 2013 when compared to 2012, core earnings
increased by 9%, driven by significantly improved manufacturing
performance for our automotive and heavy-duty diesel products, and
lower operating expenses.
The Environmental Technologies segment sells to a concentrated
customer base of catalyzer and emission control systems manufacturers,
who then sell to automotive and diesel engine manufacturers. Although
our sales are to the emission control systems manufacturers, the use
of our substrates and filters is generally required by the specifications
of the automotive and diesel vehicle or engine manufacturers. For
2014, 2013, and 2012, net sales to three customers, which individually
accounted for more than 10% of segment sales, accounted for 88%, 87%
and 86%, respectively, of total segment sales. While we are not aware
of any significant customer credit issues with our direct customers, our
near-term sales and profitability would be impacted if any individual
customers were unable to continue to purchase our products.
Outlook:
We anticipate that Environmental Technologies sales in the first quarter
of 2015 will be consistent when compared to the first quarter of 2014.
37
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Specialty Materials
As Reported (in millions)
Net sales
Net income
Core Performance (in millions)
Net sales
Net income
2014
$
$
1,205
144
2013
$
$
1,170
187
2012
$
$
1,346
137
% change
14 vs. 13
13 vs. 12
3
(23)
% change
2014
$
$
1,205
162
2013
$
$
1,170
196
2012
14 vs. 13
13 vs. 12
$
$
1,346
201
3
(17)
(13)
36
(13)
(2)
The following table reconciles the non-GAAP financial measures for the Specialty Materials segment with our financial statements presented in
accordance with GAAP (in millions).
(in millions)
As reported
Constant-yen(1)
Purchased collars and average forward contracts(2)
Acquisition-related costs(4)
Restructuring, impairment, and other charges(7)
Pension mark-to-market(11)
Year ended
December 31, 2014
Year ended
December 31, 2013
Year ended
December 31, 2012
Sales
Net
income
Sales
Net
income
Sales
Net
income
$
1,205 $
144
$
1,170 $
187 $
1,346 $
(7)
14
(1)
12
(2)
1
12
(2)
137
25
33
6
201
Core performance
$
1,205 $
162
$
1,170 $
196 $
1,346 $
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance
Measures, “Items which we exclude from GAAP measures to arrive at Core Performance measures” for an explanation of the reconciling items.
As Reported
2014 vs. 2013
The Specialty Materials segment manufactures products
that
provide more than 150 material formulations for glass, glass ceramics
and fluoride crystals to meet demand for unique customer needs.
Consequently, this segment operates in a wide variety of commercial
and industrial markets that include display optics and components,
semiconductor optics components, aerospace and defense, astronomy,
ophthalmic products, telecommunications components and a protective
cover glass that is optimized for portable display devices.
Net sales for the twelve months ended December 31, 2014 in the
Specialty Materials segment increased by $35 million, or 3%, when
compared to the same period in 2013, driven by higher sales of our
advanced optics and commercial optics products. Although Corning
Gorilla Glass volume increased by 23%, net sales remained consistent
with the prior year, driven by an unfavorable shift in product mix and
price declines. Additionally, although volume increased in 2014 when
compared to 2013, the growth did not meet our expectations due to the
flat market for tablets.
When compared to the same period last year, the decrease in net
income for the twelve months ended December 31, 2014 was driven
by the absence of the inventory build we experienced in the first half
of 2013, the write-off a trade receivable balance in the amount of $8
million and price declines for Corning Gorilla Glass. Partially offsetting
the decrease was an increase in volume for both Corning Gorilla Glass
and advanced optics products and the impact of costs reductions as a
result of restructuring actions.
2013 vs� 2012
Net sales for the year ended December 31, 2013 decreased in the Specialty
Materials segment when compared to 2012, due to a 17% decline in sales
of Corning Gorilla Glass. Although retail demand for products using
our Corning Gorilla Glass has increased in 2013, supply chain variability,
during which we experienced robust sales of this glass in the latter
half of 2012, resulted in a supply chain contraction throughout 2013.
Advanced optics products sales increased slightly in the year ended
December 31, 2013, driven by the beginning of a business recovery.
Although net sales declined by 13% in the year ended December 31, 2013,
net income increased by 36%, when compared to 2012, due to strong
cost controls, lower restructuring charges, manufacturing cost reduction
initiatives and the beginning of the advanced optics products business
recovery, which partially offset the lower sales of Corning Gorilla Glass.
The depreciation of the Japanese yen versus the U.S. dollar positively
impacted net income by approximately $27 million in the year ended
December 31, 2013, when compared to the same period in the prior year.
Movements in foreign exchange rates did not significantly impact the
results of this segment in the years ended December 31, 2014 and 2013.
Core Performance
2014 vs. 2013
When compared to the same period last year, the decrease in core
earnings in the twelve months ended December 31, 2014 was driven
by the absence of the inventory build we experienced in the first half
of 2013, price declines for Corning Gorilla Glass and higher production
costs. Partially offsetting the decrease was an increase in volume for
both Corning Gorilla Glass and advanced optics products and the impact
of costs reductions as a result of restructuring actions.
38
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
2013 vs. 2012
Although core net sales declined by 13% in the year ended December 31,
2013, core earnings decreased by only 2%, when compared to 2012, due
to strong cost controls, manufacturing cost reduction initiatives and
the beginning of the advanced optics products business recovery, which
partially offset the lower sales of Corning Gorilla Glass.
For 2014 and 2013, three customers of the Specialty Materials segment,
which individually accounted for more than 10% of segment sales,
accounted for 51% and 47%, respectively, of total segment sales. For 2012,
two customers of the Specialty Materials segment, which individually
accounted for more than 10% of segment sales, accounted for 54% of
total segment sales.
Outlook:
In the first quarter of 2015, Specialty Materials segment sales are
expected to increase by approximately 10% when compared to the
first quarter of 2014, as a result of increased Gorilla Glass demand for
products launched in the third and fourth quarters of 2014.
Life Sciences
As Reported (in millions)
Net sales
Net income
Core Performance (in millions)
Net sales
Net income
2014
$
$
862
71
2014
$
$
862
87
2013
$
$
2013
$
$
851
71
851
92
% change
2012
14 vs. 13
13 vs. 12
$
$
657
28
1
30
154
% change
2012
14 vs. 13
13 vs. 12
$
$
657
48
1
(5)
30
92
The following table reconciles the non-GAAP financial measures for the Life Sciences segment with our financial statements presented in accordance
with GAAP (in millions).
(in millions)
As reported
Acquisition-related costs(4)
Restructuring, impairment, and other charges(7)
Pension mark-to-market(11)
Core performance
Year ended
December 31, 2014
Year ended
December 31, 2013
Year ended
December 31, 2012
Sales
Net
income
Sales
Net
income
Sales
Net
income
$
862 $
71
14
2
$
851 $
71 $
657 $
21
3
(3)
28
15
1
4
$
862 $
87
$
851 $
92 $
657 $
48
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance
Measures, “Items which we exclude from GAAP measures to arrive at Core Performance measures” for an explanation of the reconciling items.
As Reported
2014 vs. 2013
Net sales for the year ended December 31, 2014 increased by $11 million
when compared to the same period in the prior year. Higher sales in
North America and China, up $12 million and $5 million, respectively,
were offset slightly by lower sales in Australia. Net income remained
consistent when compared to the same period in 2013, driven by less
favorable product mix and higher operating expenses which were
offset by higher volume and lower acquisition-related costs due to the
completion of the integration of Discovery Labware business.
2013 vs. 2012
Net sales for the year ended December 31, 2013 increased when compared
to the same period last year, due to the impact of the acquisition of the
Discovery Labware business completed in the fourth quarter of 2012,
which increased net sales by $192 million. Net sales of the segment’s
existing lines remained relatively consistent.
When compared to the same period in 2012, net income in the year
ended December 31, 2013 increased substantially, driven by a $38 million
improvement attributable to the impact of the Discovery Labware
acquisition and the positive impact of $7 million on the change in
the mark-to-market of our defined benefit pension plans. Offsetting
the gains from Discovery Labware and the pension mark-to-market
were an increase in acquisition-related costs of $6 million and higher
restructuring charges.
Movements in foreign exchange rates did not significantly impact the
results of this segment in the years ended December 31, 2014 and 2013.
Core Performance
2014 vs. 2013
Core earnings decreased slightly when compared to the same period
in 2013, driven by less favorable product mix, offset somewhat by
higher volume.
39
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
2013 vs. 2012
When compared to the same period in 2012, core earnings in the year
ended December 31, 2013 increased substantially, driven by the impact
of the Discovery Labware acquisition in the amount of $38 million.
Movements in foreign exchange rates did not significantly impact the
results of this segment in the year ended December 31, 2013.
For 2014, 2013 and 2012, two customers in the Life Sciences segment,
which individually accounted for more than 10% of total segment net
sales, collectively accounted for 45%, 44% and 38%, respectively, of total
segment sales.
Outlook:
Sales in the Life Sciences segment are expected to remain relatively
consistent in the first quarter of 2015, when compared to the same
period in 2014.
All Other
As Reported (in millions)
Net sales
Research, development and engineering expenses
Equity earnings of affiliated companies
Net loss
* Percent change not meaningful
Core Performance (in millions)
Net sales
Research, development and engineering expenses
Equity earnings of affiliated companies
Net loss
% change
2014
2013
2012
14 vs. 13
13 vs. 12
$
$
$
$
53
177
18
(196)
$
$
$
$
8
116
(24)
(163)
$
$
$
$
6
123
17
(98)
563
53
*
20
33
(6)
*
66
% change
2014
2013
2012
14 vs. 13
13 vs. 12
$
$
$
$
53
177
18
(193)
$
$
$
$
8
116
12
(122)
$
$
$
$
6
123
17
(98)
563
53
50
58
33
(6)
(29)
24
The following table reconciles the non-GAAP financial measures for the All Other segment with our financial statements presented in accordance with
GAAP (in millions).
Year ended December 31, 2014
Year ended December 31, 2013
Sales
Equity
earnings
Net
income
Sales
Equity
earnings
Net
income
$
53
$
18
$
(196)
$
8
$
(24)
$
(163)
(in millions)
As reported
Purchased collars and average forward contracts(2)
Restructuring, impairment, and other charges(7)
Pension mark-to-market(11)
2
1
36
12
41
$
(122)
Core performance
$
53
$
18
$
(193)
$
8
$
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance
Measures, “Items which we exclude from GAAP measures to arrive at Core Performance measures” for an explanation of the reconciling items.
All other segments that do not meet the quantitative threshold for
separate reporting have been grouped as “All Other.” This group is
primarily comprised of the results of Corning Precision Materials’
non-LCD business and new product lines and development projects
that involve the use of various technologies for new products such as
advanced flow reactors and adjacency businesses in pursuit of thin,
strong glass. This segment also includes results for certain corporate
investments such as Eurokera and Keraglass equity affiliates, which
manufacture smooth cooktop glass/ceramic products.
2014 vs. 2013
The increase in net sales of this segment in the year ended December 31,
2014 reflects the consolidation of the Corning Precision Materials’ non-
LCD business as a result of the Acquisition. The increase in the net loss of
this segment reflects higher spending for development projects which
were not part of the segment in the year ended December 31, 2013.
40
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
2013 vs. 2012
The increase in segment net loss in 2013 when compared to 2012 was
driven by the write-down of assets to their fair value in the amount
of $36 million in Samsung Corning Precision Materials’ non-LCD glass
business, the absence of the 2012 gain on the sale of assets in Samsung
Corning Precision Materials’ non-LCD glass business, and restructuring
costs of $5 million associated with our global restructuring program
implemented in the fourth quarter of 2013, partially offset by lower
research, development and engineering expenses on development
projects. The increase in core net loss in 2013 reflects the absence of the
2012 gain on the sale of assets in Samsung Corning Precision Materials’
non-LCD glass business and a decline in research, development and
engineering expenses for development projects.
Liquidity and Capital Resources
Financing and Capital Structure
The following items impacted Corning’s financing and capital structure
during 2014 and 2013:
2014
• In the third quarter of 2014, we amended and restated our existing
revolving credit facility. The amended facility provides a $2 billion
unsecured multi-currency line of credit and expires on September 30,
2019. At December 31, 2014, there were no outstanding amounts under
this credit facility. The facility includes affirmative and negative
covenants that Corning must comply with, including a leverage (debt
to capital ratio) financial covenant. As of December 31, 2014, we were in
compliance with all of the covenants.
2013
• In the first quarter of 2013, we amended and restated our then-existing
revolving credit facility. The 2013 amended facility provided a $1 billion
unsecured multi-currency line of credit that would have expired in
March 2018. This facility was terminated when we entered into the
amended and restated $2 billion facility in the third quarter of 2014.
• 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 billion. The total amount
repaid was approximately $500 million. Upon repayment, this facility
was terminated.
• 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 revolving
credit facility is available to support obligations under the commercial
paper program, if needed. At December 31, 2013, we did not have any
outstanding commercial paper.
• In the fourth quarter of 2013, we issued $250 million of 3.70% senior
unsecured notes that mature on November 15, 2023. The net proceeds of
approximately $248 million were used for general corporate purposes.
• In the fourth quarter of 2013, we recorded a financing obligation in the
approximate amount of $230 million for a new LCD glass substrate
facility in China.
Common Stock Dividends
On December 3, 2014, Corning’s Board of Directors declared a 20%
increase in the quarterly common stock dividend, which increased the
quarterly dividend from $0.10 to $0.12 per common share, beginning
with the dividend to be paid in the first quarter of 2015. This increase
marks the fourth dividend increase since October 2011.
Fixed Rate Cumulative Convertible Preferred
Stock, Series A
On January 15, 2014, Corning designated a new series of its preferred
stock as Fixed Rate Cumulative Convertible Preferred Stock, Series A,
par value $100 per share, and issued 1,900 shares of Preferred Stock at
an issue price of $1 million per share, for an aggregate issue price of
$1.9 billion, to Samsung Display in connection with the Acquisition of
its equity interests in Samsung Corning Precision Materials. Corning
also issued to Samsung Display an additional 400 shares of Fixed Rate
Cumulative Convertible Preferred Stock at closing, for an aggregate
issue price of $400 million in cash.
Dividends on the Preferred Stock are cumulative and accrue at the
annual rate of 4.25% on the per share issue price of $1 million. The
dividends are payable quarterly as and when declared by the Company’s
Board of Directors. The Preferred Stock ranks senior to our common stock
with respect to payment of dividends and rights upon liquidation. The
Preferred Stock is not redeemable except in the case of a certain deemed
liquidation event, the occurrence of which is under the control of the
Company. The Preferred Stock is convertible at the option of the holder
and the Company upon certain events, at a conversion rate of 50,000
shares of Corning’s common stock per one share of Preferred Stock,
subject to certain anti-dilution provisions. As of December 31, 2014, the
Preferred Stock has not been converted, and none of the anti-dilution
provisions have been triggered. Following the seventh anniversary of
the closing of the Acquisition, the Preferred Stock will be convertible, in
whole or in part, at the option of the holder. The Company has the right,
at its option, to cause some or all of the shares of Preferred Stock to be
converted into Common Stock, if, for 25 trading days (whether or not
consecutive) within any period of 40 consecutive trading days, the closing
price of Common Stock exceeds $35 per share. If the aforementioned
right becomes exercisable before the seventh anniversary of the closing,
the Company must first obtain the written approval of the holders of
a majority of the Preferred Stock before exercising its conversion right.
The Preferred Stock does not have any voting rights except as may be
required by law.
41
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Capital Spending
Capital spending totaled $1.1 billion in 2014, slightly above the amount spent in 2013. Spending in 2014 was driven primarily by the Display Technologies
segment, and focused on finishing line optimization and tank rebuilds. We expect our 2015 capital expenditures to be approximately $1.3 billion to
$1.4 billion. Approximately $650 million will be allocated to our Display Technologies segment.
Cash Flows
Summary of cash flow data (in millions):
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
2014 vs� 2013
Net cash provided by operating activities increased significantly in the year
ended December 31, 2014, when compared to the same period last year,
due to a dividend of approximately $1.6 billion received from Samsung
Corning Precision Materials, an increase in net income of $511 million and
the cash inflows from inventory movements. Although net inventory
increased by $52 million due to the Acquisition, which added $121 million,
this inventory was acquired through the issuance of preferred stock.
Cash outflows for inventory declined by $120 million in the base Display
Technologies and Specialty Materials segments in 2014 when compared
to 2013, offset somewhat by an increase of approximately $50 million,
driven by spending for new business development, and increases in the
Optical Communications and Life Sciences segments.
Net cash used in investing activities decreased slightly in the year ended
December 31, 2014, when compared to the same period last year, driven
by a decrease in investments in unconsolidated entities, the realized
gains on our yen-denominated purchased collars and the absence of the
premium paid for our yen-denominated purchased collars in 2013, offset
by an increase in short-term investments.
Net cash used in financing activities in the year ended December 31, 2014
increased when compared to the same period last year, driven by our
share repurchase programs and the absence of the proceeds received
in 2013 from the issuance of long-term debt, somewhat offset by cash
received from the issuance of preferred stock and the absence of the
retirement of long-term debt in the first quarter of 2013.
2013 vs� 2012
Net cash provided by operating activities decreased in the year ended
December 31, 2013, when compared to the same period last year, largely
due to a decrease in dividends received from affiliated companies and
the unfavorable impact of changes in working capital, driven by the
following items:
• Higher incentive compensation payments of approximately $100 million,
driven by the pay-out of the initial year of the executive cash-based
performance plan and an increase in performance-driven incentives;
• An increase in foreign tax payments in the amount of $114 million,
driven by higher withholding tax in Taiwan; and
• An increase in fiber and cable inventory in the Optical Communications
segment in the amount of $111 million, due to a decline in sales in
China, Europe and North America.
Years ended December 31,
2014
$
$
$
4,709
(962)
(2,586)
2013
$
$
$
2,787
(1,004)
(2,063)
2012
$
$
$
3,206
(2,628)
(115)
A decline in accounts receivable in the Display Technologies, Optical
Communications and Specialty Materials segments somewhat offset
these unfavorable impacts.
Net cash used in investing activities declined in 2013, when compared to
2012, due to a decrease in capital spending, lower business acquisition
spending and the liquidation of short-term investments, offset by the
premium related to our purchased collars.
Net cash used in financing activities increased in 2013 when compared
to the same period last year, driven primarily by the absence of the
issuance of long-term debt in the first quarter of 2012, higher share
repurchases, the retirement of long-term debt in the first quarter of
2013, and higher dividend payments.
Defined Benefit Pension Plans
We have defined benefit pension plans covering certain domestic and
international employees. Our largest single pension plan is Corning’s
U.S. qualified plan. At December 31, 2014, this plan accounted for 77%
of our consolidated defined benefit pension plans’ projected benefit
obligation and 86% of the related plans’ assets.
We have historically contributed to the U.S. qualified pension plan on
an annual basis in excess of the IRS minimum requirements. In 2014,
we made voluntary cash contributions of $85 million to our domestic
defined benefit pension plan and $45 million to our international
pension plans. In 2013, we did not contribute to our domestic defined
benefit pension plan and contributed $5 million to our international
pension plans. In 2012, we made voluntary cash contributions of
$75 million to our domestic defined benefit pension plan and $30 million
to our international pension plans. Although we will not be subject to
any mandatory contributions in 2015, we anticipate making voluntary
cash contributions of up to $65 million to our U.S. pension plan and up
to $28 million to our international pension plans in 2015.
Refer to Note 13 (Employee Retirement Plans) to the Consolidated
Financial Statements for additional information.
Restructuring
For the year ended December 31, 2014, we recorded charges of $71 million
for workforce reductions, asset disposals and write-offs, and exit costs
for restructuring activities with total cash expenditures estimated to be
$51 million.
42
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
In the fourth quarter of 2013, Corning implemented a global restructuring
plan within several of our segments, consisting of workforce reductions,
asset disposals and write-offs, and exit costs. We recorded charges of
$67 million associated with these actions, with total cash expenditures
expected to be approximately $40 million.
In 2012, we recorded a charge of $89 million associated with a corporate-
wide restructuring plan to reduce our global workforce in response to
anticipated lower sales in 2013. The charge included costs for workforce
reductions, asset disposals and write-offs, and exit costs. Total cash
expenditures associated with these actions are expected to be
approximately $49 million primarily related to termination benefits, and
were largely finalized in 2013.
During 2014, 2013 and 2012, we made payments of $39 million,
$35 million and $15 million, respectively, related to employee severance
and other exit costs resulting from restructuring actions. Refer
to Note 2 (Restructuring, Impairment and Other Charges) to the
Consolidated Financial Statements for additional information.
Key Balance Sheet Data
Balance sheet and working capital measures are provided in the following table (in millions):
Working capital
Current ratio
Trade accounts receivable, net of allowances
Days sales outstanding
Inventories
Inventory turns
Days payable outstanding(1)
Long-term debt
Total debt to total capital
(1) Includes trade payables only.
Credit Ratings
As of February 13, 2015, our credit ratings were as follows:
Rating Agency
Fitch
Standard & Poor’s
Moody’s
December 31,
2014
2013
$
$
$
$
7,914
4.4:1
1,501
56
1,322
4.2
41
3,227
$
$
$
$
7,145
5.1:1
1,253
58
1,270
3.6
47
3,272
13%
13%
Rating long-term debt
Outlook last update
A-
A-
A3
Stable
May 17, 2011
Stable
December 16, 2013
Stable
September 12, 2011
Management Assessment of Liquidity
We ended the fourth quarter of 2014 with approximately $6.1 billion
of cash, cash equivalents and short-term investments. The Company
has adequate sources of liquidity and we are confident in our ability
to generate cash to meet existing or reasonably likely future cash
requirements. Our cash, cash equivalents, and short-term investments
are held in various locations throughout the world and are generally
unrestricted. Although approximately 68% of the consolidated amount
was held outside of the U.S. at December 31, 2014, we have sufficient
U.S. liquidity, including borrowing capacity, to fund foreseeable U.S. cash
needs without requiring the repatriation of foreign cash. We utilize a
variety of tax effective financing strategies to ensure that our worldwide
cash is available in the locations in which it is needed.
From time to time, we may issue debt, the proceeds of which may
be used for general corporate purposes or to refinance certain debt
maturities. Additionally, to manage interest rate exposure, the Company,
from time to time, enters into interest rate swap agreements. In the
fourth quarter of 2014, the Company entered into interest rate swap
agreements to hedge against the variability in cash flows due to changes
in the benchmark interest rate related to an anticipated issuance. The
instruments were designated as cash flow hedges.
On June 24, 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 revolving credit facility is available to support obligations
under the commercial paper program, if needed. At December 31, 2014,
we did not have any outstanding commercial paper under this program.
43
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Share Repurchase Programs
On October 31, 2013, as part of the share repurchase program announced
on April 24, 2013 (the “2013 Repurchase Program”), Corning entered into
an accelerated share repurchase (“ASR”) agreement with JP Morgan
Chase Bank, National Association, London Branch (“JPMC”). Under the
ASR agreement with JPMC, Corning agreed to purchase $1 billion of its
common stock, in total, with an initial delivery by JPMC of 47.1 million
shares based on the current market price, and payment of $1 billion
made by Corning to JPMC. The payment to JPMC was recorded as a
reduction to shareholders’ equity, consisting of an $800 million increase
in treasury stock, which reflects the value of the initial 47.1 million shares
received upon execution, and a $200 million decrease in other-paid-in
capital, which reflects the value of the stock held back by JPMC pending
final settlement. On January 28, 2014, the ASR agreement with JPMC
was completed. Corning received an additional 10.5 million shares on
January 31, 2014 to settle the ASR agreement. In total, Corning purchased
57.6 million shares based on the average daily volume weighted-average
price of Corning’s common stock during the term of the ASR agreement
with JPMC, less a discount.
In addition to the shares repurchased through the ASR agreement, we
repurchased 61.3 million shares of common stock on the open market
for approximately $1.0 billion, as part of the 2013 Repurchase Program.
This program was executed between the second quarter of 2013 and the
first quarter of 2014, with a total of 118.9 million shares repurchased for
approximately $2 billion.
On March 4, 2014, as part of the $2 billion share repurchase program
announced on October 22, 2013 and made effective concurrent with the
closing of Corning’s Acquisition of Samsung Corning Precision Materials
on January 15, 2014 (the “2014 Repurchase Program”), Corning entered into
an ASR agreement with Citibank N.A. (“Citi”). Under the ASR agreement
with Citi, Corning agreed to purchase $1.25 billion of its common stock,
with an initial delivery by Citi of 52.5 million shares based on the current
market price, and payment of $1.25 billion made by Corning to Citi. On
May 28, 2014, the ASR agreement with Citi was completed, and Corning
received an additional 8.7 million shares to settle the ASR agreement. In
total, Corning repurchased 61.2 million shares based on the average daily
volume weighted-average price of Corning’s common stock during the
term of the ASR agreement with Citi, less a discount.
In addition to the shares repurchased through the ASR agreement, in
the year ended December 31, 2014, we repurchased 36.9 million shares
of common stock on the open market for approximately $750 million, as
part of the 2014 Repurchase Program. This program was completed in the
fourth quarter of 2014, with a total of 98.2 million shares repurchased
for approximately $2 billion.
On December 3, 2014, Corning’s Board of Directors authorized the
repurchase of up to $1.5 billion shares of common stock between
the date of announcement and December 31, 2016. No shares were
repurchased under this program between the date of authorization and
December 31, 2014.
Other
We complete comprehensive reviews of our significant customers
and their creditworthiness by analyzing their financial strength
at least annually or more frequently for customers where we have
identified a measure of increased risk. We closely monitor payments
and developments which may signal possible customer credit issues.
We currently have not identified any potential material impact on our
liquidity resulting from customer credit issues.
Our major source of funding for 2015 and beyond will be our operating
cash flow and our existing balances of cash, cash equivalents, short-
term investments and proceeds from any issuances of debt. We believe
we have sufficient liquidity for the next several years to fund operations,
share repurchase programs, acquisitions, the asbestos litigation, research
and development, capital expenditures, scheduled debt repayments and
dividend payments.
Corning also has access to a $2 billion unsecured committed revolving
credit facility. This credit facility includes a leverage ratio financial
covenant. The required leverage ratio, which measures debt to total
capital, is a maximum of 50%. At December 31, 2014, our leverage
using this measure was 13% and we are in compliance with the
financial covenant.
Our debt instruments contain customary event of default provisions,
which allow the lenders the option of accelerating all obligations
upon the occurrence of certain events. In addition, some of our debt
instruments contain a cross default provision, whereby an uncured
default in excess of a specified amount on one debt obligation of the
Company, also would be considered a default under the terms of another
debt instrument. As of December 31, 2014, we were in compliance with
all such provisions.
Management is not aware of any known trends or any known demands,
commitments, events or uncertainties that will result in or that are
reasonably likely to result in a material increase or decrease in our
liquidity. In addition, other than items discussed, there are no known
material trends, favorable or unfavorable, in our capital resources and no
expected material changes in the mix and relative cost of such resources.
Purchased Collars and Average Rate Forwards
In the first quarter of 2013, Corning executed a series of purchased collars
that expire quarterly across a two-year period to hedge its translation
exposure resulting from movements in the Japanese yen against the U.S.
dollar. These derivatives are not designated as accounting hedges and
changes in fair value are recorded in other income immediately. The fair
value of these derivative contracts are recorded as either assets (gain
position) or liabilities (loss position) on the Consolidated Balance Sheet.
Beginning in the second quarter of 2013 and continuing throughout
2014, Corning entered into a series of average rate forwards with no
associated premium, which hedge the translation impact of Japanese
yen on Corning’s projected 2015 net income and a significant portion of
Corning’s projected 2016 and 2017 net income. Like the purchased collars,
these contracts settle quarterly, and are not designated as accounting
hedges. In the years ended December 31, 2014 and 2013, we recorded
pre-tax net gains of $1,406 million and $435 million, respectively, related
to changes in the fair value of the purchased collars and average rate
forward contracts, offset slightly by premium expense. Included in these
amounts are realized gains of $344 million and $110 million, respectively,
for the years ended December 31, 2014 and 2013. The gross notional value
outstanding for purchase collars and average rate forwards which hedge
our exposure to the Japanese yen at December 31, 2014 and 2013 was
$9.8 billion and $6.8 billion, respectively.
In the second quarter of 2014, following the Acquisition, we entered
into a portfolio of zero cost collars to hedge our translation exposure
resulting from movements in the Korean won and its impact on our net
earnings. These zero cost collars have a gross notional value outstanding
at December 31, 2014 of $2.3 billion, and began settling quarterly in the
third quarter of 2014 and will conclude at the end of 2015. In the year
ended December 31, 2014, we recorded a pre-tax net loss of $37 million
related to changes in the fair value of these zero cost collars, which
included $6 million in realized losses.
Gains and losses related to purchased collars and average rate forwards
are recorded in earnings in the Other income, net line of the Consolidated
Statements of Income.
44
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Off Balance Sheet Arrangements
Off balance sheet arrangements are transactions, agreements, or other
contractual arrangements with an unconsolidated entity for which
Corning has an obligation to the entity that is not recorded in our
consolidated financial statements.
Corning’s off balance sheet arrangements include guarantee contracts.
At the time a guarantee is issued, the Company is required to recognize
a liability for the fair value or market value of the obligation it assumes.
In the normal course of our business, we do not routinely provide
significant third-party guarantees. Generally, 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. These guarantees have various terms, and
none of these guarantees are individually significant.
Refer to Note 14 (Commitments, Contingencies, and Guarantees) to the
Consolidated Financial Statements for additional information.
Contractual Obligations
The amounts of our obligations follow (in millions):
For variable interest entities, we assess the terms of our interest in
each entity to determine if we are the primary beneficiary. The primary
beneficiary of a variable interest entity is the party that absorbs a
majority of the entity’s expected losses, receives a majority of its expected
residual returns, or both, as a result of holding variable interests, which
are the ownership, contractual, or other pecuniary interests in an entity
that change with changes in the fair value of the entity’s net assets
excluding variable interests.
Corning has identified one entity that qualifies as a variable interest
entity. This entity is not considered to be significant to Corning’s
consolidated statements of position.
Corning does not have retained interests in assets transferred to an
unconsolidated entity that serve as credit, liquidity or market risk
support to that entity.
Amount of commitment and contingency expiration per period
Total
Less than 1 year
1 to 3 years
3 to 5 years
Performance bonds and guarantees
Stand-by letters of credit(1)
Loan guarantees
Subtotal of commitment expirations per period
Purchase obligations(6)
Capital expenditure obligations(2)
Total debt(3)
Interest on long-term debt(4)
Capital leases and financing obligations(3)
Imputed interest on capital leases and financing obligations
Minimum rental commitments
Uncertain tax positions(5)
Subtotal of contractual obligation payments due by period
Total commitments and contingencies
$
$
$
$
75
61
14
150
287
358
2,899
2,451
360
258
238
2
6,853
7,003
$
$
$
$
21
57
78
152
358
29
151
7
19
48
1
765
843
$
$
$
$
3
3
105
314
293
14
38
75
1
840
843
$
$
$
$
1
1
15
250
274
7
38
44
628
629
5 years and
thereafter
$
$
$
50
4
14
68
15
2,306
1,733
332
163
71
4,620
4,688
$
(1) At December 31, 2014, $41 million of the $61 million was included in other accrued liabilities on our consolidated balance sheets.
(2) Capital expenditure obligations primarily reflect amounts associated with our capital expansion activities.
(3) Total debt above is stated at maturity value, and excludes interest rate swap gains and bond discounts.
(4) The estimate of interest payments assumes interest is paid through the date of maturity or expiration of the related debt, based upon stated rates
in the respective debt instruments.
(5) At December 31, 2014, $8 million was included on our balance sheet related to uncertain tax positions. Of this amount, we are unable to estimate
when $6 million of that amount will become payable.
(6) Purchase obligations are enforceable and legally binding obligations which primarily consist of raw material and energy-related take-or-pay contracts.
We are required, at the time a guarantee is issued, to recognize a liability
for the fair value or market value of the obligation it assumes. In the
normal course of our business, we do not routinely provide significant
third-party guarantees. Generally, 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. These guarantees have various terms, and
none of these guarantees are individually significant.
We believe a significant majority of these guarantees and contingent
liabilities will expire without being funded.
45
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Environment
Corning has been named by the Environmental Protection Agency (the
Agency) under the Superfund Act, or by state governments under similar
state laws, as a potentially responsible party for 15 active hazardous waste
sites. Under the Superfund Act, all parties who may have contributed
any waste to a hazardous waste site, identified by the Agency, are jointly
and severally liable for the cost of cleanup unless the Agency agrees
otherwise. It is Corning’s policy to accrue for its estimated liability related
to Superfund sites and other environmental liabilities related to property
owned by Corning based on expert analysis and continual monitoring
by both internal and external consultants. At December 31, 2014 and
2013, Corning had accrued approximately $42.5 million (undiscounted)
and $15 million (undiscounted), respectively, for its 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.
Critical Accounting Estimates
The preparation of financial statements requires us to make estimates
and assumptions that affect amounts reported therein. The estimates
that required us to make difficult, subjective or complex judgments,
including future projections of performance and relevant discount rates,
are set forth below.
Impairment of assets held for use
We are required to assess the recoverability of the carrying value of
long-lived assets when an indicator of impairment has been identified.
We review our long-lived assets in each quarter to assess whether
impairment indicators are present. We must exercise judgment in
assessing whether an event of impairment has occurred.
Manufacturing equipment includes certain components of production
equipment that are constructed of precious metals, primarily platinum
and rhodium. These metals are not depreciated because they have very
low physical losses and are repeatedly reclaimed and reused in our
manufacturing process over a very long useful life. Precious metals are
reviewed for impairment as part of our assessment of long-lived assets.
This review considers all of the Company’s precious metals that are
either in place in the production process; in reclamation, fabrication, or
refinement in anticipation of re-use; or awaiting use to support increased
capacity. Precious metals are only acquired to support our operations and
are not held for trading or other non-manufacturing related purposes.
Examples of events or circumstances that may be indicative of
impairments include, but are not limited to:
• A significant decrease in the market price of an asset;
• A significant change in the extent or manner in which a long-lived
asset is being used or in its physical condition;
• A significant adverse change in legal factors or in the business climate
that could affect the value of the asset, including an adverse action or
assessment by a regulator;
• An accumulation of costs significantly in excess of the amount
originally expected for the acquisition or construction of an asset;
• A current-period operating or cash flow loss combined with a history
of operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of an asset; and
• A current expectation that, more likely than not, an asset will be sold
or otherwise disposed of significantly before the end of its previously
estimated useful life.
For purposes of recognition and measurement of an impairment loss, a
long-lived asset or assets is grouped with other assets and liabilities at
the lowest level for which identifiable cash flows are largely independent
of the cash flows of other assets and liabilities. We must exercise
judgment in assessing the lowest level for which identifiable cash flows
are largely independent of the cash flows of other assets and liabilities.
For the majority of our reportable segments, we concluded that locations
or businesses which share production along the supply chain must be
combined in order to appropriately identify cash flows that are largely
independent of the cash flows of other assets and liabilities.
For long-lived assets, when impairment indicators are present, we
compare estimated undiscounted future cash flows, including the
eventual disposition of the asset group at market value, to the assets’
carrying value to determine if the asset group is recoverable. This
assessment requires the exercise of judgment in assessing the future
use of and projected value to be derived from the assets to be held and
used. Assessments also consider changes in asset utilization, including
the temporary idling of capacity and the expected timing for placing
this capacity back into production. If there is an impairment, a loss is
recorded to reflect the difference between the assets’ fair value and
carrying value. This may require judgment in estimating future cash
flows and relevant discount rates and residual values in estimating the
current fair value of the impaired assets to be held and used.
For an asset group that fails the test of recoverability described above, the
estimated fair value of long-lived assets is determined using an “income
approach”, “market approach”, “cost approach”, or a combination of one
or more of these approaches as appropriate for the particular asset
group being reviewed. All of these approaches start with the forecast
of expected future net cash flows including the eventual disposition at
market value of long-lived assets, and also considers the fair market value
of all precious metals if appropriate for the asset group being reviewed.
Some of the more significant estimates and assumptions in our analysis
include: market size and growth, market share, projected selling prices,
manufacturing cost and discount rate. Our estimates are based upon our
historical experience, our commercial relationships, and available external
information about future trends. We believe fair value assessments
are most sensitive to market growth and the corresponding impact on
volume and selling prices and that these are also more subjective than
manufacturing cost and other assumptions. The Company believes its
current assumptions and estimates are reasonable and appropriate.
In the event the current net book value of an asset group is found to be
greater than the net present value of the cash flows derived from the
asset group, we determine the actual fair market value of long-lived
assets with the assistance from valuation appraisals conducted by third
parties. The results of these valuations generally represent the fair market
value of the asset group that will remain after any necessary impairment
adjustments have been recorded. The impairment charge will be allocated
to assets within the asset group on a relative fair value basis.
46
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
At December 31, 2014 and December 31, 2013, the carrying value of
precious metals was higher than the fair market value by $222 million
and $164 million, respectively. These precious metals are utilized by the
Display Technologies and Specialty Materials segments. Corning believes
these precious metal assets to be recoverable due to the significant
positive cash flow in both segments. The potential for impairment exists
in the future if negative events significantly decrease the cash flow of
these segments. Such events include, but are not limited to, a significant
decrease in demand for products or a significant decrease in profitability
in our Display Technologies or Specialty Materials segments.
In the fourth quarter of 2011, the Specialty Materials segment recorded
an impairment charge in the amount of $130 million related to certain
assets used in the production of large cover glass due to sales that were
significantly below our expectations. In the fourth quarter of 2012, after
reassessing the large cover glass business, Corning concluded that the
large cover glass market was developing differently in 2012 than our
expectations, and demand for larger-sized cover glass was declining,
and the market for this type of glass was instead targeting smaller gen
size products. Additionally, in the fourth quarter of 2012, our primary
customer of large cover glass notified Corning of its decision to exit from
this display market. Based on these events, we recorded an additional
impairment charge in the fourth quarter of 2012 in the amount of
$44 million, before tax. This impairment charge represents a write-down
of assets specific to the glass-strengthening process for large size cover
glass to their fair market values, and includes machinery and equipment
used in the ion exchange process. Additional information on the asset
impairment is found in Note 2 (Restructuring, Impairment and Other
Charges) to the Consolidated Financial Statements.
Impairment of Goodwill
We are required to make certain subjective and complex judgments in
assessing whether an event of impairment of goodwill has occurred,
including assumptions and estimates used to determine the fair value
of our reporting units.
Corning’s goodwill relates primarily to the Display Technologies, Optical
Communications, Specialty Materials and Life Sciences operating
segments. On a quarterly basis, management performs a qualitative
assessment of factors in each reporting unit to determine whether
there have been any triggering events. The two-step impairment test is
required only if we conclude that it is more likely than not that a reporting
unit’s fair value is less than its carrying amount. We perform a detailed,
two-step process every three years if no indicators suggest a test should
be performed in the interim. We use this calculation as quantitative
validation of the step-zero qualitative process that is performed during
the intervening periods and does not represent an election to perform
the two-step process in place of the step-zero review.
The following summarizes our qualitative process to assess our goodwill
balances for impairment:
• We assess qualitative factors in each of our reporting units which carry
goodwill to determine whether it is necessary to perform the first step
of the two-step quantitative goodwill impairment test.
• The following events and circumstances are considered when
evaluating whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount:
– Macroeconomic conditions, such as a deterioration in general
economic conditions, fluctuations in foreign exchange rates and/or
other developments in equity and credit markets;
– Market capital in relation to book value;
– Industry and market considerations, such as a deterioration in the
environment in which an entity operates, material loss in market
share and significant declines in product pricing;
– Cost factors, such as an increase in raw materials, labor or other costs;
– Overall financial performance, such as negative or declining cash
flows or a decline in actual or forecasted revenue;
– Other relevant entity-specific events, such as material changes in
management or key personnel; and
– Events affecting a reporting unit, such as a change in the
composition or carrying amount of its net assets including
acquisitions and dispositions.
The examples noted above are not all-inclusive, and the Company will
consider other relevant events and circumstances that affect the fair
value of a reporting unit in determining whether to perform the first
step of the goodwill impairment test.
Our two-step goodwill recoverability assessment is based on our annual
strategic planning process. This process includes an extensive review of
expectations for the long-term growth of our businesses and forecasted
future cash flows. Our valuation method is an “income approach” using
a discounted cash flow model in which cash flows anticipated over
several periods, plus a terminal value at the end of that time horizon,
are discounted to their present value using an appropriate rate of return.
Our estimates are based upon our historical experience, our current
knowledge from our commercial relationships, and available external
information about future trends.
Display Technologies
Goodwill for the Display Technologies segment is tested at the reporting
unit level which is also the operating segment level. On a quarterly basis
in 2014, management performed a qualitative assessment of factors
and determined there had not been any triggering events which would
indicate that the Display Technologies reporting unit’s fair value is less
than its carrying amount.
Optical Communications
Goodwill for the Optical Communications segment is tested at the
reporting unit level which is also the operating segment level. On a
quarterly basis in 2014, management performed a qualitative assessment
of factors and determined there had not been any triggering events
which would indicate that the Optical Communications reporting unit’s
fair value is less than its carrying amount.
In addition to assessing qualitative factors each quarter, we performed
a quantitative goodwill recoverability test in 2012 for this reporting
unit. The results of our impairment test indicated that the fair value of
the reporting unit exceeded its book value by a significant amount. A
discount rate of 9% was used in 2012. We determined a range of discount
rates between 7% and 11% would not have affected our conclusion.
Specialty Materials
Goodwill for the Specialty Materials segment is tested at the reporting
unit level, which is one level below an operating segment, as goodwill is
the result of transactions associated with certain businesses within this
operating segment. There is only one reporting unit with goodwill within
this operating segment. On a quarterly basis in 2014, management
performed a qualitative assessment of factors and determined there had
not been any triggering events which would indicate that the Specialty
Materials reporting unit’s fair value is less than its carrying amount.
47
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
In addition to assessing qualitative factors each quarter, we performed
a quantitative goodwill recoverability test in 2012 for this reporting
unit. The results of our impairment test indicated that the fair value of
the reporting unit exceeded its book value by a significant amount. A
discount rate of 8% was used in 2012. We determined a range of discount
rates between 6% and 10% would not have affected our conclusion.
Additionally, the asset impairment which occurred in the fourth quarter
of 2012 did not cause a triggering event for goodwill impairment in this
reporting unit because the cash flow related to this lower level asset
group is not material to this reporting unit.
Life Sciences
Goodwill for the Life Sciences segment is tested at the reporting unit
level which is also the operating segment level. On a quarterly basis in
2014, management performed a qualitative assessment of factors and
determined there had not been any triggering events which would
indicate that the Life Sciences reporting unit’s fair value is less than its
carrying amount.
In addition to assessing qualitative factors each quarter, we performed
a quantitative goodwill recoverability test in 2012 for this reporting
unit. The results of our impairment test indicated that the fair value of
the reporting unit exceeded its book value by a significant amount. A
discount rate of 7% was used in 2012. We determined a range of discount
rates between 5% and 9% would not have affected our conclusion.
Restructuring charges and impairments
resulting from restructuring actions
We are required to assess whether and when a restructuring event has
occurred and in which periods charges related to such events should be
recognized. We must estimate costs of plans to restructure including,
for example, employee termination costs. Restructuring charges require
us to exercise judgment about the expected future of our businesses, of
portions thereof, their profitability, cash flows and in certain instances
eventual outcome. The judgment involved can be difficult, subjective and
complex in a number of areas, including assumptions and estimates used
in estimating the future profitability and cash flows of our businesses.
Restructuring events often give rise to decisions to dispose of or abandon
certain assets or asset groups which, as a result, require impairment. We
are required to carry assets to be sold or abandoned at the lower of cost
or fair value. We must exercise judgment in assessing the fair value of
the assets to be sold or abandoned.
Income taxes
We are required to exercise judgment about our future results in
assessing the realizability of our deferred tax assets. Inherent in this
estimation process is the requirement for us to estimate future book and
taxable income and possible tax planning strategies. These estimates
require us to exercise judgment about our future results, the prudence
and feasibility of possible tax planning strategies, and the economic
environments in which we do business. It is possible that actual results
will differ from assumptions and require adjustments to allowances.
Corning accounts for uncertain tax positions in accordance with FASB
ASC Topic 740, Income Taxes. As required under FASB ASC Topic 740, we
only record tax benefits for technical positions that we believe have
a greater than 50% likelihood of being sustained on their technical
merits and then only to the extent of the amount of tax benefit that is
greater than 50% likely of being realized upon settlement. In estimating
these amounts, we must exercise judgment around factors such as the
weighting of the tax law in our favor, the willingness of a tax authority
to aggressively pursue a particular position, or alternatively, consider a
negotiated compromise, and our willingness to dispute a tax authorities
assertion to the level of appeal we believe is required to sustain our
position. As a result, it is possible that our estimate of the benefits we
will realize for uncertain tax positions may change when we become
aware of new information affecting these judgments and estimates.
Equity method investments
In October 2013, Corning announced that it was entering into a series
of strategic and financial agreements with Samsung Display which
would result in Corning obtaining full ownership of Samsung Corning
Precision Materials. As part of this agreement, in the fourth quarter of
2013, Corning acquired the minority interests of three shareholders in
Samsung Corning Precision Materials for $506 million, which included
payment for the transfer of non-operating assets and the pro-rata
portion of cash on Samsung Corning Precision Materials balance sheet
at September 30, 2013. The resulting transfer of shares to Corning
increased Corning’s ownership percentage of Samsung Corning
Precision Materials from 50% to 57.5%. Because this transaction did
not result in a change in control based on the governing articles of this
entity, Corning did not consolidate this entity as of December 31, 2013.
The remaining transactions were completed on January 15, 2014, which
increased Corning’s ownership to 100% and resulted in consolidation of
the entity beginning in the first quarter of 2014. This organization was
integrated into Corning’s Display Technologies segment in 2014. Refer
to Note 8 (Acquisition) to the Consolidated Financial Statements for
additional information.
At December 31, 2014 and 2013, the carrying value of our equity method
investments was $1.8 billion and $5.5 billion, respectively. In 2014, our
largest equity method investment, Dow Corning, comprised 74% of the
balance. In 2013, prior to the Acquisition and consolidation of Samsung
Corning Precision Materials, our largest equity method investments,
Dow Corning and Samsung Corning Precision Materials, comprised
approximately 93% of the balance. We review our equity method
investments for indicators of impairment on a periodic basis or if events
or circumstances change to indicate the carrying amount may be other-
than-temporarily impaired. When such indicators are present, we then
perform an in-depth review for impairment. An impairment assessment
requires the exercise of judgment related to key assumptions such
as forecasted revenue and profitability, forecasted tax rates, foreign
currency exchange rate movements, terminal value assumptions,
historical experience, our current knowledge from our commercial
relationships, and available external information about future trends.
As of December 31, 2014 and 2013, we have not identified any instances
where the carrying values of our equity method investments were
not recoverable.
Fair value measures
As required, Corning uses two kinds of inputs 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, we prioritize the inputs used to
measure fair value into one of three broad levels. Characterization of
fair value inputs is required for those accounting pronouncements that
prescribe or permit fair value measurement. In addition, observable
market data must be used when available and the highest-and-best-
use measure should be applied to non-financial assets. Corning’s major
categories of financial assets and liabilities required to be measured at
fair value are short-term and long-term investments, certain pension
asset investments and derivatives. These categories use observable
inputs only and are measured using a market approach based on quoted
prices in markets considered active or in markets in which there are
few transactions.
48
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Derivative assets and liabilities may include interest rate swaps and
forward exchange contracts that are measured using observable quoted
prices for similar assets and liabilities. In arriving at the fair value of
Corning’s derivative assets and liabilities, we have considered the
appropriate valuation and risk criteria, including such factors as credit
risk of the relevant party to the transaction. Amounts related to credit
risk are not material.
As a result of the Acquisition of Samsung Corning Precision Materials,
the Company has contingent consideration that was measured
using unobservable (Level 3) inputs. This contingent consideration
arrangement potentially requires additional consideration to be paid
between the parties in 2018: one based on projections of future revenues
generated by the business of Corning Precision Materials for the period
between the acquisition date and December 31, 2017, which is subject to
a cap of $665 million; and another based on the volumes of certain sales
during the same period, which is subject to a separate cap of $100 million.
The fair value of the potential receipt of the contingent consideration in
2018 in the amount of $196 million recognized on the acquisition date
was estimated by applying an option pricing model using the Company’s
projection of future revenues generated by Corning Precision Materials.
Changes in the fair value of the contingent consideration in future
periods are valued using an option pricing model and are recorded in
Corning’s results in the period of the change. As of December 31, 2014,
the fair value of the potential receipt of the contingent consideration
in 2018 is estimated to be $445 million. Corning recorded a pre-tax
adjustment in the year ended December 31, 2014 in the amount of
$249 million to reflect the increase in the fair value which is mainly due
to the movement in foreign exchange rate.
Probability of litigation outcomes
We are required to make judgments about future events that are
inherently uncertain. In making determinations of likely outcomes
of litigation matters, we consider the evaluation of legal counsel
knowledgeable about each matter, case law, and other case-specific
issues. See Part II – Item 3. Legal Proceedings for a discussion of the
material litigation matters we face. The most significant matter involving
judgment is the liability for asbestos litigation. There are a number
of factors bearing upon our potential liability, including the inherent
complexity of a Chapter 11 filing, our history of success in defending
asbestos claims, our assessment of the strength of our corporate veil
defenses, and our continuing dialogue with our insurance carriers
and the claimants’ representatives. The proposed asbestos resolution
(Amended PCC Plan) is subject to a number of contingencies. As noted
in Part II – Item 3. Legal Proceedings, the District Court’s affirmation of
the Amended PCC Plan faces objections by certain parties. For these
and other reasons, Corning’s liability for these asbestos matters may be
subject to changes in subsequent quarters. The estimate of the cost of
resolving the non-PCC asbestos claims may also be subject to change
as developments occur. Management continues to believe that the
likelihood of the uncertainties surrounding these proceedings causing
a material adverse impact to Corning’s financial statements is remote.
Other possible liabilities
We are required to make judgments about future events that are
inherently uncertain. In making determinations of likely outcomes of
certain matters, including certain tax planning and environmental
matters, these judgments require us to consider events and actions that
are outside our control in determining whether probable or possible
liabilities require accrual or disclosure. It is possible that actual results
will differ from assumptions and require adjustments to accruals.
Pension and other postretirement employee
benefits (OPEB)
Corning offers employee retirement plans consisting of defined benefit
pension plans covering certain domestic and international employees
and postretirement plans that provide health care and life insurance
benefits for eligible retirees and dependents. The costs and obligations
related to these benefits reflect the Company’s assumptions related
to general economic conditions (particularly interest rates), expected
return on plan assets, rate of compensation increase for employees and
health care trend rates. The cost of providing plan benefits depends on
demographic assumptions including retirements, mortality, turnover
and plan participation.
Costs for our defined benefit pension plans consist of two elements:
1) on-going costs recognized quarterly, which are comprised of service
and interest costs, expected return on plan assets and amortization of
prior service costs; and 2) mark-to-market gains and losses 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, which are recognized annually in the fourth quarter of each year.
These gains and losses result from changes in actuarial assumptions for
discount rates and the differences between actual and expected return
on plan assets. Any interim remeasurements triggered by a curtailment,
settlement or significant plan changes, as well as any true-up to the
annual valuation, are recognized as a mark-to-market adjustment in the
quarter in which such event occurs.
Costs for our OPEB plans consist of on-going costs recognized quarterly,
and are comprised of service and interest costs, amortization of prior
service costs and amortization of actuarial gains and losses. We recognize
the actuarial gains and losses resulting from changes in actuarial
assumptions for discount rates as a component of Stockholders’ Equity
on our consolidated balance sheets on an annual basis and amortize
them into our operating results over the average remaining service
period of employees expected to receive benefits under the plans, to the
extent such gains and losses are outside of the corridor.
While management believes that the assumptions used are appropriate,
differences in actual experience or changes in assumptions may affect
Corning’s employee pension and other postretirement obligations, and
current and future expense.
49
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table presents our actual and expected return on assets, as well as the corresponding percentage, for the years ended 2014, 2013 and 2012:
(In millions)
Actual return on plan assets – Domestic plans
Expected return on plan assets – Domestic plans
Actual return on plan assets – International plans
Expected return on plan assets – International plans
Weighted-average actual and expected return on assets:
Actual return on plan assets – Domestic plans
Expected return on plan assets – Domestic plans
Actual return on plan assets – International plans
Expected return on plan assets – International plans
2014
$
287
159
68
15
December 31,
2013
$
65
158
6
11
December 31,
2012
$
299
150
10
10
2014
2013
2012
10.82%
6.25%
17.15%
4.12%
2.67%
6.00%
2.73%
3.73%
12.06%
6.00%
6.01%
6.01%
As of December 31, 2014, the Projected Benefit Obligation (PBO) for U.S. pension plans was $3,222 million.
The following information illustrates the sensitivity to a change in certain assumptions for U.S. pension plans:
Change in assumption
25 basis point decrease in discount rate
25 basis point increase in discount rate
25 basis point decrease in expected return on assets
25 basis point increase in expected return on assets
Effect on 2015
pre-tax pension expense
Effect on
December 31, 2014 PBO
- 2 million
+ 2 million
+ 7 million
- 7 million
+ 89 million
- 87 million
The above sensitivities reflect the impact of changing one assumption
at a time. Note that economic factors and conditions often affect
multiple assumptions simultaneously and the effects of changes in key
assumptions are not necessarily linear. These changes in assumptions
would have no effect on Corning’s funding requirements.
In addition, at December 31, 2014, a 25 basis point decrease in the discount
rate would decrease stockholders’ equity by $116 million before tax, and a
25 basis point increase in the discount rate would increase stockholders’
equity by $113 million. In addition, the impact of greater than a 25 basis
point decrease in discount rate would not be proportional to the first 25
basis point decrease in the discount rate.
The following table illustrates the sensitivity to a change in the discount rate assumption related to Corning’s U.S. OPEB plans:
Change in assumption
25 basis point decrease in discount rate
25 basis point increase in discount rate
* Accumulated Postretirement Benefit Obligation (APBO).
Effect on 2015
pre-tax OPEB expense
Effect on
December 31, 2014 APBO*
+ 2 million
- 2 million
+ 27 million
- 26 million
The above sensitivities reflect the impact of changing one assumption at a time. Note that economic factors and conditions often affect multiple
assumptions simultaneously and the effects of changes in key assumptions are not necessarily linear.
50
CORNING INCORPORATED - 2014 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Share-Based Compensation
Share-based compensation cost is measured at the grant date based
on the fair value of the award and is recognized as expense over the
requisite service period. Determining the fair value of stock-based
awards at the grant date requires judgment, including estimating
expected dividends. In addition, judgment is also required in estimating
the amount of share-based awards that are expected to be forfeited.
If actual results differ significantly from these estimates, share-based
compensation expense and our results of operations could be impacted.
Revenue recognition
The Company recognizes revenue when it is realized or realizable and
earned. In certain instances, revenue recognition is based on estimates
of fair value of deliverables as well as estimates of product returns,
allowances, discounts, and other factors. These estimates are supported
by historical data. Corning also has contractual arrangements with
certain customers in which we recognize revenue on a completed
contract basis. Revenues under the completed-contract method are
recognized upon substantial completion, defined as acceptance by the
customer and compliance with performance specifications as agreed
upon in the contract, which in certain instances require estimates and
judgments in the determining the timing of substantial completion of
the contract. While management believes that the estimates used are
appropriate, differences in actual experience or changes in estimates
may affect Corning’s future results.
New Accounting Standards
Refer to Note 1 (Summary of Significant Accounting Policies) to the Consolidated Financial Statements.
51
CORNING INCORPORATED - 2014 Annual Report Quantitative and Qualitative Disclosures About
Market Risks
We operate and conduct business in many foreign countries and as a
result are exposed to movements in foreign currency exchange rates.
Our exposure to exchange rates has the following effects:
• Exchange rate movements on financial instruments and transactions
denominated in foreign currencies that impact earnings; and
• Exchange rate movements upon conversion of net assets and net
income of foreign subsidiaries for which the functional currency is not
the U.S. dollar, which impact our net equity.
Our most significant foreign currency exposures relate to the Japanese
yen, South Korean won, New Taiwan dollar, Chinese renminbi, and the
Euro. We seek to mitigate the impact of exchange rate movements
in our income statement 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.
We are exposed to potential losses in the event of non-performance by our
counterparties to these derivative contracts. However, we minimize this
risk by maintaining a diverse group of highly-rated major international
financial institutions with which we have other financial relationships
as our counterparties. 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.
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. We also
use 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.
We use a sensitivity analysis to assess the market risk associated with
our foreign currency exchange risk. Market risk is defined as the potential
change in fair value of assets and liabilities resulting from an adverse
movement in foreign currency exchange rates. At December 31, 2014,
with respect to open foreign exchange forward and option contracts,
and foreign denominated debt with values exposed to exchange rate
movements, a 10% adverse movement in quoted foreign currency
exchange rates could result in a loss in fair value of these instruments
of $1,080 million compared to $479 million at December 31, 2013.
Specific to the Japanese yen, a 10% adverse movement in quoted yen
exchange rates could result in a loss in fair value of these instruments
of $959 million compared to $398 million at December 31, 2013. Specific
to the South Korean won, a 10% adverse movement in quoted South
Korean won exchange rates could result in a loss in fair value of these
instruments of $79 million compared to $0 million at December 31, 2013.
As we derive approximately 73% of our net sales from outside the U.S.,
our sales and net income could be affected if the U.S. dollar significantly
strengthens or weakens against foreign currencies, most notably the
Japanese yen, South Korean won, and Euro. Our forecasts generally
assume exchange rates during 2015 will remain constant at January 2015
levels. As an example of the impact that changes in foreign currency
exchange rates could have on our financial results, we compare 2014
actual sales in yen, won and Euro transaction currencies at an average
currency exchange rate during the year to a 10% change in the currency
exchange rate. A plus or minus 10% movement in the U.S. dollar –
Japanese yen exchange rate would result in a change to 2014 net sales
of approximately $384 million. A plus or minus 10% movement in the
U.S. dollar – South Korean won and U.S. dollar – euro exchange rates
would result in a change to 2014 net sales of approximately $4 million
and $100 million, respectively. We estimate that a plus or minus 10%
movement in the U.S. dollar – Japanese yen exchange rate would result
in a change to 2014 net income attributable to Corning Incorporated
of approximately $238 million. A plus or minus 10% movement in the
U.S. dollar – South Korean won and U.S. dollar – euro exchange rates
would result in a change to 2014 net income attributable to Corning
Incorporated of approximately $73 million and $31 million, respectively.
Interest Rate Risk Management
It is our policy to conservatively manage our exposure to changes
in interest rates. We are party to 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.
From time to time, we may issue debt, the proceeds of which may
be used for general corporate purposes or to refinance certain debt
maturities. Additionally, to manage interest rate exposure, the Company,
from time to time, enters into interest rate swap agreements. In the
fourth quarter of 2014, the Company entered into interest rate swap
agreements to hedge against the variability in cash flows due to changes
in the benchmark interest rate related to an anticipated issuance. The
instruments were designated as cash flow hedges.
52
CORNING INCORPORATED - 2014 Annual Report Management’s Annual Report on Internal Control Over
Financial Reporting
Management is responsible for establishing and maintaining adequate disclosure controls and procedures and adequate internal control over
financial reporting for Corning. Management is also responsible for the assessment of the effectiveness of disclosure controls and procedures and the
effectiveness of internal control over financial reporting.
Disclosure controls and procedures mean controls and other procedures of an issuer that are designed to ensure that information required to be
disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the
time periods specified in the SEC’s rules and forms. Corning’s disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by Corning in the reports that it files or submits under the Exchange Act is accumulated
and communicated to Corning’s management, including Corning’s principal executive and principal financial officers, or other persons performing
similar functions, as appropriate to allow timely decisions regarding required disclosure.
Corning’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of
America. Corning’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of Corning’s assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United
States of America, and that Corning’s receipts and expenditures are being made only in accordance with authorizations of Corning’s management and
directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Corning’s
assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment
of internal control over financial reporting includes controls over recognition of equity earnings and equity investments by Corning. Internal control
over financial reporting for Dow Corning is the responsibility of Dow Corning management. Based on this evaluation, management concluded that
Corning’s internal control over financial reporting was effective as of December 31, 2014. The effectiveness of Corning’s internal control over financial
reporting as of December 31, 2014, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in
their report which is included herein.
Wendell P� Weeks
Chairman, Chief Executive Officer and President
James B� Flaws
Vice Chairman and Chief Financial Officer
53
CORNING INCORPORATED - 2014 Annual Report
Report of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
To the Board of Directors and Shareholders of Corning Incorporated:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of
Corning Incorporated and its subsidiaries at December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these
financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in “Management’s Annual Report on Internal Control Over Financial Reporting,”
appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the
Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting
was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
New York, New York
February 13, 2015
54
CORNING INCORPORATED - 2014 Annual Report Consolidated Statements of Income
Corning Incorporated and Subsidiary Companies
(In millions, except per share amounts)
Net sales
Cost of sales
Gross margin
Operating expenses:
Selling, general and administrative expenses
Research, development and engineering expenses
Amortization of purchased intangibles
Restructuring, impairment and other charges (Note 2)
Asbestos litigation (credit) charges (Note 7)
Operating income
Equity in earnings of affiliated companies (Note 7)
Interest income
Interest expense
Transaction-related gain, net (Note 8)
Other income, net
Income before income taxes
Provision for income taxes (Note 6)
Net income attributable to Corning Incorporated
Earnings per common share attributable to Corning Incorporated:
Basic (Note 18)
Diluted (Note 18)
Dividends declared per common share
The accompanying notes are an integral part of these consolidated financial statements.
Years ended December 31,
2014
$
$
$
$
$
9,715
5,663
4,052
1,211
815
33
71
(9)
1,931
266
26
(123)
74
1,394
3,568
(1,096)
2,472
1.82
1.73
0.52
2013
$
$
$
$
$
7,819
4,495
3,324
1,126
710
31
67
19
1,371
547
8
(120)
667
2,473
(512)
1,961
1.35
1.34
0.39
2012
$
$
$
$
$
8,012
4,693
3,319
1,205
769
19
133
14
1,179
810
14
(111)
83
1,975
(339)
1,636
1.10
1.09
0.32
55
CORNING INCORPORATED - 2014 Annual Report Consolidated Statements of Comprehensive Income
Corning Incorporated and Subsidiary Companies
Years ended December 31,
2013
$
1,961
(682)
2
392
(24)
(312)
$
1,649
$
2012
$
1,636
(179)
13
(1)
47
(120)
1,516
(In millions)
Net income attributable to Corning Incorporated
Foreign currency translation adjustments and other
Net unrealized (losses) gains on investments
Unamortized (losses) gains and prior service costs for postretirement
benefit plans
Net unrealized gains (losses) on designated hedges
Other comprehensive loss, net of tax (Note 17)
2014
$
Comprehensive income attributable to Corning Incorporated
$
The accompanying notes are an integral part of these consolidated financial statements.
2,472
(1,073)
(1)
(281)
4
(1,351)
1,121
56
CORNING INCORPORATED - 2014 Annual Report Consolidated Balance Sheets
Corning Incorporated and Subsidiary Companies
(In millions, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents
Short-term investments, at fair value (Note 3)
Total cash, cash equivalents and short-term investments
Trade accounts receivable, net of doubtful accounts and allowances - $47 and $28
Inventories, net of inventory reserves - $127 and $94 (Note 5)
Deferred income taxes (Note 6)
Other current assets (Note 11 and 15)
Total current assets
Investments (Note 7)
Property, plant and equipment, net of accumulated depreciation - $8,332 and $7,865 (Note 9)
Goodwill, net (Note 10)
Other intangible assets, net (Note 10)
Deferred income taxes (Note 6)
Other assets (Note 8, 11 and 15)
Total Assets
Liabilities and Equity
Current liabilities:
Current portion of long-term debt (Note 12)
Accounts payable
Other accrued liabilities (Note 11 and 14)
Total current liabilities
Long-term debt (Note 12)
Postretirement benefits other than pensions (Note 13)
Other liabilities (Note 11 and 14)
Total liabilities
Commitments and contingencies (Note 14)
Shareholders’ equity (Note 17):
Convertible preferred stock, Series A – Par value $100 per share; Shares authorized 3,100; Shares issued: 2,300
2,300
Common stock – Par value $0.50 per share; Shares authorized: 3.8 billion; Shares issued: 1,672 million
and 1,661 million
Additional paid-in capital – common stock
Retained earnings
Treasury stock, at cost; shares held: 398 million and 262 million
Accumulated other comprehensive (loss) income
Total Corning Incorporated shareholders’ equity
Noncontrolling interests
Total equity
Total Liabilities and Equity
The accompanying notes are an integral part of these consolidated financial statements.
December 31,
2014
2013
$
5,309
$
4,704
759
6,068
1,501
1,322
248
1,099
10,238
1,801
12,766
1,150
497
1,889
1,722
531
5,235
1,253
1,270
278
855
8,891
5,537
9,801
1,002
540
2,234
473
$
30,063
$
28,478
$
$
36
997
1,291
2,324
3,227
814
2,046
8,411
21
771
954
1,746
3,272
766
1,483
7,267
831
13,066
11,320
(4,099)
44
21,162
49
21,211
836
13,456
13,021
(6,727)
(1,307)
21,579
73
21,652
$
30,063
$
28,478
57
CORNING INCORPORATED - 2014 Annual Report Consolidated Statements of Cash Flows
Corning Incorporated and Subsidiary Companies
(In millions)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Years ended December 31,
2014
2013
2012
$
2,472
$
1,961
$
1,636
Depreciation
Amortization of purchased intangibles
Restructuring, impairment and other charges
Loss on retirement of debt
Stock compensation charges
Equity in earnings of affiliated companies
Dividends received from affiliated companies
Deferred tax provision
Restructuring payments
Employee benefit payments (in excess of) less than expense
Gains on translated earnings contracts
Unrealized translation losses on transactions
Contingent consideration fair value adjustment
Changes in certain working capital items:
Trade accounts receivable
Inventories
Other current assets
Accounts payable and other current liabilities
Other, net
Net cash provided by operating activities
Cash Flows from Investing Activities:
Capital expenditures
Acquisitions of businesses, net of cash received
Investment in unconsolidated entities
Proceeds from loan repayments from unconsolidated entities
Short-term investments – acquisitions
Short-term investments – liquidations
Premium on purchased collars
Realized gains on translated earnings contracts
Other, net
Net cash used in investing activities
Cash Flows from Financing Activities:
Retirement of long-term debt, net
Net repayments of short-term borrowings and current portion of long-term debt
Proceeds from issuance of long-term debt, net
Proceeds from issuance of short-term debt, net
Proceeds (payments) from the settlement of interest rate swap agreements
Principal payments under capital lease obligations
Proceeds from issuance of preferred stock(1)
Proceeds received for asset financing and related incentives, net
Payments to acquire noncontrolling interest
Proceeds from the exercise of stock options
Repurchases of common stock for treasury
Dividends paid
Other, net
Net cash used in financing activities
Effect of exchange rates on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
1,167
33
71
58
(266)
1,704
612
(39)
(52)
(1,369)
431
(249)
(16)
2
(16)
(3)
169
4,709
(1,076)
66
(109)
23
(1,398)
1,167
361
4
(962)
(52)
29
(6)
400
1
116
(2,483)
(591)
(2,586)
(556)
605
4,704
5,309
$
971
31
67
54
(547)
630
189
(35)
52
(435)
96
(29)
(247)
34
(23)
18
2,787
(1,019)
(68)
(526)
8
(1,406)
2,026
(107)
87
1
(1,004)
(498)
(71)
248
33
(7)
276
(47)
85
(1,516 )
(566)
(2,063)
(4)
(284)
4,988
4,704
$
$
978
19
133
26
70
(810)
1,090
18
(15)
178
241
(272)
(23)
(81)
189
(171 )
3,206
(1,801)
(723)
(111)
(2,270)
2,269
8
(2,628)
(280)
(26)
1,362
(18)
(1)
38
(720)
(472)
2
(115)
(136)
327
4,661
4,988
(1) In the first quarter of 2014, Corning issued 1,900 shares of Preferred Stock to Samsung Display Co., Ltd. in connection with the acquisition of their
equity interests in Samsung Corning Precision Materials Co., Ltd. (Note 8). Corning also issued to Samsung Display an additional 400 shares of
Preferred Stock at closing, for an issue price of $400 million in cash (Note 17).
The accompanying notes are an integral part of these consolidated financial statements.
58
CORNING INCORPORATED - 2014 Annual Report Consolidated Statements of Changes in Shareholders’ Equity
Corning Incorporated and Subsidiary Companies
(In millions)
Convertible
preferred
stock
Common
stock
Additional
paid-in
capital-
common
Retained
earnings
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Total Corning
Incorporated
shareholders’
equity
Non-
controlling
interests
Balance, December 31, 2011
$
818
$ 13,041
$ 8,767
$ (2,024)
$
476
$
21,078
$
Net income
Other comprehensive loss
Purchase of common stock
for treasury
Shares issued to
benefit plans and
for option exercises
Dividends on shares
Other, net
1,636
(472)
1
(719)
(1)
(29)
(120)
1,636
(120)
(719)
111
(472)
(28)
7
105
51
(5)
1
Total
$
21,129
1,631
(119)
(719)
111
(472)
(28)
Balance, December 31, 2012
$
825
$ 13,146
$ 9,932
$ (2,773)
$
356
$
21,486
$
47
$ 21,533
Net income
Other comprehensive loss
Purchase of common stock
for treasury
Shares issued to
benefit plans and
for option exercises
Dividends on shares
Other, net
1,961
(312)
(200 )
(1,316)
6
139
(566)
(7)
(19)
(1)
(9)
1,961
(312)
(1,516)
144
(566)
(35)
1,961
(312)
(1,516)
144
(566)
(33)
2
Balance, December 31, 2013
$
831
$ 13,066
$ 11,320
$ (4,099)
$
44
$
21,162
$
49
$
21,211
Net income
Other comprehensive loss
Shares issued for
acquisition of equity
investment company
Shares issued for cash
Purchase of common stock
for treasury
Shares issued to
benefit plans and
for option exercises
Dividends on shares
Other, net
$
1,900
400
2,472
(1,351)
129
(2,612)
5
261
(771)
(2)
(14)
2,472
(1,351)
1,900
400
(2,483)
264
(771)
(14)
Balance, December 31, 2014
$
2,300
$
836
$ 13,456
$ 13,021
$ (6,727)
$
(1,307 )
$
21,579
$
The accompanying notes are an integral part of these consolidated financial statements.
3
(1)
15
2,475
(1,352)
1,915
400
(2,483)
264
(771)
(7 )
$ 21,652
7
73
59
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
Corning Incorporated and Subsidiary Companies
1. Summary of Significant Accounting Policies
Organization
Corning Incorporated is a provider of high-performance glass for
notebook computers, flat panel desktop monitors, LCD televisions, and
other information display applications; carrier network and enterprise
network products for the telecommunications
industry; ceramic
substrates for gasoline and diesel engines in automotive and heavy
duty vehicle markets; laboratory products for the scientific community
and specialized polymer products for biotechnology applications;
advanced optical materials for the semiconductor industry and the
scientific community; and other technologies. In these notes, the terms
“Corning,” “Company,” “we,” “us,” or “our” mean Corning Incorporated
and subsidiary companies.
Basis of Presentation and Principles of
Consolidation
Our consolidated financial statements were prepared in conformity
with generally accepted accounting principles in the U.S. and include
the assets, liabilities, revenues and expenses of all majority-owned
subsidiaries over which Corning exercises control.
The equity method of accounting is used for investments in affiliated
companies that are not controlled by Corning and in which our
interest is generally between 20% and 50% and we have significant
influence over the entity. Our share of earnings or losses of affiliated
companies, in which at least 20% of the voting securities is owned
and we have significant influence but not control over the entity, is
included in consolidated operating results. In the fourth quarter of
2013, Corning acquired the minority interests of three shareholders in
one of our affiliated companies, Samsung Corning Precision Materials,
which increased Corning’s ownership percentage from 50% to 57.5%.
Because this transaction did not result in a change in control based
on the governing articles of this entity, Corning did not consolidate
this entity as of December 31, 2013. Corning acquired the remaining
ownership interests of Samsung Corning Precision Materials on
January 15, 2014, which increased Corning’s ownership to 100% and
resulted in consolidation of the entity beginning in the first quarter
of 2014.
We use the cost method to account for our investments in companies
that we do not control and for which we do not have the ability to
exercise significant influence over operating and financial policies. In
accordance with the cost method, these investments are recorded at
cost or fair value, as appropriate.
All material intercompany accounts, transactions and profits are
eliminated in consolidation.
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.
Samsung Corning Precision Materials Co., Ltd.
(“Samsung Corning Precision Materials”)
As further discussed in Note 8 (Acquisition), on January 15, 2014,
Corning completed a series of strategic and financial agreements to
acquire the common shares of Samsung Corning Precision Materials
previously held by Samsung Display Co., Ltd. (“Samsung Display”). As
a result of these transactions, Corning is now the owner of 100% of
the common shares of Samsung Corning Precision Materials, which
we have consolidated into our results beginning in the first quarter of
2014. Operating under the name of Corning Precision Materials Co., Ltd.
(“Corning Precision Materials”), the former Samsung Corning Precision
Materials organization and operations were integrated into the Display
Technologies segment in the first quarter of 2014.
Use of Estimates
The preparation of financial statements requires management to
make estimates and assumptions that affect amounts reported in
the consolidated financial statements and related notes. Significant
estimates and assumptions in these consolidated financial statements
include estimates of fair value associated with revenue recognition,
restructuring charges, goodwill and long-lived asset impairment tests,
estimates of acquired assets and liabilities, estimates of fair value
of investments, equity interests, environmental and legal liabilities,
income taxes and deferred tax valuation allowances, assumptions used
in calculating pension and other postretirement employee benefit
expenses and the fair value of stock based compensation. Due to the
inherent uncertainty involved in making estimates, actual results
reported in future periods may be different from these estimates.
Revenue Recognition
Revenue for sales of goods is recognized when a firm sales agreement
is in place, delivery has occurred and sales price is fixed or determinable
and collection is reasonably assured. If customer acceptance of products
is not reasonably assured, sales are recorded only upon formal customer
acceptance. Sales of goods typically do not include multiple product
and/or service elements.
At the time revenue is recognized, allowances are recorded, with the
related reduction to revenue, for estimated product returns, allowances
and price discounts based upon historical experience and related terms
of customer arrangements. Where we have offered product warranties,
we also establish liabilities for estimated warranty costs based upon
historical experience and specific warranty provisions. Warranty
liabilities are adjusted when experience indicates the expected outcome
will differ from initial estimates of the liability.
In addition, Corning also has contractual arrangements with certain
customers in which we recognize revenue on a completed contract
basis. Revenues under the completed-contract method are recognized
upon substantial completion, defined as acceptance by the customer
and compliance with performance specifications as agreed upon in
the contract. The Company acts as a principal under the contracts, and
recognizes revenues with corresponding cost of revenues on a gross
basis for the full amount of the contract.
60
CORNING INCORPORATED - 2014 Annual Report Other Income, Net
“Other income, net” in Corning’s consolidated statements of income includes the following (in millions):
Notes to Consolidated Financial Statements
Royalty income from Samsung Corning Precision Materials
Foreign currency transaction and hedge gains, net
Loss on retirement of debt
Foreign government subsidy
Other, net
Total
Beginning in the first quarter of 2014, due to the Acquisition and
consolidation of Samsung Corning Precision Materials (now Corning
Precision Materials), royalty income from Corning Precision Materials is
no longer recognized in Corning’s consolidated statements of income.
Included in the line item Foreign currency transaction and hedge gains,
net, for the years ended December 31, 2014 and 2013 is the impact of
purchased collars and average forward contracts which hedge our
translation exposure resulting from movements in the Japanese yen
and its impact on our net earnings. In the years ended December 31,
2014 and 2013, we recorded net pre-tax gains on our yen-denominated
hedging programs in the amount of $1,406 million and $435 million,
respectively, which included $344 million and $110 million of realized
gains, respectively. These gains were driven by the mark-to-market of
the purchased collars and average forward contracts, and occurred
due to the depreciation in the 2014 and 2013 exchange rates for the
Japanese yen versus the U.S. dollar of 14% and 22%, respectively. The
gross notional value outstanding for purchased collars and average rate
forward contracts was $9.8 billion at December 31, 2014 and $6.8 billion
at December 31, 2013.
In the second quarter of 2014, following the Acquisition, we entered into
a portfolio of zero cost collars to hedge our exposure to movements
in the Korean won and its impact on our net earnings. These zero cost
collars have a gross notional value outstanding at December 31, 2014
of $2.3 billion, and began settling quarterly in the third quarter of 2014
and will conclude at the end of 2015. The net pre-tax loss on these zero
cost collars, which is also included in the line item Foreign currency
transaction and hedge gains, net, was $37 million for the twelve months
ended December 31, 2014, and included $6 million of realized losses.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Research and development costs totaled $701 million in 2014, $613 million
in 2013 and $651 million in 2012.
Years ended December 31,
2014
$
1,352
2013
$
3
39
56
500
55
56
2012
$
$
1,394
$
667
$
83
8
(26)
18
83
currency. For all transactions denominated in a currency other than a
subsidiary’s functional currency, exchange rate gains and losses are
included in income for the period in which the exchange rates changed.
Foreign subsidiary functional currency balance sheet accounts are
translated at current exchange rates, and statement of operations
accounts are translated at average exchange rates for the year.
Translation gains and losses are recorded as a separate component of
accumulated other comprehensive income in shareholders’ equity. The
effects of remeasuring non-functional currency assets and liabilities
into the functional currency are included in current earnings, except for
those related to intra-entity foreign currency transactions of a long-term
investment nature, which are recorded together with translation gains
and losses in other comprehensive income in shareholders’ equity.
Upon sale or substantially complete liquidation of an investment in a
foreign entity, the amount of net translation gains or losses that have
been accumulated in other comprehensive income attributable to that
investment are reported as a gain or loss for the period in which the sale
or liquidation occurs.
Stock-Based Compensation
Corning’s stock-based compensation programs
include employee
stock option grants, time-based restricted stock awards, time-based
restricted stock units, performance based restricted stock awards and
performance-based restricted stock units, as more fully described
in Note
the Consolidated
Financial Statements.
(Share-based Compensation)
19
to
The cost of stock-based compensation awards is equal to the fair
value of the award at the date of grant and compensation expense is
recognized for those awards earned over the vesting period. Corning
estimates the fair value of stock based awards using a multiple-point
Black-Scholes option valuation model, which incorporates assumptions
including expected volatility, dividend yield, risk-free rate, expected term
and departure rates.
Foreign Currency Translation and Transactions
The determination of the functional currency for Corning’s foreign
subsidiaries is made based on the appropriate economic factors. For
most foreign operations, the local currencies are generally considered
to be the functional currencies. Corning’s most significant exception is
our Taiwanese subsidiary, which uses the Japanese yen as its functional
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments that are readily
convertible into cash. We consider securities with contractual maturities
of three months or less, when purchased, to be cash equivalents. The
carrying amount of these securities approximates fair value because of
the short-term maturity of these instruments.
61
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
Supplemental disclosure of cash flow information follows (in millions):
Non-cash transactions:
Accruals for capital expenditures
Cash paid for interest and income taxes:
Interest(1)
Income taxes, net of refunds received
Years ended December 31,
2014
2013
2012
$
$
$
358
171
577
$
$
$
185
182
469
$
$
$
240
178
355
(1) Included in this amount are approximately $40 million, $35 million and $74 million of interest costs that were capitalized as part of property, plant
and equipment, net in 2014, 2013 and 2012, respectively.
Short-Term Investments
Our short-term investments consist of available-for-sale securities that
are stated at fair value. Consistent with Corning’s cash investment policy,
our short-term investments consist primarily of fixed-income securities.
Preservation of principal is the primary principle of our cash investment
policy that is carried out by limiting interest rate, reinvestment, security,
quality and event risk. Our investments are generally liquid and all are
investment grade quality. The portfolio is invested predominantly in
U.S. Treasury securities and quality money market funds. 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 in shareholders’ equity until realized. Realized gains
and losses are recorded in other income (expense), net.
Allowance for Doubtful Accounts
The Company’s allowance for doubtful accounts is determined based
on a variety of factors that affect the potential collectability of the
related receivables, including length of time receivables are past
due, customer credit ratings, financial stability of customers, specific
one-time events and past customer history. In addition, in circumstances
where the Company is made aware of a specific customer’s inability to
meet its financial obligations, a specific allowance is established. The
majority of accounts are individually evaluated on a regular basis and
appropriate reserves are established as deemed appropriate based on
the above criteria.
Environmental Liabilities
The Company accrues for its environmental investigation, remediation,
operating, and maintenance costs when it is probable that a liability
has been incurred and the amount can be reasonably estimated. For
environmental matters, the most likely cost to be incurred is accrued
based on an evaluation of currently available facts with respect to each
individual site, current laws and regulations and prior remediation
experience. For sites with multiple potential responsible parties, the
Company considers its likely proportionate share of the anticipated
remediation costs and the ability of the other parties to fulfill their
obligations in establishing a provision for those costs. Where no amount
within a range of estimates is more likely to occur than another, the
minimum amount is accrued. When future liabilities are determined to
be reimbursable by insurance coverage, an accrual is recorded for the
potential liability and a receivable is recorded related to the insurance
reimbursement when reimbursement is virtually certain.
The uncertain nature inherent in such remediation and the possibility
that initial estimates may not reflect the final outcome could result in
additional costs being recognized by the Company in future periods.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis)
or market.
Property, Plant and Equipment, Net of
Accumulated Depreciation
Land, buildings, and equipment,
including precious metals, are
recorded at cost. Depreciation is based on estimated useful lives of
properties using the straight-line method. Except as described in Note
2 (Restructuring, Impairment and Other Charges) to the Consolidated
Financial Statements related to accelerated depreciation arising from
restructuring programs and Note 9 (Property, Plant and Equipment, Net
of Accumulated Depreciation) of the Consolidated Financial Statements
related to the depletion of precious metals, the estimated useful lives
range from 10 to 40 years for buildings and 2 to 20 years for equipment.
Included in the subcategory of equipment are the following types of
assets (excluding precious metals):
Asset type
Range of useful life
Computer hardware and software
Manufacturing equipment
Furniture and fixtures
Transportation equipment
3 to 7 years
2 to 15 years
5 to 10 years
3 to 20 years
Manufacturing equipment includes certain components of production
equipment that are constructed of precious metals. These assets are
not depreciated because they have very low physical losses and are
repeatedly reclaimed and reused in our manufacturing process over a
very long useful life. We treat the physical loss of precious metals in the
manufacturing and reclamation process as depletion and account for
these losses as a period expense based on actual units lost. Precious
metals are integral to many of our glass production processes. They are
only acquired to support our operations and are not held for trading or
other purposes.
62
CORNING INCORPORATED - 2014 Annual Report Goodwill and Other Intangible Assets
Goodwill is the excess of cost of an acquired entity over the amounts
assigned to assets acquired and liabilities assumed in a business
combination. Goodwill relates to and is assigned directly to a specific
reporting unit. Reporting units are either operating segments or one
level below the operating segment. Impairment testing for goodwill
is done at a reporting unit level. Goodwill is reviewed for indicators of
impairment quarterly or if an event occurs or circumstances change that
indicate the carrying amount may be impaired. Corning also performs
a detailed, two-step process every three years if no indicators suggest
a test should be performed in the interim. We use this calculation as
quantitative validation of the step-zero qualitative process; this process
does not represent an election to perform the two-step process in place
of the step-zero review.
The qualitative process includes an extensive review of expectations
for the long-term growth of our businesses and forecasting future cash
flows. If we are required to perform the two-step impairment analysis,
our valuation method is an “income approach” using a discounted cash
flow model in which cash flows anticipated over several periods, plus
a terminal value at the end of that time horizon, are discounted to
their present value using an appropriate rate of return. Our estimates
are based upon our historical experience, our current knowledge from
our commercial relationships, and available external information
about future trends. If the fair value is less than the carrying value, a
loss is recorded to reflect the difference between the fair value and
carrying value.
intangible assets
Other
include patents, trademarks, and other
intangible assets acquired from an independent party. Such intangible
assets have a definite life and are amortized on a straight-line basis over
estimated useful lives ranging from 4 to 50 years.
Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets, such as plant
and equipment and intangible assets, when events or changes in
circumstances occur that indicate the carrying value of the asset or
asset group may not be recoverable. When impairment indicators
are present, we compare estimated undiscounted future cash flows,
including the eventual disposition of the asset group at market value, to
the assets’ carrying value to determine if the asset group is recoverable.
For an asset group that fails the test of recoverability, the estimated fair
value of long-lived assets is determined using an “income approach”
that starts with the forecast of all the expected future net cash flows
including the eventual disposition at market value of long-lived assets,
and also considers the fair market value of all precious metals. We assess
the recoverability of the carrying value of long-lived assets at the lowest
level for which identifiable cash flows are largely independent of the
cash flows of other assets and liabilities. If there is an impairment, a loss
is recorded to reflect the difference between the assets’ fair value and
carrying value. Refer to Note 2 (Restructuring, Impairment and Other
Charges) to the Consolidated Financial Statements for more detail.
Employee Retirement Plans
Corning offers employee retirement plans consisting of defined benefit
pension plans covering certain domestic and international employees
and postretirement plans that provide health care and life insurance
benefits for eligible retirees and dependents. The costs and obligations
related to these benefits reflect the Company’s assumptions related
to general economic conditions (particularly interest rates), expected
return on plan assets, rate of compensation increase for employees and
Notes to Consolidated Financial Statements
health care trend rates. The cost of providing plan benefits depends on
demographic assumptions including retirements, mortality, turnover
and plan participation.
Costs for our defined benefit pension plans consist of two elements:
1) on-going costs recognized quarterly, which are comprised of service
and interest costs, expected return on plan assets and amortization of
prior service costs; and 2) mark-to-market gains and losses 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, which are recognized annually in the fourth quarter of each year.
These gains and losses result from changes in actuarial assumptions for
discount rates and the differences between actual and expected return
on plan assets. Any interim remeasurements triggered by a curtailment,
settlement or significant plan changes, as well as any true-up to the
annual valuation, are recognized as a mark-to-market adjustment in the
quarter in which such event occurs.
Costs for our postretirement benefit plans consist of on-going costs
recognized quarterly, and are comprised of service and interest costs,
amortization of prior service costs and amortization of actuarial gains
and losses. We recognize the actuarial gains and losses resulting from
changes in actuarial assumptions for discount rates as a component of
Stockholders’ Equity on our consolidated balance sheets on an annual
basis and amortize them into our operating results over the average
remaining service period of employees expected to receive benefits
under the plans, to the extent such gains and losses are outside of
the corridor.
Refer to Note 13 (Employee Retirement Plans) to the Consolidated
Financial Statements for more detail.
Treasury Stock
Shares of common stock repurchased by us are recorded at cost as
treasury stock and result in a reduction of shareholders’ equity in the
consolidated balance sheets. From time to time, treasury shares may
be reissued as contributions to our employee benefit plans and for the
retirement or conversion of certain debt instruments. When shares
are reissued, we use an average cost method for determining cost. The
difference between the cost of the shares and the reissuance price is
added to or deducted from additional paid-in capital.
Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to operating
loss and tax credit carry forwards and for differences between the
carrying amounts of existing assets and liabilities and their respective
tax bases.
The effective income tax rate reflects our assessment of the ultimate
outcome of tax audits. In evaluating the tax benefits associated with
our various tax filing positions, we record a tax benefit for uncertain tax
positions using the highest cumulative tax benefit that is more likely than
not to be realized. Adjustments are made to our liability for unrecognized
tax benefits in the period in which we determine the issue is effectively
settled with the tax authorities, the statute of limitations expires for the
return containing the tax position or when new information becomes
available. Our liability for unrecognized tax benefits, including accrued
penalties and interest, is included in other accrued liabilities and other
long-term liabilities on our consolidated balance sheets and in income
tax expense in our consolidated statements of earnings.
63
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
Discrete events such as audit settlements or changes in tax laws are
recognized in the period in which they occur. Valuation allowances are
established when management is unable to conclude that it is more
likely than not that some portion, or all, of the deferred tax asset will
ultimately be realized.
The Company is subject to income taxes in the United States and in
numerous foreign jurisdictions. With minor exceptions, no provision is
made for U.S. income taxes on the undistributed earnings of wholly-
owned foreign subsidiaries because substantially all such earnings
are indefinitely reinvested in those companies. Provision for the
tax consequences of distributions, if any, from consolidated foreign
subsidiaries is recorded in the year in which the earnings are no longer
indefinitely reinvested in those subsidiaries.
Equity Method Investments
Our equity method investments are reviewed for impairment on a
periodic basis or if an event occurs or circumstances change that
indicate the carrying amount may be impaired. This assessment is
based on a review of the equity investments’ performance and a review
of indicators of impairment to determine if there is evidence of a loss in
value of an equity investment. Factors we consider include:
• Absence of our ability to recover the carrying amount;
• Inability of the equity affiliate to sustain an earnings capacity which
would justify the carrying amount of the investment; and
• Significant
litigation, bankruptcy or other events that could
impact recoverability.
For an equity investment with impairment indicators, we measure
fair value on the basis of discounted cash flows or other appropriate
valuation methods, depending on the nature of the company involved.
If it is probable that we will not recover the carrying amount of our
investment, the impairment is considered other-than-temporary and
recorded in earnings, and the equity investment balance is reduced to its
fair value accordingly. We require our material equity method affiliates
to provide audited financial statements. Consequently, adjustments for
asset recoverability are included in equity earnings. We also utilize these
financial statements in our recoverability assessment.
Fair Value of Financial Instruments
Major categories of financial assets and liabilities, including short-term
investments, other assets and derivatives are measured at fair value on a
recurring basis. Certain assets and liabilities including long-lived assets,
goodwill, asset retirement obligations, and cost and equity investments
are measured at fair value on a nonrecurring basis.
Fair value is the price that would be received from selling an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value
measurements for assets and liabilities required to be recorded at fair
value, we consider the principal or most advantageous market in which
we would transact and consider assumptions that market participants
would use when pricing the asset or liability, such as inherent risk,
transfer restrictions, and risk of nonperformance.
Derivative Instruments
We participate in a variety of foreign exchange forward contracts and
foreign exchange option contracts entered into in connection with
the management of our exposure to fluctuations in foreign exchange
rates. We utilize interest rate swaps to reduce the risk of changes in a
benchmark interest rate from the probable forecasted issuance of debt
and to swap fixed rate interest payments into floating rate interest
payments. These financial exposures are managed in accordance with
corporate policies and procedures.
All derivatives are recorded at fair value on the balance sheet. Changes in
the fair value of derivatives designated as cash flow hedges and hedges
of net investments in foreign operations are not recognized in current
operating results but are recorded in accumulated other comprehensive
income. Amounts related to cash flow hedges are reclassified from
accumulated other comprehensive income when the underlying hedged
item impacts earnings. This reclassification is recorded in the same line
item of the consolidated statement of operations as where the effects
of the hedged item are recorded, typically sales, royalties, or cost of sales.
Changes in the fair value of derivatives designated as fair value hedges
are recorded currently in earnings offset, to the extent the derivative was
effective, by the change in the fair value of the hedged item. Changes
in the fair value of derivatives not designated as hedging instruments
are recorded currently in earnings in the other income, net line of the
consolidated statement of operations.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update No. (ASU) 2014-09, Revenue from
Contracts with Customers, as a new Topic, Accounting Standards
Codification (ASC) Topic 606. The new revenue recognition standard
provides a five-step analysis of transactions to determine when and
how revenue is recognized. The core principle is that a company should
recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services.
This ASU is effective for annual periods beginning after December 15,
2016, including interim periods within that reporting period, and shall
be applied retrospectively to each period presented or as a cumulative-
effect adjustment as of the date of adoption. Early adoption is not
permitted. We are currently assessing the potential impact of adopting
this ASU on our financial statements and related disclosures.
64
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
2. Restructuring, Impairment and Other Charges
2014 Activity
For the year ended December 31, 2014, we recorded charges of $71 million for workforce reductions, asset disposals and write-offs, and exit costs for
restructuring activities with total cash expenditures estimated to be $51 million.
The following table summarizes the restructuring, impairment and other charges as of and for the year ended December 31, 2014 (in millions):
Reserve at
January 1, 2014
Net
Charges/
Reversals
Non cash
adjustments
Cash
payments
Reserve at
December 31, 2014
Restructuring:
Employee related costs
Other charges (credits)
Total restructuring activity
Impairment charges and disposal of long-lived assets
Total restructuring, impairment and other charges
$
$
36
8
44
$
$
$
$
48
1
49
22
71
$
$
(9)
(1)
(10)
$
$
(31)
(8)
(39)
$
$
44
44
Cash payments for employee-related and exit activity related to the 2014 restructuring actions are expected to be substantially completed in 2015.
The year-to-date cost of these plans for each of our reportable segments was as follows (in millions):
Operating segment
Display Technologies
Optical Communications
Specialty Materials
Life Sciences
Corporate and All Other
Total restructuring, impairment and other charges
Employee-related
and other charges
$
$
50
17
1
1
2
71
2013 Activity
Corning implemented a corporate-wide restructuring plan within several of our segments in the fourth quarter of 2013, consisting of workforce
reductions, asset disposals and write-offs, and exit costs. We recorded charges of $67 million associated with these actions, with total cash expenditures
expected to be approximately $40 million.
The following table summarizes the restructuring, impairment and other charges as of and for the year ended December 31, 2013 (in millions):
Reserve at
January 1,
2013
Net
Charges/
Reversals
Non cash
adjustments
Cash
payments
Reserve at
December 31, 2013
Restructuring:
Employee related costs
Other charges (credits)
Total restructuring activity
Impairment charges and disposal of long-lived assets:
Total restructuring, impairment and other charges
$
$
38
4
42
$
$
$
$
34
7
41
26
67
$
$
(4)
(4)
$
$
(32)
(3)
(35)
$
$
36
8
44
Cash payments for employee-related and exit activity related to the 2013 corporate-wide restructuring plan were substantially completed in 2014.
2012 Activity
Corning implemented a corporate-wide restructuring plan in the
fourth quarter of 2012 due to uncertain global economic conditions,
and the potential for slower growth in many of our businesses in
2013. We recorded charges of $89 million, before tax, which included
costs for workforce reductions, asset write-offs and exit costs. Total
cash expenditures associated with these actions are expected to be
approximately $49 million.
65
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
The Specialty Materials segment recorded an impairment charge in the
fourth quarter of 2011 in the amount of $130 million related to certain
assets used in the production of large cover glass due to sales that were
significantly below our expectations. In the fourth quarter of 2012, after
reassessing the large cover glass business, Corning concluded that the
large cover glass market was developing differently in 2012 than our
expectations, demand for larger-sized cover glass was declining, and
the market for this type of glass was instead targeting smaller gen
size products. Additionally, in the fourth quarter of 2012, our primary
customer of large cover glass notified Corning of its decision to exit from
this display market. Based on these events, we recorded an additional
impairment charge in the fourth quarter of 2012 in the amount of
$44 million, before tax. This impairment charge represents a write-down
of assets specific to the glass-strengthening process for large size cover
glass to their fair market values, and includes machinery and equipment
used in the ion exchange process.
The following table summarizes the restructuring, impairment and other charges as of and for the year ended December 31, 2012 (in millions):
Reserve at
January 1,
2012
Net
Charges/
Reversals
Non cash
adjustments
Cash
payments
Reserve at
December 31, 2012
Restructuring:
Employee related costs
Other charges (credits)
Total restructuring activity
Impairment charges and disposal of long-lived assets:
Assets to be held and used
Assets to be disposed of
Total asset impairment charges and disposals
Total restructuring, impairment and other charges
$
$
2
8
10
$
$
$
$
47
5
52
44
37
81
133
$
$
(7)
(5)
(12)
$
$
(4)
(4)
(8)
$
$
38
4
42
Cash payments for employee-related costs related to the 2012 corporate-wide restructuring plan were substantially completed in 2013. Cash payments
for exit activities were completed in 2012.
3. Available-for-Sale Investments
The following is a summary of the fair value of available-for-sale securities (in millions):
Bonds, notes and other securities:
U.S. government and agencies
Total short-term investments
Asset-backed securities
Total long-term investments
Amortized cost December 31,
Fair value December 31,
2014
2013
2014
2013
$
$
$
$
759
759
42
42
$
$
$
$
530
530
46
46
$
$
$
$
759
759
38
38
$
$
$
$
531
531
38
38
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 contractual maturities of available-for-sale securities at December 31, 2014 (in millions):
Less than one year
Due in 1-5 years
Due in 5-10 years
Due after 10 years(1)
Total
$
$
440
319
38
797
(1) Included in the maturity table is $38 million of asset-based securities that mature over time.
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 in shareholders’ equity until realized.
66
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
The following tables provide the fair value and gross unrealized losses of the Company’s investments and unrealized losses that are not deemed
to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous
unrealized loss position at December 31, 2014 and 2013:
(in millions)
Asset-backed securities
Total long-term investments
December 31, 2014
Number of
securities in
a loss position
21
21
12 months or greater
Total
Fair value
$
$
37
37
Unrealized
losses(1)
$
$
(4)
(4)
Fair value
$
$
37
37
Unrealized
losses
$
$
(4)
(4)
(1) Unrealized losses in securities less than 12 months were not significant.
(in millions)
Asset-backed securities
Total long-term investments
December 31, 2013
Number of
securities in
a loss position
20
20
12 months or greater
Total
Fair value
$
$
38
38
Unrealized
losses(1)
$
$
(8)
(8)
Fair value
$
$
38
38
Unrealized
losses
$
$
(8)
(8)
(1) Unrealized losses in securities less than 12 months were not significant.
As of December 31, 2014 and 2013, for securities that have credit losses, an unrealized loss on other than temporary impaired securities of $4 million and
$6 million, respectively, is recognized in accumulated other comprehensive income.
Proceeds from sales and maturities of short-term investments totaled $1.2 billion, $2 billion and $2.3 billion in 2014, 2013 and 2012, respectively.
4. Significant Customers
For 2014, Corning’s sales to Samsung Display Co. Ltd., a customer of our Display Technologies segment, represented 14% of the Company’s consolidated
net sales. In 2013, Corning’s sales to AU Optronics Corporation, a customer of our Display Technologies segment, represented 10% of the Company’s
consolidated net sales. In 2012, no customers met or exceeded 10% of Corning’s consolidated net sales.
5.
Inventories, Net of Inventory Reserves
Inventories, net of inventory reserves comprise the following (in millions):
Finished goods
Work in process
Raw materials and accessories
Supplies and packing materials
Total inventories, net of inventory reserves
6.
Income Taxes
Income before income taxes follows (in millions):
U.S. companies
Non-U.S. companies
Income before income taxes
December 31,
2014
$
486
255
302
279
2013
$
486
234
311
239
$
1,322
$
1,270
Years ended December 31,
2014
$
$
2,384
1,184
3,568
2013
$
$
1,274
1,199
2,473
2012
$
$
382
1,593
1,975
67
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
The current and deferred amounts of the provision (benefit) for income taxes follow (in millions):
Current:
Federal
State and municipal
Foreign
Deferred:
Federal
State and municipal
Foreign
Provision for income taxes
Years ended December 31,
2013
$
2014
$
38
32
414
411
(9)
210
$
1,096
$
2012
$
$
3
12
308
112
50
27
512
Amounts are reflected in the preceding tables based on the location of the taxing authorities.
Reconciliation of the U.S. statutory income tax rate to our effective tax rate for continuing operations follows:
Statutory U.S. income tax rate
State income tax (benefit), net of federal effect
Tax holidays(1)
Investment and other tax credits(2)
Rate difference on foreign earnings
Equity earnings impact(3)
Valuation allowances
Other items, net
Effective income tax (benefit) rate
Years ended December 31,
2014
2013
2012
35.0%
4.9(8)
(0.4)
(0.3)
(8.3)
(2.0)
0.7(6)
1.1(7)
30.7%
35.0%
0.6
(1.2)
(2.0)
(7.9)(4)
(6.6)
3.1(5)
(0.3)
20.7%
(4)
3
321
143
(8)
(116)
339
35.0%
0.2
(1.7)
(1.1)
(2.0)
(13.6)
(0.1)
0.5
17.2%
(1) Primarily related to a subsidiary in Taiwan operating under tax holiday arrangements. The nature and extent of such arrangements vary, and the
benefits of existing arrangements phase out in future years (through 2018). The impact of tax holidays on net income per share on a diluted basis
was $0.01 in 2014, $0.02 in 2013 and $0.02 in 2012.
(2) Primarily related to research and development and other credits in the U.S.
(3) Equity in earnings of nonconsolidated affiliates reported in the financials net of tax. The decrease from 2012-2013 was driven by significantly
lower earnings from Samsung Corning Precision Materials and from 2013-2014 the change of Samsung Corning Precision Materials from an equity
company to a consolidated entity.
(4) In 2013, $74 million of tax benefit increase was due to $37 million expense recorded in 2012 that was reversed in the first quarter of 2013 as a result
of the retroactive application of the American Taxpayer Relief Act enacted on January 3, 2013. In 2013, the additional increase in the benefit was
attributable to excess foreign tax credits realized in U.S. from a taxable intercompany loan.
(5) Primarily related to change in judgment on the realizability of Australia and certain state deferred tax assets.
(6) $177 million tax expense related to change in judgment on the realizability of Germany and Japan deferred tax assets is partially offset with benefit
from state deferred tax asset valuation allowance reductions, including the valuation allowance relating to the New York State attribute reduction
discussed in (8) below.
(7) Includes in 2014, $9 million benefit for domestic manufacturing deduction and $46 million of tax expense related to out of period transfer pricing
adjustments. The impact of these corrections is not material to any individual period previously presented.
(8) Includes $100 million tax expense related to the write-off of New York State tax attributes for a state law change that were offset with full
valuation allowance.
68
CORNING INCORPORATED - 2014 Annual Report The tax effects of temporary differences and carryforwards that gave rise to significant portions of the deferred tax assets and liabilities follows
(in millions):
Notes to Consolidated Financial Statements
Loss and tax credit carryforwards
Other Assets
Asset impairments and restructuring reserves
Postretirement medical and life benefits
Fixed assets
Other accrued liabilities
Other employee benefits
Gross deferred tax assets
Valuation allowance
Total deferred tax assets
Intangible and other assets
Fixed assets
Total deferred tax liabilities
Net deferred tax assets
The net deferred tax assets are classified in our consolidated balance sheets as follows (in millions):
Current deferred tax assets
Non-current deferred tax assets
Current deferred tax liabilities
Non-current deferred tax liabilities
Net deferred tax assets
December 31,
1,235
69
170
312
246
473
2,505
(298)
2,207
(152)
(299)
(451)
1,756
December 31,
248
1,889
(5)
(376)
1,756
2014
$
$
2014
$
$
2013
$
1,788
63
172
290
85
320
387
3,105
(286)
2,819
(321)
(321)
$
2,498
2013
$
278
2,234
(1)
(13)
$
2,498
Details on deferred tax assets for loss and tax credit carryforwards at December 31, 2014 follow (in millions):
Net operating losses
Capital losses
Tax credits
Totals as of December 31, 2014
Expiration
Amount
2015-2019
2020-2024
2025-2034
Indefinite
$
$
423
9
803
1,235
$
$
92
9
62
163
$
$
120
672
792
$
$
20
38
58
$
$
191
31
222
The recognition of windfall tax benefits from stock-based compensation
deducted on the tax return is prohibited until realized through a
reduction of income tax payable. Cumulative tax benefits totaling
$236 million will be recorded in additional paid-in-capital when credit
carry forwards are utilized and the windfall tax benefit can be realized.
Deferred tax assets are to be reduced by a valuation allowance if, based
on the weight of available positive and negative evidence, it is more
likely than not (a likelihood of greater than 50 percent) that some
portion or all of the deferred tax assets will not be realized. Corning has
valuation allowances on certain shorter-lived deferred tax assets such
as those represented by capital loss and state tax net operating loss
carry forwards, as well as other foreign net operating loss carryforwards,
because we cannot conclude that it is more likely than not that we will
earn income of the character required to utilize these assets before
they expire. U.S. profits of approximately $5.1 billion will be required
to fully realize the U.S. deferred tax assets as of December 31, 2014, of
which $110.3 million will be required over the next 20 years to realize the
deferred tax assets related to general business credits and $2.1 billion of
foreign sourced income will be required over the next 10 years to fully
realize the deferred tax assets associated with foreign tax credits. The
amount of U.S. and foreign deferred tax assets that have remaining
valuation allowances at December 31, 2014 and 2013 was $298 million
and $286 million, respectively.
69
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
The following is a tabular reconciliation of the total amount of unrecognized tax benefits (in millions):
Balance at January 1
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements and lapse of statute of limitations
Balance at December 31
Included in the balance at December 31, 2014 and 2013 are $5 million and
$7 million, respectively, of unrecognized tax benefits that would impact
our effective tax rate if recognized.
We recognize accrued interest and penalties associated with uncertain
tax positions as part of tax expense. For the years ended December 31,
2014, 2013 and 2012, the amounts recognized in interest expense and
income were immaterial. The amounts accrued at December 31, 2014
and 2013 for the payment of interest and penalties were not significant.
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.
Corning Incorporated, as the common parent company, and all 80%-or-
more-owned of its U.S. subsidiaries join in the filing of consolidated U.S.
federal income tax returns. All such returns for periods ended through
December 31, 2004, have been audited by and settled with the Internal
Revenue Service (IRS). The statute for all years from 2004 forward will
remain open until the statute closes for the return in which the NOL
carryovers generated in 2004 and 2005 are fully utilized. The statute for
U.S. foreign tax and research and experimentation credit carryforwards
generated through 2013 will also remain open until the statute closes
for the returns in which the credits are utilized.
Corning Incorporated and its U.S. subsidiaries file income tax returns
on a combined, unitary or stand-alone basis in multiple state and local
jurisdictions, which generally have statutes of limitations ranging from
3 to 5 years. Various state income tax returns are currently in the process
of examination or administrative appeal.
7.
Investments
Investments comprise the following (in millions):
Affiliated companies accounted for by the equity method
Samsung Corning Precision Materials(2)
Dow Corning
All other
Other investments
Total
2014
$
$
15
5
(10)
10
2013
$
$
16
1
(2)
15
Our foreign subsidiaries file income tax returns in the countries in
which they have operations. Generally, these countries have statutes
of limitations ranging from 3 to 7 years. Years still open to examination
by foreign tax authorities in major jurisdictions include Japan (2009
onward), Taiwan (2013 onward) and South Korea (2010 onward).
Corning continues to indefinitely reinvest substantially all of its foreign
earnings, with the exception of approximately $10 million of current
earnings that have very low or no tax cost associated with their
repatriation. Our current analysis indicates that we have sufficient U.S.
liquidity, including borrowing capacity, to fund foreseeable U.S. cash
needs without requiring the repatriation of foreign cash. 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, derivative contract settlements or the development of tax
planning ideas that allow us to repatriate earnings at minimal or no
tax cost, 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. As of December 31, 2014, taxes have
not been provided on approximately $10.3 billion of accumulated foreign
unremitted earnings that are expected to remain invested indefinitely.
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.
Ownership
interest(1)
December 31,
2014
2013
50%
20% to 50%
$
$
1,325
452
1,777
24
1,801
$
$
3,709
1,420
390
5,519
18
5,537
(1) Amounts reflect Corning’s direct ownership interests in the respective affiliated companies at December 31, 2014. Corning does not control any of
such entities.
(2) On January 15, 2014 Corning acquired the remaining equity interests of Samsung Corning Precision Materials, resulting in 100% ownership of
this entity.
70
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
Affiliated Companies at Equity
The results of operations and financial position of the investments accounted for under the equity method follow (in millions):
Years ended December 31,
2014
2013
2012
Statement of operations(1)(2):
Net sales
Gross profit
Net income
Corning’s equity in earnings of affiliated companies
Related party transactions:
Corning sales to affiliated companies
Corning purchases from affiliated companies
Corning transfers of assets, at cost, to affiliated companies(3)
Dividends received from affiliated companies
Royalty income from affiliated companies
Corning services to affiliates
Balance sheet(1)(2):
Current assets
Noncurrent assets
Short-term borrowings, including current portion of long-term debt
Other current liabilities
Long-term debt
Other long-term liabilities
Non-controlling interest
Related party transactions:
Balances due from affiliated companies
Balances due to affiliated companies
$
$
$
$
$
$
$
$
$
7,124
1,701
647
266
13
25
130
2
$
$
$
$
$
$
$
$
$
$
8,526
2,655
1,135
547
13
189
37
629
57
2
$
$
$
$
$
$
$
$
$
$
December 31,
2014
2013
$
$
$
$
$
$
$
$
$
5,432
6,864
7
1,630
950
5,143
634
19
2
$
$
$
$
$
$
$
$
$
9,957
3,628
1,541
810
50
167
55
1,089
84
24
8,416
12,220
79
1,886
937
6,502
619
45
5
(1) 2013 and 2012 amounts include Samsung Corning Precision Materials.
(2) As a result of the series of strategic and financial agreements with Samsung Display entered into on October 22, 2013, certain non-operating assets
of Samsung Corning Precision Materials were held for sale as of December 31, 2013 and are reported as discontinued operations in Samsung Corning
Precision Materials financial statements, which are attached in Item 15, Exhibits and Financial Statement Schedules. Previous period amounts have
been conformed for comparative purposes.
(3) In 2013 and 2012, Corning purchased machinery and equipment on behalf of Samsung Corning Precision Materials to support its capital
expansion initiatives.
We have contractual agreements with several of our equity affiliates which include sales, purchasing, licensing and technology agreements.
At December 31, 2014, approximately $1.9 billion of equity in undistributed earnings of equity companies was included in our retained earnings.
Samsung Corning Precision Materials
Prior to December 2013, Corning owned 50% of its equity affiliate,
Samsung Corning Precision Materials, Samsung Display owned 42.5%
and three shareholders owned the remaining 7%. In the fourth quarter
of 2013, in connection with a series of agreements with Samsung Display
announced in October 2013, Corning acquired the minority interests
of three shareholders in Samsung Corning Precision Materials for
$506 million, which included payment for the transfer of non-operating
assets and the pro-rata portion of cash on the Samsung Corning
Precision Materials balance sheet at September 30, 2013. The resulting
transfer of shares to Corning increased Corning’s ownership percentage
of Samsung Corning Precision Materials from 50% to 57.5%. Because this
transaction did not result in a change in control based on the governing
documents of this entity, Corning did not consolidate this entity as of
December 31, 2013.
As further discussed in Note 8 (Acquisition), on January 15, 2014, Corning
completed the acquisition of the common shares of Samsung Corning
Precision Materials previously held by Samsung Display. As a result of
these transactions, Corning became the owner of 100% of the common
shares of Samsung Corning Precision Materials, which was consolidated
into our results beginning in the first quarter of 2014. Operating under
the name of Corning Precision Materials, the former Samsung Corning
Precision Materials organization and operations were integrated into
the Display Technologies segment in the first quarter of 2014.
71
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
Dow Corning
Dow Corning is a U.S.-based manufacturer of silicone products. Corning and Dow Chemical each own half of Dow Corning.
Dow Corning’s financial position and results of operations follow (in millions):
Statement of operations:
Net sales
Gross profit(1)
Net income attributable to Dow Corning
Corning’s equity in earnings of Dow Corning
Related party transactions:
Corning purchases from Dow Corning
Dividends received from Dow Corning
Balance sheet:
Current assets
Noncurrent assets
Short-term borrowings, including current portion of long-term debt
Other current liabilities
Long-term debt
Other long-term liabilities
Non-controlling interest
Years ended December 31,
2014
2013
2012
$
$
$
$
$
$
6,221
1,543
513
252
15
125
$
$
$
$
$
$
5,711
1,280
376
196
22
100
$
$
$
$
$
$
December 31,
2014
2013
$
$
$
$
$
$
$
4,712
6,433
7
1,441
945
5,125
634
$
$
$
$
$
$
$
6,119
1,413
181
90
23
100
3,996
8,306
79
1,267
937
6,240
606
(1) Gross profit for the year ended December 31, 2014 includes R&D cost of $273 million (2013: $248 million and 2012: $281 million).
Beginning in the latter half of 2011, and continuing into 2012, Dow Corning
began experiencing unfavorable industry conditions at its consolidated
subsidiary Hemlock, a producer of high purity polycrystalline silicon
for the semiconductor and solar industries, driven by over-capacity at
all levels of the solar industry supply chain. This over-capacity led to
significant declines in polycrystalline spot prices in the fourth quarter of
2011, and prices remained depressed throughout 2012. In 2013, markets
stabilized, but prices remain significantly below historical levels.
Due to the conditions and uncertainties during 2012 described above,
sales volume declined and production levels of certain operating
assets were reduced. As a result, in the fourth quarter of 2012, Dow
Corning determined that a polycrystalline silicon plant expansion
previously delayed since the fourth quarter of 2011 would no longer be
economically viable and made the decision to abandon this expansion
activity. The abandonment resulted in an impairment charge of
$57 million, before tax, for Corning’s share of the write down in the value
of these construction-in-progress assets. Further, the startup of another
polycrystalline silicon plant expansion that was expected to begin
production in 2013 was delayed and its assets were idled.
In July 2012, the MOFCOM initiated antidumping 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 alleged that
producers within these countries exported solar-grade polycrystalline
silicon to China at less than fair 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 product from the Dow Corning subsidiary
into China. On September 16, 2013, the Chinese authorities imposed
provisional countervailing duties of 6.5% on solar grade polycrystalline
silicon products from the Dow Corning subsidiary. On January 20,
2014, MOFCOM issued a final determination. The final determination
resulted in no change to the antidumping duties, and the countervailing
duties were reduced to 2.1%. The requirement for customers to pay
provisional duties on imports from solar-grade polycrystalline silicon
producers became effective on July 24, 2013 for the antidumping duties
and on September 20, 2013 for the countervailing duties, adjusted for
the final determination. Dow Corning will not be subject to duties for
previous sales.
In December 2014, Dow Corning determined its polycrystalline silicon
plant expansion which was delayed in the fourth quarter of 2012, would
not be economically viable and made the decision to permanently
abandon the assets. This decision was made after review of sustained
adverse market conditions and continued oversupply, the cost of
operating the facility and the ongoing impact of tariffs on polycrystalline
silicon imported into China. The decision to permanently cease use
of these assets resulted in Dow Corning taking a pre-tax charge of
approximately $1.5 billion in the fourth quarter of 2014 (Corning’s share
after-tax: $465 million). As a result of the significant change in the use
of this asset, Dow Corning assessed whether the carrying value of all
polycrystalline silicon assets might be impaired. Dow Corning’s estimates
of future undiscounted cash flows indicated the polycrystalline silicon
asset group was recoverable.
72
CORNING INCORPORATED - 2014 Annual Report In May 1995, Dow Corning filed for bankruptcy protection to address
pending and claimed liabilities arising from breast implant product
lawsuits. In 1995, Corning fully impaired its investment in Dow Corning
after it filed for bankruptcy protection. Corning did not recognize net
equity earnings from the second quarter of 1995 through the end of
2002. Corning began recognizing equity earnings in the first quarter
of 2003 when management concluded that Dow Corning’s emergence
from bankruptcy was probable. Corning considers the $171 million
difference between the carrying value of its investment in Dow Corning
and its 50% share of Dow Corning’s equity to be permanent.
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 Plan, Dow Corning
established and agreed to fund a products liability settlement program
(the “Settlement Facility”). The Plan contains a cap on the amount of
payments required from Dow Corning to fund the Settlement Facility.
Inclusive of insurance, Dow Corning has paid approximately $1.8 billion
to the Settlement Facility, and approximately $1.3 billion has been paid to
claimants out of the Settlement Facility. Dow Corning’s recorded liability
related to implant matters (“Implant Liability”) was approximately $1.7
billion at September 30, 2014, representing Dow Corning’s estimated
remaining obligation for future funding of the Settlement Facility.
During the fourth quarter of 2014, Dow Corning, with the assistance of a
third-party advisor, developed an estimate of the future Implant Liability
based on evidence that the actual funding required for the Settlement
Facility is expected to be lower than the full funding cap set forth in the
Plan. On December 12, 2014, Dow Corning reduced its Implant Liability
by approximately $1.3 billion (Corning’s share after-tax: $393 million).
Previously, the Implant Liability was based on the full funding cap set
forth in the Plan. The revised Implant Liability reflects Dow Corning’s
best estimate of its remaining obligations under the Plan. Should events
or circumstances occur in the future which change Dow Corning’s
estimate of the remaining funding obligations, the Implant Liability will
be revised. This adjustment does not affect Dow Corning’s commitment
or ability to fulfill its obligations under the settlement, and all claims
that qualify under the settlement will be paid according to the terms
of the Plan.
As a separate matter arising from its 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
December 31, 2014, Dow Corning has estimated the potential liability to
these creditors to be within the range of $99 million to $324 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
$99 million, net of applicable tax benefits. There are a number of other
claims in the bankruptcy proceedings against Dow Corning awaiting
resolution by the U.S. District Court, and it is reasonably possible that
Dow Corning may record bankruptcy-related charges in the future.
The remaining tort claims against Dow Corning are expected to be
channeled by the Plan into facilities established by the Plan or otherwise
defended by the Litigation Facility.
Pittsburgh Corning Corporation and Asbestos Litigation.
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 were
Notes to Consolidated Financial Statements
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. At the time PCC filed for bankruptcy protection, there
were approximately 11,800 claims pending against Corning in state
court lawsuits alleging various theories of liability based on exposure
to PCC’s asbestos products and typically requesting monetary damages
in excess of one million dollars per claim. Corning has defended those
claims on the basis of the separate corporate status of PCC and the
absence of any facts supporting claims of direct liability arising from
PCC’s asbestos products.
PCC Plan of Reorganization
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 courts and parties. On November 12, 2013,
the Bankruptcy Court issued a decision finally confirming an Amended
PCC Plan of Reorganization (the “Amended PCC Plan” or the “Plan”). On
September 30, 2014, the United States District Court for the Western
District of Pennsylvania (the “District Court”) affirmed the Bankruptcy
Court’s decision confirming the Amended PCC Plan. On October 30, 2014,
one of the objectors to the Plan appealed the District Court’s affirmation
of the Plan to the United States Court of Appeals for the Third Circuit
(the “Third Circuit Court of Appeals”), and that appeal is currently being
scheduled for briefing. It will likely take many months for the Third
Circuit Court of Appeals to render its decision.
Under the Plan as affirmed by the Bankruptcy Court and affirmed by the
District Court, Corning is required to contribute its equity interests in
PCC and Pittsburgh Corning Europe N.V. (“PCE”), a Belgian corporation,
and to contribute $290 million in a fixed series of payments, recorded
at present value. Corning has the option to use its shares rather than
cash to make these payments, but the liability is fixed by dollar value
and not the number of shares. The Plan requires Corning to make:
(1) one payment of $70 million one year from the date the Plan becomes
effective and certain conditions are met; and (2) five additional payments
of $35 million, $50 million, $35 million, $50 million, and $50 million,
respectively, on each of the five subsequent anniversaries of the first
payment, the final payment of which is subject to reduction based on
the application of credits under certain circumstances.
Non-PCC Asbestos Litigation
In addition to the claims against Corning related to its ownership
interest in PCC, Corning is also the defendant in approximately 9,700
other cases (approximately 37,300 claims) alleging injuries from
asbestos related to its Corhart business and similar amounts of
monetary damages per case. When PCC filed for bankruptcy protection,
the Court granted a preliminary injunction to suspend all asbestos cases
against PCC, PPG and Corning – including these non-PCC asbestos cases
(the “stay”). The stay remains in place as of the date of this filing. Under
the Bankruptcy Court’s order confirming the Amended PCC Plan, the stay
will remain in place until the Amended PCC Plan is finally affirmed by
the District Court and the Third Circuit Court of Appeals. These non-PCC
asbestos cases have been covered by insurance without material impact
to Corning to date. As of December 31, 2014, Corning had received for
these cases approximately $19 million in insurance payments related to
those claims. If and when the Bankruptcy Court’s confirmation of the
Amended PCC Plan is finally affirmed, these non-PCC asbestos claims
would be allowed to proceed against Corning. Corning has recorded in
its estimated asbestos litigation liability an additional $150 million for
these and any future non-PCC asbestos cases.
73
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
Total Estimated Liability for the Amended PCC Plan and the Non-PCC
Asbestos Claims
The liability for the Amended PCC Plan and the non-PCC asbestos claims
was estimated to be $681 million at December 31, 2014, compared
with an estimate of liability of $690 million at December 31, 2013. The
$681 million liability is comprised of $241 million of the fair value of PCE,
$290 million for the fixed series of payments, and $150 million for the
non-PCC asbestos litigation, all referenced in the preceding paragraphs.
With respect to the PCE liability, at December 31, 2014 and 2013, the fair
value of $241 million and $250 million of our interest in PCE significantly
exceeded its carrying value of $162 million and $167 million, respectively.
There have been no impairment indicators for our investment in PCE
and we continue to recognize equity earnings of this affiliate. At the
time Corning recorded this liability, it determined it lacked the ability to
recover the carrying amount of its investment in PCC and its investment
was other than temporarily impaired. As a result, we reduced our
investment in PCC to zero. As the fair value in PCE is significantly higher
than book value, management believes that the risk of an additional
loss in an amount materially higher than the fair value of the liability
is remote. With respect to the liability for other asbestos litigation, the
liability for non-PCC claims was estimated based upon industry data for
asbestos claims since Corning does not have recent claim history due to
the injunction issued by the Bankruptcy Court. The estimated liability
represents the undiscounted projection of claims and related legal fees
over the next 20 years. The amount may need to be adjusted in future
periods as more data becomes available; however, we cannot estimate
any additional losses at this time. For the years ended December 31, 2014
and 2013, Corning recorded asbestos litigation income of $9 million and
expense of $19 million, respectively. The entire obligation 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).
Non-PCC Asbestos Cases Insurance Litigation
Several of Corning’s insurers have commenced litigation in state courts
for a declaration of the rights and obligations of the parties under
insurance policies affecting the non-PCC asbestos cases, including
rights that may be affected by the potential resolutions described above.
Corning is vigorously contesting these cases, and management is unable
to predict the outcome of the litigation.
8. Acquisition
On January 15, 2014, Corning consummated a series of strategic and
financial agreements pursuant to the Framework Agreement with
Samsung Display, previously announced on October 22, 2013, to acquire
the remaining common shares of Samsung Corning Precision Materials.
The transaction is expected to strengthen product and technology
collaborations between the two companies and allow Corning to extend
its leadership in specialty glass and drive earnings growth.
The Acquisition was accounted for under the purchase method of
accounting in accordance with business combination accounting
guidance. Accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed, based on their fair value on the date
of Acquisition. The fair value was determined based on the fair value of
consideration transferred for the remaining equity interest of Samsung
Display’s shares.
In connection with the purchase of Samsung Display’s equity interest
in Samsung Corning Precision Materials pursuant to the Framework
Agreement, the Company designated a new series of its preferred stock
as Fixed Rate Cumulative Convertible Preferred Stock, Series A, par value
$100 per share (“Preferred Stock”). As contemplated by the Framework
Agreement, Samsung Display became the owner of 2,300 shares of
Preferred Stock (with an issue price of $1 million per share), of which
1,900 shares were issued in connection with the Acquisition and 400
shares were issued for cash.
Corning issued 1,900 shares of Preferred Stock as consideration in
the Acquisition of Samsung Corning Precision Materials which had
a fair value of $1.9 billion on the acquisition date. The fair value was
determined using an option pricing model based on the features of the
Preferred Stock. That measure is based on Level 2 inputs observable in
the market such as Corning’s common stock price and dividend yield.
The Acquisition also includes a contingent consideration arrangement
that potentially requires additional consideration to be paid between
the parties in 2018: one based on projections of future revenues
generated by the business of Samsung Corning Precision Materials for
the period between the acquisition date and December 31, 2017, which
is subject to a cap of $665 million; and another based on the volumes of
certain sales during the same period, which is subject to a separate cap
of $100 million. The fair value of the potential receipt of the contingent
consideration in 2018 in the amount of $196 million at date of acquisition
and $445 million at December 31, 2014 was estimated by applying an
option pricing model using the Company’s projections of Corning
Precision Materials’ future revenues. Changes in the fair value of the
contingent consideration in future periods are valued using an option
pricing model and are recorded in Corning’s results in the period of the
change. Corning recorded $249 million of pre-tax reductions in Selling,
general and administrative expenses for the year ended December 31,
2014 to reflect the increase in the fair value of the potential receipt of
the contingent consideration.
The following table summarizes the total fair value of Samsung
Corning Precision Materials at the acquisition date including the
net consideration transferred to acquire the remaining 42.5% of
Samsung Corning Precision Materials, the fair value of Corning’s non-
controlling interest in Samsung Corning Precision Materials pre- and
post-acquisition and the amount of the implied fair value of the total
entity for the purpose of allocating the purchase price to the acquired
net assets.
74
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
Samsung
Display
Corning
Incorporated
42.5%
1,911
(196)
1,715
(136)
1,579
2,139
3,718
$
$
$
57.5%
2,588
(265)
2,323
(184)
2,139
$
$
Samsung
Corning
Precision
Materials
100%
4,499
(461)
4,038
(320)
3,718
$
$
• At acquisition, since the contract with Samsung Corning Precision
Materials was effectively settled, Corning recognized a loss of
$320 million. Of the $320 million, $184 million effectively offset
the portion of the gain on previously held equity investment
attributable to Corning’s interest in the royalty contract. As a result,
the pre-acquisition fair value of Corning’s 57.5% share of $2.3 billion
decreased to the fair value of $2.1 billion post-acquisition; and
• At acquisition, since the seller, Samsung Display, was a 42.5%
shareholder of Samsung Corning Precision Materials, 42.5%, or
$136 million, of the $320 million loss to effectively settle the contract
reduced the consideration transferred to acquire Samsung Display’s
interest
in Samsung Corning Precision Materials. Accordingly,
$136 million of the consideration transferred was treated separately
from the purchase price, resulting in the implied consideration
transferred of approximately $1.6 billion.
The net economic effect to Corning following the transaction was a net
loss of $136 million, constituting a $320 million loss due to Corning’s
unfavorable contract and its share of the favorable contract in Samsung
Corning Precision Materials of $184 million.
The gain on the previously held equity investment was calculated based
on the fair value of the entity immediately preceding the Acquisition.
As the pre-existing contract was treated as a separate transaction, the
pre-existing contract was not taken into consideration when calculating
the gain on the previously held equity interest.
Net consideration applied to acquired assets
Ownership percentage
Fair value based on $1.9 billion consideration transferred
Less contingent consideration - receivable
Net fair value of consideration @ 100%
Corning’s loss on royalty contract
Fair value post-acquisition
Corning’s fair value 57.5% post-acquisition
Total fair value at January 15, 2014
The $1.9 billion fair value of consideration transferred for the remaining
42.5% interest in Samsung Corning Precision Materials plus the fair value
of Corning’s pre-acquisition fair value less the contingent consideration
due Corning as of the acquisition date results in a net fair value for the
total entity of $4 billion.
As a result of the acquisition of Samsung Corning Precision Materials,
Corning reacquired its technology license rights and effectively settled
its pre-existing royalty contract with the acquired entity, Samsung
Corning Precision Materials. With regard to the reacquired right, Corning
engaged a third-party specialist to assist in assessing the fair value
of this right and determined that the reacquired right had a value of
zero. In addition, the Company assessed whether this royalty contract
was favorable or unfavorable to Corning. It was determined that the
contractual royalty rate of 3% as compared to the then current market
rate of 12% was unfavorable to Corning. The effective settlement of
the contract was valued using the Income Approach; specifically, a
relief from royalty method. The amount by which the contract was
unfavorable to Corning when compared to current market transactions
for similar items resulted in a loss of $320 million which was recorded
on the acquisition date, representing 100% of the loss on the effective
settlement of the contract. There were no stated contractual settlement
provisions or previously recorded assets or liabilities to consider when
determining the value associated with the settlement.
Because the pre-existing contract was unfavorable to Corning, a portion
of the consideration transferred was deemed to be applicable to the
effective settlement of the royalty contract between Corning and the
acquiree, Samsung Corning Precision Materials. The $320 million loss
attributable to the settlement of the pre-existing arrangement was
accounted for as a separate transaction from the business combination
as follows:
75
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
The net gain on previously owned equity was calculated as follows:
December 2013 Investment Balance
Dividend(1)
Other
Net investment book balance at 1/15/2014
Fair value Samsung Corning Precision Materials
57.5% of Samsung Corning Precision Materials(2)
Working capital adjustment and other
57.5% of the pre-acquisition fair value of assets
Gain on previously held equity investment(2)
Translation gain
Net gain
$
3,709
(1,574)
(18)
2,117
4,038
2,323
52
2,375
258
136
394
$
$
$
$
$
(1) In conjunction with the Framework Agreement, the parties agreed to have Samsung Corning Precision Materials distribute all cash and cash
equivalents as a dividend to the shareholders of record as of December 31, 2013. The dividend was not part of the purchase price as the agreement
was to distribute cash and cash equivalents as a dividend to the shareholders as soon as practicable. As such, at acquisition Corning did not
have legal title to the cash to be distributed, although the dividend was distributed subsequent to the acquisition date. Therefore, the portion of
Corning’s share of the $1.6 billion dividend received was accounted for in Corning’s consolidated financial statements as if the dividend occurred
at or immediately prior to the date of acquisition at which time Samsung Corning Precision Materials was still an equity method investment in
Corning’s consolidated financial statements.
(2) As Corning was a 57.5% shareholder at the date of acquisition, immediately preceding the acquisition of Samsung Corning Precision Materials,
Corning recognized an asset and respective gain as part of the calculation of its previously held equity investment which included approximately
$184 million attributed to its economic interest in the royalty contract.
The following table summarizes the amounts of identified assets acquired and liabilities assumed at acquisition date and recorded measurement
period adjustments. Corning has completed its accounting for the Acquisition and its review of deferred taxes.
Recognized amounts of identified assets acquired and liabilities assumed (in millions):
Cash and cash equivalents(1)
Trade receivables(3)
Inventory(3)
Property, plant and equipment(3)
Other current and non-current assets(3)
Debt – current
Accounts payable and accrued expenses(3)
Other current and non-current liabilities(3)
Total identified net assets(3)
Non-controlling interests
Fair value of Samsung Corning Precision Materials on acquisition date
Goodwill(2)(3)
$
133
357
105
3,595
71
(32)
(357)
(294)
3,578
15
(3,718)
$
125
(1) Cash and cash equivalents are presented net of the 2014 dividend distributed subsequent to the Acquisition, in the amount of $2.8 billion.
(2) The goodwill recognized is not deductible for U.S. income tax purposes. The goodwill was allocated to the Display Technologies segment.
(3) During 2014, the Company recorded total measurement period adjustments of $60 million for the Acquisition of Corning Precision Materials
primarily related to accrual of contingent liabilities and employee benefit obligations.
The goodwill
is primarily attributable to the workforce of the
acquired business and the synergies expected to result from the
integration of Corning Precision Materials. Acquisition-related costs
of $93 million in the year ended December 31, 2014 included costs for
post-Acquisition compensation expense, legal, accounting, valuation
and other professional services and were included in selling, general
and administrative expenses in the Consolidated Statements of Income.
Since the date of acquisition, the consolidation of Corning Precision
Materials added $1,761 million to Net sales. The impact to Net income
of the consolidation of Corning Precision Materials is impracticable to
calculate due to the level of integration within the Display Technologies
segment and the significant amount of estimates that would
be required.
Unaudited Pro Forma Financial Information
The unaudited pro forma combined consolidated statement of income
for the year ended December 31, 2013, was derived from the unaudited
financial statements of Corning and Samsung Corning Precision
Materials for the year ended December 31, 2013, and is presented to
show how Corning might have appeared had the Acquisition occurred
as of January 1, 2013.
The unaudited pro forma combined consolidated financial information
was prepared pursuant to the rules and regulations of the SEC. The
unaudited pro forma adjustments reflecting the Acquisition have been
prepared in accordance with the business combination accounting
guidance and reflect the allocation of the purchase price to the acquired
assets and liabilities based upon the fair values, using the assumptions
set forth above.
76
CORNING INCORPORATED - 2014 Annual Report Unaudited Pro Forma Financial Information (in millions, except per share data):
Net sales
Net income attributable to Corning Incorporated – basic earnings per share
Net income – attributable to Corning Incorporated – diluted earnings per share
Earnings per common share attributable to common shareholders
Basic
Diluted
Shares used in computing per share amounts
Basic
Diluted
Notes to Consolidated Financial Statements
Twelve months
ended
December 31,
2013
$
$
$
$
$
9,871
2,327
2,425
1.60
1.54
1,452
1,577
There were no other significant acquisitions for the year ended
December 31, 2014.
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
Fixed Assets
Other intangible assets
Net tangible and intangible assets
Purchase price
Goodwill(1)
$
$
$
74
81
279
434
739
305
(1) The goodwill recognized is 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.
77
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
9. Property, Plant and Equipment, Net of Accumulated Depreciation
Property, plant and equipment, net of accumulated depreciation follow (in millions):
Land
Buildings
Equipment
Construction in progress
Accumulated depreciation
Total
2013
$
December 31,
2014
$
458
5,470
13,848
1,322
21,098
(8,332)
$
12,766
$
121
4,175
12,286
1,084
17,666
(7,865)
9,801
The increase in Property, plant and equipment, net of accumulated
depreciation in 2014 is primarily driven by the Acquisition of Samsung
Corning Precision Materials, which added $3.6 billion to this balance
at acquisition.
Approximately $40 million, $35 million and $74 million of interest
costs were capitalized as part of Property, plant and equipment, net of
accumulated depreciation, in 2014, 2013 and 2012, respectively.
Manufacturing equipment includes certain components of production
equipment that are constructed of precious metals. At December 31,
2014 and 2013, the recorded value of precious metals totaled $3.1 billion
and $2.2 billion, respectively. Depletion expense for precious metals
in the years ended December 31, 2014, 2013 and 2012 was $21 million,
$20 million and $20 million, respectively. The consolidation of Corning
Precision Materials added approximately $1.1 billion in precious metals
and approximately $4 million of depletion expense for the year ended
December 31, 2014.
10. Goodwill and Other Intangible Assets
Goodwill
Changes in the carrying amount of goodwill for the twelve months ended December 31, 2014 and 2013 were as follows (in millions):
Optical
Communications
Display
Technologies
Specialty
Materials
Life
Sciences
Balance at December 31, 2012
Acquired goodwill(2)
Measurement period adjustment(1)
Foreign currency translation adjustment
Balance at December 31, 2013
Acquired goodwill(3)
Measurement period adjustment(4)
Foreign currency translation adjustment
Balance at December 31, 2014
$
$
$
209
32
(1)
240
(2)
238
$
$
9
$
150
$
606
(4)
1
Total
$
974
32
(4)
9
68
60
(3)
$
134
$
$
150
54
(6)
198
$
603
$
1,002
122
60
(34)
$
1,150
(23)
580
$
(1) 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. Refer to Note 8 (Acquisition) to the Consolidated Financial Statements
for additional information.
(2) The company recorded a small acquisition and consolidated an equity company due to a change in control in the second quarter of 2013.
(3) The Company recorded the Acquisition of Samsung Corning Precision Materials and a small acquisition in the Specialty Materials segment in
the first quarter of 2014. Refer to Note 8 (Acquisition) to the Consolidated Financial Statements for additional information on the Acquisition of
Samsung Corning Precision Materials.
(4) In the year ended December 31, 2014, the Company recorded measurement period adjustments of $60 million for the Acquisition of Samsung
Corning Precision Materials primarily related to the accrual of contingent liabilities and employee benefit obligations.
Corning’s gross goodwill balance for the fiscal years ended December 31, 2014 and 2013 were $7.6 billion and $7.5 billion, respectively. Accumulated
impairment losses were $6.5 billion for the fiscal years ended December 31, 2014 and 2013, respectively, and were generated entirely through goodwill
impairments related to the Optical Communications segment.
78
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
Other Intangible Assets
Other intangible assets follow (in millions):
Amortized intangible assets:
Patents, trademarks & trade names
Customer list and other
Total
2014
Accumulated
amortization
Gross
December 31,
Net
Gross
2013
Accumulated
amortization
$
$
302
411
713
$
$
149
67
216
$
$
153
344
497
$
$
290
436
726
$
$
138
48
186
Net
$
$
152
388
540
Amortized intangible assets are primarily related to the Optical Communications and Life Sciences segments. The net carrying amount of intangible
assets decreased by $43 million during the year ended December 31, 2014, primarily due to amortization of $33 million and foreign currency translation
adjustments of $17 million, offset by a small acquisition.
Amortization expense related to these intangible assets is estimated to be $33 million for 2015 and $32 million annually from 2016 to 2019.
11. Other Assets and Other Liabilities
Other assets follow (in millions):
Current assets:
Derivative instruments
Other current assets
Other current assets
Non-current assets:
Derivative instruments
Contingent consideration asset
Other non-current assets
Other assets
Other liabilities follow (in millions):
Current liabilities:
Wages and employee benefits
Income taxes
Other current liabilities
Other accrued liabilities
Non-current liabilities:
Asbestos litigation
Other non-current liabilities
Other liabilities
December 31,
2014
2013
$
$
$
$
687
412
1,099
847
445
430
1,722
$
$
$
$
December 31,
2014
2013
$
$
$
$
562
106
623
1,291
681
1,365
2,046
$
$
$
$
372
483
855
90
383
473
445
139
370
954
690
793
1,483
79
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
Asbestos Litigation
Corning and PPG each own 50% of the capital stock of PCC. Over a
period of more than two decades, PCC and several other defendants
were named in numerous lawsuits involving claims alleging personal
injury from exposure to asbestos. The liability for the Amended PCC
Plan and the non-PCC asbestos claims was estimated to be $681 million
at December 31, 2014, compared with an estimate of liability of
$690 million at December 31, 2013. The $681 million liability is comprised
of $241 million of the fair value of PCE, $290 million for the fixed series
of payments, and $150 million for the non-PCC asbestos litigation, all
referenced in the preceding paragraphs. With respect to the liability
for other asbestos litigation, the estimated liability for non-PCC claims
represents the undiscounted projection of claims and related legal fees
12. Debt
(In millions)
Current portion of long-term debt
Long term debt
Debentures, 8.875%, due 2016
Debentures, 1.45%, due 2017
Debentures, 6.625%, due 2019
Debentures, 4.25%, due 2020
Debentures, 8.875%, due 2021
Debentures, 3.70%, due 2023
Medium-term notes, average rate 7.66%, due through 2023
Debentures, 7.00%, due 2024
Debentures, 6.85%, due 2029
Debentures, callable, 7.25%, due 2036
Debentures, 4.70%, due 2037
Debentures, 5.75%, due 2040
Debentures, 4.75%, due 2042
Other, average rate 4.94%, due through 2042
Total long term debt
Less current portion of long-term debt
Long-term debt
over the next 20 years. The amount may need to be adjusted in future
periods as more data becomes available; however, we cannot estimate
any additional losses at this time. The entire obligation 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). Refer to Note 7 (Investments) to the
Consolidated Financial Statements for additional information on the
asbestos litigation.
December 31,
2014
2013
$
$
36
66
250
243
287
69
249
45
99
170
249
250
398
499
389
$
$
21
67
250
238
276
70
249
45
99
172
249
250
398
499
431
3,263
36
3,293
21
$
3,227
$
3,272
At December 31, 2014 and 2013, the weighted-average interest rate on current portion of long-term debt was 2.5% and 2.6%, respectively.
Based on borrowing rates currently available to us for loans with similar terms and maturities, the fair value of long-term debt was $3.6 billion at
December 31, 2014 and $3.5 billion at December 31, 2013. The measurement of the fair value of long term debt was determined using Level 2 inputs.
The following table shows debt maturities by year at December 31, 2014 (in millions)*:
2015
$
36
2016
$
71
2017
$
257
2018
$
3
2019
$
253
Thereafter
$
2,639
* Excludes interest rate swap gains and bond discounts.
80
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
Debt Issuances and Retirements
2014
• In the third quarter of 2014, we amended and restated our existing
revolving credit facility. The amended facility provides a $2 billion
unsecured multi-currency line of credit and expires on September 30,
2019. At December 31, 2014, there were no outstanding amounts on this
credit facility. The facility includes affirmative and negative covenants
that Corning must comply with, including a leverage (debt to
capital ratio) financial covenant. As of December 31, 2014, we were in
compliance with all of the covenants.
credit facility is available to support obligations under the commercial
paper program, if needed. At December 31, 2013, we did not have any
outstanding commercial paper.
• In the fourth quarter of 2013, we issued $250 million of 3.70% senior
unsecured notes that mature on November 15, 2023. The net proceeds of
approximately $248 million were used for general corporate purposes.
• In the fourth quarter of 2013, we recorded a financing obligation in the
approximate amount of $230 million for a new LCD glass substrate
facility in China.
2013
2012
• In the first quarter of 2013, we amended and restated our then-existing
revolving credit facility. The 2013 amended facility provided a $1 billion
unsecured multi-currency line of credit that would have expired in
March 2018. This facility was amended and restated by the $2 billion
facility entered into in the third quarter of 2014.
• 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 billion. The total amount
repaid was approximately $500 million. Upon repayment, this facility
was terminated.
• 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 revolving
• In the first quarter of 2012, we issued $500 million of 4.75% senior
unsecured notes that mature on March 15, 2042 and $250 million of
4.70% senior unsecured notes that mature on March 15, 2037. The net
proceeds of $742 million were used for general corporate purposes.
• In the fourth quarter of 2012, we completed the following
debt-related transactions:
– We issued $250 million of 1.45% senior unsecured notes that mature
on November 15, 2017. The net proceeds of $248 million from the
offering were used for general corporate purposes.
– We repurchased $13 million of our 8.875% senior unsecured
notes due 2021, $11 million of our 8.875% senior unsecured notes
due 2016, and $51 million of our 6.75% senior unsecured notes
due 2013. Additionally, we redeemed $100 million of our 5.90%
senior unsecured notes due 2014 and $74 million of our 6.20%
senior unsecured notes due 2016. We recognized a pre-tax loss of
$26 million upon the early redemption of these notes.
• In 2012, we borrowed the equivalent of approximately $377 million
from a Chinese renminbi credit facility that a wholly-owned subsidiary
entered into in the second quarter of 2011.
13. Employee Retirement Plans
Defined Benefit Plans
We have defined benefit pension plans covering certain domestic and
international employees. Our funding policy has been to contribute, as
necessary, an amount in excess of the minimum requirements in order
to achieve the Company’s long-term funding targets. In 2014, we made
voluntary cash contributions of $85 million to our domestic defined
benefit pension plan and contributed $45 million to our international
pension plans. In 2013, we did not contribute to our domestic defined
benefit pension plan and contributed $5 million to our international
pension plans. Although we will not be subject to any mandatory
contributions in 2015, we anticipate making voluntary cash contributions
of up to $65 million to our domestic pension plan and up to $28 million
to our international pension plans in 2015.
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 have 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 benefits upon retirement;
however, these employees will pay 100% of the cost.
81
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
Obligations and Funded Status
The change in benefit obligation and funded status of our employee retirement plans follows (in millions):
December 31,
Change in benefit obligation
Total
pension benefits
Domestic
pension benefits
International
pension benefits
2014
2013
2014
2013
2014
2013
Benefit obligation at beginning of year
$
3,300
$
3,630
$
2,844
$
3,198
$
456
$
Service cost
Interest cost
Plan participants’ contributions
Acquisitions
Amendments
Actuarial loss (gain)
Other
Benefits paid
Foreign currency translation
Benefit obligation at end of year
Change in plan assets
Fair value of plan assets at
beginning of year
Actual gain on plan assets
Employer contributions
Plan participants’ contributions
Acquisitions
Benefits paid
Foreign currency translation
Fair value of plan assets at end of year
Funded status at end of year
Fair value of plan assets
Benefit obligations
Funded status of plans
Amounts recognized in the consolidated
balance sheets consist of:
Noncurrent asset
Current liability
Noncurrent liability
Recognized liability
Amounts recognized in accumulated
other comprehensive income consist of:
Net actuarial loss
Prior service cost (credit)
Amount recognized at end of year
82
160
1
103
25
394
(3)
(207)
(46)
3,809
2,896
355
147
1
97
(207)
(26)
3,263
3,263
(3,809)
(546)
47
(41)
(552)
(546)
308
41
349
$
$
$
$
$
$
$
$
$
70
131
1
(362)
2
(177)
5
3,300
2,975
71
20
1
(177)
6
2,896
2,896
(3,300)
(404)
23
(15)
(412)
(404)
132
21
153
$
$
$
$
$
$
$
$
$
55
137
1
25
327
(167)
3,222
2,596
287
97
1
$
$
60
115
1
(368)
2
(164)
2,844
2,684
65
10
1
(167)
(164)
2,814
2,814
(3,222)
(408)
(30)
(378)
(408)
278
44
322
$
$
$
$
$
$
$
2,596
2,596
(2,844)
(248)
15
(10)
(253)
(248)
83
27
110
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
27
23
103
67
(3)
(40)
(46)
587
300
68
50
97
(40)
(26)
449
449
(587)
(138)
47
(11)
(174)
(138)
30
(3)
27
$
$
$
$
$
$
$
$
$
432
10
16
6
(13)
5
456
291
6
10
(13)
6
300
300
(456)
(156)
8
(5)
(159)
(156)
49
(6)
43
The accumulated benefit obligation for defined benefit pension plans was $3.6 billion and $3.2 billion at December 31, 2014 and 2013, respectively.
82
CORNING INCORPORATED - 2014 Annual Report December 31,
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Plan participants’ contributions
Amendments
Actuarial loss (gain)
Other
Benefits paid
Medicare subsidy received
Foreign currency translation
Benefit obligation at end of year
Funded status at end of year
Fair value of plan assets
Benefit obligations
Funded status of plans
Amounts recognized in the consolidated balance sheets consist of:
Current liability
Noncurrent liability
Recognized liability
Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial loss
Prior service credit
Amount recognized at end of year
Notes to Consolidated Financial Statements
Postretirement benefits
2014
2013
$
$
$
$
$
$
$
$
815
11
38
7
(5)
49
(56)
3
862
0
(862)
(862)
(48)
(814)
(862)
132
(27)
105
$
$
$
$
$
$
$
$
987
13
39
14
(4)
(178)
5
(61)
1
(1)
815
0
(815)
(815)
(49)
(766)
(815)
82
(29)
53
The following information is presented for pension plans where the projected benefit obligation as of December 31, 2014 and 2013 exceeded the fair
value of plan assets (in millions):
Projected benefit obligation
Fair value of plan assets
December 31,
2014
2013
$
$
3,425
2,831
$
$
447
20
In 2014, the fair value of plan assets exceeded the projected benefit obligation for the United Kingdom, the South Korea and one of the France
pension plans.
The following information is presented for pension plans where the accumulated benefit obligation as of December 31, 2014 and 2013 exceeded the
fair value of plan assets (in millions):
Accumulated benefit obligation
Fair value of plan assets
December 31,
2014
2013
$
$
479
17
$
$
417
20
In 2014, the fair value of plan assets exceeded the accumulated benefit obligation for the United States, the United Kingdom, the South Korea and one
of the France pension plans.
83
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
The components of net periodic benefit expense for our employee retirement plans follow (in millions):
Total pension benefits
Domestic pension benefits
International pension benefits
2014
2013
2012
2014
2013
2012
2014
2013
2012
$
82
$
160
(174)
6
29
70
131
(169)
5
(30)
$
62
154
(161)
8
217
$
55
137
(159)
7
4
$ 60
$
115
(158)
6
(41)
(18)
53
138
(151)
9
187
Total net periodic benefit expense
$ 103
$
7
$ 280
$
44
$
$ 236
$
(3)
(2)
212
(29)
25
(6)
$ (264)
$ 257
$ 198
$ (274)
$ 218
30
(217)
3
(5)
(8)
(4)
25
(7)
41
(187)
3
(6)
(9)
1
$ 197
$ (239)
$
35
$ 212
$ (239)
$
25
$
(15)
$
$ 300
$ (232)
$
315
$ 256
$ (257)
$ 261
$
44
$
25
$
54
December 31,
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service
cost (credit)
Recognition of actuarial (gain) loss
Other changes in plan assets and
benefit obligations recognized in other
comprehensive income:
Curtailment effects
Settlements
Current year actuarial loss (gain)
Recognition of actuarial gain (loss)
Current year prior service cost
Amortization of prior service
(cost) credit
Total recognized in other comprehensive
(income) loss
Total recognized in net periodic
benefit cost and other comprehensive
(income) loss
Service cost
Interest cost
Amortization of net loss
Amortization of prior service credit
Total net periodic benefit expense
$
$
$
27
23
(15)
(1)
25
59
(3)
(2)
14
(25)
$
$
$
10
16
(11)
(1)
11
25
$
$
9
16
(10)
(1)
30
44
10
(11)
$
39
(30)
1
0
1
$
10
Postretirement benefits
2014
$
$
$
$
$
11
38
(6)
43
49
(5)
6
50
93
2013
$
$
$
$
$
13
39
15
(6)
61
(178)
(15)
(5)
6
(192)
(131)
2012
$
$
$
$
$
13
45
15
(6)
67
20
(16)
6
10
77
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Current year actuarial loss (gain)
Amortization of actuarial loss
Current year prior service credit
Amortization of prior service credit
Total recognized in other comprehensive (income) loss
Total recognized in net periodic benefit cost and other comprehensive (income) loss
The Company expects to recognize $6 million of net prior service cost as
a component of net periodic pension cost in 2015 for its defined benefit
pension plans. The Company expects to recognize $5 million of net loss
and $6 million of net prior service credit as components of net periodic
postretirement benefit cost in 2015.
Corning uses a hypothetical yield curve and associated spot rate curve to
discount the plan’s projected benefit payments. Once the present value
of projected benefit payments is calculated, the suggested discount
rate is equal to the level rate that results in the same present value.
The yield curve is based on actual high-quality corporate bonds across
the full maturity spectrum, which also includes private placements
as well as Eurobonds that are denominated in U.S. currency. The curve
is developed from yields on approximately 350-375 bonds from four
grading sources, Moody’s, S&P, Fitch and the Dominion Bond Rating
Service. A bond will be included if at least half of the grades from these
sources are Aa, non-callable bonds. The very highest 10% yields and the
lowest 40% yields are excluded from the curve to eliminate outliers in
the bond population.
84
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
Mortality is one of the key assumptions used in valuing liabilities of
retirement plans. It is used to assign a probability of payment for future
plan benefits that are contingent upon participants’ survival. To make this
assumption, benefit plan sponsors typically use a base mortality table
and an improvement scale that adjusts the rates of mortality for future
anticipated changes to historical death rates. For the past seven years,
Corning has utilized the RP 2000 mortality table with improvement
Scale AA in performing valuations of its U.S. pension and OPEB liabilities.
On October 27, 2014, the Society of Actuaries (“SOA”) published new
mortality tables for benefit plan sponsors to consider when measuring
their benefit plan costs and obligations. These tables reflect the fact
that life expectancies have improved since the last comprehensive
study of mortality data was released in 2000. In the fourth quarter of
2014, Corning undertook a review of its mortality assumption for its U.S.
benefit plans to determine if an update to our current mortality table
was appropriate. Based on the findings of this analysis, Corning believes
that the RP-2014 table adjusted for Corning’s experience with future
improvements projected using scale BB-2D represents the best estimate
of future mortality improvement for Corning’s U.S. benefit plans. The
impact of the mortality table change was an increase of $88 million to
our pension obligation.
is based on
Measurement of postretirement benefit expense
assumptions used to value the postretirement benefit obligation at the
beginning of the year.
The weighted-average assumptions used to determine benefit obligations at December 31 follow:
Pension benefits
Domestic
International
Postretirement benefits
2014
2013
2012
2014
2013
2012
2014
2013
2012
Discount rate
Rate of compensation increase
4.00%
3.50%
4.75%
4.00%
3.75%
4.00%
3.21%
3.88%
4.08%
3.85%
4.48%
3.45%
4.00%
4.75%
4.00%
The weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 follow:
Pension benefits
Domestic
International
Postretirement benefits
2014
2013
2012
2014
2013
2012
2014
2013
2012
Discount rate
Expected return on plan assets
Rate of compensation increase
4.75%
6.25%
4.00%
3.75%
6.00%
4.00%
4.75%
6.00%
4.25%
4.08%
4.12%
3.85%
4.48%
3.73%
3.45%
4.40%
6.01%
3.44%
4.75%
4.00%
4.75%
The assumed rate of return was determined based on the current interest rate environment and historical market premiums relative to fixed income
rates of equities and other asset classes. Reasonableness of the results is tested using models provided by the plan actuaries.
Assumed health care trend rates at December 31
Health care cost trend rate assumed for next year
Rate that the cost trend rate gradually declines to
Year that the rate reaches the ultimate trend rate
2014
2013
6.67%
5%
2020
7%
5%
2020
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects (in millions):
Effect on annual total of service and interest cost
Effect on postretirement benefit obligation
One-percentage-
point increase
One-percentage-
point decrease
$
$
4
49
$
$
(3)
(41)
Plan Assets
Corning’s expected long-term rates of return on plan assets reflect the
average rates of earnings expected on the funds invested to provide
for the benefits included in our domestic and international projected
benefit obligations. We based these rates on asset/liability forecast
modeling, which is based on our current asset allocation, the return and
standard deviation for each asset class, current market conditions and
transitions from current conditions to long-term returns.
The Company’s overall investment strategy is to obtain sufficient return
to offset or exceed inflation and provide adequate liquidity to meet the
benefit obligations of the pension plan. Investments are made in public
securities to ensure adequate liquidity to support benefit payments.
Domestic and international stocks and bonds provide diversification to
the portfolio. The target allocation range for global equity investment
is 20%-25% which includes large, mid and small cap companies and
investments in both developed and emerging markets. The target
allocation for bond investments is 60%, which predominately includes
corporate bonds. Long duration fixed income assets are utilized to
mitigate the sensitivity of funding ratios to changes in interest rates. The
target allocation range for non-public investments in private equity and
real estate is 5%-15%, and is used to enhance returns and offer additional
asset diversification. The target allocation range for commodities is
0%-5%, which provides some inflation protection to the portfolio.
85
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
The following tables provide fair value measurement information for the Company’s major categories of our domestic defined benefit plan assets:
(in millions)
Equity securities:
U.S. companies
International companies
Fixed income:
U.S. corporate bonds
Private equity(1)
Real estate(2)
Cash equivalents
Commodities(3)
Total
Fair value measurements at reporting date using
Quoted prices in
active markets
for identical
assets (Level 1)
Significant other
observable
inputs (Level 2)
Significant
unobservable
inputs (Level 3)
December 31, 2014
$
310
327
1,720
192
84
80
101
$
49
78
166
80
$
261
249
1,554
101
$
192
84
$
2,814
$
373
$
2,165
$
276
(1) This category includes venture capital, leverage buyouts and distressed debt limited partnerships invested primarily in U.S. companies. The inputs
are valued by discounted cash flow analysis and comparable sale analysis.
(2) This category includes industrial, office, apartments, hotels, infrastructure, and retail investments which are limited partnerships predominately in
the U.S. The inputs are valued by discounted cash flow analysis; comparable sale analysis and periodic external appraisals.
(3) This category includes investments in energy, industrial metals, precious metals, agricultural and livestock primarily through futures, options, swaps,
and exchange traded funds.
(in millions)
Equity securities:
U.S. companies
International companies
Fixed income:
U.S. corporate bonds
Private equity(1)
Real estate(2)
Cash equivalents
Commodities(3)
Total
Fair value measurements at reporting date using
Quoted prices in
active markets
for identical
assets (Level 1)
Significant other
observable
inputs (Level 2)
Significant
unobservable
inputs (Level 3)
December 31, 2013
$
325
294
1,538
207
93
39
100
$
$
216
118
142
39
$
2,596
$
515
$
109
176
1,396
100
1,781
$
207
93
$
300
(1) This category includes venture capital, leverage buyouts and distressed debt limited partnerships invested primarily in U.S. companies. The inputs
are valued by discounted cash flow analysis and comparable sale analysis.
(2) This category includes industrial, office, apartments, hotels, infrastructure, and retail investments which are limited partnerships predominately in
the U.S. The inputs are valued by discounted cash flow analysis; comparable sale analysis and periodic external appraisals.
(3) This category includes investments in energy, industrial metals, precious metals, agricultural and livestock primarily through futures, options, swaps,
and exchange traded funds.
86
CORNING INCORPORATED - 2014 Annual Report The following tables provide fair value measurement information for the Company’s major categories of our international defined benefit plan assets:
Notes to Consolidated Financial Statements
(in millions)
Equity securities:
U.S. companies
International companies
Fixed income:
International fixed income
Insurance contracts
Mortgages
Cash equivalents
Total
(in millions)
Equity securities:
U.S. companies
International companies
Fixed income:
International fixed income
Insurance contracts
Mortgages
Cash equivalents
Total
Fair value measurements at reporting date using
Quoted prices in
active markets
for identical
assets (Level 1)
Significant other
observable
inputs (Level 2)
Significant
unobservable
inputs (Level 3)
December 31, 2014
$
$
6
22
361
5
7
48
449
$
293
48
341
$
$
6
22
68
$
96
$
$
5
7
12
Fair value measurements at reporting date using
Quoted prices in
active markets
for identical
assets (Level 1)
Significant other
observable
inputs (Level 2)
Significant
unobservable
inputs (Level 3)
December 31, 2013
$
$
6
22
245
6
21
300
$
185
21
206
$
$
6
22
60
$
88
$
$
6
6
The tables below set forth a summary of changes in the fair value of the defined benefit plans Level 3 assets for the years ended December 31, 2014
and 2013:
(in millions)
Beginning balance at December 31, 2013
Actual return on plan assets relating to assets still held at the reporting date
Transfers in and/or out of level 3
Ending balance at December 31, 2014
(in millions)
Beginning balance at December 31, 2012
Actual return on plan assets relating to assets still held at the reporting date
Transfers in and/or out of level 3
Ending balance at December 31, 2013
Level 3 assets – Domestic
Level 3 assets – International
Year ended December 2014
Year ended December 2014
Private equity
Real estate
Mortgages
$
$
207
31
(46)
192
$
$
93
8
(17)
84
$
$
0
7
7
Insurance
contracts
$
$
6
1
(2)
5
Level 3 assets – Domestic
Level 3 assets – International
Year ended December 2013
Year ended December 2013
Private equity
Real estate
Mortgages
$
$
221
25
(39)
207
$
103
$
0
9
(19)
93
$
$
0
Insurance
contracts
$
$
6
6
87
CORNING INCORPORATED - 2014 Annual Report
Notes to Consolidated Financial Statements
Credit Risk
Liquidity Risk
61% of domestic plan assets are invested in long duration bonds. The
average rating for these bonds is A. These bonds are subject to credit
risk, such that a decline in credit ratings for the underlying companies,
countries or assets (for asset-backed securities) would result in a decline
in the value of the bonds. These bonds are also subject to default risk.
10% of the domestic securities are invested in Level 3 securities. These
are long-term investments in private equity and private real estate
investments that may not mature or be sellable in the near-term
without significant loss.
At December 31, 2014 and 2013, the amount of Corning common stock
included in equity securities was not significant.
Currency Risk
12% of domestic assets are valued in non-U.S. dollar denominated
investments that are subject to currency fluctuations. The value of these
securities will decline if the U.S. dollar increases in value relative to the
value of the currencies in which these investments are denominated.
Cash Flow Data
In 2015, we anticipate making voluntary cash contributions of
approximately $65 million to our domestic defined benefit plan and
approximately $28 million to our international defined benefit plans.
The following reflects the gross benefit payments that are expected to be paid for our domestic and international defined benefit pension plans, the
postretirement medical and life plans and the gross amount of annual Medicare Part D federal subsidy expected to be received (in millions):
2015
2016
2017
2018
2019
2020-2024
Expected benefit payments
Domestic
pension benefits
International
pension benefits
Postretirement
benefits
Expected federal
subsidy payments
postretirement
benefits
$
$
$
$
$
$
202
185
189
194
199
1,091
$
$
$
$
$
$
27
22
23
26
26
165
$
$
$
$
$
$
48
49
49
48
48
239
$
$
$
$
$
$
2
2
3
3
3
15
Other Benefit Plans
We offer defined contribution plans covering employees meeting certain eligibility requirements. Total consolidated defined contribution plan expense
was $62 million, $63 million and $50 million for the years ended December 31, 2014, 2013 and 2012, respectively.
88
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
14. Commitments, Contingencies, and Guarantees
The amounts of our obligations follow (in millions):
Amount of commitment and contingency expiration per period
Total
Less than 1 year
1 to 3 years
3 to 5 years
5 years and
thereafter
Performance bonds and guarantees
Stand-by letters of credit(1)
Loan guarantees
Subtotal of commitment expirations per period
Purchase obligations(6)
Capital expenditure obligations(2)
Total debt(3)
Interest on long-term debt(4)
Capital leases and financing obligations(3)
Imputed interest on capital leases and financing
obligations
Minimum rental commitments
Uncertain tax positions(5)
$
$
$
75
61
14
150
287
358
2,899
2,451
360
258
238
2
Subtotal of contractual obligation payments due
by period
Total commitments and contingencies
6,853
7,003
$
$
$
$
$
21
57
78
152
358
29
151
7
19
48
1
765
843
$
$
$
$
3
3
105
314
293
14
38
75
1
840
843
$
$
$
1
1
15
250
274
7
38
44
$
$
$
50
4
14
68
15
2,306
1,733
332
163
71
628
629
$
4,620
4,688
$
(1) At December 31, 2014, $41 million of the $61 million was included in other accrued liabilities on our consolidated balance sheets.
(2) Capital expenditure obligations primarily reflect amounts associated with our capital expansion activities.
(3) Total debt above is stated at maturity value, and excludes interest rate swap gains and bond discounts.
(4) The estimate of interest payments assumes interest is paid through the date of maturity or expiration of the related debt, based upon stated rates
in the respective debt instruments.
(5) At December 31, 2014, $8 million was included on our balance sheet related to uncertain tax positions. Of this amount, we are unable to estimate
when $6 million of that amount will become payable.
(6) Purchase obligations are enforceable and legally binding obligations which primarily consist of raw material and energy-related take-or-pay
contracts.
We are required, at the time a guarantee is issued, to recognize a liability
for the fair value or market value of the obligation it assumes. In the
normal course of our business, we do not routinely provide significant
third-party guarantees. Generally, 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. These guarantees have various terms, and
none of these guarantees are individually significant.
We believe a significant majority of these guarantees and contingent
liabilities will expire without being funded.
Minimum rental commitments under leases outstanding at December 31, 2014 follow (in millions):
2015
$
48
2016
$
45
2017
$
30
2018
$
25
2019
$
19
2020 and
thereafter
$
71
Total rental expense was $92 million for 2014, $85 million for 2013 and
$80 million for 2012.
Product warranty liability accruals at December 31, 2014 and December 31,
2013 are insignificant.
Corning is a defendant in various lawsuits, including environmental,
product-related suits, the Dow Corning and PCC matters discussed in
Note 7 (Investments) to the Consolidated Financial Statements, and is
subject to various claims that arise in the normal course of business. In
the opinion of management, the likelihood that the ultimate disposition
of these matters will have a material adverse effect on Corning’s
consolidated financial position, liquidity, or results of operations, is
remote. Other than certain asbestos related claims, there are no other
material loss contingencies related to litigation.
89
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
Corning has been named by the Environmental Protection Agency (the
Agency) under the Superfund Act, or by state governments under similar
state laws, as a potentially responsible party for 15 active hazardous waste
sites. Under the Superfund Act, all parties who may have contributed
any waste to a hazardous waste site, identified by the Agency, are jointly
and severally liable for the cost of cleanup unless the Agency agrees
otherwise. It is Corning’s policy to accrue for its estimated liability related
to Superfund sites and other environmental liabilities related to property
owned by Corning based on expert analysis and continual monitoring
by both internal and external consultants. At December 31, 2014 and
December 31, 2013, Corning had accrued approximately $42.5 million
(undiscounted) and $15 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.
The ability of certain subsidiaries and affiliated companies to transfer
funds is limited by provisions of foreign government regulations,
affiliate agreements and certain loan agreements. At December 31,
2014, the amount of equity subject to such restrictions for consolidated
subsidiaries and affiliated companies was not significant. While this
amount is legally restricted, it does not result in operational difficulties
since we have generally permitted subsidiaries to retain a majority of
equity to support their growth programs.
15. 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, South Korean won, New Taiwan dollar, Chinese renminbi, and the
Euro. We seek to mitigate the impact of exchange rate movements
in our income statement 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.
We are exposed to potential losses in the event of non-performance
by our counterparties to these derivative contracts. However, we
minimize this risk by maintaining a diverse group of highly-rated
major international financial institutions with which we have other
financial relationships as our counterparties. 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 April 2014, the Finance Committee of the Board of
Directors approved the Company’s qualification for and election of the
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. In the fourth quarter of 2014,
the Company entered into interest rate swap agreements to hedge
against the variability in cash flows due to changes in the benchmark
interest rate related to an anticipated issuance. The instruments were
designated as cash flow hedges.
Corning uses a regression analysis to monitor the effectiveness of
its cash flow hedges both prospectively and retrospectively. Through
ineffectiveness related to these
December 31, 2014, the hedge
instruments is not material. Corning defers net gains and losses
related to effective portion of cash flow hedges into accumulated other
comprehensive (loss) income on the consolidated balance sheet until
such time as the hedged item impacts earnings. At December 31, 2014,
the amount expected to be reclassified into earnings within the next
12 months is a pre-tax net gain of $15.2 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.
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 year ended December 31,
2013. There were no outstanding fair value hedges in 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.
90
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
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 or vice versa. 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
December 31, 2014, the U.S. dollar net notional value of the Korean won
purchased collars is $1.2 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 through 2017 net income. These forwards have a notional
value of $9.8 billion and will 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
December 31, 2014 and December 31, 2013 (in millions):
Notional amount
2014
2013
Balance sheet
location
Fair value
2014
2013
Balance sheet
location
Fair value
2014
2013
Asset derivatives
Liability derivatives
Derivatives designated as
hedging instruments
Foreign exchange contracts
$
487
$
433
Other current
assets
$
22
$
Other accrued
liabilities
8
$
(6)
$
(3)
Interest rate contracts
1,300
550
Other assets
1
Other
liabilities
(15)
(28)
Derivatives not designated as
hedging instruments
Foreign exchange contracts
1,285
804
Translated earnings contracts
12,126
6,826
Other current
assets
Other current
assets
Other assets
17
649
846
Total derivatives
$
15,198
$
8,613
$
1,535
$
Other accrued
liabilities
20
Other accrued
liabilities
344
90
462
(5)
(33)
(3)
(3)
$
(59)
$
(37)
The following tables summarize the effect on the consolidated financial statements relating to Corning’s derivative financial instruments (in millions):
Effect of derivative instruments on the consolidated financial statements for the years ended December 31
Gain/(loss) recognized in other
comprehensive income (OCI)
Derivatives in hedging relationships
2014
2013
2012
Cash flow hedges
Interest rate hedge
Foreign exchange contracts
Total cash flow hedges
$
$
(3)
20
17
$
$
33
56
89
$
$
15
85
100
Location of gain/
(loss) reclassified from
accumulated OCI into
income effective/
ineffective
Gain/(loss) reclassified from
accumulated OCI into income
ineffective/effective(1)
2014
2013
2012
Net sales
Cost of sales
Other income, net
$
$
3
7
10
$
$
$
38
91
129
$
Gain (loss) recognized in income
Undesignated derivatives
Location
2014
2013
2012
Foreign exchange contracts – balance sheet
Foreign exchange contracts – loans
Translated earnings contracts
Total undesignated
Other income, net
Other income, net
Other income, net
$
$
29
13
1,369
1,411
$
$
100
87
435
622
$
$
(1) There was no amount of ineffectiveness for 2014 and the amount of hedge ineffectiveness for the year ended December 31, 2013 was $24 million
related to interest rate swaps settled in the fourth quarter. The amount of ineffectiveness for 2012 was insignificant.
91
1
16
11
28
82
141
223
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
16. Fair Value Measurements
Fair value standards under U.S. GAAP define fair value, establish a
framework for measuring fair value in applying generally accepted
accounting principles, and require disclosures about fair value
measurements. The standards also identify two kinds of inputs
that are used to determine the fair value of assets and liabilities:
observable and unobservable. Observable inputs are based on market
data or independent sources while unobservable inputs are based
on the Company’s own market assumptions. Once inputs have been
characterized, the inputs are prioritized into one of three broad
levels (provided in the table below) used to measure fair value. Fair
value standards apply whenever an entity is measuring fair value
under other accounting pronouncements that require or permit fair
value measurement and require the use of observable market data
when available.
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)
Current assets:
Short-term investments
Other current assets(1)
Non-current assets:
Other assets(2)
Current liabilities:
Other current liabilities(1)
Non-current liabilities:
Other liabilities(1)
December 31, 2014
Quoted prices in
active markets for
identical assets (Level 1)
Significant other observable
inputs (Level 2)
Significant unobservable
inputs (Level 3)
Fair value measurements at reporting date using
$
759
$
$
$
$
$
759
687
1,330
44
15
$
$
$
$
687
885
44
15
$
445
(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 and a contingent consideration
asset which was measured by applying an option pricing model using projected future Corning Precision Materials’ revenue.
(in millions)
Current assets:
Short-term investments
Other current assets(1)
Non-current assets:
Other assets(2)
Current liabilities:
Other current liabilities(1)
Non-current liabilities:
Other liabilities(1)
December 31, 2013
Quoted prices in
active markets for
identical assets (Level 1)
Significant other observable
inputs (Level 2)
Significant unobservable
inputs (Level 3)
Fair value measurements at reporting date using
$
531
$
$
$
$
$
531
372
128
9
28
$
$
$
$
372
128
9
28
(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.
92
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
As a result of the Acquisition of Samsung Corning Precision Materials
in January 2014, the Company has contingent consideration that
was measured using unobservable (Level 3) inputs. This contingent
consideration arrangement potentially requires additional consideration
to be paid between the parties in 2018: one based on projections
of future revenues generated by the business of Corning Precision
Materials for the period between the acquisition date and December 31,
2017, which is subject to a cap of $665 million; and another based on
the volumes of certain sales during the same period, which is subject
to a separate cap of $100 million. The fair value of the potential receipt
of the contingent consideration in 2018 in the amount of $196 million
recognized on the acquisition date was estimated by applying an
option pricing model using the Company’s projection of future revenues
generated by Corning Precision Materials. Changes in the fair value
of the contingent consideration in future periods are valued using an
option pricing model and are recorded in Corning’s results in the period
of the change. As of December 31, 2014, the fair value of the potential
receipt of the contingent consideration in 2018 is $445 million. Corning
recorded a pre-tax adjustment in the amount of $249 million to reflect
the increase in the fair value which is mainly due to the movement in
foreign exchange rate.
There were no significant financial assets and liabilities measured on a
nonrecurring basis during the years ended December 31, 2014 and 2013.
17. Shareholders’ Equity
Fixed Rate Cumulative Convertible Preferred
Stock, Series A
On January 15, 2014, Corning designated a new series of its preferred
stock as Fixed Rate Cumulative Convertible Preferred Stock, Series A,
par value $100 per share, and issued 1,900 shares of Preferred Stock at
an issue price of $1 million per share, for an aggregate issue price of
$1.9 billion, to Samsung Display in connection with the Acquisition of its
equity interests in Samsung Corning Precision Materials. Corning also
issued to Samsung Display an additional amount of Preferred Stock at
closing, for an aggregate issue price of $400 million in cash.
Dividends on the Preferred Stock are cumulative and accrue at the
annual rate of 4.25% on the per share issue price of $1 million. The
dividends are payable quarterly as and when declared by the Company’s
Board of Directors. The Preferred Stock ranks senior to our common stock
with respect to payment of dividends and rights upon liquidation. The
Preferred Stock is not redeemable except in the case of a certain deemed
liquidation event, the occurrence of which is under the control of the
Company. The Preferred Stock is convertible at the option of the holder
and the Company upon certain events, at a conversion rate of 50,000
shares of Corning’s common stock per one share of Preferred Stock,
subject to certain anti-dilution provisions. As of December 31, 2014, the
Preferred Stock has not been converted, and none of the anti-dilution
provisions have been triggered. Following the seventh anniversary of
the closing of the Acquisition, the Preferred Stock will be convertible, in
whole or in part, at the option of the holder. The Company has the right,
at its option, to cause some or all of the shares of Preferred Stock to be
converted into Common Stock, if, for 25 trading days (whether or not
consecutive) within any period of 40 consecutive trading days, the closing
price of Common Stock exceeds $35 per share. If the aforementioned
right becomes exercisable before the seventh anniversary of the closing,
the Company must first obtain the written approval of the holders of
a majority of the Preferred Stock before exercising its conversion right.
The Preferred Stock does not have any voting rights except as may be
required by law.
Share Repurchases
During 2012, we repurchased 56 million shares of common stock on the
open market for $719 million as part of the share repurchase program
announced on October 5, 2011.
On October 31, 2013, as part of the share repurchase program announced
on April 24, 2013 (the “2013 Repurchase Program”), Corning entered into
an accelerated share repurchase (“ASR”) agreement with JP Morgan
Chase Bank, National Association, London Branch (“JPMC”). Under the
ASR agreement with JPMC, Corning agreed to purchase $1 billion of its
common stock, in total, with an initial delivery by JPMC of 47.1 million
shares based on the current market price, and payment of $1 billion
made by Corning to JPMC. The payment to JPMC was recorded as a
reduction to shareholders’ equity, consisting of an $800 million increase
in treasury stock, which reflects the value of the initial 47.1 million shares
received upon execution, and a $200 million decrease in other-paid-in
capital, which reflects the value of the stock held back by JPMC pending
final settlement. On January 28, 2014, the ASR agreement with JPMC
was completed. Corning received an additional 10.5 million shares on
January 31, 2014 to settle the ASR agreement. In total, Corning purchased
57.6 million shares based on the average daily volume weighted-average
price of Corning’s common stock during the term of the ASR agreement
with JPMC, less a discount.
In addition to the shares repurchased through the ASR agreement, we
repurchased 61.3 million shares of common stock on the open market
for approximately $1 billion, as part of the 2013 Repurchase Program.
This program was executed between the second quarter of 2013 and the
first quarter of 2014, with a total of 118.9 million shares repurchased for
approximately $2 billion.
On March 4, 2014, as part of the $2 billion share repurchase program
announced on October 22, 2013 and made effective concurrent with the
closing of Corning’s Acquisition of Samsung Corning Precision Materials
on January 15, 2014 (the “2014 Repurchase Program”), Corning entered into
an ASR agreement with Citibank N.A. (“Citi”). Under the ASR agreement
with Citi, Corning agreed to purchase $1.25 billion of its common stock,
with an initial delivery by Citi of 52.5 million shares based on the current
market price, and payment of $1.25 billion made by Corning to Citi. On
May 28, 2014, the ASR agreement with Citi was completed, and Corning
received an additional 8.7 million shares to settle the ASR agreement. In
total, Corning repurchased 61.2 million shares based on the average daily
volume weighted-average price of Corning’s common stock during the
term of the ASR agreement with Citi, less a discount.
In addition to the shares repurchased through the ASR agreement, in
the year ended December 31, 2014, we repurchased 36.9 million shares
of common stock on the open market for approximately $750 million, as
part of the 2014 Repurchase Program. This program was completed in the
fourth quarter of 2014, with a total of 98.2 million shares repurchased
for approximately $2 billion.
93
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
The following table presents changes in capital stock for the period from January 1, 2012 to December 31, 2014 (in millions):
Balance at December 31, 2011
Shares issued to benefit plans and for option exercises
Shares purchased for treasury
Other, net
Balance at December 31, 2012
Shares issued to benefit plans and for option exercises
Shares purchased for treasury
Other, net
Balance at December 31, 2013
Shares issued to benefit plans and for option exercises
Shares purchased for treasury
Other, net
Balance at December 31, 2014(1)
Common stock
Treasury stock
Shares
Par value
Shares
Cost
1,636
13
1,649
12
1,661
11
$
$
$
818
7
825
6
831
5
1,672
$
836
(121)
$
(2,024)
(56)
(2)
(179)
(82)
(1)
(262)
(135)
(1)
(398)
(1)
(719)
(29)
$
(2,773)
(1)
(1,316)
(9)
$
(4,099)
(2)
(2,612)
(14)
$
(6,727)
(1) On January 15, 2014, in conjunction with the Acquisition of Corning Precision Materials, Corning issued 2,300 Fixed Rate Cumulative Convertible
Preferred Stock, Series A (“Preferred Stock”), par value $100 per share, at an issue price of $1 million per share, for an aggregate issue price of
$2.3 billion. There have been no further issuances or conversions of Preferred Stock during 2014.
94
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
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)(1):
Foreign currency
translation
adjustments
and other
Unamortized
actuarial gains
(losses) and
prior service
costs
Net unrealized
gains (losses) on
investments
Net unrealized
gains (losses) on
designated hedges
Accumulated other
comprehensive
income (loss)
Balance at December 31, 2011
Other comprehensive income before
reclassifications(4)
Amounts reclassified from accumulated
other comprehensive income(2)
Equity method affiliates(3)
Net current-period other comprehensive
income (loss)
Balance at December 31, 2012
Other comprehensive income before
reclassifications(5)
Amounts reclassified from accumulated
other comprehensive income(2)
Equity method affiliates(3)
Net current-period other comprehensive
income (loss)
Balance at December 31, 2013
Other comprehensive income before
reclassifications(6)
Amounts reclassified from accumulated
other comprehensive income(2)
Equity method affiliates(3)
Net current-period other comprehensive
income (loss)
$
$
$
$
$
$
$
$
$
$
$
$
1,353
(439)
(52)
312
(179)
1,174
(756)
74
(682)
492
(821)
(136)
(116)
(1,073)
Balance at December 31, 2014
$
(581)
$
(819)
(181)
149
31
(1)
(820)
283
(10)
119
392
(428)
(172)
18
(127)
(281)
(709)
$
$
$
$
$
$
$
(29)
11
(6)
8
13
(16)
1
(1)
2
2
(14)
4
1
(6)
(1)
(15)
$
$
$
$
$
$
$
(29)
63
(18)
2
47
18
56
(81)
1
(24)
(6)
10
(6)
4
(2)
$
$
$
$
$
$
$
476
(546)
73
353
(120)
356
(416)
(92)
196
(312)
44
(979)
(123)
(249)
(1,351)
(1,307)
(1) All amounts are after tax. Amounts in parentheses indicate debits to accumulated other comprehensive income.
(2) Tax effects of reclassifications are disclosed separately in this Note 17.
(3) Tax effects related to equity method affiliates are not significant.
(4) Amounts are net of total tax benefit of $56 million, including $(37) million related to the hedges component, $99 million related to the retirement
plans component and $(6) million related to the investments component.
(5) Amounts are net of total tax expense of $(197) million, including $(33) million related to the hedges component and $(164) million related to the
retirement plans component.
(6) Amounts are net of total tax benefit of $96 million, including $(7) million related to the hedges component and $104 million related to the retirement
plans component and $(1) million related to the investments component.
95
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
(In millions)
Reclassifications Out of Accumulated Other Comprehensive Income (AOCI) by Component(1)
Amount reclassified from AOCI
Years ended December 31,
2013
2012
2014
Affected line item
in the consolidated
statements of income
Transaction-related gain, net
Details about AOCI Components
Foreign currency translation adjustment
Amortization of net actuarial (loss) gain
Amortization of prior service cost
Realized (losses) gains on investments
Realized gains on designated hedges
Total reclassifications for the period
(1) Amounts in parentheses indicate debits to the statement of income.
$
$
$
$
$
$
$
$
136
136
(29)
(29)
11
(18)
(1)
(1)
3
7
10
(4)
6
123
$
$
$
$
$
$
$
$
52 Other income, net
52 Net of tax
(233)
(2)
(2)
(2)
(235) Total before tax
86 Tax benefit (expense)
(149) Net of tax
10 Other income, net
(4) Tax expense
6 Net of tax
1 Sales
16 Cost of sales
11 Other income, net
28 Total before tax
(10) Tax expense
18 Net of tax
(73) Net of tax
$
$
$
$
$
$
$
15
1
16
(6)
10
1
1
38
91
129
(48)
81
92
(2) These accumulated other comprehensive income components are included in net periodic pension cost. See Note 13 – Employee Retirement Plans
for additional details.
18. Earnings Per Common Share
Basic earnings per common share are computed by dividing income attributable to common shareholders by the weighted-average number of
common shares outstanding for the period. Diluted earnings per common share assumes the issuance of common shares for all potentially dilutive
securities outstanding.
The reconciliation of the amounts used to compute basic and diluted earnings per common share from continuing operations follows (in millions,
except per share amounts):
Net income attributable to Corning Incorporated
Less: Series A convertible preferred stock dividend
Net income available to common stockholders - basic
Plus: Series A convertible preferred stock dividend
Net income available to common stockholders - diluted
Weighted-average common shares outstanding - basic
Effect of dilutive securities:
Stock options and other dilutive securities
Series A convertible preferred stock dividend
Weighted-average common shares outstanding - diluted
Basic earnings per common share
Diluted earnings per common share
Anti-dilutive potential shares excluded from diluted earnings per common share:
Employee stock options and awards
Accelerated share repurchase forward contract
Total
96
$
$
$
$
Years ended December 31,
2014
2013
2012
2,472
$
1,961
$
1,636
$
$
$
94
2,378
94
2,472
1,305
12
110
1,427
1.82
1.73
24
3
27
$
$
$
1,961
1,961
1,452
10
1,462
1.35
1.34
39
3
42
1,636
1,636
1,494
12
1,506
1.10
1.09
43
43
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
19. Share-based Compensation
Stock Compensation Plans
We maintain long-term incentive plans (the Plans) for key team members
and non-employee members of our Board of Directors. The Plans allow
us to grant equity-based compensation awards, including stock options,
stock appreciation rights, performance share units, restricted stock
units, restricted stock awards or a combination of awards (collectively,
share-based awards). At December 31, 2014, there were approximately
75 million unissued common shares available for future grants under
the Plans.
The Company measures and recognizes compensation cost for all share-
based payment awards made to employees and directors based on
estimated fair values.
The fair value of awards granted subsequent to January 1, 2006 that are
expected to ultimately vest is recognized as expense over the requisite
service periods. The number of options expected to vest equals the
total options granted less an estimation of the number of forfeitures
expected to occur prior to vesting. The forfeiture rate is calculated based
on 15 years of historical data and is adjusted if actual forfeitures differ
significantly from the original estimates. The effect of any change
in estimated forfeitures would be recognized through a cumulative
adjustment that would be included in compensation cost in the period
of the change in estimate.
Total share-based compensation cost of $58 million, $54 million and
$70 million was disclosed in operating activities on the Company’s
Consolidated Statements of Cash Flows for the years ended December 31,
2014, 2013 and 2012, respectively.
Stock Options
Our stock option plans provide non-qualified and incentive stock options
to purchase authorized but unissued, 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 options outstanding including the related transactions under the stock option plans for the
year ended December 31, 2014:
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, 2013
Granted
Exercised
Forfeited and expired
Options outstanding as of December 31, 2014
Options expected to vest as of December 31, 2014
Options exercisable as of December 31, 2014
57,139
1,606
(9,338)
(683)
48,724
48,562
35,445
$
17.83
20.99
12.60
17.19
18.94
18.95
20.63
4.49
4.49
3.27
$
229,808
228,602
117,170
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 December 31, 2014, which
would have been received by the option holders had all option holders
exercised their “in-the-money” options as of that date. The total number
of “in-the-money” options exercisable on December 31, 2014, was
approximately 22 million.
The weighted-average grant-date fair value for options granted for the
years ended December 31, 2014, 2013 and 2012 was $8.29, $5.02 and $4.95,
respectively. The total fair value of options that vested during the years
ended December 31, 2014, 2013 and 2012 was approximately $16 million,
$29 million and $47 million, respectively. Compensation cost related to
stock options for the years ended December 31, 2014, 2013 and 2012, was
approximately $22 million, $25 million and $37 million, respectively.
As of December 31, 2014, there was approximately $8 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 1.7 years.
Proceeds received from the exercise of stock options were $116 million
for the year ended December 31, 2014, which were included in financing
activities on the Company’s Consolidated Statements of Cash Flows.
The total intrinsic value of options exercised for the years ended
December 31, 2014, 2013 and 2012 was approximately $69 million,
$55 million and $51 million, respectively. The income tax benefit realized
from share-based compensation was not significant for the year ended
December 31, 2014. There were no income tax benefits realized from
share-based compensation for the years ended December 31, 2013
and 2012, due to net operating loss and credit carryforwards available
to the Company. Refer to Note 6 (Income Taxes) to the Consolidated
Financial Statements.
An award is considered vested when the employee’s retention of the
award is no longer contingent on providing subsequent service (the
“non-substantive vesting period approach”). Awards to retirement
eligible employees are fully vested at the date of grant, and the related
compensation expense is recognized immediately upon grant or over
the period from the grant date to the date of retirement eligibility for
employees that become age 55 during the vesting period.
Corning uses a multiple-point Black-Scholes valuation model to
estimate the fair value of stock option grants. Corning utilizes a
blended approach for calculating the volatility assumption used in the
multiple-point Black-Scholes valuation model 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 rates used in the multiple-point
Black-Scholes valuation model are the implied rates for a zero-coupon
U.S. Treasury bond with a term equal to the option’s expected term. The
ranges given below reflect results from separate groups of employees
exhibiting different exercise behavior.
97
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
The following inputs were used for the valuation of option grants under our Stock Option Plans:
Expected volatility
Weighted-average volatility
Expected dividends
Risk-free rate
Average risk-free rate
Expected term (in years)
Pre-vesting departure rate
2014
45.4-46.2%
45.4-46.2%
1.90-2.09%
2.0-2.2%
2.0-2.2%
7.2-7.2
0.5-0.5%
2013
46.5-47.4%
46.6-47.3%
2.35-3.02%
0.8-2.2%
1.1-2.2%
5.8-7.2
0.4-4.1%
2012
47.8-48.9%
48.0-48.5%
2.28-3.31%
0.8-1.3%
1.0-1.3%
5.7-7.1
0.4-4.2%
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 Plan was estimated on the date of grant.
As of December 31, 2014, there was approximately $22 million of
unrecognized compensation cost related to nonvested 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 2.0 years. The total fair value of time-based
restricted stock that vested during the years ended December 31, 2014,
2013 and 2012 was approximately $32 million, $29 million and $13 million,
respectively. Compensation cost related to time-based restricted stock
and restricted stock units was approximately $36 million, $29 million
and $31 million for the years ended December 31, 2014, 2013 and
2012, respectively.
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, 2013, and changes which occurred during the year ended
December 31, 2014:
Shares
(000’s)
Weighted-average
grant-date fair value
Non-vested shares at
December 31, 2013
Granted
Vested
Forfeited
Non-vested shares and share
units at December 31, 2014
6,108
1,566
(1,803)
(134)
5,737
$
14.58
20.46
16.95
14.90
15.43
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 will 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 December 31, 2014, there is no unrecognized compensation cost
related to non-vested performance-based restricted stock and restricted
stock units compensation arrangements granted under the Plan. The
total fair value of performance-based restricted stock that vested during
the year ended December 31, 2012, was approximately $45 million.
Compensation cost related to performance-based restricted stock and
restricted stock units was approximately $2 million for the year ended
December 31, 2012.
20. Reportable Segments
Our reportable segments are as follows:
• Display Technologies – manufactures glass substrates for flat panel
liquid crystal displays.
• Optical Communications – manufactures carrier network and
enterprise network components for the telecommunications industry.
• Environmental Technologies – manufactures ceramic substrates and
filters for automotive and diesel applications.
• 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 reportable segments that do not meet the quantitative
threshold for separate reporting have been grouped as “All Other.” This
group is primarily comprised of development projects and results for
new product lines.
98
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
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 reportable segments
differently than we would for stand-alone financial information.
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.
The following provides historical segment information as described above:
SEgmEnT InfORmATIOn
(in millions)
for the year ended
December 31, 2014
Net sales
Depreciation(1)
Amortization of purchased intangibles
Research, development and engineering expenses(2)
Restructuring, impairment and other charges
Equity in earnings of affiliated companies
Income tax (provision) benefit
Net income (loss)(5)
Investment in affiliated companies, at equity
Segment assets(6)
Capital expenditures
for the year ended
December 31, 2013
Net sales
Depreciation(1)
Amortization of purchased intangibles
Research, development and engineering expenses(2)
Restructuring, impairment and other charges
Equity in earnings of affiliated companies(4)
Income tax (provision) benefit
Net income (loss)(5)
Investment in affiliated companies, at equity
Segment assets(6)
Capital expenditures
for the year ended
December 31, 2012
Net sales
Depreciation(1)
Amortization of purchased intangibles
Research, development and engineering expenses(2)
Restructuring, impairment and other charges(3)
Equity in earnings of affiliated companies(4)
Income tax (provision) benefit
Net income (loss)(5)
Investment in affiliated companies, at equity
Segment assets(6)
Capital expenditures
Display
Technologies
Optical
Communications
Environmental
Technologies
Specialty
Materials
Life
Sciences
All
Other
Total
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,851
676
138
54
(20)
(599)
1,369
63
8,863
492
2,545
481
84
7
357
(327)
1,267
3,666
9,501
350
2,909
514
103
21
692
(367)
1,589
3,262
9,953
845
$ 2,652
154
$
10
$
141
$
17
$
$
$
$
$
$
(116)
205
2
1,737
145
$ 2,326
147
$
10
$
140
$
12
$
2
$
(101)
$
199
$
3
$
1,654
$
105
$
$
$
$
$
$
$
$
$
$
$
2,130
130
9
137
39
(58)
146
17
1,435
311
$ 1,092
119
$
$ 1,205
113
$
91
2
(91)
182
32
1,297
173
$
$
$
$
140
(1)
(78)
144
$ 1,288
104
$
919
120
$
$
1,170
137
89
1
1
(65)
132
31
1,230
196
144
$
19
$
4
$
(91)
$
187
$
$
10
$ 1,333
62
$
$ 862
60
$
22
$
22
$
1
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(34)
71
553
30
851
57
21
20
4
(36)
71
551
51
$
$
9,715
1,153
32
709
68
53 $
31 $
$
177 $
$
(3) $
$
18
$
(833)
85 $
$
1,775
$ (196) $
214 $
$
311
518 $ 14,256
$
1,045
101 $
$
$
$
7,819
8 $
960
18 $
31
$
593
116 $
$
51
8 $
$
340
(24) $
$
(559)
61 $
$
1,693
$ (163) $
232 $
$
3,942
422 $ 14,691
$
819
$
55 $
964
117
$ 1,346
153
$
100
3
1
(58)
112
30
1,103
154
$
$
$
$
$
$
$
143
54
(69)
137
4
1,707
93
$ 657
44
$
10
$
22
$
2
$
$
$
$
$
(14)
28
552
47
$
$
$
$
$
$
$
$
$
6 $
14 $
$
123 $
$
17 $
53 $
(98) $
262 $
351 $
52 $
8,012
972
19
628
119
710
(513)
1,914
3,575
15,101
1,502
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(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) In 2012, Corning recorded a $44 million impairment charge in the Specialty Materials segment related to certain assets located in Japan used for the
production of large cover glass.
(4) In 2013, equity in earnings of affiliated companies in the Display Technologies segment included a $28 million restructuring charge for our share
of costs for headcount reductions and asset write-offs. In 2012, equity in earnings of affiliated companies in the Display Technologies segment
included a $18 million restructuring charge for our share of costs for headcount reductions and asset write-offs.
(5) 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.
(6) Segment assets include inventory, accounts receivable, property, plant and equipment, net, and associated equity companies and cost investments.
99
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
For the year ended December 31, 2014, 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, three customers accounted for 61% of total segment sales.
• In the Optical Communications 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, three customers accounted for 51% of total segment sales.
• In the Life Sciences segment, two customers accounted for 45% 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 use of a facility located outside of an entity’s home country 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 to our display business
and the Company as a whole.
A reconciliation of reportable segment net income (loss) to consolidated net income (loss) follows (in millions):
Net income of reportable segments
Net loss of All Other
Unallocated amounts:
Net financing costs(1)
Stock-based compensation expense
Exploratory research
Corporate contributions
Equity in earnings of affiliated companies, net of impairments(2)
Asbestos settlement
Purchased collars and average rate forward contracts
Other corporate items(3)
Net income
Years ended December 31,
2014
$
1,971
(196)
(113)
(58)
(102)
(43)
269
(13)
639
118
2013
$
1,856
(163)
2012
$
(66)
(54)
(112)
(42)
207
(19)
197
157
$
2,472
$
1,961
$
2,012
(98)
(196)
(70)
(89)
(44)
82
(14)
53
1,636
(1) Net financing costs include interest expense, interest income, and interest costs and investment gains and losses associated with benefit plans.
(2) Equity in earnings of affiliated companies is primarily equity in earnings of Dow Corning, which includes the following items:
• In 2014, Dow Corning’s net income includes an after-tax gain of $365 million from the reduction of the Implant Liability, an after-tax gain on a
derivative instrument of $29 million, foreign tax credits of approximately $99 million, and an energy tax credit of approximately $13 million, offset
partially by the after-tax charge of $432 million for the abandonment of a polycrystalline silicon plant expansion.
• In 2013, gains in the amount of approximately $30 million for the resolution of contract disputes against customers relating to enforcement of
long-term supply agreements and $16 million for the positive impact of the settlement of a derivative, along with a charge of $4 million related to
the impact of a tax valuation allowance. Also included are restructuring charges in the amount of $11 million.
• In 2012, restructuring and impairment charges in the amount of $87 million for our share of a charge related to workforce reductions and asset
write-offs at Dow Corning, and a $10 million credit for Corning’s share of Dow Corning’s settlement of a dispute related to long term supply
agreements.
(3) Other corporate items include the tax impact of the unallocated amounts, excluding purchased collars and average rate forward contracts, and the
following significant items:
• In 2014, Corning recorded $150 million from changes in deferred tax valuation allowances and $46 million of tax expense related to out-of-period
transfer pricing adjustments.
• In 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.
• In 2012, Corning recorded a $52 million translation gain on the liquidation of a foreign subsidiary; a loss of $26 million ($17 million after tax) from
the repurchase of $13 million principal amount of our 8.875% senior unsecured notes due 2021, $11 million of our 8.875% senior unsecured notes
due 2016, and $51 million principal amount of our 6.75% senior unsecured notes due 2013; and a $37 million tax expense resulting from the delay
of the passage of the American Taxpayer Relief Act of 2012 until January 2013, that was reversed in the first quarter of 2013.
100
CORNING INCORPORATED - 2014 Annual Report
A reconciliation of reportable segment net assets to consolidated net assets follows (in millions):
Total assets of reportable segments
Non-reportable segments
Unallocated amounts:
Current assets(1)
Investments(2)
Property, plant and equipment, net(3)
Other non-current assets(4)
Total assets
Notes to Consolidated Financial Statements
December 31,
2014
2013
2012
$
13,738
$
14,269
$
14,750
518
422
7,402
1,490
1,657
5,258
6,349
1,595
1,594
4,249
351
7,300
1,340
1,494
4,140
$
30,063
$
28,478
$
29,375
(1) Includes current corporate assets, primarily cash, short-term investments, current portion of long-term derivative assets and deferred taxes.
(2) Represents corporate investments in affiliated companies, at both cost and equity (primarily Dow Corning).
(3) Represents corporate property not specifically identifiable to an operating segment.
(4) Includes non-current corporate assets, pension assets, long-term derivative assets and deferred taxes.
Selected financial information concerning the Company’s product lines and reportable segments follow (in millions):
Revenues from External Customers
Display Technologies
Optical Communications
Carrier network
Enterprise network
Total Optical Communications
Environmental Technologies
Automotive and other
Diesel
Total Environmental Technologies
Specialty Materials
Corning Gorilla Glass
Advanced optics and other specialty glass
Total Specialty materials
Life Sciences
Labware
Cell culture products
Total Life Science
All Other
Fiscal Years Ended December 31,
2014
2013
2012
$
3,851
$
2,545
$
2,909
2,036
616
2,652
528
564
1,092
846
359
1,205
536
326
862
53
1,782
544
2,326
485
434
919
848
322
1,170
529
322
851
8
1,619
511
2,130
486
478
964
1,027
319
1,346
430
227
657
6
$
9,715
$
7,819
$
8,012
101
CORNING INCORPORATED - 2014 Annual Report Notes to Consolidated Financial Statements
Information concerning principal geographic areas was as follows (in millions):
North America
United States
Canada
Mexico
Total North America
Asia Pacific
Japan
Taiwan
China
Korea
Other
Total Asia Pacific
Europe
Germany
France
United Kingdom
Other
Total Europe
Latin America
Brazil
Other
Total Latin America
All Other
Total
2014
2013
2012
Net sales(2)
Long-lived
assets(1)
Net sales(2)
Long-lived
assets(1)
Net sales(2)
Long-lived
assets(1)
$
$
2,275
311
35
2,621
608
1,092
1,893
1,882
308
5,783
397
81
187
369
1,034
67
35
102
175
9,715
$
7,998
$
50
8,048
1,311
2,005
1,115
3,595
109
8,135
217
277
176
980
1,650
36
36
19
17,888
$
$
2,061
308
23
2,392
621
1,376
1,916
96
278
4,287
337
79
165
280
861
77
37
114
165
7,819
$
7,170
$
36
7,206
1,548
2,277
1,218
3,234
127
8,404
171
287
6
1,147
1,611
66
6
72
25
17,318
$
$
1,859
246
24
2,129
751
1,708
2,103
94
243
4,899
264
57
134
274
729
29
33
62
193
8,012
$
6,771
87
6,858
1,949
2,836
1,215
3,342
84
9,426
139
267
14
550
970
1
6
7
35
17,296
$
(1) Long-lived assets primarily include investments, plant and equipment, goodwill and other intangible assets. In 2014, assets in the U.S. include
the investment in Dow Corning. In 2013 and 2012, assets in the U.S. and South Korea include investments in Dow Corning and Samsung Corning
Precision Materials.
(2) Net sales are attributed to countries based on location of customer.
102
CORNING INCORPORATED - 2014 Annual Report Valuation Accounts and Reserves
(in millions)
Year ended December 31, 2014
Doubtful accounts and allowances
Deferred tax assets valuation allowance
Accumulated amortization of purchased intangible assets
Reserves for accrued costs of business restructuring
Balance at
beginning of period
Additions
Net deductions
and other
Balance at end
of period
$
$
$
$
28
286
185
44
$
$
$
$
19
186
31
49
$
$
174
49
$
$
$
$
47
298
216
44
Year ended December 31, 2013
Doubtful accounts and allowances
Deferred tax assets valuation allowance
Accumulated amortization of purchased intangible assets
Reserves for accrued costs of business restructuring
Balance at
beginning of period
Additions
Net deductions
and other
Balance at end
of period
$
$
$
$
26
210
154
42
$
$
$
$
2
80
31
41
$
$
4
39
$
$
$
$
28
286
185
44
Year ended December 31, 2012
Doubtful accounts and allowances
Deferred tax assets valuation allowance
Accumulated amortization of purchased intangible assets
Reserves for accrued costs of business restructuring
Balance at
beginning of period
Additions
Net deductions
and other
Balance at end
of period
$
$
$
$
19
219
135
10
$
$
$
$
7
10
19
52
$
$
19
20
$
$
$
$
26
210
154
42
103
CORNING INCORPORATED - 2014 Annual Report Quarterly Operating Results
(unaudited) (In millions, except per share amounts)
2014
First quarter
Second quarter
Third quarter
Fourth quarter
Total year
Net sales
Gross margin
Restructuring, impairment and other credits
Asbestos litigation charges
Equity in earnings of affiliated companies
Provision for income taxes
Net income attributable to
Corning Incorporated
Basic earnings per common share
Diluted earnings per common share
$
$
$
$
$
$
$
$
$
2,289
935
17
2
86
(180)
301
0.21
0.20
$
$
$
$
$
$
$
$
$
2,482
1,032
34
4
62
(172)
169
0.11
0.11
$
$
$
$
$
$
$
$
2,540
1,089
5
95
(395)
1,014
0.77
0.72
$
$
$
$
$
$
$
$
$
2,404
996
20
(20)
23
(349)
988
0.76
0.70
$
$
$
$
$
$
$
$
$
9,715
4,052
71
(9)
266
(1,096)
2,472
1.82
1.73
2013
First quarter
Second quarter
Third quarter
Fourth quarter
Total year
Net sales
Gross margin
Restructuring, impairment and other charges
Asbestos litigation charges
Equity in earnings of affiliated companies
Provision for income taxes
Net income attributable to
Corning Incorporated
Basic earnings per common share
Diluted earnings per common share
$
$
$
$
$
$
$
$
1,814
770
2
173
(34)
494
0.33
0.33
$
$
$
$
$
$
$
$
1,982
883
6
166
(191)
638
0.43
0.43
$
$
$
$
$
$
$
$
2,067
901
5
138
(141)
408
0.28
0.28
$
$
$
$
$
$
$
$
$
1,956
770
67
6
70
(146)
421
0.30
0.30
$
$
$
$
$
$
$
$
$
7,819
3,324
67
19
547
(512)
1,961
1.35
1.34
104
CORNING INCORPORATED - 2014 Annual Report This page intentionally left blank. Annual MeetingThe annual meeting of shareholders will be held on Tuesday, April 30, 2015, in Corning, New York. A formal notice of the meeting and a proxy statement will be mailed to shareholders on or about March 17, 2015. The proxy statement can also be accessed electronically through the Investor Relations page of the Corning website at www.corning.com and at www.corning.com/2015_proxy. A summary report of the proceedings at the annual meeting will be available without charge upon written request to Linda E. Jolly, Corporate Secretary, Corning Incorporated, One Riverfront Plaza, Corning, NY 14831.Additional InformationA copy of Corning’s 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) is avail- able without charge to shareholders upon written request to Corporate Secretary, Corning Incorporated, One Riverfront Plaza, Corning, NY 14831. The annual report, proxy statement, Form 10-K, and other information can also be accessed electronically through the Investor Relations page of the Corning website at www. corning.com.Investor InformationInvestment analysts and investors who need additional information may contact Ann Nicholson, Division Vice President, Investor Relations, Corning Incorporated, One Riverfront Plaza, Corning, NY 14831. Telephone: 607.974.9000.Common StockCorning Incorporated common stock is listed on the New York Stock Exchange (NYSE). In addition, it is traded on the Boston, Midwest, Pacific, and Philadelphia stock exchanges. Common stock options are traded on the Chicago Board Options Exchange. The ticker symbol for Corning Incorporated is “GLW.”Transfer Agent & RegistrarComputershare Trust CompanyP.O. Box 30170, College Station, TX 77842-3170 Telephone: 800.255.0461Website: www.computershare.com/contactusIndependent AuditorsPricewaterhouseCoopers LLP300 Madison Ave., New York, NY 10017Executive CertificationsCorning submitted its 2014 Annual CEO Certification to NYSE in compliance with NYSE corporate governance listing standards, and filed with the SEC its Sarbanes Oxley Act 301 Certifications as exhibits to its most recent Form 10-K.TrademarksA number of Corning trademarks appear throughout this annual report. For a complete listing of Corning’s registered trademarks, visit: www.corning.com/legal/legal_notices.aspx.Corning is an equal opportunity employer.Wendell Weeks photo by Robert Barker, Cornell University.View image courtesy of Moody Nolan, Inc.Printed in the USAThe statements in this Annual Report that are not historical facts or information are forward-looking statements. These forward-looking statements involve risks and uncertainties that may cause the outcome to be materially different. Such risks and uncertainties include, but are not limited to:— global business, financial, economic, and political conditions;— tariffs and import duties;— currency fluctuations between the U.S. dollar and other currencies, primarily the Japanese yen, New Taiwan dollar, Euro, and Korean won;— product demand and industry capacity;— competitive products and pricing;— availability and costs of critical components and materials;— new product development and commercialization;— order activity and demand from major customers;— fluctuations in capital spending by customers;— possible disruption in commercial activities due to terrorist activity, cyber attack, armed conflict, political or financial instability, natural disasters, or major health concerns;— unanticipated disruption to equipment, facilities, or operations;— facility expansions and new plant start-up costs;— effect of regulatory and legal developments;— ability to pace capital spending to anticipated levels of customer demand;— credit rating and ability to obtain financing and capital on commercially reasonable terms;— adequacy and availability of insurance;— financial risk management;— acquisition and divestiture activities;— rate of technology change;— level of excess or obsolete inventory;— ability to enforce patents and protect intellectual property and trade secrets;— adverse litigation;— product and components performance issues;— retention of key personnel;— stock price fluctuations;— trends for the continued growth of the company’s businesses;— the ability of research and development projects to produce revenues in future periods;— a downturn in demand or decline in growth rates for LCD glass substrates;— customer ability, most notably in the Display Technologies segment, to maintain profitable operations and obtain financing to fund their ongoing operations and manufacturing expansions and pay their receivables when due;— loss of significant customers;— fluctuations in supply chain inventory levels;— equity company activities; — changes in tax laws and regulations;— changes in accounting rules and standards;— the potential impact of legislation, government regulations, and other government action and investigations;— temporary idling of capacity or delaying expansion;— the ability to implement productivity, consolidation, and cost-reduction efforts, and to realize anticipated benefits;— restructuring actions and charges; and— other risks detailed in Corning’s SEC filings.Neither this report nor any statement contained herein is furnished in connection with any offering of securities or for the purpose of promoting or influencing the sale of securities.“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995 Corning is one of the world’s leading innovators
in materials science. For more than 160 years,
Corning has applied its unparalleled expertise
in specialty glass, ceramics, and optical physics
to develop products that have created new industries
and transformed people’s lives.
Board of Directors
Donald W. Blair
Executive Vice President
& Chief Financial Officer
NIKE, Inc.
Beaverton, OR
(1) (3)
Stephanie A. Burns
Retired Chairman
& Chief Executive Officer
Dow Corning Corporation
Sunset, SC
(1) (3)
John A. Canning, Jr.
Co-Founder & Chairman
Madison Dearborn Partners, LLC
Chicago, IL
(4) (5) (6)
Richard T. Clark
Retired Chairman, President
& Chief Executive Officer
Merck & Co., Inc.
Whitehouse Station, NJ
(2) (5) (6)
Robert F. Cummings, Jr.
Vice Chairman
of Investment Banking
JPMorgan Chase & Co.
New York, NY
(4) (5) (6)
James B. Flaws
Vice Chairman
& Chief Financial Officer
Corning Incorporated
Corning, NY
(2) (6)
Deborah A. Henretta
Group President E-Business
Proctor & Gamble
Cincinnati, OH
(1) (3)
Daniel P. Huttenlocher
Dean and Vice Provost
Cornell University
New York City Tech Campus
New York, NY
(1) (4)
Kurt M. Landgraf
Retired President
& Chief Executive Officer
Educational Testing Service
Princeton, NJ
(1) (2) (6)
Kevin J. Martin
Consultant
Squire Patton Boggs, LLP
Washington, DC
(3) (5)
Deborah D. Rieman
Executive Chairman
MetaMarkets Group
Woodside, CA
(1) (2)
Hansel E. Tookes II
Retired Chairman
& Chief Executive Officer
Raytheon Aircraft Company
Palm Beach Gardens, FL
(2) (5) (6)
Wendell P. Weeks
Chairman of the Board,
Chief Executive Officer
& President
Corning Incorporated
Corning, NY
(6)
Mark S. Wrighton
Chancellor
& Professor of Chemistry
Washington University
in St. Louis
St. Louis, MO
(1) (4)
Corporate Officers
Wendell P. Weeks
Chairman of the Board,
Chief Executive Officer
& President
James B. Flaws
Vice Chairman
& Chief Financial Officer
Kirk P. Gregg
Executive Vice President
& Chief Administrative Officer
Lawrence D. McRae
Executive Vice President —
Strategy & Corporate
Development
David L. Morse
Executive Vice President
& Chief Technology Officer
Lewis A. Steverson
Senior Vice President
& General Counsel
Jeffrey W. Evenson
Senior Vice President
& Operations Chief of Staff
Mark S. Rogus
Senior Vice President
& Treasurer
R. Tony Tripeny
Senior Vice President
& Corporate Controller
Linda E. Jolly
Vice President
& Corporate Secretary
Other Officers
James P. Clappin
President —
Corning Glass Technologies
Martin J. Curran
Executive Vice President
& Innovation Officer
Clark S. Kinlin
Executive Vice President —
Optical Communications
Eric S. Musser
Executive Vice President —
Corning Technologies
& International
Christine M. Pambianchi
Senior Vice President —
Human Resources
Thomas Appelt
President —
Corning International
Emerging Markets
Madapusi K. Badrinarayan
Vice President
& Research Director —
Inorganic & Broad-based
Technologies
John P. Bayne, Jr.
Vice President
& General Manager —
High Performance Displays
Thomas R. Beall
Vice President
& Lead Intellectual
Property Counsel
Gary S. Calabrese
Senior Vice President —
Global Research
Thomas G. Capek
Vice President
& Chief Engineer
Cheryl C. Capps
Vice President —
Global Supply Management
Jack H. Cleland
Senior Vice President
& Deputy General Counsel
Charles R. Craig
Senior Vice President —
Science & Technology
Michael W. Donnelly
Vice President —
Business Services
Richard M. Eglen
Vice President
& General Manager —
Life Sciences
Li Fang
President
& General Manager —
Corning Greater China
Lisa Ferrero
General Manager —
Display Technologies
Susan L. Ford
Vice President — Tax
Vivian L. Gernand
Vice President
& Chief Information
Security Officer
Clifford L. Hund
General Manager
& President —
Corning East Asia
John R. Igel
Vice President
& General Manager —
Corning Optical Communications
Wilfred M. Kenan, Jr.
Vice President
& Manufacturing Manager —
Environmental Technologies
John P. MacMahon
Senior Vice President —
Global Compensation
& Benefits
Jean-Pierre Mazeau
Senior Vice President —
Corporate Product
& Process Development
Kevin J. McManus
Senior Vice President
& Chief Information Officer
Stephen P. Miller
Vice President —
Strategy
Corning Optical Communications
& Corporate Development
Avery H. Nelson III
Vice President
& General Manager —
Environmental Technologies
Timothy J. Regan
Senior Vice President —
Worldwide Government Affairs
Robert J. Ritchie
Vice President —
Technology Exchange
James R. Steiner
Senior Vice President
& General Manager —
Specialty Materials
Lydia Kenton Walsh
Vice President —
Commercial Operations
Life Sciences
Curt Weinstein
Vice President
& General Manager —
Advanced Optics
Mariam O. Wright
Senior Vice President —
Global Manufacturing & Quality
Board Committees
(1) Audit; (2) Compensation; (3) Corporate Relations; (4) Finance; (5) Nominating & Corporate Governance; (6) Executive
© Corning Incorporated 2015. All Rights Reserved.
Corning Incorporated
One Riverfront Plaza
Corning, NY 14831-0001
U.S.A.
www.corning.com
02AR40014EN
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© Corning Incorporated 2015. All Rights Reserved.
2014 Annual Report