2015 Annual Report
Corning Incorporated
One Riverfront Plaza
Corning, NY 14831-0001
U.S.A.
www.corning.com
02AR40015EN
© 2016 Corning Incorporated. All Rights Reserved.
296423_Corning_CVR.indd 1
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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
Retired Executive Vice President
& Chief Financial Officer
NIKE, Inc.
Beaverton, OR
(1) (4)
Stephanie A. Burns
Retired Chairman
& Chief Executive Officer
Dow Corning Corporation
Sunset, SC
(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.
Retired Vice Chairman
of Investment Banking
JPMorgan Chase & Co.
New York, NY
(4) (5) (6)
Deborah A. Henretta
Retired Group President
E-Business
Procter & 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
Vice President
Facebook, Inc.
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)
Officers
Management Committee
James P. Clappin
President —
Corning Glass Technologies
Martin J. Curran
Executive Vice President
& Innovation Officer
Jeffrey W. Evenson
Senior Vice President
& Chief Strategy Officer
Lisa Ferrero
Senior Vice President
& Chief Administrative Officer
Lawrence D. McRae
Vice Chairman & Corporate
Development Officer
David L. Morse
Executive Vice President
& Chief Technology Officer
Eric S. Musser
Executive Vice President —
Corning Technologies
& International
Christine M. Pambianchi
Senior Vice President —
Human Resources
Lewis A. Steverson
Senior Vice President
& General Counsel
R. Tony Tripeny
Senior Vice President
& Chief Financial Officer
Wendell P. Weeks
Chairman of the Board,
Chief Executive Officer
& President
Other Officers
Thomas Appelt
President —
Corning International
Emerging Markets
Corning Optical Communications
Madapusi K. Badrinarayan
Vice President
& Technology Executive —
Science & Technology
John P. Bayne, Jr.
Vice President
& General Manager —
High Performance Displays
Thomas R. Beall
Vice President
& Chief Intellectual
Property Counsel
Stefan Becker
Vice President
& Operations Controller
Michael A. Bell
Senior Vice President
& General Manager,
Optical Connectivity —
Gary S. Calabrese
Senior Vice President —
Global Research
Thomas G. Capek
Vice President
& Chief Engineer
Cheryl C. Capps
Vice President —
& Chief Information Officer
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
Kimberly S. Hartwell
Senior Vice President
& Chief Commercial Officer —
Corning Optical Communications
Clifford L. Hund
General Manager
& President —
Corning East Asia
Timothy L. Hunt
Vice President & Director —
Corporate Product
& Process Development
John R. Igel
Vice President
& General Manager —
Corning Optical Communications
Linda E. Jolly
Vice President
& Corporate Secretary
Wilfred M. Kenan, Jr.
Vice President
& Manufacturing Manager —
Environmental Technologies
Judith A. Lemke
Vice President — Tax
John P. MacMahon
Senior Vice President —
Global Compensation
& Benefits
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
Mark S. Rogus
Senior Vice President
& Treasurer
Edward A. Schlesinger
Vice President
& Corporate Controller
John M. Sharkey
Vice President
& Chief of Staff to the CEO
James R. Steiner
Senior Vice President
& General Manager —
Specialty Materials
Ronald L. Verkleeren
Vice President
& General Manager —
Corning Pharmaceutical
Technologies
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
John Z. Zhang
General Manager —
Corning Display Technologies
Clark S. Kinlin
Executive Vice President —
Corning Optical Communications
Mark S. Clark
Vice President
Global Supply Management
Board Committees
(1) Audit; (2) Compensation; (3) Corporate Relations; (4) Finance; (5) Nominating & Corporate Governance; (6) Executive
© Corning Incorporated 2016. All Rights Reserved.
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Wendell P. Weeks
Chairman of the Board,
Chief Executive Officer & President
To Our Shareholders:
Corning entered 2015 with a goal to Build on Our
Momentum and Grow. We understand that growth
is an ongoing process and the path is rarely linear,
so we did not expect to declare “mission accom-
plished” at year’s end. However, we encountered
global economic headwinds and other challenges
that lowered our growth expectations as the year
progressed, despite increasing our momentum
in several key areas. Fortunately, Corning is well-
equipped to navigate these challenges.
More than a decade of outstanding industrial
performance has given us a strong foundation on
which to build. Since 2004, we have grown sales,
net income, earnings per share, and operating cash
flow at close to double-digit rates. We’ve outper-
formed our competitors in our major segments.
We’ve achieved the lowest-cost manufacturing
position in key businesses. And we’ve created more
than $1.5 billion in entirely new revenue streams
by launching disruptive products such as Corning®
Gorilla® Glass.
This track record of performance has created a rich
set of opportunities and strong cash flow that make
us confident in our ability to deliver sustainable
growth and continue creating value for shareholders.
2015 Performance Highlights
Before I turn to Corning’s strategy for 2016
and the years ahead, let’s review Corning’s 2015
performance.
Core sales were $9.8 billion; core earnings were
$1.88 billion; and core earnings per share were
$1.40. Those numbers reflect the weak global
economy and foreign currency fluctuations, which
impacted most of our businesses. However, strong
results in Optical Communications helped offset
challenges in other areas.
Here’s a closer look at how each of our major
businesses performed:
n In Display Technologies, sales were down from
2014 due to lower demand for LCD televisions
and IT products. However, LCD glass price declines
were the smallest they have been in five years,
despite the worst display industry environment
in five years.
n Optical Communications sales were up year over
year, driven by strong demand for fiber to the
home and data centers in North America.
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n In Specialty Materials, Gorilla Glass volume was
up versus 2014. However, segment sales were
down overall due to the completion of a large
aerospace and defense program, softer demand
in the semiconductor industry, and the weaker
euro.
n Environmental Technologies sales were down
year over year due to the declining euro and
end-market weakness in China for both passenger
cars and heavy-duty diesel trucks.
n In Life Sciences, sales were lower than expected,
due to the weak euro.
Despite the economic headwinds, growth in Optical
Communications was sufficient to produce aggre-
gate growth in our non-Display segments. These
results once again demonstrate the value of our
diverse business portfolio.
New Growth Drivers
Corning grows primarily through innovation.
We invest strongly in research, development, and
engineering (RD&E) to innovate in our existing busi-
nesses, while also creating entirely new businesses
to drive growth in the years ahead. We then supple-
ment that organic growth by pursuing acquisitions
and ventures to enhance our product portfolio and
extend our market access.
In 2015, we introduced several new products and
advanced key innovation programs.
n We launched Corning Lotus® NXT Glass, which
has become the leading glass substrate for
high-performance displays.
n The first televisions to use our new Corning
Iris™ Glass as a light-guide plate became
commercially available.
n We introduced our EDGE8™ solution, a new
full-connectivity system for data centers.
n We commercialized FLORA™ substrates, which
reduce the dangerous emissions that occur
upon engine startup.
n We expanded our drug-discovery portfolio
with the introduction of HepatoCells™ for
toxicology and drug metabolism studies,
and TransportoCells™ for testing drug-drug
interactions.
n We reached a major milestone in our efforts
to extend Gorilla Glass into new markets, with
Ford’s introduction of the Ford GT. This is the first
production vehicle to use Gorilla Glass for multiple
glazing applications, including the windshield,
rear engine cover, and acoustic separation wall.
We faced challenges as well. The exact timing and
impact of innovations remain difficult to predict.
The adoption of some products (such as Gorilla
Glass 4) proceeded more quickly than anticipated,
while others (such as our ONE™ Cellular Solutions) are
proceeding more slowly. However, when we assess
Corning’s overall innovation portfolio, we are pleased
with the robustness of our pipeline and the oppor-
tunities for both near-term and long-term growth.
On the acquisition front, we extended our leader-
ship in Optical Communications with the addition
of TR Manufacturing, Inc.; Samsung Electronics Co.,
Ltd.’s fiber business; and iBwave Solutions. These
acquisitions had an immediate positive impact on
Corning’s bottom line, in addition to improving
our competitive position. We also acquired
Gerresheimer’s glass tubing business and entered
into an equity venture to capture an exciting
opportunity in pharmaceutical packaging that we
believe has the potential to become a very signifi-
cant new business.
Our Strategy and Capital Allocation Framework
Let’s turn to how we are focusing Corning’s portfolio
and utilizing our financial strength to drive growth
and create value for shareholders.
Capital Allocation Plans
We expect to generate more than $20 billion
between 2016 and 2019. In October 2015, we
announced our plan to invest $10 billion of that cash
in RD&E, capital expenditures, and acquisitions to
drive growth in the years ahead. We also announced
that we will distribute at least $10 billion (approxi-
mately half of our current market cap) to sharehold-
ers. We are committed to increasing the dividend
by at least 10 percent annually through 2019, and
we will continue to be opportunistic on share
repurchases. We are executing on that commitment.
Last October, Corning’s board of directors increased
our repurchase authorization by $4 billion; between
October 2015 and January of this year, we executed
a $1.25 billion accelerated share repurchase; and in
February, our board authorized a 12.5 percent quar-
terly common stock dividend increase.
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n We reached a major milestone in our efforts
to extend Gorilla Glass into new markets, with
Ford’s introduction of the Ford GT. This is the first
production vehicle to use Gorilla Glass for multiple
glazing applications, including the windshield,
rear engine cover, and acoustic separation wall.
We faced challenges as well. The exact timing and
impact of innovations remain difficult to predict.
The adoption of some products (such as Gorilla
Glass 4) proceeded more quickly than anticipated,
while others (such as our ONE™ Cellular Solutions) are
proceeding more slowly. However, when we assess
Corning’s overall innovation portfolio, we are pleased
with the robustness of our pipeline and the oppor-
tunities for both near-term and long-term growth.
On the acquisition front, we extended our leader-
ship in Optical Communications with the addition
of TR Manufacturing, Inc.; Samsung Electronics Co.,
Ltd.’s fiber business; and iBwave Solutions. These
acquisitions had an immediate positive impact on
Corning’s bottom line, in addition to improving
our competitive position. We also acquired
Gerresheimer’s glass tubing business and entered
into an equity venture to capture an exciting
opportunity in pharmaceutical packaging that we
believe has the potential to become a very signifi-
cant new business.
Our Strategy and Capital Allocation Framework
Let’s turn to how we are focusing Corning’s portfolio
and utilizing our financial strength to drive growth
and create value for shareholders.
Capital Allocation Plans
We expect to generate more than $20 billion
between 2016 and 2019. In October 2015, we
announced our plan to invest $10 billion of that cash
in RD&E, capital expenditures, and acquisitions to
drive growth in the years ahead. We also announced
that we will distribute at least $10 billion (approxi-
mately half of our current market cap) to sharehold-
ers. We are committed to increasing the dividend
by at least 10 percent annually through 2019, and
we will continue to be opportunistic on share
repurchases. We are executing on that commitment.
Last October, Corning’s board of directors increased
our repurchase authorization by $4 billion; between
October 2015 and January of this year, we executed
a $1.25 billion accelerated share repurchase; and in
February, our board authorized a 12.5 percent quar-
terly common stock dividend increase.
Focused Portfolio
Higher Success Rate, Lower Costs, and Better Cohesion
3
Core
Technologies
4
Manufacturing &
Engineering Platforms
5
Market-Access
Platforms
Glass
Science
Ceramic
Science
Optical
Physics
Vapor Deposition
Fusion
Precision Forming
Optical
Communications
Mobile Consumer
Electronics
Display
Automotive
Extrusion
Life Sciences Vessels
Focus > 80% of resources on opportunities that leverage capabilities from at least two of three columns.
Focusing Our Portfolio
The core of what Corning does is invent, make, and
sell. We create value by inventing category-defining
products, using transformative manufacturing plat-
forms, and building strong, trust-based relationships
with global leaders in their industries. We’re seek-
ing to augment that value-creation through a more
focused and cohesive portfolio that improves our
probability of success, reduces the cost of innovation,
and increases the barriers to entry.
The framework focuses our portfolio on a set of
reinforcing capabilities with strong inter-connections.
Corning’s best-in-the-world capabilities include
three core technologies, four manufacturing and
engineering platforms, and five market-access
platforms. Our probability of success increases
as we apply more of these world-class capabilities;
our cost of innovation declines as we re-apply talent
and leverage our existing assets; and we create
higher, more sustainable competitive barriers
when we combine multiple capabilities.
Focusing our portfolio means we are directing 80
percent or more of our resources to opportunities
that draw from at least two of these three capabili-
ties sets. Few competitors can match our expertise
in any one of our focus capabilities, and when we
combine capabilities, we can create market-leading
positions and margins. Of course, we recognize that
Corning is the natural leader for some great oppor-
tunities that do not require multiple capabilities.
Our framework allows us to apply up to 20 percent
of our resources on these opportunities. However,
we know that those initiatives are riskier, so we only
pursue them if the potential payoff is exceptional.
We developed this approach based on experience.
Gorilla Glass is a great example of re-applying talent
and leveraging our manufacturing and market-
access platforms. To develop Gorilla Glass, we
re-applied our expertise in glass science to deliver
a new-to-the-world product faster and at lower cost
than anyone else could have done. To manufacture
it, we used fusion technology and manufacturing
assets built for our Display business. That saved
us about $800 million in capital, significantly
enhancing our return on investment.
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Our track record in Optical Communications
demonstrates how combining capabilities creates
higher and more sustainable competitive advantages.
Using glass science, optical physics, and vapor
deposition, we have dramatically increased the
performance and lowered the cost of optical fiber.
Ceramic science helped us improve connectors and
reduce signal loss. We use extrusion to make cabling.
And we use precision forming to make connectors.
Not only have our customers benefited from this
combination of our world-class capabilities, we’ve
benefited as well. For instance, in the passive
optical markets we serve, we capture 20 percent
of the revenue, but 30 percent of the profits.
Focusing our portfolio also means that we will peri-
odically add assets that complement our capabilities
and divest or realign assets that fall outside our core
capabilities. In December, we announced our plans
to exchange Corning’s 50 percent interest in Dow
Corning Corporation for a subsidiary that will hold
approximately 40 percent ownership in Hemlock
Semiconductor Group and $4.8 billion in cash. We
believe this transaction creates significant value for
shareholders. The realignment will be accretive to
Corning’s EPS, and our position in Hemlock allows
us to capture potential upside from a rebound in
the solar market. The $4.8 billion is approximately
30 times the equity earnings from Dow Corning’s
silicones business, and we expect the realignment
to be essentially tax free.
Opportunities Ahead
Corning’s technologies and manufacturing plat-
forms are becoming increasingly relevant to a broad
range of industries, as illustrated in our depiction
of The Glass Age (opposite page). For example,
automakers are looking to make cars lighter,
safer, sleeker, and more interactive, which creates
disruptive innovation opportunities for Corning.
We believe Gorilla Glass offers compelling benefits
including lighter weight for better fuel economy
and vehicle handling; toughness and damage
resistance to make vehicles safer and more durable;
and an optically advantaged surface for head-up
displays and touch technology. Best of all, we can
leverage our existing capabilities and trust-based
relationships to develop the new products. The
automotive industry represents a potential glass
market larger in square feet than the current LCD
market, so we are understandably excited about
this opportunity. In January, we entered into a joint
venture with Saint-Gobain Sekurit to produce light-
weight auto glazing. We look forward to providing
updates on this initiative and other growth oppor-
tunities as we progress.
Closing Thoughts
No doubt, we will continue to face challenges
in 2016. But we’re confident in Corning’s long-
term growth prospects and our ability to execute,
because we have a strong record of performance, a
robust innovation portfolio, and distinct capabilities
that are becoming increasingly vital. Most impor-
tantly, we always keep our eyes on the prize —
not just another 165 years of innovation and
independence for Corning, but also a world with
cleaner air, unlimited bandwidth, more effective
medicine, richer entertainment experiences, and
more efficient communication. When you invest
in Corning, you are investing in that world, too.
Thank you for helping us bring it to life.
Sincerely,
Wendell P. Weeks
Chairman of the Board,
Chief Executive Officer, and President
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Kitchen Hub
Smart hubs will turn
the heart of your home
into its nerve center as
well. Control appliances,
manage calendars, display
images, and more via a
customizable, aesthetically
pleasing interface.
Connected Car
Head-up displays,
interactive dashboards,
and cascading consoles
will enhance the experience
for drivers and passengers
in next-generation
connected cars.
Retail Window
Interactive retail windows
bridge the gaps between
online shopping and brick-
and-mortar stores, placing
countless options right
at your fingertips.
Infotainment Wall
Infotainment walls will
dissolve the boundaries
between the real and the
virtual by integrating digital
content, social networking,
and home and office
management capabilities.
Collaboration Surface
Interactive multi-user
surfaces allow you
to achieve greater
productivity, enhance
your entertainment
experiences, and
collaborate with friends
and colleagues at the
speed of touch.
A few short years ago, Corning shared its vision for a world powered by
specialty glass and unlimited bandwidth. This vision captured the imagination
of millions of people and inspired leading innovators to work together to help
bring it to life. Today, that world is becoming a reality.
As Corning extends the technical and aesthetic capabilities of precision
glass, technology developers are identifying new applications, designers are
imagining new possibilities, and consumers are experiencing exciting new
benefits.
The prototypes above are just a peek at where the world is heading. We
believe we’ve entered a new era that can best be described as The Glass Age.
Learn more at GlassAgeToday.com
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Financial Highlights:
In millions, except per share amounts
As reported — GAAP Core performance*
2015
2014
2013
2015
2014
2013
Net Sales
$ 9,111
$ 9,715
$ 7,819
$ 9,800
$ 9,955
$ 7,780
Net income attributable
to Corning Incorporated
$ 1,339
$ 2,472
$ 1,961
$ 1,882
$ 2,023
$ 1,656
Diluted earnings per common share
attributable to Corning Incorporated $ 1.00
$ 1.73
$ 1.34
$ 1.40
$ 1.42
$ 1.13
* Core performance measures are non-GAAP financial measures. The reconciliation between these non-GAAP measures and their most
directly comparable GAAP measure is provided on pages 29 through 32 of this Annual Report, as well as on the company’s website.
Core performance measures are adjusted to exclude the impact of changes in Japanese yen and Korean won foreign exchange rates,
as well as other items that do not reflect ongoing operations of the company.
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Corning Incorporated 2015 Annual Report
Index
1
8
14
Business Description ��������������������������������������������������������������������������������������������������������������������������������������������������������
Risk Factors ������������������������������������������������������������������������������������������������������������������������������������������������������������������������
Legal Proceedings �������������������������������������������������������������������������������������������������������������������������������������������������������������
Market for Registrant’s Common Equity, Related Stockholder Matters and
16
Issuer Purchases of Equity Securities ����������������������������������������������������������������������������������������������������������������������������
17
Selected Financial Data (Unaudited) ����������������������������������������������������������������������������������������������������������������������������
Management’s Discussion and Analysis of Financial Condition and Results of Operations ��������������������������������
18
Quantitative and Qualitative Disclosures About Market Risks �������������������������������������������������������������������������������� 51
Management’s Annual Report on Internal Control Over Financial Reporting ������������������������������������������������������� 52
Report of Independent Registered Public Accounting Firm �������������������������������������������������������������������������������������� 53
Consolidated Statements of Income ����������������������������������������������������������������������������������������������������������������������������� 54
Consolidated Statements of Comprehensive Income ������������������������������������������������������������������������������������������������ 55
Consolidated Balance Sheets ����������������������������������������������������������������������������������������������������������������������������������������� 56
Consolidated Statements of Cash Flows ���������������������������������������������������������������������������������������������������������������������� 57
Consolidated Statements of Changes in Shareholders’ Equity ��������������������������������������������������������������������������������� 58
Notes to Consolidated Financial Statements �������������������������������������������������������������������������������������������������������������� 59
1� Summary of Significant Accounting Policies ��������������������������������������������������������������������������������������������������������������������������������������������������� 59
2� Restructuring, Impairment and Other Charges ����������������������������������������������������������������������������������������������������������������������������������������������� 63
3� Available-for-Sale Investments �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 64
4� Significant Customers ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 65
5�
Inventories, Net of Inventory Reserves �������������������������������������������������������������������������������������������������������������������������������������������������������������� 65
6�
Income Taxes ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 65
7�
Investments ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 68
8� Acquisitions ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 72
9� Property, Plant and Equipment, Net of Accumulated Depreciation ������������������������������������������������������������������������������������������������������������� 75
10� Goodwill and Other Intangible Assets �������������������������������������������������������������������������������������������������������������������������������������������������������������� 76
11� Other Assets and Other Liabilities ��������������������������������������������������������������������������������������������������������������������������������������������������������������������� 77
12� Debt ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 78
13� Employee Retirement Plans �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 79
14� Commitments, Contingencies and Guarantees ����������������������������������������������������������������������������������������������������������������������������������������������� 87
15� Hedging Activities ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 88
16� Fair Value Measurements ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 90
17� Shareholders’ Equity �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 91
18� Earnings Per Common Share ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 94
19� Share-based Compensation �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 95
20� Reportable Segments ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 96
Valuation Accounts and Reserves ���������������������������������������������������������������������������������������������������������������������������������� 101
Quarterly Operating Results ������������������������������������������������������������������������������������������������������������������������������������������� 102
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 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.
We succeed through sustained investment in research and development,
a unique combination of material and process innovation, and close
collaboration with customers to solve tough technology challenges.
Corning operates in five reportable segments: Display Technologies,
Optical Communications, Environmental Technologies, Specialty
Materials and Life Sciences, and manufactures and processes products at
approximately 89 plants in 17 countries.
Display Technologies Segment
Corning’s Display Technologies segment manufactures glass substrates
for 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 highly automated process
yields glass substrates with a pristine surface and excellent thermal
dimensional stability and uniformity – essential attributes for the
production of large, high performance LCDs. Corning’s fusion process is
scalable and we believe it is the most cost effective process in producing
large size substrates.
We are recognized for providing product innovations that enable our
customers to produce larger, lighter, thinner and higher-resolution
displays more affordably. Some of the product innovations that we have
launched over the past ten years utilizing our world-class processes and
capabilities include the following:
• EAGLE XG®, the industry’s first LCD glass substrate that is free of
heavy metals;
• EAGLE XG® Slim glass, a line of thin glass substrates which enables
lighter-weight portable devices and thinner televisions and monitors;
• Corning® Willow™ Glass, our ultra-thin flexible glass for use in next-
generation consumer electronic technologies, including curved displays
for immersive viewing or mounting on non-flat surfaces. This glass is
also used in a variety of non-display applications, such as decorative
laminates for
interior architecture and advanced semiconductor
packaging; and
• The family of Corning Lotus™ Glass, high-performance display glass
developed to enable cutting-edge technologies, including organic
light-emitting diode (“OLED”) displays and next generation LCDs. These
substrate glasses provide industry-leading levels of low total pitch
variation, resulting in brighter, more energy-efficient displays with
higher resolutions for consumers and better yields for panel makers.
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%. As
described more fully in Note 8 (Acquisitions) to the Consolidated Financial
Statements, 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. Corning
completed the acquisition of Samsung Corning Precision Materials on
January 15, 2014.
In the fourth quarter of 2015, Corning announced that with the support of
the Hefei government it will locate a Gen 10.5 glass manufacturing facility
adjacent to the BOE Technology Group Co. Ltd. (BOE) plant in the Hefei
XinZhan General Pilot Zone in Anhui Province, China. Glass substrate
production from the new facility is expected to support BOE’s plan to
begin mass production of LCD panels for large-size televisions by the third
quarter of 2018.
As part of this investment, Corning and BOE have entered into a long-
term supply agreement that commits BOE to the purchase of Gen
10.5 glass substrates from the Corning manufacturing facility in Hefei.
BOE also has extended its long-term supply agreement with Corning to
purchase glass substrates for Gen 8.5 and smaller sizes. This investment
will enable Corning to become the first manufacturer of TFT-grade Gen
10.5 substrates. At 2,940 mm x 3,370 mm, Gen 10.5 will be the largest LCD
glass substrate available, providing the most economical cuts for 65-inch
and 75-inch televisions. The Gen 10.5 substrates manufactured at the
Hefei facility will use Corning® EAGLE XG® slim glass.
1
CORNING INCORPORATED - 2015 Annual Report Business Description
Corning has LCD glass manufacturing operations in the United States,
South Korea, Japan, Taiwan and China. Following the acquisition of
Samsung Corning Precision Materials, 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. Refer to the material under
the heading “Patents and Trademarks” for information relating to patents
and trademarks.
The Display Technologies segment represented 34% of Corning’s sales
in 2015.
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, telecommunications 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.
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
in metropolitan and access networks;
transmission wavelengths
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. A portion of our optical fiber is sold directly to
end users and 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
FlexNAPTM terminal distribution system, which provides pre-connectorized
distribution and drop cable assemblies for cost-effectively deploying
Fiber-to-the-Home (“FTTH”) networks; and the CentrixTM 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
(different
demarcation, connection and protection devices, xDSL
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.
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 Texas, Arizona, Mexico, Brazil, Denmark, Germany, Poland, Israel,
Australia and China.
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 33% of Corning’s
sales for 2015.
2
CORNING INCORPORATED - 2015 Annual Report 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 12% of Corning’s
sales for 2015.
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
over previous generations of competitive glass, 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 and handheld devices 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, 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.
Business Description
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 include glass lens and window components
and assemblies and are made in New York, New Hampshire, Kentucky and
France or sourced from China.
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 2015.
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 and drug manufacturers seeking new
approaches to increase efficiencies, reduce costs and compress timelines.
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.
Life Sciences laboratory products include consumables (plastic vessels,
specialty surfaces and media), as well as general labware and equipment,
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 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 laboratory consumables for life
science research, Corning continues to develop and produce innovative
technologies aimed at the growing biologic drug production markets.
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 more information.
The Life Sciences segment represented approximately 9% of Corning’s
sales for 2015.
3
CORNING INCORPORATED - 2015 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’s Pharmaceutical Technologies
business, which consists of a pharmaceutical glass vessel business and
a glass tubing business used in the pharmaceutical packaging industry.
This segment also includes Corning Precision Materials’ non-LCD business
and new product lines and development projects such as precision laser
cutting/shaping technologies, advanced flow reactors and adjacency
businesses in pursuit of thin, strong glass, as well as certain corporate
investments such as Eurokera and Keraglass equity affiliates.
Corporate Investments
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
$5,649 million in 2015.
On December 11, 2015, Corning announced its intention to exchange its
50% equity interest in Dow Corning Corporation for 100% of the stock
of a newly formed entity that will become a wholly-owned subsidiary of
Corning Incorporated. The newly formed entity will hold approximately
40% ownership in Hemlock Semiconductor Group and approximately
$4.8 billion in cash. Upon completion of this strategic realignment, which is
expected to close during the first half of 2016, Dow Chemical, an equal owner
of Dow Corning with Corning since 1943, will assume 100% ownership of
Dow Corning.
Competition
The All Other segment represented less than 1% of Corning’s sales for 2015.
Additional explanation regarding Corning and
its five reportable
segments, as well as financial information about geographic areas,
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.
Additional discussion about Dow Corning appears in Part II – Item 3. Legal
Proceedings section and in Note 7 (Investments) to the Consolidated
Financial Statements. 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
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.
in Pennsylvania
Additional information about corporate investments is presented in the
Legal Proceedings section and in Note 7 (Investments) to the Consolidated
Financial Statements.
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 maintain 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 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 continually improving 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.
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 and
industry
enterprise networks. The competitive
innovation
consolidation, price pressure and competition for the
landscape
includes
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 Commscope and Prysmian Group.
Environmental Technologies Segment
Corning has a major market position in worldwide automotive ceramic
substrate products, as well as a strong presence in the heavy duty and
light duty diesel vehicle market. The Company 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.
4
CORNING INCORPORATED - 2015 Annual Report Business Description
Life Sciences Segment
Corning seeks to maintain a competitive advantage by emphasizing
product quality, global distribution, supply chain efficiency, a broad
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.
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.
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. Additionally,
in the fourth quarter of 2015, we entered into a 25-year power purchase
agreement for solar-generated electricity in which we will purchase
62.5% of the expected output of a solar power facility in North Carolina.
This is a major step in Corning’s commitment to reduce its carbon
footprint and continues our long history of being an environmentally
conscious company.
Availability of resources (ores, minerals, polymers, helium and 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
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 2015,
Corning was granted about 420 patents in the U.S. and over 740 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 2015, Corning and its wholly-owned subsidiaries
owned over 7,750 unexpired patents in various countries of which over
3,250 were U.S. patents. Between 2016 and 2017, approximately 6% of
these patents will expire, while at the same time Corning intends to seek
patents protecting its newer innovations. Worldwide, Corning has about
9,170 patent applications in process, with about 2,350 in process in the
U.S. Corning believes that its patent portfolio will continue to provide a
competitive advantage in protecting the Company’s innovation, although
Corning’s competitors in each of its businesses are actively seeking patent
protection as well.
The Display Technologies segment has over 1,430 patents in various
countries, of which about 340 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 are six important Display Technologies segment
patents set to expire between 2016 and 2018.
The Optical Communications segment has over 2,730 patents in
various countries, of which over 1,270 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 are 10 important
Optical Communications segment patents set to expire between 2016
and 2018.
5
CORNING INCORPORATED - 2015 Annual Report Business Description
The Environmental Technologies segment has over 690 patents in various
countries, of which over 295 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 are 36 important Environmental Technologies
segment patents set to expire between 2016 and 2018.
The Specialty Materials segment has over 750 patents in various countries,
of which over 360 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 are eight important
Specialty Materials segment patents set to expire between 2016 and 2018.
The Life Sciences segment has over 540 patents in various countries, of
which about 220 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
Protection of the Environment
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 are 31 important
Life Sciences segment patents set to expire between 2016 and 2018.
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.
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: Corning, Celcor,
ClearCurve, DuraTrap, Eagle XG, Epic, Gorilla, HPFS, Pyrex, Steuben, Falcon,
SMF-28e, and Willow.
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 $14 million
in 2015 and are estimated to be $26 million in 2016.
Corning’s 2015 consolidated operating results were charged with
approximately $45 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, 2015, Corning had approximately 35,700 full-time employees, including approximately 12,100 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 23.1% of Corning’s U.S. employees.
Executive Officers
James P� Clappin President, Corning Glass Technologies
Jeffrey W� Evenson Senior Vice President and Chief Strategy 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 Shizuoka facility. In 2002, he was appointed
as general manager of CDT worldwide business. He served as president
of Corning Display Technologies from September 2005 through July 2010.
He was appointed president, Corning Glass Technologies, in 2010. Age 58.
Dr. Evenson joined Corning in June 2011 as senior vice president and
operations chief of staff. In 2015, he was named Chief Strategy Officer. 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 50.
Martin J� Curran Executive Vice President and Corning Innovation Officer
Mr. Curran joined Corning in 1984 and has held a variety of roles in
finance, manufacturing, and marketing. He has served as senior vice
president, general manager for Corning Cable Systems Hardware and
Equipment Operations in the Americas, responsible for operations in
Hickory, North Carolina; Keller, Texas; Reynosa, Mexico; Shanghai, China;
and the Dominican Republic. Mr. Curran was appointed as Corning’s first
innovation officer in August 2012. Age 57.
6
CORNING INCORPORATED - 2015 Annual Report Lisa Ferrero Senior Vice President and Chief Administrative Officer
Christine M� Pambianchi Senior Vice President, Human Resources
Business Description
Ms. Ferrero joined Corning in 1987 as a statistician and held various
production management positions until joining Display Technologies
in 1995 as a market analyst in Tokyo. While in Japan, she was appointed
export sales manager for Taiwan and Korea. In 1998, she returned to
Corning, N.Y. and was named market development manager. She was
appointed director of strategic marketing, planning, and analysis for
Display Technologies in 2000. In 2002, Ms. Ferrero joined Environmental
Technologies as business manager for the heavy-duty diesel business
and was named director of the automotive substrates business in 2003.
She was named vice president and deputy general manager, Display
Technologies Asia in June 2005. She served as general manager of Corning
Display Technologies from July 2010 through 2015 overseeing operations
across four regions: China, Japan, Taiwan and the U.S. Ms. Ferrero became
senior vice president and chief administrative officer in January 2016.
Age 52.
Clark S� Kinlin Executive Vice President
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. 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. Mr. Kinlin is on
the board of Dow Corning Corporation. Age 56.
Lawrence D� McRae Vice Chairman and Corporate Development Officer
Mr. McRae joined Corning in 1985 and served in various financial, sales
and marketing positions. He was appointed vice president Corporate
Development in 2000, senior vice president Corporate Development
in 2003, senior vice president Strategy and Corporate Development
in October 2005, and executive vice president Strategy and Corporate
Development in 2010. He was appointed to his present position in August
2015. Mr. McRae is on the board of directors of Dow Corning Corporation.
Age 57.
David L� Morse Executive Vice President and Chief Technology Officer
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 appointed vice president in January 2003,
becoming senior vice president and director of corporate research in
2006. Dr. Morse was appointed 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 63.
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 56.
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 47.
Mark S� Rogus Senior Vice President and Treasurer
Mr. Rogus joined Corning in 1996 as manager, Corporate Finance. In 1999
he was appointed assistant treasurer. He was appointed as vice president
and treasurer in December 2000, responsible for Corning’s worldwide
treasury functions, including corporate finance, treasury operations, risk
management, investment and pension plans. He has served as senior vice
president and treasurer of Finance since January 2004. Prior to joining
Corning, Mr. Rogus was a senior vice president at Wachovia Bank where
he managed the bank’s business development activities in the U.S mid-
Atlantic region and Canada for both investment and non-investment
grade clients. Age 56.
Edward A� Schlesinger Vice President and Corporate Controller
Mr. Schlesinger joined Corning in 2013 as senior vice president and
chief financial officer of Corning Optical Communications. He led the
Finance function for Corning Optical Communications and served on the
Communications Leadership Team. He was named vice president and
corporate controller in September 2015, and appointed principal accounting
officer in December 2015. Prior to joining Corning, Mr. Schlesinger served
as Vice President, Finance and Sector Chief Financial Officer for two of
Ingersoll Rand’s business segments. Mr. Schlesinger has a financial career
that spans more than 20 years garnering extensive expertise in technical
financial management and reporting. Age 48.
Lewis A� Steverson Senior Vice President and General Counsel
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 52.
R� Tony Tripeny Senior Vice President and Chief Financial 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
October 2005, and senior vice president and principal accounting officer in
April 2009. Mr. Tripeny was appointed to his current position as senior vice
president and chief financial officer in September 2015. He is a member of
the board of directors of Hardinge, Inc. Age 56.
in August 2004, vice president, corporate controller
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. and Amazon.
com, Inc. Mr. Weeks has been a member of Corning’s Board of Directors
since 2000. Age 56.
7
CORNING INCORPORATED - 2015 Annual Report Risk Factors
Document Availability
A copy of Corning’s 2015 Annual Report on Form 10-K filed with the
Securities and Exchange Commission is available upon written request to
Corporate Secretary, Corning Incorporated, One Riverfront Plaza, 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 website 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
We operate in 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.
As a global company, we face many risks which could adversely impact
our ongoing operations and reported financial results
We are a global company 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,
research and development, customer support, and shared administrative
service centers.
Compliance with laws and regulations increases our costs. 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 2015, Corning’s ten largest customers accounted for 45% of our sales.
A relatively small number of customers accounted for a high percentage
of net sales in our reportable segments. For 2015, three customers of the
Display Technologies segment accounted for 62% of total segment net
sales when combined. In the Optical Communications segment in 2015,
two customers accounted for 22% of total segment net sales when
combined. In the Environmental Technologies segment in 2015, three
customers accounted for 86% of total segment sales in aggregate. In the
Specialty Materials segment, three customers accounted for 56% of total
segment sales in 2015 when combined. In the Life Sciences segment, two
customers accounted for 46% of total segment sales in 2015 in aggregate.
As a result of mergers and consolidations between customers, Corning’s
customer base could become more concentrated.
8
CORNING INCORPORATED - 2015 Annual Report Risk Factors
We face pricing pressures in each of our businesses that could adversely
affect our financial performance
We face pricing pressure in each of our businesses as a result of intense
competition, emerging technologies, or over-capacity. We may not be able
to achieve proportionate reductions in costs or sustain our current rate of
cost reduction to offset pricing pressures. 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, South 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 U.S. dollar and Japanese yen. Sales in our Display
Technologies segment, representing 34% of Corning’s sales in 2015, 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-
U.S. 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. 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.
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 and data
center expansions. Our sales will be dependent on planned targets for
homes passed and connected and construction of new and/or expansion
of existing data centers. 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. 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.
9
CORNING INCORPORATED - 2015 Annual Report Risk Factors
If the financial condition of our customers declines, our credit risks
could increase
If our products, including materials purchased from our suppliers,
experience performance issues, our business will suffer
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 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.
The success of our business depends on our ability to develop and produce
advantaged products that meet our customers’ needs
We have incurred, and may in the future incur, goodwill and other
intangible asset impairment charges
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. 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.
At December 31, 2015, Corning had goodwill and other intangible assets
of $2,086 million. In the fourth quarter of 2015, we recorded a charge
of $29 million for the impairment of goodwill resulting from a small
acquisition in 2014. While we believe the estimates and judgments about
future cash flows used in the goodwill impairment tests are reasonable,
we cannot provide assurance that additional impairment charges in the
future 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.
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.
10
CORNING INCORPORATED - 2015 Annual Report 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 assessment 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.
Risk Factors
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.
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.
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, which could result in loss of market share, 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,
potentially resulting in loss of market share. 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.
11
CORNING INCORPORATED - 2015 Annual Report Risk Factors
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 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.
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, 2015, we recognized $299 million of
equity earnings, of which approximately 94% came from Dow Corning
(which makes silicone and high purity polycrystalline products).
On December 11, 2015, Corning announced its intention to exchange its
50% equity interest in Dow Corning for 100% of the stock of a newly
formed entity that will become a wholly-owned subsidiary of Corning
Incorporated. The newly formed entity will hold approximately 40%
ownership
in Hemlock Semiconductor Group and approximately
$4.8 billion in cash. Upon completion of this strategic realignment,
which is expected to close during the first half of 2016, Dow Chemical, an
equal owner of Dow Corning with Corning since 1943, will assume 100%
ownership of Dow Corning.
Going forward, we face the risk that our other equity investments may
not perform at the levels expected. 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 or
regulations 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.
Our global operations are subject to extensive trade and anti-corruption
laws and regulations
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.
12
CORNING INCORPORATED - 2015 Annual Report Risk Factors
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. Our IT systems may be 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.
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, and we face the reputational and legal risk that our
related partners 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.
Significant macroeconomic events, changes in regulations, or a crisis in
the financial markets could limit our access to capital
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.
13
CORNING INCORPORATED - 2015 Annual Report Legal Proceedings
Dow Corning Corporation� Corning and Dow Chemical each own 50% of
the common stock of 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 Chemical 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, 2015, Dow Corning had recorded a reserve for breast implant
litigation of $291 million. See Note 7 (Investments) to the Consolidated
Financial Statements 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, 2015, Dow Corning has estimated the liability to commercial
creditors to be within the range of $104 million to $341 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
$104 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 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”). On January 6, 2016, all pending appeals
of the Plan were withdrawn and Corning expects that the Plan will
become effective in April 2016.
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 will contribute its equity interest in PCC and PCE
on the Plan’s Funding Effective Date, which is expected to occur in June
2016. Corning has the option to use its common stock 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
(the “non-PCC asbestos claims”). 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 claims
(the “Stay”). The Stay remains in place as of the date of this filing; however,
given that the Amended PCC Plan is now affirmed by the District Court
and the Third Circuit Court of Appeals, Corning anticipates the Stay will
be lifted in the second half of 2016. These non-PCC asbestos claims have
been covered by insurance without material impact to Corning to date. As
of December 31, 2015, Corning had received for these claims approximately
$19 million in insurance payments. When the Stay is lifted, these non-
PCC asbestos claims will be allowed to proceed against Corning. In prior
periods, Corning recorded in its estimated asbestos litigation liability an
additional $150 million for these and any future non-PCC asbestos claims.
14
CORNING INCORPORATED - 2015 Annual Report 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 $678 million at December 31, 2015, compared with an
estimate of liability of $681 million at December 31, 2014. The $678 million
liability is comprised of $238 million of the fair value of PCE, $290 million
for the fixed series of payments, and $150 million for the non-PCC
asbestos claims, all referenced in the preceding paragraphs. With respect
to the PCE liability, at December 31, 2015 and 2014, the fair value of $238
million and $241 million of our interest in PCE significantly exceeded
its carrying value of $154 million and $162 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
asbestos claims was estimated based upon industry data for asbestos
claims since Corning does not have recent claim history due to the Stay
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, 2015 and 2014,
Corning recorded asbestos litigation income of $15 million and expense
of $9 million, respectively. At December 31, 2015, $440 million of the
obligation, consisting of the $290 million for the fixed series of payments
and $150 million for the non-PCC asbestos claims, 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. The amount of the obligation
related to the fair value of PCE, $238 million, was reclassified to a current
liability in the fourth quarter of 2015, as the contribution of the assets is
expected to be made within the next twelve months.
Non-PCC Asbestos Claims 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 has resolved these issues with a
majority of its relevant insurers, and is vigorously contesting these cases
with the remaining relevant insurers. Management is unable to predict
the outcome of the litigation with these remaining insurers.
Legal Proceedings
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 17 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, 2015 and 2014, Corning had
accrued approximately $37 million (undiscounted) and $43 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.
Chinese Anti-Dumping Investigation Involving Optical Fiber Preforms
Produced in the United States� On March 19, 2014, the Chinese Ministry
of Commerce (“MOFCOM”) initiated an anti-dumping investigation
involving optical fiber preforms originating in the United States and
Japan. On July 23, 2015, MOFCOM announced its Final Determination that
included a dumping margin of 41.79% against Corning. The company is
evaluating its options to appeal MOFCOM’s decision.
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.
15
CORNING INCORPORATED - 2015 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 New York Stock Exchange Composite Tape.
2015
Price range
High
Low
2014
Price range
High
Low
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
$
$
25.16
21.89
20.99
16.55
$
$
$
$
22.98
19.57
22.20
20.17
$
$
$
$
20.02
15.24
22.37
19.23
$
$
$
$
19.29
16.36
23.52
17.03
As of December 31, 2015, there were approximately 16,622 registered holders of common stock and approximately 492,337 beneficial shareholders.
On February 3, 2016, Corning’s Board of Directors declared a 12.5% increase in the Company’s quarterly common stock dividend, which increased the
quarterly dividend from $0.12 to $0.135 per share of common stock, beginning with the dividend to be paid in the first quarter of 2016. This increase marks
the fifth dividend increase since October 2011. The Board previously increased the quarterly dividend 20%, from $0.10 to $0.12, on December 3, 2014. The
Company paid four quarterly dividends of $0.12 during the year ended December 31, 2015 and paid four quarterly dividends of $0.10 during the year ended
December 31, 2014.
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
$200
$150
$100
$50
$0
2010
2011
2012
2013
2014
2015
Corning Incorporated
S&P Communications Equipment
S&P 500
(b) Not applicable.
16
CORNING INCORPORATED - 2015 Annual Report (c) The following table provides information about our purchases of our common stock during the fiscal fourth quarter of 2015:
ISSUER PURCHASES OF EQUITY SECURITIES
Selected Financial Data (Unaudited)
Period
October 1-31, 2015
November 1-30, 2015
December 1-31, 2015
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)
54,513,746
10,654
141,145
$
$
$
$
18.77
18.82
18.42
18.77
54,500,524
54,500,524
$
$
$
$
4,521,528,007
4,521,528,007
4,521,528,007
4,521,528,007
Total at December 31, 2015
54,665,545
(1) These columns reflect the following transactions during the fourth quarter of 2015: (i) the deemed surrender to us of 86,015 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 79,006 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 54,500,524 shares of common stock in conjunction with the repurchase programs announced on July 15, 2015.
(2) On July 15, 2015, Corning’s Board of Directors authorized the repurchase of up to $2 billion worth of shares of common stock between the date of
announcement and December 31, 2016. On October 26, 2015, Corning’s Board of Directors supplemented this program with the authorization to
repurchase an additional $4 billion worth of shares of common stock.
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
2015
2014
2013
2012
2011
Years ended December 31,
$
$
$
$
$
$
$
$
$
$
$
$
$
9,111
769
299
1,339
1.02
1.00
0.36
1,219
1,343
5,455
28,547
3,910
18,788
1,250
1,184
35,700
$
$
$
$
$
$
$
$
$
$
$
$
$
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
1,200
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
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 - 2015 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:
• Overview
• Results of Operations
• Core Performance Measures
• Reportable Segments
• Liquidity and Capital Resources
Overview
• Environment
• Critical Accounting Estimates
• New Accounting Standards
• Forward-Looking Statements
Strategy and Capital Allocation Framework
In October 2015, Corning announced a new strategy and capital allocation
framework that reflects the company’s financial and operational
strengths, as well as its ongoing commitment to increasing shareholder
value.
Our probability of success increases as we invest in our world-
class capabilities. Over the next four years, Corning will concentrate
approximately 80% of its research, development and engineering
investment and capital spending on a cohesive set of three core
technologies, four manufacturing and engineering platforms, and five
market-access platforms. This strategy will allow us to quickly apply our
talents and repurpose our assets as needed.
Our financial strength also allows us to increase our return to shareholders.
Through 2019, we expect to generate and deploy over $20 billion in
cash and to return more than $10 billion to shareholders through share
repurchases and dividends. As a result, we expect to increase our dividend
per common share by at least 10% annually through 2019.
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. Our
spending level for research, development and engineering remained
consistent at 8% of sales in the year ended December 31, 2015 when
compared to the year ended December 31, 2014. We continue to maintain
our innovation strategy focusing 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, emission
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. We
have also focused our research, development and engineering spending
to support the advancement of new product attributes for our Corning
Gorilla Glass suite of products, including Gorilla Glass® in automotive
and architectural markets. 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 and
architectural applications.
2015 Results
The global economic headwinds, the continued softening in the television
and consumer electronic device retail markets and the negative impact of
the strengthening of the U.S. dollar negatively impacted Corning in 2015,
resulting in lower net sales and net income when compared to results
in 2014.
Net sales in the year ended December 31, 2015 were $9,111 million, a decrease
of $604 million, or 6%, when compared to the year ended December
31, 2014. Sales in our Optical Communications segment increased by
$328 million, or 12%, but were more than offset by declines in our other
segments. The increase in sales in the Optical Communications segment
was due to an increase in volume in North America in both carrier network
and enterprise network products and the impact of several acquisitions
completed in 2015. The decrease in sales of $765 million, or 20%, in the
Display Technologies segment was the most significant segment decline,
and was driven by the depreciation of the Japanese yen versus the U.S.
dollar in the amount of $446 million and price declines in the low-teens in
percentage terms, partially offset by a mid-single digit increase in volume.
18
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
For the year ended December 31, 2015, we generated net income of
$1.3 billion, or $1.00 per share, compared to net income of $2.5 billion, or
$1.73 per share, for 2014. When compared to last year, the decrease in net
income was due to the following items (amounts presented after tax):
• The decrease in the unrealized gains from our foreign currency hedges
related to translated earnings in the amount of $1,054 million;
• A decrease in net income of $301 million in the Display Technologies
segment, driven by price declines in the low-teens in percentage terms
more than offsetting a mid-single digit percentage increase in volume,
continued softening in the television and IT retail markets and the
impact of the change in the fair value of the contingent consideration
resulting from the acquisition of Corning Precision Materials in the
amount of $184 million;
• The increase of $81 million in our defined benefit pension plans mark-to-
market loss, driven by lower returns on our U.S. pension assets; and
• The absence of a gain of $38 million recorded in 2014 related to the
settlement of an intellectual property dispute.
The decrease in net income for the year ended December 31, 2015 was
partially offset by the following items:
• The positive change in the amounts recorded related to tax law changes
and valuation allowance adjustments of $204 million;
• An increase of $43 million in the Optical Communications segment, due
to higher sales volume for both carrier and enterprise network products,
the favorable impact of several acquisitions completed this year and
manufacturing efficiencies gained through cost reductions; and
Results of Operations
Selected highlights from our continuing operations follow (in millions):
• An increase in equity earnings of $33 million, driven by higher earnings
at Dow Corning.
The translation impact of fluctuations in foreign currency exchange rates
negatively affected Corning’s consolidated net income in the year ended
December 31, 2015 in the amount of $294 million when compared to 2014.
This impact was partially offset by the increase in the realized gain from
our foreign currency translation hedges related to translated earnings of
$186 million.
Corporate Outlook
In 2016, Corning expects its Display Technologies segment to experience
continued moderate sequential LCD glass price declines and glass volume
growth in the mid-single digit percentage year over year, in line with total
glass demand growth. We anticipate that a rise in global demand for
Corning’s carrier and enterprise network products will drive an increase
in sales of a mid-single digit percentage in our Optical Communications
segment, and that an increase in Corning Gorilla Glass and advanced
optics volume will drive sales growth in the low-teens on a percentage
basis in our Specialty Materials segment. We expect sales in our
Environmental Technologies segment to be down slightly for the year,
driven by lower year-over-year demand for heavy-duty diesel products.
And we expect to continue the execution of our strategy and capital
allocation framework begun in the fourth quarter of 2015, under which
we plan to grow and sustain our leadership position in the markets in
which we operate and return more than $10 billion to shareholders
through 2019.
2015
2014
2013
15 vs. 14
14 vs. 13
% change
Net sales
Gross margin
(gross margin %)
Selling, general and administrative expenses
(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)
$
$
$
$
9,111
3,653
40%
1,523
17%
769
8%
Equity in earnings of affiliated companies
$
299
(as a % of net sales)
Transaction-related gain, net
(as a % of net sales)
Foreign currency hedge gain, 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.
3%
85
1%
1,486
16%
(147)
(2)%
1,339
15%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
9,715
4,052
42%
1,211
12%
815
8%
71
1%
266
3%
74
1%
1,411
15%
3,568
37%
(1,096)
(11)%
2,472
25%
$
$
$
$
$
$
$
$
$
$
7,819
3,324
43%
1,126
14%
710
9%
67
1%
547
7%
622
8%
2,473
32%
(512)
(7)%
1,961
25%
(6)
(10)
26
(6)
*
12
*
(94)
(58)
(87)
(46)
24
22
8
15
6
(51)
*
127
44
114
26
19
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Sales
The following table presents net sales by reportable segment (in millions):
Display Technologies
Optical Communications
Environmental Technologies
Specialty Materials
Life Sciences
All Other
Total net sales
Year ended December 31,
$
2015
3,086
2,980
1,053
1,107
821
64
2014
$
3,851
2,652
1,092
1,205
862
53
2013
$
2,545
2,326
919
1,170
851
8
$
9,111
$
9,715
$
7,819
%
Change
15 vs. 14
%
Change
14 vs. 13
(20)%
12%
(4)%
(8)%
(5)%
21%
(6)%
51%
14%
19%
3%
1%
563%
24%
For the twelve months ended December 31, 2015, net sales decreased by
$604 million, or 6%, when compared to the same period in 2014. Driving
the decline in net sales are the following items:
• A decrease of $765 million in the Display Technologies segment, driven
by the depreciation of the Japanese yen versus the U.S. dollar, which
adversely impacted net sales in the amount of $446 million, and price
declines in the low-teens on a percentage basis. Although volume
increased in the mid-single digits in percentage terms, growth was
muted somewhat by weakness in demand for televisions, computer
monitors and mobile computing products;
• A decrease in the Environmental Technologies segment of $39 million,
driven by the translation impact from movements in foreign currency
exchange rates versus the U.S. dollar, primarily the euro, of $57 million
and lower sales of light duty diesel products in Europe, partially offset by
higher volume for heavy-duty diesel and light-duty substrate products;
• A decrease of $98 million in the Specialty Materials segment, driven
primarily by a decline in advanced optics sales; and
• A decrease of $41 million in the Life Sciences segment due to the impact
of unfavorable movements in foreign exchange rates of $43 million.
An increase of $328 million in the Optical Communications segment
slightly offset the decline in sales. The increase was driven by higher sales
of enterprise network products, up $170 million, due to an acquisition
completed in the first quarter of 2015 and an increase in data center
products sales. Sales of carrier network products also increased by $158
million driven by growth in fiber-to-the-home products in North America
and the impact of two small acquisitions completed in the first quarter
of 2015.
In the year ended December 31, 2015, the translation impact of fluctuations
in foreign currency exchange rates, primarily the Japanese yen and the
euro, negatively affected Corning’s consolidated net sales in the amount
of $663 million when compared to the same period in 2014.
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, partially offset by price declines in the mid-teens on a percentage
basis 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,
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 Sciences increased by $11 million, driven by growth in North America
and China, up $12 million and $5 million, respectively.
In the year ended December 31, 2014, the translation impact of fluctuations
in foreign currency exchange rates, primarily the Japanese yen, negatively
affected Corning’s consolidated net sales in the amount of $347 million
when compared to the same period in 2013.
In 2015, 2014 and 2013, sales in international markets accounted for 70%,
77% and 74%, 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.
20
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Gross Margin
In the year ended December 31, 2015, gross margin dollars and gross margin
as a percentage of net sales both declined when compared to the same
period last year, declining $399 million and 2%, respectively. The negative
impact of the depreciation of the Japanese yen versus the U.S. dollar in
the amount of $368 million and price declines in the Display Technologies
segment in the low teens in percentage terms drove the decrease, but
were partially offset by cost reductions and the impact of several small
acquisitions in the Optical Communications segment, improvements in
manufacturing performance in the Display Technologies and Specialty
Materials segments and lower acquisition-related and restructuring costs.
Additionally, our Emerging Innovation Group and Corning Pharmaceutical
Technologies business added $26 million in gross margin dollars in 2015,
reflecting the growing significance of new business development.
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.
Selling, General and Administrative Expenses
In the twelve months ended December 31, 2015, selling, general and
administrative expenses increased by $312 million when compared
to the same period in 2014, driven primarily by an increase of $133
million in our defined benefit pension plans mark-to-market loss, the
absence of the positive impact of a contingent consideration fair value
adjustment of $249 million recorded in 2014 and an increase in spending
in the Optical Communications segment driven by several acquisitions
completed in 2015. Offsetting these increases somewhat were a decrease
in variable compensation, lower spending in the Display Technologies
and Specialty Materials segments and a decline in acquisition-related
and post-combination expenses, which were higher last year due to
additional costs incurred related to the acquisition of the remaining
equity interests of Samsung Corning Precision Materials. When compared
to the same period last year, as a percentage of net sales, selling, general
and administrative expenses increased driven by lower net sales in 2015.
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 of Samsung Corning Precision Materials.
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, 2015, research, development and
engineering expenses decreased by $46 million when compared to the
same period last year, driven by lower variable compensation and a
decrease in the Display Technologies and Specialty Materials segments.
As a percentage of net sales, research, development and engineering
expenses remained consistent with the same period in 2014.
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.
Restructuring, Impairment, and Other Charges
Corning recorded restructuring, impairment, and other charges and
credits in 2014 and 2013, 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:
2015 Activity
For the year ended December 31, 2015, we did not record significant
restructuring,
impairment and other charges or reversals. Cash
expenditures for restructuring activities were $40 million.
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 of approximately
$39 million. Annualized savings from these actions are estimated to be
approximately $94 million and will be reflected largely in selling, general
and administrative expenses.
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. Cash expenditures were
approximately $35 million.
21
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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,
2015
2014
2013
$
$
281
18
299
$
$
252
14
266
$
$
320
196
31
547
Equity earnings of affiliated companies increased by $33 million in
the twelve months ended December 31, 2015, when compared to the
same period in 2014, reflecting the increase in equity earnings from
Dow Corning.
Equity earnings of affiliated companies decreased by $281 million in the
twelve months ended December 31, 2014, when compared to the same
period in 2013, 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):
Year ended December 31,
2015
2014
2013
$
$
160
121
281
$
$
653
(401)
252
$
$
166
30
196
– The negative impact of the change in the mark-to-market of a
derivative instrument in the amount of $56 million ($43 million loss
in 2015 compared to $13 million gain in 2014); and
– Lower volume and unfavorable movements
in
foreign
exchange rates.
• A significant increase in equity earnings from the polysilicon business
in the amount of $522 million, driven by the absence of the
$465 million charge for the abandonment of a polycrystalline silicon
plant expansion recorded in 2014 and an increase in Corning’s share of
settlements of long-term sales agreements in the amount of $40 million
($49 million in the first quarter of 2015 compared to $9 million in the
first quarter of 2014), partially offset by lower volume.
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
• A 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
million, 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.
Silicones
Polysilicon (Hemlock Semiconductor Group)
Total Dow Corning
In May 1995, Dow Corning filed for bankruptcy protection to address
pending and claimed liabilities arising from many thousands of breast
implant product lawsuits. On June 1, 2004, Dow Corning emerged from
Chapter 11 with a Plan of Reorganization (the “Plan”) which provided
for the settlement or other resolution of implant claims. The Plan also
includes releases for Corning and Dow Chemical 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, 2015, Dow Corning had recorded a reserve for breast implant
litigation of $291 million. See Note 7 (Investments) to the Consolidated
Financial Statements and Part II – Item 3. Legal Proceedings for additional
detail.
On December 11, 2015, Corning announced its intention to exchange its
50% equity interest in Dow Corning Corporation for 100% of the stock
of a newly formed entity that will become a wholly-owned subsidiary of
Corning. The newly formed entity will hold approximately 40% ownership
in Hemlock Semiconductor Group and approximately $4.8 billion in cash.
Upon completion of this strategic realignment, which is expected to
close during the first half of 2016, Dow Chemical, an equal owner of Dow
Corning with Corning since 1943, will assume 100% ownership of Dow
Corning.
2015 vs. 2014
Equity earnings from Dow Corning increased by $29 million in the twelve
months ended December 31, 2015, when compared to the same period in
2014, driven by the following items:
• A decrease in equity earnings from the silicones business of $493 million,
driven by the following items:
– The absence of the gain resulting from the reduction of the Implant
Liability in the amount of $393 million;
– The absence of $46 million of favorable tax adjustments recorded
in 2014;
22
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Foreign Currency Hedge Gain, Net
Included in the line item Foreign currency hedge gain, net, is the impact
of foreign currency hedges which hedge our translation exposure arising
from movements in the Japanese yen, South Korean won and euro against
the U.S. dollar and its impact on our net earnings, as well as other foreign
exchange hedges that limit exposures to foreign functional currency
fluctuations. The following tables provide detailed information on the
impact of our foreign currency hedge gains and losses:
(in millions)
Hedges related to translated earnings:
Realized gains, net
Unrealized (losses) gains
Total translated earnings contract gain
Foreign currency hedges, other
Foreign Currency Hedge Gain, Net
(in millions)
Hedges related to translated earnings:
Realized gains, net
Unrealized gains
Total translated earnings contract gain
Foreign currency hedges, other
Foreign Currency Hedge Gain, Net
Year ended
December 31, 2015
Year ended
December 31, 2014
Change
2015 vs. 2014
Income before
income taxes
Net
income
Income before
income taxes
Net
income
Income before
income taxes
Net
income
$
410
$
274
$
$
$
653
(573)
80
5
85
(362)
48
3
51
$
1,095
1,369
42
224
692
916
27
$
379
$
186
(1,668)
(1,289)
(37)
(1,054)
(868)
(24)
$
1,411
$
943
$ (1,326)
$ (892)
Year ended
December 31, 2014
Year ended
December 31, 2013
Change
2014 vs. 2013
Income before
income taxes
Net
income
Income before
income taxes
Net
income
Income before
income taxes
Net
income
$
274
$
1,095
1,369
42
224
692
916
27
$
1,411
$
943
$
$
67
368
435
187
622
$
55
232
287
118
$
405
$
$
207
727
934
(145)
789
$
169
460
629
(91)
$
538
The gross notional value outstanding for our foreign currency hedges
related to translated earnings at December 31, 2015 is $11.9 billion, and
is comprised of the following: 1) Japanese yen-denominated hedges -
$8.3 billion; 2) South Korean won-denominated hedges - $3.3 billion; and
3) euro-denominated hedges - $345 million.
Income Before Income Taxes
The translation impact of fluctuations in foreign currency exchange rates
negatively affected Corning’s Income before income taxes in the year
ended December 31, 2015 in the amount of $388 million when compared
to 2014. This impact was partially offset by the increase in the realized
gain from our foreign currency translation hedges related to translated
earnings of $379 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
Years ended December 31,
2015
$
147
2014
$ 1,096
9.9%
30.7%
2013
$
512
20.7%
The effective income tax rate for 2015 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 resulting from the
inclusion of high-taxed foreign earnings in U.S. income;
• The impact of equity in earnings of nonconsolidated affiliates reported in
the financials, net of tax;
• $63 million tax expense for unrecognized tax benefit primarily for
positions taken related to net transfer pricing adjustments (offset with
benefit for competent authority relief); and
• $100 million tax benefit primarily related to change in judgment on the
realizability of Germany and Japan deferred tax assets which is partially
offset with tax expense from U.S. state and China deferred tax allowances
increases.
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 resulting from the
inclusion of high-taxed foreign earnings in U.S. income; and
• The impact of equity in earnings of nonconsolidated affiliates reported in
the financials, net of tax.
23
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Partially offsetting the benefits above is a $177 million charge attributable
to a change in judgment on the realizability of certain foreign deferred tax
assets in Germany and Japan.
Corning has valuation allowances on certain shorter-lived deferred
tax assets such as those represented by capital loss and state tax net
operating loss carryforwards, 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, 2015
and 2014 was $238 million and $298 million, respectively.
Corning continues to indefinitely reinvest substantially all of its foreign
earnings, with the exception of an immaterial amount of current earnings
that have very low or no tax cost associated with their repatriation.
Our current analysis indicates that we have sufficient U.S. liquidity,
including borrowing capacity, to fund foreseeable U.S. cash needs
without requiring the repatriation of foreign cash. 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, 2015, taxes have not been provided on approximately $11
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 0.5, 0.4 and 1.2
percentage points for 2015, 2014 and 2013, 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
Net income attributable to Corning Incorporated used in basic earnings
per common share calculation(1)
Net income attributable to Corning Incorporated used in diluted earnings
per common share calculation(1)
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
Years ended December 31,
2015
2014
2013
$ 1,339
$ 2,472
$ 1,961
$ 1,241
$ 2,378
$ 1,961
$ 1,339
$
$
1.02
1.00
1,219
1,343
$ 2,472
$
$
1.82
1.73
1,305
1,427
$ 1,961
$
$
1.35
1.34
1,452
1,462
(1) Refer to Note 18 (Earnings per Common Share) to the Consolidated Financial Statements for additional information.
Comprehensive Income
(In millions)
Net income attributable to Corning Incorporated
Foreign currency translation adjustments and other
Net unrealized gains (losses) on investments
Unamortized gains (losses) and prior service (costs) credits for postretirement benefit plans
Net unrealized (losses) gains on designated hedges
Other comprehensive loss, net of tax (Note 17)
Comprehensive income attributable to Corning Incorporated
Years ended December 31,
2015
2014
2013
$
1,339
$ 2,472
$
1,961
(590)
1
121
(36)
(504)
835
$
(1,073)
(1)
(281)
4
(1,351)
(682)
2
392
(24)
(312)
$
1,121
$ 1,649
24
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
2015 vs. 2014
For the year ended December 31, 2015, comprehensive income decreased
by $286 million when compared to the same period in 2014, driven
by a decrease of $1,133 million in net income attributable to Corning
Incorporated, offset by the positive impact of the change in foreign
currency translation adjustments and the increase in unamortized gains
for postretirement benefit plans.
The decrease in the loss on foreign currency translation adjustments for
the year ended December 31, 2015 in the amount of $483 million (after-
tax) was driven by the following items: 1) the decrease in the loss in the
translation of Corning’s consolidated subsidiaries in the amount of $334
million; 2) the decrease in the loss in the translation of Corning’s equity
method investments in the amount of $13 million; and 3) the absence of
the reclassification of a gain to net income in 2014 in the amount of $136
million related to the acquisition of Samsung Corning Precision Materials.
The increase in unamortized gains for postretirement benefit plans in the
amount of $402 million (after-tax) is due to the following: 1) the increase
in the reclassification to the income statement of $81 million of actuarial
losses in our defined benefit pension plans, largely driven by lower
investment returns; 2) a decrease in actuarial losses of $119 million; and
3) the increase in actuarial gains of $202 million from our equity affiliate
Dow Corning.
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
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. Corning has adopted the use of constant currency reporting for
the Japanese yen and South Korean won, and uses an internally derived
management rate which is closely aligned to our foreign currency hedges.
In the first quarter of 2015, we changed the yen-to-dollar management
rate from ¥93 to ¥99 to closely align with the yen-denominated hedges
entered into for the years 2015 through 2017. Prior periods presented have
been recast based on the new rate.
Net sales, equity in earnings of affiliated companies and net income are
adjusted to exclude the impacts of changes in the Japanese yen and
the South Korean won, gains and losses on our foreign currency hedges
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.
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.
See Note 13 (Employee Retirement Plans) and Note 17 (Shareholders’ Equity)
to the Consolidated Financial Statements for additional details.
related to translated earnings, acquisition-related costs, discrete tax items,
restructuring and restructuring-related charges, certain litigation-related
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’s discussion and analysis on our reportable segments has
also been adjusted for these items, as appropriate. These measures are
not prepared in accordance with Generally Accepted Accounting Principles
in the United States (“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 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
2015
2014
2013
15 vs. 14
14 vs. 13
$
$
$
9,800
269
1,882
$
$
$
9,955
310
2,023
$
$
$
7,780
531
1,656
(2)%
(13)%
(7)%
28%
(42)%
22%
% change
25
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Core Net Sales
The following table presents core net sales by reportable segment (in millions):
Display Technologies
Optical Communications
Environmental Technologies
Specialty Materials
Life Sciences
All Other
Total core net sales
Year ended December 31,
2015
$
3,774
2,980
1,053
1,107
821
65
2014
$
4,092
2,652
1,092
1,205
862
52
2013
$
2,507
2,326
919
1,170
851
7
$
9,800
$
9,955
$
7,780
%
Change
15 vs. 14
%
Change
14 vs. 13
(8)%
12%
(4)%
(8)%
(5)%
25%
(2)%
63%
14%
19%
3%
1%
643%
28%
Corning’s core net sales in the year ended December 31, 2014 improved in
all of our segments, increasing by $2,175 million to $9,955 million, when
compared to the same period in 2013. Driving the growth in core net sales
are the following items:
• Display Technologies increased by $1,585 million, due to the consolidation
of Corning Precision Materials 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, 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%, 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.
The translation impact from movements in foreign currency exchange
rates in the years ended December 31, 2015 and 2014, excluding the
Japanese yen and South Korean won, negatively affected core net sales in
the amount of $215 million and $68 million, respectively, when compared
to the prior years.
In all segments except Display Technologies, core net sales are consistent
with GAAP net sales. Because a significant portion of revenues
and manufacturing costs in the Display Technologies segment are
denominated in Japanese yen, this segment is adjusted to remove the
impact 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 January 1, 2015, we use an internally derived management
rate of ¥99, which is closely aligned to our current yen-denominated
hedges related to translated earnings, and have recast all periods
presented based on this rate in order to effectively remove the impact of
changes in the Japanese yen.
Core net sales decreased by $155 million to $9.8 billion in the year ended
December 31, 2015 when compared to the same period in 2014. Driving the
decline in core net sales are the following items:
• A decrease of $318 million in the Display Technologies segment, driven
by price declines in the low-teens on a percentage basis. Although
volume increased in the mid-single digits in percentage terms, growth
was muted somewhat by weakness in demand for televisions, computer
monitors and mobile computing products;
in
• A decrease
the Environmental Technologies segment of
$39 million, driven by the translation impact from movements in
foreign currency exchange rates versus the U.S. dollar, primarily the euro,
of $57 million and lower sales of light duty diesel products in Europe,
partially offset by higher volume for heavy duty diesel and light duty
substrate products;
• A decrease of $98 million in the Specialty Materials segment, driven
primarily by a decline in advanced optics sales; and
• A decrease of $41 million in the Life Sciences segment due to the
impact of unfavorable movements in foreign exchange rates of
$43 million.
An increase of $328 million in the Optical Communications segment
slightly offset the decline in sales. The increase was driven by higher sales
of enterprise network products, up $170 million, due to an acquisition
completed in the first quarter of 2015 and an increase in data center
increased,
products sales. Sales of carrier network products also
up $158 million, driven by growth in fiber-to-the-home products in
North America and the impact of two small acquisitions completed in
the first quarter of 2015.
26
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Core Equity in Earnings of Affiliated Companies
The following provides a summary of core equity in earnings of affiliated companies (in millions):
Samsung Corning Precision Materials
Dow Corning*
All other
Total core equity earnings
% change
2015
2014
2013
15 vs. 14
14 vs. 13
$
$
245
24
269
$
$
287
23
310
$
$
356
145
30
531
(15)%
4%
(13)%
98%
(23)%
(42)%
*
In 2013, 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 by $41 million in the twelve months ended December 31, 2015, when compared to the same period
in 2014, reflecting the decrease in equity earnings from Dow Corning.
Core equity earnings of affiliated companies decreased by $221 million in the twelve months ended December 31, 2014, when compared to the twelve
months ended December 31, 2013, 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,
2015
2014
2013
$
$
176
69
245
$
$
197
90
287
$
$
145
31
176
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(8)
Hemlock Semiconductor non-operating results(8)
Equity in earnings of affiliated companies(8)
Core Performance measures
2015
$
2014
2013
281
$
252
$
196
(36)
245
$
35
287
$
$
(31)
(1)
(19)
145
See Reconciliation of Non-GAAP Measures – Items Excluded from GAAP Measures below for the descriptions of the footnoted reconciling items.
2015 vs. 2014
Core equity earnings from Dow Corning decreased by $42 million, or 15%,
in the year ended December 31, 2015, when compared to the same period
last year, due to lower volume and unfavorable movements in foreign
exchange rates and the devaluation of the Chinese yuan.
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.
Core Earnings
2015 vs. 2014
In the year ended December 31, 2015, we generated core earnings
of $1,882 million or $1.40 per share, compared to $2,023 million or
$1.42 per share in the year ended December 31, 2014. The decrease was
due to lower core earnings in the Display Technologies, Environmental
Technologies, Specialty Materials and Life Sciences segments, and the
unfavorable translation impact from movements in foreign currency
exchange rates, excluding the Japanese yen and South Korean won,
of $57 million. Slightly offsetting the decline is higher core earnings in
the Optical Communications segment, up $61 million, driven by higher
sales volume for both carrier network and enterprise network products,
the favorable impact of several acquisitions completed this year and
manufacturing efficiencies gained through cost reductions.
27
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
2014 vs. 2013
When compared to the same period in the prior year, core earnings
increased in the twelve months ended December 31, 2014 by $367 million,
or 22%, to $2,023 million, 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 $58 million in the Environmental Technologies segment,
driven by an increase in demand for our diesel products and improved
manufacturing efficiency; and
• An increase of $34 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.
Included in core earnings for the years ended December 31, 2015, 2014
and 2013 is net periodic pension expense in the amount of $62 million,
$74 million and $37 million, respectively, which excludes the annual
pension mark-to-market adjustments. In the years ended December 31,
2015, 2014 and 2013, the mark-to-market adjustments were a pre-tax
loss of $165 million, a pre-tax loss of $29 million and a pre-tax gain of
$30 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
2015
$
$
$
$
1,882
98
1,784
98
1,882
1,219
9
115
1,343
1.46
1.40
2014
$
$
$
$
2,023
94
1,929
94
2,023
1,305
12
110
1,427
1.48
1.42
2013
$
$
$
$
1,656
1,656
1,656
1,452
10
1,462
1.14
1.13
28
CORNING INCORPORATED - 2015 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
$
9,111
687
2
As reported
Constant-yen(1)
Constant-won(1)
Foreign currency hedges related to
translated earnings(2)
Acquisition-related costs(3)
Discrete tax items and other tax-related
adjustments(4)
Litigation, regulatory and other legal
matters(5)
Restructuring, impairment and other
charges(6)
Liquidation of subsidiary(7)
Equity in earnings of affiliated companies(8)
Impacts from the acquisition of Samsung
Corning Precision Materials(9)
Post-combination expenses(10)
Pension mark-to-market adjustment(11)
Year ended December 31, 2015
Equity
earnings
Income before
income taxes
Net
income
Effective
tax rate
Earnings
per share
$
299
$
1,486
$
1,339
9.9%
$
6
(2)
(34)
567
(25)
(80)
55
5
46
(34)
(20)
25
165
423
(19)
(48)
36
36
3
42
(33)
(18)
16
105
Core performance measures
$ 9,800
$
269
$
2,190
$
1,882
14.1%
$
See “Items Excluded from GAAP Measures” below for the descriptions of the footnoted reconciling items.
1.00
0.31
(0.01)
(0.04)
0.03
0.03
0.03
(0.02)
(0.01)
0.01
0.08
1.40
29
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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)
Foreign currency hedges related to
translated earnings(2)
Acquisition-related costs(3)
Discrete tax items and other tax-related
adjustments(4)
Litigation, regulatory and other legal
matters(5)
Restructuring, impairment and other
charges(6)
Liquidation of subsidiary(7)
Equity in earnings of affiliated companies(8)
Gain on previously held equity investment(9)
Settlement of pre-existing contract(9)
Contingent consideration fair value
adjustment(9)
Post-combination expenses(9)
Impacts from the acquisition of Samsung
Corning Precision Materials(9)
Pension mark-to-market adjustment(11)
$
9,715
$
266
$
3,568
$
2,472
30.7%
$
240
1
43
197
37
(1,369)
74
(1)
86
43
(394)
320
(249)
72
(9)
29
144
26
(916)
57
240
(2)
66
(3)
38
(292)
320
(194)
55
(12)
24
Core performance measures
$
9,955
$
310
$
2,404
$
2,023
15.8%
$
1.73
0.10
0.02
(0.64)
0.04
0.17
0.05
0.03
(0.20)
0.22
(0.14)
0.04
(0.01)
0.02
1.42
*
In the first quarter of 2015, we changed the yen-to-dollar management rate from ¥93 to ¥99 to closely align with the yen-denominated hedges
entered into for the years 2015 through 2017. Prior periods presented have been recast based on the new rate.
See “Items Excluded from GAAP Measures” below for the descriptions of the footnoted reconciling items.
30
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net sales
Equity
earnings
Income before
income taxes
Net
income
Effective
tax rate
Per share
Year ended December 31, 2013
$
7,819
$
(39)
547
(28)
42
(31)
1
$
2,473
$
1,961
20.7%
$
1.34
(53)
(435)
(99)
54
19
67
42
(31)
1
(30)
(17)
4
(45)
(287)
(69)
40
9
13
46
44
(30)
1
(17)
(12)
2
(0.03)
(0.20)
(0.05)
0.03
0.01
0.01
0.03
0.02
(0.02)
(0.01)
(0.01)
(in millions)
As reported
Constant-yen(1)*
Foreign currency hedges related to
translated earnings(2)
Other yen-related transactions(2)
Acquisition-related costs(3)
Discrete tax items and other tax-related
adjustments(4)
Litigation, regulatory and other legal
matters(5)
Restructuring, impairment and other
charges(6)
Equity in earnings of affiliated
companies(8)
Hemlock Semiconductor operating
results(8)
Hemlock Semiconductor non-operating
results(8)
Pension mark-to-market adjustment(11)
Gain on change in control of equity
investment(12)
Other
Core performance measures
$
7,780
$
531
$
1,995
$
1,656
17.0%
$
1.13
*
In the first quarter of 2015, we changed the yen-to-dollar management rate from ¥93 to ¥99 to closely align with the yen-denominated hedges
entered into for the years 2015 through 2017. Prior periods presented have been recast based on the new rate.
See “Items Excluded from GAAP Measures” below for the descriptions of the footnoted reconciling items.
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 Display Technologies segment 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 January 1, 2015, we used an internally derived management rate of ¥99,
which is closely aligned to our current yen portfolio of foreign currency hedges, 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 Corning Precision Materials’
costs are denominated in South 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 South 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.
(2) Foreign currency hedges related to translated earnings: We have excluded the impact of the gains and losses of our foreign currency hedges related
to translated earnings for each period presented.
(3) Acquisition-related costs: These expenses include intangible amortization, inventory valuation adjustments and external acquisition-related deal
costs.
(4) 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 transfer pricing out-of-period adjustments in 2014 and 2015.
(5) 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 other legal matters.
(6) Restructuring, impairment and other charges: This amount includes restructuring, impairment and other charges, including goodwill impairment
charges and other expenses and disposal costs not classified as restructuring expense.
31
CORNING INCORPORATED - 2015 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(7) Liquidation of subsidiary: The partial impact of non-restructuring related items due to the decision to liquidate a consolidated subsidiary that is not
significant.
(8) 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. In 2013, 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.
(9)
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.
(10) Post-combination expenses: Post-combination expenses incurred as a result of an acquisition in the first quarter of 2015.
(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.
(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.
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 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’s Pharmaceutical Technologies
business, which consists of a pharmaceutical glass business and a glass
tubing business used in the pharmaceutical packaging industry. This
segment also includes Corning Precision Materials’ non-LCD business and
new product lines and development projects such as laser technologies,
advanced flow reactors and adjacency businesses in pursuit of thin, strong
glass, as well as certain corporate investments such as Eurokera and
Keraglass equity affiliates.
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 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”
above. 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.
32
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Display Technologies
The following table provides net sales and net income for the Display Technologies segment and 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)
Foreign currency hedges related to
translated earnings(2)
Other yen-related transactions(2)
Acquisition-related costs(3)
Discrete tax items and other tax-related
adjustments(4)
Restructuring, impairment and other charges(6)
Equity in earnings of affiliated companies(8)
Impacts from the acquisition of Samsung
Corning Precision Materials(9)
Pension mark-to-market adjustment(11)
Year ended December 31, 2015
Year ended December 31, 2014
Year ended December 31, 2013
Sales
Net
income
Sales
Net
income
Sales
Net
income
$
3,086
$
1,095
$
686
2
419
(17)
(416)
3,851
240
(10)
4
1
$
1,396
$
2,545
$
1,293
142
27
(290)
37
4
40
6
(121)
2
(38)
(47)
(90)
(67)
8
10
6
28
(8)
Core performance measures
$
3,774
$
1,075
$
4,092
$
1,243
$
2,507
$
1,133
*
In the first quarter of 2015, we changed the yen-to-dollar management rate from ¥93 to ¥99 to closely align with the yen-denominated hedges
entered into for the years 2015 through 2017. Prior periods presented have been recast based on the new rate.
See “Items Excluded from GAAP Measures” above for the descriptions of the footnoted reconciling items.
As Reported
2015 vs. 2014
When compared to the same period in 2014, the decrease in net sales of
$765 million, or 20%, in the year ended December 31, 2015 was driven by
price declines in the low-teens in percentage terms and the depreciation
of the Japanese yen versus the U.S. dollar, which adversely impacted
net sales in the amount of $446 million. Sequentially, fourth quarter
LCD glass price declines were the lowest sequential decline of 2015.
Although volume increased in the mid-single digits in percentage terms,
growth was muted somewhat by weakness in demand for televisions,
computer monitors and mobile computing products. Additionally, in the
third quarter of 2015, we experienced temporary share loss at one of our
largest customers due to a contract dispute. We resolved the dispute in
the fourth quarter of 2015, and extended our long-term supply agreement
with this customer to 2025.
income
Net
in the Display Technologies segment decreased by
$301 million, or 22%, in the year ended December 31, 2015, when
compared to the same period last year. This decrease was driven by the
following items:
• The impact of price declines in the low-teens in percentage terms that
more than offset the mid-single digit percent increase in volume;
• A decrease of $184 million in the gain on the fair value adjustment of
the contingent consideration resulting from the acquisition of Corning
Precision Materials; and
• The absence of a gain on the settlement of an intellectual property
dispute recorded in 2014 in the amount of $38 million.
The decrease in net income was partially offset by the following items:
• A decrease of $40 million in restructuring, impairment and other
charges; and
• A decline in operating expenses.
The translation impact of fluctuations in foreign currency exchange rates
negatively impacted Display Technologies net income in the year ended
December 31, 2015 in the amount of $233 million when compared to the
same period in 2014. This impact was partially offset by the increase in
the realized gain from our foreign currency hedges related to translated
earnings in the amount of $126 million.
last year, the
2014 vs. 2013
When compared to the same period
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.
Net income in the Display Technologies segment increased by $103 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 $79 million;
• Improvements in manufacturing efficiency of $46 million.
• A decline in transaction and acquisition-related costs in the amounts of
$73 million and $37 million, respectively;
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;
33
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
• 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.
Core Performance
2015 vs. 2014
When compared to the same period in 2014, core net sales in the Display
Technologies segment decreased by $318 million, or 8%, in the year
ended December 31, 2015, driven primarily by price declines in the low-
teens in percentage terms. Sequentially, LCD glass price declines in the
fourth quarter remained moderate. Although volume increased in the
mid-single digits in percentage terms, growth was muted somewhat
by weakness in demand for televisions, computer monitors and mobile
computing products. Additionally, in the third quarter of 2015, we
experienced temporary share loss at one of our largest customers due
to a contract dispute. We resolved the dispute in the fourth quarter of
2015, and extended our long-term supply agreement with this customer
to 2025.
Core earnings in the Display Technologies segment in the year ended
December 31, 2015 declined by $168 million, or 14%, when compared to
the same period last year. Volume increases in the mid-single digits in
percentage terms, lower manufacturing costs and a decline in operating
expenses were more than offset by price declines in the low-teens and the
absence of a gain on the settlement of an intellectual property dispute
recorded in 2014 in the amount of $38 million.
2014 vs. 2013
When compared to the same period last year, the increase in core net sales
of $1,585 million, or 63%, 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 $1.9 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
$110 million, or 10%, 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.
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 2015, three customers of the Display
Technologies segment, which individually accounted for more than 10%
of segment net sales, accounted for a combined 62% of total segment
sales. 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. 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,
sales to two LCD panel makers located in South Korea accounted for
approximately 93% of Samsung Corning Precision Materials sales.
Corning has invested to expand capacity to meet the projected demand
for LCD glass substrates. In 2015, 2014 and 2013, capital spending in this
segment was $594 million, $492 million and $350 million, respectively. We
expect capital spending for 2016 to be approximately $600 million.
2016 Outlook:
In the first quarter of 2016, Corning anticipates that panel maker
utilization will continue to decline, which will reduce inventory levels
in the supply chain. As a result, the overall glass market and Corning’s
LCD glass volume are expected to decline by a mid-to-high single-digit
percentage sequentially. Corning’s LCD glass price decline is expected
to be moderate, achieving what will be one of the lowest first-quarter
declines in five years.
For the full year, Corning expects moderate sequential price declines to
continue, and for its glass volume to grow by a mid-single-digit percentage
year over year, in line with total glass demand growth. Corning expects
global television unit sales will grow by a low single-digit percentage, and
the average screen size will increase by at least 1.5 inches. The company
expects panel maker utilization to increase as the year progresses, and
retail LCD glass area demand to be up by a high single-digit percentage
in 2016.
34
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Optical Communications
The following table provides net sales and net income for the Optical Communications segment and reconciles the non-GAAP financial measures for the
Optical Communications segment with our financial statements presented in accordance with GAAP (in millions):
Year ended
December 31, 2015
Sales
Net
income
Year ended
December 31, 2014
Sales
Net
income
$
2,980
$
237
16
13
(1)
16
$
2,652
$
194
(2)
17
(2)
13
(in millions)
As reported
Acquisition-related costs(3)
Litigation, regulatory and other legal
matters(5)
Restructuring, impairment and other
charges(6)
Liquidation of subsidiary(7)
Post-combination expenses(10)
Pension mark-to-market adjustment(11)
Gain on change in control of equity
investment(12)
Year ended
December 31, 2013
Sales
Net
income
$
2,326
$
189
9
8
(9)
(11)
186
Core performance measures
$
2,980
$
281
$
2,652
$
220
$
2,326
$
See “Items Excluded from GAAP Measures” above for the descriptions of the footnoted items.
As Reported
2015 vs. 2014
In the year ended December 31, 2015, net sales of the Optical
Communications segment increased by $328 million, or 12%, when
compared to the same period in 2014, driven by an increase in both
carrier network and enterprise network products. Carrier networks
increased by $158 million, driven by higher sales of fiber-to-the-home and
cable products in North America and the impact of recent acquisitions,
offset somewhat by lower sales of wireless products and fiber and cable
products in Europe. Sales declined in Europe driven by lower volume and
the negative impact of movements in the euro exchange rate versus
the U.S. dollar. Enterprise network sales grew by $170 million, primarily
due to the impact of an acquisition completed in 2015 and an increase
in data center product sales. The translation impact from movements
in foreign currency exchange rates in 2015 negatively impacted Optical
Communications net sales in the amount of $101 million, when compared
to the same period in 2014.
The increase in net income of $43 million, or 22%, was primarily driven
by higher sales volume for both carrier network and enterprise network
products and manufacturing efficiencies gained through cost reductions,
offset somewhat by acquisition-related and post-combination expenses
associated with three acquisitions completed in the first quarter of 2015.
Also somewhat offsetting the increase were price declines and a small
legal settlement. The translation impact from movements in foreign
currency exchange rates did not significantly impact net income of this
segment in the year ended December 31, 2015 when compared to the
same period in 2014.
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. The translation impact from
movements in foreign currency exchange rates in 2014 negatively
impacted Optical Communications net sales in the amount of $64 million,
when compared to the same period in 2013.
Net income increased by $5 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.
The translation impact from movements in foreign currency exchange
rates did not significantly impact net income of this segment in the year
ended December 31, 2014 when compared to the same period in 2013.
35
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Core Performance
2015 vs. 2014
In the year ended December 31, 2015, core earnings increased by
$61 million, or 28%, driven by higher sales volume for both carrier network
and enterprise network products and manufacturing efficiencies gained
through cost reductions, offset somewhat by price declines.
2014 vs. 2013
Core earnings in the twelve months ended December 31, 2014 increased
by $34 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.
The Optical Communications segment has a concentrated customer base.
In the year ended December 31, 2015, two customers, which individually
accounted for more than 10% of segment net sales, accounted for 22%
of total segment net sales. In the years ended December 31, 2014 and
2013, one customer, which individually accounted for more than 10%
of segment net sales, accounted for 11% and 10%, respectively, of total
segment net sales.
2016 Outlook:
Corning expects sales in the first quarter of 2016 to increase in the low-to-
mid-single digit percentage range over its sales in the comparable period
a year ago. For the full year, the company expects sales to increase by a
mid-single-digit percentage and exceed the goal of two times the growth
rate of industry capital expenditures.
Environmental Technologies
The following table provides net sales and net income for the Environmental Technologies segment and 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(6)
Pension mark-to-market adjustment(11)
Core performance measures
Year ended
December 31, 2015
Sales
Net
income
$
$
1,053
1,053
$
$
161
161
Year ended
December 31, 2014
Year ended
December 31, 2013
Sales
$
$
1,092
1,092
Net
income
$
$
178
5
183
Sales
$
$
919
919
Net
income
$
$
127
1
(3)
125
See “Items Excluded from GAAP Measures” above for the descriptions of the footnoted items.
As Reported
2015 vs. 2014
In the year ended December 31, 2015, net sales of this segment decreased
by $39 million, or 4%, when compared to the same period in 2014. Sales
of automotive light-duty substrates declined driven almost entirely by
the negative impact of movements in the euro exchange rate versus the
U.S. dollar, partially offset by higher volume in North America and Europe.
Sales of diesel products also declined in these periods, driven by lower
sales of light-duty diesel products in Europe and the negative impact
of the movements in the euro exchange rate, partially offset by higher
volume for heavy duty diesel. The translation impact from movements
in foreign currency exchange rates versus the U.S. dollar, primarily the
euro, negatively impacted net sales in the Environmental Technologies
segment in 2015 in the amount of $57 million, when compared to the
same period in 2014.
Net income declined in the year ended December 31, 2015 by $17 million, or
10%, when compared to the same period last year, driven predominantly by
lower sales, the unfavorable impact of the depreciation of the euro versus
the U.S. dollar and facility expansion costs to support growth in China.
The translation impact from movements in foreign currency exchange
rates versus the U.S. dollar, primarily the euro, negatively impacted net
income in the Environmental Technologies segment in the amount of
$21 million in the year ended December 31, 2015 when compared to the
same period in 2014.
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 $51 million,
or 40%, 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.
The translation impact from movements in foreign currency exchange
rates did not significantly impact sales or net income of this segment in
the year ended December 31, 2014 when compared to the same period
in 2013.
36
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Core Performance
2015 vs. 2014
Core earnings declined by $22 million, or 12%, in the year ended
December 31, 2015, when compared to the same period last year, driven
predominantly by lower sales, the unfavorable impact of the depreciation
of the euro versus the U.S. dollar and facility expansion costs to support
growth in China. The translation impact from movements in foreign
currency exchange rates versus the U.S. dollar, primarily the euro,
negatively impacted net income in the Environmental Technologies
segment in the amount of $21 million in the year ended December 31, 2015
when compared to the same period in 2014.
2014 vs. 2013
When compared to the same period last year, core earnings in the twelve
months ended December 31, 2014 increased by $58 million, or 46%, 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.
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
2015, 2014 and 2013, net sales to three customers, which individually
accounted for more than 10% of segment sales, accounted for 86%, 88%
and 87%, 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.
2016 Outlook:
The North American heavy-duty truck market is down after several years
of robust growth. As a result, first-quarter sales are expected to decline
by approximately 10%, compared with the same period last year. The full-
year outlook is for sales to decline by a low single-digit percentage.
Specialty Materials
The following table provides net sales and net income for the Specialty Materials segment and 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)*
Constant-won(1)
Foreign currency hedges related to translated earnings(2)
Acquisition-related costs(3)
Restructuring, impairment and other charges(6)
Pension mark-to-market adjustment(11)
Year ended
December 31, 2015
Year ended
December 31, 2014
Year ended
December 31, 2013
Sales
Net
income
Sales
Net
income
Sales
Net
income
$
1,107 $
167
$
1,205 $
138 $
1,170 $
(6)
(2)
5
14
(3)
14
(1)
12
181
2
1
12
(2)
Core performance measures
$
1,107 $
178
$
1,205 $
160 $
1,170 $
194
*
In the first quarter of 2015, we changed the yen-to-dollar management rate from ¥93 to ¥99 to closely align with the yen-denominated hedges
entered into for the years 2015 through 2017. Prior periods presented have been recast based on the new rate.
See “Items Excluded from GAAP Measures” above for the descriptions of the footnoted items.
As Reported
2015 vs. 2014
Net sales for the year ended December 31, 2015 decreased by $98 million,
or 8%, when compared to the same period in 2014, primarily due to lower
sales of advanced optics products. This decline was driven by weakness
in the semiconductor industry, delays in a large aerospace and defense
program and the depreciation of the euro versus the U.S. dollar. The
translation impact from movements in foreign currency exchange rates
negatively impacted net sales in the Specialty Materials segment in the
amount of $12 million in 2015, when compared to the same period in 2014.
When compared to the same period last year, the increase in net income of
$29 million, or 21%, in the year ended December 31, 2015 was driven by an
increase in Corning Gorilla Glass volume, improvements in manufacturing
efficiency and lower operating expenses gained through cost reductions,
offset somewhat by a decrease in sales of advanced optics products. The
translation impact from movements in foreign currency exchange rates
did not significantly impact net income of this segment in 2015 when
compared to the same period in 2014.
2014 vs. 2013
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
of $43 million, or 24%, 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 of 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.
37
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
The translation impact from movements in foreign currency exchange
rates did not significantly impact sales or net income of this segment in
the year ended December 31, 2014 when compared to the same period
in 2013.
Core Performance
2015 vs. 2014
When compared to the same period last year, core earnings increased
by $18 million, or 11%, in the year ended December 31, 2015, driven by an
increase in Corning Gorilla Glass volume, improvements in manufacturing
efficiency and lower operating expenses gained through cost reductions,
offset somewhat by a decrease in sales of advanced optics products.
2014 vs. 2013
When compared to the same period last year, the decrease in core earnings
of $34 million, or 18%, 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.
For 2015, 2014 and 2013, three customers of the Specialty Materials
segment, which individually accounted for more than 10% of segment
sales, accounted for 56%, 51% and 47%, respectively, of total segment sales.
2016 Outlook:
First-quarter sales are expected to decline year over year by a mid-teen
percentage. For 2016, the Company estimates annual sales will grow by
a low-teen percentage when compared to 2015. The variable timing of
mobile device product launches drives Corning Gorilla Glass demand and
is expected to cause significant swings in quarterly results.
Life Sciences
The following table provides net sales and net income for the Life Sciences segment and 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(3)
Restructuring, impairment and other charges(6)
Pension mark-to-market adjustment(11)
Core performance measures
Year ended
December 31, 2015
Year ended
December 31, 2014
Year ended
December 31, 2013
Sales
Net
income
Sales
Net
income
Sales
Net
income
$
821 $
61
12
$
862 $
67 $
851 $
68
14
2
21
3
(3)
$
821 $
73
$
862 $
83 $
851 $
89
See “Items Excluded from GAAP Measures” above for the descriptions of the footnoted items.
As Reported
Core Performance
2015 vs. 2014
Net sales for the year ended December 31, 2015 decreased by $41 million,
or 5%, when compared to the same period last year, due to the negative
impact of the strengthening of the U.S. dollar versus foreign currencies,
which negatively impacted net sales by $43 million. Net income in the
Life Sciences segment declined by $6 million, or 9%, when compared to
the same period last year, with the negative impact from movements in
foreign exchange rates in the amount of $14 million more than offsetting
improvements in manufacturing efficiency.
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
relatively consistent when compared to the same period in 2013, driven
by less favorable product mix and higher operating expenses which more
than offset higher volume and lower acquisition-related costs due to the
completion of the integration of Discovery Labware business.
The translation impact from movements in foreign currency exchange
rates did not significantly impact sales or net income of this segment in
the year ended December 31, 2014 when compared to the same period
in 2013.
2015 vs. 2014
In the year ended December 31, 2015, core earnings in the Life Sciences
segment declined by $10 million, or 12%, when compared to the same period
last year, with the negative impact from movements in foreign exchange
rates more than offsetting improvements in manufacturing efficiency.
2014 vs. 2013
Core earnings decreased by $6 million in the year ended December 31,
2014, when compared to the same period in 2013, driven by less favorable
product mix, offset somewhat by higher volume.
For 2015, 2014 and 2013, two customers in the Life Sciences segment,
which individually accounted for more than 10% of total segment net
sales, collectively accounted for 46%, 45% and 44%, respectively, of total
segment sales.
2016 Outlook:
First-quarter sales are expected to increase by a low single-digit
percentage, compared with last year. For the full year, sales are anticipated
to grow faster than the market, which is expected to be up by a low
single-digit percentage.
38
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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’s Pharmaceutical Technologies
business, which consists of a pharmaceutical glass business and a glass
tubing business used in the pharmaceutical packaging industry. This
segment also includes Corning Precision Materials’ non-LCD business and
new product lines and development projects such as laser technologies,
advanced flow reactors and adjacency businesses in pursuit of thin,
strong glass, as well as certain corporate investments such as Eurokera
and Keraglass equity affiliates.
The following table provides net sales and other data for All Other (in millions):
As Reported
Net sales
Research, development and engineering expenses
Equity earnings of affiliated companies
Net loss
* Percent change not meaningful
% change
2015
2014
2013
15 vs. 14
14 vs. 13
$
$
$
$
64
186
17
(202)
$
$
$
$
53
177
18
(198)
$
$
$
$
8
116
(24)
(165)
21
5
(6)
(2)
563
53
*
20
2015 vs. 2014
The increase in net sales of this segment in the year ended December 31,
2015 reflects the impact of an acquisition in the Corning Pharmaceutical
Technologies business completed in the fourth quarter of 2015 and
an increase in sales in our emerging businesses. The slight increase
in the net loss of this segment was driven by a goodwill impairment
loss of $29 million, offset by higher net income in the pharmaceutical
technologies and Corning Precision Materials’ non-LCD businesses.
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.
Liquidity and Capital Resources
Financing and Capital Structure
The following items impacted Corning’s financing and capital structure
during 2015, 2014 and 2013:
2015
• In the second quarter of 2015, we issued $375 million of 1.50% senior
unsecured notes that mature on May 8, 2018 and $375 million of 2.90%
senior unsecured notes that mature on May 15, 2022. The net proceeds
of $745 million will be used for general corporate purposes. We can
redeem these notes at any time, subject to certain customary terms
and conditions.
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, 2015, 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, 2015, 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 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 credit facility is available to support
obligations under the commercial paper program, if needed.
• 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.
39
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Common Stock Dividends
On February 3, 2016, Corning’s Board of Directors declared a 12.5% increase
in the Company’s quarterly common stock dividend, which increased
the quarterly dividend from $0.12 to $0.135 per share of common stock,
beginning with the dividend to be paid in the first quarter of 2016. This
increase marks the fifth dividend increase since October 2011. The Board
previously increased the quarterly dividend 20%, from $0.10 to $0.12,
on December 3, 2014. The Company paid four quarterly dividends of
$0.12 during the year ended December 31, 2015 and paid four quarterly
dividends of $0.10 during the year ended December 31, 2014.
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, 2015, 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 of Samsung Corning Precision Materials,
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.
Customer Deposits
In December 2015, Corning announced that with the support of the
Hefei government it will locate a Gen 10.5 glass manufacturing facility
in the Hefei XinZhan General Pilot Zone in Anhui Province, China. Glass
substrate production from the new facility is expected to support mass
production of LCD panels for large-size televisions by the third quarter
of 2018.
As part of this investment, Corning and a Chinese customer have entered
into a long-term supply agreement that commits the customer to the
purchase of Gen 10.5 glass substrates from the Corning manufacturing
facility in Hefei. This agreement stipulates that the customer will
provide a non-refundable cash deposit in the amount of approximately
$400 million to Corning to secure rights to an amount of glass that is
produced by Corning over the next 10 years. Corning received $197 million
of this deposit in 2015 and will receive the additional $197 million in 2016.
As glass is shipped to the customer, Corning will recognize revenue and
issue credit memoranda to reduce the amount of the customer deposit
liability, which are applied against customer receivables resulting from
the sale of glass. In 2015, there were no credit memoranda issued.
Capital Spending
Capital spending totaled $1.3 billion in 2015, slightly above the amount
spent in 2014. Spending in 2015 was driven primarily by the Display
Technologies segment, and focused on finishing line optimization
and tank rebuilds. We expect our 2016 capital expenditures to be
approximately $1.3 billion. Approximately $600 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
Years ended December 31,
2015
$
$
$
2,809
(685)
(2,603)
2014
$
$
$
4,709
(962)
(2,586)
2013
$
$
$
2,787
(1,004)
(2,063)
2015 vs. 2014
Net cash provided by operating activities decreased significantly
in the year ended December 31, 2015, when compared to the same
period last year, due to the absence of a special one-time dividend of
$1,574 million received from Samsung Corning Precision Materials in the
first quarter of 2014, lower net income and cash outflows from working
capital movements, offset somewhat by the receipt of a $197 million
customer deposit and the adjustment to net income related to gains
on foreign currency hedges and other noncash operating adjustments.
Cash outflows from working capital movements were largely driven by
an increase in variable compensation paid in 2015 and an increase in
inventory in the Display Technologies segment.
Net cash used in investing activities decreased in the year ended
December 31, 2015, when compared to the same period last year, due to
net liquidations of short-term investments and an increase in realized
gains on our foreign currency hedges related to translated earnings, offset
by higher capital spending and several acquisitions that were completed
in 2015.
40
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net cash used in financing activities in the year ended December 31, 2015
increased slightly when compared to the same period last year, driven by
an increase in share repurchases and the absence of cash received from
the issuance of preferred stock, offset by proceeds received from the
issuance of long-term debt and commercial paper.
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 $1,574 million 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
of Samsung Corning Precision Materials, which added $121 million,
this inventory was acquired through the issuance of preferred stock.
Cash outflows for inventory declined by $120 million in the 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.
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, 2015, 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 2015,
we made voluntary cash contributions of $65 million to our domestic
defined benefit pension plan and $35 million to our international pension
plans. 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. Although we will not be subject to any
mandatory contributions in 2016, we anticipate making voluntary cash
contributions of up to $62 million to our U.S. pension plan and up to
$36 million to our international pension plans in 2016.
Refer to Note 13 (Employee Retirement Plans) to the Consolidated
Financial Statements for additional information.
Restructuring
For the year ended December 31, 2015, we did not record significant
restructuring,
impairment and other charges or reversals. Cash
expenditures for restructuring activities were $40 million.
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 of approximately
$39 million.
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
of $35 million.
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.
December 31,
2015
2014
$
$
$
$
5,455
2.9:1
1,372
55
1,385
4.0
42
3,910
$
$
$
$
7,914
4.4:1
1,501
56
1,322
4.2
41
3,227
19%
13%
41
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Credit Ratings
As of February 12, 2016, our credit ratings were as follows:
Rating long-term debt
Outlook last update
BBB+
BBB+
Baa1
Stable
October 29, 2015
Stable
October 27, 2015
Stable
October 28, 2015
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 2013 ASR
agreement was completed. Corning received an additional 10.5 million
shares on January 31, 2014 to settle the 2013 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 2013 ASR agreement, less a discount.
In addition to the shares repurchased through the 2013 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.
March 2014 Repurchase Program
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 “March 2014 Repurchase Program”),
Corning entered into an ASR agreement (the “2014 ASR agreement”) with
Citibank N.A. (“Citi”). Under the 2014 ASR agreement, 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. The 2014 ASR agreement was
completed on May 28, 2014, and Corning received an additional 8.7 million
shares to settle the 2014 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 2014 ASR
agreement, less a discount.
In addition to the shares repurchased through the 2014 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 March 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.
Rating Agency
Fitch
Standard & Poor’s
Moody’s
Management Assessment of Liquidity
We ended the fourth quarter of 2015 with approximately $4.6 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 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 71% of the consolidated amount was held outside of the
United States at December 31, 2015, 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 financing
strategies to ensure that our worldwide cash is available in the locations
in which it is needed.
To manage interest rate exposure, the Company, from time to time, may
enter into interest rate swap agreements. In the first quarter of 2015, the
interest rate swaps that were entered into in the fourth quarter of 2014
to hedge future interest payments from an anticipated debt issuance
were settled prior to the issuance of the anticipated debt. Because the
Company continued to anticipate that the debt issuance would occur,
it entered into two interest rate swap agreements in the first quarter
of 2015 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, and were settled on
May 5, 2015. Concurrent with the settlement of the interest rate swap
agreements, Corning issued $375 million of 1.50% senior unsecured notes
that mature on May 8, 2018 and $375 million of 2.90% senior unsecured
notes that mature on May 15, 2022.
Corning also has a commercial paper program 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 vary, but may not exceed 390 days from the date of issue.
The interest rates 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, 2015,
we had a balance of $481 million in outstanding commercial paper under
this program.
Share Repurchase Programs
2013 Repurchase Program
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 (the “2013 ASR
agreement”) with JP Morgan Chase Bank, National Association, London
Branch (“JPMC”). Under the 2013 ASR agreement, Corning agreed to
42
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
December 2014 Repurchase Program
On December 3, 2014, Corning’s Board of Directors authorized the
repurchase of up to $1.5 billion shares of common stock (the “December
2014 Repurchase Program”) between the date of announcement and
December 31, 2016. In the year ended December 31, 2015, we repurchased
70.4 million shares of common stock for approximately $1.5 billion as part
of the December 2014 Repurchase Program, which was completed in the
third quarter of 2015.
2015 Repurchase Programs
On July 15, 2015, Corning’s Board of Directors approved a $2 billion
share repurchase program (the “July 2015 Repurchase Program”) and
on October 26, 2015 the Board of Directors authorized an additional $4
billion share repurchase program (together with the July 2015 Repurchase
Program, the “2015 Repurchase Programs”). The 2015 Repurchase
Programs permit Corning to effect repurchases from time to time
through a combination of open market repurchases, privately negotiated
transactions, advance repurchase agreements and/or other arrangements.
On October 28, 2015, Corning entered into an ASR with Morgan Stanley
& Co. LLC (“Morgan Stanley”) to repurchase $1.25 billion of Corning’s
common stock (the “2015 ASR agreement”). The 2015 ASR agreement was
executed under the July 2015 Repurchase Program. Under the 2015 ASR
agreement, Corning made a $1.25 billion payment to Morgan Stanley
on October 29, 2015 and received an initial delivery of approximately
53.1 million shares of Corning common stock from Morgan Stanley
on the same day. The payment to Morgan Stanley was recorded as a
reduction to shareholders’ equity, consisting of a $1 billion increase in
treasury stock, which reflects the value of the initial 53.1 million shares
received upon execution, and a $250 million decrease in other-paid-
in capital, which reflects the value of the stock held back by Morgan
Stanley pending final settlement. On January 19, 2016, the 2015 ASR
agreement was completed. Corning received an additional 15.9 million
shares on January 22, 2016 to settle the 2015 ASR agreement. In total,
Corning purchased 69 million shares based on the average daily volume
weighted-average price of Corning’s common stock during the term of
the 2015 ASR agreement, less a discount.
In addition to the shares repurchased through the 2015 ASR agreement,
we repurchased 98 million shares of common stock on the open market
for approximately $2 billion, as part of the December 2014 Repurchase
Program and the July 2015 Repurchase Program, resulting in a total of 151
million shares repurchased during 2015.
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 2016 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, 2015, our leverage
using this measure was 19% 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, 2015, 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, Zero-Cost 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. Beginning in the second quarter of 2013 and continuing
throughout 2015, Corning entered into a series of zero cost average rate
collars and average rate forwards with no associated premium to hedge
the translation impact of Japanese yen on Corning’s projected 2015,
2016 and 2017 net income. Additionally, in January 2016, Corning took
advantage of the stronger yen to extend its foreign exchange hedging
program to hedge a significant portion of its projected yen exposure for
the period 2018 through 2022. In the years ended December 31, 2015, 2014
and 2013, we recorded pre-tax net gains of $113 million, $1,406 million and
$435 million, respectively, related to changes in the fair value of these
derivative instruments. Included in these amounts are realized gains of
$686 million, $280 million and $67 million, respectively. The gross notional
value outstanding for purchase collars and average rate forwards which
hedge our exposure to the Japanese yen at December 31, 2015, 2014 and
2013 was $8.3 billion, $9.8 billion and $6.8 billion, respectively.
Beginning in the second quarter of 2014, and continuing throughout
2015, we entered into a portfolio of zero-cost collars to hedge our
translation exposure resulting from movements in the South Korean won
and its impact on our net earnings. In the years ended December 31, 2015
and 2014, we recorded a pre-tax net loss of $36 million and $37 million,
respectively, related to changes in the fair value of these zero-cost
collars. Included in these amounts are realized losses of $33 million and
$6 million, respectively. These zero-cost collars have a gross notional
value outstanding at December 31, 2015 and 2014 of $3.3 billion and
$2.3 billion, respectively.
In the first quarter of 2015, in response to the significant strengthening
of the U.S. dollar versus the euro, we entered into a portfolio of zero-cost
collars and average rate forwards with an associated premium to hedge
against our euro translation exposure. In the year ended December 31
2015, we recorded a net pre-tax gain of $3 million. These collars have a
gross notional amount of $345 million at December 31, 2015.
These purchased collars, zero-cost collars, zero cost average rate collars
and average rate forwards are not designated as accounting hedges, and
changes in their fair value are recorded in earnings in the foreign currency
hedge gain, net line of the Consolidated Statements of Income.
43
CORNING INCORPORATED - 2015 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.
Contractual Obligations
The amounts of our obligations follow (in millions):
Refer to Note 14 (Commitments, Contingencies and Guarantees) to the
Consolidated Financial Statements for additional information.
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
5 years and
thereafter
Performance bonds and guarantees
Stand-by letters of credit(1)
Credit Facility to Equity Company
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(5)
Total commitments and contingencies(5)
$
$
$
$
92
47
31
14
184
220
298
4,122
2,385
355
240
573
58
8,251
8,435
$
$
$
$
$
$
25
44
27
96
106
298
565
165
7
19
49
1,209
$
1,305
$
6
6
77
625
316
10
37
110
1,175
1,181
$
$
$
$
1
1
33
550
280
7
36
77
983
984
$
$
$
60
3
4
14
81
4
2,382
1,624
331
148
337
4,826
4,907
$
(1) At December 31, 2015, $38 million of the $47 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, 2015, $58 million was included on our balance sheet related to uncertain tax positions. Of this amount, we are unable to estimate
when any 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.
44
CORNING INCORPORATED - 2015 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 17 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, 2015 and
2014, Corning had accrued approximately $37 million (undiscounted)
and $43 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
impairments include, but are not limited to:
indicative of
• 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.
45
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
At December 31, 2015 and December 31, 2014, the carrying value of
precious metals was higher than the fair market value by $976 million
and $222 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.
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. We test for goodwill impairment at the reporting
unit level and our reporting units are the operating segments or the
components of operating segments which constitute businesses for
which discrete financial information is available and is regularly reviewed
by segment management.
Corning has recorded goodwill in the Display Technologies, Optical
Communications, Specialty Materials, Life Sciences and All Other
operating segments. On a quarterly basis, management performs a
qualitative assessment of factors in each reporting unit within these
operating segments 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;
46
– 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
including acquisitions
its net assets
or carrying amount of
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 consisting of two
components. For the purposes of the annual goodwill impairment
assessment, we have aggregated these two components into one
reporting unit based upon their similar economic characteristics. On a
quarterly basis in 2015, 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.
In addition to assessing qualitative factors each quarter, we performed a
quantitative goodwill recoverability test in 2015 for this reporting unit. A
discount rate of 5.8% and a growth rate of 1% were used in 2015. The results
of our impairment test indicated that the fair value of the reporting unit
exceeded its book value by a significant amount, and as such, further
goodwill impairment testing was not necessary. We determined a range
of discount rates between 3.8% and 7.8% and growth rates between 0%
and 3% would not have affected our conclusion.
Optical Communications
Goodwill for the Optical Communications segment is tested at the
reporting unit level, which is also the operating segment level consisting
of two components.. For the purposes of the annual goodwill impairment
assessment, we have aggregated these two components into one
reporting unit based upon their similar economic characteristics. On a
quarterly basis in 2015, 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 2015 for this reporting unit.
A discount rate of 5.6% and a growth rate of 3% were used in 2015. The
results of our impairment test indicated that the fair value of the reporting
unit exceeded its book value by a significant amount, and as such, further
goodwill impairment testing was not necessary. We determined a range
of discount rates between 3.6% and 7.6% and growth rates between 0%
and 3% would not have affected our conclusion.
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Specialty Materials
Goodwill for the Specialty Materials segment is tested at the reporting
unit level, which is one level below an operating segment, as the goodwill
is the result of transactions associated with a certain business within this
operating segment. On a quarterly basis in 2015, 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.
In addition to assessing qualitative factors each quarter, we performed
a quantitative goodwill recoverability test in 2015 for this reporting unit.
A discount rate of 5.8% and a growth rate of 3% were used in 2015. The
results of our impairment test indicated that the fair value of the reporting
unit exceeded its book value by a significant amount, and as such, further
goodwill impairment testing was not necessary. We determined a range
of discount rates between 3.8% and 7.8% and growth rates between 0%
and 3% would not have affected our conclusion.
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
2015, 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 2015 for this reporting unit. A
discount rate of 6% and a growth rate of 3% were used in 2015. The results
of our impairment test indicated that the fair value of the reporting unit
exceeded its book value by a significant amount, and as such, further
goodwill impairment testing was not necessary. We determined a range
of discount rates between 4% and 8% and growth rates between 0% and
3% would not have affected our conclusion.
All Other
All Other segment is comprised of various operating segments and
corporate investments that do not meet the quantitative threshold
for separate reporting. Goodwill for the All Other segment is tested at
the reporting unit level, which is also the operating segment level. For
the purposes of the annual goodwill impairment assessment, we have
identified two reporting units in this segment that require an assessment
of their goodwill. On a quarterly basis in 2015, management performed a
qualitative assessment of factors and determined there had not been any
triggering events which would indicate that the reporting units’ fair value
is less than the carrying amount.
In addition to assessing qualitative factors each quarter, we performed
a quantitative goodwill recoverability test in 2015 for this reporting unit.
A discount rate of 7.4% and a growth rate of 3% were used in 2015. The
results of our impairment test indicated that the book value of one of the
reporting units exceeded its fair value by 80%. We determined a range
of discount rates between 5.4% and 9.4% and growth rates between 0%
and 3% would not have affected our conclusion. Corning concluded that
a Step 2 analysis was required to measure the impairment loss for this
reporting unit.
Our Step 2 test consisted of identifying the underlying net assets in the
reporting unit, allocating the implied purchase price to the asset and
liabilities of the reporting unit and the calculation of the implied fair
value of goodwill and the resulting impairment loss. In December 2015,
we recorded a goodwill impairment loss of $29 million related to this
reporting unit.
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 (Acquisitions) to the
Consolidated Financial Statements for additional information.
47
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
On December 11, 2015, Corning announced its intention to exchange its
50% equity interest in Dow Corning Corporation for 100% of the stock
of a newly formed entity that will become a wholly-owned subsidiary of
Corning Incorporated. The newly formed entity will hold approximately
40% ownership in Hemlock Semiconductor Group and approximately
$4.8 billion in cash. Upon completion of this strategic realignment,
which is expected to close during the first half of 2016, Dow Chemical, an
equal owner of Dow Corning with Corning since 1943, will assume 100%
ownership of Dow Corning.
At December 31, 2015 and 2014, the carrying value of our equity method
investments was $1.9 billion and $1.8 billion, respectively, with our largest
equity method investment, Dow Corning, comprising 78% and 74%,
respectively, 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, 2015 and
2014, 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.
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. Included in our forward exchange
contracts are foreign currency hedges that hedge our translation
exposure resulting from movements in the Japanese yen, South Korean
won and euro. These contracts are not designated as accounting hedges,
and changes in their fair value are recorded in earnings in the foreign
currency hedge gain, net line of the Consolidated Statements of Income.
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
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.
On December 29, 2015, Corning and Samsung Display entered into
an agreement pursuant to which Corning exchanged the amount of
contingent consideration in excess of $300 million (net present fair value:
$246 million), as consideration for the incremental fair value associated
with a number of commercial agreements, including the amendment of
its long-term supply agreement with Samsung Display. As of December 29,
2015, the net present fair value of the contingent consideration receivable
was $458 million. The net present fair value of the commercial benefit
associated with the amended long-term supply agreement exceeds the
value exchanged by Corning pursuant to this agreement (net present fair
value: $212 million). Consequently, Corning reclassified this amount to the
Other asset line of the Consolidated Balance Sheet and will amortize the
amount over the remaining term of the long-term supply agreement as
a reduction in revenue.
Additionally, as a result of the acquisitions of iBwave Solutions Inc. and the
fiber-optics business of Samsung Electronics Co., Ltd. in the first quarter
of 2015, the Company has contingent consideration that was measured
using unobservable (Level 3) inputs. As of December 31, 2015, the fair value
of the contingent consideration payable is $10 million.
There were no significant financial assets and liabilities measured on a
nonrecurring basis during the twelve months ended December 31, 2015.
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.
48
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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. 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.
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.
Prior to the December 31, 2015 valuation of its defined benefit pension
and OPEB plans, Corning used the traditional, single weighted-average
discount rate approach to develop the obligation, interest cost and service
cost components of net periodic benefit cost for its defined benefit
pension and OPEB plans. The individual spot rates from the yield curve
are used in measuring the pension plan projected benefit obligation
(PBO) or OPEB plan accumulated postretirement benefit obligation
(APBO) at the measurement date. The benefit obligation is effectively
calculated as the aggregate present value at the measurement date of
each future benefit payment related to past service, with each payment
discounted using a spot rate from a high-quality corporate bond yield
curve that matches the duration of the benefit payment. Under Corning’s
traditional, single weighted-average discount rate approach, a single
weighted-average rate is developed from the approach described above
and rounded to the nearest 25 basis points. Traditionally, the weighted-
average discount rate is determined at the plan measurement date, based
on the same projected future benefit payments used in developing the
benefit obligation. The traditional single weighted-average discount rate
represents the constant annual rate that would be required to discount all
future benefit payments related to past service from the date of expected
future payment to the measurement date such that the aggregate
present value equals the benefit obligation.
Beginning with the December 31, 2015 valuation of its defined benefit
pension and OPEB plans, Corning is changing its methodology of
determining the service and interest cost components of net periodic
pension and other postretirement benefit costs to a more granular
approach. Under the new approach, the cash flows from each applicable
pension and OPEB plan are used to directly calculate the benefit
obligation, service cost and interest cost using the spot rates from the
applicable yield curve.
Moving to a more granular approach has a limited impact on the
determination of the respective benefit obligations. The only impacts will
be as a result of the elimination of the rounding of the discount rate that
occurred in the traditional approach and the use of specific cash flows
for Corning’s non-qualified pension plans, while separately applying the
yield curve to each separate OPEB plan instead of aggregating the OPEB
plan cash flows. This change will result in a decrease in the interest cost
and service cost components of net periodic pension and OPEB costs. For
the year ended December 31, 2016, net periodic pension and OPEB costs
will be lower by approximately $28 million and $6 million, respectively,
due to this change. For Corning’s pension plans, this change will increase
the immediate recognition of actuarial losses (or decrease the immediate
recognition of actuarial gains), due to Corning’s previous election to
immediately recognize actuarial gains and losses outside of the corridor.
For Corning’s OPEB plans, this change will increase the accumulated other
comprehensive income (AOCI) account balance due to the accumulation
of lower actuarial gains or higher actuarial losses. Over time, the
amortization of the actuarial losses from AOCI will begin to reduce the
savings from the lower interest cost and service cost.
is a change
This change
in accounting estimate and therefore
applied prospectively (beginning with the next measurement date of
December 31, 2015). No restatement of prior periods is required.
The following table presents our actual and expected return on assets, as well as the corresponding percentage, for the years ended 2015, 2014 and 2013:
(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
2015
$
(111)
166
3
12
December 31,
2014
$
287
159
68
15
2013
$
65
158
6
11
49
CORNING INCORPORATED - 2015 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
December 31,
2015
2014
2013
(4.23%)
6.00%
0.59%
2.97%
10.82%
6.25%
17.15%
4.12%
2.67%
6.00%
2.73%
3.73%
As of December 31, 2015, the Projected Benefit Obligation (PBO) for U.S. pension plans was $3,161 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 each spot rate
25 basis point increase in each spot rate
25 basis point decrease in expected return on assets
25 basis point increase in expected return on assets
Effect on 2016
pre-tax pension expense
Effect on
December 31, 2015 PBO
- 2 million
+ 2 million
+ 6 million
- 6 million
+ 87 million
- 83 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, 2015, a 25 basis point decrease in each spot
rate would decrease stockholders’ equity by $110 million before tax, and
a 25 basis point increase in each spot rate would increase stockholders’
equity by $105 million. In addition, the impact of greater than a 25 basis
point decrease in each spot rate would not be proportional to the first 25
basis point decrease in each spot rate.
The following table illustrates the sensitivity to a change in each spot rate assumption related to Corning’s U.S. OPEB plans:
Change in assumption
25 basis point decrease in each spot rate
25 basis point increase in each spot rate
* Accumulated Postretirement Benefit Obligation (APBO).
Effect on 2016
pre-tax OPEB expense
Effect on
December 31, 2015 APBO*
+ 0 million
- 0 million
+ 23 million
- 22 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.
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 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
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.
Refer to Note 1 (Summary of Significant Accounting Policies) to the Consolidated Financial Statements.
50
CORNING INCORPORATED - 2015 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. 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, 2015,
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 $901 million compared to $1,080 million at December 31, 2014. 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 $741
million compared to $959 million at December 31, 2014. 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
$99 million compared to $79 million at December 31, 2014.
Because we derive approximately 70% 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 2016 will remain constant at
January 2016 levels. As an example of the impact that changes in foreign
currency exchange rates could have on our financial results, we compare
2015 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 2015 net sales
of approximately $309 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 2015 net sales of approximately $5 million and $92
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
2015 net income attributable to Corning Incorporated of approximately
$188 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 2015 net income attributable to Corning Incorporated of approximately
$67 million and $22 million, respectively.
Interest Rate Risk Management
It is our policy to conservatively manage our exposure to changes in
interest rates. To manage interest rate exposure, the Company, from time
to time, enters into interest rate swap agreements. We are currently 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.
51
CORNING INCORPORATED - 2015 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, 2015. The
effectiveness of Corning’s internal control over financial reporting as of
December 31, 2015, 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
R� Tony Tripeny
Senior Vice President and Chief Financial Officer
52
CORNING INCORPORATED - 2015 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, 2015
and 2014, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2015 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, 2015, 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.
As discussed in Note 1 to the consolidated financial statements, the
Company changed the manner in which it presents deferred income
taxes in 2015.
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 12, 2016
53
CORNING INCORPORATED - 2015 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)
Foreign currency hedge gain, net
Other (expense) 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(1)
(1) The first quarter 2015 dividend was declared on December 3, 2014.
The accompanying notes are an integral part of these consolidated financial statements.
Years ended December 31,
2015
$
$
$
$
$
9,111
5,458
3,653
1,523
769
54
(15)
1,322
299
21
(140)
85
(101)
1,486
(147)
1,339
1.02
1.00
0.36
2014
$
$
$
$
$
9,715
5,663
4,052
1,211
815
33
71
(9)
1,931
266
26
(123)
74
1,411
(17)
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)
622
45
2,473
(512)
1,961
1.35
1.34
0.39
54
CORNING INCORPORATED - 2015 Annual Report
Consolidated Statements of Comprehensive Income
Corning Incorporated and Subsidiary Companies
(In millions)
Net income attributable to Corning Incorporated
Foreign currency translation adjustments and other
Net unrealized gains (losses) on investments
2015
$
Unamortized gains (losses) and prior service (costs) credits for postretirement
benefit plans
Net unrealized (losses) gains on designated hedges
Other comprehensive loss, net of tax (Note 17)
Comprehensive income attributable to Corning Incorporated
$
The accompanying notes are an integral part of these consolidated financial statements.
Years ended December 31,
1,339
(590)
1
121
(36)
(504)
835
2014
$
$
2,472
(1,073)
(1)
(281)
4
(1,351)
1,121
2013
$
1,961
(682)
2
392
(24)
(312)
$
1,649
55
CORNING INCORPORATED - 2015 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 - $48 and $47
Inventories, net of inventory reserves - $146 and $127 (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 - $9,188 and $8,332 (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:
December 31,
2015
2014
$
4,500
$
5,309
100
4,600
1,372
1,385
912
8,269
1,975
12,648
1,380
706
2,056
1,513
759
6,068
1,501
1,322
248
1,099
10,238
1,801
12,766
1,150
497
1,889
1,722
$
28,547
$
30,063
Current portion of long-term debt and short-term borrowings (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):
572
934
1,308
2,814
3,910
718
2,242
9,684
$
36
997
1,291
2,324
3,227
814
2,046
8,411
Convertible preferred stock, Series A – Par value $100 per share; Shares authorized 3,100; Shares issued: 2,300
2,300
2,300
Common stock – Par value $0.50 per share; Shares authorized: 3.8 billion; Shares issued: 1,681 million
and 1,672 million
Additional paid-in capital – common stock
Retained earnings
Treasury stock, at cost; shares held: 551 million and 398 million
Accumulated other comprehensive loss
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.
840
13,352
13,832
(9,725)
(1,811)
18,788
75
18,863
836
13,456
13,021
(6,727)
(1,307)
21,579
73
21,652
$
28,547
$
30,063
56
CORNING INCORPORATED - 2015 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,
2015
2014
2013
$
1,339
$
2,472
$
1,961
Depreciation
Amortization of purchased intangibles
Restructuring, impairment and other charges
Stock compensation charges
Equity in earnings of affiliated companies
Dividends received from affiliated companies
Deferred tax provision
Restructuring payments
Customer deposits
Employee benefit payments (in excess of) less than expense
Gains on foreign currency hedges related to translated earnings
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 (paid) received
Proceeds from sale of a business
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 foreign currency hedges related to translated earnings
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
Proceeds from issuance of short-term debt, net
Proceeds from issuance of commercial paper
(Payments) proceeds 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
Net cash used in financing activities
Effect of exchange rates on cash
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
1,130
54
46
(299)
143
54
(40)
197
(52)
(80)
268
(13)
162
(77)
(57)
(146)
180
2,809
(1,250)
(732)
12
(33)
6
(969)
1,629
653
(1)
(685)
(12)
745
3
481
(10)
(6)
1
102
(3,228)
(679)
(2,603)
(330)
(809)
5,309
4,500
$
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
$
(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.
57
CORNING INCORPORATED - 2015 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
Total
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)
3
(1)
15
7
2,475
(1,352)
1,915
400
(2,483)
264
(771)
(7)
Balance, December 31, 2014
$
2,300
$
836
$ 13,456
$ 13,021
$ (6,727)
$
(1,307)
$
21,579
$
73
$ 21,652
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
1,339
(504)
(250)
(2,978)
4
146
(528)
(1)
(19)
1,339
(504)
(3,228)
149
(528)
(19)
Balance, December 31, 2015
$
2,300
$
840
$ 13,352
$ 13,832
$ (9,725)
$
(1,811)
$
18,788
$
The accompanying notes are an integral part of these consolidated financial statements.
9
(1)
1,348
(505)
(3,228)
149
(528)
(25)
$ 18,863
(6)
75
58
CORNING INCORPORATED - 2015 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
eliminated in consolidation.
intercompany accounts, transactions and profits are
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 (Acquisitions) to the Consolidated Financial
Statements, 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 share-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.
59
CORNING INCORPORATED - 2015 Annual Report
Notes to Consolidated Financial Statements
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.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Research and development costs totaled $638 million in 2015, $701 million
in 2014 and $613 million in 2013.
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 accumulated 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.
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
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 currency transaction losses for the years ended
December 31, 2015, 2014 and 2013 were $22 million, $60 million and
$190 million, respectively.
Share-Based Compensation
Corning’s share-based compensation programs include employee stock
option grants, time-based restricted stock awards and time-based
restricted stock units, as more fully described in Note 19 (Share-based
Compensation) to the Consolidated Financial Statements.
The cost of share-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 share-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.
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.
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,
2015
2014
2013
$
$
$
298
178
253
$
$
$
358
171
577
$
$
$
185
182
469
(1) Included in this amount are approximately $35 million, $40 million and $35 million of interest costs that were capitalized as part of property, plant and
equipment, net of accumulated depreciation, in 2015, 2014 and 2013, 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. government 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 (expense) income, 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.
60
CORNING INCORPORATED - 2015 Annual Report 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) to 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.
Notes to Consolidated Financial Statements
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.
Other intangible assets 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
health care trend rates. The cost of providing plan benefits depends on
demographic assumptions including retirements, mortality, turnover and
plan participation.
61
CORNING INCORPORATED - 2015 Annual Report Notes to Consolidated Financial Statements
two
for our defined benefit pension plans consist of
Costs
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
Shareholders’ 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 additional 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 carryforwards 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 income.
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
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.
indefinitely reinvested
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.
62
CORNING INCORPORATED - 2015 Annual Report Notes to Consolidated Financial Statements
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 income as where the effects of the
hedged item are recorded, typically sales, cost of sales or other (expense)
income, net. 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 Foreign currency
hedge gain, net line of the consolidated statement of income.
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 originally was effective for annual periods beginning after
December 15, 2016, including interim periods within that reporting period.
This ASU shall be applied retrospectively to each period presented or as a
cumulative-effect adjustment as of the date of adoption.
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with
Customers (Topic 606), deferring the effective date of ASU 2014-09 by
one year. We can elect to adopt the provisions of ASU 2014-09 for annual
periods beginning after December 15, 2017, including interim periods
within that reporting period. The FASB also agreed to allow entities to
choose to adopt the standard as of the original effective date. We are
currently assessing the adoption date and potential impact of adopting
ASU 2014-09 on our financial statements and related disclosures.
issued ASU 2015-17,
Income Taxes
In November 2015, the FASB
(Topic 740), requiring deferred tax assets and liabilities to be classified as
noncurrent in a classified balance sheet. This ASU is effective for annual
periods beginning after December 15, 2016, and interim periods within
those annual periods. Early adoption is permitted as of the beginning
of an interim or annual reporting period. We have adopted this ASU
prospectively for the year ended December 31, 2015. See Note 6 (Income
Taxes) to the Consolidated Financial Statements for additional information.
2. Restructuring, Impairment and Other Charges
2015 Activity
For the year ended December 31, 2015, we did not record significant restructuring, impairment and other charges or reversals. Cash expenditures for
restructuring activities were $40 million.
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 of approximately $39 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 were substantially completed in 2015.
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
cash expenditures of $35 million.
63
CORNING INCORPORATED - 2015 Annual Report Notes to Consolidated Financial Statements
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.
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,
2015
2014
2015
2014
$
$
$
$
100
100
37
37
$
$
$
$
759
759
42
42
$
$
$
$
100
100
33
33
$
$
$
$
759
759
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, 2015 (in millions):
Less than one year
Due in 1-5 years
Due in 5-10 years
Due after 10 years
Total
$
$
70
30
33
133
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.
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, 2015 and 2014:
(in millions)
Asset-backed securities
Total long-term investments
December 31, 2015
Number of
securities in
a loss position
21
21
12 months or greater
Total
Fair value
$
$
33
33
Unrealized
losses(1)
$
$
(4)
(4)
Fair value
$
$
33
33
Unrealized
losses
$
$
(4)
(4)
(1) Unrealized losses in securities less than 12 months were not significant.
64
CORNING INCORPORATED - 2015 Annual Report Notes to Consolidated Financial Statements
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)
(in millions)
Asset-backed securities
Total long-term investments
(1) Unrealized losses in securities less than 12 months were not significant.
Proceeds from sales and maturities of short-term investments totaled $1.6 billion, $1.2 billion and $2.0 billion in 2015, 2014 and 2013, respectively.
4. Significant Customers
For 2015, Corning’s sales to Samsung Display Co. Ltd., a customer of our Display Technologies and Specialty Materials segments, represented 11% of the
Company’s consolidated net sales. 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.
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,
2015
$
633
264
200
288
2014
$
586
255
202
279
$
1,385
$
1,322
Years ended December 31,
2015
$
$
426
1,060
1,486
2014
$
$
2,384
1,184
3,568
2013
$
$
1,274
1,199
2,473
65
CORNING INCORPORATED - 2015 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,
2015
$
$
40
20
33
144
30
(120)
147
2013
$
2014
$
38
32
414
411
(9)
210
$
1,096
$
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
Uncertain tax positions
Equity earnings impact(3)
Valuation allowances
Other items, net
Effective income tax (benefit) rate
Years ended December 31,
2015
2014
2013
35.0%
0.1
(0.5)
(1.7)
(19.8)(11)
4.3(10)
(5.4)
(4.2)(7)
2.1
9.9%
35.0%
4.9(9)
(0.4)
(0.3)
(8.3)
(0.1)
(2.0)
0.8(6)
1.1(8)
30.7%
3
12
308
112
50
27
512
35.0%
0.6
(1.2)
(2.0)
(8.1)(4)
0.2
(6.6)
3.1(5)
(0.3)
20.7%
(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 2015, $0.01 in 2014 and $0.02 in 2013.
(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 difference between 2013-2014 was due to 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 (9) below.
(7) $100 million tax benefit primarily related to change in judgment on the realizability of Germany and Japan deferred tax assets is partially offset with
tax expense from U.S. state and China deferred tax allowance increases.
(8) 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.
(9) 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.
(10) Unrecognized tax benefit reserve was primarily for tax positions taken related to transfer pricing of which $31 million tax expense is related to out
of period adjustments. The impact of these corrections is not material to any individual period previously presented. Since the Company operates in
a number of countries with income tax treaties, an offsetting benefit was recorded where it believes it is more-likely-than-not to receive competent
authority relief.
(11) Tax benefit is primarily for excess foreign tax credits resulting from the inclusion of high-taxed foreign earnings in U.S. income and the income of
Taiwan and Korea subsidiaries with lower statutory rates than the U.S. The amount of tax benefit in 2015 is relatively consistent with 2014. The change
in the effective tax rate reconciliation percentage is driven by the significant decrease in the gain on our foreign currency translation hedges in 2015
versus 2014.
66
CORNING INCORPORATED - 2015 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
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,
1,151
69
153
276
265
505
2,419
(238)
2,181
(181)
(284)
(465)
1,716
December 31,
2,056
(340)
1,716
2015
$
$
2015
$
$
2014
$
$
2014
$
$
1,235
69
170
312
246
473
2,505
(298)
2,207
(152)
(299)
(451)
1,756
248
1,889
(5)
(376)
1,756
Corning adopted ASU 2015-17 prospectively. All deferred taxes are classified as non-current on the balance sheet as of December 31, 2015. Prior periods
were not retrospectively adjusted.
Details on deferred tax assets for loss and tax credit carryforwards at December 31, 2015 follow (in millions):
Net operating losses
Tax credits
Totals as of December 31, 2015
Expiration
Amount
2016-2020
2021-2025
2026-2035
Indefinite
$
$
406
745
1,151
$
$
127
414
541
$
$
63
58
121
$
$
3
237
240
$
$
213
36
249
The recognition of windfall tax benefits from share-based compensation
deducted on the tax return is prohibited until realized through a reduction
of income tax payable. Cumulative tax benefits totaling $244 million will
be recorded in additional paid-in-capital when credit carryforwards 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
carryforwards, 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 $4.7 billion will be required
to fully realize the U.S. deferred tax assets as of December 31, 2015, of
which $88 million will be required over the next 20 years to realize the
deferred tax assets related to general business credits and $1.9 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, 2015 and 2014 was $238 million and
$298 million, respectively.
67
CORNING INCORPORATED - 2015 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
2014
$
2015
$
10
245
(1)
(1)
$
253
$
15
5
(10)
10
The additions for tax positions of prior years include $221 million for
unrecognized tax benefits related to gross transfer pricing adjustments.
See footnote (10) of the Reconciliation of the U.S. statutory income tax
rate to our effective tax rate for continuing operations above for more
information. Included in the balance at December 31, 2015 and 2014 are
$102 million and $5 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 year ended December 31, 2015 the
amount recognized in interest expense is $6 million. In 2014 and 2013, the
amounts recognized in interest expense and income were immaterial.
The amounts accrued at December 31, 2015 and 2014 for the payment of
interest and penalties was $5 million and $1 million, 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.
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 of limitations is closed for all returns
prior to 2002, but the IRS can make adjustments for the return in which
the NOL, U.S. foreign tax and research experimentation credit carryovers
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.
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 (2014 onward) and South Korea (2015 onward).
Corning continues to indefinitely reinvest substantially all of its foreign
earnings, with the exception of an immaterial amount of current earnings
that have very low or no tax cost associated with their repatriation. Our
current analysis indicates that we have sufficient U.S. liquidity, including
borrowing capacity, to fund foreseeable U.S. cash needs without
requiring the repatriation of foreign cash. 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, 2015, taxes have not been provided on approximately
$11 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.
7.
Investments
Investments comprise the following (in millions):
Affiliated companies accounted for by the equity method
Dow Corning
All other
Other investments
Total
Ownership
interest(1)
50%
20% to 50%
December 31,
2015
2014
$
$
1,483
422
1,905
70
1,975
$
$
1,325
452
1,777
24
1,801
(1) Amounts reflect Corning’s direct ownership interests in the respective affiliated companies at December 31, 2015. Corning does not control any of
such entities.
68
CORNING INCORPORATED - 2015 Annual Report Affiliated Companies at Equity
The results of operations and financial position of the investments accounted for under the equity method follow (in millions):
Notes to Consolidated Financial Statements
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:
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
(1) 2013 amounts include Samsung Corning Precision Materials.
Years ended December 31,
2015
2014
2013
$
$
$
$
$
$
$
6,461
1,606
586
299
30
19
143
$
$
$
$
$
$
$
$
7,124
1,701
647
266
13
25
130
2
$
$
$
$
$
$
$
$
$
$
December 31,
2015
2014
$
$
$
$
$
$
$
$
$
5,228
6,453
6
1,461
800
4,557
631
11
1
$
$
$
$
$
$
$
$
$
8,526
2,655
1,135
547
13
189
37
629
57
2
5,432
6,864
7
1,630
950
5,143
634
19
2
(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 Schedules. Previous period amounts have been
conformed for comparative purposes.
(3) In 2013, Corning purchased machinery and equipment on behalf of Samsung Corning Precision Materials to support its capital expansion initiative.
We have contractual agreements with several of our equity affiliates which include sales, purchasing, licensing and technology agreements.
At December 31, 2015, approximately $2.0 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 strategic and financial 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 (Acquisitions), 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 were 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.
69
CORNING INCORPORATED - 2015 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,
2015
2014
2013
$
$
$
$
$
$
5,649
1,472
563
281
15
143
$
$
$
$
$
$
6,221
1,543
513
252
15
125
$
$
$
$
$
$
December 31,
2015
2014
$
$
$
$
$
$
$
4,511
6,064
6
1,305
785
4,539
631
$
$
$
$
$
$
$
5,711
1,280
376
196
22
100
4,712
6,433
7
1,441
945
5,125
634
(1) Gross profit for the year ended December 31, 2015 includes R&D cost of $233 million (2014: $273 million and 2013: $248 million).
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. The Plan also includes releases for
Corning and Dow Chemical 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 Litigation Facility (the “Settlement Facility”) to
provide a means for tort claimants to settle or litigate their claims. 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. As of
December 31, 2015, Dow Corning had recorded a reserve for breast implant
litigation of $291 million.
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,
2015, Dow Corning has estimated the potential liability to these creditors
to be within the range of $104 million to $341 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 $104 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.
On December 11, 2015, Corning announced its intention to exchange its
50% equity interest in Dow Corning Corporation for 100% of the stock
of a newly formed entity that will become a wholly owned subsidiary of
Corning Incorporated. The newly formed entity will hold approximately
40% ownership in Hemlock Semiconductor Group and approximately
$4.8 billion in cash. Upon completion of this strategic realignment,
which is expected to close during the first half of 2016, Dow Chemical, an
equal owner of Dow Corning with Corning since 1943, will assume 100%
ownership of Dow Corning.
70
CORNING INCORPORATED - 2015 Annual Report 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 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”). On January 6, 2016, all pending appeals
of the Plan were withdrawn and Corning expects that the Plan will
become effective in April 2016.
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 will contribute its equity interest in PCC and PCE
on the Plan’s Funding Effective Date, which is expected to occur in June
2016. Corning has the option to use its common stock 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
(the “non-PCC asbestos claims”). 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 claims
(the “Stay”). The Stay remains in place as of the date of this filing; however,
Notes to Consolidated Financial Statements
given that the Amended PCC Plan is now affirmed by the District Court
and the Third Circuit Court of Appeals, Corning anticipates the Stay will
be lifted in the second half of 2016. These non-PCC asbestos claims have
been covered by insurance without material impact to Corning to date. As
of December 31, 2015, Corning had received for these claims approximately
$19 million in insurance payments. When the Stay is lifted, these non-
PCC asbestos claims will be allowed to proceed against Corning. In prior
periods, Corning recorded in its estimated asbestos litigation liability an
additional $150 million for these and any future non-PCC asbestos claims.
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 $678 million at December 31, 2015, compared
with an estimate of liability of $681 million at December 31, 2014. The
$678 million liability is comprised of $238 million of the fair value of
PCE, $290 million for the fixed series of payments, and $150 million for
the non-PCC asbestos claims, all referenced in the preceding paragraphs.
With respect to the PCE liability, at December 31, 2015 and 2014, the fair
value of $238 million and $241 million of our interest in PCE significantly
exceeded its carrying value of $154 million and $162 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 asbestos claims was estimated based upon industry data
for asbestos claims since Corning does not have recent claim history
due to the Stay 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, 2015
and 2014, Corning recorded asbestos litigation income of $15 million and
expense of $9 million, respectively. At December 31, 2015, $440 million
of the obligation, consisting of the $290 million for the fixed series of
payments and $150 million for the non-PCC asbestos claims, 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. The amount of the obligation
related to the fair value of PCE, $238 million, was reclassified to a current
liability in the fourth quarter of 2015, as the contribution of the assets is
expected to be made within the next twelve months.
Non-PCC Asbestos Claims 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 has resolved these issues with a
majority of its relevant insurers, and is vigorously contesting these cases
with the remaining relevant insurers. Management is unable to predict
the outcome of the litigation with these remaining insurers.
71
CORNING INCORPORATED - 2015 Annual Report Notes to Consolidated Financial Statements
8. Acquisitions
Year ended December 31, 2015
Corning completed five acquisitions in 2015. There have been minor adjustments during 2015 made to the preliminary allocation of the total purchase
consideration related to working capital adjustments and true-up of the fair value of assets acquired for the acquisitions. Corning has completed the
purchase accounting for four acquisitions. The purchase accounting related to one acquisition in the fourth quarter of 2015 has not been completed and
amounts related to this acquisition are subject to change. A summary of the allocation of the total purchase consideration for the five acquisitions is as
follows (in millions):
Cash and cash equivalents
Trade receivables
Inventory
Property, plant and equipment
Other intangible assets
Other current and non-current assets
Current and non-current liabilities
Total identified net assets
Purchase consideration
Goodwill(1)
$
2
63
47
117
286
27
(117)
425
(725)
$
300
(1) The goodwill recognized is partially deductible for U.S. income tax purposes. The goodwill was allocated to the Optical Communications and All Other
reporting segment in the amount of $213 million and $87 million, respectively.
The total consideration related to the acquisitions primarily consisted
of cash and, in two of the acquisitions, contingent consideration. The
contingent consideration arrangements may require additional amounts
to be paid in 2016 and 2017 based on projections of future revenues. The
combined potential additional consideration is capped at $28 million. The
total fair value of the contingent consideration for the two acquisitions
was valued at $13 million as of the acquisition date and $10 million as of
December 31, 2015. The change in fair value of contingent consideration
of $3 million was recorded as an adjustment to selling, general and
administrative expenses.
The goodwill generated from these acquisitions is primarily related to
the value of the product portfolio and customer/distribution networks
acquired, combined with Corning’s existing business segments, as well as
market participant synergies and other intangibles that do not qualify for
separate recognition.
The acquired amortizable intangible assets have a weighted-average
useful life of approximately 10 years.
Acquisition-related costs of $11 million included in selling, general and
administrative expense in the Consolidated Statements of Income for
the year ended December 31, 2015 included costs for legal, accounting,
valuation and other professional services. The Consolidated Financial
Statements include the operating results of each business combination
from the date of acquisition. Pro forma results of operations have not
been presented because the effects of the acquisitions, individually and
in the aggregate, were not material to Corning’s financial results.
Year ended December 31, 2014
On January 15, 2014, Corning completed a series of strategic and financial
agreements pursuant to the Framework Agreement with Samsung
Display 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.
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 of Samsung Corning Precision Materials 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.
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.
72
CORNING INCORPORATED - 2015 Annual Report On December 29, 2015, Corning and Samsung Display entered into
an agreement pursuant to which Corning exchanged the amount of
contingent consideration in excess of $300 million (net present fair
value: $246 million), as consideration for the incremental fair value
associated with a number of commercial agreements, including the
amendment of its long-term supply agreement with Samsung Display.
As of December 29, 2015, the net present fair value of the contingent
consideration receivable was $458 million. The net present fair value of
the commercial benefit associated with the amended long-term supply
agreement exceeds the value exchanged by Corning pursuant to this
agreement (net present fair value: $212 million). Consequently, Corning
reclassified this amount to the other asset line of the Consolidated
Balance Sheet and will amortize the amount over the remaining term of
the long-term supply agreement as a reduction in revenue.
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
Notes to Consolidated Financial Statements
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.
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
$
$
attributable to the settlement of the pre-existing arrangement was
accounted for as a separate transaction from the business combination
as follows:
• 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 of
Samsung Corning Precision Materials. 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.
73
CORNING INCORPORATED - 2015 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 of Samsung Corning Precision Materials 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 of Samsung Corning Precision
Materials, 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 $1,343 million and
$1,761 million to net sales for the years ending December 31, 2015 and 2014,
respectively. 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.
74
CORNING INCORPORATED - 2015 Annual Report Notes to Consolidated Financial Statements
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 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 of Samsung Corning Precision
Materials 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 of Samsung
Corning Precision Materials 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.
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
There were no other significant acquisitions for the year ended December 31, 2014 and December 31, 2013.
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
Twelve months
ended
December 31,
2013
$
$
$
$
$
9,871
2,327
2,425
1.60
1.54
1,452
1,577
December 31,
2015
$
438
5,504
14,688
1,206
21,836
(9,188)
2014
$
458
5,470
13,848
1,322
21,098
(8,332)
$
12,648
$
12,766
Approximately $35 million, $40 million and $35 million of interest costs were capitalized as part of property, plant and equipment, net of accumulated
depreciation, in 2015, 2014 and 2013, respectively.
Manufacturing equipment includes certain components of production equipment that are constructed of precious metals. At December 31, 2015 and
2014, the recorded value of precious metals totaled $3 billion and $3.1 billion, respectively. Depletion expense for precious metals in the years ended
December 31, 2015, 2014 and 2013 was $19 million, $21 million and $20 million, respectively.
75
CORNING INCORPORATED - 2015 Annual Report Notes to Consolidated Financial Statements
10. Goodwill and Other Intangible Assets
Goodwill
Changes in the carrying amount of goodwill for the twelve months ended December 31, 2015 and 2014 were as follows (in millions):
Optical
Communications
Display
Technologies
Specialty
Materials
Balance at December 31, 2013
Acquired goodwill(1)
Measurement period adjustment(2)
Foreign currency translation adjustment
Balance at December 31, 2014
Acquired goodwill(3)
Measurement period adjustment
Foreign currency translation adjustment
Other(4)
$
240
$
(2)
238
220
(7)
(12)
$
$
9
68
60
(3)
134
(6)
$
$
Balance at December 31, 2015
$
439
$
128
$
150
54
(6)
198
(4)
(44)
150
Life
Sciences
$
603
All
Other
Total
$
1,002
(23)
580
$
(18)
$
562
$
$
87
(1)
15
101
$
122
60
(34)
1,150
307
(7)
(41 )
(29)
$
1,380
(1) 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 (Acquisitions) to the Consolidated Financial Statements for additional information on the acquisition of Samsung
Corning Precision Materials.
(2) 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.
(3) The Company completed four acquisitions in the Optical Communications segment during the first quarter of 2015 and one acquisition that is being
reported in All Other in the fourth quarter of 2015. Refer to Note 8 (Acquisitions) to the Consolidated Financial Statements for additional information
on these acquisitions.
(4) In the fourth quarter of 2015, Corning made a change to the internal reporting structure related to a small acquisition in 2014 originally recorded in the
Specialty Materials segment, which is now being reported in All Other. Additionally, a charge of $29 million for the impairment of goodwill related to
this acquisition was recorded in the fourth quarter.
Corning’s gross goodwill balance for the fiscal years ended December 31, 2015 and 2014 were $7.9 billion and $7.6 billion, respectively. Accumulated
impairment losses were $6.5 billion for the fiscal years ended December 31, 2015 and 2014, respectively, and were generated primarily through goodwill
impairments related to the Optical Communications segment.
Other Intangible Assets
Other intangible assets follow (in millions):
Amortized intangible assets:
Patents, trademarks & trade names
Customer list and other
Total
2015
Accumulated
amortization
Gross
December 31,
Net
Gross
2014
Accumulated
amortization
$
$
350
621
971
$
$
162
103
265
$
$
188
518
706
$
$
302
411
713
$
$
149
67
216
Net
$
$
153
344
497
Amortized intangible assets are primarily related to the Optical Communications and Life Sciences segments. The net carrying amount of intangible
assets increased by $209 million during the year ended December 31, 2015, primarily due to acquisitions of $288 million offset by amortization of
$54 million and foreign currency translation adjustments of $25 million.
Amortization expense related to these intangible assets is estimated to be $61 million annually for 2016 through 2018, $60 million for 2019 and $55 million
for 2020.
76
CORNING INCORPORATED - 2015 Annual Report
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
Asbestos litigation
Other current liabilities
Other accrued liabilities
Non-current liabilities:
Asbestos litigation
Other non-current liabilities
Other liabilities
Notes to Consolidated Financial Statements
December 31,
2015
2014
$
$
$
$
522
390
912
473
246
794
1,513
$
$
$
$
December 31,
2015
2014
$
$
$
$
491
53
238
526
1,308
440
1,802
2,242
$
$
$
$
687
412
1,099
847
445
430
1,722
562
106
623
1,291
681
1,365
2,046
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 $678 million at
December 31, 2015, compared with an estimate of liability of $681 million
at December 31, 2014. At December 31, 2015, $440 million of the obligation,
consisting of $290 million for the fixed series of payments and $150 million
for the non-PCC asbestos claims, is classified as a non-current liability,
Customer Deposits
In December 2015, Corning announced that with the support of the Hefei
government it will locate a Gen 10.5 glass manufacturing facility in the
Hefei XinZhan General Pilot Zone in Anhui Province, China. Glass substrate
production from the new facility is expected to support mass production
of LCD panels for large-size televisions by the third quarter of 2018.
As part of this investment, Corning and a Chinese customer have entered
into a long-term supply agreement that commits the customer to the
purchase of Gen 10.5 glass substrates from the Corning manufacturing
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. The amount of the obligation related to the
fair value of PCE, $238 million, was reclassified to a current liability in the
fourth quarter of 2015, as the contribution of the assets is expected to be
made within the next twelve months. Refer to Note 7 (Investments) to
the Consolidated Financial Statements for additional information on the
asbestos litigation.
facility in Hefei. This agreement stipulates that the customer will provide
a non-refundable cash deposit in the amount of approximately $400
million to Corning to secure rights to an amount of glass that is produced
by Corning over the next 10 years. Corning received $197 million of this
deposit in 2015 and will receive the additional $197 million in 2016. As
glass is shipped to the customer, Corning will recognize revenue and issue
credit memoranda to reduce the amount of the customer deposit liability,
which are applied against customer receivables resulting from the sale of
glass. In 2015, there were no credit memoranda issued.
77
CORNING INCORPORATED - 2015 Annual Report Notes to Consolidated Financial Statements
12. Debt
(In millions)
Current portion of long-term debt and short-term borrowings
Current portion of long-term debt
Commercial paper
Total current portion of long-term debt and short-term borrowings
Long-term debt
Debentures, 8.875%, due 2016
Debentures, 1.45%, due 2017
Debentures, 1.5%, due 2018
Debentures, 6.625%, due 2019
Debentures, 4.25%, due 2020
Debentures, 8.875%, due 2021
Debentures, 2.9%, due 2022
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 5.02%, due through 2042
Total long-term debt
Less current portion of long-term debt
Long-term debt
December 31,
2015
2014
$
$
$
91
481
572
64
250
375
246
291
68
374
249
45
99
169
249
250
398
499
375
$
$
$
36
36
66
250
243
287
69
249
45
99
170
249
250
398
499
389
4,001
91
3,263
36
$
3,910
$
3,227
At December 31, 2015 and 2014, the weighted-average interest rate on current portion of long-term debt was 7.0% and 2.5%, respectively. At
December 31, 2015, the weighted-average interest rate on commercial paper was 0.6%.
Based on borrowing rates currently available to us for loans with similar terms and maturities, the fair value of long-term debt was $4.1 billion at
December 31, 2015 and $3.6 billion at December 31, 2014. The Company measures the fair value of its long-term debt using Level 2 inputs based primarily
on current market yields for its existing debt traded in the secondary market.
The following table shows debt maturities by year at December 31, 2015 (in millions)*:
2016
$
572
2017
$
2018
2019
2020
Thereafter
257
$
378
$
253
$
304
$
2,713
* Excludes interest rate swap gains and bond discounts.
78
CORNING INCORPORATED - 2015 Annual Report Debt Issuances and Retirements
2015
• In the second quarter of 2015, we issued $375 million of 1.50% senior
unsecured notes that mature on May 8, 2018 and $375 million of 2.90%
senior unsecured notes that mature on May 15, 2022. The net proceeds
of $745 million will be used for general corporate purposes. We can
redeem these notes at any time, subject to certain customary terms
and conditions.
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, 2015, 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, 2015, 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 amended and restated by the $2 billion
facility entered into in the third quarter of 2014.
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 2015, we made
voluntary cash contributions of $65 million to our domestic defined
benefit pension plan and contributed $35 million to our international
pension plans. 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. Although we will not be
subject to any mandatory contributions in 2016, we anticipate making
voluntary cash contributions of up to $62 million to our domestic pension
plan and up to $36 million to our international pension plans in 2016.
Notes to Consolidated Financial Statements
• 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.
• 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.
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.
79
CORNING INCORPORATED - 2015 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
2015
2014
2015
2014
2015
2014
Benefit obligation at beginning of year
$
3,809
$
3,300
$
3,222
$
2,844
$
Service cost
Interest cost
Plan participants’ contributions
Acquisitions
Amendments
Actuarial (gain) loss
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 (loss) 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
90
144
1
(95)
(8)
(188)
(38)
3,715
3,263
(108)
116
1
(188)
(26)
3,058
3,058
(3,715)
(657)
50
(35)
(672)
(657)
332
35
367
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
64
126
1
(87)
(165)
3,161
2,814
(111)
77
1
$
$
55
137
1
25
327
(167)
3,222
2,596
287
97
1
(165)
(167)
2,616
2,616
(3,161)
(545)
(30)
(515)
(545)
305
37
342
$
$
$
$
$
$
$
2,814
2,814
(3,222)
(408)
(30)
(378)
(408)
278
44
322
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
587
26
18
(8)
(8)
(23)
(38)
554
449
3
39
(23)
(26)
442
442
(554)
(112)
50
(5)
(157)
(112)
27
(2)
25
$
$
$
$
$
$
$
$
$
$
456
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
The accumulated benefit obligation for defined benefit pension plans was $3.5 billion and $3.6 billion at December 31, 2015 and 2014, respectively.
80
CORNING INCORPORATED - 2015 Annual Report
December 31,
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Plan participants’ contributions
Amendments
Actuarial (gain) loss
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
2015
2014
$
862
$
13
33
7
(97)
4
(61)
2
763
0
(763)
(763)
(45)
(718)
(763)
33
(19)
14
$
$
$
$
$
$
$
$
$
$
$
$
$
$
815
11
38
7
(5)
49
(56)
3
862
0
(862)
(862)
(48)
(814)
(862)
132
(27)
105
The following information is presented for pension plans where the projected benefit obligation as of December 31, 2015 and 2014 exceeded the fair value
of plan assets (in millions):
Projected benefit obligation
Fair value of plan assets
December 31,
2015
2014
$
$
3,341
2,635
$
$
3,425
2,831
In 2015, the fair value of plan assets exceeded the projected benefit obligation for the United Kingdom, one of 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, 2015 and 2014 exceeded the fair
value of plan assets (in millions):
Accumulated benefit obligation
Fair value of plan assets
December 31,
2015
2014
$
$
3,159
2,634
$
$
479
17
In 2015, the fair value of plan assets exceeded the accumulated benefit obligation for the United Kingdom, the South Korea and one of the France
pension plans.
81
CORNING INCORPORATED - 2015 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
December 31,
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost (credit)
Recognition of actuarial loss (gain)
2015
2014
2013
2015
2014
$ 90
$
82
$
144
(178)
6
165
160
(174)
6
29
70
131
(169)
5
(30)
$
64
$
126
(166)
7
162
55
137
(159)
7
4
Total net periodic benefit expense
$ 227
$ 103
$
7
$ 193
$
44
$
Other changes in plan assets and
benefit obligations recognized in other
comprehensive income:
Curtailment effects
Settlements
Current year actuarial loss (gain)
Recognition of actuarial (loss) gain
Current year prior service cost
$
(1)
191
(165)
Amortization of prior service (cost) credit
(6)
$
(3)
(2)
212
(29)
25
(6)
$ (264)
$ 189
$ 198
$ (274)
30
(5)
(162)
(7)
(4)
25
(7)
41
(6)
115
(158)
6
(41)
(18)
2013
$ 60
$
2015
2014
2013
$
26
18
(12)
(1)
3
$
34
$
$
$
(1)
2
(3)
1
$
$
$
27
23
(15)
(1)
25
59
(3)
(2)
14
(25)
1
10
16
(11)
(1)
11
25
10
(11)
1
0
$
19
$ 197
$ (239)
$
20
$ 212
$ (239)
$
(1)
$
(15)
$
$ 246
$ 300
$ (232)
$ 213
$ 256
$ (257)
$
33
$
44
$
25
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
Postretirement benefits
2015
$
$
$
$
$
13
33
3
(7)
42
(96)
(3)
7
(92)
(50)
2014
$
$
$
$
$
11
38
(6)
43
49
(5)
6
50
93
2013
$
$
$
$
$
13
39
15
(6)
61
(178)
(15)
(5)
6
(192)
(131)
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Current year actuarial (gain) loss
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 2016 for its defined benefit
pension plans. The Company expects to recognize $1 million of net
actuarial gain and $4 million of net prior service credit as components of
net periodic postretirement benefit cost in 2016.
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.
82
CORNING INCORPORATED - 2015 Annual Report 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 seven years prior to
the year ended December 31, 2014, Corning 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.
Therefore, 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.
Prior to the December 31, 2015 valuation of its defined benefit pension
and OPEB plans, Corning used the traditional, single weighted-average
discount rate approach to develop the obligation, interest cost and service
cost components of net periodic benefit cost for its defined benefit
pension and OPEB plans. The individual spot rates from the yield curve
are used in measuring the pension plan projected benefit obligation
(PBO) or OPEB plan accumulated postretirement benefit obligation
(APBO) at the measurement date. The benefit obligation is effectively
calculated as the aggregate present value at the measurement date of
each future benefit payment related to past service, with each payment
discounted using a spot rate from a high-quality corporate bond yield
curve that matches the duration of the benefit payment. Under Corning’s
traditional, single weighted-average discount rate approach, a single
weighted-average rate is developed from the approach described above
and rounded to the nearest 25 basis points. Traditionally, the weighted-
average discount rate is determined at the plan measurement date, based
on the same projected future benefit payments used in developing the
benefit obligation. The traditional single weighted-average discount rate
Notes to Consolidated Financial Statements
represents the constant annual rate that would be required to discount all
future benefit payments related to past service from the date of expected
future payment to the measurement date such that the aggregate
present value equals the benefit obligation.
Beginning with the December 31, 2015 valuation of its defined benefit
pension and OPEB plans, Corning is changing its methodology of
determining the service and interest cost components of net periodic
pension and other postretirement benefit costs to a more granular
approach. Under the new approach the cash flows from each applicable
pension and OPEB plan will be used to directly calculate the benefit
obligation, service cost and interest cost using the spot rates from the
applicable yield curve.
Moving to a more granular approach has a limited impact on the
determination of the respective benefit obligations. The only impacts will
be as a result of the elimination of the rounding of the discount rate that
occurred in the traditional approach and the use of specific cash flows
for Corning’s non-qualified pension plans, while separately applying
the yield curve to each separate OPEB plan instead of aggregating
the OPEB plan cash flows. This change will result in a decrease in the
interest cost and service cost components of net periodic pension and
OPEB costs. For Corning’s pension plans, this change will increase the
immediate recognition of actuarial losses (or decrease the immediate
recognition of actuarial gains), due to Corning’s previous election to
immediately recognize actuarial gains and losses outside of the corridor.
For Corning’s OPEB plans, this change will increase the accumulated other
comprehensive income (AOCI) account balance due to the accumulation
of lower actuarial gains or higher actuarial losses. Over time, the
amortization of the actuarial losses from AOCI will begin to reduce the
savings from the lower interest cost and service cost.
This change is a change in accounting estimate and therefore applied
prospectively (beginning with the next measurement date of December 31,
2015). No restatement of prior periods is required.
Measurement of postretirement benefit expense is based on 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
2015
2014
2013
2015
2014
2013
2015
2014
2013
Discount rate
Rate of compensation increase
4.24%
3.50%
4.00%
3.50%
4.75%
4.00%
3.23%
3.92%
3.21%
3.88%
4.08%
3.85%
4.31%
4.00%
4.75%
The weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 follow:
Pension benefits
Domestic
International
Postretirement benefits
2015
2014
2013
2015
2014
2013
2015
2014
2013
Discount rate
Expected return on plan assets
Rate of compensation increase
4.00%
6.00%
3.50%
4.75%
6.25%
4.00%
3.75%
6.00%
4.00%
3.21%
2.97%
3.88%
4.08%
4.12%
3.85%
4.48%
3.73%
3.45%
4.00%
4.75%
4.00%
83
CORNING INCORPORATED - 2015 Annual Report Notes to Consolidated Financial Statements
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
2015
2014
7%
5%
2024
6.67%
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
52
$
$
(3)
(43)
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.
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, 2015
$
336
322
1,566
163
61
71
97
$
51
79
158
71
$
285
243
1,408
97
$
163
61
$
2,616
$
359
$
2,033
$
224
(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.
84
CORNING INCORPORATED - 2015 Annual Report (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
Notes to Consolidated Financial Statements
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.
The following tables provide fair value measurement information for the Company’s major categories of our international defined benefit plan assets:
(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, 2015
$
$
7
23
347
3
2
60
442
$
286
60
346
$
$
7
23
61
$
91
$
$
3
2
5
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
85
CORNING INCORPORATED - 2015 Annual Report Notes to Consolidated Financial Statements
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, 2015
and 2014:
(in millions)
Beginning balance at December 31, 2014
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, 2015
(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
Level 3 assets – Domestic
Level 3 assets – International
Year ended December 2015
Year ended December 2015
Private equity
Real estate
Mortgages
$
$
192
16
(45)
163
$
$
84
12
(35)
61
$
$
7
(5)
2
Insurance
contracts
$
$
5
(2)
3
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
Credit Risk
Liquidity Risk
60% 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.
9% 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, 2015 and 2014, the amount of Corning common stock
included in equity securities was not significant.
Currency Risk
Cash Flow Data
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.
In 2016, we anticipate making voluntary cash contributions of
approximately $62 million to our domestic defined benefit plan and
approximately $36 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):
Expected benefit payments
Domestic
pension benefits
International
pension benefits
Postretirement
benefits
Expected federal
subsidy payments
postretirement
benefits
$
$
$
$
$
$
192
178
186
192
198
1,100
$
$
$
$
$
$
18
22
24
25
29
168
$
$
$
$
$
$
45
44
44
44
46
230
$
$
$
$
$
$
2
3
3
3
3
16
2016
2017
2018
2019
2020
2021-2025
86
CORNING INCORPORATED - 2015 Annual Report
Notes to Consolidated Financial Statements
Other Benefit Plans
We offer defined contribution plans covering employees meeting certain eligibility requirements. Total consolidated defined contribution plan expense
was $53 million, $62 million and $63 million for the years ended December 31, 2015, 2014 and 2013, respectively.
14. Commitments, Contingencies and Guarantees
The amounts of our obligations follow (in millions):
Performance bonds and guarantees
Stand-by letters of credit(1)
Credit facility to equity company
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(5)
Total commitments and contingencies(5)
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
$
$
$
92
47
31
14
184
220
298
4,122
2,385
355
240
573
58
$
$
$
25
44
27
96
106
298
565
165
7
19
49
$
$
$
6
6
77
625
316
10
37
110
$
$
$
1
1
33
550
280
7
36
77
$
$
$
60
3
4
14
81
4
2,382
1,624
331
148
337
$
$
8,251
8,435
$
$
1,209
1,305
$
$
1,175
1,181
$
$
983
984
$
$
4,826
4,907
(1) At December 31, 2015, $38 million of the $47 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/losses 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, 2015, $58 million was included on our balance sheet related to uncertain tax positions. Of this amount, we are unable to estimate
when any 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, 2015 follow (in millions):
2016
$
49
2017
$
58
2018
$
52
2019
$
41
2020
$
36
2021 and
thereafter
$
337
Total rental expense was $94 million for 2015, $92 million for 2014 and
$85 million for 2013.
Product warranty liability accruals at December 31, 2015 and December 31,
2014 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.
87
CORNING INCORPORATED - 2015 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 17 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, 2015 and
December 31, 2014, Corning had accrued approximately $37 million
(undiscounted) and $43 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, 2015, 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. 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. The Company qualified
for and elected 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
December 31, 2015, the hedge ineffectiveness related to these instruments
is not material. Corning defers net gains and losses related to effective
portion of cash flow hedges into accumulated other comprehensive (loss)
income on the consolidated balance sheet until such time as the hedged
item impacts earnings. At December 31, 2015, the amount expected to be
reclassified into earnings within the next 12 months is a pre-tax net loss
of $4.8 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 (expense) income, net
component, relative to ineffectiveness, is nominal for the year ended
December 31, 2015.
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 Income.
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, South Korean won and euro. When these
revenues are translated back to U.S. dollars, the Company is exposed to
foreign exchange rate movements in the Japanese yen, South Korean won
and euro. To protect translated earnings against movements in these
currencies, the Company has entered into a series of zero-cost collars and
average rate forwards.
88
CORNING INCORPORATED - 2015 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 zero-cost collar structure,
the Company writes a local currency call option and purchases a local
currency put option or vice versa. The zero-cost collars offset the impact of
translated earnings above the put price and below the call strike price and
that offset is reported in foreign currency hedge gain, net. The Company
entered into a series of zero-cost collars, settling quarterly, to hedge the
effect of translation impact for each respective quarter, and span up to
the fourth quarter of 2017. 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, 2015, the U.S. dollar net notional value of the zero-cost
collar is $2.9 billion. The Company entered into a series of average rate
forwards with no associated premium, which will partially hedge the
impact of Japanese yen and euro translation on the Company’s projected
2015 through 2017 net income. These forwards have a notional value of
$6.4 billion and will settle net without obligation to deliver Japanese yen
and euro. In January 2016, Corning took advantage of the stronger yen
to extend its foreign exchange hedging program to hedge a significant
portion of its projected yen exposure for the period 2018 through 2022.
The Company benefits from the increase in the U.S. dollar equivalent
value of its foreign currency earnings in translation. The zero-cost collar
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 foreign currency hedge gain, net line of the
Consolidated Statement of Income.
The following table summarizes the notional amounts and respective fair values of Corning’s derivative financial instruments on a gross basis for
December 31, 2015 and December 31, 2014 (in millions):
Notional amount
2015
2014
Balance sheet
location
Fair value
2015
2014
Balance sheet
location
Fair value
2015
2014
Asset derivatives
Liability derivatives
Derivatives designated as
hedging instruments
Foreign exchange contracts
$
782
$
487
Other current
assets
$
Other assets
5
1
Interest rate contracts
550
1,300
Other assets
1
Derivatives not designated as
hedging instruments
Foreign exchange
contracts, other
Foreign currency hedges
related to translated earnings
1,095
1,285
11,972
12,126
Other current
assets
Other current
assets
Other assets
Total derivatives
$
14,399
$
15,198
$
6
511
472
995
$
22
Other accrued
liabilities
$
(10)
$
(6)
Other
liabilities
Other
liabilities
Other accrued
liabilities
17
Other accrued
liabilities
Other
liabilities
649
846
(23)
(4)
(12)
(33)
(61)
(15)
(5)
(33)
$
1,535
$
(143)
$
(59)
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
Derivatives in hedging relationships
2015
2014
2013
(Loss)/gain recognized in other
comprehensive income (OCI)
Location of gain/
(loss) reclassified from
accumulated OCI into
income effective/
ineffective
Gain/(loss) reclassified from
accumulated OCI into income
ineffective/effective(1)
2015
2014
2013
Cash flow hedges
Interest rate hedge
Foreign exchange contracts
Total cash flow hedges
$
$
(7)
$
(3)
$
(17)
(24)
$
20
17
$
33
56
89
Net sales
$
Cost of sales
Other (expense)
income, net
$
20
6
3
7
$
38
$
26
$
10
$
91
129
89
CORNING INCORPORATED - 2015 Annual Report
Notes to Consolidated Financial Statements
Undesignated derivatives
Location of gain/(loss)
recognized in income
Foreign exchange contracts – balance sheet
Foreign currency hedge gain (loss), net
Foreign exchange contracts – loans
Foreign currency hedge (loss) gain, net
Foreign currency hedges related to translated earnings
Foreign currency hedge gain (loss), net
Total undesignated
Gain (loss) recognized in income
2015
2014
2013
$
$
8
(3)
80
85
$
$
29
13
1,369
1,411
$
$
100
87
435
622
(1) There were no material amounts of ineffectiveness for 2015 and 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.
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(1)(2)
Current liabilities:
Other accrued liabilities(1)
Non-current liabilities:
Other liabilities(1)(2)
December 31, 2015
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
$
100
$
$
$
$
$
100
522
752
55
98
$
$
$
$
522
506
55
88
$
246
$
10
(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 contingent consideration
assets or liabilities which are measured by applying an option pricing model using projected future revenues.
(in millions)
Current assets:
Short-term investments
Other current assets(1)
Non-current assets:
Other assets(1)(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.
90
CORNING INCORPORATED - 2015 Annual Report (in millions)
Beginning balance
Unrealized gains (loss)
Transfer in (out) of level 3
Ending balance
Notes to Consolidated Financial Statements
Level 3 Roll-Forward – Other Assets
2015
2014
$
$
445
13
(212)
246
$
$
196
249
445
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.
On December 29, 2015, Corning and Samsung Display entered into
an agreement pursuant to which Corning exchanged the amount of
contingent consideration in excess of $300 million (net present fair value:
$246 million), as consideration for the incremental fair value associated
with a number of commercial agreements, including the amendment of
its long-term supply agreement with Samsung Display. As of December 29,
2015, the net present fair value of the contingent consideration receivable
was $458 million. The net present fair value of the commercial benefit
associated with the amended long-term supply agreement exceeds the
value exchanged by Corning pursuant to this agreement (net present fair
value: $212 million). Consequently, Corning reclassified this amount to the
other asset line of the Consolidated Balance Sheet and will amortize the
amount over the remaining term of the long-term supply agreement as
a reduction in revenue.
Additionally, as a result of the acquisitions of iBwave Solutions Inc. and the
fiber-optics business of Samsung Electronics Co., Ltd. in the first quarter
of 2015, the Company has contingent consideration that was measured
using unobservable (Level 3) inputs. As of December 31, 2015, the fair value
of the contingent consideration payable is $10 million.
There were no significant financial assets and liabilities measured on a
nonrecurring basis during the years ended December 31, 2015 and 2014.
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, 2015, 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 of Samsung Corning Precision Materials,
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
2013 Repurchase Program
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 (the “2013 ASR
agreement”) with JP Morgan Chase Bank, National Association, London
Branch (“JPMC”). Under the 2013 ASR agreement, 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 2013 ASR
agreement was completed. Corning received an additional 10.5 million
shares on January 31, 2014 to settle the 2013 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 2013 ASR agreement, less a discount.
In addition to the shares repurchased through the 2013 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.
91
CORNING INCORPORATED - 2015 Annual Report Notes to Consolidated Financial Statements
March 2014 Repurchase Program
2015 Repurchase Programs
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 “March 2014 Repurchase Program”),
Corning entered into an ASR agreement (the “2014 ASR agreement”) with
Citibank N.A. (“Citi”). Under the 2014 ASR agreement, 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. The 2014 ASR agreement was
completed on May 28, 2014, and Corning received an additional 8.7 million
shares to settle the 2014 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 2014 ASR
agreement, less a discount.
In addition to the shares repurchased through the 2014 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 March 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.
December 2014 Repurchase Program
On December 3, 2014, Corning’s Board of Directors authorized the
repurchase of up to $1.5 billion shares of common stock (the “December
2014 Repurchase Program”) between the date of announcement and
December 31, 2016. In the year ended December 31, 2015, we repurchased
70.4 million shares of common stock for approximately $1.5 billion as part
of the December 2014 Repurchase Program, which was completed in the
third quarter of 2015.
On July 15, 2015, Corning’s Board of Directors approved a $2 billion
share repurchase program (the “July 2015 Repurchase Program”) and
on October 26, 2015 the Board of Directors authorized an additional
$4 billion share repurchase program (together with the July 2015
Repurchase Program, the “2015 Repurchase Programs”). The 2015
Repurchase Programs permit Corning to effect repurchases from time
to time through a combination of open market repurchases, privately
negotiated transactions, advance
repurchase agreements and/or
other arrangements.
On October 28, 2015, Corning entered into an ASR with Morgan Stanley
& Co. LLC (“Morgan Stanley”) to repurchase $1.25 billion of Corning’s
common stock (the “2015 ASR agreement”). The 2015 ASR was executed
under the July 2015 Repurchase Program. Under the 2015 ASR agreement,
Corning made a $1.25 billion payment to Morgan Stanley on October 29,
2015 and received an initial delivery of approximately 53.1 million shares
of Corning common stock from Morgan Stanley on the same day. The
payment to Morgan Stanley was recorded as a reduction to shareholders’
equity, consisting of $1 billion increase in treasury stock, which reflects
the value of the initial 53.1 million shares received upon execution, and
a $250 million decrease in other-paid-in capital, which reflects the value
of the stock held back by Morgan Stanley pending final settlement. On
January 19, 2016, the 2015 ASR agreement was completed. Corning received
an additional 15.9 million shares on January 22, 2016 to settle the 2015 ASR
agreement. In total, Corning purchased 69 million shares based on the
average daily volume weighted-average price of Corning’s common stock
during the term of the 2015 ASR agreement, less a discount.
In addition to the shares repurchased through the 2015 ASR agreement,
we repurchased 98 million shares of common stock on the open market
for approximately $2 billion, as part of the December 2014 Repurchase
Program and the July 2015 Repurchase Program, resulting in a total of
151 million shares repurchased during 2015.
The following table presents changes in capital stock for the period from January 1, 2013 to December 31, 2015 (in millions):
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)
Shares issued to benefit plans and for option exercises
Shares purchased for treasury
Other, net
Balance at December 31, 2015
Common stock
Treasury stock
Shares
Par value
Shares
Cost
1,649
12
1,661
11
1,672
9
$
$
825
6
831
5
$
836
4
1,681
$
840
(179)
$
(2,773)
(82)
(1)
(262)
(135)
(1)
(398)
(151)
(2)
(551)
(1)
(1,316)
(9)
$
(4,099)
(2)
(2,612)
(14)
$
(6,727)
(1)
(2,978)
(19)
$
(9,725)
(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 since 2014.
92
CORNING INCORPORATED - 2015 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) credits
Net unrealized
gains (losses) on
investments
Net unrealized
gains (losses) on
designated hedges
Accumulated other
comprehensive
income (loss)
Balance at December 31, 2012
Other comprehensive income before
reclassifications(4)
Amounts reclassified from accumulated
other comprehensive income(2)
Equity method affiliates(3)
Net current-period other comprehensive
(loss) income
Balance at December 31, 2013
Other comprehensive income before
reclassifications(5)
Amounts reclassified from accumulated
other comprehensive income(2)
Equity method affiliates(3)
Net current-period other comprehensive
(loss) income
Balance at December 31, 2014
Other comprehensive income before
reclassifications(6)
Amounts reclassified from accumulated
other comprehensive income(2)
Equity method affiliates(3)
Net current-period other comprehensive
(loss) income
Balance at December 31, 2015
$
$
$
$
$
$
$
1,174
(756)
74
(682)
492
(821)
(136)
(116)
(1,073)
(581)
(487)
(103)
(590)
(1,171)
$
$
$
$
$
$
$
(820)
283
(10)
119
392
(428)
(172)
18
(127)
(281)
(709)
(59)
105
75
121
(588)
$
$
$
$
$
$
$
(16)
1
(1)
2
2
(14)
4
1
(6)
(1)
(15)
1
1
(14)
$
$
$
$
$
$
$
18
56
(81)
1
(24)
(6)
10
(6)
4
(2)
(18)
(20)
2
(36)
(38)
$
$
$
$
$
$
$
356
(416)
(92)
196
(312)
44
(979)
(123)
(249)
(1,351)
(1,307)
(564)
86
(26)
(504)
(1,811)
(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 expense of $(197) million, including $(33) million related to the hedges component and $(164) million related to the
retirement plans component.
(5) 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.
(6) Amounts are net of total tax benefit of $41 million, including $35 million related to the retirement plans component and $6 million related to the
hedges component.
93
CORNING INCORPORATED - 2015 Annual Report Notes to Consolidated Financial Statements
(In millions)
Reclassifications Out of Accumulated Other Comprehensive Income (AOCI) by Component(1)
Details about AOCI Components
Foreign currency translation adjustment
Amortization of net actuarial (loss) gain
Amortization of prior service credit
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.
Amount reclassified from AOCI
Years ended December 31,
2014
2013
2015
$
$
$
$
$
$
$
$
136
136
(29)
(29)
11
(18)
(1)
(1)
3
7
10
(4)
6
123
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(168)
1
(167)
62
(105)
(1)
(1)
20
6
26
(6)
20
(86)
Affected line item
in the consolidated
statements of income
Transaction-related gain, net
Net of tax
15 (2)
(2)
1
16 Total before tax
(6) Tax benefit (expense)
10 Net of tax
1 Other (expense) income, net
Tax expense
1 Net of tax
Sales
38 Cost of sales
91 Other (expense) income, net
129 Total before tax
(48) Tax expense
81 Net of tax
92 Net of tax
(2) These accumulated other comprehensive income components are included in net periodic pension cost. See Note 13 (Employee Retirement Plans) to
the Consolidated Financial Statements 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
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
Years ended December 31,
2015
2014
2013
$
$
$
$
$
$
$
$
1,339
98
1,241
98
1,339
1,219
9
115
1,343
1.02
1.00
22
15
37
2,472
$
1,961
$
$
$
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
94
CORNING INCORPORATED - 2015 Annual Report Notes to Consolidated Financial Statements
19. Share-based Compensation
Stock Compensation Plans
Corning maintains long-term incentive plans (the Plans) for key
employees 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, 2015, there were
approximately 72 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 $46 million, $58 million and
$54 million was disclosed in operating activities on the Company’s
Consolidated Statements of Cash Flows for the years ended December 31,
2015, 2014 and 2013, respectively.
Stock Options
Corning’s stock option plans provide non-qualified and incentive stock
options to purchase authorized but unissued shares, or treasury shares,
at the market price on the grant date and generally become exercisable
in installments from one to five years from the grant date. The maximum
term of non-qualified and incentive stock options is 10 years from the
grant date.
The following table summarizes information concerning stock options outstanding including the related transactions under the stock option plans for
the year ended December 31, 2015:
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, 2014
Granted
Exercised
Forfeited and expired
Options outstanding as of December 31, 2015
Options expected to vest as of December 31, 2015
Options exercisable as of December 31, 2015
48,724
1,578
(6,340)
(1,224)
42,738
42,696
35,245
$
18.94
21.48
16.13
20.78
19.40
19.40
19.86
3.93
3.93
3.08
$
83,023
82,992
65,817
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, 2015,
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, 2015, was
approximately 13 million.
The weighted-average grant-date fair value for options granted for the
years ended December 31, 2015, 2014 and 2013 was $7.99, $8.29 and $5.02,
respectively. The total fair value of options that vested during the years
ended December 31, 2015, 2014 and 2013 was approximately $36 million,
$16 million and $29 million, respectively. Compensation cost related to
stock options for the years ended December 31, 2015, 2014 and 2013, was
approximately $14 million, $22 million and $25 million, respectively.
As of December 31, 2015, there was approximately $7 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 $102 million
for the year ended December 31, 2015, 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, 2015, 2014 and 2013 was approximately $48 million, $69 million and
$55 million, respectively. The income tax benefit realized from share-based
compensation was not significant for the years ended December 31, 2015
and 2014. There were no income tax benefits realized from share-based
compensation for the year ended December 31, 2013, due to net operating
loss and credit carryforwards available to the Company. Refer to Note 6
(Income Taxes).
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.
95
CORNING INCORPORATED - 2015 Annual Report Notes to Consolidated Financial Statements
The following inputs were used for the valuation of option grants under our Stock Option Plans:
2015
2014
2013
43.6-44.9%
45.4-46.2%
46.5-47.4%
43.6-44.9%
45.4-46.2%
46.6-47.3%
1.92-2.68%
1.90-2.09%
2.35-3.02 %
1.9-2.1%
1.9-2.1%
7.2-7.2
0.6-0.6%
2.0-2.2%
2.0-2.2%
7.2-7.2
0.5-0.5%
0.8-2.2%
1.1-2.2%
5.8-7.2
0.4-4.1%
Shares
(000’s)
Weighted-average
grant-date fair value
Non-vested shares and share
units at December 31, 2014
Granted
Vested
Forfeited
Non-vested shares and share
units at December 31, 2015
5,737
1,815
(2,238)
(72)
5,242
$
15.43
21.49
14.35
21.11
17.91
As of December 31, 2015, there was approximately $27 million of
unrecognized compensation cost related to non-vested time-based
restricted stock and restricted stock units compensation arrangements
granted under the Plan. The cost is expected to be recognized over a
weighted-average period of 2.3 years. The total fair value of time-based
restricted stock that vested during the years ended December 31, 2015,
2014 and 2013 was approximately $32 million, $32 million and $29 million,
respectively. Compensation cost related to time-based restricted stock
and restricted stock units was approximately $32 million, $36 million
and $29 million for the years ended December 31, 2015, 2014 and
2013, respectively.
and a glass tubing business used in the pharmaceutical packaging
industry. This segment also includes Corning Precision Materials’ non-
LCD business and new product lines and development projects such as
laser technologies, advanced flow reactors and adjacency businesses in
pursuit of thin, strong glass, as well as certain corporate investments such
as Eurokera and Keraglass equity affiliates.
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.
Expected volatility
Weighted-average volatility
Expected dividends
Risk-free rate
Average risk-free rate
Expected term (in years)
Pre-vesting departure rate
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 is based on the grant date closing price of
the Company’s stock.
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, 2014, and changes which occurred during the year ended
December 31, 2015:
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
labware,
equipment, media and reagents to provide workflow solutions for
scientific applications.
– manufactures glass and plastic
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’s Pharmaceutical
Technologies business, which consists of a pharmaceutical glass business
96
CORNING INCORPORATED - 2015 Annual Report Notes to Consolidated Financial Statements
The following provides historical segment information as described above:
SEGMENT INFORMATION
(in millions)
For the year ended
December 31, 2015
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)(4)
Investment in affiliated companies, at equity
Segment assets(5)
Capital expenditures
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)(4)
Investment in affiliated companies, at equity
Segment assets(5)
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(3)
Income tax (provision) benefit
Net income (loss)(4)
Investment in affiliated companies, at equity
Segment assets(5)
Capital expenditures
Display
Technologies
Optical
Communications
Environmental
Technologies
Specialty
Materials
Life
Sciences
All
Other
Total
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,086
605
105
(9)
(499)
1,095
43
8,344
594
3,851
676
138
45
(20)
(608)
1,396
63
8,863
492
2,545
481
84
7
357
(337)
1,293
3,666
9,501
350
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,980
163
32
138
(1)
(115)
237
1
1,783
171
2,652
154
10
141
17
(111)
194
2
1,737
145
2,326
147
10
140
12
2
(96)
189
3
1,654
105
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,053
125
93
(78)
161
32
1,288
117
1,092
119
91
2
(89)
178
32
1,297
173
919
120
89
1
1
(63)
127
31
1,230
196
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,107
112
113
16
(85)
167
1,407
88
1,205
113
140
(1)
(75)
138
1,288
104
1,170
137
144
19
4
(88)
181
10
1,333
62
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
821
60
20
23
(30)
61
514
32
862
60
22
22
1
(33)
67
553
30
851
57
21
20
4
(34)
68
551
51
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
64 $
43 $
1 $
186 $
$
17 $
89 $
(202) $
261 $
9,111
1,108
53
658
15
8
(718)
1,519
337
738 $
14,074
57 $
1,059
53 $
31 $
$
177 $
6 $
18
83 $
(198) $
214 $
9,715
1,153
32
709
68
(833)
1,775
311
518 $
14,256
101 $
1,045
8 $
7,819
18 $
$
116 $
8 $
(24) $
59 $
960
31
593
51
340
(559)
(165) $
1,693
232 $
3,942
422 $
14,691
55 $
819
(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 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.
(4) 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.
(5) Segment assets include inventory, accounts receivable, property, plant and equipment, net of accumulated depreciation, and associated equity
companies and cost investments.
97
CORNING INCORPORATED - 2015 Annual Report
Notes to Consolidated Financial Statements
For the year ended December 31, 2015, 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 62% of total segment sales.
• In the Optical Communications segment, two customers accounted for 22% of total segment sales.
• In the Environmental Technologies segment, three customers accounted for 86% of total segment sales.
• In the Specialty Materials segment, three customers accounted for 56% of total segment sales.
• In the Life Sciences segment, two customers accounted for 46% 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 follows (in millions):
Net income of reportable segments
Net loss of All Other
Unallocated amounts:
Net financing costs(1)
Share-based compensation expense
Exploratory research
Corporate contributions
Equity in earnings of affiliated companies, net of impairments(2)
Unrealized (loss) gain on foreign currency hedges related to translated earnings
Income tax benefit (provision)
Other corporate items
Net income
2015
$
Years ended December 31,
2014
$
1,973
(198)
(113)
(58)
(102)
(43)
269
1,095
(267)
(84)
1,721
(202)
(111)
(46)
(109)
(52)
291
(573)
568
(148)
2013
$
1,858
(165)
(66)
(54)
(112)
(42)
207
368
(1)
(32)
$
1,339
$
2,472
$
1,961
(1) Net financing costs include interest income, interest expense, and interest costs and investment gains and losses associated with benefit plans.
(2) Primarily represents the equity earnings of Dow Corning.
A reconciliation of reportable segment assets to consolidated total 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
December 31,
2015
2014
2013
$
13,336
$
13,738
$
14,269
738
5,488
1,638
1,692
5,655
518
7,402
1,490
1,657
5,258
422
6,349
1,595
1,594
4,249
$
28,547
$
30,063
$
28,478
(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.
98
CORNING INCORPORATED - 2015 Annual Report Selected financial information concerning the Company’s product lines and reportable segments follow (in millions):
Notes to Consolidated Financial Statements
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
Years Ended December 31,
2015
2014
2013
$
3,086
$
3,851
$
2,545
2,194
786
2,980
528
525
1,053
810
297
1,107
512
309
821
64
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
$
9,111
$
9,715
$
7,819
99
CORNING INCORPORATED - 2015 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
2015
2014
2013
Net sales(2)
Long-lived
assets(1)
Net sales(2)
Long-lived
assets(1)
Net sales(2)
Long-lived
assets(1)
$
2,719
$
8,241
$
2,275
$
7,998
$
2,061
$
7,170
244
37
3,000
440
841
1,869
1,501
331
4,982
326
90
164
311
891
55
34
89
149
9,111
$
144
135
8,520
1,160
2,301
1,036
3,552
98
8,147
189
263
47
987
1,486
36
36
311
35
2,621
608
1,092
1,893
1,882
308
5,783
397
81
187
369
1,034
67
35
102
175
50
8,048
1,311
2,005
1,115
3,595
109
8,135
217
277
47
1,109
1,650
36
36
19
308
23
2,392
621
1,376
1,916
96
278
4,287
337
79
165
280
861
77
37
114
165
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
$
18,189
$
9,715
$
17,888
$
7,819
$
17,318
(1) Long-lived assets primarily include investments, plant and equipment, goodwill and other intangible assets. In 2014 and 2015, assets in the U.S.
include the investment in Dow Corning. In 2013, 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.
100
CORNING INCORPORATED - 2015 Annual Report Valuation Accounts and Reserves
(in millions)
Year ended December 31, 2015
Balance at
beginning of period
Additions
Net deductions
and other
Balance at end
of period
Doubtful accounts and allowances
Deferred tax valuation allowance
Accumulated amortization of purchased intangible assets
Reserves for accrued costs of business restructuring
$
$
$
$
47
298
216
44
$
$
$
1
30
49
$
$
90
41
$
$
$
$
48
238
265
3
Year ended December 31, 2014
Balance at
beginning of period
Additions
Net deductions
and other
Balance at end
of period
Doubtful accounts and allowances
Deferred tax valuation allowance
Accumulated amortization of purchased intangible assets
Reserves for accrued costs of business restructuring
$
$
$
$
28
286
185
44
$
$
$
$
19
186
31
49
$
$
174
49
$
$
$
$
47
298
216
44
Year ended December 31, 2013
Balance at
beginning of period
Additions
Net deductions
and other
Balance at end
of period
Doubtful accounts and allowances
Deferred tax valuation allowance
Accumulated amortization of purchased intangible assets
Reserves for accrued costs of business restructuring
$
$
$
$
26
210
154
42
$
$
$
$
2
80
31
41
$
$
4
39
$
$
$
$
28
286
185
44
101
CORNING INCORPORATED - 2015 Annual Report
Quarterly Operating Results
(unaudited) (In millions, except per share amounts)
2015
First quarter
Second quarter
Third quarter
Fourth quarter
Total year
Net sales
Gross margin
Equity in earnings of affiliated companies
(Provision) benefit for income taxes
Net income attributable to
Corning Incorporated
Basic earnings per common share
Diluted earnings per common share
$
$
$
$
$
$
$
2,265
929
94
(86)
407
0.30
0.29
$
$
$
$
$
$
$
2,343
975
62
(110)
496
0.38
0.36
$
$
$
$
$
$
$
2,272
892
39
(6)
212
0.16
0.15
$
$
$
$
$
$
$
2,231
857
104
55
224
0.17
0.17
$
$
$
$
$
$
$
9,111
3,653
299
(147)
1,339
1.02
1.00
2014
First quarter
Second quarter
Third quarter
Fourth quarter
Total year
Net sales
Gross margin
Restructuring, impairment and other 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
86
(180)
301
0.21
0.20
$
$
$
$
$
$
$
$
2,482
1,032
34
62
(172)
169
0.11
0.11
$
$
$
$
$
$
$
2,540
1,089
95
(395)
1,014
0.77
0.72
$
$
$
$
$
$
$
$
2,404
996
20
23
(349)
988
0.76
0.70
$
$
$
$
$
$
$
$
9,715
4,052
71
266
(1,096)
2,472
1.82
1.73
102
CORNING INCORPORATED - 2015 Annual Report
This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. Annual MeetingThe annual meeting of shareholders will be held on Thursday, April 28, 2016, in Corning, New York. A formal notice of the meeting and a proxy statement will be mailed to shareholders on or about March 15, 2016. 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/2016-proxy. A summary report of the proceedings at the annual meeting will be available without charge upon written request to Corporate Secretary, Corning Incorporated, One Riverfront Plaza, Corning, NY 14831.Additional InformationA copy of Corning’s 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) is available 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 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 Company P.O. Box 30170, College Station, TX 77842-3170 Telephone: 800.255.0461 Website: www.computershare.com/contactusIndependent AuditorsPricewaterhouseCoopers LLP 300 Madison Ave., New York, NY 10017Executive CertificationsCorning submitted its 2015 Annual CEO Certification to the NYSE in compliance with NYSE corporate governance listing standards, and filed with the SEC its Sarbanes Oxley Act 302 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/worldwide/en/legal-notices.htmlCorning is an equal opportunity employer.Printed in the USA“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995The 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, Chinese renminbi 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, principally at Dow Corning;- 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 isfurnished in connection with any offering of securities or for the purpose of promoting or influencing the sale of securities. 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
Retired Executive Vice President
& Chief Financial Officer
NIKE, Inc.
Beaverton, OR
(1) (4)
Stephanie A. Burns
Retired Chairman
& Chief Executive Officer
Dow Corning Corporation
Sunset, SC
(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.
Retired Vice Chairman
of Investment Banking
JPMorgan Chase & Co.
New York, NY
(4) (5) (6)
Deborah A. Henretta
Retired Group President
E-Business
Procter & 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
Vice President
Facebook, Inc.
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)
Officers
Management Committee
James P. Clappin
President —
Corning Glass Technologies
Martin J. Curran
Executive Vice President
& Innovation Officer
Jeffrey W. Evenson
Senior Vice President
& Chief Strategy Officer
Lisa Ferrero
Senior Vice President
& Chief Administrative Officer
Clark S. Kinlin
Executive Vice President —
Corning Optical Communications
Lawrence D. McRae
Vice Chairman & Corporate
Development Officer
David L. Morse
Executive Vice President
& Chief Technology Officer
Eric S. Musser
Executive Vice President —
Corning Technologies
& International
Christine M. Pambianchi
Senior Vice President —
Human Resources
Lewis A. Steverson
Senior Vice President
& General Counsel
R. Tony Tripeny
Senior Vice President
& Chief Financial Officer
Wendell P. Weeks
Chairman of the Board,
Chief Executive Officer
& President
Other Officers
Thomas Appelt
President —
Corning International
Emerging Markets
Madapusi K. Badrinarayan
Vice President
& Technology Executive —
Science & Technology
John P. Bayne, Jr.
Vice President
& General Manager —
High Performance Displays
Thomas R. Beall
Vice President
& Chief Intellectual
Property Counsel
Stefan Becker
Vice President
& Operations Controller
Michael A. Bell
Senior Vice President
& General Manager,
Optical Connectivity —
Corning Optical Communications
Gary S. Calabrese
Senior Vice President —
Global Research
Thomas G. Capek
Vice President
& Chief Engineer
Cheryl C. Capps
Vice President —
Global Supply Management
Mark S. Clark
Vice President
& Chief Information Officer
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
Kimberly S. Hartwell
Senior Vice President
& Chief Commercial Officer —
Corning Optical Communications
Clifford L. Hund
General Manager
& President —
Corning East Asia
Timothy L. Hunt
Vice President & Director —
Corporate Product
& Process Development
John R. Igel
Vice President
& General Manager —
Corning Optical Communications
Linda E. Jolly
Vice President
& Corporate Secretary
Wilfred M. Kenan, Jr.
Vice President
& Manufacturing Manager —
Environmental Technologies
Judith A. Lemke
Vice President — Tax
John P. MacMahon
Senior Vice President —
Global Compensation
& Benefits
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
Mark S. Rogus
Senior Vice President
& Treasurer
Edward A. Schlesinger
Vice President
& Corporate Controller
John M. Sharkey
Vice President
& Chief of Staff to the CEO
James R. Steiner
Senior Vice President
& General Manager —
Specialty Materials
Ronald L. Verkleeren
Vice President
& General Manager —
Corning Pharmaceutical
Technologies
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
John Z. Zhang
General Manager —
Corning Display Technologies
Board Committees
(1) Audit; (2) Compensation; (3) Corporate Relations; (4) Finance; (5) Nominating & Corporate Governance; (6) Executive
© Corning Incorporated 2016. All Rights Reserved.
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Corning Incorporated
One Riverfront Plaza
Corning, NY 14831-0001
U.S.A.
www.corning.com
02AR40015EN
© 2016 Corning Incorporated. All Rights Reserved.