Corning Incorporated
One Riverfront Plaza
Corning, NY 14831-0001
U.S.A.
www.corning.com
02AR40016EN
© 2017 Corning Incorporated. All Rights Reserved.
Cover: Glass is remarkably versatile. To date, scientists have combined silica with approximately
50 elements to develop unique glass compositions. But we have the potential to use the entire
Periodic Table in countless combinations. To drive that point home, imagine you’re holding
an Oxford English Dictionary in your hands and think of how many words we can make using
only 26 letters. That’s why we believe some of the greatest glass innovations are still ahead.
Corning is one of the world’s
leading innovators in materials
science. For more than 165 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.
(1) (4)
Stephanie A. Burns
Retired Chairman
& Chief Executive Officer
Dow Corning Corporation
(1) (3)
John A. Canning Jr.
Co-Founder & Chairman
Madison Dearborn Partners, LLC
(4) (5) (6)
Richard T. Clark
Retired Chairman, President
& Chief Executive Officer
Merck & Co., Inc.
(2) (5) (6)
Robert F. Cummings Jr.
Retired Vice Chairman
of Investment Banking
JPMorgan Chase & Co.
(4) (5) (6)
Deborah A. Henretta
Retired Group President
E-Business
Procter & Gamble
(1) (3)
Daniel P. Huttenlocher
Dean and Vice Provost
Cornell University
New York City Tech Campus
(1) (4)
Kurt M. Landgraf
Retired President
& Chief Executive Officer
Educational Testing Service
(1) (2) (6)
Kevin J. Martin
Vice President
Facebook, Inc.
(3) (5)
Deborah D. Rieman
Retired Executive Chairman
MetaMarkets Group
(1) (2)
Hansel E. Tookes II
Retired Chairman
& Chief Executive Officer
Raytheon Aircraft Company
(2) (5) (6)
Wendell P. Weeks
Chairman of the Board,
Chief Executive Officer
& President
Corning Incorporated
(6)
Mark S. Wrighton
Chancellor
& Professor of Chemistry
Washington University
in St. Louis
(1) (4)
Officers
Management Committee
James P. Clappin
President —
Corning Glass Technologies
Stefan Becker
Vice President
& Operations Controller
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
Jaymin Amin
Vice President —
Technology
Thomas Appelt
President —
Corning International
Emerging Markets
Madapusi K. Badrinarayan
Vice President
& Technology Executive —
Science & Technology
John P. Bayne Jr.
Vice President
& General Manager —
Corning® Gorilla® Glass
Specialty Materials
Thomas R. Beall
Vice President
& Chief Intellectual
Property Counsel
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
Laura J. Coleman
Vice President —
Litigation
Kevin G. Corliss
Vice President
Chief Compliance Officer
& Director —
Employee Relations
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
Timothy L. Hunt
Vice President & Director —
Corporate Product
& Process Development
John R. Igel
Vice President
& General Manager —
Corning Optical Communications
Board Committees
(1) Audit; (2) Compensation; (3) Corporate Relations; (4) Finance; (5) Nominating & Corporate Governance; (6) Executive
© Corning Incorporated 2017. All Rights Reserved.
Linda E. Jolly
Vice President
& Corporate Secretary
William L. Juan
Vice President —
Commercial Law
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
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
.
1
0
2
0
1
5
Introduced Strategy
& Capital Allocation
Framework
1
1
.
2
0
1
5
Acquired Gerresheimer’s
pharmaceutical glass
tubing business
To Our Shareholders:
Corning marked its 165th birthday in 2016. When you are
at the helm of an institution that spans three centuries,
you learn to take the long view. That means rewarding
shareholders in the near term, while protecting the interests
of all stakeholders long term. It means optimizing today’s
businesses, while investing to create tomorrow’s growth
drivers. And it means making strategic choices to ensure
sustainable success and ongoing relevance in an evolving
and highly competitive global marketplace.
That’s exactly what Corning’s Management Committee
was doing when it laid out the company’s Strategy and
Capital Allocation Framework in late 2015. (Details follow.)
Stakeholders’ assessment of Corning’s 2016 performance
will depend on their vantage point. An examination of the
year’s financial results reveals core sales that were down
slightly from 2015. A broader view shows a company that
strengthened its industry leadership and ended the year
strong. And the long view reveals strong progress toward
the targets Corning said it would achieve within a four-year
period.
Although 2016 was not a growth year for us, we were
extremely pleased with several key achievements. We
strengthened Corning’s portfolio with strategic transac-
tions. We advanced major innovation programs. And we
returned cash to shareholders through stock buybacks and
a double-digit dividend increase. As we look ahead, we are
confident in Corning’s ability to deliver sustainable secular
growth over the long term.
2016 Financial Results
Before I review our execution against the Framework, here’s
a closer look at Corning’s financial performance.
Core sales were $9.7 billion, down 1 percent from 2015,
while core earnings were $1.8 billion, down approximately
6 percent year over year. However, core earnings per share
of $1.55 were up 11 percent from 2015, driven by share
repurchases as part of our strategy to create value for
investors.
The first quarter was our weakest, driven by a combination
of slow demand in some markets and a short-term execution
issue. We told investors our performance would improve as
the year progressed, and we delivered on that commitment
with strong year-over-year growth in the second half.
n
n
In Display Technologies, volume was up despite a matur-
ing market for LCD televisions and lower-than-expected
demand in the IT segment. Core sales were down year
over year due to price declines, which exceeded volume
growth. However, price declines were more moderate
than in 2015, and Corning continues to lead competitors
on sales and profitability by a wide margin.
In Optical Communications, strong demand for fiber-
to-the-home technology was offset by problems with
a manufacturing software implementation early in the
year. We resolved the issue in the second quarter and
believe that the sales growth in the third and fourth
quarters reflects the true strength of this segment.
.
1
2
2
0
1
5
Announced
strategic realignment
of Dow Corning
.
1
2
2
0
1
5
Announced Corning®
Gorilla® Glass for
Automotive on Ford GT
1
.
2
0
1
6
1
.
Formed new joint venture
with Saint-Gobain Sekurit
for lightweight automotive
glazing
2
0
1
6
Completed $1.25 billion
accelerated share
repurchase program
.
2
2
0
1
6
Increased quarterly
dividend 12.5% to $0.135
per share
n Specialty Materials sales were lower than expected due
to weakness in the smartphone and tablet markets.
However, the year finished strong, driven by the
introduction of new products in the Corning® Gorilla®
Glass family.
n
In Environmental Technologies, record sales of automo-
tive emissions-control products beat expectations and
offset anticipated slow sales of products for heavy-duty
applications in North America and China.
n Life Sciences sales were up, driven by growth in the
bioprocess segment and in Greater China.
Our Strategy and Capital Allocation Framework
I described Corning’s Strategy and Capital Allocation
Framework in my last letter, but here’s a quick recap. The
Framework articulates Corning’s plan for leveraging its
financial strength and focusing its portfolio to deliver value
over the next several years.
Utilizing Our Financial Strength
We expect to generate and deploy $26 – $30 billion through
2019. We will invest $10 billion to grow and sustain our
leadership. We also plan to distribute more than $12.5 billion
to our shareholders through share repurchases and annual
dividend increases of at least 10 percent. Note that we
increased this distribution target from our original plan of
$10 billion, which underscores our confidence in Corning’s
future operating cash flows.
Focusing Our Portfolio
The Framework focuses our portfolio on a set of reinforcing
capabilities with strong inter-connections. Our best-in-
the-world capabilities include three core technologies
(glass science, ceramics science, and optical physics),
four manufacturing and engineering platforms (vapor
deposition, fusion, extrusion, and precision forming), and
five market-access platforms (optical communications,
display, mobile consumer electronics, automotive, and
life sciences vessels). We direct 80 percent or more of our
resources to opportunities that draw from at least two of
these capabilities sets. We believe this approach reduces
the cost of innovation, increases our likelihood of success,
and creates higher barriers to entry for our competitors.
Focusing our portfolio also means we will make strategic
acquisitions that enhance our product portfolio or increase
our market reach, as well as divestitures that deliver value
for shareholders.
The Framework underscores our commitment to good
capital stewardship, while also honoring our commitment
to life-changing innovation. However, we follow Winston
Churchill’s sage advice: “However beautiful the strategy,
you should occasionally look at the results.” We have
been closely measuring our progress and providing
regular updates to investors so they can assess Corning’s
performance and outlook for themselves.
Since introducing the Framework in late 2015, we have
distributed more than $6 billion to shareholders through
share repurchases and a 12.5 percent increase to our
quarterly dividend. We also announced a new $4 billion
share repurchase authorization in December 2016 and a
14.8 percent dividend increase in February 2017 as part of
our ongoing commitment to reward our investors.
Turning to our portfolio, we realigned our interest in Dow
Corning, which creates significant value for shareholders,
including unlocking $4.8 billion in cash. We strengthened our
position in Optical Communications with the acquisitions of
Alliance Fiber Optic Products, Inc. and STRAN Technologies.
We also entered into a joint venture with Saint-Gobain
Sekurit to develop automotive glazing solutions and seeded
a startup, Versalume, to commercialize our Fibrance® light-
diffusing fiber in a range of industries.
On the innovation front, we launched new products and
gained traction with customers on key growth initiatives.
n We expanded our cover-glass portfolio with Gorilla®
Glass 5, which offers superior drop performance versus
its predecessor and competitive technologies; Gorilla®
Glass SR+ for wearable devices; and Vibrant Gorilla®
Glass, which enables high-resolution designs for smart-
phones, tablets, and notebooks.
n Corning Iris™ Glass was named a “Display Component
of the Year” by the Society for Information Display.
Completed $1.25 billion
accelerated share
repurchase program
.
2
2
0
1
6
Increased quarterly
dividend 12.5% to $0.135
per share
.
6
2
0
1
6
Raised potential
shareholder distributions
through 2019 to >$12.5
billion
.
6
2
0
1
6
Acquired Alliance Fiber
Optic Products, Inc.
.
6
2
0
1
6
Completed realignment
of Dow Corning
Focusing Our Portfolio
The Framework focuses our portfolio on a set of reinforcing
capabilities with strong inter-connections. Our best-in-
the-world capabilities include three core technologies
(glass science, ceramics science, and optical physics),
four manufacturing and engineering platforms (vapor
deposition, fusion, extrusion, and precision forming), and
five market-access platforms (optical communications,
display, mobile consumer electronics, automotive, and
life sciences vessels). We direct 80 percent or more of our
resources to opportunities that draw from at least two of
these capabilities sets. We believe this approach reduces
the cost of innovation, increases our likelihood of success,
and creates higher barriers to entry for our competitors.
Focusing our portfolio also means we will make strategic
acquisitions that enhance our product portfolio or increase
our market reach, as well as divestitures that deliver value
for shareholders.
The Framework underscores our commitment to good
capital stewardship, while also honoring our commitment
to life-changing innovation. However, we follow Winston
Churchill’s sage advice: “However beautiful the strategy,
you should occasionally look at the results.” We have
been closely measuring our progress and providing
regular updates to investors so they can assess Corning’s
performance and outlook for themselves.
Since introducing the Framework in late 2015, we have
distributed more than $6 billion to shareholders through
share repurchases and a 12.5 percent increase to our
quarterly dividend. We also announced a new $4 billion
share repurchase authorization in December 2016 and a
14.8 percent dividend increase in February 2017 as part of
our ongoing commitment to reward our investors.
Turning to our portfolio, we realigned our interest in Dow
Corning, which creates significant value for shareholders,
including unlocking $4.8 billion in cash. We strengthened our
position in Optical Communications with the acquisitions of
Alliance Fiber Optic Products, Inc. and STRAN Technologies.
We also entered into a joint venture with Saint-Gobain
Sekurit to develop automotive glazing solutions and seeded
a startup, Versalume, to commercialize our Fibrance® light-
diffusing fiber in a range of industries.
n We have won the majority of platforms to date for gas
particulate filters.
n And we continue to expand the opportunities for
Gorilla Glass in the automotive market. Our first
windshield, sunroof, and backlite windows went into
series production, and we have been selected for
multiple auto interior jobs. The 2016 Paris Auto Show
featured a curved Gorilla Glass console and instrument
panel, and our Gorilla Glass-enabled concept car was
lauded as one of the highlights of the 2017 Consumer
Electronics Show.
The Framework has paid off from a shareholder perspec-
tive, as well. Between October 2015 (when we introduced
the Framework) and December 2016, Corning returned
50 percent versus 13.8 percent for the S&P 500 (both
dividend adjusted).
On the innovation front, we launched new products and
gained traction with customers on key growth initiatives.
Opportunities Ahead
n We expanded our cover-glass portfolio with Gorilla®
Glass 5, which offers superior drop performance versus
its predecessor and competitive technologies; Gorilla®
Glass SR+ for wearable devices; and Vibrant Gorilla®
Glass, which enables high-resolution designs for smart-
phones, tablets, and notebooks.
n Corning Iris™ Glass was named a “Display Component
of the Year” by the Society for Information Display.
As we look to 2017 and beyond, here are some of the ways
we are exploiting our distinctive capabilities to create new
revenue generators.
n
In Display Technologies, we’re leveraging our fusion
assets, glass science, and optical physics capabilities
to drive the next round of display innovations (better
images, ubiquitous touch, flexible displays, thinner
form factors) so we can continue creating and capturing
value as the LCD industry matures.
.
7
2
0
1
6
Launched $2 billion
accelerated share
repurchase program
.
7
2
0
1
6
Launched Corning®
Gorilla® Glass 5
.
8
2
0
1
6
Launched Corning®
Gorilla® Glass SR+
.
1
0
2
0
1
6
Paris Motor Show
featured Corning®
Gorilla® Glass for
Auto Interiors
.
1
2
2
0
1
6
Authorized new
$4 billion share
repurchase program
n
n
In Optical Communications, we expect significant
growth as we continue innovating for rapidly evolving
applications, such as fiber to the home, wireless
technology, and data centers.
The mobile consumer electronics market remains a
key focus for our Specialty Materials segment. We will
continue innovating to increase scratch resistance,
improve drop durability, enhance optical clarity, and
enable new form factors.
n Corning is well positioned to benefit from the
automotive industry’s trend toward cleaner, safer,
and more connected cars. The adoption of gasoline
particulate filters for gasoline direct-injection engines
has the potential to increase our sales opportunity
in our
per vehicle by a factor of three-to-four
Environmental Technologies segment. We’re also
pursuing opportunities for Gorilla Glass to reduce
vehicle weight, improve damage resistance, increase
interactivity, and add aesthetic appeal.
n
Life Sciences growth will be driven by bioprocessing,
cell therapy, and 3D cell culture. Our Pharmaceutical
Technologies business is also poised to capture an excit-
ing opportunity for next-generation glass packaging for
drug storage and delivery.
We are excited to have such rich growth opportunities
in diverse markets, and we believe that these initiatives
position us to resume growth in the medium term. Will they
all succeed? Probably not, but we are confident that many
will. And because we are leveraging existing capabilities
and resources to capture these opportunities, we reduce
the cost of our innovation investments, creating a very
attractive risk/reward ratio.
Living in the Glass Age
The demand for advanced glass will continue to grow as
more industries recognize its unique aesthetic and technical
attributes. Last year, I told you that Corning believes we’ve
entered a new era that can best be described as The Glass
Age. Several factors led us to that declaration, including
the ubiquity of glass and its central role in our day-to-day
lives, the increasing relevance of glass to a broad range of
industries, and the accelerating pace of glass innovation.
Recent developments lend credence to our claim.
Corning has helped bring to life many of the products
that we envisioned in our 2011 video A Day Made of Glass,
including infotainment walls, digital fitting rooms, and
connected cars. More and more of today’s leading innovators
are recognizing the potential of glass to solve some of
their toughest problems, which is reflected in the diversity
of the companies who approach us and the enthusiastic
response we received at the Consumer Electronics Show.
Additionally, the International Journal of Applied Glass
Science recently published a special issue titled “The Glass
Age,” featuring contributions from universities and research
institutions across the globe on today’s most cutting-
edge glass research, including technologies to enhance
healthcare, explore planetary and geological phenomena,
and augment reality. Taken in sum, this work reinforces the
fact that glass is not only one of the most transformative
materials in history, but also has the potential to solve some
of our world’s most urgent challenges in the future.
Corning is excited to be leading the effort to enhance
people’s lives with advanced glass technologies, and we
believe that some of the greatest glass innovations still
lie ahead.
Closing Thoughts
I began my letter by talking about the long view. I’ll end
with an example of what that looks like in action. More than
four decades ago, Corning invented low-loss optical fiber
and ushered in a communications revolution. Today, almost
3 billion kilometers of optical fiber are deployed worldwide,
and a single optical fiber link can carry up to 10 terabits
per second — enough to stream 2 million high-definition
videos simultaneously. In 2016, Corning won a Technical and
Engineering Emmy® Award for this pioneering invention
and its continued impact on the broadcasting industry.
That’s the kind of innovation we do at Corning — inventions
that transform industries and unleash significant new
capabilities. Our style of innovation also delivers long-
term value for Corning and its shareholders. Using glass
Paris Motor Show
featured Corning®
Gorilla® Glass for
Auto Interiors
.
1
2
2
0
1
6
Authorized new
$4 billion share
repurchase program
1
.
2
0
1
7
Corning’s Gorilla®
Glass-powered concept
car cited as one of the
highlights of the
Consumer Electronics
Show
.
2
2
0
1
7
Increased quarterly
dividend 14.8% to $0.155
per share
position us to resume growth in the medium term. Will they
all succeed? Probably not, but we are confident that many
will. And because we are leveraging existing capabilities
and resources to capture these opportunities, we reduce
the cost of our innovation investments, creating a very
attractive risk/reward ratio.
Living in the Glass Age
The demand for advanced glass will continue to grow as
more industries recognize its unique aesthetic and technical
attributes. Last year, I told you that Corning believes we’ve
entered a new era that can best be described as The Glass
Age. Several factors led us to that declaration, including
the ubiquity of glass and its central role in our day-to-day
lives, the increasing relevance of glass to a broad range of
industries, and the accelerating pace of glass innovation.
Recent developments lend credence to our claim.
Corning has helped bring to life many of the products
that we envisioned in our 2011 video A Day Made of Glass,
including infotainment walls, digital fitting rooms, and
connected cars. More and more of today’s leading innovators
are recognizing the potential of glass to solve some of
their toughest problems, which is reflected in the diversity
of the companies who approach us and the enthusiastic
response we received at the Consumer Electronics Show.
Additionally, the International Journal of Applied Glass
Science recently published a special issue titled “The Glass
Age,” featuring contributions from universities and research
institutions across the globe on today’s most cutting-
edge glass research, including technologies to enhance
healthcare, explore planetary and geological phenomena,
and augment reality. Taken in sum, this work reinforces the
fact that glass is not only one of the most transformative
materials in history, but also has the potential to solve some
of our world’s most urgent challenges in the future.
Corning is excited to be leading the effort to enhance
people’s lives with advanced glass technologies, and we
believe that some of the greatest glass innovations still
lie ahead.
Closing Thoughts
I began my letter by talking about the long view. I’ll end
with an example of what that looks like in action. More than
four decades ago, Corning invented low-loss optical fiber
and ushered in a communications revolution. Today, almost
3 billion kilometers of optical fiber are deployed worldwide,
and a single optical fiber link can carry up to 10 terabits
per second — enough to stream 2 million high-definition
videos simultaneously. In 2016, Corning won a Technical and
Engineering Emmy® Award for this pioneering invention
and its continued impact on the broadcasting industry.
science, ceramics science, and optical physics — along with
our expertise in vapor deposition, extrusion, and precision
forming — we have continually increased the performance,
lowered the cost, and improved the installation of optical
networks. This has allowed us to capture a disproportionate
share of the profits versus our competitors. And by
leveraging our best-in-the-world capabilities, we believe
we can grow our Optical Communications segment at
more than double the rate of the overall industry.
Innovation done our way isn’t easy. It isn’t always fast. And
it’s hard to predict the ultimate timing and returns. But I
believe it’s worth it, because our successes have a profound
impact on the world and create value for decades.
Corning has a 165-year track record of life-changing
innovation, and we are committed to another 165 years.
You can count on us to manage through challenges, deliver
on our commitments, and communicate our progress along
the way.
Sincerely,
That’s the kind of innovation we do at Corning — inventions
that transform industries and unleash significant new
capabilities. Our style of innovation also delivers long-
term value for Corning and its shareholders. Using glass
Wendell P. Weeks
Chairman of the Board,
Chief Executive Officer, and President
Financial Highlights:
In millions, except per share amounts
As reported — GAAP Core performance*
2016
2015
2014
2016
2015
2014
Net Sales
$ 9,390
$ 9,111
$ 9,715
$ 9,710
$ 9,800
$ 9,955
Net income attributable
to Corning Incorporated
$ 3,695
$ 1,339
$ 2,472
$ 1,774
$ 1,882
$ 2,023
Diluted earnings per common share
attributable to Corning Incorporated $ 3.23
$ 1.00
$ 1.73
$ 1.55
$ 1.40
$ 1.42
* 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 23 through 25 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 South Korean won foreign exchange
rates, as well as other items that do not reflect ongoing operations of the company.
Corning Incorporated 2016 Annual Report
Index
1
7
11
Business Description �����������������������������������������������������������������������������������������������������������������������������������������������������
Risk Factors ���������������������������������������������������������������������������������������������������������������������������������������������������������������������
Legal Proceedings ����������������������������������������������������������������������������������������������������������������������������������������������������������
Market for Registrant’s Common Equity, Related Stockholder Matters and
11
Issuer Purchases of Equity Securities �������������������������������������������������������������������������������������������������������������������������
13
Selected Financial Data (Unaudited) �������������������������������������������������������������������������������������������������������������������������
14
Management’s Discussion and Analysis of Financial Condition and Results of Operations �����������������������������
Quantitative and Qualitative Disclosures About Market Risks ����������������������������������������������������������������������������� 42
Management’s Annual Report on Internal Control Over Financial Reporting ���������������������������������������������������� 43
Report of Independent Registered Public Accounting Firm ����������������������������������������������������������������������������������� 44
Consolidated Statements of Income �������������������������������������������������������������������������������������������������������������������������� 45
Consolidated Statements of Comprehensive Income ��������������������������������������������������������������������������������������������� 46
Consolidated Balance Sheets �������������������������������������������������������������������������������������������������������������������������������������� 47
Consolidated Statements of Cash Flows ������������������������������������������������������������������������������������������������������������������� 48
Consolidated Statements of Changes in Shareholders’ Equity ������������������������������������������������������������������������������ 49
Notes to Consolidated Financial Statements ����������������������������������������������������������������������������������������������������������� 50
1� Summary of Significant Accounting Policies ����������������������������������������������������������������������������������������������������������������������������������������������� 50
2� Restructuring, Impairment and Other Charges ������������������������������������������������������������������������������������������������������������������������������������������� 55
3. Available-for-Sale Investments ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� 55
4� Significant Customers �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 55
5�
Inventories, Net of Inventory Reserves ���������������������������������������������������������������������������������������������������������������������������������������������������������� 55
6�
Income Taxes ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 56
7�
Investments ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 58
8� Acquisitions ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 61
9� Property, Plant and Equipment, Net of Accumulated Depreciation ��������������������������������������������������������������������������������������������������������� 64
10� Goodwill and Other Intangible Assets ���������������������������������������������������������������������������������������������������������������������������������������������������������� 65
11� Other Assets and Other Liabilities ����������������������������������������������������������������������������������������������������������������������������������������������������������������� 66
12� Debt �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 67
13� Employee Retirement Plans ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 68
14� Commitments, Contingencies and Guarantees ������������������������������������������������������������������������������������������������������������������������������������������� 75
15� Hedging Activities �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 76
16� Fair Value Measurements �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 78
17� Shareholders’ Equity ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 80
18� Earnings Per Common Share ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 83
19� Share-based Compensation ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 84
20� Reportable Segments ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 85
Valuation Accounts and Reserves ������������������������������������������������������������������������������������������������������������������������������� 90
Quarterly Operating Results ���������������������������������������������������������������������������������������������������������������������������������������� 91
This page intentionally left blank. Corning Incorporated and its consolidated subsidiaries are hereinafter sometimes referred to as the “Company,” the “Registrant,” “Corning,” or “we.”
This report contains forward-looking statements that involve a number of risks and uncertainties. These statements relate to our future plans,
objectives, expectations and estimates and may contain words such as “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” or similar expressions.
Our actual results could differ materially from what is expressed or forecasted in our forward-looking statements. Some of the factors that could
contribute to these differences include those discussed under “Forward-Looking Statements,” “Risk Factors,” “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” and elsewhere in this report.
Business Description
General
Corning traces its origins to a glass business established in 1851. The
present corporation was incorporated in the State of New York in
December 1936. The Company’s name was changed from Corning Glass
Works to Corning Incorporated on April 28, 1989.
Corning Incorporated is a leading innovator in materials science. For
more than 165 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 products at 98 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 panels.
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.
Corning has LCD glass manufacturing operations in 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 2016.
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 experience
puts us in a unique position to design and deliver optical solutions that
reach every edge of the communications network.
1
CORNING INCORPORATED - 2016 Annual Report Business Description
This segment is classified into two main product groupings – carrier
network and enterprise network. The carrier network group consists
primarily of products and solutions for optical-based communications
infrastructure for services such as video, data and voice communications.
The enterprise network group consists primarily of optical-based
communication networks sold to businesses, governments and
individuals for their own use.
Our carrier network product portfolio encompassed an array of optical
fiber products, including Vascade® submarine optical fibers for use in
submarine networks; LEAF® optical fiber for long-haul, regional and
metropolitan networks; SMF-28® ULL fiber for more scalable long-haul
and regional networks; SMF-28e+™ single-mode optical fiber that
provides additional transmission wavelengths in metropolitan and
access networks; ClearCurve® ultra-bendable single-mode fiber for use
in multiple-dwelling units and fiber-to-the-home applications; and
Corning® SMF-28® Ultra Fiber, designed for high performance across
the range of long-haul, metro, access, and fiber-to-the-home network
applications, combining the benefits of industry-leading attenuation
and improved macrobend performance in one fiber. A portion of our
optical fiber is sold directly to end users and third-party cablers globally.
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 wireless
platform. The 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. It provides virtually unlimited bandwidth,
and meets all of the wireless service needs of large-scale enterprises at a
lower cost than the typical DAS solution.
In addition to our optical-based portfolio, Corning’s carrier network
portfolio also contains select copper-based products including subscriber
demarcation, connection and protection devices, xDSL (different
variations of digital subscriber lines) passive solutions and outside plant
enclosures. In addition, Corning offers coaxial RF interconnects for the
cable television industry as well as for microwave applications for GPS,
radars, satellites, manned and unmanned military vehicles, and wireless
and telecommunications systems.
Our enterprise network 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
2
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 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.
Our optical fiber manufacturing facilities are located in North Carolina,
China and India. Cabling operations are located in North Carolina,
locations. Our
Germany, Poland, China and smaller
manufacturing operations for hardware and equipment products are
located in Texas, Arizona, Mexico, Brazil, Denmark, Germany, Poland,
Israel, Australia and China.
regional
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 32% of Corning’s
sales in 2016.
Environmental Technologies Segment
Corning’s Environmental Technologies segment manufactures ceramic
substrates and filter products for emissions control in mobile and
stationary applications around the world. In the early 1970s, Corning
developed an economical, high-performance cellular ceramic substrate
that is now the standard for catalytic converters in vehicles worldwide.
As global emissions control regulations tighten, Corning has continued
to develop more effective and durable ceramic substrate and filter
products for gasoline and diesel applications. Corning manufactures
substrate and filter products in New York, Virginia, China, Germany and
South Africa. Corning sells its ceramic substrate and filter products
worldwide to catalyzers and manufacturers of emission control systems
who then sell to automotive and diesel vehicle or engine manufacturers.
Although most sales are made to the emission control systems
manufacturers, the use of Corning substrates and filters is generally
required by the specifications of the automotive and diesel vehicle or
engine manufacturers.
Patent protection is important to the segment’s operations. The
segment has an extensive portfolio of patents relating to its products,
technologies and manufacturing processes. Corning is licensed to use
certain patents owned by others, which are also considered important
to the segment’s operations. Refer to the material under the heading
“Patents and Trademarks” for information relating to the Company’s
patents and trademarks.
The Environmental Technologies segment represented 11% of Corning’s
sales in 2016.
CORNING INCORPORATED - 2016 Annual Report 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 mobile phones, tablets and notebook PCs. 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. In 2016, Corning unveiled its latest Corning
Gorilla Glass innovation, Corning® Gorilla® Glass 5, which is designed to
provide further protection against breakage while maintaining optical
clarity, touch sensitivity, and damage resistance.
Corning Gorilla Glass is manufactured in Kentucky, South Korea, Japan
and Taiwan.
optics manufactured
Semiconductor
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.
Corning
by
Other specialty glass products
lens and window
components and assemblies and are made in New York, New Hampshire,
Kentucky and France, and sourced from China.
include glass
Patent protection is important to the segment’s operations. The segment
has a growing portfolio of patents relating to its products, technologies
and manufacturing processes. Brand recognition and loyalty, through
well-known trademarks, are important to the segment. Refer to the
material under the heading “Patents and Trademarks” for information
relating to the Company’s patents and trademarks.
The Specialty Materials segment represented approximately 12% of
Corning’s sales in 2016.
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
Corporate Investments
Dow Corning Corporation� Prior to May 31, 2016, Corning and The Dow
Chemical Company (“Dow Chemical”) each owned half of Dow Corning
Corporation (“Dow Corning”), an equity company headquartered in
Michigan that manufactures silicone products worldwide. Dow Corning
was the majority-owner of Hemlock Semiconductor Group (“HSG”), a
market leader in the production of high purity polycrystalline silicon for
the semiconductor and solar energy industries.
On May 31, 2016, Corning completed the strategic realignment of
its equity investment in Dow Corning pursuant to the Transaction
Agreement announced in December 2015. Under the terms of the
Transaction Agreement, Corning exchanged with Dow Corning its
50% stock interest in Dow Corning for 100% of the stock of a newly
formed entity, which holds an equity interest in HSG and approximately
$4.8 billion in cash.
Business Description
approaches to increase efficiencies, reduce costs and compress timelines.
Using unique expertise in the fields of materials science, surface science,
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 advanced 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 in 2016.
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, our non-LCD glass business, new product lines
and development projects, as well as certain corporate investments such
as Eurokera and Keraglass equity affiliates.
The All Other segment represented 2% of Corning’s sales in 2016.
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.
Prior to realignment, HSG, a consolidated subsidiary of Dow Corning,
was an indirect equity investment of Corning. Upon completion of the
exchange, Corning now has a direct equity investment in HSG. Because
our ownership percentage in HSG did not change as a result of the
realignment, the investment in HSG is recorded at its carrying value,
which had a negative carrying value of $383 million at the transaction
date. The negative carrying value resulted from a one-time charge to
this entity in 2014 for the permanent abandonment of certain assets.
Excluding this charge, the entity is profitable and is expected to recover
its equity in the near term.
3
CORNING INCORPORATED - 2016 Annual Report Business Description
Pittsburgh Corning Corporation� Prior to the second quarter of 2016,
Corning and PPG Industries, Inc. each owned 50% of the capital stock
of Pittsburgh Corning Corporation (“PCC”). PCC filed for Chapter 11
reorganization in 2000 and the Modified Third Amended Plan of
Reorganization for PCC (the “Plan”) became effective in April 2016. In
the second quarter of 2016, Corning contributed its equity interests
in PCC and Pittsburgh Corning Europe N.V. as required by the Plan and
recognized a gain of $56 million for the difference between the fair value
of the asbestos litigation liability and carrying value of the investment.
Additional information about corporate investments is presented in
Note 7 (Investments) to the Consolidated Financial Statements.
Competition
Corning competes 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, its commitment to
reliability of supply and product quality and technical specification of its
products. 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
Corning believes it maintains a leadership position in the segment’s
principal product groups, which include carrier and enterprise networks.
The competitive
industry consolidation, price
includes
pressure and competition for the innovation of new products. These
competitive conditions are likely to persist. Corning believes its large
scale manufacturing experience, fiber process, technology leadership
and intellectual property provide cost advantages relative to several of
its competitors.
landscape
The primary competing producers of the Optical Communications
segment are Commscope and Prysmian Group.
Raw Materials
Corning’s manufacturing processes and products require access to
uninterrupted power sources, significant quantities of industrial water,
certain precious metals, and various batch materials. 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 raw and batch
materials as well as precious metals. For many products, Corning has
alternate suppliers that would allow operations to continue without
interruption in the event of specific materials shortages.
4
Environmental Technologies Segment
Corning believes it maintains a leadership position in the worldwide
automotive ceramic substrate products, and 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.
Specialty Materials Segment
Corning has 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.
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., Greiner Group AG,
Eppendorf AG and Sarsedt AG. Corning also faces increasing competition
from large distributors that have pursued backward integration or
introduced private label products.
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. To minimize this risk, Corning closely
monitors raw materials and equipment with limited availability or
which are sourced through one supplier. However, any future difficulty
in obtaining sufficient and timely delivery of components and/or raw
materials could result in lost sales due to delays or reductions in product
shipments, or reductions in Corning’s gross margins.
CORNING INCORPORATED - 2016 Annual Report Business Description
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
2016, Corning was granted about 460 patents in the U.S. and over 1,100
patents in countries outside the U.S.
• Optical Communications: patents relating to (i) 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) optical fiber ribbons and methods for making such ribbon,
fiber optic cable designs and methods for installing optical fiber cable;
(iii) optical fiber connectors, termination and storage and associated
methods of manufacture; and (iv) distributed communication systems.
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 2016, Corning and its
wholly-owned subsidiaries owned over 9,660 unexpired patents in
various countries of which over 3,840 were U.S. patents. Between 2017
and 2019, 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 10,500 patent applications
in process, with about 2,500 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.
While each of our reportable segments has numerous patents in
various countries, no one patent is considered material to any of these
segments. Important U.S.-issued patents in our reportable segments
include the following:
• Display Technologies: patents relating to glass compositions and
methods for the use and manufacture of glass substrates for
display applications.
Approximate number of patents granted to our reportable segments follows:
• Environmental Technologies: 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.
• Specialty Materials: 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.
• Life Sciences: patents relating to methods and apparatus for the
manufacture and use of scientific laboratory equipment including
multiwell plates and cell culture products, as well as equipment and
processes for label independent drug discovery.
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.
Display Technologies
Optical Communications
Environmental Technologies
Specialty Materials
Life Sciences
Total
number of
patents
worldwide
1,700
3,500
800
920
600
U.S. patents
370
1,600
320
430
240
Important
patents expiring
between 2017
and 2019
11
10
36
8
16
Many of the Company’s patents are used in operations or are licensed for
use by others, and Corning is licensed to use patents owned by others.
Corning has entered into cross-licensing arrangements with some major
competitors, but the scope of such licenses has been limited to specific
product areas or technologies.
Corning’s principal trademarks include the following: Axygen, Corning,
Celcor, ClearCurve, DuraTrap, Eagle XG, Edge8, Gorilla, Gosselin, HPFS,
Leaf, Pyrex, Steuben, Falcon, SMF-28e, Unicam, and Willow.
Protection of the Environment
Corning has a program to ensure that its facilities are in compliance with
state, federal and foreign pollution-control regulations. This program
has resulted in capital and operating expenditures each year. In order
to maintain compliance with such regulations, capital expenditures for
pollution control in operations were approximately $14 million in 2016
and are estimated to be $31 million in 2017.
Corning’s 2016 consolidated operating results were charged with
approximately $43 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.
5
CORNING INCORPORATED - 2016 Annual Report Business Description
Employees
At December 31, 2016, Corning had approximately 40,700 full-time employees. From time to time, Corning also retains consultants, independent
contractors, temporary and part-time workers.
Executive Officers
James P� Clappin President, Corning Glass Technologies
Lawrence D� McRae Vice Chairman and Corporate Development 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 59.
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. He has also served as senior vice president
and general manager for Corning Optical Fiber. Mr. Curran was appointed
as Corning’s first innovation officer in August 2012. Age 58.
Jeffrey W� Evenson Senior Vice President and Chief Strategy Officer
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 51.
Lisa Ferrero Senior Vice President and Chief Administrative Officer
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 53.
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. Age 57.
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. Age 58.
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 a member of the National Academy of Engineering and the
National Chemistry Board. Age 64.
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 57.
Christine M� Pambianchi Senior Vice President, Human Resources
Ms. Pambianchi joined Corning in 2000 as division human resource
manager, Corning Optical Fiber, and later was named director, Human
Resources, Corning Optical Communications. She has led the Human
Resources function since January 2008 when she was named vice
president, Human Resources. Ms. Pambianchi was appointed to senior
vice president, Human Resources, in 2010, and is responsible for leading
Corning’s global human resource function. Age 48.
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 57.
6
CORNING INCORPORATED - 2016 Annual Report Risk Factors
Edward A� Schlesinger Vice President and Corporate Controller
R� Tony Tripeny Senior Vice President and Chief Financial Officer
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 49.
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 53.
Mr. Tripeny joined Corning in 1985 as the corporate accounting
manager of Corning Cable Systems, and became the Keller, Texas
facility’s plant controller in 1989. In 1993, he was appointed equipment
division controller of Corning Cable Systems and, in 1996 corporate
controller. Mr. Tripeny was appointed chief financial officer of Corning
Cable Systems in July 2000. In 2003, he took on the additional role of
Telecommunications group controller. He was appointed division vice
president, operations controller in August 2004, vice president, corporate
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 57.
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 57.
Document Availability
A copy of Corning’s 2016 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, political, 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, our ability to successfully
execute our strategy and capital allocation framework, 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 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.
labor
Compliance with laws and regulations increases our costs. We are
subject to both U.S. laws and local laws which, among other things,
include data privacy requirements, employment and
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.
7
CORNING INCORPORATED - 2016 Annual Report Risk Factors
We are also subject to a variety of other risks in managing a global
organization, including those related to:
• Difficulty in collecting obligations owed to us;
• Natural disasters such as floods, earthquakes, tsunamis and
• The economic and political conditions in each country or region;
windstorms; and
• 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;
• Differing legal systems, including protection and treatment of
intellectual property and patents;
• Complex, or competing tax regimes;
• Tariffs, trade duties and other trade barriers including anti-dumping
duties;
• Potential loss of utilities or other disruption affecting manufacturing.
Corning’s Display Technologies segment generates a significant amount
of the Company’s profits and cash flow� Any significant decrease in
LCD glass pricing 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 profitability of our LCD glass business, which is subject
to continuous pricing pressure due to intense industry competition,
potential over-capacity, and development of new technologies. If we
are not able to achieve proportionate reductions in costs or sustain our
current rate of cost reduction to offset potential pricing pressures it
could have a material adverse impact on our financial results.
Because we have a concentrated customer base in each of our
businesses, our sales could be negatively impacted by the actions or
insolvency of one or more key customers, as well as our ability to retain
these customers
A relatively small number of customers accounted for a high percentage
of net sales in our reportable segments. Mergers and consolidations
between customers could result in further concentration of Corning’s
customer base. If further concentration occurs or a key customer becomes
insolvent, the loss of a key customer could result in a substantial loss of
sales and reduction in anticipated in cash flows. Unforeseen events or
actions on the part of Corning could also result in the loss of customers,
resulting in further customer concentration.
The following table details the number of combined customers of our segments that accounted for a large percentage of segment net sales:
Display Technologies
Optical Communications
Environmental Technologies
Specialty Materials
Life Sciences
Number of
combined
customers
% of total
segment net sales
in 2016
3
1
3
3
2
65%
15%
85%
56%
46%
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. For example, certain manufacturing
sites require high quality, continuous, and uninterrupted power and
access to industrial water. Unplanned outages could have a material
negative impact on our operations and ability to supply our customers.
Additionally, a significant amount of the specialized manufacturing
capacity for our reportable segments is concentrated in single-site
locations 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, it may not be possible to find replacement capacity quickly
or substitute production from other facilities. Accordingly, a disruption
at a single-site manufacturing operation could significantly impact
Corning’s ability to supply its customers and could produce a near-term
severe impact on our individual businesses and the Company as a whole.
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.
8
CORNING INCORPORATED - 2016 Annual Report 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.
Information technology dependency and security vulnerabilities could
lead to reduced revenue, liability claims, or competitive harm
The Company is dependent on information technology (“IT”) systems
and infrastructure for its business and manufacturing controls. Our IT
systems may be vulnerable to disruptions from human error, outdated
applications, computer viruses, natural disasters, unauthorized access,
cyber-attack and other similar disruptions. Any significant disruption,
breakdown, intrusion, interruption or corruption of these systems or data
breaches could cause the loss of data, equipment damage, downtime,
and/or safety related issues and could have a material adverse effect
on our business. Like other global companies, we have, from time to
time, experienced incidents related to our 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. 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, disrupt our manufacturing, reduce the value of our
investment in research and development and other strategic initiatives,
or otherwise adversely affect our business.
Additionally, we believe that utilities and other operators of critical
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.).
We may not earn a positive return from our research, development and
engineering investments
Developing our products through our innovation model of research and
development is expensive and often involves a long investment cycle.
We make significant expenditures and investments in research and
development and four process engineering platforms that may earn an
economic return. If our investments do not provide a pipeline of new
technologies that our customers demand or lower cost manufacturing
platforms, it could negatively impact our revenues and operating
margins both near- and long-term.
Risk Factors
We have significant exposure to foreign currency movements and to
counterparties of our related derivatives portfolio
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. We also maintain
a significant portfolio of over the counter derivatives to hedge our
projected currency exposure to the Japanese yen, New Taiwan dollar,
South Korean won, Chinese yuan and euro. We are exposed to potential
losses in the event of non-performance by our counterparties to these
derivative contracts. Any failure of a counterparty to pay on such a
contract when due could materially impact our results of operations,
financial position, and cash flows.
For example, we will experience foreign currency gains and losses
in certain instances if it is not possible or cost effective to hedge our
currency exposures or should we elect not to hedge certain 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.
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 exchange rates associated with these exposures
and changes in those rates, whether we have entered into foreign
currency contracts to offset these exposures and other factors. Our
hedge portfolio may reduce our flexibility to respond to price moves by
our Display Technologies segment competitors.
All of these factors could materially impact our results of operations,
anticipated future results, financial position and cash flows, the timing
of which is variable and generally outside of our control.
If we are unable to obtain certain specialized equipment, raw and batch
materials or natural resources required in our products or processes, our
business will suffer
Our ability to meet customer demand depends, in part, on our ability
to obtain timely and adequate delivery of equipment, 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. Certain manufacturing
equipment and components are available only from single or limited
sources, and 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, utilities including energy and industrial
water, could have a material adverse effect on our businesses.
We use specialized raw materials from single-source suppliers
(e.g., specific mines or quarries) and natural resources (e.g., helium) in
certain products and processes. If a supplier is unable to provide the
required raw materials or the natural resource is in scarce supply or not
readily available, we may be unable to change our product composition
or manufacturing process in order to prevent a disruption to our
business.
9
CORNING INCORPORATED - 2016 Annual Report Risk Factors
We have incurred, and may in the future incur, goodwill and other
intangible asset impairment charges
At December 31, 2016, Corning had goodwill and other intangible assets
of $2.4 billion. 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.
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 impacted by several factors,
including:
• 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 laws, 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
and political environments in which we do business;
• The outcome of current and future tax audits, examinations, or
administrative appeals;
• Changes in generally accepted accounting principles that affect the
accounting for taxes; and
• Limitations or adverse findings regarding our ability to do business in
some jurisdictions.
We may have additional tax liabilities
We are subject to income taxes in the U.S. and many foreign jurisdictions
and are commonly audited by various tax authorities. In the ordinary
course of our business, there are many transactions and calculations
where the ultimate tax determination
is uncertain. Significant
judgment is required in determining our worldwide provision for
income taxes. Although we believe our tax estimates are reasonable,
the final determination of tax audits and any related litigation could
be materially different from our historical income tax provisions and
accruals. The results of an audit or litigation could have a material effect
on our financial statements in the period or periods for which that
determination is made.
A significant amount of our net profits and cash flows are generated
from outside the U.S., and certain repatriation of funds currently held
in foreign jurisdictions may result in higher effective tax rates for the
Company. In addition, there have been proposals to change U.S. tax
laws that could significantly impact how U.S. global corporations are
taxed. Although we cannot predict whether or in what form proposed
legislation may pass, if enacted certain proposals could have a material
adverse impact on our tax expense and cash flow.
Our innovation model depends on our ability to attract and retain
specialized experts in our core technologies
Our innovation model requires us to employ highly specialized experts
in glass science, ceramic science, and optical physics to conduct our
research and development and engineer our products and design
our manufacturing facilities. The loss of the services of any member
of our key research and development or engineering team without
adequate replacement, or the inability to attract new qualified
personnel, could have a material adverse effect on our operations and
financial performance.
10
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 to adopt
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.
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.
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 Anti-boycott 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 violation by an employee or the
Company 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.
CORNING INCORPORATED - 2016 Annual Report 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.
International trade policies may negatively impact our ability to sell and
manufacture our products outside of the U�S�
Government policies on international trade and investment such
as import quotas, tariffs, and capital controls, 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 and/or manufacture 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.
Legal Proceedings
Non-PCC Asbestos Litigation� Corning is a defendant in cases alleging
injuries from asbestos which had been stayed pending the confirmation
of the PCC Plan. The stay was lifted on August 25, 2016. For additional
information and updates to estimated liabilities as of December 31, 2016,
see Note 7 (Investments) to the Consolidated Financial Statements.
Environmental Litigation� Corning has been named by the Environmental
Protection Agency (the Agency) under the Superfund Act, or by state
governments under similar state laws, as a potentially responsible
party for 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, 2016 and December 31, 2015, Corning had
accrued approximately $43 million (undiscounted) and $37 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.
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.
2016
Price range
High
Low
2015
Price range
High
Low
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
$
$
21.07
16.13
25.16
21.89
$
$
$
$
21.30
18.21
22.98
19.57
$
$
$
$
23.81
19.78
20.02
15.24
$
$
$
$
25.35
22.23
19.29
16.36
As of December 31, 2016, there were approximately 15,892 registered holders of common stock and approximately 456,079 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 paid in the first quarter of 2016.
On February 1, 2017, Corning’s Board of Directors declared a 14.8% increase in the Company’s quarterly common stock dividend, which increased the
quarterly dividend from $0.135 to $0.155 per share of common stock, beginning with the dividend to be paid in the first quarter of 2017.
11
CORNING INCORPORATED - 2016 Annual Report 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. The graph includes the capital weighted performance results of those companies in the communications
equipment company classification that are also included in the S&P 500.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG CORNING INCORPORATED, S&P 500 AND S&P COMMUNICATIONS EQUIPMENT
(Fiscal Years Ended December 31)
Indexed to 100
$250
$200
$150
$100
$50
$0
2011
2012
2013
2014
2015
2016
Corning Incorporated
S&P Communications Equipment
S&P 500
(b) Not applicable.
(c) The following table provides information about our purchases of our common stock during the fiscal fourth quarter of 2016:
Issuer Purchases of Equity Securities
Period
October 1-31, 2016
Open market and shares
surrendered for tax
withholdings
November 1-30, 2016
Open market and shares
surrendered for tax
withholdings
ASR (Tranche I)(3)
December 1-31, 2016
Open market and shares
surrendered for tax
withholdings
ASR (Tranche II)(3)
Total at December 31, 2016
Number of shares
purchased(2)
Average price paid
per share
Number of shares purchased as
part of publicly announced
plans or programs(1)
Approximate dollar value of shares that
may yet be purchased under the plans
or programs(1)
4,888,855
$
23.49
4,875,834
4,892,049
3,306,805
4,732,989
8,963,288
26,783,986
$
$
23.48
(3)
24.42
(3)
4,876,439
3,306,805
4,689,256
8,963,288
26,711,622
$
4,026,996,347
(1) On October 26, 2015, Corning’s Board of Directors authorized the repurchase of up to $4 billion of common stock. This authorization was fully
utilized in the first quarter of 2017. On December 7, 2016, Corning’s Board of Directors authorized a share repurchase program with no expiration for
the repurchase of up to $4 billion of common stock (the “2016 Repurchase Program”).
(2) This column reflects the following transactions during the fourth quarter of 2016: (i) the deemed surrender to us of 16,996 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 55,368
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 26,711,622 shares of common stock (14,441,529 shares in open market repurchases and 12,270,093 shares as part of the Accelerated
Share Repurchase (“ASR”) agreement entered into in the third quarter of 2016) under the 2015 Repurchase Program.
(3) In the third quarter of 2016, the Company paid $2 billion under an ASR agreement with Morgan Stanley and Co. LLC and received an initial delivery
of approximately 74.4 million shares. In the fourth quarter of 2016, the purchase period for this ASR ended and an additional 12.3 million shares were
delivered in two tranches to Corning. In total, 86.7 million shares were delivered under the 2016 ASR at an average repurchase price of $23.07. See
Note 17 (Shareholders’ Equity) to the Consolidated Financial Statements for additional detail.
12
CORNING INCORPORATED - 2016 Annual ReportMarket for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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(1)
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
2016
2015
2014
2013
2012
Years ended December 31,
$
$
$
$
$
$
$
$
$
$
$
$
$
9,390
742
284
3,695
3.53
3.23
0.54
1,020
1,144
6,297
27,899
3,646
17,893
1,130
1,195
40,700
$
$
$
$
$
$
$
$
$
$
$
$
$
9,111
769
299
1,339
1.02
1.00
0.36
1,219
1,343
5,455
28,527
3,890
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
30,041
3,205
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
28,455
3,249
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
29,354
3,361
21,486
1,801
997
28,700
(1) Year ended December 31, 2016 includes a $2.7 billion non-taxable gain on the strategic realignment of our ownership interest in Dow Corning.
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.
13
CORNING INCORPORATED - 2016 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 (“the Framework”) that reflects the Company’s financial and
operational strengths, as well as its ongoing commitment to increasing
shareholder value. The Framework outlines our leadership priorities, and
articulates the opportunities we see across our businesses. We designed
the Framework to create significant value for shareholders by focusing
our portfolio and leveraging our financial strength. Under our Framework
we target generating $26 billion to $30 billion of cash through 2019,
returning more than $12.5 billion to shareholders and investing
$10 billion to sustain our leadership positions and deliver growth.
Our probability of success increases as we invest in our world-class
capabilities. Over the next three 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.
Performance against the Framework
Since introducing the Framework, we have distributed approximately
$6 billion to shareholders through share repurchases and dividends. Our
Board also approved a new $4 billion share repurchase authorization
in December 2016, and annual dividend increases of 12.5% in 2016 and
14.8% in February 2017 as part of our ongoing commitment to return
cash to our investors.
Within our portfolio, we realigned our interest in Dow Corning, which
created significant value for shareholders, including unlocking $4.8 billion
in cash. We strengthened our position in Optical Communications with
two acquisitions to expand our access to various segments of the
telecommunications market. We also entered into a joint venture with
Saint-Gobain Sekurit to develop automotive glazing solutions.
We also utilized our financial strength in 2016 to continue our focus on
innovation, resulting in the launch of new products and traction with
customers on key growth initiatives, including:
• Gorilla® Glass 5, which offers superior drop performance versus its
predecessor and competitive technologies; expanding our cover-glass
portfolio with Vibrant® Gorilla® Glass, which enables high-resolution
designs for smartphones, tablets, and notebooks; and Gorilla® Glass
SR+ for wearable devices.
• Leveraging our competitive advantages and market-leading products
to continue to win business in the optical market, with customer
commitments and demand that support the capacity expansions now
underway.
• Winning business in the automotive sector for both substrates and
our new gas particulate filters. We anticipate that our gas particulate
filters will increase our sales opportunity by a factor of 3-to-4 per
vehicle.
• Expanding the opportunities for Corning Gorilla Glass
in the
automotive market.
• Technical and commercial progress on Corning Iris™ glass.
2016 Results
Our sales grew in total in 2016 driven by year-over-year growth in most
of our operating segments. The first quarter was our weakest, driven
by a combination of slow demand in some markets and production
issues related to the implementation of new manufacturing software,
which constrained our ability to manufacture product. Momentum built
steadily throughout the year and our performance in the second half of
2016 was significantly improved from the first half.
Net sales in the year ended December 31, 2016 were $9,390 million,
an increase of $279 million, or 3%, when compared to the year ended
December 31, 2015. The increase was primarily driven by the Display
Technologies segment and the Corning Pharmaceutical Technologies
business, up $152 million and $84 million, respectively. The Optical
Communications, Specialty Materials and Life Sciences segments also
increased, up $25 million, $17 million and $18 million, respectively.
14
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
For the year ended December 31, 2016, we generated net income of
$3.7 billion, or $3.23 per share, compared to net income of $1.3 billion,
or $1.00 per share, for 2015. When compared to last year, the $2.4 billion
increase in net income was due to the following items (amounts
presented after tax):
• A $2.7 billion non-taxable gain and $105 million positive tax adjustment
on the strategic realignment of our ownership interest in Dow Corning
completed on May 31, 2016;
• The increase in unrealized losses from our foreign currency translation
hedges in the amount of $47 million.
The translation impact of fluctuations in foreign currency exchange rates
positively affected Corning’s consolidated net income in the year ended
December 31, 2016 in the amount of $229 million when compared to
2015, largely due to the strengthening of the Japanese yen versus the U.S.
dollar. This impact was more than offset by the decrease of $283 million
in the realized gain from our foreign currency translation hedges.
• The positive change in the amounts recorded for tax law changes,
valuation allowance adjustments and other discrete tax items of
$104 million; and
• A decrease of $61 million in the defined benefit pension plans
mark-to-market loss, driven by higher returns on pension assets.
Partially offsetting these events were the following items:
• Lower net income in the Display Technologies, Specialty Materials
and Life Sciences segments. The largest decrease was in the Display
Technologies segment, down $160 million, or 15%, primarily driven
by LCD glass price declines which were slightly higher than 10% and
a decrease of $289 million in net realized gains from our yen and
won-denominated currency hedge contracts;
• The resolution of an investigation by the U.S. Department of Justice
and related costs in the total amount of $86 million;
• An increase of $71 million in acquisition and transaction related costs,
driven primarily by expenses associated with the strategic realignment
of our ownership interest in Dow Corning; and
Results of Operations
Selected highlights from our operations follow (in millions):
2017 Corporate Outlook
In 2017, Corning will continue to advance the objectives of its Strategy
and Capital Allocation Framework, which sets its leadership priorities
and articulates opportunities across its businesses. In the Display
Technologies segment, we expect the rate of growth in both retail
market and glass demand to be in the mid-single digit percentage, and
an overall favorable LCD glass price environment, with price declines
more moderate than in 2016. In the Optical Communications segment,
we anticipate sales to increase by a low-teens percentage over 2016.
In the Environmental Technologies segment, we expect sales to be
consistent to up slightly from 2016, driven by continued sales growth
in the auto market, offset somewhat by lower heavy-duty volume. We
expect growth in the Specialty Materials segment, the amount of which
will depend on the timing and extent of customers deploying Gorilla
Glass 5 and other Corning innovations. In the Life Sciences segment,
we expect low-single digit sales growth, ahead of forecasted market
growth rates.
2016
2015
2014
16 vs. 15
15 vs. 14
% 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)
Equity in earnings of affiliated companies
(as a % of net sales)
Translated earnings contract (loss) gain, net
(as a % of net sales)
Gain on realignment of equity investment
(as a % of net sales)
Income before income taxes
(as a % of net sales)
Benefit (provision) for income taxes
(as a % of net sales)
Net income attributable to Corning
Incorporated
(as a % of net sales)
* Percent change not meaningful.
$
$
$
$
$
$
$
$
$
$
9,390
3,746
40%
1,472
16%
742
8%
284
3%
(448)
(5)%
2,676
28%
3,692
39%
3
0%
3,695
39%
$
$
$
$
$
$
$
$
$
9,111
3,653
40%
1,508
17%
769
8%
299
3%
80
1%
1,486
16%
(147)
(2)%
1,339
15%
$
$
$
$
$
$
$
$
$
9,715
4,052
42%
1,202
12%
815
8%
266
3%
1,369
14%
3,568
37%
(1,096)
(11)%
2,472
25%
3
3
(2)
(4)
(5)
(6)
(10)
25
(6)
12
(660)
(94)
*
148
102
*
(58)
(87)
176
(46)
15
CORNING INCORPORATED - 2016 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
Years ended December 31,
$
2016
3,238
3,005
1,032
1,124
839
152
2015
$
3,086
2,980
1,053
1,107
821
64
2014
$
3,851
2,652
1,092
1,205
862
53
$
9,390
$
9,111
$
9,715
%
Change
16 vs. 15
%
Change
15 vs. 14
5%
1%
(2)%
2%
2%
138%
3%
(20)%
12%
(4)%
(8)%
(5)%
21%
(6)%
For the year ended December 31, 2016, net sales increased by $279 million,
or 3%, when compared to the same period in 2015. The following items
drove the increase:
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;
• An increase of $152 million in the Display Technologies segment, driven
by the positive impact from the strengthening of the Japanese yen in
the amount of $370 million and a mid-single digit percentage volume
increase, offset somewhat by LCD glass price declines slightly higher
than 10%;
• An increase of $25 million in the Optical Communications segment,
driven primarily by an increase of $76 million in sales of carrier products
and the impact of a small acquisition completed in the second
quarter of 2016, partially offset by production issues related to the
implementation of new manufacturing software, which constrained
our ability to manufacture product in the first half of 2016;
• A decrease of $21 million in the Environmental Technologies segment
driven by a decline of $78 million in sales of diesel products due to the
weakening of the North American truck market, offset partially by
an increase of $57 million in sales of light-duty substrates, driven by
strength in the North American, European and Chinese markets;
• An increase of $17 million in the Specialty Materials segment, driven
by an increase in sales of Corning Gorilla Glass 5 and advanced optics
products;
• An increase of $18 million in the Life Sciences segment, driven by
volume growth in Europe, North America and China; and
• An increase of $88 million in the All Other segment, driven primarily by
our glass tubing business acquired in the fourth quarter of 2015.
In the year ended December 31, 2016, the translation impact of
fluctuations in foreign currency exchange rates, primarily the Japanese
yen, positively affected Corning’s consolidated net sales in the amount
of $330 million when compared to the same period in 2015.
For the year ended December 31, 2015, net sales decreased by
$604 million, or 6%, when compared to the same period in 2014. The
following items drove the decrease:
• 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;
• An increase of $328 million in the Optical Communications segment,
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
• 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.
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.
In 2016, 2015 and 2014, sales in international markets accounted for 72%,
70% and 77%, respectively, of total net sales.
Cost of Sales
The types of expenses included in the cost of sales line item are: raw
materials consumption, including direct and indirect materials; salaries,
wages and benefits; depreciation and amortization; production utilities;
production-related purchasing; warehousing (including receiving and
inspection); repairs and maintenance; inter-location inventory transfer
costs; production and warehousing facility property insurance; rent for
production facilities; and other production overhead.
Gross Margin
In the year ended December 31, 2016, gross margin dollars increased
$93 million, and gross margin as a percentage of net sales remained
consistent at 40% when compared to the same period last year. The
increase in gross margin dollars was primarily driven by the positive
impact from the strengthening of the Japanese yen in the amount
of $266 million, an increase in manufacturing efficiency and cost
reductions in our Display Technologies and Optical Communications
segments which added approximately $160 million, a more favorable
mix of products sold in the Optical Communications segment and an
increase in volume in the mid-single digit percentage in the Display
Technologies segment. Display Technologies segment price declines
slightly above 10% partially offset the increase.
16
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 in 2014, 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
in the
segment,
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.
in manufacturing performance
improvements
Selling, General and Administrative Expenses
In the year ended December 31, 2016, selling, general and administrative
expenses decreased by $36 million when compared to the same period
in 2015, driven primarily by the following items:
• A decrease of $94 million in the loss on the mark-to-market of our
defined benefit pension plans;
• The positive impact of the change in the contingent consideration fair
value adjustment of $43 million; and
• The absence of $25 million of post-combination expenses
incurred in 2015.
Partially offsetting these events were:
• An increase of $59 million in acquisition-related costs primarily related
to the realignment of our equity interest in Dow Corning and an
acquisition completed in the second quarter of 2016;
• An increase of $49 million in litigation, regulatory and other legal costs,
driven by the resolution of an investigation by the U.S. Department of
Justice and an environmental matter in the amount of $98 million,
partially offset by the gain of $56 million on the contribution of our
equity interests in PCC and PCE as partial settlement of the asbestos
litigation; and
• Higher operating expenses
in
the Optical Communications,
Environmental Technologies and Specialty Materials segments.
When compared to the same period in 2015, as a percentage of net sales,
selling, general and administrative expenses decreased by 1%.
In the year ended December 31, 2015, selling, general and administrative
expenses increased by $312 million when compared to the same period
in 2014, driven primarily by the following items:
• An increase of $133 million in our defined benefit pension plans
mark-to-market loss;
When compared to the same period in 2014, as a percentage of net
sales, selling, general and administrative expenses in the year ended
December 31, 2015 increased driven by lower net sales.
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
In the year ended December 31, 2016, research, development and
engineering expenses declined $27 million when compared to the same
period in 2015 driven by the impact of a joint development agreement
with a Display Technologies customer, offset partially by project
development spending in the Optical Communications, Environmental
Technologies and Specialty Materials segments. As a percentage of
net sales, research, development and engineering expenses remained
consistent with the same period in 2015.
In the year ended December 31, 2015, research, development and
engineering expenses decreased by $46 million when compared to
the same period in 2014, 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.
Restructuring, Impairment, and Other Charges
Corning recorded restructuring, impairment, and other charges and
credits in 2016 and 2014, 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:
2016 Activity
For the year ended December 31, 2016, we recorded charges of $77 million
for employee related costs, asset disposals, and exit costs associated with
restructuring activities with total cash expenditures of approximately
$12 million.
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.
• The absence of the positive impact of a contingent consideration fair
value adjustment of $249 million recorded in 2014; and
2014 Activity
• An increase in spending in the Optical Communications segment
driven by several acquisitions completed in 2015.
lower spending
Offsetting these increases somewhat were a decrease in variable
compensation,
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.
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.
17
CORNING INCORPORATED - 2016 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):
Dow Corning Corporation(1)
Hemlock Semiconductor Group(2)
All other
Total equity earnings
Years ended December 31,
2016
2015
2014
$
$
82
212
(10)
284
$
$
281
18
299
$
$
252
14
266
(1) Results include equity earnings for Dow Corning, which includes the silicones business and Hemlock Semiconductor business, through May 31, 2016,
the date of the realignment of our ownership interest in Dow Corning.
(2) Results include equity earnings for Hemlock Semiconductor Group beginning on June 1, 2016.
On May 31, 2016, Corning completed the strategic realignment of
its equity investment in Dow Corning Corporation (“Dow Corning”)
pursuant to the Transaction Agreement announced on December 10,
2015. Under the terms of the Transaction Agreement, Corning exchanged
with Dow Corning its 50% stock interest in Dow Corning for 100% of
the stock of a newly formed entity, which holds an equity interest in
Hemlock Semiconductor Group and approximately $4.8 billion in cash.
The equity in earnings line on our income statement for the year ended
December 31, 2016 reflects both the equity earnings from the silicones and
polysilicones (Hemlock Semiconductor) businesses of Dow Corning from
January 1, 2016 through May 31, 2016, the closing date of the Transaction
Agreement, and seven months of equity earnings from Hemlock
Semiconductor Group. Prior to the realignment of Dow Corning, equity
earnings from the Hemlock Semiconductor business were reported on
the equity in earnings line in Corning’s income statement, net of Dow
Corning’s 35% U.S. tax. Additionally, Corning reported its tax on equity
earnings from Dow Corning on the tax provision line on its income
statement at a U.S. tax provision rate of 7%. As part of the realignment,
Hemlock Semiconductor Group was converted to a partnership. Each
of the partners is responsible for the taxes on their portion of equity
earnings. Therefore, post-realignment, Hemlock Semiconductor Group’s
equity earnings is reported before tax on the equity in earnings line and
Corning’s tax is reported on the tax provision line.
Refer to Note 7 (Investments) to the consolidated financial statements
for additional information.
Translated earnings contracts
Included in the line item Translated earnings contract (loss) gain, net, is the impact of foreign currency hedges which hedge our translation exposure
arising from movements in the Japanese yen, South Korean won, euro, New Taiwan dollar and Chinese yuan against the U.S. dollar and its impact on
our net earnings. The following table provides detailed information on the impact of our translated earnings contract losses and gains:
(in millions)
Hedges related to translated earnings:
Realized gain, net
Unrealized (loss) gain
Total translated earnings contract (loss) gain
(in millions)
Hedges related to translated earnings:
Realized gain, net
Unrealized (loss) gain
Total translated earnings contract gain (loss)
Year ended
December 31, 2016
Year ended
December 31, 2015
Change
2016 vs. 2015
Income before
income taxes
Net
income
Income before
income taxes
Net
income
Income before
income taxes
Net
income
$
$
201
(649)
(448 )
$
127
(409)
$ (282 )
$
$
653
(573)
80
$
$
410
(362)
48
$
$
(452)
(76)
(528)
$ (283)
(47)
$
(330)
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
$
$
653
(573)
80
$
$
410
(362)
48
$
274
1,095
$ 1,369
$
$
224
692
916
$
379
$
186
(1,668)
(1,054)
$ (1,289)
$ (868)
18
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
The gross notional value outstanding for our translated earnings contracts at December 31, 2016, 2015 and 2014 were as follows (in billions):
Japanese yen-denominated hedges
South Korean won-denominated hedges
Euro-denominated hedges
Chinese yuan-denominated hedges
Total gross notional value outstanding
Years ended December 31,
2015
$
8.3
3.3
0.3
2014
$ 9.8
2.3
2016
$ 14.9
1.2
0.3
0.3
$ 16.7
$
11.9
$ 12.1
Income Before Income Taxes
The translation impact of fluctuations in foreign currency exchange
rates positively affected Corning’s Income before income taxes in the
year ended December 31, 2016 in the amount of $304 million when
compared to 2015. This impact was partially offset by the decrease in
the realized gain from our foreign currency translation hedges related to
translated earnings of $452 million.
Benefit (Provision) for Income Taxes
Our benefit (provision) for income taxes and the related effective income tax rates were as follows (dollars in millions):
Years ended December 31,
2016
$
3
(0.1)%
2015
$
(147)
9.9%
2014
$ (1,096)
30.7%
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 may impact our ability or intent to keep our foreign
earnings and cash indefinitely reinvested. As of December 31, 2016, taxes
have not been provided on approximately $12.6 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.
We do not expect a material change to the amount of unrecognized tax
benefits in the next 12 months.
Refer to Note 6 (Income Taxes) to the Consolidated Financial Statements
for further details regarding income tax matters.
Benefit (provision) for income taxes
Effective tax rate
The effective income tax rate for 2016 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 foreign earnings in U.S. income; and
• The tax-free nature of the realignment of our equity interest in Dow
Corning during the period, as well as the release of the deferred tax
liability related to Corning’s tax on Dow Corning’s undistributed
earnings as of the date of the transaction.
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 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 deferred tax assets which is partially offset with tax
expense from deferred tax allowance increases.
19
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
Weighted-average common shares outstanding - basic
Weighted-average common shares outstanding - diluted
Years ended December 31,
2016
2015
2014
$ 3,695
$ 1,339
$ 2,472
$ 3,597
$ 1,241
$ 2,378
$ 3,695
$ 1,339
$ 2,472
$
$
3.53
3.23
1,020
1,144
$
$
1.02
1.00
1,219
1,343
$
$
1.82
1.73
1,305
1,427
(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 (losses) gain on investments
Unamortized gains (losses) and prior service credits (costs) for postretirement benefit plans
Net unrealized gains (losses) on designated hedges
Other comprehensive income (loss), net of tax
Years ended December 31,
2016
2015
2014
$ 3,695
$ 1,339
(104)
(3)
241
1
135
(590)
1
121
(36)
(504)
$ 2,472
(1,073)
(1)
(281)
4
(1,351)
Comprehensive income attributable to Corning Incorporated
$ 3,830
$
835
$
1,121
2016 vs� 2015
2015 vs� 2014
For the year ended December 31, 2016, comprehensive income increased
by $2,995 million when compared to the same period in 2015, driven
by an increase of $2,356 million in net income attributable to Corning
Incorporated, the positive impact of the change in foreign currency
translation adjustments and an increase in unamortized actuarial gains
for postretirement benefit plans.
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, 2016 in the amount of $486 million
(after-tax) was driven by the following items: 1) the decrease in the loss
on the translation of Corning’s consolidated subsidiaries in the amount
of $398 million, largely driven by the strengthening of the Japanese
yen; and 2) the decrease in the loss in the translation of Corning’s
equity method investments in the amount of $88 million, driven by the
realignment of our ownership interests in Dow Corning.
The increase in unamortized actuarial gains for postretirement benefit
plans in the amount of $120 million (after-tax) is due to the following:
1) the decrease of $65 million related to the reclassification of actuarial
gains to the income statement, largely due to higher pension asset
returns; 2) an increase in actuarial losses of $3 million; and 3) a decrease
of $188 million in unamortized losses related to our equity companies.
The significant change was driven by the release of Dow Corning’s
unamortized actuarial loss, which was included in the gain on the
realignment of our ownership interests in Dow Corning.
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.
See Note 13 (Employee Retirement Plans) and Note 17 (Shareholders’
Equity) to the Consolidated Financial Statements for additional details.
20
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 yen-to-dollar management rate of ¥99 and won-to-dollar
management rate of ₩1,100.
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 translated earnings contracts,
acquisition-related costs, certain 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. With respect to the Company’s outlooks for future
periods, it is not able to provide reconciliations for these non-GAAP
measures because the Company does not forecast the movement
of the Japanese yen and South Korean won against the U.S. dollar, or
other items that do not reflect ongoing operations, nor does it forecast
items that have not yet occurred or are out of the Company’s control.
As a result, the Company is unable to provide outlook information on a
GAAP basis.
See “Use of Non-GAAP Financial Measures” for details on core
performance measures. For a reconciliation of non-GAAP performance
measures to their most directly comparable GAAP financial measure,
please see “Reconciliation of Non-GAAP Measures” below.
Results of Operations – Core Performance Measures
Selected highlights from our operations follow (in millions):
Core net sales
Core equity in earnings of affiliated companies
Core earnings
2016
2015
2014
16 vs. 15
15 vs. 14
$
$
$
9,710
250
1,774
$
$
$
9,800
269
1,882
$
$
$
9,955
310
2,023
(1)%
(7)%
(6)%
(2)%
(13)%
(7)%
% change
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
Years ended December 31,
2016
$
3,556
3,005
1,032
1,124
839
154
2015
$
3,774
2,980
1,053
1,107
821
65
2014
$
4,092
2,652
1,092
1,205
862
52
Total core net sales
$
9,710
$
9,800
$
9,955
%
Change
16 vs. 15
%
Change
15 vs. 14
(6)%
1%
(2)%
2%
2%
137%
(1)%
(8)%
12%
(4)%
(8)%
(5)%
25%
(2)%
In all segments except Display Technologies, core net sales are consistent
with GAAP net sales. Because a significant portion of revenues in the
Display Technologies segment are denominated in Japanese yen, this
segment’s net sales are adjusted to remove the impact of translating
yen into dollars. 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 $90 million in the year ended December 31,
2016 when compared to the same period in 2015. Core net sales in the
Display Technologies segment decreased by $218 million, or 6%, in the
year ended December 31, 2016, driven by LCD glass price declines slightly
higher than 10%, partially offset by an increase in volume of a mid-single
digit percentage.
21
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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. The decline was driven by a decrease of $318 million in the
Display Technologies segment primarily due to 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.
The translation impact from movements in foreign currency exchange
rates in the years ended December 31, 2016 and 2015, excluding the
Japanese yen and South Korean won, negatively affected core net
sales in the amount of $39 million and $215 million, respectively, when
compared to the prior years.
Core Equity in Earnings of Affiliated Companies
The following provides a summary of core equity in earnings of affiliated companies (in millions):
Dow Corning Corporation(1)
Hemlock Semiconductor Group(2)
All other
Total core equity earnings
% change
2016
2015
2014
16 vs. 15
15 vs. 14
$
$
98
154
(2)
250
$
$
245
24
269
$
$
287
23
310
(60)%
(108)%
(7)%
(15)%
4%
(13)%
(1) Results include equity earnings for Dow Corning, which includes the silicones business and Hemlock Semiconductor business, through May 31, 2016,
the date of the realignment of our ownership interest in Dow Corning.
(2) Results include equity earnings for Hemlock Semiconductor Group beginning on June 1, 2016.
Core Earnings
2016 vs. 2015
In the year ended December 31, 2016, we generated core earnings of
$1,774 million, or $1.55 per share, compared to $1,882 million, or $1.40 per
share, in the year ended December 31, 2015. The decrease was due to
declines in the Display Technologies and Environmental Technologies
segments. Slightly offsetting the decline was higher core earnings in the
Optical Communications segment, up $16 million, driven by higher sales
volume in carrier network products, the favorable translation impact
from movements in foreign currency exchange rates, excluding the
Japanese yen and South Korean won, of $13 million and manufacturing
efficiencies gained through cost reductions.
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.
Included in core earnings for the years ended December 31, 2016, 2015
and 2014 is net periodic pension expense in the amount of $50 million,
$62 million and $74 million, respectively, which excludes the annual
pension mark-to-market adjustments. In the years ended December 31,
2016, 2015 and 2014, the mark-to-market adjustments were a pre-tax loss
of $67 million, $165 million and $29 million, respectively. Refer to Note 13
(Employee Retirement Plans) to the Consolidated Financial Statements
for additional information.
22
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
2016
$
$
$
$
1,774
98
1,676
98
1,774
1,020
9
115
1,144
1.64
1.55
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
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 in 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 (amounts in millions
except percentages and per share amounts):
Net sales
Equity
earnings
Income before
income taxes
Net
income
Effective
tax rate(a)
Earnings
per share
Year ended December 31, 2016
As reported
Constant-yen(1)
Constant-won(1)
Translated earnings contract loss(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)
Impacts from the acquisition of Samsung
Corning Precision Materials(9)
Pension mark-to-market adjustment(11)
Gain on realignment of equity
investment(12)
Taiwan power outage(13)
Core performance measures
$
9,390
$
284
$
3,692
$
3,695
0%
$
316
4
4
(1)
(37)
300
(47)
448
127
55
199
(37)
(49)
67
222
(34)
282
107
(27)
70
138
(18)
(42)
44
$
9,710
$
250
$
2,096
$
1,774
15.4%
$
(2,676)
17
(2,676)
13
(a) Based upon statutory tax rates in the specific jurisdiction for each event.
See “Items Excluded from GAAP Measures” below for the descriptions of the footnoted reconciling items.
3.23
0.19
(0.03)
0.25
0.09
(0.02)
0.06
0.12
(0.02)
(0.04)
0.04
(2.34)
0.01
1.55
23
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net sales
$
9,111
687
2
As reported
Constant-yen(1)
Constant-won(1)
Translated earnings contract gain(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)
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(a)
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
1.00
0.31
(0.01)
(0.04)
0.03
0.03
0.03
(0.02)
(0.01)
0.01
0.08
1.40
Core performance measures
$
9,800
$
269
$
2,190
$
1,882
14.1%
$
(a) Based upon statutory tax rates in the specific jurisdiction for each event.
See “Items Excluded from GAAP Measures” below for the descriptions of the footnoted reconciling items.
Net sales
Equity
earnings
Income before
income taxes
Net
income
Effective
tax rate(a)
Earnings
per share
Year ended December 31, 2014
As reported
Constant-yen(1)*
Constant-won(1)
Translated earnings contract gain(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%
$
(a) Based upon statutory tax rates in the specific jurisdiction for each event.
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.
24
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Items Excluded from GAAP Measures
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: 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) Translated earnings contract loss (gain): We have excluded the impact of the gains and losses of our translated earnings contracts 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.
(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.
(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 realignment of equity investment: Gain recorded upon the completion of the strategic realignment of our ownership interest in
Dow Corning.
(13) Taiwan power outage: Impact of the power outage that temporarily halted production at our Tainan, Taiwan manufacturing location in the second
quarter of 2016. The impact includes asset write-offs and charges for facility repairs, offset somewhat by partial reimbursement through our
insurance program.
Reportable Segments
Our reportable segments are as follows:
• Display Technologies – manufactures glass substrates primarily for flat
panel liquid crystal displays.
• Optical Communications – manufactures carrier and enterprise
network components for the telecommunications industry.
• Environmental Technologies – manufactures ceramic substrates and
filters for automotive and diesel emission control 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 enabling 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, our non-LCD glass business, new product lines
and development projects, as well as certain corporate investments such
as Eurokera and Keraglass equity affiliates.
25
CORNING INCORPORATED - 2016 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 GAAP. Our reportable
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 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 their 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.
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):
Year ended December 31, 2016
Year ended December 31, 2015
Year ended December 31, 2014
(in millions)
As reported
Constant-yen(1)*
Constant-won(1)
Translated earnings contract gain(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)
Taiwan power outage(13)
Sales
Net
income
Sales
Net
income
Sales
$
3,238
$
316
2
935
222
(33)
(127)
44
(42)
1
6
$
3,086
$
1,095
$
686
2
419
(17)
(416)
3,851
240
(10)
4
1
Net
income
$
1,396
142
27
(290)
37
4
40
6
(121)
2
Core performance measures
$
3,556
$
1,006
$
3,774
$
1,075
$
4,092
$
1,243
*
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
2016 vs. 2015
Net sales in the Display Technologies segment increased by $152 million,
or 5%, in the year ended December 31, 2016 when compared to the same
period in 2015, driven by the positive impact from the strengthening of
the Japanese yen in the amount of $370 million and a mid-single digit
percentage volume increase driven by growth in television screen size.
This increase was partially offset by LCD glass price declines slightly
higher than 10%.
Net income in the Display Technologies segment decreased by
$160 million, or 15%, in the year ended December 31, 2016 when
compared to the same period in 2015. This decrease was driven by the
following items:
• The impact of price declines slightly higher than 10%;
• A decrease of $289 million in the realized gain from our yen and
won-denominated currency hedges; and
• An increase of $44 million in asset write-off expenses.
The decrease in net income was partially offset by the following items:
• A mid-single digit percentage increase in volume;
• An increase of $35 million in the gain on the fair value adjustment of
the contingent consideration resulting from the acquisition of Corning
Precision Materials;
• Improvements in manufacturing efficiency; and
• A decline in operating expenses.
The translation impact of fluctuations in foreign currency exchange
rates positively impacted Display Technologies net income in the year
ended December 31, 2016 in the amount of $213 million when compared
to the same period in 2015. This impact was more than offset by the
decrease in the realized gain from our translated earnings contracts in
the amount of $289 million.
26
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
Net income in the Display Technologies segment decreased by
$301 million, or 22%, in the year ended December 31, 2015 when
compared to the same period in 2014. 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.
by a mid-single digit percentage volume increase. Core earnings also
decreased in this period, down $69 million, or 6%, driven by LCD glass
price declines slightly higher than 10%, partially offset by a mid-single
digit percentage volume increase, improvements in manufacturing
efficiency and a decline in operating expenses.
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.
The decrease in net income was partially offset by the following items:
Other Information
• Improvements in manufacturing efficiency of $79 million;
• A decline in transaction and acquisition-related costs in the amounts
of $73 million and $37 million, respectively;
• 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 translated earnings contracts in
the amount of $126 million.
Core Performance
2016 vs. 2015
Core net sales decreased by $218 million, or 6%, in the year ended
December 31, 2016 when compared to the same period in 2015, driven
by LCD glass price declines slightly higher than 10%, partially offset
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 2016, 2015 and 2014, three customers
of the Display Technologies segment, which individually accounted for
more than 10% of segment net sales, accounted for a combined 65%,
62% and 61% of total segment sales in those years. Our near-term sales
and profitability would be impacted if any of these significant customers
were unable to continue to purchase our products.
Corning has invested to expand capacity to meet the projected demand
for LCD glass substrates. In 2016, 2015 and 2014, capital spending in this
segment was $464 million, $594 million and $492 million, respectively.
Outlook:
For full-year 2017, Corning expects the rate of growth in both retail
market and glass demand to be in the mid-single digit percentages.
In the first quarter of 2017, the company expects Corning’s volume to
increase by mid-teen percentage year over year, and decline by mid-single
digit percentage sequentially. The company expects an overall favorable
LCD glass price environment for the full year, with price declines more
moderate than in 2016.
27
CORNING INCORPORATED - 2016 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, 2016
Year ended
December 31, 2015
Year ended
December 31, 2014
Sales
$
3,005
$
(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)
Core performance measures
$
3,005
$
Net
income
Sales
Net
income
Sales
Net
income
245
23
24
5
297
$
2,980
$
237
$
2,652
$
16
13
(1)
16
$
2,980
$
281
$
2,652
$
194
(2)
17
(2)
13
220
See “Items Excluded from GAAP Measures” above for the descriptions of the footnoted items.
As Reported
2016 vs. 2015
In the year ended December 31, 2016, net sales of the Optical
Communications segment increased $25 million, or 1%, when compared
to the same period in 2015, driven by an increase in carrier network sales.
The sales increase was driven by fiber-to-the-home products in North
America, higher sales of optical fiber and the impact of an acquisition
completed in the second quarter of 2016. These increases were partially
offset by production issues related to the implementation of new
manufacturing software, which constrained our ability to manufacture
product in the first half of 2016. Production returned to normal levels at
the end of the second quarter. The translation impact from movements
in foreign currency exchange rates in 2016 negatively impacted Optical
Communications net sales in the amount of $8 million, when compared
to the same period in 2015.
income
in the Optical Communications segment
increased
Net
$8 million, or 3%, in the year ended December 31, 2016 when compared
to the same period in 2015. The increase was driven by cost reductions
and the continuation of the favorable shift toward sales of our solutions
products, partially offset by the impact of the production issues
described above, costs incurred related to a small acquisition completed
in the second quarter of 2016 and restructuring and asset write-off
expenses. Movements in foreign exchange rates positively impacted net
income in the amount of $12 million when compared to 2015.
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.
28
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.
Core Performance
2016 vs. 2015
Core earnings increased $16 million, or 6%, in the year ended December
31, 2016, driven by higher sales of our solutions products and cost
reductions, partially offset by the impact of the production issues
described above. Movements in foreign exchange rates positively
impacted core earnings in the amounts of $12 million when compared
to 2015.
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.
The Optical Communications segment has a concentrated customer
base. In the year ended December 31, 2016, one customer, which
individually accounted for more than 10% of segment net sales,
accounted for 15% of total segment net sales. 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 year ended December 31, 2014, one customer, which individually
accounted for more than 10% of segment net sales, accounted for 11% of
total segment net sales.
Outlook:
In the first quarter of 2017, year-over-year Optical Communications sales
growth is expected to be at least 25%. Full-year 2017 sales are expected
to increase by a low-teens percentage over 2016.
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2016
Year ended
December 31, 2015
Year ended
December 31, 2014
Sales
1,032
1,032
$
$
Net
income
$
$
133
3
136
$
$
Sales
1,053
1,053
Net
income
$
$
161
161
$
$
Sales
1,092
1,092
Net
income
$
$
178
5
183
See “Items Excluded from GAAP Measures” above for the descriptions of the footnoted items.
As Reported
Core Performance
2016 vs. 2015
Net sales in the Environmental Technologies segment decreased by
$21 million, or 2%, in the year ended December 31, 2016 when compared
to the same period in 2015, driven by a decrease of $78 million in sales
of diesel products due to the weakening of the heavy-duty diesel truck
market in North America, offset partially by an increase of $57 million in
light-duty substrates sales, driven by strength in the North American,
European and Chinese markets. Net income decreased by $28 million,
or 17%, driven by lower sales of heavy-duty diesel products and our
investment in capacity for our gas particulate filters. Movements in
foreign exchange rates versus the U.S. dollar negatively impacted net
sales and net income in this segment in the amounts of $22 million
and $8 million, respectively, in the year ended December 31, 2016, when
compared to the same period in 2015.
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 in 2014, 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.
2016 vs. 2015
Core earnings decreased by $25 million, or 16%, in the year ended
December 31, 2016, driven by the items impacting our “As Reported”
results described above.
2015 vs. 2014
Core earnings declined by $22 million, or 12%, in the year ended December
31, 2015, when compared to the same period in 2014, 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.
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
2016, 2015 and 2014, net sales to three customers, which individually
accounted for more than 10% of segment sales, accounted for 85%, 86%
and 88%, respectively, of total segment sales. While we are not aware
of any significant customer credit issues with our direct customers, our
near-term sales and profitability would be impacted if any individual
customers were unable to continue to purchase our products.
Outlook:
For the first quarter of 2017, year-over-year segment sales are expected
to be consistent to down slightly. Full-year 2017 sales are expected to be
consistent to up slightly from last year with continued strength in the
automotive market and lower demand for heavy-duty diesel products.
Sales of the company’s new gas particulate filters are expected to begin
during the second half of 2017.
29
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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):
Year ended
December 31, 2016
Year ended
December 31, 2015
Year ended
December 31, 2014
Sales
$
1,124
$
(in millions)
As reported
Constant-yen(1)*
Constant-won(1)
Translated earnings contract loss (gain)(2)
Acquisition-related costs(3)
Restructuring, impairment and other charges(6)
Taiwan power outage(13)
Core performance measures
$
1,124
$
Net
income
Sales
Net
income
Sales
Net
income
174
(1)
(2)
15
3
189
$
1,107
$
167
$
1,205
$
(6)
(2)
5
14
138
(3)
14
(1)
12
$
1,107
$
178
$
1,205
$
160
*
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
2016 vs. 2015
Net sales in the Specialty Materials segment increased by $17 million, or
2%, in the year ended December 31, 2016 when compared to the same
period in 2015, driven by an increase in sales of Corning Gorilla Glass 5
and advanced optics products. Although Corning Gorilla Glass sales
were lower in the first three quarters of 2016, sales in the fourth quarter
of 2016 increased approximately 22% over the same period last year, led
by the rapid adoption of Corning Gorilla Glass 5. Net income increased
by $7 million, or 4%, driven by manufacturing cost reductions, higher
advanced optics sales and the impact of Gorilla Glass 5, offset slightly
by higher research and development costs. Movements in foreign
exchange rates did not materially impact net sales and net income in
the Specialty Materials segment in the twelve months ended December
31, 2016 when compared to the same period in 2015.
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 in 2014, 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.
Core Performance
2016 vs. 2015
Core earnings in the twelve months ended December 31, 2016 increased
by $11 million, or 6%, driven primarily by cost reductions and an increase
in advanced optics and Gorilla Glass 5 sales, offset slightly by higher
research and development costs.
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.
For 2016, 2015 and 2014, three customers of the Specialty Materials
segment, which
individually accounted for more than 10% of
segment sales, accounted for 56%, 56% and 51%, respectively, of total
segment sales.
Outlook:
In the first quarter of 2017, year-over-year segment sales growth is
expected to be in the high-teen percentages. The company expects full-
year 2017 segment sales to increase, with the rate of growth dependent
on the timing and extent of customers deploying Gorilla Glass 5 and
other Corning innovations.
30
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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)
Year ended
December 31, 2016
Year ended
December 31, 2015
Year ended
December 31, 2014
Sales
Net
income
Sales
Net
income
Sales
Net
income
As reported
Acquisition-related costs(3)
Restructuring, impairment and other charges(6)
Core performance measures
$
$
839
839
$
$
58
12
7
77
$
$
821
821
$
$
61
12
73
$
$
862
862
$
$
67
14
2
83
See “Items Excluded from GAAP Measures” above for the descriptions of the footnoted items.
As Reported
Core Performance
2016 vs. 2015
Net sales in the Life Sciences segment increased by $18 million, or 2%, in
the year ended December 31, 2016 when compared to the same period
in 2015, driven by volume growth in North America, China and Europe,
slightly offset by the impact of movements in foreign exchange rates
in the amount of $11 million. Net income declined by $3 million, or 5%,
driven by asset write-offs and exit costs and the impact of movements
in foreign exchange rates of $7 million, offset slightly by higher volume.
2015 vs. 2014
Net sales for the year ended December 31, 2015 decreased by $41 million,
or 5%, when compared to the same period in 2014, 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 in 2014, with the negative impact from movements in
foreign exchange rates in the amount of $14 million more than offsetting
improvements in manufacturing efficiency.
2016 vs. 2015
In the year ended December 31, 2016, core earnings in the Life Sciences
segment increased by $4 million, or 5%, when compared to the same
period last year, with higher volume more than offsetting the negative
impact from movements in foreign exchange rates.
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 in 2014, with the negative impact from movements in foreign
exchange rates more than offsetting improvements in manufacturing
efficiency.
For 2016, 2015 and 2014, two customers in the Life Sciences segment,
which individually accounted for more than 10% of total segment net
sales, collectively accounted for 46%, 46% and 45%, respectively, of total
segment sales.
Outlook:
The Life Sciences segment is expected to have low-single-digit
percentage sales growth for first-quarter and full-year 2017, ahead of
forecasted market growth rates.
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, our non-LCD glass business, new product lines
and development projects, 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
% change
2016
2015
2014
16 vs. 15
15 vs. 14
$
$
$
$
152
191
(6)
(240)
$
$
$
$
64
186
17
(202)
$
$
$
$
53
177
18
(198)
138
3
(135)
(19)
21
5
(6)
(2)
2016 vs. 2015
The increase in net sales of this segment in the year ended December 31,
2016 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 increase in the
net loss of this segment was driven by asset write-offs in emerging
businesses, offset slightly by the addition of the Corning Pharmaceutical
Technologies business net income.
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 glass businesses.
31
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
Financing and Capital Structure
The following items impacted Corning’s financing and capital structure
during 2016 and 2015:
2016
• In the third quarter of 2016, Corning’s Board of Directors approved
a $1 billion increase to our commercial paper program, raising it
to $2 billion. If needed, this program is supported by our $2 billion
revolving credit facility that expires in 2019. Corning did not have
outstanding commercial paper at December 31, 2016.
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.
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. The
Company paid four quarterly dividends of $0.135 during the year ended
December 31, 2016 and paid four quarterly dividends of $0.12 during the
year ended December 31, 2015.
On February 1, 2017, Corning’s Board of Directors declared a 14.8% increase
in the Company’s quarterly common stock dividend, which increased
the quarterly dividend from $0.135 to $0.155 per share of common stock,
beginning with the dividend to be paid in the first quarter of 2017. This
increase marks the sixth dividend increase since October 2011.
Fixed Rate Cumulative Convertible Preferred
Stock, Series A
On January 15, 2014, Corning designated a new series of its preferred
stock as Fixed Rate Cumulative Convertible Preferred Stock, Series A,
par value $100 per share, and issued 1,900 shares of Preferred Stock at
an issue price of $1 million per share, for an aggregate issue price of
$1.9 billion, to Samsung Display in connection with the acquisition of
its equity interests in Samsung Corning Precision Materials. Corning
also issued to Samsung Display an additional 400 shares of Fixed Rate
Cumulative Convertible Preferred Stock at closing, for an aggregate
issue price of $400 million in cash.
Dividends on the Preferred Stock are cumulative and accrue at the
annual rate of 4.25% on the per share issue price of $1 million. The
dividends are payable quarterly as and when declared by the Company’s
Board of Directors. The Preferred Stock ranks senior to our common stock
with respect to payment of dividends and rights upon liquidation. The
Preferred Stock is not redeemable except in the case of a certain deemed
liquidation event, the occurrence of which is under the control of the
Company. The Preferred Stock is convertible at the option of the holder
and the Company upon certain events, at a conversion rate of 50,000
shares of Corning’s common stock per one share of Preferred Stock,
subject to certain anti-dilution provisions. As of December 31, 2016, 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 beginning in 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 has collected the
full amount of this deposit, adjusted for foreign exchange movements,
receiving $185 million of this deposit in 2016 and $197 million in 2015.
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 2016 and 2015, there were no credit
memoranda issued.
Capital Spending
Capital spending totaled $1.1 billion in 2016, slightly below the amount
spent in 2015. Spending in our Display Technologies and Optical
Communications segments represented 41% and 22%, respectively. We
expect our 2017 capital expenditures to be approximately $1.5 billion,
driven by expansions related to the Gen 10.5 glass manufacturing
facility in China, the addition of capacity to support the new gas-
particulate filters business in the Environmental Technologies segment
and investment to support general business growth in the Optical
Communications and Specialty Materials segments.
32
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cash Flows
Summary of cash flow data (in millions):
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash used in financing activities
2016 vs. 2015
Net cash provided by operating activities decreased $288 million in the
year ended December 31, 2016 when compared to 2015, driven largely
by a decrease in net income excluding non-cash gains, an increase in
accounts receivable in the Optical Communications and Specialty
Materials segments, up $81 and $70 respectively, partially offset by an
increase in accounts payable and other current liabilities. A decrease
of $58 million in dividends received from equity affiliates, driven by the
strategic realignment of our ownership interest in Dow Corning, also
negatively impacted cash flow from operations.
Net cash provided by investing activities increased substantially, up
$4,347 million, in the year ended December 31, 2016 when compared to
2015, driven by $4,818 million in cash received upon the realignment of
Dow Corning, a decrease of $120 million in capital expenditures and a
decrease of $399 million in acquisition spending, partially offset by a
decrease of $452 million in realized gains on our translated earnings
contracts.
Net cash used in financing activities in the year ended December 31,
2016 increased $2,703 when compared to 2015, driven by an increase
of $999 million in share repurchases, the repayment of $481 million of
commercial paper outstanding in 2015 and the absence of cash received
from the issuance of long-term debt in the amount of $745 million in the
third quarter of 2015.
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 translated earnings contracts, offset by higher capital
spending and several acquisitions that were completed in 2015.
Years ended December 31,
2016
$
$
$
2,521
3,662
(5,306)
2015
$
$
$
2,809
(685)
(2,603)
2014
$
$
$
4,709
(962)
(2,586)
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.
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, 2016, 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 2016,
we made voluntary cash contributions of $73 million to our domestic
defined benefit pension plan and $16 million to our international
pension plans. 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. We are not subject to any mandatory
contributions in 2017, and do not anticipate making voluntary cash
contributions to our U.S. qualified pension plan. We anticipate
contributing up to $23 million to our international pension plans in 2017.
Refer to Note 13 (Employee Retirement Plans) to the Consolidated
Financial Statements for additional information.
Restructuring
For the year ended December 31, 2016, we recorded charges of $77 million
for employee related costs, asset disposals, and exit costs associated
with some minor restructuring activities in all of the segments with
total cash expenditures of approximately $12 million.
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.
Refer to Note 2 (Restructuring, Impairment and Other Charges) to the
Consolidated Financial Statements for additional information.
33
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Key Balance Sheet Data
Balance sheet and working capital measures are provided in the following table (in millions):
Working capital
Current ratio
Trade accounts receivable, net of allowances
Days sales outstanding
Inventories
Inventory turns
Days payable outstanding(1)
Long-term debt
Total debt to total capital
(1) Includes trade payables only.
Credit Ratings
As of February 6, 2017, our credit ratings were as follows:
Rating Agency
Standard & Poor’s
Moody’s
Management Assessment of Liquidity
We ended the fourth quarter of 2016 with approximately $5.3 billion of
cash and cash equivalents. Our cash and cash equivalents are held in
various locations throughout the world and are generally unrestricted.
Although approximately 62% of the consolidated amount was held
outside of the United States at December 31, 2016, 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.
It is our policy to 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.
Corning also has a commercial paper program pursuant to which we
may issue short-term, unsecured commercial paper notes. On July 20,
2016, Corning’s Board of Directors approved an increase to the allowable
maximum aggregate principal amount outstanding at any time from
$1 billion to $2 billion. Under this program, the Company may issue
the notes from time to time and will use the proceeds for general
corporate purposes. The Company’s $2 billion revolving credit facility is
available to support obligations under the commercial paper program,
if needed. Corning did not have outstanding commercial paper at
December 31, 2016.
34
December 31,
2016
2015
$
$
$
$
6,297
3.3:1
1,481
54
1,471
3.8
45
3,646
18%
$
$
$
$
5,455
2.9:1
1,372
55
1,385
4.0
42
3,890
19%
Rating long-term debt
Outlook last update
BBB+
Baa1
Stable
October 27, 2015
Stable
October 28, 2015
Share Repurchases
During 2014, Corning repurchased 98.1 shares for approximately
$2 billion through an accelerated share repurchase agreement and open
market repurchases 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”).
During 2015, Corning repurchased 167 million shares for approximately
$3.25 billion through an accelerated share repurchase agreement and
open market repurchases as part of a repurchase program authorized
by Corning’s Board of Directors in December 2014 (the “December 2014
Repurchase Program”) and repurchase programs authorized by Corning’s
Board of Directors in July 2015 and October 2015 (the “2015 Repurchase
Programs”).
During 2016, Corning repurchased 197.1 million shares for approximately
$4.2 billion through an accelerated share repurchase agreement and
open market repurchases as part of the 2015 Repurchase Programs.
Refer to Note 17 (Shareholders’ Equity) to the Consolidated Financial
Statements for additional information.
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.
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our major source of funding for 2017 and beyond will be our operating
cash flow and our existing balances of cash and cash equivalents
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, 2016, our leverage
using this measure was 18% 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, 2016, 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.
Translated Earnings Contracts
In the first quarter of 2013, Corning executed a series of purchased collars
that expired 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 to hedge the translation impact of
Japanese yen on Corning’s projected 2015, 2016 and 2017 net income.
Additionally, in January 2016, Corning extended its foreign exchange
hedging program to hedge a significant portion of its projected yen
exposure for the period 2018 through 2022. In the year ended December
31, 2016, we recorded a pre-tax net loss of $459 million, and in the years
ended December 31, 2015 and 2014, we recorded pre-tax net gains of
$113 million and $1,406 million, respectively, related to changes in the
fair value of these derivative instruments. Included in these amounts
are realized gains of $207 million, $686 million and $280 million,
respectively. The gross notional value outstanding for purchased collars
and average rate forwards which hedge our exposure to the Japanese
yen at December 31, 2016, 2015 and 2014 was $14.9 billion, $8.3 billion and
$9.8 billion, respectively.
We have entered into zero-cost collars and average rate forwards to
hedge our translation exposure resulting from movements in the South
Korean won and its impact on our net earnings. In the year ended
December 31, 2016, we recorded a pre-tax net gain of $7 million, and 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 instruments. Included in these amounts are realized losses
of $7 million, $33 million and $6 million, respectively. These instruments
had a gross notional value outstanding at December 31, 2016, 2015 and
2014 of $1.2 billion, $3.3 billion and $2.3 billion, respectively.
We have entered into a portfolio of zero-cost collars and average
rate forwards to hedge against our euro translation exposure. In the
fourth quarter of 2016, the zero-cost collars expired. In the years ended
December 31 2016 and 2015, we recorded net pre-tax gains of $15 million
and $3 million, respectively. At December 31, 2016, the euro-denominated
average rate forwards had a gross notional amount of $278 million, and
at December 31, 2015, the zero-cost collars and average rate forwards had
a gross notional value of $345 million.
In 2016, we entered into a portfolio of average rate forwards to hedge
against our translation exposure resulting from movements in the
Chinese yuan and the New Taiwan dollar (“TWD”). These instruments
begin settling in the first quarter of 2017. In the year ended December 31
2016, we recorded a net pre-tax unrealized loss of $11 million on the yuan-
denominated translation hedges. At December 31, 2016, the yuan-
denominated average rate forwards had a gross notional amount of
$275 million, and the TWD average rate forwards had a gross notional
value of $56 million.
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 translated
earnings contract (loss) gain, net line of the Consolidated Statements
of Income.
Off Balance Sheet Arrangements
Off balance sheet arrangements are transactions, agreements, or other
contractual arrangements with an unconsolidated entity for which
Corning has an obligation to the entity that is not recorded in our
consolidated financial statements.
Corning’s off balance sheet arrangements include guarantee contracts.
At the time a guarantee is issued, the Company is required to recognize
a liability for the fair value or market value of the obligation it assumes.
In the normal course of our business, we do not routinely provide
significant third-party guarantees. Generally, third-party guarantees
provided by Corning are limited to certain financial guarantees, including
stand-by letters of credit and performance bonds, and the incurrence of
contingent liabilities in the form of purchase price adjustments related
to attainment of milestones. These guarantees have various terms, and
none of these guarantees are individually significant.
Refer to Note 14 (Commitments, Contingencies and Guarantees) to the
Consolidated Financial Statements for additional information.
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 eleven entities that qualify as a variable interest
entity. These entities are 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.
35
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Contractual Obligations
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
Imputed interest on capital leases and financing obligations
Minimum rental commitments
Amended PCC Plan(7)
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
$
$
$
178
51
30
8
267
231
378
3,557
2,222
359
231
545
290
48
$
$
$
102
44
30
176
127
378
250
162
6
18
68
70
$
$
$
2
1
3
81
625
299
8
36
111
85
$
$
$
1
1
20
362
259
10
36
76
85
$
$
$
74
6
7
87
3
2,320
1,502
335
141
290
50
$
$
7,861
8,128
$
$
1,079
1,255
$
$
1,245
1,248
$
$
848
849
$
$
4,641
4,728
(1) At December 31, 2016, $39 million of the $51 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, 2016, $48 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.
(7) See Note 7 (Investments) to the Consolidated Financial Statements for additional details.
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.
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, 2016 and 2015, Corning had accrued approximately
$43 million (undiscounted) and $37 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.
36
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Estimates
The preparation of financial statements requires us to make estimates
and assumptions that affect amounts reported therein. The estimates
that required us to make difficult, subjective or complex judgments,
including future projections of performance and relevant discount rates,
are set forth below.
Impairment of assets held for use
We are required to assess the recoverability of the carrying value of
long-lived assets when an indicator of impairment has been identified.
We review our long-lived assets in each quarter to assess whether
impairment indicators are present. We must exercise judgment in
assessing whether an event of impairment has occurred.
Manufacturing equipment includes certain components of production
equipment that are constructed of precious metals, primarily platinum
and rhodium. These metals are not depreciated because they have very
low physical losses and are repeatedly reclaimed and reused in our
manufacturing process over a very long useful life. Precious metals are
reviewed for impairment as part of our assessment of long-lived assets.
This review considers all of the Company’s precious metals that are
either in place in the production process; in reclamation, fabrication,
or refinement in anticipation of re-use; or awaiting use to support
increased capacity. Precious metals are only acquired to support our
operations and are not held for trading or other non-manufacturing
related purposes.
Examples of events or circumstances that may be indicative of
impairments include, but are not limited to:
• A significant decrease in the market price of an asset;
• A significant change in the extent or manner in which a long-lived
asset is being used or in its physical condition;
• A significant adverse change in legal factors or in the business climate
that could affect the value of the asset, including an adverse action or
assessment by a regulator;
• An accumulation of costs significantly in excess of the amount
originally expected for the acquisition or construction of an asset;
• A current-period operating or cash flow loss combined with a
history of operating or cash flow losses or a projection or forecast
that demonstrates continuing losses associated with the use of an
asset; and
• A current expectation that, more likely than not, an asset will be sold
or otherwise disposed of significantly before the end of its previously
estimated useful life.
For purposes of recognition and measurement of an impairment loss, a
long-lived asset or assets is grouped with other assets and liabilities at
the lowest level for which identifiable cash flows are largely independent
of the cash flows of other assets and liabilities. We must exercise
judgment in assessing the lowest level for which identifiable cash flows
are largely independent of the cash flows of other assets and liabilities.
For the majority of our reportable segments, we concluded that locations
or businesses which share production along the supply chain must be
combined in order to appropriately identify cash flows that are largely
independent of the cash flows of other assets and liabilities.
For long-lived assets, when impairment indicators are present, we
compare estimated undiscounted future cash flows, including the
eventual disposition of the asset group at market value, to the assets’
carrying value to determine if the asset group is recoverable. This
assessment requires the exercise of judgment in assessing the future
use of and projected value to be derived from the assets to be held and
used. Assessments also consider changes in asset utilization, including
the temporary idling of capacity and the expected timing for placing
this capacity back into production. If there is an impairment, a loss is
recorded to reflect the difference between the assets’ fair value and
carrying value. This may require judgment in estimating future cash
flows and relevant discount rates and residual values in estimating the
current fair value of the impaired assets to be held and used.
For an asset group that fails the test of recoverability, 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. 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.
At December 31, 2016 and December 31, 2015, the carrying value of
precious metals was higher than the fair market value by $890 million
and $976 million, respectively. The majority of 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.
37
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
• The following events and circumstances are considered when
evaluating whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount:
– Macroeconomic conditions, such as a deterioration in general
economic conditions, fluctuations in foreign exchange rates and/or
other developments in equity and credit markets;
– Market capital in relation to book value;
– Industry and market considerations, such as a deterioration in the
environment in which an entity operates, material loss in market
share and significant declines in product pricing;
– Cost factors, such as an increase in raw materials, labor or other costs;
– Overall financial performance, such as negative or declining cash
flows or a decline in actual or forecasted revenue;
assessment, we have aggregated these two components into one
reporting unit based upon their similar economic characteristics.
On a quarterly basis in 2016, 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.
– Other relevant entity-specific events, such as material changes in
Specialty Materials
management or key personnel; and
– Events affecting a reporting unit, such as a change in the
composition or carrying amount of its net assets including
acquisitions and dispositions.
The examples noted above are not all-inclusive, and the Company will
consider other relevant events and circumstances that affect the fair
value of a reporting unit in determining whether to perform the first
step of the goodwill impairment test.
Our two-step goodwill recoverability assessment is based on our annual
strategic planning process. This process includes an extensive review of
expectations for the long-term growth of our businesses and forecasted
future cash flows. Our valuation method is an “income approach” using
a discounted cash flow model in which cash flows anticipated over
several periods, plus a terminal value at the end of that time horizon,
are discounted to their present value using an appropriate rate of return.
Our estimates are based upon our historical experience, our current
knowledge from our commercial relationships, and available external
information about future trends.
Display Technologies
Goodwill for the Display Technologies segment is tested at the reporting
unit level, which is also the operating segment level 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 2016, 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
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 2016, 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
2016, 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 2016, 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.
38
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
In addition to assessing qualitative factors each quarter, we performed a
quantitative goodwill recoverability test in 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
On May 31, 2016, Corning completed the strategic realignment of
its equity investment in Dow Corning pursuant to the Transaction
Agreement announced on December 10, 2015. Under the terms of the
Transaction Agreement, Corning exchanged with Dow Corning its 50%
stock interest in Dow Corning for 100% of the stock of a newly formed
entity, which holds an equity interest in Hemlock Semiconductor Group
and approximately $4.8 billion in cash.
The equity in earnings line on our income statement for the year ended
December 31, 2016 reflects both the equity earnings from the silicones and
polysilicones (Hemlock Semiconductor) businesses of Dow Corning from
January 1, 2016 through May 31, 2016, the closing date of the Transaction
Agreement, and seven months of equity earnings from Hemlock
Semiconductor Group. Prior to the realignment of Dow Corning, equity
earnings from the Hemlock Semiconductor business were reported on
the equity in earnings line in Corning’s income statement, net of Dow
Corning’s 35% U.S. tax. Additionally, Corning reported its tax on equity
earnings from Dow Corning on the tax provision line on its income
statement at a U.S. tax provision rate of 7%. As part of the realignment,
Hemlock Semiconductor Group was converted to a partnership. Each
of the partners is responsible for the taxes on their portion of equity
earnings. Therefore, post-realignment, Hemlock Semiconductor Group’s
equity earnings is reported before tax on the equity in earnings line and
Corning’s tax is reported on the tax provision line.
At December 31, 2016 and 2015, the carrying value of our equity method
investments was $269 million and $1.9 billion, respectively. 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, 2016 and 2015, 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, euro, New Taiwan dollar and Chinese yuan. These contracts are
not designated as accounting hedges, and changes in their fair value
are recorded in earnings in the translated earnings contract (loss) 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.
Refer to Note 16 (Fair Value Measurements) to the Consolidated Financial
Statements for additional information.
39
CORNING INCORPORATED - 2016 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
Other possible liabilities
We are required to make judgments about future events that are
inherently uncertain. In making determinations of likely outcomes of
certain matters, including certain tax planning and environmental
matters, these judgments require us to consider events and actions that
are outside our control in determining whether probable or possible
liabilities require accrual or disclosure. It is possible that actual results
will differ from assumptions and require adjustments to accruals.
Pension and other postretirement employee
benefits (OPEB)
Corning offers employee retirement plans consisting of defined benefit
pension plans covering certain domestic and international employees
and postretirement plans that provide health care and life insurance
benefits for eligible retirees and dependents. The costs and obligations
related to these benefits reflect the Company’s assumptions related
to general economic conditions (particularly interest rates), expected
return on plan assets, rate of compensation increase for employees and
health care trend rates. The cost of providing plan benefits depends
on demographic assumptions
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.
including
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 changed
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 are
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, 2017, net periodic pension and
OPEB costs will be lower by approximately $23 million and $5 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.
This change was a change in accounting estimate and therefore
was applied prospectively beginning with the 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 2016, 2015 and 2014:
(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
40
2016
$
235
153
75
12
December 31,
2015
$
(111)
166
3
12
2014
$
287
159
68
15
CORNING INCORPORATED - 2016 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,
2016
2015
2014
9.62%
6.00%
19.06%
3.92%
(4.23%)
6.00%
0.59%
2.97%
10.82%
6.25%
17.15%
4.12%
As of December 31, 2016, the Projected Benefit Obligation (PBO) for U.S. pension plans was $3,289 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 2017
pre-tax pension expense
Effect on
December 31, 2016 PBO
- 2 million
+ 2 million
+ 7 million
- 7 million
+ 92 million
- 88 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, 2016, a 25 basis point decrease in each spot
rate would decrease stockholders’ equity by $117 million before tax, and
a 25 basis point increase in each spot rate would increase stockholders’
equity by $111 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 2017
pre-tax OPEB expense
Effect on
December 31, 2016 APBO*
+ 0 million
- 0 million
+ 25 million
- 23 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.
Share-Based Compensation
Share-based compensation cost is measured at the grant date based
on the fair value of the award and is recognized as expense over the
requisite service period. Determining the fair value of stock-based
awards at the grant date requires judgment, including estimating
expected dividends. In addition, judgment is also required in estimating
the amount of share-based awards that are expected to be forfeited.
If actual results differ significantly from these estimates, share-based
compensation expense and our results of operations could be impacted.
Revenue recognition
The Company recognizes revenue when it is realized or realizable and
earned. In certain instances, revenue recognition is based on estimates
of fair value of deliverables as well as estimates of product returns,
allowances, discounts, and other factors. These estimates are supported
by historical data. Corning also has contractual arrangements with
certain customers in which we recognize revenue on a completed
contract basis. Revenues under the completed-contract method are
recognized upon substantial completion, defined as acceptance by the
customer and compliance with performance specifications as agreed
upon in the contract, which in certain instances require estimates and
judgments in determining the timing of substantial completion of
the contract. While management believes that the estimates used are
appropriate, differences in actual experience or changes in estimates
may affect Corning’s future results.
New Accounting Standards
Refer to Note 1 (Summary of Significant Accounting Policies) to the Consolidated Financial Statements.
41
CORNING INCORPORATED - 2016 Annual Report Quantitative and Qualitative Disclosures About
Market Risks
of $1,458 million compared to $741 million at December 31, 2015. Specific
to the South Korean won, a 10% adverse movement in quoted South
Korean won exchange rates could result in a loss in fair value of these
instruments of $79 million compared to $99 million at December 31,
2015. The Company expects that these hypothetical losses from a 10%
adverse movement in quoted foreign currency exchange rates on the
derivative financial instruments should largely offset gains and losses
on the assets, liabilities and future transactions being hedged.
Because we derive approximately 72% 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. As an example of
the impact that changes in foreign currency exchange rates could have
on our financial results, we compare 2016 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 2016 net sales of approximately $328 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 2016 net sales
of approximately $5 million and $80 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 2016 net income attributable
to Corning Incorporated of approximately $201 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 2016 net income
attributable to Corning Incorporated of approximately $65 million and
$6 million, respectively.
Interest Rate Risk Management
It is our policy to 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.
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 yuan, 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 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 zero cost 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, 2016,
with respect to open foreign exchange forward and option contracts,
and foreign denominated debt with values exposed to exchange rate
movements, a 10% adverse movement in quoted foreign currency
exchange rates could result in a loss in fair value of these instruments
of $1,618 million compared to $901 million at December 31, 2015.
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
42
CORNING INCORPORATED - 2016 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 Hemlock Semiconductor
Group is the responsibility of its management. Based on this evaluation,
management concluded that Corning’s internal control over financial
reporting was effective as of December 31, 2016. The effectiveness of
Corning’s internal control over financial reporting as of December 31,
2016, 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
43
CORNING INCORPORATED - 2016 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, 2016 and 2015, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2016 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, 2016, based on criteria
established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s management is responsible for these financial
statements and financial statement schedule, for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in
“Management’s Annual Report on Internal Control Over Financial
Reporting,” appearing under Item 9A. Our responsibility is to express
opinions on these financial statements, on the financial statement
schedule and on the Company’s internal control over financial reporting
based on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
New York, New York
February 6, 2017
44
CORNING INCORPORATED - 2016 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)
Operating income
Equity in earnings of affiliated companies (Note 7)
Interest income
Interest expense
Transaction-related gain, net (Note 8)
Translated earnings contract (loss) gain, net
Gain on realignment of equity investment
Other (expense) income, net
Income before income taxes
Benefit (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,
2016
$
$
$
$
$
9,390
5,644
3,746
1,472
742
64
77
1,391
284
32
(159)
(448)
2,676
(84)
3,692
3
3,695
3.53
3.23
0.54
2015
$
$
$
$
$
9,111
5,458
3,653
1,508
769
54
1,322
299
21
(140)
80
(96)
1,486
(147)
1,339
1.02
1.00
0.36
2014
$
$
$
$
$
9,715
5,663
4,052
1,202
815
33
71
1,931
266
26
(123)
74
1,369
25
3,568
(1,096)
2,472
1.82
1.73
0.52
45
CORNING INCORPORATED - 2016 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 (losses) gains on investments
Unamortized gains (losses) and prior service credits (costs) for postretirement
benefit plans
Net unrealized gains (losses) on designated hedges
Other comprehensive income (loss), net of tax (Note 17)
Years ended December 31,
2016
$
3,695
2015
$
(104)
(3)
241
1
135
1,339
(590)
1
121
(36)
(504)
835
2014
$
$
2,472
(1,073)
(1)
(281)
4
(1,351)
1,121
Comprehensive income attributable to Corning Incorporated
$
3,830
$
The accompanying notes are an integral part of these consolidated financial statements.
46
CORNING INCORPORATED - 2016 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)
Trade accounts receivable, net of doubtful accounts and allowances - $59 and $48
Inventories, net of inventory reserves - $151 and $146 (Note 5)
Other current assets (Note 8, 11 and 15)
Total current assets
Investments (Note 7)
Property, plant and equipment, net of accumulated depreciation - $9,884 and $9,188 (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,
2016
2015
$
5,291
$
4,500
1,481
1,471
805
9,048
336
12,546
1,577
796
2,325
1,271
100
1,372
1,385
912
8,269
1,975
12,648
1,380
706
2,056
1,493
$
27,899
$
28,527
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):
256
1,079
1,416
2,751
3,646
737
2,805
9,939
$
572
934
1,308
2,814
3,890
718
2,242
9,664
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: 1,691 million and
1,681 million
Additional paid-in capital – common stock
Retained earnings
Treasury stock, at cost; shares held: 765 million and 551 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.
846
13,695
16,880
(14,152)
(1,676)
17,893
67
17,960
840
13,352
13,832
(9,725)
(1,811)
18,788
75
18,863
$
27,899
$
28,527
47
CORNING INCORPORATED - 2016 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,
2016
2015
2014
$
3,695
$
1,339
$
2,472
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 (benefit) provision
Restructuring payments
Customer deposits
Employee benefit payments in excess of expense
Translated earnings contract loss (gain)
Unrealized translation losses on transactions
Contingent consideration fair value adjustment
Gain on realignment of equity investment
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
Cash received on realignment of equity investment
Proceeds from sale of assets to related party
(Payments) repayments of loans to unconsolidated entities
Short-term investments – acquisitions
Short-term investments – liquidations
Realized gains on translated earnings contracts
Other, net
Net cash provided by (used in) investing activities
Cash Flows from Financing Activities:
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
(Payments) proceeds from issuance of commercial paper
Payments from the settlement of interest rate swap agreements
Principal payments under capital lease obligations
Proceeds from issuance of preferred stock(1)
Proceeds received for asset financing and related incentives, net
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 increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
1,131
64
77
42
(284)
85
(308)
(12)
185
(92)
448
1
(43)
(2,676)
(106)
(68)
18
243
121
2,521
(1,130)
(333)
(24)
4,818
42
(23)
(20)
121
201
10
3,662
(85)
(481)
(7)
1
138
(4,227)
(645)
(5,306)
(86)
791
4,500
5,291
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
$
(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.
48
CORNING INCORPORATED - 2016 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, 2013
$
831
$ 13,066
$ 11,320
$ (4,099)
$
44
$
21,162
$
49
$ 21,211
Net income
Other comprehensive loss
Shares issued for
acquisition of equity
investment company
Shares issued for cash
Purchase of common stock
for treasury
Shares issued to
benefit plans and
for option exercises
Dividends on shares
Other, net
$
1,900
400
2,472
(1,351)
129
(2,612)
5
261
(771)
(2)
(14)
2,472
(1,351)
1,900
400
(2,483)
264
(771)
(14)
Balance, December 31, 2014
$
2,300
$
836
$ 13,456
$ 13,021
$ (6,727)
$
(1,307)
$
21,579
$
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
$
Net income
Other comprehensive
income (loss)
Purchase of common stock
for treasury
Shares issued to
benefit plans and
for option exercises
Dividends on shares
Other, net
3,695
135
165
(4,409)
6
178
(647)
(2)
(16)
3,695
135
(4,244)
182
(647)
(16)
Balance, December 31, 2016
$
2,300
$
846
$ 13,695
$ 16,880
$ (14,152)
$
(1,676)
$
17,893
$
The accompanying notes are an integral part of these consolidated financial statements.
3
(1)
15
7
73
9
(1)
(6)
75
10
(6)
2,475
(1,352)
1,915
400
(2,483)
264
(771)
(7)
$ 21,652
1,348
(505)
(3,228)
149
(528)
(25)
$ 18,863
3,705
129
(4,244)
182
(647)
(28)
$ 17,960
(12)
67
49
CORNING INCORPORATED - 2016 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.
We use the cost method to account for our investments in companies
that we do not control and for which we do not have the ability to
exercise significant influence over operating and financial policies. In
accordance with the cost method, these investments are recorded at
cost or fair value, as appropriate.
All material intercompany accounts, transactions and profits are
eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to the
current-year presentation. These reclassifications had no impact on
our results of operations, financial position, or changes in shareholders’
equity.
Samsung Corning Precision Materials Co., Ltd.
(“Samsung Corning Precision Materials”)
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 became the owner
of 100% of the common shares of Samsung Corning Precision Materials,
which we 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.
Refer to Note 8 (Acquisitions) to the Consolidated Financial Statements
for additional information.
Dow Corning
Prior to May 31, 2016, Corning and Dow Chemical each owned half
of Dow Corning, an equity company headquartered in Michigan
that manufactures silicone products worldwide. Dow Corning was
the majority-owner of HSG, a market leader in the production of
high purity polycrystalline silicon for the semiconductor and solar
energy industries. On May 31, 2016, Corning completed the strategic
realignment of its equity investment in Dow Corning pursuant to the
Transaction Agreement announced in December 2015. Under the terms
of the Transaction Agreement, Corning exchanged with Dow Corning
its 50% stock interest in Dow Corning for 100% of the stock of a newly
formed entity, which holds an equity interest in HSG and approximately
$4.8 billion in cash. Prior to realignment, HSG, a consolidated subsidiary
of Dow Corning, was an indirect equity investment of Corning. Upon
completion of the exchange, Corning now has a direct equity investment
in HSG.
Refer to Note 7 (Investments) to the Consolidated Financial Statements
for additional information.
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.
50
CORNING INCORPORATED - 2016 Annual Report At the time revenue is recognized, allowances are recorded, with the
related reduction to revenue, for estimated product returns, allowances
and price discounts based upon historical experience and related terms
of customer arrangements. Where we have offered product warranties,
we also establish liabilities for estimated warranty costs based upon
historical experience and specific warranty provisions. Warranty
liabilities are adjusted when experience indicates the expected outcome
will differ from initial estimates of the liability.
In addition, Corning also has contractual arrangements with certain
customers in which we recognize revenue on a completed contract
basis. Revenues under the completed-contract method are recognized
upon substantial completion, defined as acceptance by the customer
and compliance with performance specifications as agreed upon in
the contract. The Company acts as a principal under the contracts, and
recognizes revenues with corresponding cost of revenues on a gross
basis for the full amount of the contract.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Research and development costs totaled $637 million
in 2016,
$638 million in 2015 and $701 million in 2014.
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.
Notes to Consolidated Financial Statements
We recorded foreign currency transaction gains of $21 million for the
year ended December 31, 2016, and foreign currency transaction losses
of $22 million and $60 million for the years ended December 31, 2015 and
2014, respectively. These amounts were recorded in the line item Other
(expense) income, net in the consolidated statements of income.
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 (loss) 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.
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,
2016
2015
2014
$
$
$
381
184
293
$
$
$
298
178
253
$
$
$
358
171
577
(1) Included in this amount are approximately $23 million, $35 million and $40 million of interest costs that were capitalized as part of property, plant
and equipment, net of accumulated depreciation, in 2016, 2015 and 2014, respectively.
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.
51
CORNING INCORPORATED - 2016 Annual Report Goodwill and Other Intangible Assets
Goodwill is the excess of cost of an acquired entity over the amounts
assigned to assets acquired and liabilities assumed in a business
combination. Goodwill relates to and is assigned directly to a specific
reporting unit. Reporting units are either operating segments or one
level below the operating segment. Impairment testing for goodwill
is done at a reporting unit level. Goodwill is reviewed for indicators of
impairment quarterly or if an event occurs or circumstances change that
indicate the carrying amount may be impaired. Corning also performs
a detailed, two-step process every three years if no indicators suggest
a test should be performed in the interim. We use this calculation as
quantitative validation of the step-zero qualitative process; this process
does not represent an election to perform the two-step process in place
of the step-zero review.
The qualitative process includes an extensive review of expectations
for the long-term growth of our businesses and forecasting future cash
flows. If we are required to perform the two-step impairment analysis,
our valuation method is an “income approach” using a discounted cash
flow model in which cash flows anticipated over several periods, plus
a terminal value at the end of that time horizon, are discounted to
their present value using an appropriate rate of return. Our estimates
are based upon our historical experience, our current knowledge from
our commercial relationships, and available external information about
future trends. If the fair value is less than the carrying value, a loss is
recorded to reflect the difference between the fair value and carrying
value.
intangible assets
Other
include patents, trademarks, and other
intangible assets acquired from an independent party. Such intangible
assets have a definite life and are amortized on a straight-line basis over
estimated useful lives ranging from 4 to 50 years.
Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets, such as plant
and equipment and intangible assets, when events or changes in
circumstances occur that indicate the carrying value of the asset or
asset group may not be recoverable. When impairment indicators
are present, we compare estimated undiscounted future cash flows,
including the eventual disposition of the asset group at market value, to
the assets’ carrying value to determine if the asset group is recoverable.
For an asset group that fails the test of recoverability, the estimated fair
value of long-lived assets is determined using an “income approach”
that starts with the forecast of all the expected future net cash flows
including the eventual disposition at market value of long-lived assets,
and also considers the fair market value of all precious metals. We assess
the recoverability of the carrying value of long-lived assets at the lowest
level for which identifiable cash flows are largely independent of the
cash flows of other assets and liabilities. If there is an impairment, a loss
is recorded to reflect the difference between the assets’ fair value and
carrying value. Refer to Note 2 (Restructuring, Impairment and Other
Charges) to the Consolidated Financial Statements for more detail.
Notes to Consolidated Financial Statements
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.
52
CORNING INCORPORATED - 2016 Annual Report 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.
Costs for our defined benefit pension plans consist of two elements:
1) on-going costs recognized quarterly, which are comprised of service
and interest costs, expected return on plan assets and amortization of
prior service costs; and 2) mark-to-market gains and losses outside of the
corridor, where the corridor is equal to 10% of the greater of the benefit
obligation or the market-related value of plan assets at the beginning of
the year, which are recognized annually in the fourth quarter of each year.
These gains and losses result from changes in actuarial assumptions for
discount rates and the differences between actual and expected return
on plan assets. Any interim remeasurements triggered by a curtailment,
settlement or significant plan changes, as well as any true-up to the
annual valuation, are recognized as a mark-to-market adjustment in the
quarter in which such event occurs.
Costs for our postretirement benefit plans consist of on-going costs
recognized quarterly, and are comprised of service and interest costs,
amortization of prior service costs and amortization of actuarial gains
and losses. We recognize the actuarial gains and losses resulting from
changes in actuarial assumptions for discount rates as a component of
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. 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
Notes to Consolidated Financial Statements
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 indefinitely reinvested in those companies. Provision for the
tax consequences of distributions, if any, from consolidated foreign
subsidiaries is recorded in the year in which the earnings are no longer
indefinitely reinvested in those subsidiaries.
Equity Method Investments
Our equity method investments are reviewed for impairment on a
periodic basis or if an event occurs or circumstances change that
indicate the carrying amount may be impaired. This assessment is
based on a review of the equity investments’ performance and a review
of indicators of impairment to determine if there is evidence of a loss in
value of an equity investment. Factors we consider include:
• Absence of our ability to recover the carrying amount;
• Inability of the equity affiliate to sustain an earnings capacity which
would justify the carrying amount of the investment; and
• Significant litigation, bankruptcy or other events that could impact
recoverability.
For an equity investment with impairment indicators, we measure
fair value on the basis of discounted cash flows or other appropriate
valuation methods, depending on the nature of the company involved.
If it is probable that we will not recover the carrying amount of our
investment, the impairment is considered other-than-temporary and
recorded in earnings, and the equity investment balance is reduced to its
fair value accordingly. We require our material equity method affiliates
to provide audited financial statements. Consequently, adjustments for
asset recoverability are included in equity earnings. We also utilize these
financial statements in our recoverability assessment.
Fair Value of Financial Instruments
Major categories of financial assets and liabilities, including short-term
investments, other assets and derivatives are measured at fair value on a
recurring basis. Certain assets and liabilities including long-lived assets,
goodwill, asset retirement obligations, and cost and equity investments
are measured at fair value on a nonrecurring basis.
Fair value is the price that would be received from selling an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value
measurements for assets and liabilities required to be recorded at fair
value, we consider the principal or most advantageous market in which
we would transact and consider assumptions that market participants
would use when pricing the asset or liability, such as inherent risk,
transfer restrictions, and risk of nonperformance.
53
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
Derivative Instruments
We participate in a variety of foreign exchange forward contracts and
foreign exchange option contracts entered into in connection with
the management of our exposure to fluctuations in foreign exchange
rates. We utilize interest rate swaps to reduce the risk of changes in a
benchmark interest rate from the probable forecasted issuance of debt
and to swap fixed rate interest payments into floating rate interest
payments. These financial exposures are managed in accordance with
corporate policies and procedures.
All derivatives are recorded at fair value on the balance sheet. Changes in
the fair value of derivatives designated as cash flow hedges and hedges
of net investments in foreign operations are not recognized in current
operating results but are recorded in accumulated other comprehensive
income. Amounts related to cash flow hedges are reclassified from
accumulated other comprehensive
income when the underlying
hedged item impacts earnings. This reclassification is recorded in the
same line item of the consolidated statements 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 not
designated as hedging instruments are recorded in the Consolidated
Statements of Income in the Translated earnings contract (loss) gain, net
and the Other (expense) income, net lines.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2014-09, Revenue from
Contracts with Customers, as a new Topic, Accounting Standards
Codification (“ASC”) Topic 606. The new revenue recognition standard
relates to revenue from contracts with customers, which, along with
amendments issued in 2015 and 2016, will supersede nearly all current
U.S. GAAP guidance on this topic and eliminate industry-specific
guidance. The underlying principle is to use a five-step analysis of
transactions to recognize revenue when promised goods or services are
transferred to customers in an amount that reflects the consideration
that is expected to be received for those goods or services. Corning has
evaluated its material contracts, and has concluded that the impact of
adopting the standard on its financial statements and related disclosure
will not be material. The standard, as amended, will be effective for
annual periods beginning after December 15, 2017, including interim
periods within that reporting period. We expect to adopt the standard
on a modified retrospective basis in 2018.
Corning’s equity affiliates are currently evaluating their material
contracts, and have not concluded on the potential impact of adopting
ASU 2014-09 on their financial statements and related disclosure.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842),
which supersedes all existing guidance on accounting for leases in ASC
Topic 840. ASU 2016-02 is intended to provide enhanced transparency
and comparability by requiring lessees to record right-of-use assets
and corresponding lease liabilities on the balance sheet. ASU 2016-
02 will continue to classify leases as either finance or operating, with
classification affecting the pattern of expense recognition in the
statement of income. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal
years. Early adoption is permitted. ASU 2016-02 is required to be applied
with a modified retrospective approach to each prior reporting period
presented with various optional practical expedients. We are currently
assessing the potential impact of adopting ASU 2016-02 on our financial
statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock
Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting. ASU 2016-09 changes how companies account
for certain aspects of share-based payment awards to employees,
including the accounting for income taxes, forfeitures and statutory
tax withholding requirements, as well as classification in the statement
of cash flows. ASU 2016-09 is effective for annual periods beginning
after December 15, 2016, including interim periods within those annual
periods. If an entity early adopts in an interim period, any adjustments
should be reflected as of the beginning of the fiscal year that includes
that interim period and the entity must adopt all of the amendments
from ASU 2016-09 in the same period. We have determined that the
impact of this standard will not be material. We will adopt this standard
in 2017.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15 refines how companies classify certain aspects of the
cash flow statement in regards to debt prepayment, settlement of
debt instruments, contingent consideration payments, proceeds from
insurance claims and life insurance policies, distribution from equity
method investees, beneficial interests in securitization transactions and
separately identifiable cash flows. ASU 2016-15 is effective for annual
periods beginning after December 15, 2017, and for interim periods
within fiscal years beginning after December 15, 2018. No early adoption
is permitted. We are currently assessing the potential impact of adopting
ASU 2016-15 on our financial statements and related disclosures.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic
740): Intra-Entity Transfers of Assets Other Than Inventory, which reduces
the complexity in the accounting standards by allowing the recognition
of current and deferred income taxes for an intra-entity asset transfer,
other than inventory, when the transfer occurs. Historically, recognition
of the income tax consequence was not recognized until the asset
was sold to an outside party. This amendment should be applied on a
modified retrospective basis through a cumulative-effect adjustment
directly to retained earnings as of the beginning of the period of
adoption. ASU 2016-16 is effective for annual periods beginning after
December 15, 2017, including interim reporting periods within those
annual reporting periods. Early adoption is permitted for all entities
as of the beginning of an annual reporting period for which financial
statements (interim or annual) have not been issued or made available
for issuance. That is, earlier adoption should be in the first interim
period if an entity issues interim financial statements. We are currently
evaluating the impact of ASU 2016-16 on our consolidated financial
statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and
Other (Topic 350). ASU 2017-04 simplifies the subsequent measurement
of goodwill by removing the second step of the two-step impairment
test. The amendment requires an entity to perform its annual, or interim
goodwill impairment test by comparing the fair value of a reporting unit
with its carrying amount. An impairment charge should be recognized
for the amount by which the carrying amount exceeds the reporting
unit’s fair value; however, the loss recognized should not exceed the
total amount of goodwill allocated to that reporting unit. An entity still
has the option to perform the qualitative assessment for a reporting
unit to determine if the quantitative impairment test is necessary. The
amendment should be applied on a prospective basis. ASU 2017-04 is
effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. Early adoption is permitted
for interim or annual goodwill impairment tests performed on testing
dates after January 1, 2017. The Company intends to early adopt the ASU
in 2017.
54
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
2. Restructuring, Impairment and Other Charges
2016 Activity
For the year ended December 31, 2016, we recorded charges of $77
million, pre-tax, for employee related costs of $14 million, asset disposals
of $62 million, and exit costs associated with some minor restructuring
activities in all of our segments of $1 million, with total cash expenditures
of approximately $12 million.
Cash payments for employee-related and exit activity related to the
2016 restructuring activities were substantially completed in 2016.
Restructuring reserves as of December 31, 2016, 2015 and 2014 were
not significant.
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 of $48 million, asset disposals and write-offs of
$22 million, and exit costs for restructuring activities of $1 million with
total cash expenditures of approximately $39 million.
Cash payments for employee-related and exit activity related to the 2014
restructuring actions were substantially completed in 2015.
3. Available-for-Sale Investments
At December 31, 2015, the Company held $100 million of short-term
investments (U.S. government and agency securities). At December 31,
2016 and 2015, the Company held long-term investments of $29 million
and $33 million in asset-backed securities, respectively. The Company’s
investments in available-for-sale securities are held at fair value with
amortized cost of $32 million and $37 million at December 31, 2016 and
2015, respectively.
4. Significant Customers
We have no plans 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.
Proceeds from sales and maturities of short-term investments totaled
$121 million, $1.6 billion and $1.2 billion in 2016, 2015 and 2014, respectively.
For 2016 and 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.
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
December 31,
2016
$
606
303
270
292
2015
$
633
264
200
288
$
1,471
$
1,385
55
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
6.
Income Taxes
Income before income taxes follows (in millions):
U.S. companies
Non-U.S. companies
Income before income taxes
Years ended December 31,
2016
$
$
2,658
1,034
3,692
2015
$
$
426
1,060
1,486
2014
$
$
2,384
1,184
3,568
The current and deferred amounts of the benefit (provision) for income taxes follow (in millions):
Current:
Federal
State and municipal
Foreign
Deferred:
Federal
State and municipal
Foreign
Benefit (provision) for income taxes
Years ended December 31,
2016
2015
$
$
(1)
(17)
(287)
310
48
(50)
3
$
$
(40)
(20)
(33)
(144)
(30)
120
(147)
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 operations follows:
Statutory U.S. income tax rate
State income tax (benefit), net of federal effect
Rate difference on foreign earnings(1)
Uncertain tax positions
Equity earnings impact
Valuation allowances
Realignment of Dow Corning interest(2)
Other items, net
Effective income tax (benefit) rate
Years ended December 31,
2016
2015
2014
35.0%
(0.3)
(9.2)
(0.1)
(0.4)
1.2
(28.2)
1.9
(0.1)%
35.0%
0.1
(19.8)
4.3
(5.4)
(4.2)
(0.1)
9.9%
35.0%
4.9
(8.3)
(0.1)
(2.0)
0.8
0.4
30.7%
(1) Tax benefit is primarily for excess foreign tax credits resulting from the inclusion of foreign earnings in U.S. income and the income of subsidiaries
with lower statutory rates than the U.S.
(2) Refer to Note 7 (Investments) of the Consolidated Financial Statements for additional detail.
56
CORNING INCORPORATED - 2016 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):
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets
December 31,
2016
$
1,465
2015
$
62
154
283
190
462
2,616
(270)
2,346
(104)
(234)
(338)
$
2,008
$
1,151
69
153
276
265
505
2,419
(238)
2,181
(181)
(284)
(465)
1,716
December 31,
2016
$
$
2,325
(317)
2,008
2015
$
$
2,056
(340)
1,716
Details on deferred tax assets for loss and tax credit carryforwards at December 31, 2016 follow (in millions):
Net operating losses
Tax credits
Totals as of December 31, 2016
Expiration
Amount
2017-2021
2022-2026
2027-2036
Indefinite
$
$
416
1,049
1,465
$
$
144
420
564
$
$
46
70
116
$
$
8
523
531
$
$
218
36
254
Currently, the recognition of windfall tax benefits from stock-based
compensation deducted on the tax return is prohibited until realized
through a reduction of income tax payable. In 2017, we will adopt ASU
2016-09, Improvements to Employee Share-Based Payment Accounting.
At that time, the cumulative tax benefits totaling $233 million will be
recorded in beginning retained earnings.
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 $5.6 billion will be required
to fully realize the U.S. deferred tax assets as of December 31, 2016, of
which $116 million will be required over the next 20 years to realize the
deferred tax assets related to general business credits and $2.8 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, 2016 and 2015 was $270 million
and $238 million, respectively.
57
CORNING INCORPORATED - 2016 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
The 2015 additions for tax positions of prior years include $221 million for
unrecognized tax benefits related to gross transfer pricing adjustments,
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. Included in the balance at December 31, 2016 and 2015
are $92 million and $102 million, respectively, of unrecognized tax
benefits that would impact our effective tax rate if recognized.
We recognize accrued interest and penalties associated with uncertain
tax positions as part of tax expense. For the years ended December 31,
2016 and 2015 the amount recognized in interest expense is not material.
The amounts accrued at December 31, 2016 and 2015 for the payment of
interest and penalties were also not material.
We do not expect a material change to the amount of unrecognized tax
benefits in the next 12 months.
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. The statute of limitations is closed for all
periods ending through December 31, 2012. All returns for periods ended
through December 31, 2004, have been audited by and settled with the
Internal Revenue Service (IRS).
2016
$
$
253
10
4
(18)
(6)
243
2015
$
10
245
(1)
(1)
$
253
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, 2015
onward), Taiwan (2015 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 may impact our ability or intent to keep our foreign
earnings and cash indefinitely reinvested. As of December 31, 2016, taxes
have not been provided on approximately $12.6 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 are comprised of the following (in millions):
Affiliated companies accounted for by the equity method
Dow Corning(1)
All other(2)
Other investments
Subtotal Investment Assets
Affiliated companies accounted for by the equity method
HSG(3)
Subtotal Investment Liabilities
Ownership
interest
50%
20% to 50%
50%
December 31,
2016
2015
$
$
1,483
422
1,905
70
1,975
$
$
$
$
269
269
67
336
241
241
(1) Amount reflects Corning’s direct ownership interest in Dow Corning at December 31, 2015. Corning did not control Dow Corning.
(2) Amount reflects Corning’s direct ownership interests in the affiliated companies at December 31, 2016 and December 31, 2015. Corning does not
control any of such entities.
(3) HSG indirectly holds an 80.5% interest in a HSG operating partnership. The negative carrying value of the investment in HSG is recorded in
Other Liabilities.
58
CORNING INCORPORATED - 2016 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:
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
Dividends received from affiliated companies
Royalty income from affiliated companies
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
We have contractual agreements with several of our equity affiliates
which include sales, purchasing, licensing and technology agreements.
At December 31, 2015, approximately $2 billion of equity in undistributed
earnings of equity companies was included in our retained earnings.
As a result of the realignment of our investment in Dow Corning, as
of December 31, 2016 the undistributed earnings of equity companies
included in our retained earnings are not material.
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.
Years ended December 31,
2016
2015
2014
$
$
$
$
$
$
$
$
4,024
1,006
565
284
95
19
42
85
$
$
$
$
$
$
$
6,461
1,606
586
299
75
19
143
$
$
$
$
$
$
$
$
December 31,
2016
2015
$
$
$
$
$
$
$
$
1,522
2,112
3
715
23
2,523
267
27
$
$
$
$
$
$
$
$
$
7,124
1,701
647
266
53
25
130
2
5,228
6,453
6
1,461
800
4,557
631
11
1
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.
Dow Corning
On May 31, 2016, Corning completed the strategic realignment of
its equity investment in Dow Corning Corporation (”Dow Corning”)
pursuant to the Transaction Agreement announced in December 2015.
Under the terms of the Transaction Agreement, Corning exchanged with
Dow Corning its 50% stock interest in Dow Corning for 100% of the stock
of a newly formed entity, which holds an equity interest in Hemlock
Semiconductor Group (“HSG”) and approximately $4.8 billion in cash.
59
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
Prior to realignment, HSG, a consolidated subsidiary of Dow Corning,
was an indirect equity investment of Corning. Upon completion of the
exchange, Corning now has a direct equity investment in HSG. Because
our ownership percentage in HSG did not change as a result of the
realignment, the investment in HSG is recorded at its carrying value,
which had a negative carrying value of $383 million at the transaction
date. The negative carrying value resulted from a one-time charge to
Cash
Carrying Value of Dow Corning Equity Investment
Carrying Value of HSG Equity Investment
Other(1)
Gain
this entity in 2014 for the permanent abandonment of certain assets.
Excluding this charge, the entity is profitable and is expected to recover
its equity in the near term.
Corning’s financial statements as of December 31, 2016 include the
positive impact of the release of a deferred tax liability of $105 million
related to Corning’s tax on Dow Corning’s earnings that were not
distributed as of the date of the transaction and a non-taxable gain
of $2,676 million on the realignment. Details of the gain are illustrated
below (in millions):
$ 4,818
(1,560)
(383)
(199)
$ 2,676
(1) Primarily consists of the release of accumulated other comprehensive income items related to unamortized actuarial losses related to Dow
Corning’s pension plan and foreign currency translation gains in the amounts of $260 million and $45 million, respectively.
For the period ended December 31, 2016, Corning reported Dow Corning equity earnings and dividends through May 31, 2016, the transaction date. Dow
Corning information presented below is shown for the five months ended May 31, 2016 (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,
2016
2015
2014
$
$
$
$
$
$
2,215
588
163
82
7
20
$
$
$
$
$
$
5,649
1,472
563
281
15
143
$
$
$
$
$
$
6,221
1,543
513
252
15
125
December 31, 2015
$
$
$
$
$
$
$
4,511
6,064
6
1,305
785
4,539
631
(1) Gross profit for the five months ended May 31, 2016 includes R&D cost of $100 million (2015: $233 million and 2014: $273 million).
Pittsburgh Corning Corporation and Asbestos Litigation.
Corning and PPG Industries, Inc. each owned 50% of the capital stock
of Pittsburgh Corning Corporation (“PCC”). PCC filed for Chapter 11
reorganization in 2000 and the Modified Third Amended Plan of
Reorganization for PCC (the “Plan”) became effective in April 2016. At
December 31, 2015, the Company’s liability under the Plan was estimated
to be $528 million. At December 31, 2016, this estimated liability was
$290 million, due to the Company’s contribution, in the second quarter
of 2016, of its equity interests in PCC and Pittsburgh Corning Europe N.V.
in the total amount of $238 million, as required by the Plan. Corning
recognized a gain of $56 million in the second quarter of 2016 in the
selling, general and administrative expenses line of the Company’s
Consolidated Statements of Income for the difference between the
fair value of the asbestos litigation liability and carrying value of the
investment. This gain includes the release of foreign translation losses
in the amount of $25 million reclassified from accumulated other
comprehensive income. The remaining $290 million liability is for the
series of fixed payments required by the Plan. At December 31, 2016,
the total amount of the payments due in years 2018 through 2022 is
$220 million and is classified as a non-current liability. The remaining
$70 million payment due in the second quarter of 2017 is classified as
a current liability because it is expected to be made within the next
twelve months.
60
CORNING INCORPORATED - 2016 Annual Report Non-PCC Asbestos Claims Insurance Litigation
Corning is a defendant in certain cases alleging injuries from asbestos
unrelated to PCC (the “non-PCC asbestos claims”) which had been stayed
pending the confirmation of the Plan. The stay was lifted on August 25,
2016. Corning previously established a $150 million reserve for these non-
PCC asbestos claims. The estimated reserve represents the undiscounted
projection of claims and related legal fees. The amount may need to be
adjusted in future periods as more data becomes available; however, we
cannot estimate any lesser or greater liabilities at this time.
Notes to Consolidated Financial Statements
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.
A summary of changes of the estimated asbestos litigation liability is as follows (in millions):
Amended PCC Plan
Equity
Interests
Fair Value of Asbestos Litigation Liability as of December 31, 2015
$
238
Contribution of PCC & PCE Equity Interests - Carrying Value
Gain on Contribution of Equity Interests
Other adjustments
(182)
(56)
Fixed Series
of Payments
$
290
Non-PCC
150
$
Total Asbestos
Litigation Liability
678
$
(1)
149
$
(182)
(56)
(1)
439
Asbestos Litigation Liability as of December 31, 2016
$
-
$
290
$
8. Acquisitions
Year ended December 31, 2016
There were no material acquisitions completed in 2016. See Note 10 (Goodwill and Other Intangible Assets) for further information on goodwill and
intangibles acquired in 2016.
Year ended December 31, 2015
Corning completed five acquisitions in 2015. There were 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 all of these acquisitions. 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 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.
61
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
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.
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.
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.
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.
As of December 31, 2016 and December 31, 2015, the fair value of
the potential receipt of the contingent consideration in 2018 was
$289 million and $246 million, respectively.
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.
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
Samsung
Display
Corning
Incorporated
57.5%
2,588
(265)
2,323
(184)
2,139
$
$
42.5%
1,911
(196)
1,715
(136)
1,579
2,139
3,718
$
$
$
Samsung
Corning
Precision
Materials
100%
4,499
(461)
4,038
(320)
3,718
$
$
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.
62
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
Because the pre-existing contract was unfavorable to Corning, a portion
of the consideration transferred was deemed to be applicable to the
effective settlement of the royalty contract between Corning and the
acquiree, Samsung Corning Precision Materials. The $320 million loss
attributable to the settlement of the pre-existing arrangement was
accounted for as a separate transaction from the business combination
as follows:
• 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
The net gain on previously owned equity was calculated as follows:
$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.
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.
63
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
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 $1,317 million, $1,343 million and $1,761 million to net
sales for the years ending December 31, 2016, 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.
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
December 31,
2016
2015
$
435
$
5,540
14,973
1,482
22,430
(9,884)
438
5,504
14,688
1,206
21,836
(9,188)
$
12,546
$
12,648
Approximately $23 million, $35 million and $40 million of interest costs were capitalized as part of property, plant and equipment, net of accumulated
depreciation, in 2016, 2015 and 2014, respectively.
Manufacturing equipment includes certain components of production equipment that are constructed of precious metals. At December 31, 2016 and
2015, the recorded value of precious metals totaled $3 billion in each period. Depletion expense for precious metals in the years ended December 31,
2016, 2015 and 2014 was $20 million, $19 million and $21 million, respectively.
64
CORNING INCORPORATED - 2016 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, 2016 and 2015 were as follows (in millions):
Display
Technologies
Optical
Communications
Specialty
Materials
Life
Sciences
All
Other
Balance at December 31, 2014
Acquired goodwill(1)
Measurement period adjustment
Foreign currency translation adjustment
Other(2)
Balance at December 31, 2015
Acquired goodwill(3)
Measurement period adjustment
Foreign currency translation adjustment
Balance at December 31, 2016
$
134
$
(6)
128
(2)
126
$
$
$
$
238
220
(7)
(12)
439
205
(4)
5
$
198
$
580
$
87
(18)
(1)
15
Total
$
1,150
307
(7)
(41)
(29)
$
562
$
101
$
1,380
(4)
(44)
150
$
645
$
150
$
558
$
(4)
205
(4)
(4)
$
1,577
(3)
98
(1) 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.
(2) 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.
(3) The Company completed two acquisitions in the Optical Communications segment during the year ended December 31, 2016 with total purchase
price of $356 million.
Corning’s gross goodwill balance for the fiscal years ended December 31, 2016 and 2015 were $8.1 billion and $7.9 billion, respectively. Accumulated
impairment losses were $6.5 billion for the fiscal years ended December 31, 2016 and 2015, 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
Gross
$
$
360
761
1,121
2016
Accumulated
amortization
December 31,
Net
Gross
2015
Accumulated
amortization
Net
$
$
176
149
325
$
$
184
612
796
$
$
350
621
971
$
$
162
103
265
$
$
188
518
706
Amortized intangible assets are primarily related to the Optical Communications and Life Sciences segments. The net carrying amount of intangible
assets increased by $90 million during the year ended December 31, 2016, primarily due to acquisitions of $150 million and foreign currency translation
adjustments of $4 million offset by amortization of $64 million.
Amortization expense related to these intangible assets is estimated to be $68 million annually for 2017 through 2019, $65 million annually for 2020
and 2021.
65
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
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
Derivative instruments
Other current liabilities
Other accrued liabilities
Non-current liabilities:
Asbestos litigation
Derivative instruments
Investment in Hemlock Semiconductor Group(1)
Defined benefit pension plan liabilities
Other non-current liabilities
Other liabilities
December 31,
2016
2015
$
$
$
$
435
370
805
146
289
836
1,271
$
$
$
$
December 31,
2016
2015
$
$
$
$
487
150
70
88
621
1,416
369
282
241
692
1,221
2,805
$
$
$
$
522
390
912
473
246
774
1,493
491
53
238
55
471
1,308
440
88
672
1,042
2,242
(1) The negative carrying value resulted from a one-time charge to this entity in 2014 for the permanent abandonment of certain assets. Refer to Note
7 (Investments) to the Consolidated Financial Statements for additional information.
Asbestos Litigation
Corning and PPG each owned 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. Refer to Note 7 (Investments) to the Consolidated Financial
Statements for additional information on the asbestos litigation.
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 beginning in 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 has collected the
full amount of this deposit, adjusted for foreign exchange movements,
receiving $185 million of this deposit in 2016 and $197 million in 2015.
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 2016 and 2015, there were no credit
memoranda issued.
66
CORNING INCORPORATED - 2016 Annual Report 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
Notes to Consolidated Financial Statements
December 31,
2016
2015
$
$
$
256
256
250
374
245
290
67
372
248
45
99
167
248
248
395
495
359
$
$
$
91
481
572
64
249
373
245
290
68
372
248
45
99
168
248
247
395
495
375
3,902
256
3,981
91
$
3,646
$
3,890
At December 31, 2016 and 2015, the weighted-average interest rate on
current portion of long-term debt was 1.5% and 7.0%, respectively. At
December 31, 2015, the weighted-average interest rate on commercial
paper was 0.6%. Corning did not have outstanding commercial paper at
December 31, 2016.
Based on borrowing rates currently available to us for loans with similar
terms and maturities, the fair value of long-term debt was $3.9 billion at
December 31, 2016 and $4.1 billion at December 31, 2015. 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, 2016 (in millions)*:
2017
2018
2019
2020
$
256
$
379
$
254
$
305
2021
$
Thereafter
67
$
2,655
* Excludes interest rate swap gains and bond discounts.
67
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
Debt Issuances and Retirements
2016
2015
• In the third quarter of 2016, Corning’s Board of Directors approved
a $1 billion increase to our commercial paper program, raising it
to $2 billion. If needed, this program is supported by our $2 billion
revolving credit facility that expires in 2019.
• 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.
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 2016, we made
voluntary cash contributions of $73 million to our domestic defined
benefit pension plan and $16 million to our international pension
plans. 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. We are not subject to any mandatory
contributions in 2017, and do not anticipate making voluntary cash
contributions to our U.S. qualified pension plan. We anticipate
contributing up to $23 million to our international pension plans in 2017.
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.
68
CORNING INCORPORATED - 2016 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
2016
2015
2016
2015
2016
2015
Benefit obligation at beginning of year
$
3,715
$
3,809
$
3,161
$
3,222
$
Service cost
Interest cost
Plan participants’ contributions
Actuarial loss (gain)
Other
Benefits paid
Foreign currency translation
Benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning
of year
Actual gain (loss) on plan assets
Employer contributions
Plan participants’ contributions
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
$
$
$
$
$
$
$
$
$
85
124
1
229
(3)
(210)
(54)
3,887
3,058
310
125
1
(210)
(59)
3,225
3,225
(3,887)
(662)
35
(18)
(679)
(662)
348
30
378
$
$
$
$
$
$
$
$
$
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
61
111
1
145
1
(191)
3,289
2,616
235
104
1
(191)
2,765
2,765
(3,289)
(524)
(13)
(511)
(524)
311
31
342
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
64
126
1
(87)
(165)
3,161
2,814
(111)
77
1
(165)
2,616
2,616
(3,161)
(545)
(30)
(515)
(545)
305
37
342
$
$
$
$
$
$
$
$
$
554
24
13
84
(4)
(19)
(54)
598
442
75
21
(19)
(59)
460
460
(598)
(138)
35
(5)
(168)
(138)
37
(1)
36
$
$
$
$
$
$
$
$
$
$
587
26
18
(8)
(8)
(23)
(38)
554
449
3
39
(23)
(26)
442
442
(554)
(112)
50
(5)
(157)
(112)
27
(2)
25
The accumulated benefit obligation for defined benefit pension plans was $3.6 billion and $3.5 billion at December 31, 2016 and 2015, respectively.
69
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
December 31,
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Plan participants’ contributions
Actuarial loss (gain)
Other
Benefits paid
Medicare subsidy received
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
Postretirement benefits
2016
2015
$
763
$
862
9
26
8
16
2
(50)
2
776
–
(776)
(776)
(39)
(737)
(776)
50
(15)
35
$
$
$
$
$
$
$
13
33
7
(97)
4
(61)
2
763
–
(763)
(763)
(45)
(718)
(763)
33
(19)
14
$
$
$
$
$
$
$
The following information is presented for pension plans where the projected benefit obligation as of December 31, 2016 and 2015 exceeded the fair
value of plan assets (in millions):
Projected benefit obligation
Fair value of plan assets
December 31,
2016
2015
$
$
3,607
2,787
$
$
3,341
2,635
In 2016, the fair value of plan assets exceeded the projected benefit obligation for the United Kingdom and one of the South Korea pension plans.
The following information is presented for pension plans where the accumulated benefit obligation as of December 31, 2016 and 2015 exceeded the
fair value of plan assets (in millions):
Accumulated benefit obligation
Fair value of plan assets
December 31,
2016
2015
$
$
3,285
2,786
$
$
3,159
2,634
In 2016, the fair value of plan assets exceeded the accumulated benefit obligation for the United Kingdom and the South Korea pension plans.
70
CORNING INCORPORATED - 2016 Annual Report The components of net periodic benefit expense for our employee retirement plans follow (in millions):
Notes to Consolidated Financial Statements
Total pension benefits
Domestic pension benefits
International pension benefits
2016
2015
2014
2016
2015
2014
2016
2015
2014
$
85
$ 90
$
82
$
144
(178)
6
165
160
(174)
6
29
$ 227
$ 103
124
(165)
6
67
117
1
$
118
$ 227
$ 103
$
(2)
84
(64)
$
(1)
191
(165)
(6)
(6)
$
(3)
(2)
212
(29)
25
(6)
61
111
(153)
6
55
80
1
81
(2)
63
(55)
$
$
$
$
64
$
126
(166)
7
162
$ 193
$ 193
$
$
55
137
(159)
7
4
44
44
$
$
$
$ 189
$ 198
$
(162)
(4)
25
(7)
24
13
(12)
12
37
37
21
(9)
$
$
$
$
26
18
(12)
(1)
3
34
34
(1)
2
(3)
1
$
$
$
$
27
23
(15)
(1)
25
59
59
(3)
(2)
14
(25)
1
(6)
(7)
$
12
$
19
$ 197
$
0
$
20
$ 212
$
12
$
(1)
$
(15)
$ 130
$ 246
$ 300
$
81
$ 213
$ 256
$
49
$
33
$
44
December 31,
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost (credit)
Recognition of actuarial loss
Total net periodic benefit expense
$
Settlement charge
Total expense
Other changes in plan assets and
benefit obligations recognized in other
comprehensive income:
Curtailment effects
Settlements
Current year actuarial loss
Recognition of actuarial (loss)
Current year prior service cost
Amortization of prior service (cost)
credit
Total recognized in other comprehensive
(income) loss
Total recognized in net periodic benefit
cost and other comprehensive
(income) loss
Service cost
Interest cost
Amortization of net gain (loss)
Amortization of prior service credit
Total net periodic benefit expense
Postretirement benefits
2016
$
$
$
$
$
9
26
(1)
(4)
30
15
1
5
21
51
2015
$
$
$
$
$
13
33
3
(7)
42
(96)
(3)
7
(92)
(50)
2014
$
$
$
$
$
11
38
(6)
43
49
(5)
6
50
93
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Current year actuarial loss (gain)
Amortization of actuarial gain (loss)
Current year prior service credit
Amortization of prior service credit
Total recognized in other comprehensive loss (income)
Total recognized in net periodic benefit cost and other comprehensive loss (income)
The Company expects to recognize $6 million of net prior service cost as
a component of net periodic pension cost in 2017 for its defined benefit
pension plans. The Company expects to recognize $1 million of net
actuarial gain and $3 million of net prior service credit as components of
net periodic postretirement benefit cost in 2017.
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.
71
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
Mortality is one of the key assumptions used in valuing liabilities of
retirement plans. It is used to assign a probability of payment for future
plan benefits that are contingent upon participants’ survival. To make
this assumption, benefit plan sponsors typically use a base mortality
table and an improvement scale that adjusts the rates of mortality
for future anticipated changes to historical death rates. For the 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 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 changed
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 the year ended December 31, 2017, net periodic pension and
OPEB costs will be lower by approximately $23 million and $5 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.
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
2016
2015
2014
2016
2015
2014
2016
2015
2014
Discount rate
Rate of compensation increase
4.01%
3.50%
4.24%
3.50%
4.00%
3.50%
2.29%
3.97%
3.23%
3.92%
3.21%
3.88%
4.07%
4.31%
4.00%
The weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 follow:
Pension benefits
Domestic
International
Postretirement benefits
2016
2015
2014
2016
2015
2014
2016
2015
2014
Discount rate
Expected return on plan assets
Rate of compensation increase
4.24%
6.00%
3.50%
4.00%
6.00%
3.50%
4.75%
6.25%
4.00%
3.23%
2.89%
3.92%
3.21%
2.97%
3.88%
4.08%
4.12%
3.85%
4.31%
4.00%
4.75%
72
CORNING INCORPORATED - 2016 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
2016
2015
6.75%
5%
2024
7%
5%
2024
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 (credit)
Effect on postretirement benefit obligation
One-percentage-
point increase
One-percentage-
point decrease
$
$
3
55
$
$
(3)
(45)
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; Level 1 (quoted market prices in active
markets for identical assets), Level 2 (significant other observable inputs)
and Level 3 (significant unobservable inputs) of our domestic defined
benefit plan assets:
December 31, 2016
December 31, 2015
Total
(Level 1)
(Level 2)
(Level 3)
Total
(Level 1)
(Level 2)
(Level 3)
(in millions)
Equity securities:
U.S. companies
International companies
Fixed income:
$
318
340
$
U.S. corporate bonds
1,608
Private equity(1)
Real estate(2)
Cash equivalents
Commodities(3)
Total
137
150
100
112
47
90
175
100
$
271
250
1,433
112
$
137
150
$
336
322
$
1,566
163
61
71
97
51
79
158
71
$
285
243
1,408
97
$
163
61
$ 2,765
$
412
$
2,066
$
287
$ 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.
73
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
The following tables provide fair value measurement information for the Company’s major categories; Level 1 (quoted market prices in active markets
for identical assets), Level 2 (significant other observable inputs) and Level 3 (significant unobservable inputs) of our international defined benefit plan
assets:
December 31, 2016
December 31, 2015
Total
(Level 1)
(Level 2)
(Level 3)
Total
(Level 1)
(Level 2)
(Level 3)
(in millions)
Equity securities:
U.S. companies
International companies
Fixed income:
International fixed
income
Insurance contracts
Mortgages
Cash equivalents
$
7
26
385
2
40
Total
$
460
$
$
7
26
64
$
321
40
361
$
97
$
$
2
2
$
$
7
23
347
$
286
$
7
23
61
3
2
60
442
60
346
$
$
91
$
$
3
2
5
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, 2016
and 2015:
(in millions)
Beginning balance at December 31, 2015
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, 2016
(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
Level 3 assets – Domestic
Level 3 assets – International
Year ended December 2016
Year ended December 2016
Private equity
Real estate
Mortgages
$
$
163
14
(40)
137
$
$
61
(7)
96
150
$
$
2
(2)
–
Insurance
contracts
$
$
3
(1)
2
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
Credit Risk
Liquidity Risk
58% 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.
Currency Risk
12% of domestic assets are valued in non-U.S. dollar denominated
investments that are subject to currency fluctuations. The value of these
securities will decline if the U.S. dollar increases in value relative to the
value of the currencies in which these investments are denominated.
10% of the domestic securities are invested in Level 3 securities. These
are long-term investments in private equity and private real estate
investments that may not mature or be sellable in the near-term
without significant loss.
At December 31, 2016 and 2015, the amount of Corning common stock
included in equity securities was not significant.
Cash Flow Data
In 2017, we do not anticipate making voluntary cash contributions
to our domestic defined benefit plan and expect to make voluntary
contributions of approximately $23 million to our international defined
benefit plans.
74
CORNING INCORPORATED - 2016 Annual Report
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):
Notes to Consolidated Financial Statements
2017
2018
2019
2020
2021
2022-2026
Expected benefit payments
Domestic
pension benefits
International
pension benefits
Postretirement
benefits
Expected federal
subsidy payments
postretirement
benefits
$
$
$
$
$
$
182
189
196
201
206
1,118
$
$
$
$
$
$
19
24
24
27
27
172
$
$
$
$
$
$
43
42
42
42
43
215
$
$
$
$
$
$
3
3
3
3
3
17
Other Benefit Plans
We offer defined contribution plans covering employees meeting certain eligibility requirements. Total consolidated defined contribution plan expense
was $56 million, $53 million and $62 million for the years ended December 31, 2016, 2015 and 2014, 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
Imputed interest on capital leases and
financing obligations
Minimum rental commitments
Amended PCC Plan(7)
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
$
$
$
178
51
30
8
267
231
378
3,557
2,222
359
231
545
290
48
$
$
$
102
44
30
176
127
378
250
162
6
18
68
70
$
$
$
2
1
3
81
625
299
8
36
111
85
$
$
$
1
1
20
362
259
10
36
76
85
$
$
$
74
6
7
87
3
2,320
1,502
335
141
290
50
$
$
7,861
8,128
$
$
1,079
1,255
$
$
1,245
1,248
$
$
848
849
$
$
4,641
4,728
(1) At December 31, 2016, $39 million of the $51 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, 2016, $48 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.
(7) See Note 7 (Investments) to the Consolidated Financial Statements for additional details.
75
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
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, 2016 follow (in millions):
2017
$
68
2018
$
63
2019
$
48
2020
$
40
2021
$
36
2022 and
thereafter
$
290
Total rental expense was $105 million for 2016, $94 million for 2015 and
$92 million for 2014.
Product warranty
December 31, 2015 are insignificant.
liability accruals at December 31, 2016 and
Corning is a defendant in various lawsuits and is subject to various
claims that arise in the normal course of business. In the opinion of
management, the likelihood that the ultimate disposition of these
matters will have a material adverse effect on Corning’s consolidated
financial position, liquidity, or results of operations, is remote. Other
than certain asbestos related claims, there are no other material loss
contingencies related to litigation.
Corning has been named by the Environmental Protection Agency
(the Agency) under the Superfund Act, or by state governments
under similar state laws, as a potentially responsible party for 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, 2016 and December 31,
2015, Corning had accrued approximately $43 million (undiscounted)
and $37 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,
2016, 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 yuan, 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. 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 and options to reduce the risk that movements in exchange
76
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. In the first quarter of 2015, these interest rate swaps
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 uses a regression analysis to monitor the effectiveness of its
cash flow hedges both prospectively and retrospectively. Through
December 31, 2016, the hedge
ineffectiveness related to these
instruments is not material. Corning defers net gains and losses
related to effective portion of cash flow hedges into accumulated other
comprehensive income (loss) on the consolidated balance sheet until
such time as the hedged item impacts earnings. At December 31, 2016,
the amount expected to be reclassified into earnings within the next 12
months is a pre-tax net loss of $28 million.
CORNING INCORPORATED - 2016 Annual Report 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, 2016.
Net gains and losses from fair value hedges and the effects of the
corresponding hedged item are recorded on the same line item in the
consolidated statements 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 and expenses
are denominated in Japanese yen, South Korean won, New Taiwan
dollar, Chinese yuan and euro. When these revenues and expenses
are translated back to U.S. dollars, the Company is exposed to foreign
exchange rate movements. To protect translated earnings against
movements in these currencies, the Company has entered into a series
of zero-cost collars and average rate forwards.
Notes to Consolidated Financial Statements
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 Translated
earnings contract (loss) 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. The zero-cost collar program hedges
exposures through 2022 and 2017 for the Japanese yen and Korean won,
respectively. 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,
2016, the U.S. dollar net notional value of the Japanese yen and Korean
won zero-cost collars is $1 billion.
The Company extended its foreign exchange hedge program in 2016
and entered into a series of average rate forwards. These will hedge
a significant portion of its projected yen exposure for the period of
2018-2022. As of December 31, 2016, the U.S. dollar net notional value of
the yen average rate forwards program is $14 billion. The average rate
forward program was also expanded to partially hedge the impact of the
South Korean won, New Taiwan dollar, Chinese yuan and euro translation
on the Company’s projected net income. As of December 31, 2016 these
average rate forwards have a total notional value of $1 billion. The
entire average rate forward program will settle net without obligation
to deliver Japanese yen, Korean won, New Taiwan dollar, Chinese yuan
and euro.
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 Translated earnings contract (loss) 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, 2016 and December 31, 2015 (in millions):
Notional amount
2016
2015
Balance sheet
location
Fair value
2016
2015
Balance sheet
location
Fair value
2016
2015
Asset derivatives
Liability derivatives
Derivatives designated as
hedging instruments
Foreign exchange contracts(1)
$
458
$
782
Other current
assets
$
1
$
Other assets
5
1
Interest rate contracts
550
550
Other assets
Derivatives not designated as
hedging instruments
Foreign exchange
contracts, other
890
1,095
Translated earnings contracts
16,711
11,972
Other current
assets
Other current
assets
Other assets
Total derivatives
$
18,609
$
14,399
$
(1) Cash flow hedges with a typical duration of 24 months or less.
Other accrued
liabilities
6
Other accrued
liabilities
511
Other
liabilities
472
995
$
11
423
146
581
Other accrued
liabilities
$
(29)
$
(10)
Other
liabilities
Other
liabilities
(23)
(4)
(12)
(33)
(61)
(5)
(7)
(52)
(277)
$
(370)
$
(143)
77
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
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
2016
2015
2014
(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)
2016
2015
2014
Cash flow hedges
Interest rate hedge
Foreign exchange contracts
Total cash flow hedges
$
$
(33)
(33)
Net sales
$
4
$
$
20
6
3
7
$
$
(7)
$
(3)
Cost of sales
(17 )
(24 )
$
20
17
Other (expense)
income, net
(36)
(2)
$
(34)
$
26
$
10
Undesignated derivatives
Location of gain/(loss)
recognized in income
Foreign exchange contracts – balance sheet
Translated earnings contract gain (loss), net
Foreign exchange contracts – loans
Translated earnings contract (loss) gain, net
Translated earnings contracts
Total undesignated
Translated earnings contract (loss) gain, net
(1) There were no material amounts of ineffectiveness for 2016 and 2015.
Gain (loss) recognized in income
2016
2015
2014
$
$
4
(31)
(448)
(475)
$
$
8
(3)
80
85
$
$
29
13
1,369
1,411
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:
Fair value measurements at reporting date using
December 31, 2016
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs (Level 2)
Significant unobservable
inputs (Level 3)
$
$
$
$
435
464
88
282
$
$
$
$
435
175
88
282
$
289
(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)
(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.
78
CORNING INCORPORATED - 2016 Annual Report
Notes to Consolidated Financial Statements
(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)(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)
Beginning balance
Unrealized gains (loss)
Transfer in (out) of level 3
Ending balance
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
Level 3 Roll-Forward – Other Assets
2016
2015
$
$
246
43
289
$
$
445
13
(212)
246
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.
As of December 31, 2016 and 2015, the fair value of the potential
receipt of the contingent consideration in 2018 was $289 million and
$246 million, respectively.
There were no significant financial assets and liabilities measured on a
nonrecurring basis during the years ended December 31, 2016 and 2015.
79
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
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, 2016, 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
2014 Share Repurchases
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 98.1 million
shares repurchased for approximately $2 billion.
80
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.
2015 Share Repurchases
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 and 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. 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
167 million shares repurchased for $3.25 billion during 2015.
2016 Share Repurchases
In July 2016, Corning entered into an accelerated share repurchase
agreement (the “2016 ASR agreement”) under the 2015 Repurchase
Program with Morgan Stanley to repurchase Corning’s common stock.
Under the 2016 ASR agreement, Corning made a $2.0 billion payment to
Morgan Stanley in July and received an initial delivery of approximately
74.4 million shares of Corning common stock on the same day. The
transaction was structured with two tranches resulting in a total of
12.3 million shares being delivered to Corning in the fourth quarter
of 2016, for a total of 86.7 million shares repurchased under the 2016
ASR agreement.
In addition to the 2016 ASR agreement, during the year ended
December 31, 2016, the Company repurchased 110 million shares of
common stock on the open market for approximately $2.2 billion as part
of its 2015 Repurchase Programs, resulting in a total of 197.1 million shares
repurchased for $4.2 billion during 2016.
CORNING INCORPORATED - 2016 Annual Report The following table presents changes in capital stock for the period from January 1, 2014 to December 31, 2016 (in millions):
Notes to Consolidated Financial Statements
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
Shares issued to benefit plans and for option exercises
Shares purchased for treasury
Other, net
Balance at December 31, 2016
Common stock
Treasury stock
Shares
Par value
Shares
Cost
1,661
11
1,672
9
1,681
10
$
831
5
$
836
4
$
840
6
(262)
$
(4,099)
(135)
(1)
(398)
(151)
(2)
(551)
(214)
(2)
(2,612)
(14)
$
(6,727)
(1)
(2,978)
(19)
$
(9,725)
(2)
(4,409)
(16)
1,691
$
846
(765)
$
(14,152)
(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.
81
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
Accumulated Other Comprehensive Income (Loss)
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, 2013
$
492
$
(428)
$
(14)
$
Other comprehensive (loss) income
before reclassifications(4)
Amounts reclassified from accumulated
other comprehensive income (loss)(2)(8)
Equity method affiliates(3)
Net current-period other comprehensive
(loss) income
Balance at December 31, 2014
Other comprehensive (loss) income
before reclassifications(5)
Amounts reclassified from accumulated
other comprehensive income (loss)(2)
Equity method affiliates(3)
Net current-period other comprehensive
(loss) income
Balance at December 31, 2015
Other comprehensive income before
reclassifications(6)
Amounts reclassified from accumulated
other comprehensive income (loss)(2)
Equity method affiliates(3)(7)
Net current-period other comprehensive
(loss) income
(821)
(252)
(1,073)
(581)
(487)
(103)
(590)
(1,171)
(89)
(15)
(104)
$
$
$
$
$
$
$
$
Balance at December 31, 2016
$
(1,275)
$
(172)
18
(127)
(281)
(709)
(59)
105
75
121
(588)
(63)
40
264
241
(347)
4
1
(6)
(1)
(15)
1
1
(14)
(2)
(1)
(3)
(17)
$
$
$
$
$
$
$
$
$
$
(6)
10
(6)
4
(2)
(18)
(20)
2
(36)
(38)
(21)
22
1
(37)
$
44
(979)
13
(385)
(1,351)
(1,307)
(564)
86
(26)
(504)
(1,811)
(175)
62
248
135
$
$
$
$
$
(1,676)
(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 in the reported periods except for the tax expense of $20 million related to the
pension component in 2016.
(4) 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.
(5) 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.
(6) Amounts are net of total tax benefit of $52 million, including $36 million related to the retirement plans component, $12 million related to the
hedges component, $3 million related to the foreign currency translation adjustments, and $1 million related to the investments component.
(7) Most of the changes in equity method affiliate accumulated other comprehensive income components in 2016 relate to disposal transactions with
amounts reclassified to the income statement. See Note 7 (Investments) and Note 8 (Acquisitions) to the Consolidated Financial Statements for
more information on the Dow Corning realignment, the PCE disposition and the acquisition of the remaining equity interest of Samsung Corning
Precision Materials.
82
CORNING INCORPORATED - 2016 Annual Report (In millions)
Reclassifications Out of Accumulated Other Comprehensive Income (AOCI) by Component(1)
Notes to Consolidated Financial Statements
Details about AOCI Components
Amortization of net actuarial loss
Amortization of prior service (cost) credit
Realized gains (losses) on investments
Realized (losses) 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,
2015
2014
2016
$
$
$
$
$
(62)
(1)
(63)
23
(40)
4
(36)
(2)
(34)
12
(22)
(62)
$
$
$
$
$
$
$
(168)
1
(167)
62
(105)
(1)
(1)
20
6
26
(6)
20
(86)
$
$
$
$
$
$
$
Affected line item
in the consolidated
statements of income
(29)
(2)
(2)
(29) Total before tax
11 Tax benefit
(18) Net of tax
(1) Other income (expense), net
Tax expense
(1) Net of tax
3 Sales
7 Cost of sales
Other expense (income), net
10 Total before tax
(4) Tax benefit (expense)
6 Net of tax
(13) 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 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,
2016
2015
2014
$
3,695
$
1,339
$
$
$
$
$
$
$
98
3,597
98
3,695
1,020
9
115
1,144
3.53
3.23
15
15
$
$
$
98
1,241
98
1,339
1,219
9
115
1,343
1.02
1.00
22
15
37
2,472
94
2,378
94
2,472
1,305
12
110
1,427
1.82
1.73
24
3
27
83
CORNING INCORPORATED - 2016 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, 2016, there
were approximately 69 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 $42 million, $46 million and
$58 million was disclosed in operating activities on the Company’s
Consolidated Statements of Cash Flows for the years ended December 31,
2016, 2015 and 2014, 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, 2016:
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, 2015
Granted
Exercised
Forfeited and expired
Options outstanding as of December 31, 2016
Options expected to vest as of December 31, 2016
Options exercisable as of December 31, 2016
42,738
1,680
(8,549)
(4,362)
31,507
31,469
26,723
$
19.40
20.01
16.16
25.97
19.40
19.40
19.15
3.79
3.79
2.98
$
160,932
160,794
144,236
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 30, 2016,
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, 2016,
was approximately 18 million.
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.
The weighted-average grant-date fair value for options granted for the
years ended December 31, 2016, 2015 and 2014 was $6.31, $7.99 and $8.29,
respectively. The total fair value of options that vested during the years
ended December 31, 2016, 2015 and 2014 was approximately $22 million,
$36 million and $16 million, respectively. Compensation cost related to
stock options for the years ended December 31, 2016, 2015 and 2014, was
approximately $11 million, $14 million and $22 million, respectively.
As of December 31, 2016, there was approximately $6 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 $138 million
for the year ended December 31, 2016, 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, 2016, 2015 and 2014 was approximately $53 million,
$48 million and $69 million, respectively. The income tax benefit realized
from share-based compensation was not significant for the years ended
December 31, 2016, 2015 and 2014. Refer to Note 6 (Income Taxes).
84
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.
CORNING INCORPORATED - 2016 Annual Report The following inputs were used for the valuation of option grants under our Stock Option Plans:
Expected volatility
Weighted-average volatility
Expected dividends
Risk-free rate
Average risk-free rate
Expected term (in years)
Pre-vesting departure rate
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, 2015, and changes which occurred during the year ended
December 31, 2016:
20. Reportable Segments
Our reportable segments are as follows:
• Display Technologies – manufactures glass substrates for flat panel
liquid crystal displays.
• Optical Communications – manufactures carrier network and
enterprise network components for the telecommunications industry.
• Environmental Technologies – manufactures ceramic substrates and
filters for automotive and diesel applications.
• Specialty Materials – manufactures products that provide more than
150 material formulations for glass, glass ceramics and fluoride crystals
to meet demand for unique customer needs.
• Life Sciences – manufactures glass and plastic
labware,
equipment, media and reagents to provide workflow solutions for
scientific applications.
Notes to Consolidated Financial Statements
2016
2015
2014
37.1-43.1%
43.6-44.9%
45.4-46.2%
37.1-43.1%
43.6-44.9%
45.4-46.2%
2.28-2.94%
1.92-2.68%
1.90-2.09%
1.4-2.1%
1.4-2.1%
7.4-7.4
1.9-2.1%
1.9-2.1%
7.2-7.2
0.6-0.6%
0.6-0.6%
2.0-2.2%
2.0-2.2%
7.2-7.2
0.5-0.5%
Shares
(000’s)
Weighted-average
grant-date fair value
Non-vested shares and share
units at December 31, 2015
Granted
Vested
Forfeited
Non-vested shares and share
units at December 31, 2016
5,242
1,518
(2,014)
(106)
4,640
$
17.91
20.80
14.78
20.58
$
20.15
As of December 31, 2016, there was approximately $25 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 2.1 years. The total fair value of time-based
restricted stock that vested during the years ended December 31, 2016,
2015 and 2014 was approximately $27 million, $32 million and $32 million,
respectively. Compensation cost related to time-based restricted stock
and restricted stock units was approximately $31 million, $32 million
and $36 million for the years ended December 31, 2016, 2015 and
2014, respectively.
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, our non-LCD glass business, new product lines
and development projects, 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.
85
CORNING INCORPORATED - 2016 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, 2016
Net sales
Depreciation(1)
Amortization of purchased intangibles
Research, development and engineering expenses(2)
Restructuring, impairment and other charges
Equity in earnings (loss) of affiliated companies
Income tax (provision) benefit
Net income (loss)(3)
Investment in affiliated companies, at equity
Segment assets(4)
Capital expenditures
For the year ended
December 31, 2015
Net sales
Depreciation(1)
Amortization of purchased intangibles
Research, development and engineering expenses(2)
Equity in earnings (loss) of affiliated companies
Income tax (provision) benefit
Net income (loss)(3)
Investment in affiliated companies, at equity
Segment assets(4)
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 (loss) of affiliated companies
Income tax (provision) benefit
Net income (loss)(3)
Investment in affiliated companies, at equity
Segment assets(4)
Capital expenditures
Display
Technologies
Optical
Communications
Environmental
Technologies
Specialty
Materials
Life
Sciences
All
Other
Total
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,238
598
45
4
1
(372)
935
41
8,032
464
3,086
605
105
(9)
(499)
1,095
43
8,344
594
3,851
676
138
50
(20)
(608)
1,396
63
8,863
492
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,005
175
35
147
5
(129)
245
(1)
2,010
245
2,980
163
32
138
(115)
237
1
1,783
171
2,652
154
10
141
17
(111)
194
2
1,737
145
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,032
129
102
5
(65)
133
32
1,267
97
1,053
125
93
(78)
161
32
1,288
117
1,092
119
91
2
(89)
178
32
1,297
173
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,124
109
126
12
(85)
174
1,604
120
1,107
112
113
(85)
167
1,407
88
1,205
113
140
(75)
138
1,288
104
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
839
58
20
24
3
(28)
58
504
39
821
60
20
23
(30)
61
514
32
862
60
22
22
1
(33)
67
553
30
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
152 $ 9,390
50 $
1,119
8 $
191 $
40 $
(6) $
63
635
69
(5)
114 $
(565)
(240) $ 1,305
252 $
324
750 $ 14,167
56 $
1,021
64 $
9,111
43 $
1,108
1 $
53
186 $
658
17 $
8
89 $
(718)
(202) $
1,519
261 $
337
738 $ 14,074
57 $ 1,059
53 $ 9,715
31 $
1,153
$
32
177 $
709
$
68
18
83 $
(833)
(198) $
1,775
214 $
311
518 $ 14,256
101 $ 1,045
(1) Depreciation expense for Corning’s reportable segments includes an allocation of depreciation of corporate property not specifically identifiable to
a segment.
(2) Research, development and engineering expenses include direct project spending that is identifiable to a segment.
(3) Many of Corning’s administrative and staff functions are performed on a centralized basis. Where practicable, Corning charges these expenses
to segments based upon the extent to which each business uses a centralized function. Other staff functions, such as corporate finance, human
resources and legal are allocated to segments, primarily as a percentage of sales.
(4) Segment assets include inventory, accounts receivable, property, plant and equipment, net of accumulated depreciation, and associated equity
companies and cost investments.
86
CORNING INCORPORATED - 2016 Annual Report A reconciliation of reportable segment net income (loss) to consolidated net income follows (in millions):
Notes to Consolidated Financial Statements
Net income of reportable segments
Net loss of All Other
Unallocated amounts:
Net financing costs(1)
Share-based compensation expense
Exploratory research
Corporate contributions
Gain on realignment of equity investment
Equity in earnings of affiliated companies, net of impairments(2)
Unrealized (loss) gain on translated earnings contracts
Resolution of Department of Justice investigation
Income tax benefit (provision)
Other corporate items
Net income
Years ended December 31,
2016
$
1,545
(240)
(107)
(42)
(107)
(49)
2,676
292
(649)
(98)
573
(99)
2015
$
2014
$
1,973
(198)
(113)
(58)
(102)
(43)
269
1,095
(267)
(84)
1,721
(202)
(111)
(46)
(109)
(52)
291
(573)
568
(148)
$
3,695
$
1,339
$
2,472
(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 Hemlock Semiconductor Group in 2016, and Dow Corning in 2015 and 2014.
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,
2016
2015
2014
$
13,417
$
13,336
$
13,738
750
6,070
12
1,681
5,969
738
5,488
1,638
1,692
5,635
518
7,402
1,490
1,657
5,258
$
27,899
$
28,527
$
30,063
(1) Includes current corporate assets, primarily cash, short-term investments, current portion of long-term derivative assets and deferred taxes.
(2) Primarily represents the equity earnings of 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.
For the year ended December 31, 2016, 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 65% of total segment sales.
• In the Optical Communications segment, one customer accounted for 15% of total segment sales.
• In the Environmental Technologies segment, three customers accounted for 85% 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.
87
CORNING INCORPORATED - 2016 Annual Report Notes to Consolidated Financial Statements
Selected financial information concerning the Company’s product lines and reportable segments follow (in millions):
Revenues from External Customers
Display Technologies
Optical Communications
Carrier network
Enterprise network
Total Optical Communications
Environmental Technologies
Automotive and other
Diesel
Total Environmental Technologies
Specialty Materials
Corning Gorilla Glass
Advanced optics and other specialty glass
Total Specialty Materials
Life Sciences
Labware
Cell culture products
Total Life Science
All Other
Years Ended December 31,
2016
2015
2014
$
3,238
$
3,086
$
3,851
2,274
731
3,005
585
447
1,032
807
317
1,124
512
327
839
152
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
$
9,390
$
9,111
$
9,715
88
CORNING INCORPORATED - 2016 Annual Report Information concerning principal geographic areas was as follows (in millions):
Notes to Consolidated Financial Statements
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
All Other
Total
2016
2015
2014
Net sales(2)
Long-lived
assets(1)
Net sales(2)
Long-lived
assets(1)
Net sales(2)
Long-lived
assets(1)
$
2,625
$
6,473
$
2,719
$
8,241
$
2,275
$
7,998
282
50
2,957
450
840
2,083
1,444
363
5,180
363
83
182
352
980
273
142
134
6,749
1,008
2,347
1,140
3,413
167
8,075
154
266
41
1,047
1,508
44
244
37
3,000
440
841
1,869
1,501
331
4,982
326
90
164
311
891
238
144
135
8,520
1,160
2,301
1,036
3,552
98
8,147
189
263
47
987
1,486
36
$
9,390
$
16,376
$
9,111
$
18,189
$
311
35
2,621
608
1,092
1,893
1,882
308
5,783
397
81
187
369
1,034
277
9,715
50
8,048
1,311
2,005
1,115
3,595
109
8,135
217
277
47
1,109
1,650
55
$
17,888
(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.
(2) Net sales are attributed to countries based on location of customer.
89
CORNING INCORPORATED - 2016 Annual Report Valuation Accounts and Reserves
(in millions)
Year ended December 31, 2016
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
$
$
$
$
48
238
265
3
$
$
$
$
Year ended December 31, 2015
Balance at
beginning of period
Additions
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
$
$
$
11
55
64
15
1
30
49
$
$
$
23
4
13
$
$
$
$
59
270
325
5
Net deductions
and other
Balance at end
of period
$
$
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
90
CORNING INCORPORATED - 2016 Annual Report Quarterly Operating Results
(unaudited) (In millions, except per share amounts)
2016
First quarter
Second quarter
Third quarter
Fourth quarter
Total year
Net sales
Gross margin
Equity in earnings of affiliated companies
Benefit (provision) for income taxes
Net (loss) income attributable to
Corning Incorporated
Basic (loss) earnings per common share
Diluted (loss) earnings per common share
$
$
$
$
$
$
$
2,047
764
59
304
(368)
(0.36)
(0.36)
$
$
$
$
$
$
$
2,360
951
41
504
2,207
2.06
1.87
$
$
$
$
$
$
$
2,507
1,041
19
27
284
0.27
0.26
$
$
$
$
$
$
$
2,476
990
165
(832)
1,572
1.64
1.47
$
$
$
$
$
$
$
9,390
3,746
284
3
3,695
3.53
3.23
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
91
CORNING INCORPORATED - 2016 Annual Report This page intentionally left blank. This page intentionally left blank. Annual Meeting
The annual meeting of shareholders will be held on Thurs-
day, April 27, 2017, in Corning, New York. A formal notice of the
meeting and a proxy statement will be mailed to shareholders
on or about March 17, 2017. 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/2017-proxy. A summary report of the proceedings at the
annual meeting will be available without charge upon written
request to Linda E. Jolly, Corporate Secretary, Corning
Incorporated, One Riverfront Plaza, Corning, NY 14831.
Additional Information
A copy of Corning’s 2016 Annual Report on Form 10-K filed
with the Securities and Exchange Commission (SEC) is available
without charge to shareholders upon written request to Corpo-
rate 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 Information
Investment analysts and investors who need additional
information may contact Ann Nicholson, Division Vice President,
Investor Relations, Corning Incorporated, One Riverfront Plaza,
Corning, NY 14831. Telephone: 607.974.9000.
Common Stock
Corning 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 & Registrar
Computershare Trust Company
P.O. Box 30170, College Station, TX 77842-3170
Telephone: 800.255.0461
Website: www.computershare.com/contactus
Independent Auditors
PricewaterhouseCoopers LLP
300 Madison Ave., New York, NY 10017
Executive Certifications
Corning submitted its 2016 Annual CEO Certification to the
NYSE in compliance with NYSE corporate governance listing
standards, and filed with the SEC its Sarbanes Oxley Act 301
Certifications as exhibits to its most recent Form 10-K.
“Safe Harbor” Statement
Under the Private Securities Litigation Reform Act of 1995
The 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 yuan and South 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;
- the amount and timing of our cash flows and earnings
and other conditions, which may affect our ability to pay
our quarterly dividend at the planned level or to repurchase
shares at planned levels;
- 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, IT systems
or operations;
- effect of regulatory and legal developments;
- ability to pace capital spending to anticipated levels
of customer demand;
- rate of technology change;
- ability to enforce patents and protect intellectual property
and trade secrets;
- adverse litigation;
- product and components performance issues;
- retention of key personnel;
- 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;
-
- changes in tax laws and regulations;
- the potential impact of legislation, government regulations,
and other government action and investigations; and
- other risks detailed in Corning’s SEC filings.
Neither this report nor any statement contained herein is
furnished in connection with any offering of securities or for
the purpose of promoting or influencing the sale of securities.
Trademarks
A 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.html
Emmy is the trademark property of ATAS/NATAS.
Corning is an equal opportunity employer.
Board of Directors
Donald W. Blair
Retired Executive Vice President
& Chief Financial Officer
NIKE, Inc.
(1) (4)
Stephanie A. Burns
Retired Chairman
& Chief Executive Officer
Dow Corning Corporation
(1) (3)
John A. Canning Jr.
Co-Founder & Chairman
Madison Dearborn Partners, LLC
(4) (5) (6)
Richard T. Clark
Retired Chairman, President
& Chief Executive Officer
Merck & Co., Inc.
(2) (5) (6)
Robert F. Cummings Jr.
Retired Vice Chairman
of Investment Banking
JPMorgan Chase & Co.
(4) (5) (6)
Deborah A. Henretta
Retired Group President
E-Business
Procter & Gamble
(1) (3)
Daniel P. Huttenlocher
Dean and Vice Provost
Cornell University
New York City Tech Campus
(1) (4)
Kurt M. Landgraf
Retired President
& Chief Executive Officer
Educational Testing Service
(1) (2) (6)
Kevin J. Martin
Vice President
Facebook, Inc.
(3) (5)
Deborah D. Rieman
Retired Executive Chairman
MetaMarkets Group
(1) (2)
Hansel E. Tookes II
Retired Chairman
& Chief Executive Officer
Raytheon Aircraft Company
(2) (5) (6)
Wendell P. Weeks
Chairman of the Board,
Chief Executive Officer
& President
Corning Incorporated
(6)
Mark S. Wrighton
Chancellor
& Professor of Chemistry
Washington University
in St. Louis
(1) (4)
Printed in the USA
Board Committees
(1) Audit; (2) Compensation; (3) Corporate Relations; (4) Finance; (5) Nominating & Corporate Governance; (6) Executive
© Corning Incorporated 2017. All Rights Reserved.
Cover: Glass is remarkably versatile. To date, scientists have combined silica with approximately
50 elements to develop unique glass compositions. But we have the potential to use the entire
Periodic Table in countless combinations. To drive that point home, imagine you’re holding
an Oxford English Dictionary in your hands and think of how many words we can make using
only 26 letters. That’s why we believe some of the greatest glass innovations are still ahead.
Corning is one of the world’s
leading innovators in materials
science. For more than 165 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.
(1) (4)
Stephanie A. Burns
Retired Chairman
& Chief Executive Officer
Dow Corning Corporation
(1) (3)
John A. Canning Jr.
Co-Founder & Chairman
Madison Dearborn Partners, LLC
(4) (5) (6)
Richard T. Clark
Retired Chairman, President
& Chief Executive Officer
Merck & Co., Inc.
(2) (5) (6)
Robert F. Cummings Jr.
Retired Vice Chairman
of Investment Banking
JPMorgan Chase & Co.
(4) (5) (6)
Deborah A. Henretta
Retired Group President
E-Business
Procter & Gamble
(1) (3)
Daniel P. Huttenlocher
Dean and Vice Provost
Cornell University
New York City Tech Campus
(1) (4)
Kurt M. Landgraf
Retired President
& Chief Executive Officer
Educational Testing Service
(1) (2) (6)
Kevin J. Martin
Vice President
Facebook, Inc.
(3) (5)
Deborah D. Rieman
Retired Executive Chairman
MetaMarkets Group
(1) (2)
Hansel E. Tookes II
Retired Chairman
& Chief Executive Officer
Raytheon Aircraft Company
(2) (5) (6)
Wendell P. Weeks
Chairman of the Board,
Chief Executive Officer
& President
Corning Incorporated
(6)
Mark S. Wrighton
Chancellor
& Professor of Chemistry
Washington University
in St. Louis
(1) (4)
Officers
Management Committee
James P. Clappin
President —
Corning Glass Technologies
Stefan Becker
Vice President
& Operations Controller
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
Jaymin Amin
Vice President —
Technology
Thomas Appelt
President —
Corning International
Emerging Markets
Madapusi K. Badrinarayan
Vice President
& Technology Executive —
Science & Technology
John P. Bayne Jr.
Vice President
& General Manager —
Corning® Gorilla® Glass
Specialty Materials
Thomas R. Beall
Vice President
& Chief Intellectual
Property Counsel
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
Laura J. Coleman
Vice President —
Litigation
Kevin G. Corliss
Vice President
Chief Compliance Officer
& Director —
Employee Relations
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
Timothy L. Hunt
Vice President & Director —
Corporate Product
& Process Development
John R. Igel
Vice President
& General Manager —
Corning Optical Communications
Board Committees
(1) Audit; (2) Compensation; (3) Corporate Relations; (4) Finance; (5) Nominating & Corporate Governance; (6) Executive
© Corning Incorporated 2017. All Rights Reserved.
Linda E. Jolly
Vice President
& Corporate Secretary
William L. Juan
Vice President —
Commercial Law
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
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
Corning Incorporated
One Riverfront Plaza
Corning, NY 14831-0001
U.S.A.
www.corning.com
02AR40016EN
© 2017 Corning Incorporated. All Rights Reserved.