2017
A n n u a l R e p o r t
2017
January
Corning® Gorilla® Glass-
enabled concept car cited as
highlight of the Consumer
Electronics Show
Wendell P. Weeks
Chairman, Chief Executive Officer,
and President
To Our Shareholders:
Corning had a very strong 2017. We grew core sales and earnings per share. We returned cash to shareholders through
stock buybacks and a double-digit dividend increase. We introduced new products that continue Corning’s track record of
producing life-changing innovations, while positioning the company for future growth. We strengthened our portfolio with
strategic acquisitions. And we captured exciting new opportunities with customers who are global leaders in their industries.
We’re proud of our performance. But it’s important to
recognize that our achievements are not just the result
of strong execution this year. Our success stems from our
ongoing execution of the Strategy and Capital Allocation
Framework that we introduced more than two years ago,
the ability of our leaders to consistently take the long view
of what’s best for Corning and all its stakeholders, and the
dedication of our 46,000 global employees, who remain
resilient during challenging times and always keep their
eyes on the big picture.
Our 2017 results confirm that we have the right strategy
and talent in place to achieve the goals of our Framework
and drive sustainable growth long term.
Financial Results
Before I review the key elements of the Strategy and Capital
Allocation Framework, here’s a closer look at Corning’s 2017
financial performance.
Core sales were $10.5 billion, up 8 percent from 2016, while
core earnings per share of $1.72 were up 11 percent year over
year. All of Corning’s major businesses contributed to these
outstanding results, with our Optical Communications
and Specialty Materials segments having particularly
strong years. Demand for carrier and enterprise products
drove Optical Communications sales up 18 percent.
Meanwhile, adoption of Corning® Gorilla® Glass 5 in the
mobile consumer electronics market helped drive sales
in our Specialty Materials segment up 25 percent.
The stock market has reflected the company’s strong
performance. In 2017, Corning returned 35 percent, versus
22 percent for the S&P 500 (both dividend adjusted).
Those numbers, however, only tell part of the story. We are
particularly excited about how strong execution against
our Framework is positioning Corning for continued growth
in the years ahead.
Strategy and Capital Allocation Framework
By now, you should be familiar with Corning’s Strategy and
Capital Allocation Framework, but here’s a quick refresher.
The Framework articulates Corning’s plan for leveraging its
financial strength and focusing its portfolio to deliver value
over the next several years.
2017
February
2017
March
2017
April
2017
May
Increased quarterly dividend
14.8%
Announced plans to add capacity
in North Carolina to support
optical communications growth
Corning® Gorilla® Glass 5
featured on front and back
of Samsung Galaxy S8
Announced >$1 billion three-
year minimum fiber purchase
contract with Verizon
Announced investment in new
facility in China to support
demand for gas particulate filters
Gorilla® Glass SR+ featured on
Acer’s Leap Ware fitness watch
Awarded $200 million advanced
manufacturing investment by
Apple to produce next-generation
mobile devices
We expect to generate and deploy $26 – $30 billion from
2016 through 2019. We are investing $10 billion to grow
and extend our leadership through a combination of
research and development, capital spending, and strategic
acquisitions. We are also returning more than $12.5 billion
to our shareholders through share repurchases and annual
dividend increases of at least 10 percent.
The Framework focuses our portfolio on a set of reinforcing
capabilities with strong interconnections. Our best-in-
the-world capabilities include three core technologies
(glass science, ceramic science, and optical physics),
four manufacturing and engineering platforms (vapor
deposition, fusion, precision forming, and extrusion), 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 increases
our likelihood of success, reduces the cost of innovation,
creates higher barriers to entry for our competitors, and
ultimately delights our customers.
Execution and Results
Since introducing the Framework in late 2015, we have
distributed more than $9 billion to shareholders through
share repurchases and increases to our quarterly
dividend. Repurchases have reduced outstanding shares
by approximately 30 percent. We increased the annual
dividend 16.1 percent in February 2018, 14.8 percent in 2017,
and 12.5 percent in 2016, for a combined increase of
50 percent.
On the innovation front, we advanced key programs across
our market-access platforms.
(cid:81)
In Optical Communications, we celebrated a major
milestone in September with the production of our one-
billionth kilometer of optical fiber. That’s approximately
one third of the fiber ever produced worldwide, and
enough to travel to the sun and back nearly three-
and-a-half times. We also continued our technology
leadership with the introduction of a new multiuse
platform to simplify installation and reduce the costs
of deploying 4G and 5G networks.
In Display, we began shipping the world’s first Gen 10.5
LCD glass, and we continue to capture opportunities for
our other display glass innovations. Samsung chose our
Corning Lotus® NXT Glass for their flexible LTPS-OLED
line, and Corning Iris™ Glass has helped enable Dell’s
and Lenovo's new ultra-slim, ultra-bright monitors.
In Mobile Consumer Electronics, we marked the 10th
anniversary of Corning® Gorilla® Glass by winning
new models, adding more of our glass to devices, and
expanding into new applications. Gorilla Glass has now
been used on more than five billion devices worldwide.
The superior drop performance of Gorilla Glass 5 has
enabled new smartphone designs that feature glass
on both the front and back. And Gorilla Glass is now
featured on approximately 75 percent of smartwatches.
In Automotive, we generated our first sales of gas
particulate filters and secured an exclusive global
supply agreement with Groupe PSA for the PureTech
engine platform, which powers the latest models in the
Peugeot and Citroën brands. We are also experiencing
strong customer pull for Gorilla Glass for Automotive
and have been awarded 35 platforms globally.
In Life Sciences Vessels, we launched Valor® Glass, a
revolutionary new pharmaceutical packaging solution
that dramatically reduces particle contamination,
breaks, and cracks. As a result, Valor Glass helps
protect patients, while increasing throughput for
pharmaceutical manufacturers.
(cid:81)
(cid:81)
(cid:81)
(cid:81)
2017
June
2017
July
Launched multiuse platform
to enable next-generation
optical networks
Launched Valor® Glass
in collaboration with Merck
and Pfizer
Acquired SpiderCloud
Wireless, Inc.
2017
August
2017
September
Secured exclusive global supply
agreement for gas particulate
filters with Groupe PSA for
PureTech models
Produced one-billionth
kilometer of optical fiber
Posted first sales of gas
particulate filters
We supplemented these organic growth initiatives with
strategic transactions to strengthen our portfolio. In July,
we acquired SpiderCloud Wireless, Inc., a leading provider
of in-building wireless solutions. Then in December, we
announced our plans to acquire virtually all of 3M’s Commu-
nication Markets Division. These transactions strengthen
our product portfolio, extend our global reach, and support
our objective to grow annual sales in our Optical Communi-
cations segment to $5 billion by 2020.
To support our growth across multiple market-access plat-
forms, we are undertaking one of the largest expansions in
Corning’s history. In 2017, we began adding capacity in North
Carolina and Poland to help meet demand for optical com-
munications products. We are expanding manufacturing in
China to produce Gen 10.5 LCD glass and support demand
for gas particulate filters. We also announced the expansion
of an existing plant in New York and the construction of a
new high-volume manufacturing facility in North Carolina
to produce Valor® Glass. Between 2017 and 2019, we expect
to add, expand, or integrate more than 20 plants overall.
Delighting Our Customers
Perhaps the greatest measure of our success is the fact
that other innovators are turning to us to help realize their
own visions. In April, Verizon announced that they would
be purchasing more than a billion dollars’ worth of our
optical solutions to expand their coverage and enable next-
generation networks. In May, Apple announced a significant
investment in our advanced glass manufacturing capabili-
ties in Harrodsburg, Kentucky, to produce next-generation
mobile devices. And our July introduction of Valor Glass
was made possible through close collaboration with Merck
and Pfizer.
We continue to attract global leaders with our distinctive
capabilities. We earn their trust through strong relation-
ships and close collaboration. And we delight them by
producing unique solutions to tough challenges. Our track
record leads to future opportunities for collaboration with
existing customers, while also attracting other innovators
in a broad range of industries.
Opportunities Ahead
As we look to 2018 and beyond, here are some of the ways
we are exploiting our distinctive capabilities to drive growth
in both the near and long term.
(cid:81)
In Optical Communications, we remain the only
true end-to-end supplier of optical solutions, and we
continue innovating for rapidly evolving applications,
such as fiber to the home, hyperscale data centers, and
in-building networks. We’re growing at more than twice
the rate of the communications infrastructure market,
and we are confident in our ability to reach $5 billion
in annual sales by 2020, with further growth in the
years ahead.
In Display, we expect to maintain stable returns due to
our strong share position, lowest-cost manufacturing,
and the more favorable pricing environment. Simulta-
neously, we continue to leverage our fusion assets and
other capabilities to drive the next round of display
innovations ⎯ e.g., better images, ubiquitous touch,
and new form factors.
In Mobile Consumer Electronics, we continue making
progress on our goal to double sales over the next
several years by producing best-in-class products,
capturing more real estate on mobile devices, winning
share in new markets, and innovating for new product
categories such as augmented reality.
In Automotive, Corning is benefiting from the industry’s
trend toward cleaner, safer, and more connected vehicles.
We expect sales of gas particulate filters to ramp
quickly, driven by new regulations in Europe and China,
and we believe this could be a $500 million business by
early in the next decade. Meanwhile, more customers
are recognizing the potential of Gorilla® Glass to reduce
vehicle weight, increase fuel efficiency, add aesthetic
appeal, and enable sophisticated interactive displays,
thanks to events such as the 2017 Frankfurt Motor Show,
which showcased Gorilla Glass on the Renault SYMBIOZ
concept car.
(cid:81)
(cid:81)
(cid:81)
2017
October
2017
2017
November
December
2018
January
Began shipping Gen 10.5 LCD
glass to customers
Announced expansion of
facility in Big Flats, New York,
to produce Valor® Glass
Announced plans to acquire
3M’s Communication Markets
Division
Opened new fiber-optic cable
manufacturing plant in North
Carolina
Announced expansion of facility
in Poland to meet demand
for optical communications
products
Confirmed plans to construct
high-volume manufacturing
plant in North Carolina to
produce Valor® Glass
Announced that Gorilla®
Glass for Automotive has been
awarded a total of 35 platforms
(cid:81) Finally, in Life Sciences Vessels, we’re building a long-
term, multi-billion dollar franchise. Although this
industry moves at a deliberate pace, we believe Valor®
Glass has the potential to power Corning’s growth for
the next decade and beyond.
Closing Thoughts
As we look ahead, we are confident in our ability to deliver
on the goals of our Framework and continue doing what
Corning does best ⎯ transforming industries, enhancing
people’s lives, and delivering disruptive innovations that
create value for decades. Our confidence is based not only
on our outstanding 2017 results, but also on Corning’s 166-year
track record. So I’d like to close by sharing my thoughts on
what it takes to succeed for more than 165 years.
First, you need to focus on problems that matter. For example,
we all want cleaner air to breathe. We all want medicines
that are safe and effective. We all want fast, reliable access
to information and communications networks that help us
stay connected to our loved ones. And we all want devices
that enhance our lives with style and performance, beauty
and durability. Corning’s innovations are front and center
for all these needs. By focusing on problems that matter,
we ensure our ongoing relevance in a changing world. We
activate the passion of our people, who care deeply about
applying Corning’s distinctive skills to make the world a
better place. And we maintain our focus and commitment
during tough times and setbacks, because we know that
we are doing important work that makes a real difference.
Second, you need a distinctive set of capabilities. At
Corning, we are the best in the world at what we do, and
we continue to enhance our knowledge and hone our skills
so that we are always creating a better version of ourselves.
Our distinctive capabilities make us vital to our customers.
They make us increasingly relevant to new industries.
And, because our capabilities are versatile and synergistic,
they make it possible for us to evolve to meet the needs
of changing markets. We don’t know exactly how all our
products and markets will evolve in the decades to come,
but we know that Corning will be there helping customers
navigate their own transformations.
Third, you need to maintain the trust of your stakeholders.
We work hard every day to earn that trust with our
performance and our actions. We live our values, honor
our commitments, and communicate candidly about
good news and bad.
This formula has worked for us for more than 165 years,
and we are confident that it will drive our success for
the next 165 years. We hope you share our confidence in
this strategy, our pride in Corning’s track record, and our
excitement about the future. Thank you for being on this
journey with us.
Sincerely,
Wendell P. Weeks
Chairman, Chief Executive Officer, and President
Best-in-the-World Capabilities
Our cohesive portfolio allows us to capture synergies among our capabilities and reapply them
to multiple market-access platforms. Here are some examples of those synergies in action.
Core Technologies
We use our Glass Science expertise to formulate glasses with the right optical, chemical,
mechanical, and thermal properties for particular applications. This capability is at
the heart of our industry-leading display and cover glass. We also use glass science to
continually reinvent optical fiber. And today, we’re using our glass science expertise
to make next-generation pharmaceutical packaging.
Optical Physics refers to our ability to characterize and control the path of light. This
capability has enabled our leadership in optical communications for more than four
decades. We also leverage this capability for Corning Iris Glass, where the management
of light distribution allows customers to design TVs that are just half a centimeter thick.
In addition, we applied our optical physics expertise to create anti-reflective glass, which
makes display screens much easier to read.
Ceramic Science transforms inorganic, non-metallic materials into a broad range of
objects and technologies. This capability is at the heart of our emissions-control products.
Today, we’re also developing beautiful glass ceramics that create new design possibilities
in mobile consumer electronics.
Manufacturing and Engineering Platforms
Our Vapor Deposition process makes glass so pure that if it replaced the water in the
ocean, you could see the bottom clearly from any point on the surface. Vapor deposition
is essential to make low-loss optical fiber. It’s also the foundation for high-purity fused
silica, which enables stepper lenses that are used to fabricate small, power-efficient
semiconductors for mobile devices. More recently, we applied this capability to create
Gorilla Glass SR+ for wearable devices.
Our Fusion process allows us to make sheets of glass twice the size of a king-size bed, as
thin as a business card, and flat to within 200 atoms. We use this platform to make our
industry-leading display glass, as well as our tough, thin Gorilla Glass. We also leverage
our fusion process to enable flexible OLED displays and create new interconnects for
high-speed switches, routers, and servers.
We use our Precision Forming assets to make life sciences vessels that require an
extremely high degree of accuracy, such as liquid-handling tools and cell-growth surfaces.
We apply this same expertise to make optical connectors that align hair-thin fibers
perfectly and eliminate the need for splices. Precision Forming is also enhancing the value
proposition of Gorilla Glass for auto interior applications.
Corning’s expertise in Extrusion is why our cellular ceramic substrates can pack the
surface area of a football field into an object the size of a soda can. We also use extrusion
to make highly reliable and accurate pipettes for life sciences applications. And we’re
leveraging this same expertise to make durable optical fiber cables for data centers.
We are constantly reapplying our knowledge and repurposing our assets across
product sets and markets. These synergies increase our likelihood of success, reduce
the cost of innovation, create higher barriers to entry for our competitors, and allow
us to produce unique solutions that delight our customers. They also make it possible
for us to evolve to meet the needs of changing markets.
Financial Highlights:
In millions, except per share amounts
As reported — GAAP Core performance*
2017
2016
2015
2017
2016
2015
Net Sales
$ 10,116
$ 9,390
$ 9,111
$ 10,514
$ 9,710
$ 9,800
Net (loss) income attributable
to Corning Incorporated
$ (497)
$ 3,695
$ 1,339
$ 1,756
$ 1,774
$ 1,882
Diluted (loss) earnings per common share
attributable to Corning Incorporated
$ (0.66)
$ 3.23
$ 1.00
$
1.72
$ 1.55
$ 1.40
* 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 24 through 27 of this Annual Report, as well as on the Company’s website.
Core performance measures are adjusted to exclude the impact of changes in Japanese yen and Korean won foreign exchange rates,
as well as other items that do not reflect ongoing operations of the Company. The Company believes that the use of constant currency
reporting allows investors to understand our results without the volatility of currency fluctuations, and reflects the underlying economics
of the translated earnings contracts used to mitigate the impact of changes in currency exchange rates on our earnings and cash flows.
Corning Incorporated 2017 Annual Report
Index
1
7
11
Business Description �����������������������������������������������������������������������������������������������������������������������������������������������������
Risk Factors ���������������������������������������������������������������������������������������������������������������������������������������������������������������������
Legal Proceedings ����������������������������������������������������������������������������������������������������������������������������������������������������������
Market for Registrant’s Common Equity, Related Stockholder Matters and
12
Issuer Purchases of Equity Securities �������������������������������������������������������������������������������������������������������������������������
14
Selected Financial Data (Unaudited) �������������������������������������������������������������������������������������������������������������������������
Management’s Discussion and Analysis of Financial Condition and Results of Operations �����������������������������
15
Quantitative and Qualitative Disclosures About Market Risks ����������������������������������������������������������������������������� 44
Management’s Annual Report on Internal Control Over Financial Reporting ���������������������������������������������������� 45
Report of Independent Registered Public Accounting Firm ����������������������������������������������������������������������������������� 46
Consolidated Statements of (Loss) Income ��������������������������������������������������������������������������������������������������������������� 47
Consolidated Statements of Comprehensive Income ��������������������������������������������������������������������������������������������� 48
Consolidated Balance Sheets �������������������������������������������������������������������������������������������������������������������������������������� 49
Consolidated Statements of Cash Flows ������������������������������������������������������������������������������������������������������������������� 50
Consolidated Statements of Changes in Shareholders’ Equity ������������������������������������������������������������������������������ 51
Notes to Consolidated Financial Statements ����������������������������������������������������������������������������������������������������������� 52
1. Summary of Significant Accounting Policies ����������������������������������������������������������������������������������������������������������������������������������������������� 52
2. Restructuring, Impairment and Other Charges ������������������������������������������������������������������������������������������������������������������������������������������� 57
3. Available-for-Sale Investments ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� 57
4. Significant Customers �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 57
5.
Inventories, Net of Inventory Reserves ���������������������������������������������������������������������������������������������������������������������������������������������������������� 57
6.
Income Taxes ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 57
7.
Investments ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 61
8. Acquisitions ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 63
9. Property, Plant and Equipment, Net of Accumulated Depreciation ��������������������������������������������������������������������������������������������������������� 63
10. Goodwill and Other Intangible Assets ���������������������������������������������������������������������������������������������������������������������������������������������������������� 64
11. Other Assets and Other Liabilities ����������������������������������������������������������������������������������������������������������������������������������������������������������������� 65
12. Debt �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 66
13. Employee Retirement Plans ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 67
14. Commitments, Contingencies and Guarantees ������������������������������������������������������������������������������������������������������������������������������������������� 74
15. Hedging Activities �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 76
16. Fair Value Measurements �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 78
17. Shareholders’ Equity ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 79
18. (Loss) Earnings Per Common Share ���������������������������������������������������������������������������������������������������������������������������������������������������������������� 82
19. Share-based Compensation ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 83
20. Reportable Segments ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 84
Valuation Accounts and Reserves ������������������������������������������������������������������������������������������������������������������������������� 88
Quarterly Operating Results ���������������������������������������������������������������������������������������������������������������������������������������� 89
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 combined its unparalleled expertise in glass
science, ceramic science, and optical physics with deep manufacturing
and engineering capabilities to develop category-defining products
that transform industries and enhance people’s lives. We succeed
through sustained investment in research and development, a unique
combination of material and process innovation, and deep, trust-based
relationships with customers who are global leaders in their industries.
Corning’s capabilities are versatile and synergistic, which allows the
company to evolve to meet changing market needs, while also helping
our customers capture new opportunities in dynamic industries. Today,
Corning’s markets include optical communications, mobile consumer
electronics, display technology, automotive, and life sciences vessels.
Corning’s industry-leading products include damage-resistant cover
glass for mobile devices; precision glass for advanced displays; optical
fiber, wireless technologies, and connectivity solutions for state-of-the-
art communications networks; trusted products to accelerate drug
discovery and delivery; and clean-air technologies for cars and trucks.
Corning operates in five reportable segments: Display Technologies,
Optical Communications, Environmental Technologies, Specialty
Materials and Life Sciences, and manufactures products at 105 plants in
15 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 glass 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. Some of the product innovations that we have launched over
the past ten years utilizing our world-class processes and capabilities
include the following:
• Corning® EAGLE XG® Glass, the industry’s first LCD glass substrate that
is free of heavy metals;
• Corning® EAGLE XG® Slim Glass, a line of thin glass substrates which
enables lighter-weight portable devices and thinner televisions and
monitors;
• Corning Iris™ Glass, a light-guide plate solution which enables
televisions and monitors to be less the 5 mm thick;
• 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; and
• The world’s first Gen 10 and Gen 10.5 glass substrates in support of
improved efficiency in manufacturing large-sized televisions.
Corning has LCD glass manufacturing operations in South Korea, Japan,
Taiwan and China, and 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 30% of Corning’s sales
in 2017.
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 - 2017 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 encompasses 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+TM 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
interface devices,
components and couplers, closures, network
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.
In December 2017, Corning announced that
it had entered
into agreements with 3M to purchase substantially all of 3M’s
Communication Markets Division in a cash transaction valued at
approximately $900 million. The acquisition is expected to close
during 2018, subject to customary closing conditions and regulatory
approval. Corning believes that this transaction will augment its
Optical Communications segment’s global market access and expand
its broad portfolio of high-bandwidth optical connectors, assemblies,
hardware, and accessories for carrier networks, enterprise LAN, and
data center solutions.
Our optical fiber manufacturing facilities are
in North
Carolina, China and India. Cabling operations are located in North
Carolina, Germany, Poland, China and smaller regional locations. Our
manufacturing operations for hardware and equipment products are
located in Texas, Arizona, Mexico, Brazil, Denmark, Germany, Poland,
Israel, Australia and China.
located
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 35% of Corning’s
sales in 2017.
Environmental Technologies Segment
Corning’s
segment manufactures
Environmental Technologies
ceramic substrates and filter products for emissions control in mobile
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. For example, in response to the growing
popularity of gasoline direct injection engines, Corning introduced
gasoline particulate filters to help automakers reduce particulate
emissions generated by these engines. 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.
CORNING INCORPORATED - 2017 Annual Report Patent protection is important to the segment’s operations. The
segment has an extensive portfolio of patents relating to its products,
technologies and manufacturing processes. 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 2017.
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 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.
Semiconductor optics manufactured by Corning
includes high-
performance optical material products, optical-based metrology
instruments, and optical assemblies for applications in the global
semiconductor industry. Corning’s semiconductor optics products are
manufactured in New York.
Other specialty glass products
lens and window
components and assemblies and are made in New York, New Hampshire
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 14% of
Corning’s sales in 2017.
Life Sciences Segment
As a leading developer, manufacturer and global supplier of laboratory
products for over 100 years, Corning’s Life Sciences segment works with
researchers and drug manufacturers seeking to increase efficiencies,
reduce costs and compress timelines. Using unique expertise in the fields
Business Description
of materials science, polymer surface science, cell culture and biology,
the segment provides innovative solutions that improve productivity
and enable breakthrough research.
Life Sciences products include consumables (such as plastic vessels,
specialty surfaces, cell culture media and serum), 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 sciences products under these primary brands: Corning,
Falcon, Pyrex, Axygen, and Gosselin. The products are marketed globally,
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 Illinois, Maine, Massachusetts, New York, North Carolina, Utah
and Virginia and outside of the U.S. in China, France, Mexico and Poland.
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 2017.
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 the pharmaceutical technologies
business and new product lines and development projects, as well as
certain corporate investments such as Eurokera and Keraglass equity
affiliates.
In 2017, Corning’s pharmaceutical technologies business, in collaboration
with two leading pharmaceutical companies, introduced Corning
Valor® Glass, a revolutionary pharmaceutical glass packaging solution
that enhances the storage and delivery of today’s drug formulations
and provides more reliable access to medicines essential to public
health. Insights into manufacturing processes from the pharmaceutical
companies, in combination with Corning’s glass science and precision
forming capabilities, helped deliver a glass packaging solution for
injectable drugs in vials and cartridges. Corning Valor Glass packaging
offers superior chemical durability, strength and damage resistance.
These qualities enable increased throughput and more reliable access
to state-of-the-art medicines for patients, while maintaining a high level
of quality assurance for pharmaceutical companies.
The All Other segment represented 1% of Corning’s sales in 2017.
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.
CORNING INCORPORATED - 2017 Annual Report
3
Business Description
Corporate Investments
Dow Corning Corporation and Hemlock Semiconductor Group� 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.
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.
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 foreseeable 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
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.
4
Environmental Technologies Segment
Corning believes it maintains a strong position in the worldwide market
for automotive ceramic substrate and filter products, as well as in the
heavy-duty and light-duty diesel vehicle markets. The Company believes
its competitive advantage in automotive ceramic substrate products
for catalytic converters and filter products for particulate emissions
in exhaust systems is based on an advantaged product portfolio,
collaborative engineering design services, customer service and support,
strategic global presence and continued 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
industrial/commercial, and
care,
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 principal 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.
CORNING INCORPORATED - 2017 Annual Report Business Description
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 of its products, Corning
has alternate suppliers that would allow operations to continue without
interruption in the event of specific materials shortages.
in the
Certain key materials and proprietary equipment used
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.
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. Many of our earlier patents have now expired, but
Corning continues to seek and obtain patents protecting its innovations.
In 2017, Corning was granted about 560 patents in the U.S. and over 1,280
patents in countries outside the U.S.
Each business segment possesses a patent portfolio that provides
certain competitive advantages in protecting Corning’s innovations.
Corning has historically enforced, and will continue to enforce, its
intellectual property rights. At the end of 2017, Corning and its wholly-
owned subsidiaries owned over 10,900 unexpired patents in various
countries of which over 4,560 were U.S. patents. Between 2018 and
2020, approximately 7% of these patents will expire, while at the same
time Corning intends to seek patents protecting its newer innovations.
Worldwide, Corning has about 10,300 patent applications in process,
with about 2,280 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:
• 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, hardware, termination and
storage and associated methods of manufacture; and (iv) distributed
communication systems.
• 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
Number of
patents
worldwide
U.S. patents
Important
patents expiring
between 2018
and 2020
1,900
4,200
900
1,200
570
400
1,900
350
590
240
18
34
20
8
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, HPFS, Leaf, Pyrex,
Steuben, Falcon, SMF-28e, Unicam, and Willow.
5
CORNING INCORPORATED - 2017 Annual Report Business Description
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 $39 million in 2017
and are estimated to be $23 million in 2018.
Corning’s 2017 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 does not place it at a competitive
disadvantage.
Employees
At December 31, 2017, Corning had approximately 46,200 full-time employees. From time to time, Corning also retains consultants, independent
contractors, temporary and part-time workers.
Executive Officers
James P� Clappin Executive Vice President, Corning Glass Technologies
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. He was
appointed to his present position in 2017. Age 60.
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 59.
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 52.
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 54.
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 58.
Lawrence D� McRae Vice Chairman and Corporate Development Officer
Mr. McRae joined Corning in 1985 and served in various financial, sales
and marketing positions. He was appointed vice president Corporate
Development in 2000, senior vice president Corporate Development
in 2003, senior vice president Strategy and Corporate Development in
October 2005, and executive vice president Strategy and Corporate
Development in 2010. He was appointed to his present position in
August 2015. Age 59.
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 65.
6
CORNING INCORPORATED - 2017 Annual Report Risk Factors
Eric S� Musser Executive Vice President, Corning Technologies and International
Lewis A� Steverson Senior Vice President and General Counsel
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 58.
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 49.
Edward A� Schlesinger Vice President and Corporate Controller
Mr. Schlesinger joined Corning in 2013 as senior vice president and
chief financial officer of Corning Optical Communications. He led
the Finance function for Corning Optical Communications and
served on the Communications Leadership Team. He was named vice
president and corporate controller in September 2015, and appointed
principal accounting officer in December 2015. Prior to joining Corning,
Mr. Schlesinger served as Vice President, Finance and Sector Chief
Financial Officer for two of Ingersoll Rand’s business segments.
Mr. Schlesinger has a financial career that spans more than 20 years
garnering extensive expertise in technical financial management and
reporting. Age 50.
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 54.
R� Tony Tripeny Senior Vice President and Chief Financial Officer
Mr. Tripeny joined Corning in 1985 as the corporate accounting manager
of Corning Cable Systems, and became the Keller, Texas facility’s plant
controller in 1989. In 1993, he was appointed equipment division controller
of Corning Cable Systems and, in 1996 corporate controller. Mr. Tripeny
was appointed chief financial officer of Corning Cable Systems in July
2000. In 2003, he took on the additional role of Telecommunications
group controller. He was appointed division vice president, operations
controller in 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 58.
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 58.
Document Availability
A copy of Corning’s 2017 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 our 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.
7
CORNING INCORPORATED - 2017 Annual Report Risk Factors
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 labor laws, tax laws, anti-
competition regulations, prohibitions on payments to governmental
officials, import and trade restrictions and export requirements. Non-
compliance or violations could result in fines, criminal sanctions against
us, our officers or our employees, and prohibitions on the conduct of our
business. Such violations could result in prohibitions on our ability to
offer our products and services in one or more countries and could also
materially damage our reputation, our brand, our international expansion
efforts, our ability to attract and retain employees, our business and our
operating results. Our success depends, in part, on our ability to anticipate
and manage these risks.
We are also subject to a variety of other risks in managing a global
organization, including those related to:
• The economic and political conditions in each country or region;
• 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;
• Governmental protectionist policies and sovereign and political risks
that may adversely affect Corning’s profitability and assets;
• Tariffs, trade duties and other trade barriers including anti-dumping
duties;
• 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;
• Difficulty in collecting obligations owed to us;
• Natural disasters such as floods, earthquakes, tsunamis and windstorms;
and
• 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 2017
3
1
3
3
2
62%
19%
81%
58%
47%
Business disruptions could affect our operating results
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.
8
CORNING INCORPORATED - 2017 Annual Report
Risk Factors
Geopolitical events, as well as other events outside of Corning’s control,
could cause a disruption to our manufacturing operations and adversely
impact our customers, resulting in a negative impact to Corning’s net
sales, net income, asset values and liquidity
A natural disaster, epidemic, labor strike, war or political unrest
may adversely affect Corning’s ability to supply our customers and
impact the value of our assets. Such events may also impact our
customers’ facilities and reduce our sales to such customers. For example,
a sizeable portion of Corning’s glass manufacturing capacity is located in
South Korea and we generate a significant portion of our sales through
two South Korean customers. Deterioration of the geopolitical climate in
such a region could cause a disruption to our manufacturing operations
and adversely impact our customers, resulting in a negative impact to
Corning’s net sales, net income, asset values and liquidity.
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 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.
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 cyber 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
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.
We have significant exposure to foreign currency movements
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 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 have, 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.
Foreign currency movements may also impact our competitive cost
position relative to our largest, Japan-based competitors in the Display
Technologies segment. The profitability of customers may also be
impacted as they typically purchase from us in Japanese yen and they sell
in various currencies.
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.
We have significant exposure to counterparties of our related derivatives
portfolio
We 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.
9
CORNING INCORPORATED - 2017 Annual Report Risk Factors
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.
We have incurred, and may in the future incur, goodwill and other
intangible asset impairment charges
At December 31, 2017, Corning had goodwill and other intangible assets
of approximately $2.6 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
factors, including:
impacted by several
• Changes in the relative amounts of income before taxes in the
various jurisdictions in which we operate that have differing statutory
tax rates;
• Changes in tax laws, tax treaties and regulations or the interpretation
of them, including the recent Tax Cuts and Jobs Act (the “2017 Tax Act”)
passed by the U.S. Congress and signed into law on December 22, 2017;
• 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
is uncertain. Significant
where the ultimate tax determination
10
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.
The recent 2017 Tax Act could significantly impact how U.S. global
corporations are taxed. We are in the process of evaluating the impact
of this new legislation and certain changes could have a material
adverse impact on our tax expense and cash flow. Among other things,
the 2017 Tax Act requires companies to pay a one-time mandatory tax
on unrepatriated earnings of certain foreign subsidiaries that were
previously tax deferred (the “toll charge”) and creates new taxes
on certain foreign sourced earnings. The toll charge resulted in an
additional $1.1 billion provisional tax expense. However, settlement of
the toll charge will occur almost entirely through the use of existing
foreign tax credit carryovers of $1.1 billion.
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.
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.
CORNING INCORPORATED - 2017 Annual Report Legal Proceedings
Current or future litigation or regulatory investigations may harm our
financial condition or results of operations
As a global technology and manufacturing company, we are engaged
in various 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.
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
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 15 active hazardous waste sites. Under the
Superfund Act, all parties who may have contributed any waste to a
hazardous waste site, identified by the Agency, are jointly and severally
liable for the cost of cleanup unless the Agency agrees otherwise.
It is Corning’s policy to accrue for its estimated liability related to
Superfund sites and other environmental liabilities related to property
owned by Corning based on expert analysis and continual monitoring
by both internal and external consultants. At December 31, 2017 and
December 31, 2016, Corning had accrued approximately $38 million
(undiscounted) and $43 million (undiscounted), respectively, for the
estimated liability for environmental cleanup and related litigation.
Based upon the information developed to date, management believes
that the accrued reserve is a reasonable estimate of the Company’s
liability and that the risk of an additional loss in an amount materially
higher than that accrued is remote.
11
CORNING INCORPORATED - 2017 Annual Report Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities
(a)
Corning Incorporated common stock is listed on the New York Stock Exchange. In addition, it is traded on the Boston, Midwest 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.
2017
Price range
High
Low
2016
Price range
High
Low
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
$
$
28.36
24.12
21.07
16.13
$
$
$
$
30.60
26.32
21.30
18.21
$
$
$
$
32.17
27.71
23.81
19.78
$
$
$
$
32.82
29.52
25.35
22.23
As of December 31, 2017, there were approximately 15,205 registered holders of common stock and approximately 474,059 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 paid in the first quarter of 2017.
On February 6, 2018, Corning’s Board of Directors declared a 16.1% increase in the Company’s quarterly common stock dividend, which increased the
quarterly dividend from $0.155 to $0.18 per share of common stock, beginning with the dividend paid in the first quarter of 2018. This increase marks
the seventh dividend increase since October 2011.
12
CORNING INCORPORATED - 2017 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
$300
$250
$200
$150
$100
$50
$0
2012
2013
2014
2015
2016
2017
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 2017:
Issuer Purchases of Equity Securities
Period
October 1-31, 2017
Open market and shares
surrendered for tax
withholdings
November 1-30, 2017
Open market and shares
surrendered for tax
withholdings
December 1-31, 2017
Open market and shares
surrendered for tax
withholdings
Total at December 31, 2017
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)
4,888,629
$
30.41
4,866,701
3,971,949
$
31.87
3,954,613
3,759,076
12,619,654
$
$
32.27
31.42
3,719,863
12,541,177
$
1,578,548,148
(1) 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 2017: (i) the deemed surrender to us of 26,639 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 51,838 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 12,541,177 shares of common stock under the 2016 Repurchase Program.
13
CORNING INCORPORATED - 2017 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 (loss) income attributable to Corning
Incorporated(1)(2)
(Loss) 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
2017
2016
2015
2014
2013
Years ended December 31,
$
$
$
$
$
$
$
$
$
$
$
$
$
10,116
860
361
(497)
(0.66)
(0.66)
0.62
895
895
5,618
27,494
4,749
15,698
1,804
1,158
46,200
$
$
$
$
$
$
$
$
$
$
$
$
$
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
(1) Year ended December 31, 2017 includes the impact of the 2017 Tax Act, including a provisional toll charge ($1.1 billion) and provisional re-measurement
of deferred tax balances due to the reduction in Corning’s tax rate ($347 million).
(2) 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.
14
CORNING INCORPORATED - 2017 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 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 the 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 extend our leadership positions and deliver growth.
Our probability of success increases as we invest in our world-class
capabilities. Corning is concentrating 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 $9 billion to
shareholders through share repurchases and dividends, and increased
the annual dividend by 16.1% in 2018, 14.8% in 2017 and 12.5% in 2016 as
part of our ongoing commitment to return cash to our investors.
We also utilized our financial strength in 2017 to continue our focus on
innovation, advancing key programs across our market platforms. Some
of our achievements in 2017 included:
• Celebrating a major milestone with the production of our one billionth
kilometer of optical fiber. We also continued our technology leadership
with the introduction of a new multi-use platform to simplify
installation and reduce the costs of deploying 4G and 5G networks.
• Shipping the world’s first Gen 10.5 glass. In addition, we captured
new opportunities for Corning Iris™ Glass, which is featured in new
ultra-slim, ultra-bright lines of monitors.
• Expanding
into new Corning® Gorilla® Glass applications and
increasing the amount of our glass on mobile electronic devices.
Additionally, the superior drop performance of Gorilla Glass 5 has
enabled new smartphone designs that feature glass on both the front
and back.
• Securing an exclusive global supply agreement for gas particulate
filters. We also won new customers for Gorilla Glass for Automotive,
which is featured on thirty-five automotive platforms globally.
• Launching Valor® Glass, a revolutionary new pharmaceutical
packaging solution that dramatically reduces particle contamination,
breaks, and cracks. As a result, Valor helps protect patients, while
increasing manufacturing throughput.
2017 Results
Net sales in the year ended December 31, 2017 were $10,116 million,
an increase of $726 million, or 8%, when compared to the year
ended December 31, 2016. The increase was driven by the Optical
Communications and the Specialty Materials segments, up $540
million and $279 million, respectively. The Environmental Technologies
and Life Sciences segments also increased, up $74 million and $40
million, respectively. A decline in net sales of $241 million in the Display
Technologies segment partially offset these increases, driven by price
declines of approximately 10%.
For the year ended December 31, 2017, we generated a net loss of $497
million, or $(0.66) per share, compared to net income of $3,695 million,
or $3.23 per share, for 2016. When compared to last year, the $4.2 billion
decrease in net income was due to the following items (amounts
presented after tax):
• The absence of a $2.7 billion non-taxable gain and $105 million positive
tax adjustment on the strategic realignment of our ownership interest
in Dow Corning recorded in the second quarter of 2016;
• The impact of the passage of the 2017 Tax Act, including a provisional
amount related to the one-time mandatory tax on unrepatriated
foreign earnings of $1.1 billion and a provisional amount related to
the remeasurement of U.S. deferred tax assets and liabilities of $347
million;
• The change in the amounts recorded for tax law changes, valuation
allowance adjustments and other discrete tax items in the amount of
$186 million;
• Higher research, development and engineering expenses, driven by
the absence of the impact of a 2016 joint development agreement in
the Display Technologies segment, as well as higher costs associated
with new product launches in the Optical Communications, Specialty
Materials and Environmental Technologies segments; and
CORNING INCORPORATED - 2017 Annual Report
15
Management’s Discussion and Analysis of Financial Condition and Results of Operations
• A decrease of $104 million in net income in the Display Technologies
segment, primarily driven by price declines of approximately 10%, the
absence of a gain of $24 million recorded in 2016 from the contingent
consideration fair value adjustment and the negative impact of
movements in the Japanese yen and South Korean won in the amount
of $59 million.
Partially offsetting these events were the following items:
• A decrease in unrealized losses from our translated earnings contracts
in the amount of $162 million;
• Higher net income in the Optical Communications segment, up
$96 million, driven by an 18% increase in net sales;
• Higher net income in the Specialty Materials segment, up $75 million,
driven by a 25% increase in net sales;
• The absence of a charge of $86 million related to the resolution of an
investigation by the U.S. Department of Justice and related costs;
• Higher equity earnings of affiliated companies, driven by an increase
of $90 million in equity earnings from HSG, offset somewhat by the
absence of $76 million in equity earnings from Dow Corning’s silicones
business. The HSG increase was due to higher volume, which added $33
million, and an increase of approximately $78 million in settlements of
long-term sales agreements, partially offset by higher restructuring
and impairment charges of $17 million;
• A decrease in restructuring, impairment and other charges, largely
due to the absence of charges incurred in 2016 associated with
restructuring activity and the disposal of long-lived assets; and
• Lower acquisition-related expenses, down $48 million, driven by the
absence of costs related to the realignment of our equity interests in
Dow Corning completed in the second quarter of 2016, offset slightly
by several small acquisitions occurring in 2017.
The translation impact of fluctuations in foreign currency exchange
rates, including the impact of hedges realized in 2017, did not materially
impact Corning’s consolidated net income in the year ended December
30, 2017 when compared to the year ended December 31, 2016.
2018 Corporate Outlook
We believe 2018 will be another year of strong growth and investment,
consistent with our Strategy and Capital Allocation Framework, and
anticipate that core sales will grow to approximately $11 billion. In our
Display Technologies segment, we expect pricing to continue to improve,
with year-over-year declines reaching mid-single digits, an important
milestone toward our goal of stabilizing returns. We anticipate Corning’s
LCD glass volume will grow faster than the expected LCD glass market
growth of mid-single digits, driven by television screen size growth and
the ramp of our Gen 10.5 facility in China. In the Optical Communications
segment, we expect sales to increase by about 10%, excluding any
contribution from the pending acquisition of 3M’s Communications
Market Division, driven by strong demand from carrier and enterprise
network customers. We expect high-single digit sales growth in our
Environmental Technologies segment, driven by continued strength in
automotive product sales, on-going improvements in the heavy-duty
diesel market and from the commercial launch of gas-particulate filters.
We expect growth in the Specialty Materials segment, the rate of which
will depend on new model launches and the adoption of our innovations,
and anticipate mid-single digit growth in the Life Sciences segment.
Results of Operations
Selected highlights from our operations follow (in millions):
2017
2016
2015
17 vs. 16
16 vs. 15
% 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)
(Provision) benefit for income taxes
(as a % of net sales)
Net (loss) income attributable to Corning
Incorporated
(as a % of net sales)
* Percent change not meaningful.
16
$
$
$
$
$
$
$
$
$
10,116
4,032
40%
1,467
15%
860
9%
361
4%
(121)
(1)%
1,657
16%
(2,154)
(21)%
(497)
(5)%
$
$
$
$
$
$
$
$
$
$
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%
8
8
0
16
27
73
*
(55)
*
*
3
3
(2)
(4)
(5)
*
*
148
*
176
CORNING INCORPORATED - 2017 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,
$
2017
2,997
3,545
1,106
1,403
879
186
2016
$
3,238
3,005
1,032
1,124
839
152
2015
$
3,086
2,980
1,053
1,107
821
64
$
10,116
$
9,390
$
9,111
%
change
17 vs. 16
%
change
16 vs. 15
(7)%
18%
7%
25%
5%
22%
8%
5%
1%
(2)%
2%
2%
138%
3%
For the year ended December 31, 2017, net sales increased by $726 million,
or 8%, when compared to the same period in 2016. The primary sales
drivers by segment were as follows:
• A decrease of $241 million in the Display Technologies segment, driven
by price declines of approximately 10% and the negative impact from
the weakening of the Japanese yen in the amount of $79 million,
partially offset by an increase in volume in the mid-single digits in
percentage terms;
• An increase of $540 million in the Optical Communications segment,
due to higher sales of carrier and enterprise network products,
up $446 million and $94 million, respectively, combined with the
absence of production issues related to the implementation of new
manufacturing software in the first quarter of 2016 and the impact
of several small acquisitions completed in 2017. Strong growth in the
North American market drove the increase in carrier network products;
• An increase of $74 million in the Environmental Technologies segment,
driven by higher sales of automotive products, up $42 million, due to
market strength in Europe, China and Asia, and initial commercial sales
of gas particulate filters. Diesel product sales increased $32 million
with higher demand for heavy-duty diesel products in North America
and Asia;
• An increase of $279 million in the Specialty Materials segment, driven
by strong growth in sales of Corning Gorilla Glass products, combined
with an increase of $42 million in advanced optics products;
• An increase of $40 million in the Life Sciences segment, driven by
higher sales in North America and China; and
• An increase of $34 million in the All Other segment, driven by an
increase in sales in our emerging businesses.
Movements in foreign exchange rates did not materially impact
Corning’s consolidated net sales in the year ended December 31, 2017,
respectively, when compared to the same period in 2016.
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:
• 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.
In 2017, 2016 and 2015, sales in international markets accounted for 69%,
72% and 70%, 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, 2017, gross margin dollars increased
by $286 million, or 8%, 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
following items:
• Higher volume in the Optical Communications segment, driven
by growth in North America and Europe, partially offset by higher
manufacturing expenses related to capacity expansion;
• An increase in Gorilla Glass and advanced optics product volume,
slightly offset by higher raw materials costs; and
17
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
• Higher light-duty substrate demand in Europe, China and Asia, offset
somewhat by lower North America demand, as well as an increase
in demand for heavy-duty diesel products in North America and
Asia. Partially offsetting the increase in demand was a decline in
manufacturing efficiency due to the use of higher-cost manufacturing
facilities and sales of lower margin products.
LCD glass price declines of approximately 10% and the negative impact
of movements in the Japanese yen and South Korean won in the amount
of $73 million, which primarily impacted the Display Technologies
segment, partially offset the increase.
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.
Selling, General and Administrative Expenses
When compared to the year ended December 31, 2016, selling, general
and administrative expenses decreased by $5 million in the year ended
December 31, 2017. The decrease was due to the following items:
• A decrease of $52 million in acquisition-related costs, driven by the
absence of costs related to the realignment of our equity interests in
Dow Corning completed in the second quarter of 2016, offset slightly
by several small acquisitions occurring in 2017;
• A decrease of $64 million in litigation, regulatory and other legal
costs, primarily driven by the absence of events occurring in the
second quarter of 2016. In this period, we recorded litigation and
other expenses related to the resolution of an investigation by the U.S.
Department of Justice and an environmental matter in the amount of
$98 million, offset somewhat by the gain on the contribution of our
equity interests in PCC and PCE as partial settlement of the asbestos
litigation in the amount of $56 million; and
• A decrease of $46 million in the mark-to-market of our defined benefit
pension plans.
Offsetting these events were the following items:
• A decrease of $32 million in gains from the contingent consideration
fair value adjustment;
• An increase of $51 million in the Optical Communications segment due
to costs associated with acquisitions and growth initiatives; and
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%.
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, 2017, research, development and
engineering expenses increased by $118 million, or 16%, when compared
to the same period last year, driven by the absence of the impact of a 2016
joint development agreement in the Display Technologies segment, as
well as higher costs associated with new product launches in the Optical
Communications, Specialty Materials and Environmental Technologies
segments, up $20 million, $11 million and $7 million, respectively. As
a percentage of sales, these expenses increased one percent when
compared to the same period last year.
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.
Restructuring, Impairment, and Other Charges
Corning recorded restructuring, impairment, and other charges and
credits in 2016 and 2015. 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:
• An increase of $24 million in the Specialty Materials segment in
support of new product launches.
2017 Activity
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:
For the year ended December 31, 2017, we did not record significant
impairment and other charges or reversals. Cash
restructuring,
expenditures for restructuring activities were $4 million.
• 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.
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.
18
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
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,
2017
$
$
352
9
361
2016
$
82
212
(10)
$
284
2015
$
$
281
18
299
(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 14 (Commitments, Contingencies and Guarantees) 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 (loss) income. 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, 2017
Year ended
December 31, 2016
Change
2017 vs. 2016
Income before
income taxes
Net
income
Income before
income taxes
Net
income
Income before
income taxes
Net
income
$
$
270
(391)
(121 )
$
$
169
(247)
(78 )
$
$
201
(649)
(448)
$
127
(409)
$ (282)
$
$
69
258
327
$
$
42
162
204
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)
19
CORNING INCORPORATED - 2017 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, 2017, 2016 and 2015 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,
2017
$ 13.0
0.8
0.3
0.2
2016
$
14.9
1.2
0.3
0.3
2015
$ 8.3
3.3
0.3
$ 14.3
$
16.7
$ 11.9
Income Before Income Taxes
The translation impact of fluctuations in foreign currency exchange
rates, including the impact of hedges realized in 2017, did not impact
Corning’s income before income taxes in the year ended December 31,
2017 when compared to the same period in 2016.
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.
(Provision) Benefit for Income Taxes
Our (provision) benefit for income taxes and the related effective income tax rates were as follows (dollars in millions):
(Provision) benefit for income taxes
Effective tax rate (benefit)
For the year ended December 31, 2017, the effective income tax rate
differed from the U.S. statutory rate of 35% primarily due to the
following benefits:
• As a result of the 2017 Tax Act, a provisional tax expense of $1.1 billion
for the one-time mandatory tax on uprepatriated earnings of certain
foreign subsidiaries that were previously deferred (the “toll charge”);
• The result of a provisional tax expense recorded for the U.S. deferred
tax assets and liabilities re-measured at the reduced rate of 21%; and
• Rate differences on income (loss) of consolidated foreign companies.
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.
Corning’s results for the year ending December 31, 2017 included a
total $2.2 billion worldwide tax provision, inclusive of tax on normal
operations and the impacts of the 2017 Tax Act. Given the significant
complexity of the 2017 Tax Act and anticipated future guidance from
the U. S. Treasury, the Securities and Exchange Commission and the
Financial Accounting Standards Board (“FASB”) related to the 2017 Tax
Act, the Securities Exchange Commission has issued its Staff Accounting
Bulletin 118 (“SAB 118”) to provide registrants additional time to analyze
and report the effects of tax reform during the “measurement period”.
Under SAB 118, the registrant is required to record those items where ASC
740 analysis is complete; include reasonable estimates and label them
Years ended December 31,
2017
$ (2,154)
130%
2016
$
3
2015
$
(147)
(0.1)%
9.9%
as provisional where ASC 740 analysis is incomplete; and if reasonable
estimates cannot be made, record items under the previous tax law. The
measurement period ends on the date the entity has obtained, prepared,
and analyzed the information that was needed in order to complete the
accounting requirements under ASC Topic 740 and is not to exceed 1 year.
In addition to SAB 118, the FASB has issued guidance regarding how to
account for tax reform as well as a proposal to reclassify stranded tax
costs from AOCI to retained earnings. Furthermore, to date, the U.S.
Treasury has issued Notice 2018-07 on December 29, 2017 and Notice
2018-13 on January 19, 2018 with additional guidance on how to compute
the toll charges.
At December 31, 2017, we have not completed our accounting for the tax
effects of the enactment of the 2017 Tax Act; however, we have made
a reasonable estimate of the effects on our U.S. deferred tax balances
in the amount of $347 million, the one-time toll charge of $1.1 billion
and the impact on our state valuation allowances and recorded these
as provisional amounts. The initial accounting is incomplete as we
need additional time and information to analyze all aspects of the
newly enacted law and how it impacts our worldwide operations. The
additional information that needs to be obtained, prepared or analyzed
in order to complete the accounting requirements includes receiving
further guidance from the tax authorities; additional time to prepare
basis calculations; post-enactment impacts, and further time to validate
our assumptions.
We re-measured the U.S. deferred tax assets and liabilities based on
the rates at which they are expected to reverse in the future, which is
generally 21%. However, we are still analyzing certain aspects of the
2017 Tax Act and refining our calculations, which could potentially affect
the measurement of these balances or potentially give rise to new
deferred tax amounts. The provisional amount recorded related to the
re-measurement of our deferred tax balances was $347 million.
20
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
The one-time toll charge is based on our unrepatriated earnings of
certain foreign subsidiaries that were previously deferred. This charge
resulted in an additional provisional tax expense amount of $1.1 billion.
We have not yet completed our calculation of the toll charge. This
amount may change when we finalize the calculation of unrepatriated
earnings that were previously deferred from U.S. federal taxation and
finalize the amounts held in cash or other specified assets. Settlement
of the toll charge will occur almost entirely through the use of existing
foreign tax credit carryovers.
Corning has not made sufficient progress on estimating the impact of
tax reform on its assertion regarding its indefinitely reinvested foreign
earnings so the Company will continue to follow its historic position
while it continues to analyze this issue. As of December 31, 2017, Corning
estimates that its unremitted foreign earnings were $16.9 billion. While
Corning is not changing its assertion at this time, the Company has
distributed approximately $2 billion in January 2018 from two of its
foreign subsidiaries to the U.S. parent of those subsidiaries. There are
no incremental taxes beyond the toll charge due with respect to this
distribution of cash.
Under its historic policy, Corning will continue to indefinitely reinvest
substantially all of its foreign earnings, with the exception of an
immaterial amount of current earnings that have very low or no tax
cost associated with their repatriation. Our current analysis indicates
that we have sufficient U.S. liquidity, including borrowing capacity, to
fund foreseeable U.S. cash needs without requiring the repatriation of
foreign cash.
Corning’s accounting for the impact of the global intangible low-taxed
income (GILTI) provisions of the 2017 Tax Act is incomplete and, as a
result, it has not yet elected a policy to account for the GILTI provisions.
We will continue to monitor future guidance and to assess the impacts
of the 2017 Tax Act.
It is reasonably possible that the amount of unrecognized tax benefits
will change due to one or more of the following events during the next
twelve months: audit activity, tax payments, or final decisions in matters
that are the subject of controversy in various jurisdictions within which
we operate. We believe we have provided adequate contingent reserves
for these matters. However, if upon conclusion of these matters, the
ultimate determination of taxes owed is for an amount materially
different than our current reserves, our overall tax expense and effective
tax rate could be materially impacted in the period of adjustment.
Refer to Note 6 (Income Taxes) to the Consolidated Financial Statements
for further details regarding income tax matters.
Net (Loss) Income Attributable to Corning Incorporated
As a result of the items discussed above, net (loss) income and per share data was as follows (in millions, except per share amounts):
Net (loss) income attributable to Corning Incorporated
Net (loss) income attributable to Corning Incorporated used in basic earnings
per common share calculation(1)
Net (loss) income attributable to Corning Incorporated used in diluted earnings
per common share calculation(1)
Basic (loss) earnings per common share
Diluted (loss) earnings per common share
Weighted-average common shares outstanding - basic
Weighted-average common shares outstanding - diluted
Years ended December 31,
2017
2016
2015
$ (497)
$ 3,695
$ 1,339
$ (595)
$ 3,597
$ 1,241
$ (595)
$ (0.66)
$ (0.66)
895
895
$ 3,695
$ 1,339
$
$
3.53
3.23
1,020
1,144
$
$
1.02
1.00
1,219
1,343
(1) Refer to Note 18 (Earnings per Common Share) to the Consolidated Financial Statements for additional information.
Comprehensive Income
(in millions)
Net (loss) income attributable to Corning Incorporated
Foreign currency translation adjustments and other
Net unrealized gains (losses) 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
Comprehensive income attributable to Corning Incorporated
Years ended December 31,
2017
2016
2015
$
(497)
$ 3,695
$ 1,339
746
14
30
44
834
337
$
(104)
(3)
241
1
135
(590)
1
121
(36)
(504)
$ 3,830
$
835
21
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
2017 vs. 2016
2016 vs. 2015
For the year ended December 31, 2017, comprehensive income
decreased by $3.5 billion, when compared to the same period in 2016,
driven by a decrease in net income of $4.2 billion and a decrease in
unamortized actuarial gains for postretirement benefit plans. The
significant decrease in net income was largely driven by the absence
of a $2.7 billion non-taxable gain and a $105 million positive tax
adjustment on the strategic realignment of our ownership interest
in Dow Corning recorded in the second quarter of 2016, combined
with the impact of the passage of the 2017 Tax Act, which included a
provisional toll charge of $1.1 billion and a provisional charge of $347
million as a result of the remeasurement of U.S. deferred tax assets
and liabilities. Our unamortized actuarial gains decreased driven by
a decrease in the discount rates used to value our postretirement
benefit obligations.
Partially offsetting these decreases was an increase in the gain on
foreign currency translation adjustments in the amount of $850 million
(after-tax), largely driven by the weakening of foreign currencies, most
significantly the South Korean won, Japanese yen and the euro, which
impacted comprehensive income in the amounts of $420 million,
$164 million and $115 million, respectively.
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, the positive impact of the
change in foreign currency translation adjustments and an increase in
unamortized actuarial 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.
See Note 13 (Employee Retirement Plans) and Note 17 (Shareholders’
Equity) to the Consolidated Financial Statements for additional details.
Core Performance Measures
In managing the Company and assessing our financial performance,
we supplement certain measures provided by our consolidated
financial statements with measures adjusted to exclude certain items,
to arrive at core performance measures. We believe that 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. The Company believes that
the use of constant currency reporting allows investors to understand
our results without the volatility of currency fluctuations, and reflects
the underlying economics of the translated earnings contracts used
to mitigate the impact of changes in currency exchange rates on our
earnings and cash flows.
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
2017
2016
2015
17 vs. 16
16 vs. 15
$
$
$
10,514
212
1,756
$
$
$
9,710
250
1,774
$
$
$
9,800
269
1,882
8%
(15)%
(1)%
(1)%
(7)%
(6)%
% change
22
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Core Net Sales
The following table presents core net sales by reportable segment (in millions):
Years ended December 31,
Display Technologies
Optical Communications
Environmental Technologies
Specialty Materials
Life Sciences
All Other
2016
$
2017
$
3,394
3,545
1,106
1,403
879
187
Total core net sales
$
10,514
$
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.
Core net sales increased by $804 million, or 8%, in the year ended
December 31, 2017 when compared to the same period in 2016, driven
by increases in the Optical Communications and Specialty Materials
segments. Lower core net sales in the Display Technologies segment
partially offset the increase, down $162 million, or 5%, driven by LCD
glass price declines of approximately 10%, partially offset by an increase
in volume in the mid-single digits in percentage terms.
3,556
3,005
1,032
1,124
839
154
9,710
2015
$
3,774
2,980
1,053
1,107
821
65
$
9,800
% change
17 vs. 16
16 vs. 15
(5)%
18%
7%
25%
5%
21%
8%
(6)%
1%
(2)%
2%
2%
137%
(1)%
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.
The translation impact from movements in foreign currency exchange
rates, excluding the Japanese yen and South Korean won, in the year
ended December 31, 2017 positively impacted core net sales in the
amount of $12 million, and in the year ended December 31, 2016,
negatively impacted core net sales in the amount of $39 million.
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
2017
2016
2015
17 vs. 16
16 vs. 15
$
$
201
11
212
$
$
98
154
(2)
250
$
$
245
24
269
(100)%
(60)%
650%
(15)%
(108)%
(7)%
(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
2017 vs. 2016
In the year ended December 31, 2017, we generated core earnings of
$1,756 million or $1.72 per share, compared to core earnings generated
in the year ended December 31, 2016 of $1,774 million, or $1.55 per
share. The decrease in core earnings of $18 million was driven by the
following items:
• The absence of equity earnings of $102 million from Dow Corning’s
silicones business due to our 2016 realignment of our ownership
interest in Dow Corning;
• A decrease of $62 million in the Display Technologies segment, driven
by LCD glass price declines of approximately 10%, partially offset by an
increase in volume in the mid-single digits in percentage terms;
• An increase in corporate project expenses and variable compensation
of $29 million and $25 million, respectively.
The decline was offset by an increase in core earnings in the Optical
Communications segment of $99 million, due to higher sales of carrier
and enterprise network products, combined with the absence of the
production issues in the first half of 2016 related to the implementation
of new software and an increase in the Specialty Materials segment of
$61 million, driven by an increase in Corning Gorilla Glass and advanced
optics products.
23
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Although core net earnings decreased in the year ended December 31,
2017, core earnings per share increased $0.17 per share, driven by lower
weighted average shares outstanding due to repurchases of our common
stock in 2017.
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.
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
Included in core earnings for the years ended December 31, 2017, 2016
and 2015 is net periodic pension expense in the amount of $49 million,
$51 million and $62 million, respectively, which excludes the annual
pension mark-to-market adjustments. In the years ended December 31,
2017, 2016 and 2015, the mark-to-market adjustments were a pre-tax loss
of $21 million, $67 million and $165 million, respectively. Refer to Note 13
(Employee Retirement Plans) to the Consolidated Financial Statements
for additional information.
Core Earnings per Common Share
The following table sets forth the computation of core basic and core diluted earnings per common share (in millions, except per share amounts):
Core earnings attributable to Corning Incorporated
Less: Series A convertible preferred stock dividend
Core earnings available to common stockholders - basic
Add: Series A convertible preferred stock dividend
Core earnings available to common stockholders - diluted
Weighted-average common shares outstanding - basic
Effect of dilutive securities:
Stock options and other dilutive securities
Series A convertible preferred stock
Weighted-average common shares outstanding - diluted
Core basic earnings per common share
Core diluted earnings per common share
2017
$
$
$
$
1,756
98
1,658
98
1,756
895
11
115
1,021
1.85
1.72
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
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.
24
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of 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):
Year ended December 31, 2017
Net Sales
Equity
earnings
Income before
income taxes
Net (loss)
income
Effective
tax rate(a)
(Loss)
earnings
per share
$
1,657
$
(497)
130.0%
$
(0.66)
As reported
Constant-yen(1)
Constant-won(1)
Translation gain on Japanese
yen-denominated debt(2)
Translated earnings contract loss(3)
Acquisition-related costs(4)
Discrete tax items and other tax-related
adjustments(5)
Litigation, regulatory and other legal
matters(6)
Restructuring, impairment and other
charges(7)
Equity in earnings of affiliated
companies(8)
Adjustments related to acquisitions(9)
Pension mark-to-market adjustment(10)
Adjustments to remove the impacts of
the Tax Cuts and Job Act of 2017(13)
$
10,116
$
396
2
361
3
(152)
354
(21)
(14)
125
84
(12)
72
(152)
10
22
276
(16)
(9)
78
59
127
(9)
62
(97)
13
14
1,755
1,756
0.31
(0.02)
(0.01)
0.09
0.07
0.14
(0.01)
0.07
(0.11)
0.01
0.02
1.96
1.72
17.4%
$
Core performance measures
$
10,514
$
212
$
2,125
$
(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, 2016
As reported
Constant-yen(1)
Constant-won(1)
Translated earnings contract loss(3)
Acquisition-related costs(4)
Discrete tax items and other tax-related
adjustments(5)
Litigation, regulatory and other legal
matters(6)
Restructuring, impairment and other
charges(7)
Equity in earnings of affiliated
companies(8)
Adjustments related to acquisitions(9)
Pension mark-to-market adjustment(10)
Gain on realignment of equity
investment(11)
Taiwan power outage(12)
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
25
CORNING INCORPORATED - 2017 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 loss(3)
Acquisition-related costs(4)
Discrete tax items and other tax-related
adjustments(5)
Litigation, regulatory and other legal
matters(6)
Restructuring, impairment and other
charges(7)
Equity in earnings of affiliated
companies(8)
Adjustments related to acquisitions(9)
Pension mark-to-market adjustment(10)
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)
5
165
423
(19)
(48)
36
36
3
42
(33)
(2)
105
1.00
0.31
(0.01)
(0.04)
0.03
0.03
0.03
(0.02)
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.
26
CORNING INCORPORATED - 2017 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) Translation gain on Japanese yen-denominated debt: The gain on the translation of our Yen-denominated debt to U.S. dollars.
(3) Translated earnings contract loss (gain): We have excluded the impact of the gains and losses of our translated earnings contracts for each
period presented.
(4) Acquisition-related costs: These expenses include intangible amortization, inventory valuation adjustments and external acquisition-related
deal costs.
(5) Discrete tax items and other tax-related adjustments: This represents the removal of discrete adjustments (e.g. changes in judgment about the
realizability of certain deferred tax assets) as well as other non-operational tax-related adjustments.
(6) Litigation, regulatory and other legal matters: Includes amounts related to the Pittsburgh Corning Corporation (PCC) asbestos litigation, significant,
non-recurring adjustments to our estimated liability for environmental-related items and other legal matters.
(7) 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.
(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) Adjustments related to acquisitions: Includes fair value adjustments to the Corning Precision Materials indemnity asset related to contingent
consideration, post-combination expenses and other acquisition and disposal adjustments.
(10) 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.
(11) Gain on realignment of equity investment: Gain recorded upon the completion of the strategic realignment of our ownership interest in
Dow Corning.
(12) 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.
(13) Adjustments to remove the impacts of the Tax Cuts and Job Act of 2017: Includes a provisional amount related to the one-time mandatory tax on
unrepatriated foreign earnings, a provisional amount related to the remeasurement of U.S. deferred tax assets and liabilities, changes in valuation
allowances as a result of the 2017 Tax Act, and adjustments for the elimination of excess foreign tax credits planning.
27
CORNING INCORPORATED - 2017 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Reportable Segments
Our reportable segments are as follows:
• Display Technologies – manufactures glass substrates 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 the pharmaceutical technologies
business and 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 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):
(in millions)
As reported
Constant-yen(1)
Constant-won(1)
Translated earnings contract gain(3)
Discrete tax items and other tax-related
adjustments(5)
Litigation, regulatory and other legal
matters(6)
Restructuring, impairment and other
charges(7)
Adjustments related to acquisitions(9)
Pension mark-to-market adjustment(10)
Taiwan power outage(12)
Year ended December 31, 2017
Year ended December 31, 2016
Year ended December 31, 2015
Sales
Net
income
Sales
Net
income
Sales
Net
income
$
3,238
$
316
2
$
2,997
$
395
2
831
260
(12)
(169)
38
(9)
13
(8)
$
3,086
$
1,095
686
2
419
(17)
(416)
(10)
4
935
222
(33)
(127)
44
(42)
1
6
Core performance measures
$
3,394
$
944
$
3,556
$
1,006
$
3,774
$
1,075
See “Items Excluded from GAAP Measures” above for the descriptions of the footnoted reconciling items.
28
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
As Reported
2017 vs. 2016
Net sales decreased by $241 million, or 7%, in the year ended December 31,
2017, when compared to the same period in 2016, driven by price declines
of approximately 10% and the negative impact from the weakening of
the Japanese yen in the amount of $79 million, partially offset by an
increase in volume in the mid-single digits in percentage terms.
income decreased by $104 million, or 11%, driven by the
Net
following items:
• The impact of price declines of approximately 10%;
• The impact of the write-off of a net deferred tax asset of $38 million;
• A reduction of $24 million in the gain on the fair value adjustment of
the contingent consideration resulting from the acquisition of Corning
Precision Materials; and
• An increase of $40 million in research, development and engineering
expenses, primarily driven by the absence of the impact of a 2016 joint
development agreement.
The decrease in net income was partially offset by the following items:
• A mid-single digit percentage increase in volume;
• Improvements in manufacturing efficiency, which added $68 million;
• An increase of $42 million in the realized gain from our yen and
won-denominated currency hedges; and
• A decrease in asset write-off expenses of $31 million.
The translation impact of fluctuations in foreign currency exchange
rates negatively impacted Display Technologies net income in the year
ended December 31, 2017 in the amount of $59 million when compared
to the same period in 2016. This impact was partially offset by the
increase in the realized gain from our translated earnings contracts in
the amount of $42 million.
2016 vs. 2015
Net sales 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 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.
Core Performance
2017 vs. 2016
When compared to the same period in 2016, core net sales in the Display
Technologies segment decreased by $162 million, or 5%, in the year
ended December 31, 2017, driven by the price declines described above,
partially offset by the increase in volume. Core earnings also decreased
in this period, down $62 million, or 6%, driven by price declines, offset
somewhat by the increase in volume.
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
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.
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 2017, 2016 and 2015, three customers
of the Display Technologies segment, which individually accounted for
more than 10% of segment net sales, accounted for a combined 62%,
65% and 62% 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 2017, 2016 and 2015, capital spending in this
segment was $795 million, $464 million and $594 million, respectively.
Outlook:
For full-year 2018, Corning expects LCD glass market growth to be in
the mid-single digit percentages, similar to 2017. The company expects
Corning’s volume to grow faster than the market as Corning ramps up
the world’s first Gen 10.5 fab in Hefei, China. We expect LCD glass pricing
to continue to improve, with year-over-year declines reaching mid-single
digits on a percentage basis, an important milestone toward our goal of
stabilizing returns in this segment.
29
CORNING INCORPORATED - 2017 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, 2017
Year ended
December 31, 2016
Year ended
December 31, 2015
Sales
$
3,545
$
(in millions)
As reported
Acquisition-related costs(4)
Litigation, regulatory and other legal matters(6)
Restructuring, impairment and other charges(7)
Adjustments related to acquisitions(9)
Pension mark-to-market adjustment(10)
Core performance measures
$
3,545
$
Net
income
341
39
14
2
396
Sales
$
3,005
$
$
3,005
$
Net
income
Sales
Net
income
245
23
24
5
297
$
2,980
$
237
16
13
(1)
16
$
2,980
$
281
See “Items Excluded from GAAP Measures” above for the descriptions of the footnoted items.
As Reported
2017 vs. 2016
Net sales increased by $540 million, or 18%, in the year ended
December 31, 2017, when compared to the same period in 2016, due to
higher sales of carrier and enterprise network products, combined with
the absence of production issues related to the implementation of
new manufacturing software in the first half of 2016 and the impact of
several small acquisitions completed in the 2017. Strong growth in the
North American fiber-to-the-home market drove the increase in carrier
network products.
Net income in the year ended December 31, 2017 increased by $96 million,
or 39%, driven by the increase in sales described above and a decrease of
$10 million in restructuring and asset write-off expenses, partially offset
by capacity expansion spending and an increase in acquisition-related
expenses.
Movements in foreign currency exchange rates did not materially impact
net sales or net income in this segment in the year ended December 31,
2017 when compared to the same period in 2016.
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
Net
increased
$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.
Core Performance
2017 vs. 2016
Core earnings increased in the year ended December 31, 2017 by
$99 million, or 33%, driven by the increase in sales described above,
partially offset by capacity expansion spending.
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.
The Optical Communications segment has a concentrated customer
base. In the year ended December 31, 2017, one customer that individually
accounted for more than 10% of segment net sales, accounted for 19%
of total segment net sales. In the year ended December 31, 2016, one
customer that 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 that individually accounted for more
than 10% of segment net sales, accounted for 22% of total segment
net sales.
Outlook:
Full-year 2018 Optical Communications sales are expected to increase by
about 10% year over year, excluding any contribution from the pending
acquisition of 3M’s Communications Markets Division.
30
CORNING INCORPORATED - 2017 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(7)
Core performance measures
Year ended
December 31, 2017
Year ended
December 31, 2016
Year ended
December 31, 2015
Sales
$
$
1,106
1,106
Net
income
$
$
127
12
139
Sales
$
$
1,032
1,032
Net
income
$
$
133
3
136
Sales
$
$
1,053
1,053
Net
income
$
$
161
161
See “Items Excluded from GAAP Measures” above for the descriptions of the footnoted items.
As Reported
Core Performance
2017 vs. 2016
Net sales increased $74 million, or 7% in the year ended December 31,
2017. Automotive product sales increased by $42 million, due to market
strength in Europe, China and Asia, and initial commercial sales of gas
particulate filters. Diesel product sales increased $32 million with higher
demand for heavy-duty diesel products in North America and Asia.
Net income in the year ended December 31, 2017 decreased by $6 million,
or 5%, driven by expenses in support of new product launches and
charges related to the disinvestment of an equity company.
Movements in foreign currency exchange rates did not materially impact
net sales or net income in this segment in the year ended December 31,
2017 when compared to the same period in 2016.
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.
2017 vs. 2016
In the year ended December 31, 2017, core earnings increased by $3 million,
or 2%, when compared to the same period in 2016, driven by higher
volume in both automotive and diesel products, offset by expenses
in support of new product launches and a decline in manufacturing
efficiency due to the use of higher-cost manufacturing facilities and
sales of lower margin products.
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.
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
2017, 2016 and 2015, net sales to three customers, which individually
accounted for more than 10% of segment sales, accounted for 81%, 85%
and 86%, respectively, of total segment sales. While we are not aware
of any significant customer credit issues with our direct customers, our
near-term sales and profitability would be impacted if any individual
customers were unable to continue to purchase our products.
Outlook:
For 2018, Environmental Technologies sales are expected to increase by a
high-single digit percentage.
31
CORNING INCORPORATED - 2017 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):
(in millions)
As reported
Constant-yen(1)
Constant-won(1)
Translated earnings contract gain(3)
Restructuring, impairment and other charges(7)
Taiwan power outage(12)
Year ended
December 31, 2017
Year ended
December 31, 2016
Year ended
December 31, 2015
Sales
Net
income
Sales
Net
income
Sales
Net
income
$
1,403
$
249
$
1,124
$
174
$
1,107
$
167
(1)
2
(1)
(2)
15
3
(6)
(2)
5
14
Core performance measures
$
1,403
$
250
$
1,124
$
189
$
1,107
$
178
See “Items Excluded from GAAP Measures” above for the descriptions of the footnoted items.
As Reported
2017 vs. 2016
Net sales in the Specialty Materials segment increased by $279 million,
or 25%, in the year ended December 31, 2017, when compared to the same
period in 2016, driven by an increase in sales of Gorilla Glass products
in support of new product launches, combined with an increase in
advanced optics products.
Net income in year ended December 31, 2017 increased by $75 million,
or 43%, when compared to the same period in 2016, primarily due to
the significant increase in net sales, lower restructuring charges and the
absence of the costs associated with a power outage in Taiwan.
Movements in foreign currency exchange rates did not materially
impact net sales or net income in this segment in the year ended
December 31, 2017 when compared to the same period in 2016.
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.
Core Performance
2017 vs. 2016
Core earnings increased by $61 million, or 32%, in the year ended
December 31, 2017, driven primarily by the increase in sales of Corning
Gorilla Glass and advanced optics products, offset slightly by higher
selling and administrative costs.
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.
For 2017, 2016 and 2015, three customers of the Specialty Materials
segment, which individually accounted for more than 10% of segment
sales, accounted for 58%, 56% and 56%, respectively, of total segment sales.
Outlook:
The company expects year-over-year sales growth for Specialty Materials
in 2018, with the rate and pace dependent upon customer adoptions.
Life Sciences
The following table provides net sales and net income for the Life Sciences segment and reconciles the non-GAAP financial measures for the Life
Sciences segment with our financial statements presented in accordance with GAAP (in millions):
(in millions)
As reported
Acquisition-related costs(4)
Restructuring, impairment and other charges(7)
Pension mark-to-market adjustment(10)
Year ended
December 31, 2017
Year ended
December 31, 2016
Year ended
December 31, 2015
Sales
Net
income
Sales
Net
income
Sales
Net
income
$
879
$
64
13
2
1
80
$
$
839
$
58
12
7
$
821
$
61
12
839
$
77
$
821
$
73
Core performance measures
$
879
$
See “Items Excluded from GAAP Measures” above for the descriptions of the footnoted items.
32
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
As Reported
Core Performance
2017 vs. 2016
Net sales in the Life Sciences segment increased by $40 million, or 5%, in
the year ended December 31, 2017, when compared to the same period
in 2016, driven by strong performance in North America and China,
combined with a small acquisition completed in 2017.
Net income increased by $6 million, or 10%, in the year ended
December 31, 2017, driven by an increase in volume and lower asset
write-offs and exit costs, offset somewhat by higher raw materials costs.
Movements in foreign exchange rates did not materially impact net sales
or net income in this period when compared to the same period in the
prior year.
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.
2017 vs. 2016
In the year ended December 31, 2017, core earnings increased by $3 million,
or 4%, when compared to the same period last year, driven by higher
volume, offset somewhat by higher raw materials costs.
2016 vs. 2015
In the year ended December 31, 2016, core earnings 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.
For 2017, 2016 and 2015, two customers in the Life Sciences segment,
which individually accounted for more than 10% of total segment net
sales, collectively accounted for 47%, 46% and 46%, respectively, of total
segment sales.
Outlook:
For full-year 2018, sales are expected to grow by a mid-single-digit
percentage year over year.
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 the pharmaceutical technologies business and 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
Net loss
2017
2016
2015
$
$
$
186
211
(229)
$
$
$
152
191
(240)
$
$
$
64
186
(202)
2017 vs. 2016
Net sales of this segment increased by $34 million, or 22%, in the year
ended December 31, 2017, respectively, when compared to the same
period in 2016, driven by an increase in sales in our emerging businesses.
The decrease in the net loss in the year ended December 31, 2017 reflects
an increase of $14 million in equity earnings and the absence of asset
write-offs in emerging businesses recorded in the first quarter of 2016.
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 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 pharmaceutical technologies business net income.
Liquidity and Capital Resources
Financing and Capital Structure
The following items discuss Corning’s financing and changes in capital
structure during 2017 and 2016:
In the fourth quarter of 2017, Corning issued $750 million of 4.375% senior
unsecured notes that mature on November 15, 2057. The net proceeds of
$743 million will be used for general corporate purposes. We can redeem
these notes at any time, subject to certain terms and conditions.
2017
2016
In the third quarter of 2017, Corning issued ¥78 billion Japanese
yen-denominated debt securities in tranches of 7, 10 and 20 years.
The proceeds from these notes were received in Japanese yen and
immediately converted to U.S. dollars on the date of issuance. The net
proceeds received in U.S. dollars, after deducting offering expenses,
was approximately $700 million. Payments of principal and interest on
the notes will be in Japanese yen, or should yen be unavailable due to
circumstances beyond Corning’s control, a U.S. dollar equivalent.
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.
33
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Common Stock Dividends
On February 3, 2016, Corning’s Board of Directors declared a 12.5% increase
in the Company’s quarterly common stock dividend, which increased
the quarterly dividend from $0.12 to $0.135 per share of common stock,
beginning with the dividend to be paid in the first quarter of 2016. 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.
On February 6, 2018, Corning’s Board of Directors declared a 16.1% increase
in the Company’s quarterly common stock dividend, which increased
the quarterly dividend from $0.155 to $0.18 per share of common stock,
beginning with the dividend to be paid in the first quarter of 2018. This
increase marks the seventh dividend increase since October 2011.
Fixed Rate Cumulative Convertible Preferred
Stock, Series A
Corning has 2,300 outstanding shares of Fixed Rate Cumulative
Convertible Preferred Stock, Series A. 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, 2017, the Preferred Stock has not been converted, and none
of the anti-dilution provisions have been triggered.
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 2017, 2016 and 2015, no credit memoranda
were issued.
Capital Spending
Capital spending totaled $1.8 billion in 2017, an increase of approximately
$700 million when compared to 2016, 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, fiber and cable capacity in the
Optical Communications segment and general business growth in the
Specialty Materials segment. We expect our 2018 capital expenditures to
be slightly more than $2 billion.
Cash Flows
Summary of cash flow data (in millions):
Net cash provided by operating activities
Net cash (used in) provided by investing activities
Net cash used in financing activities
2017 vs. 2016
Net cash provided by operating activities decreased by $533 million in
the year ended December 31, 2017 when compared to the same period
last year, driven by $501 million of unfavorable movements in working
capital. The negative impact of working capital changes was largely
driven by an increase of $143 million in VAT receivables in Asia, a payment
of $70 million related to our obligation under the plan of reorganization
for PCC (refer to Note 2 (Commitments, Contingencies and Guarantees)
to the consolidated financial statements for additional information),
an increase in accounts receivable and inventory to support growth in
the Optical Communications, Environmental Technologies and Specialty
Materials segments.
Net cash used in investing activities increased by $5.4 billion in the
year ended December 31, 2017, when compared to the same period last
year, driven by the absence of $4.8 billion of cash received in the second
quarter of 2016 on the realignment of Dow Corning, coupled with an
increase of $674 million in capital expenditures largely due to capacity
expansions and a decline of $92 million in liquidations of short-term
investments. A decline of $162 million in acquisition spending partially
offset these events.
34
Years ended December 31,
2017
$
$
$
2,004
(1,710)
(1,624)
2016
$
$
$
2,537
3,662
(5,322)
2015
$
$
$
2,829
(685)
(2,623)
Net cash used in financing activities in the year ended December 31, 2017
decreased by $3.7 billion when compared to the same period last year,
driven by lower share repurchases, down $1.8 billion, proceeds from the
issuance of long-term debt of $1.4 billion, the absence of $481 million
of commercial paper repayments made in 2016 and an increase of $171
million in proceeds from the exercise of stock options.
2016 vs. 2015
Net cash provided by operating activities decreased $292 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.
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net cash provided by investing activities increased substantially, up
$4.3 billion, in the year ended December 31, 2016 when compared to
2015, driven by $4.8 billion 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 $2.7 billion 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.
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, 2017, this plan accounted for 77%
of our consolidated defined benefit pension plans’ projected benefit
obligation and 85% of the related plans’ assets.
In 2017, we made no voluntary cash contributions to our domestic
defined benefit pension plan and $29 million to our international
pension plans. 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. Although we are not subject to any
mandatory contributions in 2018, we anticipate making voluntary cash
contributions of $105 million to our U.S. qualified pension plan and up to
$27 million to our international pension plans in 2018.
Refer to Note 13 (Employee Retirement Plans) to the Consolidated
Financial Statements for additional information.
Restructuring
For the year ended December 31, 2017, we did not record significant
restructuring,
impairment and other charges or reversals. Cash
expenditures for restructuring activities were approximately $4 million.
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
impairment and other charges or reversals. Cash
restructuring,
expenditures for restructuring activities were approximately $40 million.
Refer to Note 2 (Restructuring, Impairment and Other Charges) to the
Consolidated Financial Statements for additional information.
Key Balance Sheet Data
Balance sheet and working capital measures are provided in the following table (in millions):
Working capital
Current ratio
Trade accounts receivable, net of allowances
Days sales outstanding
Inventories
Inventory turns
Days payable outstanding(1)
Long-term debt
Total debt to total capital
(1) Includes trade payables only.
Credit Ratings
As of February 15, 2018, our credit ratings were as follows:
Rating Agency
Standard & Poor’s
Moody’s
December 31,
2017
2016
$
$
$
$
5,618
2.8:1
1,807
62
1,712
3.7
51
4,749
$
$
$
$
6,297
3.3:1
1,481
54
1,471
3.8
45
3,646
25%
18%
Rating long-term debt
Outlook last update
BBB+
Baa1
Stable
October 27, 2015
Stable
October 28, 2015
35
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management Assessment of Liquidity
We ended the fourth quarter of 2017 with approximately $4.3 billion of
cash and cash equivalents. Our cash and cash equivalents are held in
various locations throughout the world and are generally unrestricted.
We utilize a variety of strategies to ensure that our worldwide cash is
available in the locations in which it is needed. At December 31, 2017,
approximately 79% of the consolidated amount was held outside of the
United States. In January 2018, the Company distributed approximately
$2 billion from two of its foreign subsidiaries to the U.S. parent of those
subsidiaries. There are no incremental taxes beyond the toll charge due
with respect to this distribution of cash.
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. In the third
quarter of 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 paper 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, 2017.
Share Repurchases
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. In
December 2016, Corning’s Board of Directors approved a $4 billion share
repurchase program with no expiration (the “2016 Repurchase Program”).
During 2017, Corning repurchased 84.4 million shares for approximately
$2.4 billion through accelerated share repurchase agreements and open
market repurchases under the 2016 Repurchase Program.
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.
Our major source of funding for 2017 and beyond will be our operating
cash flow, 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, acquisitions, the
asbestos litigation, capital expenditures, scheduled debt repayments,
dividend payments and share repurchase programs.
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, 2017, our leverage
using this measure was 25% 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, 2017, 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 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, Corning extended
its foreign exchange hedging program to hedge a significant portion of
its projected yen exposure for the period 2018 through 2022, with average
rate forwards, collars and puts. In the years ended December 31, 2017 and
2016, we recorded pre-tax net losses of $201 million and $459 million,
and in the year ended December 31, 2015, we recorded a pre-tax net gain
of $113 million related to changes in the fair value of these instruments.
Included in these amounts are realized gains of $268 million, $207 million
and $686 million, respectively. The gross notional value outstanding for
these instruments which hedge our exposure to the Japanese yen at
December 31, 2017, 2016 and 2015 was $13 billion, $14.9 billion and $8.3
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 income. In the years ended
December 31, 2017 and 2016, we recorded pre-tax net gains of $95 million
and $7 million, respectively, and the year ended December 31, 2015, we
recorded a pre-tax net loss of $36 million related to changes in the fair
value of these instruments. Included in these amounts are realized losses
of $1 million, $7 million and $33 million, respectively. These instruments
had a gross notional value outstanding at December 31, 2017, 2016 and
2015 of $0.8 billion, $1.2 billion and $3.3 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 year ended December
31 2017 we recorded a net pre-tax loss of $40 million, and 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, 2017, 2016 and 2015,
the euro-denominated average rate instruments had a gross notional
amount of $0.3 billion.
36
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
In 2016, we entered into a portfolio of average rate forwards to hedge
against our translation exposure resulting from movements in the
Chinese yuan. In the year ended December 31 2017, we recorded a net
pre-tax gain of $27 million, and in the year ended December 31, 2016,
we recorded a net pre-tax loss of $11 million related to changes in the
fair value of these instruments. At December 31, 2017 and 2016, the
yuan-denominated average rate forwards had a gross notional amount
of $0.2 billion and $0.3 billion, respectively.
These derivative instruments 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
(Loss) 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 ten 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.
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
Subtotal of commitment expirations per period
Purchase obligations(2)
Capital expenditure obligations(3)
Total debt(4)
Interest on long-term debt(5)
Capital leases and financing obligations
Imputed interest on capital leases and financing obligations
Minimum rental commitments
Amended PCC Plan
Uncertain tax positions(6)
Subtotal of contractual obligation payments due by period(6)
Total commitments and contingencies(6)
Amount of commitment and contingency expiration per period
Total
Less than 1 year
1 to 3 years
3 to 5 years
$
$
$
198
75
10
283
265
583
4,749
3,437
406
233
563
220
54
$
$
$
88
62
10
160
142
583
375
195
4
19
74
35
$
$
$
3
9
12
72
550
359
9
40
122
85
$
$
$
1
1
21
437
314
11
39
91
100
5 years and
thereafter
$
$
$
106
4
110
30
3,387
2,569
382
135
276
$
$
10,510
10,793
$
$
1,427
1,587
$
$
1,237
1,249
$
$
1,013
1,014
$
$
6,779
6,889
(1) At December 31, 2017, $39 million of the $75 million was included in other accrued liabilities on our consolidated balance sheets.
(2) Purchase obligations are enforceable and legally binding obligations which primarily consist of raw material and energy-related take-or-
pay contracts.
(3) Capital expenditure obligations primarily reflect amounts associated with our capital expansion activities.
(4) Total debt above is stated at maturity value, and excludes interest rate swap gains/losses and bond discounts.
(5) 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.
(6) At December 31, 2017, $54 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.
We believe a significant majority of these guarantees and contingent liabilities will expire without being funded.
37
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
Environment
Corning has been named by the Environmental Protection Agency (the
Agency) under the Superfund Act, or by state governments under similar
state laws, as a potentially responsible party for 15 active hazardous waste
sites. Under the Superfund Act, all parties who may have contributed
any waste to a hazardous waste site, identified by the Agency, are jointly
and severally liable for the cost of cleanup unless the Agency agrees
otherwise. It is Corning’s policy to accrue for its estimated liability
related to Superfund sites and other environmental liabilities related
to property owned by Corning based on expert analysis and continual
monitoring by both internal and external consultants. At December 31,
2017 and December 31, 2016, Corning had accrued approximately $38
million (undiscounted) and $43 million (undiscounted), respectively, for
the estimated liability for environmental cleanup and related litigation.
Based upon the information developed to date, management believes
that the accrued reserve is a reasonable estimate of the Company’s
liability and that the risk of an additional loss in an amount materially
higher than that accrued is remote.
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. Our assessment is performed at the reportable segment
level. For the majority of our reportable segments, we concluded that
locations or businesses within these segments 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.
38
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
At December 31, 2017 and December 31, 2016, the carrying value of
precious metals was higher than the fair market value by $711 million
and $890 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 adopted ASU 2017-04, Intangibles – Goodwill and Other, on
January 1, 2017, which 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.
Corning has recorded goodwill in the Display Technologies, Optical
Communications, Specialty Materials, Life Sciences and All Other
operating segments. On a quarterly basis, or if an event occurs or
circumstances change that indicate the carrying amount may be
impaired, management performs a qualitative assessment of factors
in each reporting unit within these operating segments to determine
if there have been any triggering events. We also perform a detailed
quantitative impairment test every three years if no indicators suggest
a test should be performed in the interim. We use this calculation as
quantitative validation of the qualitative process; this process does not
represent an election to perform the quantitative impairment test in
place of the qualitative review.
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;
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
quantitative goodwill impairment test.
Our 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. 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.
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 2017, management performed a qualitative assessment
of factors and determined there had not been any triggering events
which would indicate that the Display Technologies reporting unit’s fair
value is less than its carrying amount.
In addition to assessing qualitative factors each quarter, we performed a
quantitative goodwill recoverability test in 2015 for this reporting unit. A
discount rate of 5.8% and a growth rate of 1% were used in 2015. The results
of our impairment test indicated that the fair value of the reporting unit
exceeded its book value by a significant amount, and as such, further
goodwill impairment testing was not necessary. We determined a range
of discount rates between 3.8% and 7.8% and growth rates between 0%
and 3% would not have affected our conclusion.
Optical Communications
Goodwill for the Optical Communications segment is tested at the
reporting unit level, which is also the operating segment level consisting
of two components. For the purposes of the annual goodwill impairment
assessment, we have aggregated these two components into one
reporting unit based upon their similar economic characteristics. On a
quarterly basis in 2017, 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.
• Overall financial performance, such as negative or declining cash flows
or a decline in actual or forecasted revenue;
Specialty Materials
• Other relevant entity-specific events, such as material changes in
management or key personnel; and
• Events affecting a reporting unit, such as a change in the composition
including acquisitions
its net assets
or carrying amount of
and dispositions.
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 2017, 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.
39
CORNING INCORPORATED - 2017 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 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.
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.
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
2017, 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 2017, management
performed a qualitative assessment of factors and determined there
had not been any triggering events which would indicate that the
reporting units’ fair value is less than the carrying amount.
In addition to assessing qualitative factors each quarter, we performed a
quantitative goodwill recoverability tests in 2015. 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
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 ASC
Topic 740, Income Taxes, which requires that companies only record tax
benefits for technical positions that are believed to 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.
At December 31, 2017, Corning has not completed its accounting for the
tax effects of the enactment of the 2017 Tax Act. Pursuant to SAB 118,
the Company has made a reasonable estimate of the effects on its U.S.
deferred tax balances, the one-time toll charge and the impact on its
state valuation allowances. In addition, Corning has not made sufficient
progress on estimating the impact of tax reform on its assertion
regarding its indefinitely reinvested foreign earnings so the Company
will continue to follow its historic position while it continues to analyze
this issue. In addition, Corning’s accounting for the impact of the global
intangible low-taxed income (GILTI) provisions of the 2017 Tax Act is
incomplete and, as a result, it has not yet elected a policy to account for
the GILTI provisions.
The initial accounting is incomplete as we need additional time and
information to analyze all aspects of the newly enacted law and how
it impacts our worldwide operations. The additional information that
needs to be obtained, prepared or analyzed in order to complete the
accounting requirements includes receiving further guidance from
the tax authorities; additional time to prepare basis calculations; post
enactment impacts and further time to validate of our assumptions.
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.
40
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
The equity in earnings line on our income statement for the year ended
December 31, 2016 reflects 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, 2017 and 2016, the carrying value of our equity method
investment assets was $280 million and $269 million, respectively.
In addition, we also have an equity investment (HSG) with a negative
carrying value of $105 million. The negative carrying value resulted from
a one-time charge to this entity in 2014 for the permanent abandonment
of certain assets. 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, 2017 and
2016, 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 (Loss) 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.
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 Corning’s
material litigation matters.
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
retirements, mortality,
on demographic assumptions
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.
41
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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. 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 2017, 2016
and 2015:
(In millions)
Actual return on plan assets – Domestic plans
Expected return on plan assets – Domestic plans
Actual return on plan assets – International plans
Expected return on plan assets – International plans
Weighted-average actual and expected return on assets:
Actual return on plan assets – Domestic plans
Expected return on plan assets – Domestic plans
Actual return on plan assets – International plans
Expected return on plan assets – International plans
2017
$
393
163
18
11
December 31,
2016
$
235
153
75
12
December 31,
2015
$
(111)
166
3
12
2017
2016
2015
14.92%
6.00%
3.93%
3.97%
9.62%
6.00%
19.06%
3.92%
(4.23)%
6.00%
0.59%
2.97%
As of December 31, 2017, the Projected Benefit Obligation (PBO) for U.S. pension plans was $3,519 million.
42
CORNING INCORPORATED - 2017 Annual Report Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 2018
pre-tax pension expense
Effect on
December 31, 2017 PBO
- 2 million
+ 2 million
+ 7 million
- 7 million
+ 102 million
- 97 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, 2017, a 25 basis point decrease in each spot
rate would decrease stockholders’ equity by $128 million before tax, and
a 25 basis point increase in each spot rate would increase stockholders’
equity by $123 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 2018
pre-tax OPEB expense
Effect on
December 31, 2017 APBO*
+ 1 million
- 0 million
+ 26 million
- 25 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 requires 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.
43
CORNING INCORPORATED - 2017 Annual Report Quantitative and Qualitative Disclosures About
Market Risks
We operate and conduct business in many foreign countries and as a
result are exposed to movements in foreign currency exchange rates.
Our exposure to exchange rates has the following effects:
• Exchange rate movements on financial instruments and transactions
denominated in foreign currencies that impact earnings; and
• Exchange rate movements upon conversion of net assets and net
income of foreign subsidiaries for which the functional currency is not
the U.S. dollar, which impact our net equity.
Our most significant foreign currency exposures relate to the Japanese
yen, South Korean won, New Taiwan dollar, Chinese 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 average rate forwards and other
derivative instruments.
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, 2017,
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
$1.4 billion compared to $1.6 billion at December 31, 2016. Specific to the
Japanese yen, a 10% adverse movement in quoted yen exchange rates
could result in a loss in fair value of these instruments of $1,266 million
compared to $1,458 million at December 31, 2016. 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
$88 million compared to $79 million at December 31, 2016. 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 69% 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 2017 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 2017 net sales of approximately $300 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 2017 net sales
of approximately $6 million and $96 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 2017 net income attributable
to Corning Incorporated of approximately $187 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 2017 net income
attributable to Corning Incorporated of approximately $63 million and
$5 million, respectively.
Interest Rate Risk Management
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.
44
CORNING INCORPORATED - 2017 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, 2017. The effectiveness of
Corning’s internal control over financial reporting as of December 31,
2017, 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
45
CORNING INCORPORATED - 2017 Annual Report Report of Independent Registered Public
Accounting Firm
PricewaterhouseCoopers LLP
To the Board of Directors and Shareholders of Corning Incorporated:
Opinions on the Financial Statements and Internal Control over
Financial Reporting
We have audited the accompanying consolidated balance sheets of
Corning Incorporated and its subsidiaries as of December 31, 2017
and 2016, and the related consolidated statements of (loss) income,
comprehensive income, changes in shareholders’ equity and cash
flows for each of the three years in the period ended December 31,
2017, including the related notes and schedule of valuation accounts
and reserves for each of the three years in the period ended December
31, 2017 appearing under Item 15 (a)(2) (collectively referred to as
the “consolidated financial statements”). We also have audited the
Company’s internal control over financial reporting as of December
31, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
the Company as of December 31, 2017 and 2016, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 2017 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion,
the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control - Integrated Framework (2013) issued by
the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated
financial statements, 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 the
Company’s consolidated financial statements and on the Company’s
internal control over financial reporting based on our audits. We are a
public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or
fraud, and whether effective internal control over financial reporting
was maintained in all material respects.
Our audits of the consolidated financial statements
included
performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial statements.
Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over
Financial Reporting
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 14, 2018
We have served as the Company’s auditor since 1944.
46
CORNING INCORPORATED - 2017 Annual Report Consolidated Statements of (Loss) 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
Translated earnings contract (loss) gain, net
Gain on realignment of equity investment
Other expense, net
Income before income taxes
(Provision) benefit for income taxes (Note 6)
Net (loss) income attributable to Corning Incorporated
(Loss) 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,
2017
$
$
$
$
$
10,116
6,084
4,032
1,467
860
75
1,630
361
45
(155)
(121)
(103)
1,657
(2,154)
(497)
(0.66)
(0.66)
0.62
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
47
CORNING INCORPORATED - 2017 Annual Report Consolidated Statements of Comprehensive Income
Years ended December 31,
2017
2016
2015
$
(497)
$
3,695
$
746
14
30
44
834
337
(104)
(3)
241
1
135
$
3,830
$
1,339
(590)
1
121
(36)
(504)
835
Corning Incorporated and Subsidiary Companies
(In millions)
Net (loss) income attributable to Corning Incorporated
Foreign currency translation adjustments and other
Net unrealized gains (losses) 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)
Comprehensive income attributable to Corning Incorporated
$
The accompanying notes are an integral part of these consolidated financial statements.
48
CORNING INCORPORATED - 2017 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
Trade accounts receivable, net of doubtful accounts and allowances - $60 and $59
Inventories, net of inventory reserves - $169 and $151 (Note 5)
Other current assets (Note 11 and 15)
Total current assets
Investments (Note 7)
Property, plant and equipment, net of accumulated depreciation - $10,809 and $9,884 (Note 9)
Goodwill, net (Note 10)
Other intangible assets, net (Note 10)
Deferred income taxes (Note 6)
Other assets (Note 11 and 15)
Total Assets
Liabilities and Equity
Current liabilities:
December 31,
2017
2016
$
4,317
1,807
1,712
991
8,827
340
14,017
1,694
869
813
934
$
5,291
1,481
1,471
805
9,048
336
12,546
1,577
796
2,325
1,271
$
27,494
$
27,899
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):
Convertible preferred stock, Series A – Par value $100 per share; Shares authorized 3,100;
Shares issued: 2,300
Common stock – Par value $0.50 per share; Shares authorized: 3.8 billion; Shares
issued: 1,708 million and 1,691 million
Additional paid-in capital – common stock
Retained earnings
Treasury stock, at cost; shares held: 850 million and 765 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.
379
1,439
1,391
3,209
4,749
749
3,017
11,724
$
256
1,079
1,416
2,751
3,646
737
2,805
9,939
2,300
2,300
854
14,089
15,930
(16,633)
(842)
15,698
72
15,770
846
13,695
16,880
(14,152)
(1,676)
17,893
67
17,960
$
27,494
$
27,899
49
CORNING INCORPORATED - 2017 Annual Report Consolidated Statements of Cash Flows
Corning Incorporated and Subsidiary Companies
(In millions)
Cash Flows from Operating Activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Years ended December 31,
2016
2015
2017
$
(497)
$
3,695
$
1,339
Depreciation
Amortization of purchased intangibles
Restructuring, impairment and other charges
Equity in earnings of affiliated companies
Dividends received from affiliated companies
Deferred tax provision (benefit)
Customer incentives and deposits, net
Translated earnings contract loss (gain)
Unrealized translation losses on transactions
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
Proceeds from sale of a business
Cash received on realignment of equity investment
Proceeds from sale of assets to related party
Short-term investments – acquisitions
Short-term investments – liquidations
Realized gains on translated earnings contracts
Other, net
Net cash (used in) provided by 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 received for asset financing and related incentives, net
Payments of employee withholding tax on stock award
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
The accompanying notes are an integral part of these consolidated financial statements.
50
1,083
75
(361)
201
1,796
100
121
(339)
(225)
(170)
(172)
169
223
2,004
(1,804)
(171)
14
29
270
(48)
(1,710)
(252)
1,445
(7)
(16)
309
(2,452)
(651)
(1,624)
356
(974)
5,291
1,131
64
77
(284)
85
(308)
185
448
1
(2,676)
(106)
(68)
18
259
16
2,537
(1,130)
(333)
4,818
42
(20)
121
201
(37)
3,662
(85)
(481)
(7)
1
(16)
138
(4,227)
(645)
(5,322)
(86)
791
4,500
1,130
54
(299)
143
54
197
(80)
268
162
(77)
(57)
(126)
121
2,829
(1,250)
(732)
12
(969)
1,629
653
(28)
(685)
(12)
745
3
481
(10)
(6)
1
(20)
102
(3,228)
(679)
(2,623)
(330)
(809)
5,309
$
4,317
$
5,291
$
4,500
CORNING INCORPORATED - 2017 Annual Report
Consolidated Statements of Changes in Shareholders’ Equity
Corning Incorporated and Subsidiary Companies
(In millions)
Convertible
preferred
stock
Common
stock
Additional
paid-in
capital
common
Retained
earnings
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Total Corning
Incorporated
shareholders’
equity
Non-
controlling
interests
Balance, December 31, 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
$
Net (loss) 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(1)
(497)
834
14
(2,462)
8
349
(654)
201
31
(2)
(17)
(497)
834
(2,448)
355
(654)
215
73
9
(1)
(6)
75
10
(6)
(12)
67
18
6
(19)
Total
$ 21,652
1,348
(505)
(3,228)
149
(528)
(25)
$ 18,863
3,705
129
(4,244)
182
(647)
(28)
$ 17,960
(479)
840
(2,448)
355
(654)
196
Balance, December 31, 2017
$
2,300
$
854
$ 14,089
$ 15,930
$ (16,633)
$
(842)
$
15,698
$
72
$ 15,770
(1) Adjustment to retained earnings includes the cumulative effect of the accounting change we recorded upon adoption of ASU 2016-09 in 2017 in the
amount of $233 million.
The accompanying notes are an integral part of these consolidated financial statements.
51
CORNING INCORPORATED - 2017 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.
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.
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.
52
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
Research and Development Costs
Research and development costs are charged to expense as incurred.
Research and development costs totaled $689 million
in 2017,
$637 million in 2016 and $638 million in 2015.
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.
We recorded foreign currency transaction gains of $20 million and
$21 million for the years ended December 31, 2017 and 2016, respectively,
and foreign currency transaction losses of $22 million for the year ended
December 31, 2015. These amounts were recorded in the line item Other
expense, net in the Consolidated Statements of (Loss) 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,
2017
2016
2015
$
$
$
584
178
405
$
$
$
381
184
293
$
$
$
298
178
253
(1) Included in this amount are approximately $36 million, $23 million and $35 million of interest costs that were capitalized as part of property, plant
and equipment, net of accumulated depreciation, in 2017, 2016 and 2015, 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.
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 potentially 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.
53
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
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 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.
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 that the carrying amount may be impaired. Corning also
performs a detailed quantitative impairment test every three years if no
indicators suggest a test should be performed in the interim. We use
this calculation as quantitative validation of the qualitative process;
this process does not represent an election to perform the quantitative
impairment test in place of the qualitative 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 quantitative impairment
analysis, our valuation method is an “income approach” using a
discounted cash flow model in which cash flows anticipated over
several periods, plus a terminal value at the end of that time horizon,
are discounted to their present value using an appropriate rate of return.
Our estimates are based upon our historical experience, our current
knowledge from our commercial relationships, and available external
information about future trends. If the fair value is less than the carrying
value, a loss is recorded to reflect the difference between the fair value
and carrying value.
intangible assets
Other
include patents, trademarks, and other
intangible assets acquired from an independent party. Such intangible
assets have a definite life and are amortized on a straight-line basis over
estimated useful lives ranging from 4 to 50 years.
Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets, such as plant
and equipment and intangible assets, when events or changes in
circumstances occur that indicate the carrying value of the asset or
asset group may not be recoverable. When impairment indicators
are present, we compare estimated undiscounted future cash flows,
including the eventual disposition of the asset group at market value, to
the assets’ carrying value to determine if the asset group is recoverable.
For an asset group that fails the test of recoverability, the estimated fair
value of long-lived assets is determined using an “income approach”
that starts with the forecast of all the expected future net cash flows
including the eventual disposition at market value of long-lived assets,
and also considers the fair market value of all precious metals. We assess
the recoverability of the carrying value of long-lived assets at the lowest
level for which identifiable cash flows are largely independent of the
cash flows of other assets and liabilities. If there is an impairment, a loss
is recorded to reflect the difference between the assets’ fair value and
carrying value. Refer to Note 2 (Restructuring, Impairment and Other
Charges) to the Consolidated Financial Statements for more detail.
Employee Retirement Plans
Corning offers employee retirement plans consisting of defined benefit
pension plans covering certain domestic and international employees
and postretirement plans that provide health care and life insurance
benefits for eligible retirees and dependents. The costs and obligations
related to these benefits reflect the Company’s assumptions related
to general economic conditions (particularly interest rates), expected
return on plan assets, rate of compensation increase for employees and
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.
54
CORNING INCORPORATED - 2017 Annual Report 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.
Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to operating
loss and tax credit carryforwards and for differences between the
carrying amounts of existing assets and liabilities and their respective
tax bases.
The effective income tax rate reflects our assessment of the ultimate
outcome of tax audits. In evaluating the tax benefits associated with
our various tax filing positions, we record a tax benefit for uncertain tax
positions using the highest cumulative tax benefit that is more likely than
not to be realized. Adjustments are made to our liability for unrecognized
tax benefits in the period in which we determine the issue is effectively
settled with the tax authorities, the statute of limitations expires for the
return containing the tax position or when new information becomes
available. Our liability for unrecognized tax benefits, including accrued
penalties and interest, is included in other accrued liabilities and other
long-term liabilities on our consolidated balance sheets and in income
tax expense in our Consolidated Statements of (Loss) 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.
At December 31, 2017, Corning has not completed its accounting for
the tax effects of the enactment of the 2017 Tax Act. Pursuant to SAB
118, the Company has made a reasonable estimate of the effects on
its U.S. deferred tax balances, the one-time toll charge and the impact
on its state valuation allowances. In addition, Corning has not made
sufficient progress on estimating the impact of tax reform on its
assertion regarding its indefinitely reinvested foreign earnings so the
Company will continue to follow its historic position while it continues
to analyze this issue. In addition, Corning’s accounting for the impact
of the global intangible low-taxed income (GILTI) provisions of the 2017
Tax Act is incomplete and, as a result, it has not yet elected a policy to
account for the GILTI provisions. The initial accounting is incomplete as
we need additional time and information to analyze all aspects of the
newly enacted law and how it impacts our worldwide operations. The
additional information that needs to be obtained, prepared or analyzed
in order to complete the accounting requirements includes receiving
further guidance from the tax authorities; additional time to prepare
basis calculations; post enactment impacts and further time to validate
of our assumptions.
Notes to Consolidated Financial Statements
Equity Method Investments
Our equity method investments are reviewed for impairment on a
periodic basis or if an event occurs or circumstances change that
indicate the carrying amount may be impaired. This assessment is
based on a review of the equity investments’ performance and a review
of indicators of impairment to determine if there is evidence of a loss in
value of an equity investment. Factors we consider include:
• Absence of our ability to recover the carrying amount;
• Inability of the equity affiliate to sustain an earnings capacity which
would justify the carrying amount of the investment; and
• Significant
litigation, bankruptcy or other events that could
impact recoverability.
For an equity investment with impairment indicators, we measure
fair value on the basis of discounted cash flows or other appropriate
valuation methods, depending on the nature of the company involved.
If it is probable that we will not recover the carrying amount of our
investment, the impairment is considered other-than-temporary and
recorded in earnings, and the equity investment balance is reduced to its
fair value accordingly. We require our material equity method affiliates
to provide audited financial statements. Consequently, adjustments for
asset recoverability are included in equity earnings. We also utilize these
financial statements in our recoverability assessment.
Fair Value of Financial Instruments
Major categories of financial assets and liabilities, including short-term
investments, other assets and derivatives are measured at fair value on a
recurring basis. Certain assets and liabilities including long-lived assets,
goodwill, asset retirement obligations, and cost and equity investments
are measured at fair value on a nonrecurring basis.
Fair value is the price that would be received from selling an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value
measurements for assets and liabilities required to be recorded at fair
value, we consider the principal or most advantageous market in which
we would transact and consider assumptions that market participants
would use when pricing the asset or liability, such as inherent risk,
transfer restrictions, and risk of nonperformance.
Derivative Instruments
We participate in a variety of foreign exchange forward contracts and
foreign exchange option contracts entered into in connection with
the management of our exposure to fluctuations in foreign exchange
rates. We utilize interest rate swaps to reduce the risk of changes in a
benchmark interest rate from the probable forecasted issuance of debt
and to swap fixed rate interest payments into floating rate interest
payments. These financial exposures are managed in accordance with
corporate policies and procedures.
All derivatives are recorded at fair value on the balance sheet. Changes in
the fair value of derivatives designated as cash flow hedges and hedges
of net investments in foreign operations are not recognized in current
operating results but are recorded in accumulated other comprehensive
income. Amounts related to cash flow hedges are reclassified from
accumulated other comprehensive income when the underlying hedged
item impacts earnings. This reclassification is recorded in the same line
item of the Consolidated Statements of (Loss) 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 (Loss) Income in the Translated earnings contract (loss)
gain, net and the Other expense, net lines.
55
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
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 will adopt the standard on a
modified retrospective basis in 2018.
One of Corning’s equity affiliates is currently assessing the potential
impact of adopting ASU 2014-09 on its financial statements and will
adopt the standard on January 1, 2019. Preliminary analysis indicates
that the impact of adoption will not have a material impact on Corning’s
financial statements.
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.
One of Corning’s equity affiliates is currently assessing the potential
impact of adopting ASU 2016-02 on its financial statements and elected
to adopt the standard on January 1, 2020.
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 those fiscal years. We have determined that the impact of this
standard will not be material. We will adopt this standard in 2018.
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 have determined
that the impact of this standard will not be material. We will adopt this
standard in 2018.
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 adopted the ASU on January 1, 2017.
In March 2017, the FASB issued ASU No. 2017-07, Compensation—
Retirement Benefits (Topic 715): Improving the Presentation of Net
Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU
2017-07 requires entities to (1) disaggregate the current-service-cost
component from the other components of net benefit cost (the “other
components”) and present it with other current compensation costs for
related employees in the income statement and (2) present the other
components elsewhere in the income statement and outside of income
from operations if that subtotal is presented. In addition, the ASU
requires entities to disclose the income statement lines that contain the
other components if they are not presented on appropriately described
separate lines. The amendment should be applied retrospectively for the
presentation of the service cost component and prospectively for the
capitalization of the service cost component. ASU 2017-07 is effective for
fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. Early adoption is permitted at the beginning
of any annual period for which an entity’s financial statements have
not been issued or made available for issuance. We have determined
that the impact of this standard will not be material. We will adopt this
standard in 2018.
56
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
2. Restructuring, Impairment and Other Charges
2017 Activity
For the year ended December 31, 2017, we did not record
significant restructuring, impairment and other charges or reversals.
Cash expenditures for restructuring activities were approximately
$4 million.
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.
3. Available-for-Sale Investments
Cash payments for employee-related and exit activity related to the 2016
restructuring activities were substantially completed in 2016.
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 approximately
$40 million.
Restructuring reserves as of December 31, 2017, 2016 and 2015 were
not significant.
At December 31, 2016 and 2015, the Company held
long-term
investments of $29 million and $33 million, respectively. The Company’s
investments in available-for-sale securities were held at fair value with
amortized cost of $32 million and $37 million at December 31, 2016 and
2015, respectively.
At December 31, 2017, Corning did not hold long-term investments or
available-for-sale securities.
Proceeds from sales and maturities of short-term investments totaled
$29 million, $121 million and $1.6 billion in 2017, 2016 and 2015, respectively.
4. Significant Customers
For 2017, no customers met or exceeded 10% of Corning’s consolidated net sales. 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.
5.
Inventories, Net of Inventory Reserves
Inventories, net of inventory reserves comprise the following (in millions):
Finished goods
Work in process
Raw materials and accessories
Supplies and packing materials
Total inventories, net of inventory reserves
6.
Income Taxes
Income before income taxes follows (in millions):
U.S. companies
Non-U.S. companies
Income before income taxes
December 31,
2017
$
$
739
322
306
345
1,712
2016
$
606
303
270
292
$
1,471
Years ended December 31,
2017
$
$
653
1,004
1,657
2016
$
$
2,658
1,034
3,692
2015
$
$
426
1,060
1,486
57
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
The current and deferred amounts of the (provision) benefit for income taxes follow (in millions):
Years ended December 31,
Current:
Federal
State and municipal
Foreign
Deferred:
Federal
State and municipal
Foreign
2016
$
2017
$
(20)
(21)
(317)
(1,617)
(109)
(70)
(Provision) benefit for income taxes
$
(2,154)
$
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:
2015
$
$
(1)
(17)
(287)
310
48
(50)
3
Statutory U.S. income tax rate
State income tax (benefit), net of federal effect
Repatriation tax on accumulated previously untaxed foreign earnings
Remeasurement of deferred tax assets and liabilities
Rate difference on foreign earnings
Uncertain tax positions
Equity earnings impact
Valuation allowances
Realignment of Dow Corning interest
Other items, net
Effective income tax rate (benefit)
Years ended December 31,
2017
2016
2015
35.0%
0.8
67.4
21.0
(3.9)
0.6
0.1
6.8
2.2
35.0%
(0.3)
(9.2)
(0.1)
(0.4)
1.2
(28.2)
1.9
130.0%
(0.1)%
(40)
(20)
(33)
(144)
(30)
120
(147)
35.0%
0.1
(19.8)
4.3
(5.4)
(4.2)
(0.1)
9.9%
Corning’s results for the year ending December 31, 2017 included a
total $2.2 billion worldwide tax provision, inclusive of tax on normal
operations and the impacts of the 2017 Tax Act. Given the significant
complexity of the 2017 Tax Act and anticipated future guidance from the
U. S. Treasury, the Securities and Exchange Commission and the Financial
Accounting Standards Board (“FASB”) related to the 2017 Tax Act, the
Securities Exchange Commission has issued its Staff Accounting Bulletin
118 (“SAB 118”) to provide registrants additional time to analyze and
report the effects of tax reform during the “measurement period”. Under
SAB 118, the registrant is required to record those items where ASC 740
analysis is complete; include reasonable estimates and label them as
provisional where ASC 740 analysis is incomplete; and if reasonable
estimates cannot be made, record items under the previous tax law. The
measurement period ends on the date the entity has obtained, prepared,
and analyzed the information that was needed in order to complete the
accounting requirements under ASC Topic 740 and is not to exceed 1 year.
In addition to SAB 118, the FASB has issued some guidance regarding how
to account for tax reform as well as a proposal to reclassify stranded
tax costs from AOCI to retained earnings. Furthermore, to date, the U.S.
Treasury has issued Notice 2018-07 on December 29, 2017 and Notice
2018-13 on January 19, 2018 with additional guidance on how to compute
the toll charges.
At December 31, 2017, we have not completed our accounting for the tax
effects of the enactment of the 2017 Tax Act; however, we have made a
reasonable estimate of the effects on our U.S. deferred tax balances, the
one-time toll charge and the impact on our state valuation allowances.
We recognized provisional amounts which are included as a component
of income tax expense from continuing operations. The initial accounting
is incomplete as we need additional time and information to analyze all
aspects of the newly enacted law and how it impacts our worldwide
operations. The additional information that needs to be obtained,
prepared or analyzed in order to complete the accounting requirements
includes receiving further guidance from the tax authorities; additional
time to prepare basis calculations; post-enactment impacts, and further
time to validate our assumptions.
We re-measured the U.S. deferred tax assets and liabilities based on
the rates at which they are expected to reverse in the future, which is
generally 21%. However, we are still analyzing certain aspects of the
2017 Tax Act and refining our calculations, which could potentially affect
the measurement of these balances or potentially give rise to new
deferred tax amounts. The provisional amount recorded related to the
re-measurement of our deferred tax balances was $347 million.
58
CORNING INCORPORATED - 2017 Annual Report The one-time toll charge is based on our unrepatriated earnings of
certain foreign subsidiaries that were previously deferred. This charge
resulted in an additional provisional tax expense amount of $1.1 billion.
We have not yet completed our calculation of the toll charge. This
amount may change when we finalize the calculation of unrepatriated
earnings that were previously deferred from U.S. federal taxation and
finalize the amounts held in cash or other specified assets. Settlement
of the toll charge will occur almost entirely through the use of existing
foreign tax credit carryovers.
Corning has not made sufficient progress on estimating the impact of
tax reform on its assertion regarding its indefinitely reinvested foreign
earnings so the Company will continue to follow its historic position while
it continues to analyze this item. As of December 31, 2017, Corning estimates
that its unremitted foreign earnings were $16.9 billion. While Corning
is not changing its assertion at this time, the Company has distributed
approximately $2 billion in January 2018 from two of its foreign subsidiaries
to the U.S. parent of those subsidiaries. There are no incremental taxes
beyond the toll charge due with respect to this distribution of cash.
Under its historic policy, Corning will continue to indefinitely reinvest
substantially all of its foreign earnings, with the exception of an
immaterial amount of current earnings that have very low or no tax
Notes to Consolidated Financial Statements
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.
Corning’s accounting for the impact of the global intangible low-taxed
income (GILTI) provisions of the 2017 Tax Act is incomplete and, as a
result, it has not yet elected a policy to account for the GILTI provisions.
We will continue to monitor for future guidance and to assess the
impacts of the 2017 Tax Act.
Tax benefit associated with rate differences on foreign earnings is
primarily the income of subsidiaries with lower statutory rates than
the U.S. for 2017 and for 2016 and 2015 includes the benefit of excess
foreign tax credits resulting from the inclusion of foreign earnings in
U.S. income.
During 2016, a realignment of Dow Corning interest took place. Refer
to Note 7 (Investments) of the Consolidated Financial Statements for
additional detail.
The tax effects of temporary differences and carryforwards that gave rise to significant portions of the deferred tax assets and liabilities follows
(in millions):
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
Other accrued liabilities
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,
2017
$
$
652
43
94
191
278
1,258
(456)
802
(101)
(94)
(245)
(440)
362
2016
$
1,465
62
154
283
190
462
2,616
(270)
2,346
(104)
(234)
(338)
$
2,008
December 31,
2017
$
$
813
(451)
362
2016
$
$
2,325
(317)
2,008
Details on deferred tax assets for loss and tax credit carryforwards at December 31, 2017 follow (in millions):
Net operating losses
Tax credits
Totals as of December 31, 2017
Expiration
Amount
2017-2021
2022-2026
2027-2036
Indefinite
$
$
497
155
652
$
$
137
137
$
$
72
4
76
$
$
45
135
180
$
$
243
16
259
59
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
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. The amount of U.S. and foreign deferred tax assets that have
remaining valuation allowances at December 31, 2017 and 2016 was
$456 million and $270 million, respectively.
The 2017 Tax Act makes the following key changes to U.S. tax law
which will potentially impact Corning’s deferred tax assets. Corporate
alternative minimum tax (“AMT”) has been eliminated. Taxpayers with
AMT credit carryovers can use credits to offset regular tax liability
for any tax year or such credits will be fully refundable by year 2022.
Corning has $28 million of AMT carryover. Net operating losses (“NOL’s”)
generated prior to the 2017 Tax Act may still be carried back two years
and forward 20 years. Corning has $34 million of Federal NOL’s that are
subject to these provisions. The 2017 Tax Act limits and in some cases
eliminates foreign tax credits. Corning has $49 million of foreign tax
credit carryforwards that may be subject to these restrictions.
In 2017, we adopted ASU 2016-09, Improvements to Employee Share-
Based Payment Accounting. As a result, cumulative tax benefits
totaling $233 million were recorded as an adjustment to beginning
retained earnings.
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
2017
$
$
243
1
13
(5)
252
2016
$
$
253
10
4
(18)
(6)
243
Included in the balance at December 31, 2017 and 2016 are $97 million
and $92 million, respectively, of unrecognized tax benefits that would
impact our effective tax rate if recognized.
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).
We recognize accrued interest and penalties associated with uncertain
tax positions as part of tax expense. For the years ended December 31,
2017 and 2016 the amount recognized in interest expense is not material.
The amounts accrued at December 31, 2017 and 2016 for the payment of
interest and penalties were also not material.
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.
It is possible that the amount of unrecognized tax benefits will change
due to one or more of the following events during the next twelve
months: audit activity, tax payments, or final decisions in matters that
are the subject of controversy in various jurisdictions within which we
operate. The majority of the potential change relates to tax litigation
in Korea as well as our ongoing U.S. tax audit. We believe we have
provided adequate contingent reserves for these matters. However, if
upon conclusion of these matters, the ultimate determination of taxes
owed is for an amount materially different than our current reserves, our
overall tax expense and effective tax rate could be materially impacted
in the period of adjustment.
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
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 is currently appealing certain tax assessments resulting from
audits performed by the South Korean tax authorities covering periods
2006 through 2015. The Company is required to deposit the disputed
tax amounts with the South Korean government as a condition of its
appeal of these assessments. Because we believe that it is more likely
than not that we will prevail in the appeals process, we have recorded a
non-current receivable of $319 million for the amount on deposit with
the South Korean government.
60
CORNING INCORPORATED - 2017 Annual Report 7.
Investments
Investments are comprised of the following (in millions):
Affiliated companies accounted for by the equity method(1)
Other investments
Subtotal Investment Assets
Affiliated companies accounted for by the equity method - HSG(1)(2)
Subtotal Investment Liabilities
Notes to Consolidated Financial Statements
Ownership
interest
20% to 50%
50%
December 31,
2017
2016
$
$
$
$
280
60
340
105
105
$
$
$
$
269
67
336
241
241
(1) Amount reflects Corning’s direct ownership interests in the affiliated companies at December 31, 2017 and December 31, 2016. Corning does not
control any of such entities.
(2) 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.
Affiliated Companies at Equity
The results of operations and financial position of the investments accounted for under the equity method follow (in millions):
Years ended December 31,
2017
2016
2015
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
$
$
$
$
$
$
$
$
2,346
560
721
361
108
12
22
201
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
$
$
$
$
$
$
$
$
4,024
1,006
565
284
95
12
44
85
$
$
$
$
$
$
$
December 31,
2017
2016
$
$
$
$
$
$
$
$
1,593
1,999
3
700
16
2,128
313
47
$
$
$
$
$
$
$
$
6,461
1,606
586
299
75
19
143
1,522
2,112
3
715
23
2,523
267
33
We have contractual agreements with several of our equity affiliates which include sales, purchasing, licensing and technology agreements.
As of December 31, 2017 and 2016, the undistributed earnings of equity companies included in our retained earnings are not material.
61
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
HSG and 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.
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.
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):
Cash
Carrying Value of Dow Corning Equity Investment
Carrying Value of HSG Equity Investment
Other(1)
Gain
$ 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.
Corning began reporting HSG equity earnings and dividends on June 1, 2016. HSG information presented below is shown for the year ended December 31,
2017 and seven months ended December 31, 2016 (in millions):
Statement of operations:
Net sales
Gross profit
Net income
Corning’s equity in earnings of affiliated companies
Related party transactions:
Dividends received 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
Years ended December 31,
2017
2016
1,716
469
706
352
196
$
$
$
$
$
December 31,
2017
2016
1,206
1,522
3
484
15
2,126
313
$
$
$
$
$
$
$
1,119
361
421
212
65
1,130
1,745
3
555
17
2,518
267
$
$
$
$
$
$
$
$
$
$
$
$
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
Years ended December 31,
2016
2015
$
$
$
$
$
$
2,215
588
163
82
7
20
$
$
$
$
$
$
5,649
1,472
563
281
15
143
(1) Gross profit for the five months ended May 31, 2016 and the twelve months ended December 31, 2015 includes R&D costs of $100 million and $233
million, respectively.
62
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
8. Acquisitions
Years ended December 31, 2017 and 2016
There were no material acquisitions completed in 2017 or 2016. See Note 10 (Goodwill and Other Intangible Assets) for further information on goodwill
and intangibles acquired in 2017 and 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 (Loss) 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.
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,
$
2017
482
5,864
16,648
1,832
24,826
(10,809)
2016
$
435
5,540
14,973
1,482
22,430
(9,884)
$
14,017
$
12,546
Approximately $36 million, $23 million and $35 million of interest costs were capitalized as part of property, plant and equipment, net of accumulated
depreciation, in 2017, 2016 and 2015, respectively.
Manufacturing equipment includes certain components of production equipment that are constructed of precious metals. At December 31, 2017 and
2016, the recorded value of precious metals totaled $3 billion in each period. Depletion expense for precious metals in the years ended December 31,
2017, 2016 and 2015 was $13 million, $20 million and $19 million, respectively.
63
CORNING INCORPORATED - 2017 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, 2017 and 2016 were as follows (in millions):
Display
Technologies
Optical
Communications
Specialty
Materials
Life
Sciences
All
Other
Total
$
150
$
562
$
101
$
1,380
Balance at December 31, 2015
Acquired goodwill(1)
Measurement period adjustment
Foreign currency translation adjustment
Balance at December 31, 2016
Acquired goodwill(2)
Measurement period adjustment(3)
Foreign currency translation adjustment
Balance at December 31, 2017
$
$
$
128
(2)
126
10
136
$
$
$
439
205
(4)
5
645
22
(1)
5
$
150
$
$
(4)
558
43
1
21
671
$
150
$
623
$
205
(4)
(4)
$
1,577
99
(28)
46
$
1,694
(3)
98
34
(28)
10
114
(1) The Company completed two acquisitions in the Optical Communications segment during the year ended December 31, 2016 with total purchase
price of $356 million.
(2) The Company completed two small acquisitions in the third quarter of 2017 which are reported in the Optical Communications and Life Sciences
segment and one small acquisition in the first quarter of 2017 which is reported in All Other.
(3) In the second quarter of 2017, the Company recorded measurement period adjustments of $28 million related to an acquisition completed in a
previous period.
Corning’s gross goodwill balance for the fiscal years ended December 31, 2017 and 2016 were $8.2 billion and $8.1 billion, respectively. Accumulated
impairment losses were $6.5 billion for the fiscal years ended December 31, 2017 and 2016, 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
$
$
382
884
1,266
2017
Accumulated
amortization
December 31,
Net
Gross
2016
Accumulated
amortization
Net
$
$
188
209
397
$
$
194
675
869
$
$
360
761
1,121
$
$
176
149
325
$
$
184
612
796
Amortized intangible assets are primarily related to the Optical
Communications and Life Sciences segments. The net carrying amount
of intangible assets increased by $73 million during the year ended
December 31, 2017, primarily due to acquisitions of $131 million and
foreign currency translation adjustments of $17 million offset by
amortization of $75 million.
Amortization expense related to these intangible assets is estimated
to be $72 million annually from 2018 to 2019, $71 million annually from
2020 through 2022.
64
CORNING INCORPORATED - 2017 Annual Report 11. Other Assets and Other Liabilities
Other assets follow (in millions):
Current assets:
Contingent consideration asset
Derivative instruments
Other current assets
Other current assets
Non-current assets:
Derivative instruments
Contingent consideration asset
South Korean tax deposits
Other non-current assets
Other assets
Notes to Consolidated Financial Statements
December 31,
2017
2016
$
$
$
$
300
197
494
991
68
319
547
934
$
$
$
$
435
370
805
146
289
274
562
1,271
South Korean tax deposits
Corning is currently appealing certain tax assessments resulting from audits performed by the South Korean tax authorities. The Company is required
to deposit the disputed tax amounts with the South Korean government as a condition of its appeal of these assessments. Because we believe that it
is more likely than not that we will prevail in the appeal process, we have recorded a non-current receivable for the amount on deposit with the South
Korean government.
Other liabilities follow (in millions):
Current liabilities:
Wages and employee benefits
Income taxes
Derivative instruments
Asbestos and other litigation
Other current liabilities
Other accrued liabilities
Non-current liabilities:
Defined benefit pension plan liabilities
Derivative instruments
Asbestos and other litigation
Investment in Hemlock Semiconductor Group(1)
Customer deposits
Other non-current liabilities
Other liabilities
December 31,
2017
2016
$
$
$
$
620
148
42
41
540
1,391
713
333
338
105
382
1,146
3,017
$
$
$
487
150
88
75
616
1,416
692
282
388
241
382
820
$
2,805
(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.
65
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
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 14 (Commitments, Contingencies and
Guarantees) 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 2017 and $197 million in 2016.
As glass is shipped to the customer, Corning will recognize revenue
and issue credit memoranda to reduce the amount of the customer
deposit liability, which are applied against customer receivables
resulting from the sale of glass. In 2017 and 2016, there were no credit
memoranda issued.
12. Debt
(In millions)
Current portion of long-term debt
Long-term debt
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
Yen-denominated debentures, .698%, due 2024
Yen-denominated debentures, .992%, due 2027
Debentures, 6.85%, due 2029
Debentures, callable, 7.25%, due 2036
Debentures, 4.70%, due 2037
Yen-denominated debentures, 1.583%, due 2037
Debentures, 5.75%, due 2040
Debentures, 4.75%, due 2042
Debentures, 4.375%, due 2057
Other, average rate 5.05%, due through 2042
Total long-term debt
Less current portion of long-term debt
Long-term debt
At December 31, 2017 and 2016, the weighted-average interest rate
on current portion of long-term debt was 1.5%. Corning did not have
outstanding commercial paper at December 31, 2017 and 2016.
66
December 31,
2017
2016
$
$
379
375
245
288
66
373
249
45
99
185
414
166
248
248
85
397
496
743
406
5,128
379
$
$
256
250
374
245
290
67
372
248
45
99
167
248
248
395
495
359
3,902
256
$
4,749
$
3,646
Based on borrowing rates currently available to us for loans with similar
terms and maturities, the fair value of long-term debt was $5.1 billion at
December 31, 2017 and $3.9 billion at December 31, 2016. The Company
measures the fair value of its long-term debt using Level 2 inputs based
primarily on current market yields for its existing debt traded in the
secondary market.
CORNING INCORPORATED - 2017 Annual Report The following table shows debt maturities by year at December 31, 2017 (in millions)*:
2018
2019
2020
$
379
$
254
$
305
2021
$
67
2022
$
Thereafter
381
$
3,769
Notes to Consolidated Financial Statements
* Excludes interest rate swap gains and bond discounts.
Debt Issuances and Retirements
2017
In the third quarter of 2017, Corning issued three Japanese yen-
denominated debt securities (the “Notes”), as follows:
• ¥21 billion 0.698% senior unsecured long term notes with a maturity
of 7 years;
• ¥47 billion 0.992% senior unsecured long term notes with a maturity
of 10 years; and
• ¥10 billion 1.583% senior unsecured long term notes with a maturity of
20 years.
The proceeds from these Notes were received in Japanese yen and
converted to U.S. dollars on the date of issuance. The net proceeds
received
in U.S. dollars, after deducting offering expenses, was
approximately $700 million. Payments of principal and interest on
the Notes will be in Japanese yen, or should yen be unavailable due to
circumstances beyond Corning’s control, a U.S. dollar equivalent.
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 2017, we
made no voluntary cash contributions to our domestic defined benefit
pension plan and $29 million to our international pension plans. 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. We are not subject to any mandatory contributions in 2018, and
anticipate making voluntary cash contributions of up to $105 million
to our U.S. qualified pension plan. We anticipate contributing up to
$27 million to our international pension plans in 2018. The amount
recognized in accumulated other comprehensive loss and not yet
reflected in periodic benefit cost expected to be amortized in next year’s
periodic benefit cost is a net actuarial loss of $5.9 million.
On a quarterly basis, Corning will recognize the transaction gains and
losses resulting from changes in the JPY/USD exchange rate in the Other
expense, net line of the Consolidated Statements of (Loss) Income. Cash
proceeds from the offerings and payments for debt issuance costs are
disclosed as financing activities, and cash payments to bondholders
for interest will be disclosed as operating activities, in the Consolidated
Statements of Cash Flows.
In the fourth quarter of 2017, Corning issued $750 million of 4.375% senior
unsecured notes that mature on November 15, 2057. The net proceeds of
$743 million will be used for general corporate purposes. We can redeem
these notes at any time, subject to certain terms and conditions.
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 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 attained for pre-65 retirees in
2010. 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.
67
CORNING INCORPORATED - 2017 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
2017
2016
2017
2016
2017
2016
Benefit obligation at beginning of year
$
3,887
$
3,715
$
3,289
$
3,161
$
598
$
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 return 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
$
$
$
$
$
$
$
$
$
92
126
2
208
3
(195)
65
4,188
3,225
413
46
1
(195)
49
3,539
3,539
(4,188)
(649)
76
(20)
(705)
(649)
300
22
322
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
$
$
$
$
$
$
$
$
$
66
112
1
222
3
(171)
3,522
2,765
395
14
1
(171)
3,004
3,004
(3,522)
(518)
(12)
(506)
(518)
285
25
310
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
26
14
1
(14)
(24)
65
666
460
18
32
(24)
49
535
535
(666)
(131)
76
(8)
(199)
(131)
15
(3)
12
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
554
24
13
84
(4)
(19)
(54)
598
442
75
21
(19)
(59)
460
460
(598)
(138)
35
(5)
(168)
(138)
37
(1)
36
The accumulated benefit obligation for defined benefit pension plans was $3.9 billion and $3.6 billion at December 31, 2017 and 2016, respectively.
68
CORNING INCORPORATED - 2017 Annual Report December 31,
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Plan participants’ contributions
Actuarial loss
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
Notes to Consolidated Financial Statements
Postretirement benefits
2017
2016
$
776
$
763
10
26
8
17
(50)
2
789
(789)
(789)
(40)
(749)
(789)
68
(12)
56
$
$
$
$
$
$
$
9
26
8
16
2
(50)
2
776
(776)
(776)
(39)
(737)
(776)
50
(15)
35
$
$
$
$
$
$
$
The following information is presented for pension plans where the projected benefit obligation as of December 31, 2017 and 2016 exceeded the fair
value of plan assets (in millions):
Projected benefit obligation
Fair value of plan assets
December 31,
2017
2016
$
$
3,843
3,173
$
$
3,607
2,787
In 2017, 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, 2017 and 2016 exceeded the
fair value of plan assets (in millions):
Accumulated benefit obligation
Fair value of plan assets
December 31,
2017
2016
$
$
3,555
3,025
$
$
3,285
2,786
In 2017, the fair value of plan assets exceeded the accumulated benefit obligation for one of the Taiwan, the United Kingdom, and the South Korea
pension plans.
69
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
The components of net periodic benefit cost for our employee retirement plans follow (in millions):
December 31,
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service
cost (credit)
Recognition of actuarial loss
Settlement charge
Total pension benefits
Domestic pension benefits
International pension benefits
2017
2016
2015
2017
2016
2015
2017
2016
2015
$
92
$
85
$ 90
$
126
(174)
5
21
124
(165)
6
67
1
144
(178)
6
165
66
112
(163)
6
18
$
61
111
(153)
6
55
1
$
64
$
126
(166)
7
162
26
14
(11)
(1)
3
$
24
13
(12)
12
$
26
18
(12)
(1)
3
Total net periodic benefit cost
$
70
$
118
$ 227
$
39
$
81
$ 193
$
31
$
37
$
34
Other changes in plan assets and
benefit obligations recognized
in other comprehensive income:
Settlements
Current year actuarial (gain) loss
$ (30)
Recognition of actuarial loss
Amortization of prior service
(cost) credit
Total recognized in other
comprehensive (income) loss
Service cost
Interest cost
Amortization of net (loss) gain
Amortization of prior service credit
Total net periodic benefit expense
$
(2)
84
(64)
(6)
$
(1)
$
191
(165)
(6)
$
(8)
(18)
(6)
(2)
63
(55)
(6)
$ 189
$
(22)
$
(162)
(7)
(3)
1
$
21
(9)
(1)
2
(3)
1
(21)
(5)
$ (56)
$
12
$
19
$
(32)
$
$
20
$ (24)
$
12
$
(1)
Postretirement benefits
2016
10
26
(1)
(3)
32
17
1
3
21
53
$
$
$
$
$
9
26
(1)
(4)
30
15
1
5
21
51
2017
$
$
$
$
$
2015
$
$
$
$
$
13
33
3
(7)
42
(96)
(3)
7
(92)
(50)
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Current year actuarial loss (gain)
Amortization of actuarial gain (loss)
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 2018 for its defined benefit
pension plans. The Company expects to recognize no net actuarial gain
and $3 million of net prior service credit as components of net periodic
postretirement benefit cost in 2018.
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.
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.
Corning last revised its mortality assumption for its U.S. benefits plans
at year-end 2014 subsequent to the Society of Actuaries publication of
the RP-2014 base mortality tables and MP-2014 mortality improvement
scales. At that time, a review of Corning’s actual mortality experience
for its retiree population was undertaken and consideration given to
Corning’s view of future mortality improvements. As a result of that
study, Corning adopted the RP-2014 base mortality tables (white collar
table for its non-union population and blue collar table for its union
population) with adjustments to those tables that would calibrate
for Corning’s experience to the extent credible. Based on Corning’s
view of future mortality experience, it adopted the BB-2D mortality
improvement scale as it felt that scale represented the best available
data to predict future improvement experience.
70
CORNING INCORPORATED - 2017 Annual Report In 2017, Corning refreshed its analysis of its own retiree mortality
experience. As a result of that review, Corning decided to update the
adjustment factors applied to its base mortality assumption (RP-2014
white collar table and RP-2014 blue collar table for non-union and
union participants respectively) to value its U.S. benefit plan obligations
as of December 31, 2017. In addition, as the Society of Actuaries has
published additional mortality improvement scales (MP-2015, MP-2016
and MP-2017), Corning has considered these revised improvement
scales in setting its future mortality improvement assumption. As of
December 31, 2017, Corning decided to update its future improvement
scale to the MP-2017 scale.
Furthermore, Corning has updated the mortality assumption applied
to disabled participants to be the RP-2014 disabled mortality base table
with future improvements using MP-2017.
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
Notes to Consolidated Financial Statements
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
2017
2016
2015
2017
2016
2015
2017
2016
2015
Discount rate
Rate of compensation increase
3.58%
3.50%
4.01%
3.50%
4.24%
3.50%
1.93%
2.81%
2.29%
3.97%
3.23%
3.92%
3.63%
4.07%
4.31%
The weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 follow:
Pension benefits
Domestic
International
Postretirement benefits
2017
2016
2015
2017
2016
2015
2017
2016
2015
Discount rate
Expected return on plan assets
Rate of compensation increase
4.01%
6.00%
3.50%
4.24%
6.00%
3.50%
4.00%
6.00%
3.50%
2.29%
3.97%
2.06%
3.23%
3.92%
2.89%
3.21%
2.97%
3.88%
4.06%
4.31%
4.00%
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
2017
2016
6.50%
5%
2024
6.75%
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
57
$
$
(3)
(47)
71
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
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:
(in millions)
Equity securities:
U.S. companies
International companies
Fixed income:
U.S. corporate bonds
Private equity(1)
Real estate(2)
Cash equivalents
Commodities(3)
Total
December 31, 2017
December 31, 2016
Total
(Level 1)
(Level 2)
(Level 3)
Total
(Level 1)
(Level 2)
(Level 3)
$
374
420
$
1,815
105
147
21
122
57
117
197
21
$
317
303
1,618
122
$
105
147
$
318
340
$
1,608
137
150
100
112
47
90
175
100
$
271
250
1,433
112
$
137
150
$ 3,004
$
392
$
2,360
$
252
$ 2,765
$
412
$
2,066
$
287
(1) This category includes venture capital, leverage buyouts and distressed debt limited partnerships invested primarily in U.S. companies. The inputs
are valued by discounted cash flow analysis and comparable sale analysis.
(2) This category includes industrial, office, apartments, hotels, infrastructure and retail investments which are limited partnerships predominately in
the U.S. The inputs are valued by discounted cash flow analysis; comparable sale analysis and periodic external appraisals.
(3) This category includes investments in energy, industrial metals, precious metals, agricultural and livestock primarily through futures, options, swaps
and exchange traded funds.
The following tables provide fair value measurement information for the Company’s major categories; 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:
(in millions)
Equity securities:
U.S. companies
International companies
Fixed income:
International
fixed income
Insurance contracts
Mortgages
Cash equivalents
December 31, 2017
December 31, 2016
Total
(Level 1)
(Level 2)
(Level 3)
Total
(Level 1)
(Level 2)
(Level 3)
$
8
29
440
$
367
$
8
29
73
2
16
40
40
407
$
110
$
$
2
16
18
$
7
26
64
$
321
$
7
26
385
2
40
$
460
$
40
361
$
97
$
$
2
2
Total
$
535
$
72
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
The tables below set forth a summary of changes in the fair value of the defined benefit plans Level 3 assets for the years ended December 31, 2017
and 2016:
(in millions)
Beginning balance at December 31, 2016
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, 2017
(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
Level 3 assets – Domestic
Level 3 assets – International
Year ended December 2017
Year ended December 2017
Private equity
Real estate
Mortgages
$
$
137
7
(39)
105
$
150
6
(9)
$
147
$
$
16
16
Insurance
contracts
$
$
2
2
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
Credit Risk
Liquidity Risk
60% of domestic plan assets are invested in long duration bonds. The
average rating for these bonds is A. These bonds are subject to credit
risk, such that a decline in credit ratings for the underlying companies,
countries or assets (for asset-backed securities) would result in a decline
in the value of the bonds. These bonds are also subject to default risk.
Currency Risk
14% 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.
8% 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, 2017 and 2016, the amount of Corning common stock
included in equity securities was not significant.
Cash Flow Data
In 2018, we expect to make voluntary cash contributions of approximately
$106 million to our domestic defined benefit plan and expect to make
voluntary contributions of approximately $27 million to our international
defined benefit plans.
The following reflects the gross benefit payments that are expected to be paid for our domestic and international defined benefit pension plans, the
postretirement medical and life plans and the gross amount of annual Medicare Part D federal subsidy expected to be received (in millions):
2018
2019
2020
2021
2022
2023-2027
Expected benefit payments
Domestic
pension benefits
International
pension benefits
Postretirement
benefits
Expected federal
subsidy payments
postretirement
benefits
$
$
$
$
$
$
191
195
201
210
215
1,180
$
$
$
$
$
$
23
28
30
30
33
192
$
$
$
$
$
$
41
41
41
41
42
209
$
$
$
$
$
$
3
3
3
3
3
16
Other Benefit Plans
We offer defined contribution plans covering employees meeting certain eligibility requirements. Total consolidated defined contribution plan expense
was $60 million, $53 million and $62 million for the years ended December 31, 2017, 2016 and 2015, respectively.
73
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
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
Subtotal of commitment expirations per period
Purchase obligations(2)
Capital expenditure obligations(3)
Total debt(4)
Interest on long-term debt(5)
Capital leases and financing obligations
Imputed interest on capital leases and
financing obligations
Minimum rental commitments
Amended PCC Plan
Uncertain tax positions(6)
Subtotal of contractual obligation payments due
by period(6)
Total commitments and contingencies(6)
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
$
$
$
198
75
10
283
265
583
4,749
3,437
406
233
563
220
54
$
$
$
88
62
10
160
142
583
375
195
4
19
74
35
$
$
$
3
9
12
72
550
359
9
40
122
85
$
$
$
1
1
21
437
314
11
39
91
100
$
$
$
106
4
110
30
3,387
2,569
382
135
276
$
$
10,510
10,793
$
$
1,427
1,587
$
$
1,237
1,249
$
$
1,013
1,014
$
$
6,779
6,889
(1) At December 31, 2017, $39 million of the $75 million was included in other accrued liabilities on our consolidated balance sheets.
(2) Purchase obligations are enforceable and legally binding obligations which primarily consist of raw material and energy-related take-or-pay contracts.
(3) Capital expenditure obligations primarily reflect amounts associated with our capital expansion activities.
(4) Total debt above is stated at maturity value, and excludes interest rate swap gains/losses and bond discounts.
(5) 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.
(6) At December 31, 2017, $54 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.
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, 2017 follow (in millions):
2018
$
74
2019
$
65
2020
$
57
2021
$
49
2022
$
42
2023 and
thereafter
$
276
Total rental expense was $135 million for 2017, $105 million for 2016 and
$94 million for 2015.
Product warranty liability accruals at December 31, 2017 and 2016
are insignificant.
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,
2017, 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.
Corning is a defendant in various lawsuits and is subject to various
claims that arise in the normal course of business, the most significant
of which are summarized below. 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.
74
CORNING INCORPORATED - 2017 Annual Report Pittsburgh Corning Corporation
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 (Loss) 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, 2017, the
liability was reduced to $220 million due to a cash payment of $70 million
in the second quarter of 2017, as required by the Plan. The total amount
of the payments due in years 2019 through 2022 is $185 million and is
classified as a non-current liability at December 31, 2017. The remaining
$35 million payment is due in the second quarter of 2018 and is classified
as a current liability.
Notes to Consolidated Financial Statements
Asbestos Litigation
Corning is a defendant in certain cases alleging personal injuries from
exposure to asbestos. Corning has been defending the claims in these
cases, which are covered in part by insurance, without material impact
to Corning to date. 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.
Asbestos Claims Insurance Litigation
Several of Corning’s insurers have commenced litigation in state courts
for a declaration of the rights and obligations of the parties under
insurance policies related to asbestos claims. Corning has resolved these
issues with all of its solvent insurers and some of its insolvent insurers.
Corning continues to seek resolution with the remaining insolvent
insurers. Management is unable to predict the outcome of the litigation
with these remaining insolvent insurers.
A summary of changes of the estimated litigation liability is as follows (in millions):
Fair Value of Asbestos Litigation Liability as of December 31, 2015
$
Contribution of PCC & PCE Equity Interest - Carrying Value
Gain on Contribution of Equity Interests
Other adjustments
Fair Value of Asbestos Litigation Liability as of December 31, 2016
$
Fixed payment
Other adjustments
Asbestos Litigation Liability as of December 31, 2017
$
Amended PCC Plan
Equity
Interests
238
(182)
(56)
0
0
Fixed Series
of Payments
$
290
$
$
290
(70)
220
$
$
$
Non-PCC
150
Total Asbestos
Litigation Liability
678
$
(1)
149
(2)
147
$
$
(182)
(56)
(1)
439
(70)
(2)
367
Dow Corning Chapter 11 Related Matters
Until June 1, 2016, Corning and The Dow Chemical Company (“Dow”) each
owned 50% of the common stock of Dow Corning Corporation (“Dow
Corning”). On May 31, 2016, Corning and Dow realigned their ownership
interest in Dow Corning. In connection with the realignment, Corning
retained its indirect ownership interest in the Hemlock Semiconductor
Group and acquired HS Upstate, Inc. (now known as Corning Research &
Development Corporation) which had been capitalized by Dow Corning
with $4.8 billion. Following the realignment, Corning no longer owns any
interest in Dow Corning. In connection with the realignment, Corning
agreed to indemnify Dow Corning for 50% of Dow Corning’s non-ordinary
course, pre-closing liabilities to the extent such liabilities exceed the
amounts reserved for them by Dow Corning as of May 31, 2016, including
two legacy Dow Corning matters: the Dow Corning Breast Implant
Litigation, and the Dow Corning Bankruptcy Pendency Interest Claims.
Dow Corning Breast Implant Litigation
In May 1995, Dow Corning filed for bankruptcy protection to address
pending and claimed liabilities arising from many thousands of breast
implant product lawsuits. On June 1, 2004, Dow Corning emerged from
Chapter 11 with a Plan of Reorganization (the “Plan”) which provided
for the settlement or other resolution of implant claims. The Plan also
includes releases for Corning and Dow as shareholders in exchange for
contributions to the Plan.
Under the terms of the Plan, Dow Corning has established and is
funding a Settlement Trust and a Litigation Facility to provide a means
for tort claimants to settle or litigate their claims. Inclusive of insurance,
Dow Corning has paid approximately $1.8 billion to the Settlement
Trust. As of May 31, 2016, Dow Corning had recorded a reserve for breast
implant litigation of $290 million. In the event Dow Corning’s total
liability for these claims exceeds such amount, Corning may be required
to indemnify Dow Corning for up 50% of the excess liability.
Dow Corning Bankruptcy Pendency Interest Claims
As a separate matter arising from the bankruptcy proceedings, Dow
Corning is defending claims asserted by a number of commercial creditors
who claim additional interest at default rates and enforcement costs,
during the period from May 1995 through June 2004. As of December 31,
2017, Dow Corning has estimated the liability to commercial creditors
to be within the range of $77 million to $260 million. As of May 31, 2016,
Dow Corning had recorded a reserve for these claims of $107 million. In
the event Dow Corning’s liability for these claims exceeds such amount,
Corning may be required to indemnify Dow Corning for up 50% of the
excess liability, subject to certain conditions and limits.
75
CORNING INCORPORATED - 2017 Annual Report Notes to 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 15 active hazardous waste
sites. Under the Superfund Act, all parties who may have contributed
any waste to a hazardous waste site, identified by the Agency, are jointly
and severally liable for the cost of cleanup unless the Agency agrees
otherwise. It is Corning’s policy to accrue for its estimated liability related
to Superfund sites and other environmental liabilities related to property
owned by Corning based on expert analysis and continual monitoring
by both internal and external consultants. At December 31, 2017 and
December 31, 2016, Corning had accrued approximately $38 million
(undiscounted) and $43 million (undiscounted), respectively, for the
estimated liability for environmental cleanup and related litigation.
Based upon the information developed to date, management believes
that the accrued reserve is a reasonable estimate of the Company’s
liability and that the risk of an additional loss in an amount materially
higher than that accrued is remote.
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 our portfolio with 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
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.
76
Corning uses a regression analysis to monitor the effectiveness of
its cash flow hedges both prospectively and retrospectively. Through
December 31, 2017, the hedge
ineffectiveness related to these
instruments was not material. Corning defers net gains and losses
related to effective portion of cash flow hedges into accumulated other
comprehensive loss on the consolidated balance sheet until such time
as the hedged item impacts earnings. At December 31, 2017, the amount
expected to be reclassified into earnings within the next 12 months is a
pre-tax net gain of $20 million.
Fair Value Hedges
In October of 2012, we entered into two interest rate swaps that are
designated as fair value hedges and economically exchange a notional
amount of $550 million of previously issued fixed rate long-term debt to
floating rate debt. Under the terms of the swap agreements, we pay the
counterparty a floating rate that is indexed to the one-month LIBOR rate.
Corning utilizes the long haul method for effectiveness analysis, both
retrospectively and prospectively. The analysis excludes the impact of
credit risk from the assessment of hedge effectiveness. The amount
recorded in current period earnings in the other (expense) income, net
component, relative to ineffectiveness, is nominal for the year ended
December 31, 2017.
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 (Loss) 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 average rate forwards and other derivative instruments.
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
The Company continued to extend its foreign exchange hedge program
in 2017 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, 2017, the U.S. dollar net notional value
of the yen average rate forwards program is $12 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,
2017 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, 2017 and December 31, 2016 (in millions):
Derivatives designated as
hedging instruments
Foreign exchange
contracts(1)
Notional amount
2017
2016
Balance
sheet location
Fair value
2017
2016
Balance
sheet location
Fair value
2017
2016
Asset derivatives
Liability derivatives
$
294
$
458
Other current
assets
Other assets
$
20
$
1
Other accrued
liabilities
1
$
(29)
Interest rate contracts
550
550
Other liabilities
$
(8)
(5)
Derivatives not designated
as hedging instruments
Foreign exchange
contracts, other
Translated earnings
contracts
599
890
14,275
16,711
Other current
assets
Other current
assets
Other assets
2
176
66
Other accrued
liabilities
11
Other accrued
liabilities
423
146 Other liabilities
(7)
(7)
(34)
(325)
(52)
(277)
(370)
Total derivatives
$
15,718
$
18,609
$
265
$
581
$
(374)
$
(1) Cash flow hedges with a typical duration of 24 months or less.
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
2017
2016
2015
(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)
2017
2016
2015
Cash flow hedges
Interest rate hedge
Foreign exchange contracts
Total cash flow hedges
$
$
38
38
$
$
(33)
(33)
$
$
(7)
(17)
(24)
Net sales
$
Cost of sales
Other (expense)
income, net
$
1
(12)
(2)
(13)
$
$
(36)
(2)
(34)
4
$
20
6
$
26
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
Translated earnings contract (loss) gain, net
Total undesignated
(1) There were no material amounts of ineffectiveness for 2017, 2016 and 2015.
Gain (loss) recognized in income
2017
2016
2015
$
$
(11)
(5)
(121)
(137)
$
$
4
(31)
(448)
(475)
$
$
8
(3)
80
85
77
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
16. Fair Value Measurements
Fair value standards under U.S. GAAP define fair value, establish a
framework for measuring fair value in applying generally accepted
accounting principles, and require disclosures about fair value
measurements. The standards also identify two kinds of inputs
that are used to determine the fair value of assets and liabilities:
observable and unobservable. Observable inputs are based on market
data or independent sources while unobservable inputs are based
on the Company’s own market assumptions. Once inputs have been
characterized, the inputs are prioritized into one of three broad
levels (provided in the table below) used to measure fair value. Fair
value standards apply whenever an entity is measuring fair value
under other accounting pronouncements that require or permit fair
value measurement and require the use of observable market data
when available.
The following tables provide fair value measurement information for the Company’s major categories of financial assets and liabilities measured on
a recurring basis:
(in millions)
Current assets:
Other current assets(1)(2)
Non-current assets:
Other assets(1)
Current liabilities:
Other accrued liabilities(1)(2)
Non-current liabilities:
Other liabilities(1)(2)
December 31, 2017
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
$
$
$
$
497
68
44
353
$
$
$
$
197
68
42
333
$
$
$
300
2
20
(1) Derivative assets and liabilities include foreign exchange contracts which are measured using observable quoted prices for similar assets
and liabilities.
(2) At December 31, 2017, other current assets, other accrued liabilities and other liabilities include contingent consideration that was measured using
unobservable (level 3) inputs, in the amounts of $300 million, $2 million and $22 million, respectively.
(in millions)
Current assets:
Short-term investments
Other current assets(1)
Non-current assets:
Other assets(1)(2)
Current liabilities:
Other accrued liabilities(1)
Non-current liabilities:
Other liabilities(1)(2)
December 31, 2016
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
$
$
$
$
435
464
88
282
$
$
$
$
435
175
88
282
$
289
(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
Ending balance
78
Level 3 Roll-Forward – Other Assets
2017
2016
$
$
289
11
300
$
$
246
43
289
CORNING INCORPORATED - 2017 Annual Report 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 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 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
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, 2017, 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.
Notes to Consolidated Financial Statements
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, 2017, the fair value of the contingent consideration in
2018 was $300 million.
There were no significant financial assets and liabilities measured on a
nonrecurring basis during the years ended December 31, 2017 and 2016.
Share Repurchases
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 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
on October 29, 2015 and received an initial delivery of approximately
53.1 million shares of Corning common stock 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.
79
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
2016 Share Repurchases
2017 Share Repurchases
In July 2016, Corning entered into an accelerated share repurchase
agreement (the “2016 ASR agreement”) under the 2015 Repurchase
Program to repurchase Corning’s common stock. Under the 2016 ASR
agreement, Corning made a $2.0 billion payment 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 December 2016, Corning’s Board of Directors approved a $4 billion
share repurchase program with no expiration (the “2016 Repurchase
Program”). In the second quarter of 2017, Corning entered into and
finalized an accelerated share repurchase agreement under which we
paid $500 million for a total of 17.1 million shares. In the third quarter of
2017, Corning entered into and finalized an additional accelerated share
repurchase agreement under which we paid $500 million for a total of
17.2 million shares. Collectively, these two agreements represent the
“2017 ASR agreements”.
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.
In addition to the 2017 ASR agreements, during the year ended
December 31, 2017, the Company repurchased 50.1 million shares of
common stock on the open market for approximately $1.4 billion,
resulting in a total of 84.4 million shares repurchased for approximately
$2.4 billion during 2017.
The following table presents changes in capital stock for the period from January 1, 2015 to December 31, 2017 (in millions):
Common stock
Treasury stock
Shares
Par value
Shares
Cost
1,672
9
1,681
10
1,691
17
$
836
(398)
$
(6,727)
4
$
840
6
(151)
(2)
(551)
(214)
(1)
(2,978)
(19)
$
(9,725)
(2)
(4,409)
(16)
$
846
(765)
$
(14,152)
8
(84)
(1)
(850)
(2)
(2,462)
(17)
$
(16,633)
1,708
$
854
Balance at December 31, 2014
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
Shares issued to benefit plans and for option exercises
Shares purchased for treasury
Other, net
Balance at December 31, 2017
80
CORNING INCORPORATED - 2017 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, 2014
$
(581)
$
(709)
$
(15)
$
(2)
$
(1,307)
Other comprehensive (loss) income
before reclassifications(4)
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(5)
Amounts reclassified from accumulated
other comprehensive income (loss)(2)
Equity method affiliates(3)(7)
Net current-period other comprehensive
(loss) income
Balance at December 31, 2016
Other comprehensive income
before reclassifications(6)
Amounts reclassified from accumulated
other comprehensive income (loss)(2)
Equity method affiliates(3)
Net current-period other comprehensive
(loss) income
Balance at December 31, 2017
(487)
(103)
(590)
(1,171)
(89)
(15)
(104)
(1,275)
711
35
746
(529)
$
$
$
$
$
(59)
105
75
121
(588)
(63)
40
264
241
(347)
13
17
30
(317)
$
$
$
$
$
1
1
(14)
(2)
(1)
(3)
(17)
14
14
(3)
$
$
$
$
$
(18)
(20)
2
(36)
(38)
(21)
22
1
(37)
33
11
44
7
$
$
$
$
$
(564)
86
(26)
(504)
(1,811)
(175)
62
248
135
(1,676)
757
42
35
834
(842)
$
$
$
$
$
(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 $86 million, including $45 million related to the foreign currency translation adjustments, $35 million related
to the retirement plans component and $6 million related to the hedges component.
(5) 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.
(6) Amounts are net of total tax expense of $97 million, including $88 million related to the foreign currency translation adjustments, $5 million related
to the hedges component and $4 million related to the retirement plans 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.
81
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
(In millions)
Reclassifications Out of Accumulated Other Comprehensive Income (AOCI) by Component(1)
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,
2016
2015
2017
$
$
$
$
$
$
$
(20)
(2)
(22)
5
(17)
(3)
(11)
(14)
1
(12)
(2)
(13)
2
(11)
(42)
$
$
$
$
$
(62)
(1)
(63)
23
(40)
4
(36)
(2)
(34)
12
(22)
(62)
$
$
$
$
$
$
$
Affected line item
in the consolidated
statements of income
(168)
1
(2)
(2)
(167) Total before tax
62 Tax benefit
(105) Net of tax
(1) Other income (expense), net
Tax expense
(1) Net of tax
20 Sales
6 Cost of sales
Other expense (income), net
26 Total before tax
(6) Tax benefit (expense)
20 Net of tax
(86) 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. (Loss) Earnings Per Common Share
Basic (loss) 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 (loss) 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 (loss) earnings per common share from operations follows (in millions, except
per share amounts):
Net (loss) income attributable to Corning Incorporated
Less: Series A convertible preferred stock dividend
Net (loss) income available to common stockholders - basic
Plus: Series A convertible preferred stock dividend
Net (loss) 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(1)
Weighted-average common shares outstanding - diluted
Basic (loss) earnings per common share
Diluted (loss) earnings per common share
Anti-dilutive potential shares excluded from diluted (loss) earnings per common share:
Series A convertible preferred stock dividend(1)
Employee stock options and awards
Accelerated share repurchase forward contract
Total
$
$
$
$
Years ended December 31,
2017
2016
2015
(497)
$
3,695
$
$
$
$
98
(595)
(595)
895
895
(0.66)
(0.66)
115
13
128
98
3,597
98
3,695
1,020
9
115
1,144
3.53
3.23
15
15
$
$
$
1,339
98
1,241
98
1,339
1,219
9
115
1,343
1.02
1.00
22
15
37
(1) For the year ended December 31, 2017, the Series A preferred stock was anti-dilutive and therefore excluded from the calculation of diluted (loss)
earnings per share.
82
CORNING INCORPORATED - 2017 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, 2017, there
were approximately 65 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 that are expected to ultimately vest
is recognized as expense over the requisite service periods. The number
of options expected to vest equals the total options granted less an
estimation of the number of forfeitures expected to occur prior to
vesting. The forfeiture rate is calculated based on 15 years of historical
data and is adjusted if actual forfeitures differ significantly from the
original estimates. The effect of any change in estimated forfeitures
would be recognized through a cumulative adjustment that would be
included in compensation cost in the period of the change in estimate.
Total share-based compensation cost of $46 million, $42 million and
$46 million was disclosed in operating activities on the Company’s
Consolidated Statements of Cash Flows for the years ended December 31,
2017, 2016 and 2015, respectively. The income tax benefit realized from
share-based compensation was not significant for the years ended
December 31, 2017, 2016 and 2015. Refer to Note 6 (Income Taxes).
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, 2017:
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, 2016
Granted
Exercised
Forfeited and expired
Options outstanding as of December 31, 2017
Options expected to vest as of December 31, 2017
Options exercisable as of December 31, 2017
31,507
1,507
(14,615)
(265)
18,134
18,098
13,487
$
19.40
27.01
21.13
23.22
18.59
18.58
17.14
4.63
4.62
3.38
$
243,055
242,773
200,246
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 29, 2017,
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, 2017,
was approximately 13 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, 2017, 2016 and 2015 was $8.40, $6.31 and $7.99,
respectively. The total fair value of options that vested during the years
ended December 31, 2017, 2016 and 2015 was approximately $13 million,
$22 million and $36 million, respectively. Compensation cost related to
stock options for the years ended December 31, 2017, 2016 and 2015, was
approximately $12 million, $11 million and $14 million, respectively.
As of December 31, 2017, 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 1.8 years.
Proceeds received from the exercise of stock options were $309 million
for the year ended December 31, 2017, 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,
2017, 2016 and 2015 was approximately $103 million, $53 million and
$48 million, respectively.
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.
83
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
The following inputs were used for the valuation of option grants under our Stock Option Plans:
Expected volatility
Weighted-average volatility
Expected dividends
Risk-free rate
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, 2016, and changes which occurred during the year ended
December 31, 2017:
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.
2017
2016
2015
32.4-36.1%
37.1-43.1%
43.6-44.9%
36.1%
41.0%
44.6%
1.98-2.28%
2.28-2.94%
1.92-2.68%
2.1-2.3%
7.4-7.4
0.6-0.6%
1.4-2.1%
7.4-7.4
0.6-0.6%
1.9-2.1%
7.2-7.2
0.6-0.6%
Shares
(000’s)
Weighted-average
grant-date fair value
Non-vested shares and share
units at December 31, 2016
Granted
Vested
Forfeited
Non-vested shares and share
units at December 31, 2017
4,640
1,859
(1,457)
(109)
4,933
$
20.15
28.16
20.48
22.72
$
23.02
As of December 31, 2017, there was approximately $41 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 2.6 years. The total fair value of time-
based restricted stock that vested during the years ended December 31,
2017, 2016 and 2015 was approximately $30 million, $27 million and
$32 million, respectively. Compensation cost related to time-based
restricted stock and restricted stock units was approximately $34 million,
$31 million and $32 million for the years ended December 31, 2017, 2016
and 2015, 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 the pharmaceutical technologies
business and 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.
84
CORNING INCORPORATED - 2017 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, 2017
Net sales
Depreciation(1)
Amortization of purchased intangibles
Research, development and engineering expenses(2)
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, 2016
Net sales
Depreciation(1)
Amortization of purchased intangibles
Research, development and engineering expenses(2)
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)
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,997
534
88
(394)
831
134
8,662
795
3,238
598
45
(372)
935
41
8,032
464
3,086
605
105
(499)
1,095
43
8,344
594
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,545
193
48
174
(188)
341
2
2,599
505
3,005
175
35
147
(129)
245
(1)
2,010
245
2,980
163
32
138
(115)
237
1
1,783
171
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,106
124
113
(69)
127
1,402
157
1,032
129
102
(65)
133
32
1,267
97
1,053
125
93
(78)
161
32
1,288
117
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,403
129
152
(124)
249
3
2,155
223
1,124
109
126
(85)
174
1,604
120
1,107
112
113
(85)
167
1,407
88
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
879
52
22
22
(31)
64
538
42
839
58
20
24
(28)
58
504
39
821
60
20
23
(30)
61
514
32
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
186 $ 10,116
45 $
1,077
5 $
75
211 $
760
114 $
(692)
(229) $ 1,383
140 $
279
824 $ 16,180
156 $ 1,878
152 $ 9,390
50 $
1,119
8 $
191 $
63
635
114 $
(565)
(240) $ 1,305
252 $
324
750 $ 14,167
56 $
1,021
64 $
9,111
43 $
1,108
1 $
53
186 $
658
89 $
(718)
(202) $
1,519
261 $
337
738 $ 14,074
57 $ 1,059
(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.
85
CORNING INCORPORATED - 2017 Annual Report Notes to Consolidated Financial Statements
A reconciliation of reportable segment net income (loss) to consolidated net income follows (in millions):
Net income of reportable segments
Net loss of All Other
Unallocated amounts:
Net financing costs(1)
Share-based compensation expense
Exploratory research
Corporate contributions
Gain on realignment of equity investment
Equity in earnings of affiliated companies, net of impairments(2)
Unrealized loss on translated earnings contracts
Resolution of Department of Justice investigation
Income tax (provision) benefit
Other corporate items
Net (loss) income
Years ended December 31,
2017
$
1,612
(229)
(110)
(46)
(98)
(36)
353
(391)
(1,462)
(90)
(497)
$
2016
$
1,545
(240)
(107)
(42)
(107)
(49)
2,676
292
(649)
(98)
568
(94)
2015
$
1,721
(202)
(111)
(46)
(109)
(52)
291
(573)
571
(151)
$
3,695
$
1,339
(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 2017 and 2016, and Dow Corning in 2015.
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,
2017
2016
2015
$
15,356
$
13,417
$
13,336
824
5,315
61
1,628
4,310
750
6,070
12
1,681
5,969
738
5,488
1,638
1,692
5,635
$
27,494
$
27,899
$
28,527
(1) Includes current corporate assets, primarily cash, short-term investments, current portion of long-term derivative assets and deferred taxes.
(2) Primarily represents corporate equity and cost basis investments in 2017 and 2016, and Dow Corning in 2015. Asset balance does not include equity
method affiliate liability balance of $105 and $241 for Hemlock Semiconductor Group in 2017 2016, respectively.
(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, 2017, the following number of customers, which individually accounted for 10% or more of each segment’s sales,
represented the following concentration of segment sales:
• In the Display Technologies segment, three customers accounted for 62% of total segment sales.
• In the Optical Communications segment, one customer accounted for 19% of total segment sales.
• In the Environmental Technologies segment, three customers accounted for 81% of total segment sales.
• In the Specialty Materials segment, three customers accounted for 58% of total segment sales.
• In the Life Sciences segment, two customers accounted for 47% of total segment sales.
86
CORNING INCORPORATED - 2017 Annual Report Selected financial information concerning the Company’s product lines and reportable segments follow (in millions):
Notes to Consolidated Financial Statements
Revenues from External Customers
Display Technologies
Optical Communications
Carrier network
Enterprise network
Total Optical Communications
Environmental Technologies
Automotive and other
Diesel
Total Environmental Technologies
Specialty Materials
Corning Gorilla Glass
Advanced optics and other specialty glass
Total Specialty Materials
Life Sciences
Labware
Cell culture products
Total Life Science
All Other
Years Ended December 31,
2017
2016
2015
$
2,997
$
3,238
$
3,086
2,720
825
3,545
627
479
1,106
1,044
359
1,403
524
355
879
186
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
$
10,116
$
9,390
$
9,111
Information concerning principal geographic areas was as follows (in millions):
North America
United States
Canada
Mexico
Total North America
Asia Pacific
Japan
Taiwan
China
Korea
Other
Total Asia Pacific
Europe
Germany
Other
Total Europe
All Other
Total
2017
2016
2015
Net sales(2)
Long-lived
assets(1)
Net sales(2)
Long-lived
assets(1)
Net sales(2)
Long-lived
assets(1)
$
3,146
$
6,402
$
2,625
$
6,473
$
2,719
$
8,241
287
27
3,460
455
846
2,230
1,286
378
5,195
426
701
1,127
334
138
174
6,714
1,015
2,357
1,955
3,858
160
9,345
201
1,548
1,749
46
282
50
2,957
450
840
2,083
1,444
363
5,180
363
617
980
273
142
134
6,749
1,008
2,347
1,140
3,413
167
8,075
154
1,354
1,508
44
244
37
3,000
440
841
1,869
1,501
331
4,982
326
565
891
238
144
135
8,520
1,160
2,301
1,036
3,552
98
8,147
189
1,297
1,486
36
$
10,116
$
17,854
$
9,390
$
16,376
$
9,111
$
18,189
(1) Long-lived assets primarily include investments, plant and equipment, goodwill and other intangible assets. In 2015, assets in the U.S. include the
investment in Dow Corning.
(2) Net sales are attributed to countries based on location of customer.
87
CORNING INCORPORATED - 2017 Annual Report Valuation Accounts and Reserves
(in millions)
Year ended December 31, 2017
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
$
$
$
$
59
270
325
5
$
$
$
1
241
75
$
$
$
55
3
5
$
$
$
60
456
397
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
88
CORNING INCORPORATED - 2017 Annual Report Quarterly Operating Results
(unaudited) (In millions, except per share amounts)
2017
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 income (loss) attributable to Corning
Incorporated
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
$
$
$
$
$
$
$
2,375
957
80
66
86
0.07
0.07
$
$
$
$
$
$
$
2,497
985
37
(153)
439
0.46
0.42
$
$
$
$
$
$
$
2,607
1,056
31
(89)
390
0.41
0.39
$
$
$
$
$
$
$
2,637
1,034
213
(1,978)
(1,412)
(1.66)
(1.66)
$
$
$
$
$
$
$
10,116
4,032
361
(2,154)
(497)
(0.66)
(0.66)
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 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
89
CORNING INCORPORATED - 2017 Annual Report “Safe Harbor” Statement
Under the Private Securities Litigation Reform Act of 1995
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 including
the Tax Cuts and Jobs Act of 2017;
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.
Annual Meeting
The annual meeting of shareholders will be held on Thursday,
April 26, 2018, in Corning, New York. A formal notice of the
meeting and a proxy statement will be mailed to shareholders
on or about March 16, 2018. 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/2018-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 Incorpo-
rated, One Riverfront Plaza, Corning, NY 14831.
Additional Information
A copy of Corning’s 2017 Annual Report on Form 10-K filed with
the Securities and Exchange Commission (SEC) is available
without charge to shareholders upon written request to
Corporate Secretary, Corning Incorporated, One Riverfront Plaza,
Corning, NY 14831. The annual report, proxy statement, Form
10-K, and other information can also be accessed electronically
through the Investor Relations page of the Corning website at
www.corning.com.
Investor 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 3505000
Louisville, KY 40233-5000
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 2017 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.
Wendell Weeks photo by Robert Barker, Cornell University.
Corning is an equal opportunity employer.
Printed in the U.S.A.
Board of Directors
Management Committee
Donald W. Blair
Retired Executive Vice President
& Chief Financial Officer
James P. Clappin
Executive Vice President,
Corning Glass Technologies
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 & Vice Provost
Cornell University
New York City Tech Campus
(1) (4)
Kurt M. Landgraf
President
Washington College
(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)
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
& Product Development,
Specialty Materials
Thomas Appelt
President & General Manager
Corning International
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
Stefan Becker
Vice President
& Operations Controller
Michael A. Bell
Senior Vice President
& General Manager,
Optical Connectivity Solutions,
Corning Optical Communications
Manufacturing Technology
Gary S. Calabrese
Senior Vice President
& Director,
Global Research
Thomas G. Capek
Vice President
& Chief Engineer,
& Engineering
Cheryl C. Capps
Vice President,
Global Supply Chain
Mark S. Clark
Vice President
Laura J. Coleman
Vice President,
Litigation
Kevin G. Corliss
Vice President,
& Chief Information Officer
Global Employee Relations
& Chief Compliance Officer
Charles R. Craig
Senior Vice President,
Science & Technology,
Administration & Operations
Bernhard Deutsch
Vice President
& General Manager,
Optical Fiber & Cable
Michael W. Donnelly
Vice President,
Business Services
John D. Duke
Vice President
& General Manager,
Corning Glass Microsystems
Richard M. Eglen
Vice President
& General Manager,
Life Sciences
Li Fang
President & General Manager,
Corning Greater China
Vaughn M. Hall Jr.
International Vice President
of Operations,
Corning Glass Technologies
Kimberly S. Hartwell
Senior Vice President
& Chief Commercial Officer,
Corning Optical Communications
Stuart Hoiness
Senior Vice President,
Data Center & OEM,
Corning Optical Communications
Timothy L. Hunt
Vice President & Director,
Corporate Product
& Process Development
John R. Igel
Vice President,
Optical Fiber & Cable
Linda E. Jolly
Vice President
& Corporate Secretary
William L. Juan
Vice President,
Commercial & International Law
Wilfred M. Kenan Jr.
Vice President
& Manufacturing Manager,
Environmental Technologies
Michael P. Kunigonis Jr.
Vice President
& General Manager,
Automotive Glass Solutions
Judith A. Lemke
Vice President,
Tax
Thomas H. Lynch
Vice President
& Commercial Director,
Environmental Technologies
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
Stephen C. Propper
Vice President
& Treasurer
Timothy J. Regan
Senior Vice President,
Global Government Affairs
Edward A. Schlesinger
Vice President
& Corporate Controller
John M. Sharkey
Vice President
& Chief of Staff to the CEO
Andrew E. Tometich
Senior Vice President
& General Manager,
Specialty Materials
Ronald L. Verkleeren
Vice President
& General Manager,
Corning Pharmaceutical
Technologies
Lydia Kenton Walsh
Vice President,
Commercial Operations,
Life Sciences
Curt Weinstein
Vice President
& General Manager,
Advanced Optics
John Z. Zhang
General Manager,
Corning Display Technologies
Board Committees
(1) Audit; (2) Compensation; (3) Corporate Relations; (4) Finance; (5) Nominating & Corporate Governance; (6) Executive
Board of Directors
Management Committee
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 & Vice Provost
Cornell University
New York City Tech Campus
(1) (4)
Kurt M. Landgraf
President
Washington College
(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)
James P. Clappin
Executive Vice President,
Corning Glass Technologies
Martin J. Curran
Executive Vice President
& Innovation Officer
Jeffrey W. Evenson
Senior Vice President
& Chief Strategy Officer
Lisa Ferrero
Senior Vice President
& Chief Administrative Officer
Clark S. Kinlin
Executive Vice President,
Corning Optical Communications
Lawrence D. McRae
Vice Chairman & Corporate
Development Officer
David L. Morse
Executive Vice President
& Chief Technology Officer
Eric S. Musser
Executive Vice President,
Corning Technologies
& International
Christine M. Pambianchi
Senior Vice President,
Human Resources
Lewis A. Steverson
Senior Vice President
& General Counsel
R. Tony Tripeny
Senior Vice President
& Chief Financial Officer
Wendell P. Weeks
Chairman of the Board, Chief
Executive Officer & President
Other Officers
Jaymin Amin
Vice President, Technology
& Product Development,
Specialty Materials
Thomas Appelt
President & General Manager
Corning International
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
Stefan Becker
Vice President
& Operations Controller
Michael A. Bell
Senior Vice President
& General Manager,
Optical Connectivity Solutions,
Corning Optical Communications
Gary S. Calabrese
Senior Vice President
& Director,
Global Research
Thomas G. Capek
Vice President
& Chief Engineer,
Manufacturing Technology
& Engineering
Cheryl C. Capps
Vice President,
Global Supply Chain
Mark S. Clark
Vice President
& Chief Information Officer
Laura J. Coleman
Vice President,
Litigation
Kevin G. Corliss
Vice President,
Global Employee Relations
& Chief Compliance Officer
Charles R. Craig
Senior Vice President,
Science & Technology,
Administration & Operations
Bernhard Deutsch
Vice President
& General Manager,
Optical Fiber & Cable
Michael W. Donnelly
Vice President,
Business Services
John D. Duke
Vice President
& General Manager,
Corning Glass Microsystems
Richard M. Eglen
Vice President
& General Manager,
Life Sciences
Li Fang
President & General Manager,
Corning Greater China
Vaughn M. Hall Jr.
International Vice President
of Operations,
Corning Glass Technologies
Kimberly S. Hartwell
Senior Vice President
& Chief Commercial Officer,
Corning Optical Communications
Stuart Hoiness
Senior Vice President,
Data Center & OEM,
Corning Optical Communications
Timothy L. Hunt
Vice President & Director,
Corporate Product
& Process Development
John R. Igel
Vice President,
Optical Fiber & Cable
Linda E. Jolly
Vice President
& Corporate Secretary
William L. Juan
Vice President,
Commercial & International Law
Wilfred M. Kenan Jr.
Vice President
& Manufacturing Manager,
Environmental Technologies
Michael P. Kunigonis Jr.
Vice President
& General Manager,
Automotive Glass Solutions
Judith A. Lemke
Vice President,
Tax
Thomas H. Lynch
Vice President
& Commercial Director,
Environmental Technologies
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
Stephen C. Propper
Vice President
& Treasurer
Timothy J. Regan
Senior Vice President,
Global Government Affairs
Edward A. Schlesinger
Vice President
& Corporate Controller
John M. Sharkey
Vice President
& Chief of Staff to the CEO
Andrew E. Tometich
Senior Vice President
& General Manager,
Specialty Materials
Ronald L. Verkleeren
Vice President
& General Manager,
Corning Pharmaceutical
Technologies
Lydia Kenton Walsh
Vice President,
Commercial Operations,
Life Sciences
Curt Weinstein
Vice President
& General Manager,
Advanced Optics
John Z. Zhang
General Manager,
Corning Display Technologies
Board Committees
(1) Audit; (2) Compensation; (3) Corporate Relations; (4) Finance; (5) Nominating & Corporate Governance; (6) Executive
Corning Incorporated
One Riverfront Plaza
Corning, NY 14831-0001
U.S.A.
www.corning.com
02AR40017EN
© 2018 Corning Incorporated. All Rights Reserved.