NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies
Basis of Presentation
In these notes, the terms “Corning,” “Company,” “we,” “us,” or “our” mean Corning Incorporated and its subsidiary companies.
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been omitted or condensed. These interim consolidated financial statements should be read in conjunction with Corning’s consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”).
The unaudited consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. The results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.
On January 1, 2017, Corning adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, the impacts of which include the recording of cumulative tax benefits of
$233
million in beginning retained earnings and cash flow reclassifications that were not significant.
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.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification (“ASC”) Topic 606. The new revenue recognition standard relates to revenue from contracts with customers, which, along with amendments issued in 2015 and 2016, will supersede nearly all current U.S. GAAP guidance on this topic and eliminate industry-specific guidance. The underlying principle is to use a five-step analysis of transactions to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Corning has evaluated its material contracts, and has concluded that the impact of adopting the standard on its financial statements and related disclosure will not be material. The standard, as amended, will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. We expect to adopt the standard on a modified retrospective basis in 2018.
Corning’s equity affiliates are currently evaluating their material contracts, and have not concluded on the potential impact of adopting ASU 2014-09 on their financial statements and related disclosure.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes all existing guidance on accounting for leases in ASC Topic 840. ASU 2016-02 is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. ASU 2016-02 will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. ASU 2016-02 is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. We are currently assessing the potential impact of adopting ASU 2016-02 on our financial statements and related disclosures.
In 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 are currently assessing the potential impact of adopting ASU 2016-15 on our financial statements and related disclosures, but the effect is not expected to be material.
© 2017 Corning Incorporated. All Rights Reserved.
7
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which reduces the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, recognition of the income tax consequence was not recognized until the asset was sold to an outside party. This amendment should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. ASU 2016-16 is effective for annual periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial statements. We are currently evaluating the impact of ASU 2016-16 on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350). ASU 2017-04 simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual, or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should be applied on a prospective basis. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has decided to early adopt 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 are currently evaluating the impact of ASU 2017-07 on our consolidated financial statements and related disclosures.
2. Restructuring, Impairment and Other Charges
2016 Activity
For the three months ended March 31, 2016
, we recorded charges of
$
80
million, pre-tax, for employee related costs, asset disposals, and exit costs associated with some minor restructuring activities in all of the segments.
Cash payments for employee-related and exit activity related to the 2016 restructuring activities were substantially completed in 2016.
3. Commitments, Contingencies and Guarantees
Asbestos Claims
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.
The remaining $290 million liability is for the series of fixed payments required by the Plan.
At December 31, 2016 and March 31, 2017, the total amount of the payments due in years 2018 through 2022 is
$220
million and is classified as a non-current liability. The remaining
$70
million payment
is
due in the second quarter of 2017
and
is classified as a current liability.
© 2017 Corning Incorporated. All Rights Reserved.
8
Non-PCC Asbestos Claims Insurance Litigation
Corning is a defendant in certain cases alleging injuries from asbestos unrelated to PCC (the “non-PCC asbestos claims”) which had been stayed pending the confirmation of the Plan. The stay was lifted on August 25, 2016. Corning previously established a
$150
million reserve for these non-PCC asbestos claims. The estimated reserve represents the undiscounted projection of claims and related legal fees over the next
20
years. The amount may need to be adjusted in future periods as more data becomes available; however, we cannot estimate any lesser or greater liabilities at this time. At December 31, 2016 and March 31, 2017, the amount of the reserve for these non-PCC asbestos claims was
$149
million.
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 Corning’s asbestos claims
. Corning has resolved these issues with a majority of its relevant insurers, and is vigorously contesting these cases with the remaining relevant insurers. Management is unable to predict the outcome of the litigation with these remaining insurers.
Other Commitments and Contingencies
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, any third party guarantees provided by Corning are limited to certain financial guarantees including stand-by letters of credit and performance bonds, and the incurrence of contingent liabilities in the form of purchase price adjustments related to attainment of milestones. When provided, these guarantees have various terms, and none of these guarantees are individually significant.
As of
March 31, 2017
and
December 31, 2016
, contingent guarantees totaled a notional value of
$
283
million and
$
267
million, respectively. We believe a significant majority of these contingent guarantees will expire without being funded. We also were contingently liable for purchase obligations of
$
243
million and
$
231
million, at
March 31, 2017
and
December 31, 2016
, respectively.
Product warranty liability accruals were considered insignificant at
March 31, 2017
and
December 31, 2016
.
Corning is a defendant in various la
wsuits, including environmental and
product-related suits, and is subject to various claims that arise in the normal course of business. In the opinion of management, the likelihood that the ultimate disposition of these matters will have a material adverse effect on Corning’s consolidated financial position, liquidity, or results of operations, is remote. Other than certain asbestos related claims, there are no other material loss contingencies related to litigation.
Corning has been named by the Environmental Protection Agency (“the Agency”) under the Superfund Act, or by state governments under similar state laws, as a potentially responsible party for
17
active hazardous waste sites. Under the Superfund Act, all parties who may have contributed any waste to a hazardous waste site, identified by the Agency, are jointly and severally liable for the cost of cleanup unless the Agency agrees otherwise. It is Corning’s policy to accrue for its estimated liability related to Superfund sites and other environmental liabilities related to property owned by Corning based on expert analysis and continual monitoring by both internal and external consultants. At
March 31, 2017
and
December 31, 2016
, Corning had accrued approximately
$
42
million (undiscounted) and
$
43
million (undiscounted), respectively, for the estimated liability for environmental cleanup and related litigation. Based upon the information developed to date, management believes that the accrued reserve is a reasonable estimate of the Company’s liability and that the risk of an additional loss in an amount materially higher than that accrued is remote.
The ability of certain subsidiaries and affiliated companies to transfer funds is limited by provisions of foreign government regulations, affiliate agreements and certain loan agreements. At
March 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.
4. Debt
Based on borrowing rates currently available to us for loans with similar terms and maturities, the fair value of long-term debt was
$3.9
billion at
March 31, 2017
and
December 31, 2016
, compared to recorded book values of $3.7 billion at
March 31, 2017
and
$3.6 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 did not have outstanding commercial paper at
March 31, 2017 and December 31, 2016.
© 2017 Corning Incorporated. All Rights Reserved.
9
5. Income Taxes
Our benefit for income taxes and the related effective income tax
benefit
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Benefit for income taxes
|
|
$
|
66
|
|
$
|
304
|
Effective tax benefit
|
|
|
330.0%
|
|
|
(45.2%)
|
For the three months ended March 31, 2017, the effective income tax
benefit
differed from the U.S. statutory rate of
35%
primarily due to the following benefits:
|
·
|
|
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 impact from domestic losses attributable to foreign exchange and losses on translated earnings contracts.
|
For the three months ended March 31, 2016, the effective income tax
benefit
differed from the U.S. statutory rate of
35%
primarily due to the following benefits:
|
·
|
|
Rate differences on income (loss) of consolidated foreign companies, including the benefit of excess foreign tax credits resulting from the inclusion of foreign earni
ngs in U.S. income;
|
|
·
|
|
The impact of equity in earnings of nonconsolidated affiliates reported in the f
inancial statements, net of tax; and
|
|
·
|
|
The impact from domestic losses attributable to foreign exchange and losses on translated earnings contracts.
|
Corning continues to indefinitely reinvest substantially all of its foreign earnings, with the exception of an immaterial amount of current earnings that have very low or no tax cost associated with their repatriation.
O
ur current analysis indicates that we have sufficient U.S. liquidity, including borrowing capacity, to fund foreseeable U.S. cash needs without requiring the repatriation of foreign cash. One time or unusual items may impact our ability or intent to keep our foreign earnings and cash indefinitely reinvested. While it remains impracticable to calculate the tax cost of repatriating our total unremitted foreign earnings, such cost could be material to the results of operations of Corning in a particular period.
© 2017 Corning Incorporated. All Rights Reserved.
10
6. Earnings
(Loss)
per Common Share
The following table sets forth the computation of basic and diluted earnings (loss) per common share (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Net income (loss) attributable to Corning Incorporated
|
|
$
|
86
|
|
$
|
(368)
|
Less: Series A convertible preferred stock dividend
|
|
|
24
|
|
|
24
|
Net income (loss) available to common stockholders – basic
|
|
|
62
|
|
|
(392)
|
Net income (loss) available to common stockholders – diluted
|
|
$
|
62
|
|
$
|
(392)
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding – basic
|
|
|
925
|
|
|
1,103
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Stock options and other dilutive securities
|
|
|
11
|
|
|
|
Weighted-average common shares outstanding – diluted
|
|
|
936
|
|
|
1,103
|
Basic earnings (loss) per common share
|
|
$
|
0.07
|
|
$
|
(0.36)
|
Diluted earnings (loss) per common share
|
|
$
|
0.07
|
|
$
|
(0.36)
|
|
|
|
|
|
|
|
Antidilutive potential shares excluded from
diluted earnings per common share:
|
|
|
|
|
|
|
Series A convertible preferred stock (1)
|
|
|
115
|
|
|
115
|
Employee stock options and awards
|
|
|
2
|
|
|
47
|
Total
|
|
|
117
|
|
|
162
|
|
(1)
|
|
In the three months ended March 31, 2017 and 2016, the Series A convertible preferred stock was anti-dilutive and therefore excluded from the calculation of diluted earnings per share.
|
7. Available-for-Sale Investments
At March 31, 2017, the company held
$28
million in asset-backed securities which are classified as short-term investment because we expect to sell them within the next twelve months. At December 31, 2016 the asset-backed securities were classified as long-term investments with a fair value of
$29
million. The Company’s investments in available-for-sale securities are held at fair value with amortized cost of
$31
million and
$3
2
million at March 31, 2017 and December 31, 2016, respectively.
For the three months ended March 31, 2017 and 2016, proceeds from sales and maturities of short-term investments totaled approximately
$
0
million
and
$
121
million, respectively.
8
.
Inventories, Net of Inventory Reserves
Inventories, net of inventory reserves comprise the following (in
million
s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
Finished goods
|
|
$
|
668
|
|
$
|
606
|
Work in process
|
|
|
312
|
|
|
303
|
Raw materials and accessories
|
|
|
256
|
|
|
270
|
Supplies and packing materials
|
|
|
308
|
|
|
292
|
Total inventories, net of inventory reserves
|
|
$
|
1,544
|
|
$
|
1,471
|
9
.
Investments
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.
© 2017 Corning Incorporated. All Rights Reserved.
11
Prio
r to realignment, HSG, a wholly-
owned and 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.
Investments comprise the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership
|
|
March 31,
|
|
December 31,
|
|
interest
|
|
2017
|
|
2016
|
Affiliated companies accounted for by the equity method (1)
|
20%
|
to
|
50%
|
|
$
|
269
|
|
$
|
269
|
Other investments
|
|
|
|
|
|
68
|
|
|
67
|
Subtotal Investment Assets
|
|
|
|
|
$
|
337
|
|
$
|
336
|
|
|
|
|
|
|
|
|
|
|
Affiliated companies accounted for by the equity method
|
|
|
|
|
|
|
|
|
|
HSG (1)(2)
|
|
50%
|
|
|
$
|
195
|
|
$
|
241
|
Subtotal Investment Liabilities
|
|
|
|
|
$
|
195
|
|
$
|
241
|
|
(1)
|
|
Amounts
reflect Corning’s direct ownership interests in the respective affiliated companies at
March 31, 2017
and December 31, 201
6
. 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.
|
Hemlock Semiconductor Group
Summarized income statement information for HSG is as follows for the three months ended March 31, 2017: net sales
$280
million, gross profit
$28
million and net income attributable to HSG
$159
million. HSG’s net income in the first quarter of 2017 includes pre-tax gains on settlements of long-term sales agreements in the amount of
$144
million (after tax and non-controlling interests, Corning’s share was approximately
$72
million).
10. Goodwill and Other Intangible Assets
The carrying amount of goodwill by segment for the periods ended March 31, 2017 and December 31, 2016 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Display
|
|
Optical
|
|
Specialty
|
|
Life
|
|
All
|
|
|
|
|
|
Technologies
|
|
Communications
|
|
Materials
|
|
Sciences
|
|
Other
|
|
Total
|
Balance at December 31, 2016
|
|
$
|
126
|
|
$
|
645
|
|
$
|
150
|
|
$
|
558
|
|
$
|
98
|
|
$
|
1,577
|
Acquired goodwill (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
34
|
Foreign currency translation
adjustment
|
|
|
5
|
|
|
(1)
|
|
|
|
|
|
2
|
|
|
2
|
|
|
8
|
Balance at March 31, 2017
|
|
$
|
131
|
|
$
|
644
|
|
$
|
150
|
|
$
|
560
|
|
$
|
134
|
|
$
|
1,619
|
|
(1)
|
|
The Company completed an acquisition during the first quarter of 2017 with a purchase price of
$81
million which is reported in All Other.
|
Corning’s gross goodwill balances for the periods ended March 31, 2017 and December 31, 2016 each were
$
8.1
billion. Accumulated impairment losses were
$6.5
billion for the periods ended March 31, 2017 and December 31, 2016, and were generated primarily through goodwill impairments related to the Optical Communications segment.
© 2017 Corning Incorporated. All Rights Reserved.
12
Other intangible assets are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
amortization
|
|
Net
|
|
Gross
|
|
amortization
|
|
Net
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents, trademarks, and
trade names
|
|
$
|
363
|
|
$
|
180
|
|
$
|
183
|
|
$
|
360
|
|
$
|
176
|
|
$
|
184
|
Customer lists and other
|
|
|
805
|
|
|
163
|
|
|
642
|
|
|
761
|
|
|
149
|
|
|
612
|
Total
|
|
$
|
1,168
|
|
$
|
343
|
|
$
|
825
|
|
$
|
1,121
|
|
$
|
325
|
|
$
|
796
|
Corning’s amortized intangible assets are primarily related to the Optical Communications and Life Sciences segments. The net carrying amount of intangible assets increased during the first quarter of 2017, primarily due to acquisitions of
$42
million of other intangible assets and foreign currency translation adjustments of
$
3
million, offset by amortization of
$
17
million.
Amortization expense related to these intangible assets is estimated to be
$72
million for 2017,
$73
million for 2018,
$72
million for 2019 and
$
69
million annually from
2020
to
2022
.
11. Employee Retirement Plans
The following table summarizes the components of net periodic benefit cost for Corning’s defined benefit pension and postretirement health care and life insurance plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement benefits
|
|
|
Three months ended
|
|
Three months ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
24
|
|
$
|
22
|
|
$
|
3
|
|
$
|
2
|
Interest cost
|
|
|
31
|
|
|
31
|
|
|
7
|
|
|
7
|
Expected return on plan assets
|
|
|
(43)
|
|
|
(42)
|
|
|
|
|
|
|
Amortization of prior service
cost (credit)
|
|
|
1
|
|
|
1
|
|
|
(1)
|
|
|
(1)
|
Recognition of actuarial loss
|
|
|
|
|
|
7
|
|
|
|
|
|
|
Total pension and postretirement
benefit expense
|
|
$
|
13
|
|
$
|
19
|
|
$
|
9
|
|
$
|
8
|
© 2017 Corning Incorporated. All Rights Reserved.
13
12
.
Other Liabilities
Other liabilities follow (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
Current liabilities:
|
|
|
|
|
|
|
Wages and employee benefits
|
|
$
|
350
|
|
$
|
487
|
Income taxes
|
|
|
210
|
|
|
150
|
Asbestos and other litigation
|
|
|
83
|
|
|
70
|
Derivative instruments
|
|
|
56
|
|
|
88
|
Other current liabilities
|
|
|
450
|
|
|
621
|
Other accrued liabilities
|
|
$
|
1,149
|
|
$
|
1,416
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
Asbestos and other litigation
|
|
$
|
380
|
|
$
|
369
|
Derivative instruments
|
|
|
546
|
|
|
282
|
Investment in Hemlock Semiconductor Group (1)
|
|
|
195
|
|
|
241
|
Defined benefit pension plan liabilities
|
|
|
705
|
|
|
692
|
Other non-current liabilities
|
|
|
1,275
|
|
|
1,221
|
Other liabilities
|
|
$
|
3,101
|
|
$
|
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.
|
Asbestos
Claims
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 3 (Commitme
nts, Contingencies and Guarantees) to the consolidated financial statements for additional information on the asbestos
claims
.
13. Hedging Activities
Undesignated Hedges
The table below includes a total gross notional value for translated earnings contracts of
$
15.4
billion and
$16.7
billion at March 31, 2017 and December 31, 2016, respectively. The translated earnings contracts include average rate forwards of
$
13.9
billion and
$14.7
billion and zero-cost collars of
$1.6
billion and
$2.0
billion at March 31, 2017 and December 31, 2016, respectively. The majority of the average rate forward contracts hedge a significant portion of the Company’s exposure to the Japanese yen for 201
7
-2022 with gross notional values of
$12.8
billion and
$13.6
billion at March 31, 2017 and December 31, 2016, respectively. The average rate forward contracts also partially hedge the impacts of the South Korean won, New Taiwan dollar, Chinese yuan, Euro and British pound translation on the Company’s projected net income. With respect to the zero-cost collars, the gross notional amount includes the value of both the put and call options. However, due to the nature of the zero-cost collars, either the put or the call option can be exercised at maturity. The total net notional value of the zero-cost collars was
$0.8
billion and
$1.0
billion at March 31, 2017 and December 31, 2016, respectively.
© 2017 Corning Incorporated. All Rights Reserved.
14
The following tables summarize the notional amounts and respective fair values of Corning’s derivative financial instruments on a gross basis for March 31, 2017 and December 31, 2016 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives
|
|
Liability derivatives
|
|
Gross notional amount
|
|
Balance
|
|
Fair value
|
|
Balance
|
|
Fair value
|
|
Mar. 31,
|
|
Dec. 31,
|
|
sheet
|
|
Mar. 31,
|
|
Dec. 31,
|
|
sheet
|
|
Mar. 31,
|
|
Dec. 31,
|
|
2017
|
|
2016
|
|
location
|
|
2017
|
|
2016
|
|
location
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
designated as
hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange
contracts (1)
|
$
|
588
|
|
$
|
458
|
|
Other current
assets
|
|
$
|
5
|
|
$
|
1
|
|
Other accrued
liabilities
|
|
$
|
(13)
|
|
$
|
(29)
|
|
|
|
|
|
|
|
Other assets
|
|
|
8
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
contracts
|
|
550
|
|
|
550
|
|
Other assets
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
(6)
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not
designated as
hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange
contracts, other
|
|
717
|
|
|
890
|
|
Other current
assets
|
|
|
8
|
|
|
11
|
|
Other accrued
liabilities
|
|
|
(6)
|
|
|
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translated
earnings
contracts
|
|
15,430
|
|
|
16,711
|
|
Other current
assets
|
|
|
275
|
|
|
423
|
|
Other accrued
liabilities
|
|
|
(37)
|
|
|
(52)
|
|
|
|
|
|
|
|
Other assets
|
|
|
23
|
|
|
146
|
|
Other liabilities
|
|
|
(539)
|
|
|
(277)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
$
|
17,285
|
|
$
|
18,609
|
|
|
|
$
|
319
|
|
$
|
581
|
|
|
|
$
|
(601)
|
|
$
|
(370)
|
|
(1)
|
|
Cash flow hedges with a typical duration of 24 months or less.
|
© 2017 Corning Incorporated. All Rights Reserved.
15
The following table summarizes the effect of derivative financial instruments on Corning’s consolidated financial statements for the three months ended March 31, 2017 and 2016 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of derivative instruments on the consolidated financial statements
|
|
|
for the three months ended March 31,
|
|
|
Gain/(loss)
|
|
|
|
|
|
|
|
|
|
|
recognized in other
|
|
Location of gain/(loss)
|
|
Gain/(loss) reclassified from
|
|
|
comprehensive income
|
|
reclassified from
|
|
accumulated OCI into
|
Derivatives in hedging
|
|
(OCI)
|
|
accumulated OCI into
|
|
income (effective) (1)
|
relationships
|
|
2017
|
|
2016
|
|
income (effective)
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate hedges
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
(6)
|
|
|
(5)
|
Foreign exchange contracts
|
|
$
|
23
|
|
$
|
(29)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash flow hedges
|
|
$
|
23
|
|
$
|
(29)
|
|
|
|
$
|
(6)
|
|
$
|
(4)
|
|
(1)
|
|
The amount of hedge ineffectiveness at March 31, 2017 and 2016 was insignificant.
|
The following table summarizes the effect on the consolidated financial statements relating to Corning’s derivative financial instruments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in income
|
|
|
|
Three months ended
|
|
Location of gain/(loss)
|
|
March 31,
|
Undesignated derivatives
|
recognized in income
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
– balance sheet and loans
|
Other expense, net
|
|
$
|
2
|
|
$
|
(37)
|
Foreign currency hedges
related to translated earnings
|
Translated earnings contract
loss, net
|
|
|
(438)
|
|
|
(857)
|
|
|
|
|
|
|
|
|
Total undesignated
|
|
|
$
|
(436)
|
|
$
|
(894)
|
14
.
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.
© 2017 Corning Incorporated. All Rights Reserved.
16
The following tables provide fair value measurement information for the Company’s major categories of financial assets and liabilities measured on a recurring basis (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at reporting date using
|
|
|
|
|
|
Quoted prices in
|
|
Significant other
|
|
Significant
|
|
|
|
|
|
active markets for
|
|
observable
|
|
unobservable
|
|
|
March 31,
|
|
identical assets
|
|
inputs
|
|
inputs
|
|
|
2017
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (1)
|
|
$
|
28
|
|
|
|
|
$
|
28
|
|
|
|
Other current assets (2)
|
|
$
|
288
|
|
|
|
|
$
|
288
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets (2)(3)
|
|
$
|
323
|
|
|
|
|
$
|
31
|
|
$
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities (2)(4)
|
|
$
|
59
|
|
|
|
|
$
|
56
|
|
$
|
3
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities (2)(4)
|
|
$
|
565
|
|
|
|
|
$
|
545
|
|
$
|
20
|
|
(1)
|
|
Short-term investments
include asset-backed securities which are measured using observable quoted prices for similar assets.
|
|
(2)
|
|
Derivative assets and liabilities include foreign exchange contracts which are measured using observable quoted prices for similar assets and liabilities.
|
|
(3)
|
|
Other assets include
a contingent
consideration
asset which was measured by applying an option pricing model using projected future Corning Precision Materials’ revenues.
|
|
(4)
|
|
Other accrued liabilities and other liabilities include contingent consideration that was measured using unobservable (Level 3) inputs. As of March 31, 2017 the fair value of the contingent consideration payables is
$23
million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at reporting date using
|
|
|
|
|
|
Quoted prices in
|
|
Significant other
|
|
Significant
|
|
|
|
|
|
active markets for
|
|
observable
|
|
unobservable
|
|
|
December 31,
|
|
identical assets
|
|
inputs
|
|
inputs
|
|
|
2016
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets (1)
|
|
$
|
435
|
|
|
|
|
$
|
435
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets (1)(2)
|
|
$
|
464
|
|
|
|
|
$
|
175
|
|
$
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities (1)
|
|
$
|
88
|
|
|
|
|
$
|
88
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities (1)
|
|
$
|
282
|
|
|
|
|
$
|
282
|
|
|
|
|
(1)
|
|
Derivative assets and liabilities include foreign exchange contracts which are measured using observable quoted prices for similar assets and liabilities.
|
|
(2)
|
|
Other assets include asset-backed securities which are measured using observable quoted prices for similar assets and a contingent
consideration
asset which was measured by applying an option pricing model using projected future Corning Precision Materials’ revenues.
|
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. Changes in the fair value of the contingent consideration in future periods are valued using an option pricing model and are recorded in Corning’s results in the period of the change. As of
March 31, 2017
and
December 31, 2016
, the fair value of the potential receipt of the contingent consideration in 2018 was
$292
million
and
$2
89
million
, respectively.
There were no significant financial
assets
and
liabilities
measured on a nonrecurring basis
as of March 31, 2017 and December 31, 2016.
© 2017 Corning Incorporated. All Rights Reserved.
17
15. 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
2,300
shares of Preferred Stock at an issue price of
$1
million per share, for an aggregate issue price of
$2.3
billion. 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 March 31, 2017, the Preferred Stock has not been converted, and none of the anti-dilution provisions have been triggered.
Share Repurchases
2016 Share Repurchases
In July 2016, Corning entered into an accelerated share repurchase agreement (the “2016 ASR agreement”) under the 2015 Repurchase Program with Morgan Stanley to repurchase Corning’s common stock. Under the 2016 ASR agreement, Corning paid
$2.0
billion for a total of
86.7
million shares.
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.
2017 Share Repurchases
In December 2016, Corning’s Board of Directors approved a
$4
billion share repurchase program with no expiration (the “2016 Repurchase Program”). In the three months ended March 31, 2017, the Company repurchased
15.3
million shares of common stock on the open market for approximately
$408.3
million as part of its 2015 and 2016 Repurchase Programs.
Accumulated Other Comprehensive Income
In the three months ended March 31, 2017 and 2016, the primary changes in accumulated other comprehensive income (“AOCI”) were related to the foreign currency translation adjustment component.
A summary of changes in the foreign currency translation adjustment component of AOCI is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Beginning balance
|
|
$
|
(1,275)
|
|
$
|
(1,171)
|
Other comprehensive income
|
|
|
434
|
|
|
385
|
Equity method affiliates
|
|
|
16
|
|
|
43
|
Net current-period other comprehensive income
|
|
|
450
|
|
|
428
|
Ending balance
|
|
$
|
(825)
|
|
$
|
(743)
|
Tax effects related to foreign currency translation gains and losses for the three months ended March 31, 2017
and 2016
were
$57
million
and
$17
million, respectively
.
16
.
Share-based Compensation
Stock Compensation Plans
The Company measures and recognizes compensation cost for all share-based payment awards made to employees and directors based on estimated fair values. Fair values for stock options were estimated using a multiple-point Black-Scholes valuation model. Share-based compensation cost was approximately
$14
million
and
$
9
million
for the
three months ended March 31, 2017 and 2016
, respectively. Amounts for all periods presented included compensation expense for employee stock options and time-based restricted stock and restricted stock units.
© 2017 Corning Incorporated. All Rights Reserved.
18
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
three
years
from the grant date. The maximum term of non-qualified and incentive stock options is
ten
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
three months ended March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted-
|
|
Remaining
|
|
Aggregate
|
|
|
Number
|
|
Average
|
|
Contractual
|
|
Intrinsic
|
|
|
of Shares
|
|
Exercise
|
|
Term in
|
|
Value
|
|
|
(in thousands)
|
|
Price
|
|
Years
|
|
(in thousands)
|
Options Outstanding as of December 31, 2016
|
|
31,507
|
|
$
|
19.40
|
|
|
|
|
|
Granted
|
|
1,501
|
|
|
27.00
|
|
|
|
|
|
Exercised
|
|
(8,429)
|
|
|
21.78
|
|
|
|
|
|
Forfeited and Expired
|
|
(80)
|
|
|
21.40
|
|
|
|
|
|
Options Outstanding as of March 31, 2017
|
|
24,499
|
|
|
19.04
|
|
4.64
|
|
$
|
195,009
|
Options Expected to Vest as of March 31, 2017
|
|
24,949
|
|
|
19.07
|
|
4.68
|
|
|
197,946
|
Options Exercisable as of March 31, 2017
|
|
18,769
|
|
|
18.01
|
|
3.41
|
|
|
168,779
|
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
March 31, 2017
, which would have been received by the option holders had all option holders exercised their “in-the-money” options as of that date.
As of
March 31, 2017
, there was approximately
$18
million
of unrecognized compensation cost related to stock options granted under the plans. The cost is expected to be recognized over a weighted-average period of
1.5
years. Compensation cost related to stock options was approximately
$8
million
and
$3
million
for the
three months ended March 31, 2017 and 2016
, respectively.
Proceeds received from the exercise of stock options were
$182
million
and
$9
million
for the
three months ended March 31, 2017 and 2016
, respectively. Proceeds received from the exercise of stock options were included in financing activities on the Company’s Consolidated Statements of Cash Flows. The total intrinsic value of options exercised for the
three months ended March 31, 2017 and 2016
was approximately
$44
million
and
$
6
million
, respectively. The income tax
(expense)
benefit realized from share-based compensation was not significant for the
three months ended March 31, 2017 and 2016
, respectively. Refer to Note 5 (Income Taxes) to the Consolidated Financial Statements.
The following inputs were used for the valuation of option grants under our stock option plans:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Expected volatility
|
|
36.1%
|
|
43.1%
|
Weighted-average volatility
|
|
36.1%
|
|
43.1%
|
Expected dividends
|
|
2.28%
|
|
2.94%
|
Risk-free rate
|
|
2.3%
|
|
1.5%
|
Average risk-free rate
|
|
2.3%
|
|
1.5%
|
Expected term (in years)
|
|
7.4
|
|
7.4
|
Pre-vesting departure rate
|
|
0.6%
|
|
0.6%
|
Expected volatility is based on a blended approach defined as the weighted average of the short-term implied volatility, the most recent volatility for the period equal to the expected term, and the most recent
15
-year historical volatility. The expected term assumption is the period of time the options are expected to be outstanding, and is calculated using a combination of historical exercise experience adjusted to reflect the current vesting period of options being valued, and partial life cycles of outstanding options. The risk-free rate assumption is the implied rate for a zero-coupon U.S. Treasury bond with a term equal to the option’s expected term.
© 2017 Corning Incorporated. All Rights Reserved.
19
Incentive Stock Plans
Corning
’s
i
ncentive
s
tock
p
lan 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 re
stricted stock units under the i
ncentive
s
tock
p
lan are granted at the closing market price on the grant date, contingently vest over a period of generally
three
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
three months ended March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Shares
|
|
Grant-Date
|
|
|
|
|
|
|
|
(000’s)
|
|
Fair Value
|
Non-vested shares and share units at December 31, 2016
|
|
|
|
|
|
|
4,640
|
|
$
|
20.15
|
Granted
|
|
|
|
|
|
|
956
|
|
|
26.90
|
Vested
|
|
|
|
|
|
|
(150)
|
|
|
20.16
|
Forfeited
|
|
|
|
|
|
|
(53)
|
|
|
20.99
|
Non-vested shares and share units at March 31, 2017
|
|
|
|
|
|
|
5,393
|
|
$
|
21.34
|
As of
March 31, 2017
, there was approximately
$49
million
of unrecognized compensation cost related to non-vested time-based restricted stock and restricted stock units compensation arrangements granted under the Plan. The cost is expected to be recognized over a weighted-average period of
1.9
years. Compensation cost related to time-based restricted stock and restricted stock units was approximately
$6
million
for the
three months ended March 31, 2017 and 2016, respectively
.
17
.
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 applications.
|
|
·
|
|
Specialty Materials – manufactures products that provide more than
150
material formulations for glass, glass ceramics and fluoride crystals to meet demand for unique customer needs.
|
|
·
|
|
Life Sciences – manufactures glass and plastic labware, equipment, media and reagents enabling workflow solutions for scientific applications.
|
All other segments that do not meet the quantitative threshold for separate reporting have been grouped as “All Other.” This group is primarily comprised of the results of Corning’s Pharmaceutical Technologies business 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.
© 2017 Corning Incorporated. All Rights Reserved.
20
Reportable Segments
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Display
|
|
Optical
|
|
Environmental
|
|
Specialty
|
|
Life
|
|
All
|
|
|
|
|
|
Technologies
|
|
Communications
|
|
Technologies
|
|
Materials
|
|
Sciences
|
|
Other
|
|
Total
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
736
|
|
$
|
818
|
|
$
|
275
|
|
$
|
300
|
|
$
|
210
|
|
$
|
36
|
|
$
|
2,375
|
Depreciation (1)
|
|
$
|
129
|
|
$
|
45
|
|
$
|
31
|
|
$
|
29
|
|
$
|
12
|
|
$
|
12
|
|
$
|
258
|
Amortization of purchased
intangibles
|
|
|
|
|
$
|
11
|
|
|
|
|
|
|
|
$
|
5
|
|
$
|
1
|
|
$
|
17
|
Research, development and
engineering expenses (2)
|
|
$
|
19
|
|
$
|
37
|
|
$
|
25
|
|
$
|
36
|
|
$
|
6
|
|
$
|
52
|
|
$
|
175
|
Income tax (provision)
benefit
|
|
$
|
(102)
|
|
$
|
(45)
|
|
$
|
(14)
|
|
$
|
(24)
|
|
$
|
(8)
|
|
$
|
25
|
|
$
|
(168)
|
Net income (loss) (3)
|
|
$
|
249
|
|
$
|
82
|
|
$
|
31
|
|
$
|
48
|
|
$
|
17
|
|
$
|
(53)
|
|
$
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Display
|
|
Optical
|
|
Environmental
|
|
Specialty
|
|
Life
|
|
All
|
|
|
|
|
|
Technologies
|
|
Communications
|
|
Technologies
|
|
Materials
|
|
Sciences
|
|
Other
|
|
Total
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
705
|
|
$
|
609
|
|
$
|
264
|
|
$
|
227
|
|
$
|
204
|
|
$
|
38
|
|
$
|
2,047
|
Depreciation (1)
|
|
$
|
151
|
|
$
|
41
|
|
$
|
32
|
|
$
|
28
|
|
$
|
15
|
|
$
|
11
|
|
$
|
278
|
Amortization of purchased
intangibles
|
|
|
|
|
$
|
7
|
|
|
|
|
|
|
|
$
|
5
|
|
$
|
2
|
|
$
|
14
|
Research, development and
engineering expenses (2)
|
|
$
|
18
|
|
$
|
37
|
|
$
|
25
|
|
$
|
31
|
|
$
|
6
|
|
$
|
47
|
|
$
|
164
|
Restructuring, impairment and other charges
|
|
$
|
4
|
|
$
|
5
|
|
$
|
5
|
|
$
|
12
|
|
$
|
3
|
|
$
|
40
|
|
$
|
69
|
Income tax (provision)
benefit
|
|
$
|
(93)
|
|
$
|
(11)
|
|
$
|
(16)
|
|
$
|
(12)
|
|
$
|
(6)
|
|
$
|
43
|
|
$
|
(95)
|
Net income (loss) (3)
|
|
$
|
209
|
|
$
|
17
|
|
$
|
34
|
|
$
|
26
|
|
$
|
12
|
|
$
|
(85)
|
|
$
|
213
|
|
(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. Expenses that are not allocated to the segments are included in the reconciliation of reportable net segment net income to consolidated net income below.
|
© 2017 Corning Incorporated. All Rights Reserved.
21
A reconciliation of reportable segment net income to consolidated net income follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Net income of reportable segments
|
|
$
|
427
|
|
$
|
298
|
Net loss of All Other
|
|
|
(53)
|
|
|
(85)
|
Unallocated amounts:
|
|
|
|
|
|
|
Net financing costs (1)
|
|
|
(26)
|
|
|
(29)
|
Stock-based compensation expense
|
|
|
(14)
|
|
|
(9)
|
Exploratory research
|
|
|
(24)
|
|
|
(27)
|
Corporate contributions
|
|
|
(16)
|
|
|
(7)
|
Equity in earnings of affiliated companies (2)
|
|
|
79
|
|
|
56
|
Unrealized loss on foreign currency hedges
related to translated earnings
|
|
|
(518)
|
|
|
(950)
|
Income tax benefit
|
|
|
218
|
|
|
401
|
Other corporate items
|
|
|
13
|
|
|
(16)
|
Net income (loss)
|
|
$
|
86
|
|
$
|
(368)
|
|
(1)
|
|
N
et financing costs include interest income, interest expense, and interest costs and investment gains and losses associated with benefit plans.
|
|
(2)
|
|
For the period ending March 31, 2017, the amount represents the equity earnings of HSG. For the period ending March 31, 2016, the amount represents equity earnings from Dow Corning. Refer to Note 9, Investments, for additional information.
|
© 2017 Corning Incorporated. All Rights Reserved.
22
ITEM 2.
MA
NAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ORGANIZATION OF INFORMATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides a historical and prospective narrative on the Company’s financial condition and results of operations.
This interim MD&A should be read in conjunction with the MD&A in our 201
6
Form 10-K. The various sections of this MD&A contain a number of forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “plans,” “goals,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “should,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in “Risk Factors” in Part I, Item 1A of our 201
6
Form 10-K, and as may be updated in our Forms 10-Q. Our actual results may differ materially, and these forward-looking statements do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of
March 31, 2017
.
Our MD&A includes the following sections:
|
·
|
|
Core Performance Measures
|
|
·
|
|
Capital Resources and Liquidity
|
|
·
|
|
Critical A
ccounting Estimates
|
|
·
|
|
New Accounting Standards
|
|
·
|
|
Forward-Looking Statements
|
OVERVIEW
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 our Framework we target generating $26 billion to $30 billion of cash through 2019, returning more than $12.5 billion to shareholders and investing $10 billion to sustain our leadership positions and deliver growth.
Our probability of success increases as we invest in our world-class capabilities. Over the next three years, Corning will concentrate approximately 80% of its research, development and engineering investment and capital spending on a cohesive set of three core technologies, four manufacturing and engineering platforms, and five market-access platforms. This strategy will allow us to quickly apply our talents and repurpose our assets as needed.
Summary of results for the three months ending
March 31, 2017
Corning delivered strong operating results in the first quarter of 2017, with net sales increasing in all of our segments, and net income up in all but one of our segments, when compared to the same period in 2016. Net sales in the first quarter of 2017 were $2,375 million, compared to $2,047 million in the same period in 2016, an increase of $328 million. Optical Communications and Specialty Materials segments drove the increase, up $209 million and $73 million, respectively. The increase in the Optical Communications segment was 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 quarter of
2016. Strong growth in the North American fiber-to-the-home market drove the increase in carrier network products. The increase in the Specialty Materials segment was driven by higher sales of Corning Gorilla Glass and advanced optics products.
© 2017 Corning Incorporated. All Rights Reserved.
23
In the first quarter of 2017, we generated net income of $86 million or $0.07 per share, compared to net loss of $368 million or $(0.36) per share for the same period in 2016. The increase in net income of $454 million was primarily driven by the following items (amounts presented after-tax):
|
·
|
|
A decrease in unrealized losses from our translated earnings contracts in the amount of $273 million;
|
|
·
|
|
A decrease of $53 million in restructuring, impairment and other charges;
|
|
·
|
|
An increase in net income of $65 million in the Optical Communications segment, due to higher sales of carrier and enterprise network products, combined with the absence of the production issues in the first quarter of 2016 related to the implementation of new software;
|
|
·
|
|
An increase in net income of $40 million in the Display Technologies segment, driven by an increase in volume in the mid-teens in percentage terms, improvements in manufacturing efficiency and lower restructuring costs, offset somewhat by LCD glass price declines slightly above 10%;
|
|
·
|
|
An increase in net income of $22 million in the Specialty Materials segment, driven by an increase in Corning Gorilla Glass and advanced optics products; and
|
|
·
|
|
An increase in equity earnings, driven primarily by a gain of $46 million resulting from the modification of long-term sales agreements with a customer of HSG, combined with an increase in HSG volume. The increase was partially offset by the absence of equity earnings from Dow Corning’s silicones business, which totaled $52 million after tax in the first quarter of 2016.
|
The translation impact of fluctuations in foreign currency exchange rates
did not materially impact
Corning’s consolidated net income in the three months ended
March 31, 2017
when compared to the same period in 201
6.
2017 Corporate Outlook
In 2017, Corning will continue the advancement on its Framework initiatives. In the Display Technologies segment, we expect the rate of growth in both retail market and glass demand to be in the mid-single digit percentage. We believe full-year 2017 LCD glass pricing environment will be favorable and better than last year. We expect
price
declines will be about 10%, or possibly better. In the Optical Communications segment, we anticipate sales to increase by a low-teens percentage over 2016. In the Environmental Technologies segment, we expect sales to be consistent to up slightly from 2016, driven by continued sales growth in the auto market, offset somewhat by lower heavy-duty volume. We expect growth in the Specialty Materials segment, the amount of which will depend on the timing and extent of customers deploying Gorilla Glass 5 and other Corning innovations. In the Life Sciences segment, we expect low-single digit sales growth, ahead of forecasted market growth rates.
© 2017 Corning Incorporated. All Rights Reserved.
24
RESULTS OF OPERATIONS
Selected highlights for the
first
quarter
of 2017 and 2016 follow (
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
%
|
|
|
|
March 31,
|
|
change
|
|
|
|
2017
|
|
2016
|
|
17 vs. 16
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,375
|
|
$
|
2,047
|
|
16%
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
957
|
|
$
|
764
|
|
25%
|
|
(gross margin %)
|
|
|
40%
|
|
|
37%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
$
|
316
|
|
$
|
303
|
|
4%
|
|
(as a % of net sales)
|
|
|
13%
|
|
|
15%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research, development and
engineering expenses
|
|
$
|
200
|
|
$
|
190
|
|
5%
|
|
(as a % of net sales)
|
|
|
8%
|
|
|
9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of
affiliated companies
|
|
$
|
80
|
|
$
|
59
|
|
36%
|
|
(as a % of net sales)
|
|
|
3%
|
|
|
3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translated earnings contract
loss, net
|
|
$
|
(438)
|
|
$
|
(857)
|
|
(49%)
|
|
(as a % of net sales)
|
|
|
(18%)
|
|
|
(42%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
20
|
|
$
|
(672)
|
|
*
|
|
(as a % of net sales)
|
|
|
1%
|
|
|
(33%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes
|
|
$
|
66
|
|
$
|
304
|
|
(78%)
|
|
(as a % of net sales)
|
|
|
3%
|
|
|
15%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
Corning Incorporated
|
|
$
|
86
|
|
$
|
(368)
|
|
*
|
|
(as a % of net sales)
|
|
|
4%
|
|
|
(18%)
|
|
|
|
*Percent change is not meaningful.
© 2017 Corning Incorporated. All Rights Reserved.
25
Net Sales
The following table presents net sales by reportable segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
%
|
|
|
|
March 31,
|
|
change
|
|
|
|
2017
|
|
2016
|
|
17 vs. 16
|
|
Display Technologies
|
|
$
|
736
|
|
$
|
705
|
|
4%
|
|
Optical Communications
|
|
|
818
|
|
|
609
|
|
34%
|
|
Environmental Technologies
|
|
|
275
|
|
|
264
|
|
4%
|
|
Specialty Materials
|
|
|
300
|
|
|
227
|
|
32%
|
|
Life Sciences
|
|
|
210
|
|
|
204
|
|
3%
|
|
All Other
|
|
|
36
|
|
|
38
|
|
(5%)
|
|
Total net sales
|
|
$
|
2,375
|
|
$
|
2,047
|
|
16%
|
|
For the
three months ended March 31, 2017
, net sales
increase
d
by
$328
million
, or
16%
, when compared to the same period in
2016
. The primary sales drivers by segment were as follows:
|
·
|
|
An increase of $31 million in the Display Technologies segment, driven by an increase in volume in the mid-teens in percentage terms and the positive impact from the strengthening of the Japanese yen in the amount of $15 million, partially offset by LCD glass price declines slightly higher than 10%;
|
|
·
|
|
An increase of $209 million in the Optical Communications segment
,
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 quarter of
2016. Strong growth in the North American fiber-to-the-home market drove the increase in carrier network products
;
|
|
·
|
|
An increase of $11 million in the Environmental Technologies segm
ent, driven by an increase of 14
% in
automotive products due to
light-duty substrate market strength in Europe, China and Asia;
|
|
·
|
|
An increase of $73 million in the Specialty Materials segment, driven by strong growth in
sales of
Corning
Gorilla Glass products, combined with an increase in advanced optics products;
and
|
|
·
|
|
An increase of $6 million in the Life Sciences segment.
|
Movements in foreign exchange rates did not materially impact
Corning’s consolidated net sales
in the three months ended
March 31, 2017
when compared to the same period in 201
6
.
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 three months ended
March 31, 2017
, gross margin dollars and
gross margin as a percentage of net sales increased when compared to the same period last year, up $193 million and 3%, respectively, driven by higher sales, cost reductions and improvements in manufacturing efficiency in the majority of our segments. The Optical Communications
and Display Technologies
segment
s
ex
perienced the largest increases
.
Selling, General and Administrative Expenses
When compared to the
first
quarter of 2016, selling, general and administrative expenses increased by $13 million, or 4%, in the three months ended March 31, 2017, driven
by an increase in
employee benefit expenses
and incremental
expenses
related to two small acquisitions
in the Optical Communications segment. As
a percentage of sales
, selling, general and administrative expenses declined 2%.
The types of expenses included in the selling, general and administrative expenses line item are: salaries, wages and benefits; stock-based compensation expense; travel; sales commissions; professional fees; and depreciation and amortization, utilities and rent for administrative facilities.
Research, Development and Engineering Expenses
For the three months ended March 31, 2017, research, development and engineering expenses increased by $10 million, or 5%, and decreased 1% as a percentage of sales
,
when compared to the same period last year
, driven by h
igher
research
and development
costs for our emerging businesses
, as well as an increase in
employee benefit expenses.
© 2017 Corning Incorporated. All Rights Reserved.
26
Equity in Earnings of Affiliated Companies
The following provides a summary of equity in earnings of affiliated companies (in
million
s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Dow Corning Corporation (1)
|
|
|
|
|
$
|
56
|
Hemlock Semiconductor Group
|
|
$
|
79
|
|
|
|
All other
|
|
|
1
|
|
|
3
|
Total equity earnings
|
|
$
|
80
|
|
$
|
59
|
|
(1)
|
|
Results include equity earnings
of
the silicones business and Hemlock Semiconductor business
of Dow Corning
.
|
Refer to Note 9 (Investments) to the consolidated financial statements for additional information
.
Translated earnings contract
loss, net
Included in the line ite
m Translated earnings contract
loss, net, is the impact of foreign currency hedges which hedge our translation exposure arising from movements in the Japanese yen, South Korean won
,
euro
, New Taiwan dollar and Chinese yuan
against the U.S. dollar and its impact on our net earnings. The following table provides detailed information on the impact of our translated earnings contract losses and gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
Change
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
2017 vs. 2016
|
|
|
Income
|
|
|
|
|
Income
|
|
|
|
|
Income
|
|
|
|
|
|
before
|
|
|
|
|
before
|
|
|
|
|
before
|
|
|
|
|
|
income
|
|
Net
|
|
income
|
|
Net
|
|
income
|
|
Net
|
(in millions)
|
|
taxes
|
|
income
|
|
taxes
|
|
income
|
|
taxes
|
|
income
|
Hedges related to translated earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains, net
|
|
$
|
80
|
|
$
|
50
|
|
$
|
93
|
|
$
|
59
|
|
$
|
(13)
|
|
$
|
(9)
|
Unrealized losses, net
|
|
|
(518)
|
|
|
(326)
|
|
|
(950)
|
|
|
(599)
|
|
|
432
|
|
|
273
|
Total translated earnings contract
loss, net
|
|
$
|
(438)
|
|
$
|
(276)
|
|
$
|
(857)
|
|
$
|
(540)
|
|
$
|
419
|
|
$
|
264
|
The gross notional value outstanding on our translated earnings contracts at March, 31, 2017 and December 31, 2016 were as follows (in billions):
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Japanese yen-denominated hedges
|
$
|
14.0
|
|
$
|
14.9
|
South Korean won-denominated hedges
|
|
0.8
|
|
|
1.2
|
Euro-denominated hedges
|
|
0.3
|
|
|
0.3
|
Chinese yuan-denominated hedges
|
|
0.3
|
|
|
0.3
|
Total gross notional value outstanding
|
$
|
15.4
|
|
$
|
16.7
|
Income Before Income Taxes
I
n the three months ended
March 31, 2017, t
he impact of fluctuations in foreign exchange rates
did not materially impact
Corning’s consolidated income before income taxes when compared to the
same period
in 201
6
.
© 2017 Corning Incorporated. All Rights Reserved.
27
Benefit
for Income Taxes
Our benefit for income taxes and the related effective income tax
benefit
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Benefit for income taxes
|
|
$
|
66
|
|
$
|
304
|
Effective tax benefit
|
|
|
330.0%
|
|
|
(45.2%)
|
For the three months en
ded March 31, 2017, t
he effective income tax
benefit
differed from the U.S. statutory rate of
35%
primarily due to the following benefits:
|
·
|
|
Rate differences on income (loss) of consolidated foreign companies, including the benefit of excess foreig
n tax credits resulting from the inclusion of
foreign earnings in U.S. income; and
|
|
·
|
|
The impact from domestic losses attributable to foreign exchange and losses on translated earnings contracts.
|
For the three months ended March 31, 2016, the effective income tax
benefit
differed from the U.S. statutory rate of 35% primarily due to the following benefits:
|
·
|
|
Rate differences on income (loss) of consolidated foreign companies, including the benefit of excess foreign tax credits resulting from the inclusion of fore
ign earnings in U.S. income;
|
|
·
|
|
The impact of equity in earnings of nonconsolidated affiliates reported in the financial statements, net of tax
; and
|
|
·
|
|
The impact from domestic losses attributable to foreign exchange and losses on translated earnings contracts..
|
Refer to Note 5 (Income Taxes) to the consolidated financial statements for additional information.
Net Income
(Loss)
Attributable to Corning Incorporated
As a result of the
items discussed
above, our net income
(loss)
and per share data is as follows (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Net income (loss) attributable to Corning Incorporated
|
|
$
|
86
|
|
$
|
(368)
|
Net income (loss) attributable to Corning Incorporated used
in basic earnings per common share calculation (1)
|
|
$
|
62
|
|
$
|
(392)
|
Net income (loss) attributable to Corning Incorporated used
in diluted earnings per common share calculation (1)
|
|
$
|
62
|
|
$
|
(392)
|
Basic earnings (loss) per common share
|
|
$
|
0.07
|
|
$
|
(0.36)
|
Diluted earnings (loss) per common share
|
|
$
|
0.07
|
|
$
|
(0.36)
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
|
|
925
|
|
|
1,103
|
Weighted-average common shares outstanding - diluted
|
|
|
936
|
|
|
1,103
|
|
(1)
|
|
Refer to Note 6 (Earnings
(loss)
per Common Share) to the consolidated financial statements for additional information.
|
Comprehensive Income
For th
e three ended
March 31, 201
7
, comprehensive income increased by $
527 million
, when compared to the same period in 201
6
, driven by the following items:
|
·
|
|
An increase in net income attributable to Corning Incorporated of $
454 million
;
|
|
·
|
|
The positive impact due to the change in foreign currency translation gains and losses of $
22 million
; and
|
|
·
|
|
The change in the amount of
net unrealized gains and losses on designated hedges of $45 million
.
|
Refer to Note 15 (Shareholders’ Equity) to the consolidated financial statements for additional information.
© 2017 Corning Incorporated. All Rights Reserved.
28
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.
Net sales, equity in earnings of affiliated companies and net income are adjusted to exclude the impacts of changes in the Japanese yen and the South Korean won, gains and losses on our foreign currency hedges related to translated earnings, acquisition-related costs, discrete tax items, restructuring and restructuring-related charges, certain litigation-related expenses, pension mark-to-market adjustments and other items which do not reflect on-going operating results of the Company or our equity affiliates. Management’s discussion and analysis on our reportable segments has also been adjusted for these items, as appropriate. These measures are not prepared in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”). We believe investors should consider these non-GAAP measures in evaluating our results as they are more indicative of our core operating performance and how management evaluates our operational results and trends. These measures are not, and should not be viewed as a substitute for
,
GAAP reporting measures. 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 continuing operations, excluding certain items, follow (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
%
|
|
|
March 31,
|
|
change
|
|
|
2017
|
|
2016
|
|
17 vs. 16
|
Core net sales
|
|
$
|
2,485
|
|
$
|
2,171
|
|
14%
|
Core equity in earnings of affiliated companies
|
|
$
|
8
|
|
$
|
62
|
|
(87)%
|
Core earnings
|
|
$
|
407
|
|
$
|
340
|
|
20%
|
Core Net Sales
The following table presents core net sales by reportable segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
%
|
|
|
March 31,
|
|
change
|
|
|
2017
|
|
2016
|
|
17 vs. 16
|
Display Technologies
|
|
$
|
846
|
|
$
|
829
|
|
2%
|
Optical Communications
|
|
|
818
|
|
|
609
|
|
34%
|
Environmental Technologies
|
|
|
275
|
|
|
264
|
|
4%
|
Specialty Materials
|
|
|
300
|
|
|
227
|
|
32%
|
Life Sciences
|
|
|
210
|
|
|
204
|
|
3%
|
All Other
|
|
|
36
|
|
|
38
|
|
(5)%
|
Total core net sales
|
|
$
|
2,485
|
|
$
|
2,171
|
|
14%
|
Core net sales increased by
$314 million
in the three months ended
March 31, 2017
, when compared to the same period in 201
6
. 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
and won
into dollars.
When
compared to the first quarter of 2016, core net sales in the Display Technologies segment increased by $17 million, or 2%, in the first quarter of 2017, driven by an increase in volume in the m
i
d-teens in percentage terms, offset somewhat by LCD glass price declines slightly higher than 10%.
© 2017 Corning Incorporated. All Rights Reserved.
29
Core Equity in Earnings of Affiliated Companies
The following provides a summary of core equity in earnings of affiliated companies (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Dow Corning Corporation
(1)
|
|
|
|
|
$
|
58
|
Hemlock Semiconductor Group
|
|
$
|
7
|
|
|
|
All other
|
|
|
1
|
|
|
4
|
Total core equity earnings
|
|
$
|
8
|
|
$
|
62
|
|
(1)
|
|
Results include equity earnings
of
the silicones business and
Hemlock Semiconductor business of
Dow Corning.
|
Core Earnings
In the three months ended
March 31, 2017
, we generated core earnings of $
407 million
or $
0.39
per share, compared to $
340 million
or $
0.28
per share, in the same period in 201
6
. The increase
of $67 million
in the
first
quarter of 201
7
was primarily
driven by
an increase in core earnings
of $67 million
in the Optical Communications segment,
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 quarter of
2016. Strong growth in the North American fiber-to-the-home market drove the increase in carrier network products.
Display Technologies core earnings
also increased, up $33 million
, driven by an increase in volume in the
mid
-teens in percentage terms and improvements in manufacturing efficiency, offset somewhat by the LCD glass price declines slightly above 10%.
Included in core earnings for the three months ended
March 31, 2017
and 2016
is net periodic pension expense in the amount
s
of
$
13 million
and
$
12 million
, respectively
.
Refer to Note 11 (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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Core earnings attributable to Corning Incorporated
|
|
$
|
407
|
|
$
|
340
|
Less: Series A convertible preferred stock dividend
|
|
|
24
|
|
|
24
|
Core earnings available to common stockholders - basic
|
|
|
383
|
|
|
316
|
Add: Series A convertible preferred stock dividend
|
|
|
24
|
|
|
24
|
Core earnings available to common stockholders - diluted
|
|
$
|
407
|
|
$
|
340
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
|
|
925
|
|
|
1,103
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Stock options and other dilutive securities
|
|
|
11
|
|
|
8
|
Series A convertible preferred stock
|
|
|
115
|
|
|
115
|
Weighted-average common shares outstanding - diluted
|
|
|
1,051
|
|
|
1,226
|
Core basic earnings per common share
|
|
$
|
0.41
|
|
$
|
0.29
|
Core diluted earnings per common share
|
|
$
|
0.39
|
|
$
|
0.28
|
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.
© 2017 Corning Incorporated. All Rights Reserved.
30
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
|
|
|
|
|
Effective
|
|
|
|
|
Net
|
|
Equity
|
|
income
|
|
Net
|
|
tax (benefit)
|
|
Per
|
|
|
sales
|
|
earnings
|
|
taxes
|
|
income
|
|
rate (a)
|
|
share
|
As reported - GAAP
|
|
$
|
2,375
|
|
$
|
80
|
|
$
|
20
|
|
$
|
86
|
|
(330%)
|
$
|
0.07
|
Constant-yen
(1)
|
|
|
109
|
|
|
|
|
|
99
|
|
|
75
|
|
|
|
0.07
|
Constant-won
(1)
|
|
|
1
|
|
|
|
|
|
(9)
|
|
|
(7)
|
|
|
|
(0.01)
|
Translated earnings contract loss
(2)
|
|
|
|
|
|
|
|
|
442
|
|
|
278
|
|
|
|
0.26
|
Acquisition-related costs
(3)
|
|
|
|
|
|
|
|
|
22
|
|
|
15
|
|
|
|
0.01
|
Discrete tax items and other tax-related
adjustments
(4)
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
0.01
|
Litigation, regulatory and other legal matters (5)
|
|
|
|
|
|
|
|
|
(12)
|
|
|
(9)
|
|
|
|
(0.01)
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
|
|
|
10
|
|
|
8
|
|
|
|
0.01
|
Equity in earnings of affiliated company
(7)
|
|
|
|
|
|
(72)
|
|
|
(72)
|
|
|
(46)
|
|
|
|
(0.04)
|
Impacts from the acquisition of Samsung
Corning Precision Materials
(8)
|
|
|
|
|
|
|
|
|
(3)
|
|
|
(2)
|
|
|
|
|
Core performance measures
|
|
$
|
2,485
|
|
$
|
8
|
|
$
|
497
|
|
$
|
407
|
|
18.1%
|
$
|
0.39
|
|
(a)
|
|
Based upon statut
o
ry tax rates in the specific jurisdiction for each event.
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
© 2017 Corning Incorporated. All Rights Reserved.
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
|
|
|
|
|
Effective
|
|
|
|
|
Net
|
|
Equity
|
|
income
|
|
Net (loss)
|
|
tax (benefit)
|
|
Per
|
|
|
sales
|
|
earnings
|
|
taxes
|
|
income
|
|
rate (a)
|
|
share
|
As reported - GAAP
|
|
$
|
2,047
|
|
$
|
59
|
|
$
|
(672)
|
|
$
|
(368)
|
|
(45.2%)
|
$
|
(0.36)
|
Constant-yen
(1)
|
|
|
124
|
|
|
2
|
|
|
110
|
|
|
78
|
|
|
|
0.07
|
Constant-won
(1)
|
|
|
|
|
|
(1)
|
|
|
(20)
|
|
|
(14)
|
|
|
|
(0.01)
|
Translated earnings contract loss
(2)
|
|
|
|
|
|
|
|
|
857
|
|
|
540
|
|
|
|
0.49
|
Acquisition-related costs
(3)
|
|
|
|
|
|
|
|
|
14
|
|
|
10
|
|
|
|
0.01
|
Discrete tax items and other tax-related
adjustments
(4)
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
0.02
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
|
|
|
109
|
|
|
75
|
|
|
|
0.07
|
Equity in earnings of affiliated companies
(7)
|
|
|
|
|
|
2
|
|
|
2
|
|
|
2
|
|
|
|
|
Impacts from the acquisition of Samsung
Corning Precision Materials
(8)
|
|
|
|
|
|
|
|
|
(11)
|
|
|
(9)
|
|
|
|
(0.01)
|
Pension mark-to-market adjustment (9)
|
|
|
|
|
|
|
|
|
7
|
|
|
4
|
|
|
|
|
Core performance measures
|
|
$
|
2,171
|
|
$
|
62
|
|
$
|
396
|
|
$
|
340
|
|
14.1%
|
$
|
0.28
|
|
(a)
|
|
Based upon statutory tax rates in the specific jurisdiction for each event.
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
© 2017 Corning Incorporated. All Rights Reserved.
32
Items whic
h we exclude from GAAP measures to arrive at core performance measures are as follows:
|
|
(1)
|
Constant-currency adjustments:
|
|
Constant-yen
: Because a significant portion of Display Technologies segment revenues and manufacturing costs are denominated in Japanese yen, management believes it is important to understand the impact on core earnings of translating yen into dollars. Presenting results on a constant-yen basis mitigates the translation impact of the Japanese yen, and allows management to evaluate performance period over period, analyze underlying trends in our businesses, and establish operational goals and forecasts. As of January 1, 2015, we used an internally derived management rate of ¥99, which is closely aligned to our current yen portfolio of foreign currency hedges, and have recast all periods presented based on this rate in order to effectively remove the impact of changes in the Japanese yen.
|
|
Constant-won
: Because a significant portion of Corning Precision Materials’ costs are denominated in South Korean won, management believes it is important to understand the impact on core earnings from translating won into dollars. Presenting results on a constant-won basis mitigates the translation impact of the South Korean won, and allows management to evaluate performance period over period, analyze underlying trends in our businesses, and establish operational goals and forecasts without the variability caused by the fluctuations caused by changes in the rate of this currency. We use an internally derived management rate of ₩1,100, which is consistent with historical prior period averages of the won.
|
(2)
|
Translated earnings contract loss
: We have excluded the impact of the gains and losses of our foreign currency hedges related to translated earnings for each period presented.
|
(3)
|
Acquisition-related costs
: These expenses include intangible amortization, inventory valuation adjustments and external acquisition-related deal costs.
|
(4)
|
Discrete tax items and other tax-related adjustments
: This represents the removal of discrete adjustments attributable to changes in tax law
and changes in judgment about the realizability of certain deferred tax assets, as well as
other non-operational tax-related adjustments.
|
(5)
|
Litigation, regulatory and other legal matters
: Includes amounts related to legal matters.
|
(6)
|
Restructuring, impairment and other charges
: This amount includes restructuring, impairment and other charges, including goodwill impairment charges and other expenses and disposal costs not classified as restructuring expense.
|
(7)
|
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.
|
(8)
|
Impacts from the acquisition of Samsung Corning Precision Materials
:
Pre-acquisition gains and losses on previously held equity investment and other gains and losses related to the acquisition, including post-combination expenses, fair value adjustments to the indemnity asset related to contingent consideration and the impact of the withholding tax on a dividend from Samsung Corning Precision Materials.
|
(9
)
|
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.
|
© 2017 Corning Incorporated. All Rights Reserved.
33
REPORTABLE SEGMENTS
Our re
portable segments are as follows:
|
·
|
|
Display Technologies – manufactures glass substrates primarily for flat panel liquid crystal displays.
|
|
·
|
|
Optical Communications – manufactures carrier and enterprise network components for the telecommunications industry.
|
|
·
|
|
Environmental Technologies – manufactures ceramic substrates and filters for automotive and diesel emission control applications.
|
|
·
|
|
Specialty Materials – manufactures products that provide more than 150 material formulations for glass, glass ceramics and fluoride crystals to meet demand for unique customer needs.
|
|
·
|
|
Life Sciences – manufactures glass and plastic labware, equipment, media and reagents enabling workflow solutions for scientific applications.
|
All other segments that do not meet the quantitative threshold for separate reporting have been grouped as “All Other.” This group is primarily comprised of the results of Corning’s Pharmaceutical Technologies business 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 tables provide net sales and net income for the Display Technologies segment and reconcile the non-GAAP financial measures for the Display Technologies segment with our
consolidated
financial statements presented in accordance with GAAP (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2017
|
|
|
Net
|
|
Net
|
(in millions)
|
|
sales
|
|
income
|
As reported - GAAP
|
|
$
|
736
|
|
$
|
249
|
Constant-yen
(1)
|
|
|
109
|
|
|
72
|
Constant-won
(1)
|
|
|
1
|
|
|
(6)
|
Translated earnings contract gain
(2)
|
|
|
|
|
|
(48)
|
Litigation, regulatory and other legal matters (5)
|
|
|
|
|
|
(9)
|
Impacts from the acquisition of Samsung Corning
Precision Materials
(8)
|
|
|
|
|
|
(2)
|
Core performance
|
|
$
|
846
|
|
$
|
256
|
© 2017 Corning Incorporated. All Rights Reserved.
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2016
|
|
|
Net
|
|
Net
|
(in millions)
|
|
sales
|
|
income
|
As reported - GAAP
|
|
$
|
705
|
|
$
|
209
|
Constant-yen
(1)
|
|
|
124
|
|
|
81
|
Constant won
(1)
|
|
|
|
|
|
(13)
|
Translated earnings contract gain
(2)
|
|
|
|
|
|
(58)
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
13
|
Impacts from the acquisition of Samsung Corning
Precision Materials
(8)
|
|
|
|
|
|
(9)
|
Core performance
|
|
$
|
829
|
|
$
|
223
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
As Reported
Net sales in the Display Technologies segment
increase
d by
$31
million
, or
4%
, in the
first
quarter of
2017
when compared to the
first
quarter of
2016
. The increase was driven by
an increase in volume in the mid
-teens in percentage terms
and
the positive impact from the strengthening of the Japanese yen in the amount of
$15 million, p
artially offset by LCD glass price decl
ines slightly higher than 10%. Sequential LCD glass prices declined moderately, equaling the best first-quarter decline of the past six years.
Net income
increase
d by
$40
million
, or
19%
, in the
first
quarter of
2017
, when compared to the
first
quarter of
2016
driven by the
volume increase described above, improved manufacturing efficiency and a decrease of $13 million in restructuring costs, offset somewhat by the
LCD glass price declines
described above and lower realized gains on our yen and won-denominated currency hedges in the amount of $10 million
.
Core Performance
Core net sales increased in the
first
quarter of 201
7
by
$17 million
, or
2
%, when compared to the
first
quarter of 201
6
, driven by an increase in volume in the
mid
-teens in percentage terms, partially offset by LCD glass price declines slightly higher than 10%.
Sequential LCD glass prices declined moderately, equaling the best first-quarter decline of the past six years.
Core earnings also increased in the
first
quarter of 201
7
, up $
33 million
, or
15
%, driven by the increase in volume described above
and
improvements in manufacturing efficiency. LCD glass price declines slightly higher than 10% partially offset the increase.
Outlook:
In the second quarter, the overall LCD glass market and Corning’s volume are expected to increase by a low single-digit percentage sequentially, which is equivalent to a mid-single digit percentage increa
se year over year. The company anticipates
sequential LCD glass price declines
will
be substantially les
s than the first quarter of 2017
.
Optical Communications
The following
tables provide net sales and net income for the Optical Communications segment and reconcile the non-GAAP financial measures for the Optical Communications segment with our
consolidated
financial statements presented in accordance with GAAP (in
million
s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2017
|
|
|
Net
|
|
Net
|
(in millions)
|
|
sales
|
|
income
|
As reported - GAAP
|
|
$
|
818
|
|
$
|
82
|
Acquisition-related costs
(3)
|
|
|
|
|
|
9
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
2
|
Core performance
|
|
$
|
818
|
|
$
|
93
|
© 2017 Corning Incorporated. All Rights Reserved.
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2016
|
|
|
Net
|
|
Net
|
(in millions)
|
|
sales
|
|
income
|
As reported - GAAP
|
|
$
|
609
|
|
$
|
17
|
Acquisition-related costs
(3)
|
|
|
|
|
|
4
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
5
|
Core performance
|
|
$
|
609
|
|
$
|
26
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
As Reported
Net sales in the Optical Communications segment
increase
d by
$209
million
, or
34%
, in the
first
quarter of
2017
when compared to the same period in
2016
.
The increase was 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 quarter of
2016. Strong growth in the North American fiber-to-the-home market drove the increase in carrier network products.
Net income in the first quarter of 2017 increased by $65 million, or 382%, when compared to the first quarter of 2016, driven by
the increase in sales described above
.
Movements in foreign exchange rates did not materially impact net sales and net income in
this
segment in the three months ended
March 31, 2017
when compared to the same period in 201
6
.
Core Performance
Core earnings increased in the
first
quarter of 201
7 by $67 million, or 258
%, respectively, driven by
the items impacting the “As Reported” results described above
.
Outlook
:
In the
second
quarter, Corning expects Optical Communications
sales to be up approximately 10% year-over-year.
Environmental Technologies
The following table
s
provide net sales and net income for the Environmental Technologies segment and reconciles the non-GAAP financial measures for the Environmental Technologies segment with our
consolidated
financial statements presented in accordance with GAAP (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2017
|
|
|
Net
|
|
Net
|
(in millions)
|
|
sales
|
|
income
|
As reported - GAAP
|
|
$
|
275
|
|
$
|
31
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
6
|
Core performance measures
|
|
$
|
275
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2016
|
|
|
Net
|
|
Net
|
(in millions)
|
|
sales
|
|
income
|
As reported - GAAP
|
|
$
|
264
|
|
$
|
34
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
3
|
Core performance measures
|
|
$
|
264
|
|
$
|
37
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
© 2017 Corning Incorporated. All Rights Reserved.
36
As Reported
Net sales in the Environmental Technologies segment increased $11 million, or 4%, in the first quarter of 2017 when compared to the same period in 2016. Sales of automo
tive products increased 14%, driven by
higher sales of light-duty substrate produc
ts due to m
arket strength in Europe, China and Asia. Lower sales of heavy-duty diesel products in North America partially offset this increase. Net income in the first quarter of 2017 decreased by $3 million, or 9%, driven by
higher
restructuring, impairment and other charges,
and expenses in support of new product launches.
Movements in foreign exchange rates did not materially impact net sales and net income in
this
segment in the three months ended
March 31, 2017
when compared to the same period in 201
6
.
Core Performance
In the first quarter of 2017, c
ore earnings
remained consistent with t
he
first
quarter of 201
6
.
Outlook
:
In the
second
quarter, the Company anticipates En
vironmental Technologies sales will be
consistent with the second quarter of 2016.
Specialty Materials
The following tables provide net sales and net income for the Specialty Materials segment and reconciles the non-GAAP financial measures for the Specialty Materials segment with our
consolidated
financial statements presented in accordance with GAAP (in
million
s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2017
|
|
|
Net
|
|
Net
|
(in millions)
|
|
sales
|
|
income
|
As reported - GAAP
|
|
$
|
300
|
|
$
|
48
|
Core performance
|
|
$
|
300
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2016
|
|
|
Net
|
|
Net
|
(in millions)
|
|
sales
|
|
income
|
As reported - GAAP
|
|
$
|
227
|
|
$
|
26
|
Constant-yen
(1)
|
|
|
|
|
|
(1)
|
Constant-won
(1)
|
|
|
|
|
|
(1)
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
8
|
Core performance
|
|
$
|
227
|
|
$
|
32
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
As Reported
Net sales in the Specialty Materials segment
increase
d by
$73
million
, or
32%
, in the
first
quarter of
2017
when compared to the same period in
2016
,
driven by strong growth in sales of Gorilla Glass products, combined with an increase in advanced optics products.
Net income in the
first
quarter of
2017
increase
d by
$22
million
, or
85%
,
due to the significant increase in sales and the absence of restructuring charges, offset slightly by higher selling and administrative costs.
Movements in foreign exchange rates did not materially impact net sales and net income in the Specialty Materials segment in the three months ended
March 31, 2017
when compared to the same period in 201
6
.
Core Performance
Core earnings
increased
by
$16 million
, or
50
%, in the
three
months ended
March 31
, 201
7
, driven primarily by
the increase
in sales of Corning Gorilla Glass
and advanced optics
products
, offset slightly by higher selling and administrative costs
.
Outlook
:
On a year-over-year basis, second
-quarter segment sales are expected to
grow in the high-teens on a percentage basis.
© 2017 Corning Incorporated. All Rights Reserved.
37
Life Sciences
The following tables provide net sales and net income for the Life Sciences segment and reconcile the non-GAAP financial measures for the Life Sciences segment with our
consolidated
financial statements presented in accordance with GAAP (in
million
s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2017
|
|
|
Net
|
|
Net
|
(in millions)
|
|
sales
|
|
income
|
As reported – GAAP
|
|
$
|
210
|
|
$
|
17
|
Acquisition-related costs
(3)
|
|
|
|
|
|
3
|
Core performance
|
|
$
|
210
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2016
|
|
|
Net
|
|
Net
|
(in millions)
|
|
sales
|
|
income
|
As reported – GAAP
|
|
$
|
204
|
|
$
|
12
|
Acquisition-related costs
(3)
|
|
|
|
|
|
3
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
3
|
Core performance
|
|
$
|
204
|
|
$
|
18
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
As Reported
Net sales in the Life Sciences segment
increase
d by
$6
million
, or
3%
, in the
first
quarter of
2017
when compared to the same period in
2016
, driven by
strong performance globally
. Net
income
increase
d by
$5
million
, or
42%
, driven by an increase in volume and a decrease in restructuring expenses
.
Movements in foreign exchange rates
negatively
impact
ed
net sales
in the amount of $4 million
and net income
in the amount of $1 million
.
Core Performance
Core earnings in the three months ended
March 31, 2017
increased by 11%, driven by an increase in volume, offset slightly by the negative impact of m
ovements in foreign exchange rates
of $1 million
.
Outlook
:
Second
-quarter sales are expected to grow by a low single-digit percentage when compared to the
second
quarter of 201
6
.
All Other
All other segments that do not meet the quantitative threshold for separate reporting have been grouped as “All Other.” This group is primarily comprised of the results of Corning’s Pharmaceutical Technologies business 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
million
s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
|
As Reported
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
36
|
|
$
|
38
|
Research, development and engineering expenses
|
|
$
|
52
|
|
$
|
47
|
Equity earnings of affiliated companies
|
|
$
|
1
|
|
$
|
3
|
Net loss
|
|
$
|
(53)
|
|
$
|
(85)
|
N
et sales of this
segment in the first quarter of 2017 were consistent with the first quarter of 2016.
The de
crease in the net loss of this segment
reflects the absence of asset write-offs in emerging businesses recorded in the first quarter of 2016
.
© 2017 Corning Incorporated. All Rights Reserved.
38
CAPITAL RESOURCES AND LIQUIDITY
Financing and Capital Resources
There were no significant items that impacted Corning’s financing structure in the three months ended March 31, 201
7
and 201
6
.
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 paid in the first quarter of 2016.
On February 1, 2017, Corning’s Board of Directors declared a 14.8% increase in the Company’s quarterly common stock dividend, which increased the quarterly dividend from $0.135 to $0.155 per share of common stock, beginning with the dividend to be paid in the first quarter of 2017. This increase marks the sixth dividend increase since October 2011.
Share Repurchase Program
In
three months ended March 31, 2017, Corning repurchased 15.3 million shares of common stock for $408.3 million
.
Capital Spending
Capital spending
totaled $364 million and $270 million in the three months ended March 31, 2017 and 2016, respectively. We expect our 2017 capital ex
penditures to be approximately
$
1.5 billion, driven by expansions related to the Gen 10.5 glass manufacturing facility in China, the addition of capacity to support the new gas-particulate filters business in the Environmental Technologies segment and investment to support
growth in customer demand
in the Optical Communications and Specialty Materials segments.
Cash Flow
Summary of cash flow data (in
million
s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
Net cash provided by (used in) operating activities
|
|
$
|
191
|
|
$
|
(80)
|
|
Net cash used in investing activities
|
|
$
|
(326)
|
|
$
|
(76)
|
|
Net cash used in financing activities
|
|
$
|
(388)
|
|
$
|
(916)
|
|
Net cash provided by operating activities
increased
by
$271
million in the
three months ended March 31, 2017
when compared to the same period last year, driven largely by
the increase in net income net of non-cash items,
a decline
in taxes paid of approximately $100 million and an increase in dividends received from affiliated companies of $34
million
.
Net cash
used in
investing activities
increased by $250 million
in the
three months ended March 31, 2017
,
when compared to the
same pe
riod last year, driven by an increase of $94 million in capital expenditures, the absence of cash received from the liquidation of short-term investments of $121 million and cash paid in the amount of $35 million for a small acquisition completed in the first quarter of 2017.
Net cash used in financing activities
in the
three months ended March 31, 2017
decreased
when compared to the same p
eriod last year, driven by lower
share repurchases
, down $303 million,
an increase of $173 million in proceeds from the exercise of stock options and the absence of $64 million of debt repayments made in the first quarter of 2016
.
© 2017 Corning Incorporated. All Rights Reserved.
39
Key Balance Sheet Data
Balance sheet and working capital measures are provided in the following table (in
million
s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
6,297
|
|
$
|
6,297
|
Current ratio
|
|
|
3.6:1
|
|
|
3.3:1
|
Trade accounts receivable, net of allowances
|
|
$
|
1,583
|
|
$
|
1,481
|
Days sales outstanding
|
|
|
60
|
|
|
54
|
Inventories
|
|
$
|
1,544
|
|
$
|
1,471
|
Inventory turns
|
|
|
3.8
|
|
|
3.8
|
Days payable outstanding (1)
|
|
|
50
|
|
|
45
|
Long-term debt
|
|
$
|
3,669
|
|
$
|
3,646
|
Total debt to total capital
|
|
|
18%
|
|
|
18%
|
|
(1)
|
|
Includes trade payables only.
|
Credit Rating
Our credit ratings remain the same as those disclosed in our
2016
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Outlook
|
RATING AGENCY
|
|
Long-Term Debt
|
|
last update
|
|
|
|
|
|
Standard & Poor’s
|
|
BBB+
|
|
Stable
|
|
|
|
|
October 27, 2015
|
|
|
|
|
|
Moody’s
|
|
Baa1
|
|
Stable
|
|
|
|
|
October 28, 2015
|
Management Assessment of Liquidity
We ended the first quarter of 2017 with
approximately $4.8 billion of
cash and cash equivalents. Our cash and cash equivalents are held in various locations throughout the world and generally are unrestricted.
Although approximately 66% of the consolidated amount was held outside of the United States at March 31, 2017, we have sufficient U.S. liquidity, including borrowing
capacity, to fund foreseeable U.S. cash needs without requiring the repatriation of foreign cash. We utilize a variety of financing strategies to ensure that our worldwide cash is available in the locations in which it is needed.
It is our policy to manage our exposure to changes in interest rates. To manage interest rate exposure, the Company, from time to time, enters into interest rate swap agreements. We are currently party to two interest rate swaps that are designated as fair value hedges and economically exchange a notional amount of $550 million of previously issued fixed rate long-term debt to floating rate debt. Under the terms of the swap agreements, we pay the counterparty a floating rate that is indexed to the one-month LIBOR rate.
Corning also has a commercial paper program pursuant to which we may issue short-term, unsecured commercial paper notes. On July 20, 2016, Corning’s Board of Directors approved an increase to the allowable maximum aggregate principal amount outstanding at any time from $1 billion to $2 billion. Under this program, the Company may issue the notes from time to time and will use the proceeds for general corporate purposes. The Company’s $2 billion revolving credit facility is available to support obligations under the commercial paper program, if needed. Corning did not have outstanding commercial paper at March 31, 2017 and December 31, 2016.
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.
© 2017 Corning Incorporated. All Rights Reserved.
40
Our major source of funding for 201
7
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 and dividend payments and share repurchase programs.
Corning 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
March 31, 2017
, our leverage using this measure was
approximately 18
% and
we are in compliance with the financial covenant.
Our debt instruments contain customary event of default provisions, which allow the lenders the option of accelerating all obligations upon the occurrence of certain events. In addition, some of our debt instruments contain a cross default provision, whereby an uncured default in excess of a specified amount on one debt obligation of the Company, also would be considered a default under the terms of another debt instrument.
As of
March 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 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.
Off Balance Sheet Arrangements
There have been no material changes outside the ordinary course of business in our off balance sheet arrangements as disclosed in our
2016
Form 10-K under the caption “Off Balance Sheet Arrangements.”
Contractual Obligations
There have been no material changes outside the ordinary course of business in the contractual obligations disclosed in our
2016
Form 10-K under the caption “Contractual Obligations.”
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The estimates that require management’s most difficult, subjective or complex judgments are described in our
2016
Form 10-K and remain unchanged through the first
three
months of
2017
. For certain items, additional details are provided 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 in which 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 and have 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
manufacturing
operations and are not held for trading or other purposes.
At
March 31, 2017
and
December 31, 2016
, the carrying value of precious metals was higher than the fair market value by $837 million and $890
million
, respectively. These precious metals are utilized by the Display Technologies and Specialty Materials segments. Corning believes these precious metal assets to be recoverable due to the significant positive cash flow in both segments. The potential for impairment exists in the future if negative events significantly decrease the cash flow of these segments. Such events include, but are not limited to, a significant decrease in demand for products or a significant decrease in profitability in our Display Technologies or Specialty Materials segments.
NEW ACCOUNTING STANDARDS
Refer to Note 1 (Significant Accounting Policies) to the Consolidated Financial Statements.
© 2017 Corning Incorporated. All Rights Reserved.
41
ENVIRONMENT
Corning has been named by the Environmental Protection Agency (“the Agency”) under the Superfund Act, or by state governments under similar state laws, as a potentially responsible party
for 17 active
hazardous waste sites. Under the Superfund Act, all parties who may have contributed any waste to a hazardous waste site, identified by the Agency, are jointly and severally liable for the cost of cleanup unless the Agency agrees otherwise. It is Corning’s policy to accrue for its estimated liability related to Superfund sites and other environmental liabilities related to property owned by Corning based on expert analysis and continual monitoring by both internal and external consultants. At
March 31, 2017
and
December 31, 2016
, Corni
ng had accrued
approximately $42 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
.
FORWARD-LOOKING STATEMENTS
The statements in this Quarterly Report on Form 10-Q, in reports subsequently filed by Corning with the Securities and Exchange Commission (“SEC”) on Forms 8-K, and related comments by management that are not historical facts or information and contain words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “seek,” “see,” “would,” and “target” and similar expressions are forward-looking statements. Such statements relate to future events that by their nature address matters that are, to different degrees, uncertain. These forward-looking statements relate to, among other things, the company’s future operating performance, the company's share of new and existing markets, the company's revenue and earnings growth rates, the company’s ability to innovate and commercialize new products, and the company’s implementation of cost-reduction initiatives and measures to improve pricing, including the optimization of the company’s manufacturing capacity.
Although the company believes that these forward-looking statements are based upon reasonable assumptions regarding, among other things,
current estimates and forecasts, general economic conditions, its knowledge of its business, and key performance indicators that impact the company, actual results could differ materially. The company does not undertake to update forward-looking statements. Some of the risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements 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;
|
|
-
|
|
product and components performance issues;
|
|
-
|
|
retention of key personnel;
|
|
-
|
|
customer ability, most notably in the Display Technologies segment, to maintain profitable operations and obtain financing to fund their ongoing operations and manufacturing expansions and pay their receivables when due;
|
|
-
|
|
loss of significant customers;
|
|
-
|
|
changes in tax laws and regulations;
|
|
-
|
|
the potential impact of legislation, government regulations, and other government action and investigations; and
|
|
-
|
|
other risks detailed in Corning’s SEC filings.
|
© 2017 Corning Incorporated. All Rights Reserved.
42