GLW Corning Inc

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, 2018 (“2018 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.



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. 



Leases



Corning leases certain real estate, vehicles, and equipment from third parties. On January 1, 2019 we adopted the new leasing standard.  Corning classifies leases as either financing or operating.  Operating leases are included in other assets with the corresponding liability in other accrued liabilities and other liabilities on our consolidated balance sheets.  Finance leases are included in property, plant and equipment with the corresponding liability in the current portion and long-term debt line items on our consolidated balance sheets.  Leases where we are the lessor are not significant.



Lease expense is recognized on a straight-line basis over the lease term for operating leases.  Financ ing leases are recognized on the effective interest method for interest expense and straight-line method for asset amortization.  Renewals and terminations are included in the calculation of the Right of Use (“ROU”) asset and lease liability when considered to be reasonably certain to be exercised.  When the implicit rate is unknown, we use our incremental borrowing rate based on commencement date in determining the present value of lease payments. 



Our leases do not include residual value guarantees.  We are not the primary beneficiary in or have other forms of variable interests with the lessor of the leased assets.  The impact to the balance sheet for operating leases is a gross-up for the addition of ROU assets and liabilities relating to the operating leases in the amount of $449 million at adoption.  The impact to the balance sheet for financing leases was not material.



Corning has elected the following practical expedients and accounting policy elections to apply the new lease accounting standard at its effective date as of January 1, 2019 :  





At adoption, Corning recorded a nominal cumulative-effect adjustment to beginning retained earnings.



Refer to Note 4 (Leases) to the consolidated financial statements for additional information.



Revenue



One of Corning’s equity affiliates adopted the new revenue standard on January 1, 2019.  The impact of adopti ng the new standard   to Corning’s financial statements was a net reduction of $186 million to 2019 beginning retained earnings.  T iming of revenue recognition for certain open performance obligations as measured at January 1, 2019 under the new standard was approximately $239 million with offsetting deferred tax impacts of $53 million.



Income Taxes



In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income, which allows for reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act. We have adopted this new standard effective January 1, 2019. The impact of the new standard resulted in a reclassification of $53 million from accumulated other comprehensive income to beginning retained earnings.



Other Accounting Standards



No other accounting standards newly issued or adopted as of January 1, 2019, had a material impact on Corning’s financial statements or disclosures.



2.   Revenue



Revenue Disaggregation Table



The following table shows revenues by major product categories, similar to our reportable segment disclosure.  Within each product category, contract terms, conditions and economic factors affecting the nature, amount, timing and uncertainty around revenue recognition and cash flows are substantially similar.  The commercial markets and selling channels are also similar.  Except for an inconsequential amount of  revenue for Telecommunications products, our product category revenues are recognized at point in time when control transfers to the customer.



Revenues by product category are as follows (in millions):





Contract Assets and Liabilities



Contract assets, such as costs to obtain or fulfill contracts, are an insignificant component of Corning’s revenue recognition process.  The majority of Corning’s cost of fulfillment as a manufacturer of products is classified as inventory, fixed assets and intangible assets, which are accounted for under the respective guidance for those asset types.  Other costs of contract fulfillment are immaterial due to the nature of our products and their respective manufacturing processes.  



Contract liabilities include deferred revenues, other advanced payments and customer deposits.  Deferred revenue and other advanced payments are not significant to our operations and are classified as part of other current liabilities in our financial statements.  Customer deposits are predominately related to Display products and are classified as part of other current liabilities and other long- term liabilities as appropriate, and are disclosed below. 



We treat shipping and handling fees as a fulfillment cost and not as a separate performance obligation under the terms of our revenue contracts due to the perfunctory nature of the shipping and handling obligations. 



Customer Deposits



As of March 31, 2019 and December 31, 2018, Corning had customer deposits of approximately $1.0 billion.  The majority of these represent non-refundable cash deposits for customers to secure rights to an amount of glass produced by Corning under long-term supply agreements.  The duration of these long-term supply agreements ranges up to ten years.  As glass is shipped to customers, Corning will recognize revenue and issue credit memoranda to reduce the amount of the customer deposit liability, which are applied against customer receivables resulting from the sale of glass.  In the three months ended March 31, 2019 and 2018, no credit memoranda were issued.  As of March 31, 2019 and December 31, 2018, $907 million and $922 million were recorded as other long-term liabilities, respectively.  The remaining $84 million and $54 million, respectively, were classified as other current liabilities .



3.   Commitments, Contingencies and Guarantees



Corning is a defendant in various lawsuits and is subject to various claims that arise in the normal course of business, the most significant of which are summarized below.  In the opinion of management, the likelihood that the ultimate disposition of these matters will have a material adverse effect on Corning’s consolidated financial position, liquidity, or results of operations, is remote. 



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, 2016, the Company’s liability under the Plan was $290 million, which is required to be paid through a series of fixed payments beginning in the second quarter of 2017.  At March 31, 2019, the total amount of payments due in years 2019 through 2023 is $185 million, of which $50   million is due in the second quarter of 2019 and is classified as a current liability.  The remaining $135  million is classified as a non-current liability.



Non-PCC Asbestos Claims



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.  At December 31, 2018 and March 31, 2019, the amount of the reserve for these non-PCC asbestos claims was estimated to be $146  million.  The reserve balance as of March 31, 2019 represents the undiscounted projection of claims and related legal fees for the estimated life of the litigation.



Dow Corning Chapter 11 Related Matters



Until June 1, 2016, Corning and The Dow Chemical Company (“Dow”) each owned 50% of the common stock of Dow Corning Corporation (“Dow Corning”).  On May 31, 2016, Corning and Dow realigned their ownership interest in Dow Corning.  With the realignment, Corning retained its indirect ownership interest in the Hemlock Semiconductor Group ( “ HSG ” ) and formed a new entity which had been capitalized by Dow Corning with $4.8  billion.  Following the realignment, Corning no longer owned any interest in Dow Corning.  With the realignment, Corning agreed to indemnify Dow Corning for 50% of Dow Corning’s non-ordinary course, pre-closing liabilities to the extent such liabilities exceed the amounts reserved for them by Dow Corning as of May 31, 2016, including two legacy Dow Corning matters: the Dow Corning Breast Implant Litigation, and the Dow Corning Bankruptcy Pendency Interest Claims.



Dow Corning Breast Implant Litigation



In May 1995, Dow Corning filed for bankruptcy protection to address pending and claimed liabilities arising from many thousands of breast implant product lawsuits.  On June 1, 2004, Dow Corning emerged from Chapter 11 with a Plan of Reorganization (the “Plan”) which provided for the settlement or other resolution of implant claims.  The Plan also includes releases for Corning and Dow as shareholders in exchange for contributions to the Plan.



Under the terms of the Plan, Dow Corning has established and funded a Settlement Trust and a Litigation Facility, referred to above, to provide a means for tort claimants to settle or litigate their claims.  Inclusive of insurance, Dow Corning has paid approximately $1.8 billion to the Settlement Trust.  As of May 31, 2016, Dow Corning had recorded a reserve for breast implant litigation of $290 million.  In the event Dow Corning’s total liability for these claims exceeds such amount, Corning may be required to indemnify Dow Corning for up to 50% of the excess liability.  At March 31, 2019, Dow Corning had recorded a reserve for breast implant litigation of $263 million. 



Dow Corning Bankruptcy Pendency Interest Claims



As a separate matter arising from the bankruptcy proceedings, Dow Corning is defending claims asserted by commercial creditors who claim additional compounded interest at default and state statutory judgment rates as well as attorneys’ fees and other enforcement costs, during the period from May 1995 through June 2004.  As of May 31, 2016, Dow Corning had recorded a reserve for these claims of $107 million.  In the event Dow Corning’s liability for these claims exceeds such amount, Corning may be required to indemnify Dow Corning for up to 50% of the excess liability, subject to certain conditions and limits.  As of March 31, 2019, Dow Corning had recorded a reserve for these claims of $83 million.



Environmental Litigation



Corning has been named by the Environmental Protection Agency (“the Agency”) under the Superfund Act, or by state governments under similar state laws, as a potentially responsible party for 1 5 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, 2019 and December 31, 2018, Corning had accrued approximately $28  million and $30  million, respectively, for the undiscounted 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.



4.   Leases



We have operating and finance leases for real estate, vehicles, and equipment. 



We incurred lease expense in the amount of $42 million for the three months ended March 31, 2019.  Operating and Financ ing lease costs were $37 million and $5 million, respectively.  Short-term rental expense, for agreements less than one year in duration, is immaterial.  Financ ing lease cost was comprised of expenses for Depreciation of right-of-use assets and Interest on lease liabilities in the amounts of $2 million and $3 million, respectively.



Cash paid for amounts included in the measurement of lease liabilities totaled $29 million for the three months ended March 31, 2019.  Operating cash flows from operating and financing leases were $26 million and $3 million, respectively.  Financing cash flows from finance leases were nominal.

Supplemental balance sheet information related to leases was as follows (in millions, except lease term and discount rate):







The weighted average remaining lease terms for operating and financing leases are 11.9 years and 6.4 years, respectively.  The weighted average discount rates for operating and financing leases are 3.9% and 6.0% , respectively.



As of March 31, 2019, m aturities of lease liabilities under the new lease standard are as follows (in millions):





As of December 31, 2018, maturities of lease liabilities under the previous lease standard were as follows (in millions):





As of March 31, 2019, we have additional operating leases, primarily for new production facilities and equipment, that have not yet commenced of approximately $450 million on an undiscounted basis .  These operating leases will commence between fiscal year 2019 and fiscal year 2020 with lease terms of 10 years to 25 years.



5.   Income Taxes



Our provision for income taxes and the related effective income tax rates are as follows (in millions):







For the three months ended March 31, 2019, the effective income tax rate differed from the U.S. statutory rate of 21 % primarily due to the following:





For the three months ended March 31, 2018, the effective income tax rate differed from the U.S. statutory rate of 21 % primarily due to the following:





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):









7.   Inventories, Net of Inventory Reserves



Inventories, net of inventory reserves comprise the following (in millions):













8.  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):



The components of net period benefit cost other than the service cost component are included in the line item “Other expense, net” in the consolidated statements of income.



9.  Other Liabilities



Other liabilities follow (in millions):





10.  Hedging Activities



Undesignated Hedges



The table below includes a total gross notional value for translated earnings contracts of $12.6 billion and $13.6 billion at March 31, 2019 and December 31, 2018, respectively.  These include gross notional value for average rate forwards of $10.1   billion and $11.0 billion, zero-cost collars and purchased put or call options of $2.5   billion and $2.6 billion at March 31, 2019 and December 31, 2018, respectively.  The majority of the average rate forward contracts hedge a significant portion of the Company’s exposure to the Japanese yen with maturities spanning the years 2019-2022 and with gross notional values of $8.5 billion and $9.1 billion at March 31, 2019 and December 31, 2018, respectively.  The average rate forward contracts also partially hedge the impacts of the South Korean won, 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, only the put or the call option can be exercised at maturity.