Corning Incorporated
CORNING INC /NY (Form: 10-Q, Received: 10/25/2012 16:04:33)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the quarterly period ended September 30, 2012

 
OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from
 
to
   

 
Commission file number:   1-3247

 
CORNING INCORPORATED
 
 (Exact name of registrant as specified in its charter)

New York
 
16-0393470
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

One Riverfront Plaza, Corning, New York
 
14831
(Address of principal executive offices)
 
(Zip Code)

 
607-974-9000
 
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
 
Yes
x
 
No
¨
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes
x
 
No
¨
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
 
Accelerated filer
¨
 
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
¨
 
No
x
 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
 
Outstanding as of October 15, 2012
Corning’s Common Stock, $0.50 par value per share
 
1,477,841,448 shares


 
 

 


INDEX

PART I – FINANCIAL INFORMATION
   
Page
Item 1. Financial Statements
   
     
Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2012 and 2011
 
3
     
Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2012 and 2011
 
4
     
Consolidated Balance Sheets (Unaudited) at September 30, 2012 and December 31, 2011
 
5
     
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2012 and 2011
 
6
     
Notes to Consolidated Financial Statements (Unaudited)
 
7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
28
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
46
     
Item 4. Controls and Procedures
 
46
     
PART II – OTHER INFORMATION
   
     
Item 1. Legal Proceedings
 
47
     
Item 1A.  Risk Factors
 
48
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
48
     
Item 6. Exhibits
 
49
     
Signatures
 
50


 
-2-

 

CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in millions, except per share amounts)


 
Three months
ended September 30,
 
Nine months
ended September 30,
 
2012
 
2011
 
2012
 
2011
                       
Net sales
$
2,038 
 
$
2,075 
 
$
5,866 
 
$
6,003 
Cost of sales
 
1,159 
   
1,097 
   
3,376 
   
3,262 
                       
Gross margin
 
 879 
   
978 
   
2,490 
   
2,741 
                       
Operating expenses:
                     
Selling, general and administrative expenses
 
294 
   
216 
   
864 
   
750 
Research, development and engineering expenses
 
185 
   
166 
   
560 
   
494 
Amortization of purchased intangibles
 
   
   
13 
   
11 
Asbestos litigation charge
 
   
   
   
15 
                       
Operating income
 
393 
   
587
   
1,044 
   
1,471 
                       
Equity in earnings of affiliated companies (Note 8)
 
240 
   
324 
   
717 
   
1,150 
Interest income
 
   
   
10 
   
15 
Interest expense
 
(33)
   
(23)
   
(77)
   
(72)
Other income, net (Note 1)
 
   
27 
   
42 
   
97 
                       
Income before income taxes
 
608 
   
921 
   
1,736 
   
2,661 
Provision for income taxes (Note 4)
 
(87)
   
(110)
   
(291)
   
(347)
                       
Net income attributable to Corning Incorporated
$
521 
 
$
811 
 
$
1,445 
 
$
2,314 
                       
Earnings per common share attributable to Corning Incorporated:
                     
Basic (Note 5)
$
0.35 
 
$
0.52 
 
$
0.96 
 
$
1.48 
Diluted (Note 5)
$
0.35 
 
$
0.51 
 
$
0.95 
 
$
1.46 
                       
Dividends declared per common share
$
0.075 
 
$
0.05 
 
$
0.225 
 
$
0.15 

The accompanying notes are an integral part of these consolidated financial statements.






 
-3-

 

CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; in millions)


 
Three months ended
September 30,
 
Nine months ended
September 30,
   
 
2012
 
2011
 
2012
 
2011
                       
Net income attributable to Corning Incorporated
$
521
 
$
811 
 
$
1,445
 
$
2,314
Other comprehensive income (loss), net of tax
 
241
   
(371)
   
194
   
50
                       
Comprehensive income attributable to Corning Incorporated
$
762
 
$
440 
 
$
1,639
 
$
2,364

The accompanying notes are an integral part of these consolidated financial statements.

 
-4-

 

CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except per share amounts)

 
September 30,
2012
 
December 31,
2011
Assets
         
           
Current assets:
         
Cash and cash equivalents
$
4,952 
 
$
4,661 
Short-term investments, at fair value (Note 6)
 
1,399 
   
1,164 
Total cash, cash equivalents and short-term investments
 
6,351 
   
5,825 
Trade accounts receivable, net of doubtful accounts and allowances - $24 and $19
 
1,248 
   
1,082 
Inventories (Note 7)
 
1,003 
   
975 
Deferred income taxes (Note 4)
 
490 
   
448 
Other current assets
 
424 
   
347 
Total current assets
 
9,516 
   
8,677 
           
Investments (Note 8)
 
5,172 
   
4,726 
Property, net of accumulated depreciation - $7,745 and $7,204 (Note 9)
 
11,036 
   
10,671 
Goodwill and other intangible assets, net (Note 10)
 
912 
   
926 
Deferred income taxes (Note 4)
 
2,501 
   
2,652 
Other assets
 
273 
   
196 
           
Total Assets
$
29,410 
 
$
27,848 
           
Liabilities and Equity
         
           
Current liabilities:
         
Current portion of long-term debt (Note 3)
$
130 
 
$
27 
Accounts payable
 
901 
   
977 
Other accrued liabilities (Note 2)
 
956 
   
1,093 
Total current liabilities
 
1,987 
   
2,097 
           
Long-term debt (Note 3)
 
3,272 
   
2,364 
Postretirement benefits other than pensions
 
901 
   
897 
Other liabilities (Note 2)
 
1,364 
   
1,361 
Total liabilities
 
7,524 
   
6,719 
           
Commitments and contingencies (Note 2)
         
Shareholders’ equity:
         
Common stock – Par value $0.50 per share; Shares authorized 3.8 billion; Shares issued: 1,647 million and 1,636 million
 
824 
   
818 
Additional paid-in capital
 
13,118 
   
13,041 
Retained earnings
 
10,438 
   
9,332 
Treasury stock, at cost; Shares held: 169 million and 121 million
 
(2,646)
   
(2,024)
Accumulated other comprehensive income (loss)
 
105 
   
(89)
Total Corning Incorporated shareholders’ equity
 
21,839 
   
21,078 
Noncontrolling interests
 
47 
   
51 
Total equity
 
21,886 
   
21,129 
           
Total Liabilities and Equity
$
29,410 
 
$
27,848 

The accompanying notes are an integral part of these consolidated financial statements.

 
-5-

 

CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
 
Nine months ended
September 30,
 
2012
 
2011
Cash Flows from Operating Activities:
         
Net income
$
1,445 
 
$
2,314 
Adjustments to reconcile net income to net cash provided by operating activities:
         
Depreciation
 
717 
   
699 
Amortization of purchased intangibles
 
13 
   
11 
Cash received from settlement of insurance claims
       
66 
Stock compensation charges
 
56 
   
66 
Earnings of affiliated companies in excess of dividends received
 
(140)
   
(686)
Deferred tax provision
 
44 
   
118 
Employee benefit payments less than expense
       
105 
Changes in certain working capital items:
         
Trade accounts receivable
 
(149)
   
(182)
Inventories
 
(31)
   
(170)
Other current assets
 
(65)
   
(49)
Accounts payable and other current liabilities, net of restructuring payments
 
(42)
   
(107)
Other, net
 
118 
   
(153)
Net cash provided by operating activities
 
1,966 
   
2,032 
           
Cash Flows from Investing Activities:
         
Capital expenditures
 
(1,275)
   
(1,666)
Acquisition of business, net of cash received
       
(148)
Investment in affiliates
 
(111)
     
Short-term investments – acquisitions
 
(1,859)
   
(2,193)
Short-term investments – liquidations
 
1,618 
   
2,426 
Other, net
 
   
Net cash used in investing activities
 
(1,621)
   
(1,580)
           
Cash Flows from Financing Activities:
         
Net repayments of short-term borrowings and current portion of long-term debt
 
(24)
   
(22)
Principal payments under capital lease obligations
 
(1)
   
(32)
Proceeds from issuance of long-term debt, net
 
1,030 
   
34 
Payments to settle interest rate hedges
 
(18)
     
Proceeds from the exercise of stock options
 
26 
   
82 
Repurchases of common stock for treasury
 
(580)
     
Dividends paid
 
(339)
   
(237)
Net cash provided by (used in) financing activities
 
94 
   
(175)
Effect of exchange rates on cash
 
(148)
   
26 
Net increase in cash and cash equivalents
 
291 
   
303 
Cash and cash equivalents at beginning of period
 
4,661 
   
4,598 
           
Cash and cash equivalents at end of period
$
4,952 
 
$
4,901 

The accompanying notes are an integral part of these consolidated financial statements.

Certain amounts for prior periods were reclassified to conform to the 2012 presentation.

 
-6-

 

CORNING INCORPORATED AND SUBSIDIARY COMPANIES
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 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. GAAP for interim financial information.  Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. 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, 2011 (2011 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.

Other Income, Net

“Other income, net” in Corning’s consolidated statements of income includes the following (in millions):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2012
 
2011
 
2012
 
2011
Royalty income from Samsung Corning Precision
$
20 
 
$
51 
 
$
63 
 
$
176 
Foreign currency exchange and hedge (losses)/gains, net
 
(1)
   
(15)
   
   
(31)
Net loss attributable to noncontrolling interests
 
         
   
Other, net
 
(15)
   
(9)
   
(29)
   
(50)
Total
$
 
$
27 
 
$
42 
 
$
97 

New Accounting Standards

In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.  The ASU 2011-11 amendments require companies to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.  ASU 2011-11 is required to be applied retrospectively for all prior periods presented and is effective for annual periods for fiscal years beginning on or after January 1, 2013, and interim periods within those annual fiscal years.  Corning does not expect adoption of this standard to have a material impact on its consolidated financial condition.

 
-7-

 


In July 2012, the FASB issued Accounting Standards Update No. 2012-02, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.  The ASU 2012-02 amendments are intended to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories.  The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test.  The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  Early adoption is permitted.  Corning plans to adopt this standard during its fourth quarter impairment review process.  Corning does not expect adoption of this standard to have a material impact on its consolidated results of operations and financial condition.

2.      Commitments, Contingencies, and Guarantees

Asbestos Litigation

Pittsburgh Corning Corporation.   Corning and PPG Industries, Inc. (PPG) each own 50% of the capital stock of Pittsburgh Corning Corporation (PCC).  Over a period of more than two decades, PCC and several other defendants have been named in numerous lawsuits involving claims alleging personal injury from exposure to asbestos.  On April 16, 2000, PCC filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Western District of Pennsylvania.  Corning, with other relevant parties, has been involved in ongoing efforts to develop a Plan of Reorganization that would resolve the concerns and objections of the relevant parties.  A proposed PCC plan of reorganization (Amended PCC Plan) filed in the U.S. Bankruptcy Court for the Western District of Pennsylvania was not confirmed by the Court.  Further changes to the Amended PCC Plan were filed in August of 2012.  Corning also has an equity interest in Pittsburgh Corning Europe N.V. (PCE), a Belgian Corporation that is a component of the Company’s proposed resolution of the PCC asbestos litigation.  At September 30, 2012 and December 31, 2011, the fair value of PCE exceeded its carrying value of $142 million and $138 million, respectively.

The Amended PCC Plan does not include certain non-PCC asbestos claims that may be or have been raised against Corning.  Corning has recorded in its estimated asbestos litigation liability an additional $150 million for the approximately 9,900 current non-PCC cases alleging injuries from asbestos, and for any future non-PCC cases.  The liability for the Amended PCC Plan and the non-PCC asbestos claims was estimated to be $666 million at September 30, 2012, compared with an estimate of the liability of $657 million at December 31, 2011.  In the three and nine months ended September 30, 2012, Corning recorded asbestos litigation expense of $3 million and $9 million, respectively.  In the three and nine months ended September 30, 2011, Corning recorded asbestos litigation expense of $5 million and $15 million, respectively.  The entire obligation is classified as a non-current liability as installment payments for the cash portion of the obligation are not planned to commence until more than 12 months after the Amended PCC Plan becomes effective and the PCE portion of the obligation will be fulfilled through the direct contribution of Corning’s investment in PCE (currently recorded as a non-current other equity method investment).

Other Commitments and Contingencies

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.

We have agreed to provide a credit facility to Dow Corning Corporation (Dow Corning).  The funding of the Dow Corning credit facility will be required only if Dow Corning is not otherwise able to meet its scheduled funding obligations in its confirmed Bankruptcy Plan.  We believe a significant majority of these guarantees and contingent liabilities will expire without being funded.

 
-8-

 


As of September 30, 2012 and December 31, 2011, contingent guarantees totaled a notional value of $141 million and $170 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 $84 million and $72 million, at September 30, 2012 and December 31, 2011, respectively.

Product warranty liability accruals were $12 million at September 30, 2012 and $23 million at December 31, 2011.

Corning is a defendant in various lawsuits, including environmental litigation, product-related suits, the Dow Corning and PCC matters, and is subject to various claims which 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.

In March of 2012, Corning received a grand jury subpoena issued in the United States District Court for the Eastern District of Michigan from the U.S. Department of Justice in connection with an investigation into conduct relating to possible antitrust law violations involving certain automotive products, including catalytic converters, diesel particulate filters, substrates and monoliths. Antitrust investigations can result in significant penalties being imposed by the antitrust authorities. Currently Corning can not estimate the ultimate financial impact, if any, resulting from the investigation.  Such potential impact, if an antitrust violation by Corning is found, could however, be material to the results of operations of Corning in a particular period.

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 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 September 30, 2012, and December 31, 2011, Corning had accrued approximately $23 million (undiscounted) and $25 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.

3.      Debt

Based on borrowing rates currently available to us for loans with similar terms and maturities, the fair value of long-term debt was $3.7 billion at September 30, 2012 and $2.6 billion at December 31, 2011.  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.

2012
In the first quarter of 2012, we issued $250 million of 4.70% senior unsecured notes and $500 million of 4.75% senior unsecured notes for net proceeds of approximately $247 million and $495 million, respectively.  The 4.70% notes mature on March 15, 2037 and the 4.75% notes mature on March 15, 2042.

In 2012, Corning borrowed approximately $288 million from the credit facility that a wholly-owned subsidiary entered into in the second quarter of 2011.

2011
In the third quarter of 2011, Corning borrowed approximately $34 million on the credit facility that a wholly-owned subsidiary entered into in the second quarter of 2011.

 
-9-

 


In the second quarter of 2011, a wholly-owned subsidiary entered into a credit facility that allows Corning to borrow up to Chinese Renminbi (RMB) 4.0 billion, or approximately $636 million when translated to United States dollars.  Corning may request advances during the eighteen month period beginning on June 30, 2011 (the “Availability Period”).  Corning will repay the aggregate principal amount and accrued interest outstanding at the end of the Availability Period in six installments, with the final payment due in August, 2016, which is five years from the date of the first advance.

4.      Income Taxes

Our provision for income taxes and the related effective income tax rates were as follows (in millions):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2012
 
2011
 
2012
 
2011
                       
Provision for income taxes
$
(87)
 
$
(110)
 
$
(291)
 
$
(347)
Effective tax rate
 
14.3%
   
11.9%
   
16.8%
   
13.0%

For the three and nine months ended September 30, 2012, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:

·  
Rate differences on income (loss) of consolidated foreign companies;
·  
The impact of equity in earnings of nonconsolidated affiliates reported in the financials net of tax;
·  
The expiration of favorable U.S. tax provisions; and
·  
The benefit of tax incentives in foreign jurisdictions, primarily Taiwan.

For the three and nine months ended September 30, 2011, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:

·  
Rate differences on income/(loss) of consolidated foreign companies;
·  
The impact of equity in earnings of nonconsolidated affiliates reported in the financials net of tax;
·  
The benefit of tax incentives in foreign jurisdictions, primarily Taiwan; and
·  
The tax benefit from amending our 2006 U.S. Federal return to claim foreign tax credits.

Certain foreign subsidiaries in China and Taiwan are operating under tax holiday arrangements.  The nature and extent of such arrangements vary, and the benefits of such arrangements phase out through 2015 according to the specific terms and schedules of the relevant taxing jurisdictions. The impact of the tax holiday on our effective tax rate is a reduction in the rate of 1.7 and 2.3 percentage points for the three months ended September 30, 2012 and 2011, respectively.  The impact of the tax holidays on our effective tax rate is a reduction in the rate of 1.5 and 1.7 percentage points for the nine months ended September 30, 2012 and 2011, respectively.

While we expect the amount of unrecognized tax benefits to change in the next 12 months, we do not expect the change to have a significant impact on the results of operations or our financial position.

 
-10-

 


5.      Earnings per Common Share

The reconciliation of the amounts used in the basic and diluted earnings per common share computations follows (in millions, except per share amounts):
 
Three months ended September 30,
 
2012
 
2011
 
Net
income
attributable
to Corning
Incorporated
 
Weighted-
average
shares
 
Per
share
amount
 
Net
income
attributable
to Corning
Incorporated
 
Weighted-
average
shares
 
Per
share
amount
                       
Basic earnings per common share
$521
 
1,483
 
$0.35
 
$811
 
1,569
 
$0.52
                       
Effect of dilutive securities:
                     
Stock options and other dilutive securities
   
     11
         
     19
   
                       
Diluted earnings per common share
$521
 
1,494
 
$0.35
 
$811
 
1,588
 
$0.51

 
Nine months ended September 30,
 
2012
 
2011
 
Net
income
attributable
to Corning
Incorporated
 
Weighted-
average
shares
 
Per
share
amount
 
Net
income
attributable
to Corning
Incorporated
 
Weighted-
average
shares
 
Per
share
amount
                       
Basic earnings per common share
$1,445
 
1,502
 
$0.96
 
$2,314
 
1,567
 
$1.48
                       
Effect of dilutive securities:
                     
Stock options and other dilutive securities
   
     12
         
     22
   
                       
Diluted earnings per common share
$1,445
 
1,514
 
$0.95
 
$2,314
 
1,589
 
$1.46

The following potential common shares were excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive (in millions):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2012
 
2011
 
2012
 
2011
Stock options and other dilutive securities excluded from the calculation of diluted earnings per common share
44
 
34
 
43
 
81


 
-11-

 


6.      Available-for-Sale Investments

The following is a summary of the fair value of available-for-sale investments (in millions):
 
Amortized cost
 
Fair value
 
September 30,
2012
 
December 31,
2011
 
September 30,
2012
 
December 31,
2011
Bonds, notes and other securities:
                     
U.S. government and agencies
$
1,395
 
$
1,150
 
$
1,399
 
$
1,155
Other debt securities
       
6
         
9
Total short-term investments
$
1,395
 
$
1,156
 
$
1,399
 
$
1,164
Asset-backed securities
$
52
 
$
57
 
$
40
 
$
35
Total long-term investments
$
52
 
$
57
 
$
40
 
$
35

We do not intend to sell, nor do we believe it is more likely than not that we would be required to sell, the long-term investment asset-backed securities (which are collateralized by mortgages) before recovery of their amortized cost basis.  It is possible that a significant degradation in the delinquency or foreclosure rates in the underlying assets could cause further temporary or other-than-temporary impairments in the future.

The following table summarizes the maturities at market value of available-for-sale securities at September 30, 2012 (in millions):
Less than one year
$1,091
Due in 1-5 years
308
Due in 5-10 years
 
Due after 10 years (1)
40
Total
$1,439

(1)
Includes $40 million of asset-based securities that mature over time and are being reported at their final maturity dates.

Unrealized gains and losses, net of tax, are computed on a specific identification basis and are reported as a separate component of accumulated other comprehensive loss in shareholders’ equity until realized.

The following tables provide the fair value and gross unrealized losses of the Company’s investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2012 and December 31, 2011 (in millions):
     
September 30, 2012
     
12 months or greater
 
Total
 
Number of
securities
in a loss
position
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses  (1)
Asset-backed securities
22
 
$
40
 
$
(12)
 
$
40
 
$
(12)
Total long-term investments
22
 
$
40
 
$
(12)
 
$
40
 
$
(12)

(1)
Unrealized losses in securities less than 12 months were not significant.

 
-12-

 


     
December 31, 2011
     
12 months or greater
 
Total
 
Number of
securities
in a loss
position
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses  (1)
Asset-backed securities
22
 
$
35
 
$
(23)
 
$
35
 
$
(23)
Total long-term investments
22
 
$
35
 
$
(23)
 
$
35
 
$
(23)

(1)
Unrealized losses in securities less than 12 months were not significant.

As of September 30, 2012 and December 31, 2011, for securities that have credit losses, an other than temporary impairment loss of $10 and $18 million, respectively, is recognized in accumulated other comprehensive loss.

Proceeds from sales and maturities of short-term investments totaled $1.6 billion and $2.4 billion for the nine months ended September 30, 2012 and 2011, respectively.

7.      Inventories

Inventories comprise the following (in millions):
 
September 30,
2012
 
December 31,
2011
Finished goods
$
338
 
$
312
Work in process
  
208
 
  
199
Raw materials and accessories
  
234
 
  
268
Supplies and packing materials
  
223
 
  
196
Total inventories
$
1,003
 
$
975

8.      Investments

Investments comprise the following (in millions):
 
Ownership
interest  (1)
 
September 30,
2012
 
December 31,
2011
Affiliated companies accounted for by the equity method
             
Samsung Corning Precision Materials Co., Ltd.
50%
 
$
3,536
 
$
3,315
Dow Corning Corporation
50%
   
1,275
   
1,160
All other
20-50%
   
358
   
248
       
5,169
   
4,723
Other investments
     
3
   
3
Total
   
$
5,172
 
$
4,726

(1)
Amounts reflect Corning’s direct ownership interests in the respective affiliated companies.

 
-13-

 


Related party information for these investments in affiliates follows (in millions):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2012
 
2011
 
2012
 
2011
Related Party Transactions:
                     
Corning sales to affiliated companies
$
8
 
$
11
 
$
21
 
$
23
Corning purchases from affiliated companies
$
49
 
$
8
 
$
117
 
$
64
Corning transfers of assets, at cost, to affiliated companies
$
13
 
$
34
 
$
53
 
$
95
Dividends received from affiliated companies
$
56
 
$
75
 
$
577
 
$
464
Royalty income from affiliated companies
$
20
 
$
51
 
$
64
 
$
178
Corning services to affiliates
$
6
 
$
15
 
$
22
 
$
36

As of September 30, 2012, balances due to and due from affiliates were $33 million and $82 million, respectively.  As of December 31, 2011, balances due to and due from affiliates were $14 million and $77 million, respectively.

We have contractual agreements with several of our equity affiliates, including sales, purchasing, and licensing and technology agreements.

Summarized results of operations for our two significant investments accounted for by the equity method follow:

Samsung Corning Precision Materials Co. Ltd. (Samsung Corning Precision)
Samsung Corning Precision is a South Korea-based manufacturer primarily of liquid crystal display (LCD) glass for flat panel displays.  Samsung Corning Precision’s results of operations follow (in millions):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2012
 
2011
 
2012
 
2011
                       
Statement of Operations:
                     
Net sales
$
783
 
$
954
 
$
2,352
 
$
3,304
Gross profit
$
534
 
$
644
 
$
1,598
 
$
2,391
Net income attributable to Samsung Corning Precision
$
367
 
$
457
 
$
1,140
 
$
1,705
Corning’s equity in earnings of Samsung Corning Precision
$
186
 
$
229
 
$
562
 
$
853
                       
Related Party Transactions:
                     
Corning purchases from Samsung Corning Precision
$
31
       
$
83
 
$
41
Dividends received from Samsung Corning Precision
           
$
518
 
$
205
Royalty income from Samsung Corning Precision
$
20
 
$
51
 
$
63
 
$
176
Corning transfers of machinery and equipment to Samsung Corning Precision at cost (1)
$
13
 
$
34
 
$
53
 
$
95

(1)
Corning purchases machinery and equipment on behalf of Samsung Corning Precision to support its capital expansion initiatives.  The machinery and equipment are transferred to Samsung Corning Precision at our cost basis.

As of September 30, 2012, balances due from Samsung Corning Precision were $22 million and balances due to Samsung Corning Precision were $30 million.  As of December 31, 2011, balances due from Samsung Corning Precision were $16 million and balances due to Samsung Corning Precision were $11 million.

Corning owns 50% of Samsung Corning Precision.  Samsung Display Co., Ltd. owns 43% and other shareholders own the remaining 7%.

 
-14-

 


In June 2011, the Korean tax authorities completed an audit of Samsung Corning Precision.  As a result, Samsung Corning Precision was issued a pre-assessment of approximately $48 million at current exchange rates for an asserted underpayment of withholding tax on dividends paid from September 2006 through March 2009.  In April 2011, we appealed for a reversal of the assessment. In October 2011, that appeal was denied and a formal assessment was issued.  Corning paid the assessment in the fourth quarter of 2011, allowing us to appeal to the Korean Tax Tribunal.  Once a ruling from the Korean Tax Tribunal is received, Corning may continue the Korean appeals process and/or access the Competent Authority under the U.S./Korea tax treaty, which allows the U.S. tax authorities’ involvement in resolving the matter.  Samsung Corning Precision and Corning believe it is more likely than not we will receive a favorable ruling when all of the available appeals have been exhausted.

Dow Corning Corporation (Dow Corning)
Dow Corning is a U.S.-based manufacturer of silicone products.  Dow Corning’s results of operations follow (in millions):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2012
 
2011
 
2012
 
2011
                       
Statement of Operations:
                     
Net sales
$
1,545
 
$
1,661
 
$
4,638
 
$
4,908
Gross profit
$
382
 
$
527
 
$
1,114
 
$
1,599
Net income attributable to Dow Corning
$
97
 
$
177
 
$
288
 
$
547
Corning’s equity in earnings of Dow Corning
$
48
 
$
89
 
$
144
 
$
275
                       
Related Party Transactions:
                     
Corning purchases from Dow Corning
$
6
 
$
5
 
$
18
 
$
17
Dividends received from Dow Corning
$
50
 
$
65
 
$
50
 
$
245

At September 30, 2012 and December 31, 2011, amounts owed to Dow Corning were not significant.

At September 30, 2012, Dow Corning’s marketable securities included approximately $75 million of auction rate securities, net of a temporary impairment of an insignificant amount.

Corning and The Dow Chemical Company (Dow Chemical) each own 50% of the common stock of Dow Corning.  In May 1995, Dow Corning filed for bankruptcy protection to address pending and claimed liabilities arising from many thousands of breast implant product lawsuits.  On June 1, 2004, Dow Corning emerged from Chapter 11 with a Plan of Reorganization (the Plan) which provided for the settlement or other resolution of implant claims.  Under the terms of the Plan, Dow Corning has established and is funding a Settlement Trust and a Litigation Facility to provide a means for tort claimants to settle or litigate their claims.  Inclusive of insurance, Dow Corning has paid approximately $1.7 billion to the Settlement Trust.

As of September 30, 2012, Dow Corning had recorded a reserve for breast implant litigation of $1.6 billion.  As a separate matter arising from the bankruptcy proceedings, Dow Corning is defending claims asserted by a number of commercial creditors who claim additional interest at default rates and enforcement costs, during the period from May 1995 through June 2004.  As of September 30, 2012, Dow Corning has estimated the liability to commercial creditors to be within the range of $89 million to $291 million.  As Dow Corning management believes no single amount within the range appears to be a better estimate than any other amount within the range, Dow Corning has recorded the minimum liability within the range.  Should Dow Corning not prevail in this matter, Corning’s equity earnings would be reduced by its 50% share of the amount in excess of $89 million, net of applicable tax benefits.

 
-15-

 


On July 20, 2012, the Chinese Ministry of Commerce (“MOFCOM”) initiated antidumping and countervailing duty investigations of imports of solar-grade polycrystalline silicon products from the U.S. and Korea, based on a petition filed by Chinese solar-grade polycrystalline silicon producers.  The petition alleges that producers within these countries exported solar-grade polycrystalline silicon to China at less than fair value, and that production of solar-grade polycrystalline silicon in the U.S. has been subsidized by the U.S. government.  If the Chinese authorities find evidence of dumping or subsidization, they may impose additional duties on future imports of solar-grade polycrystalline silicon to China from the U.S.  Dow Corning is complying with MOFCOM in the investigations and is vigorously contesting the allegations.  As the outcome of such actions is uncertain, Dow Corning cannot predict the ultimate impact of these matters.

Variable Interest Entities
For variable interest entities, we routinely assess the terms of our interest in each entity to determine if we are the primary beneficiary as prescribed by U.S. GAAP.  We currently have three variable interest entities that are not considered significant to Corning’s consolidated financial statements.  Corning does not have retained interests in assets transferred to any unconsolidated entity that serves as credit, liquidity or market risk support to such entity.

9.      Property, Net of Accumulated Depreciation

Property, net follows (in millions):
 
September 30,
2012
 
December 31,
2011
Land
$
112 
 
$
113 
Buildings
 
4,098 
   
3,957 
Equipment
 
12,362 
   
11,886 
Construction in progress
 
2,209 
   
1,919 
   
18,781 
   
17,875 
Accumulated depreciation
 
(7,745)
   
(7,204)
Total
$
11,036 
 
$
10,671 

In the three months ended September 30, 2012 and 2011, interest costs capitalized as part of property, net, were $19 million and $11 million, respectively.  In the nine months ended September 30, 2012 and 2011, interest costs capitalized as part of property, net, were $62 million and $28 million, respectively.

Manufacturing equipment includes certain components of production equipment that are constructed of precious metals.  At September 30, 2012 and December 31, 2011, the recorded value of precious metals each totaled $2.5 billion.  Depletion expense for precious metals in the three months ended September 30, 2012 and 2011 totaled $4 million and $6 million, respectively.  Depletion expense for precious metals in the nine months ended September 30, 2012 and 2011 totaled $14 million and $16 million, respectively.

10.      Goodwill and Other Intangible Assets

The carrying amount of goodwill by segment for the periods ended September 30, 2012 and December 31, 2011 is as follows (in millions):
 
Telecom-
munications
 
Display
Technologies
 
Specialty
Materials
 
Life
Sciences
 
Total
                   
Goodwill Balance
$209
 
$9
 
$150
 
$296
 
$664

Corning’s gross goodwill balances for the periods ended September 30, 2012 and December 31, 2011 were $7.1 billion.  Accumulated impairment losses were $6.5 billion for the periods ended September 30, 2012 and December 31, 2011, and were generated entirely through goodwill impairments related to the Telecommunications segment recorded primarily in 2001.

 
-16-

 


Other intangible assets are as follows (in millions):
 
September 30, 2012
 
December 31, 2011
 
Gross
 
Accumulated
amortization
 
Net
 
Gross
 
Accumulated
amortization
 
Net
Amortized intangible assets:
                                 
Patents, trademarks, and trade names 
$
231
 
$
126
 
$
105
 
$
228
 
$
119
 
$
109
Customer lists and other 
 
165
   
22
   
143
   
169
   
16
   
153
                                   
Total
$
396
 
$
148
 
$
248
 
$
397
 
$
135
 
$
262

Amortized intangible assets are primarily related to the Telecommunications and Life Sciences segments.

Amortization expense related to these intangible assets is estimated to be $16 million for 2012 through 2015 and $15 million for 2016 and 2017.

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
September 30,
 
Nine months
ended
September 30,
 
Three months
ended
September 30,
 
Nine months
ended
September 30,
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
                                               
Service cost
$
16 
 
$
13 
 
$
46 
 
$
40 
 
$
 
$
 
$
 
$
11 
Interest cost
 
38 
   
39 
   
114 
   
116 
   
11 
   
12 
   
33 
   
36 
Expected return on plan assets
 
(40)
   
(41)
   
(119)
   
(122)
                       
Amortization of net loss
 
18 
   
20 
   
53 
   
57 
   
   
   
12 
   
13 
Amortization of prior service cost
 
   
   
   
   
(1)
   
(1)
   
(3)
   
(4)
Total pension and postretirement benefit expense
$
33 
 
$
33 
 
$
97 
 
$
97 
 
$
17 
 
$
18 
 
$
51 
 
$
56 

Corning and certain of its domestic subsidiaries offer postretirement plans that provide health care and life insurance benefits for retirees and eligible dependents.  Certain employees may become eligible for such postretirement benefits upon reaching retirement age and service requirements.  For current retirees (including surviving spouses) and active employees eligible for the salaried retiree medical program, we placed a “cap” on the amount we will contribute toward retiree medical coverage in the future.  The cap equals 120% of our 2005 contributions toward retiree medical benefits.  Once our contributions toward salaried retiree medical costs reach this cap, impacted retirees will have to pay the excess amount in addition to their regular contributions for coverage.  This cap was attained for post-65 retirees in 2008 and has impacted their contribution rate in 2009 and going forward.  The pre-65 retirees triggered the cap in 2010, which has impacted their contribution rate in 2011 and going forward.  Furthermore, employees hired or rehired on or after January 1, 2007 will be eligible for Corning retiree medical upon retirement; however, these employees will pay 100% of the cost.

 
-17-

 


12.      Hedging Activities

Corning operates in many foreign countries and as a result is exposed to movements in foreign currency exchange rates.  The areas in which exchange rate fluctuations affect us include:

·  
Financial instruments and transactions denominated in foreign currencies, which impact earnings; and
·  
The translation of net assets in foreign subsidiaries for which the functional currency is not the U.S. dollar, which impacts our net equity.

Our most significant foreign currency exposures relate to the Japanese yen, Korean won, New Taiwan dollar and the Euro.  We manage our foreign currency exposures, which include forecasted transactions, primarily by entering into foreign exchange forward contracts with durations of generally 18 months or less to hedge foreign currency risk.  The hedges are scheduled to mature coincident with the timing of the underlying foreign currency commitments and transactions.  The objective of these contracts is to neutralize the impact of exchange rate movements on our operating results.

The forward and option contracts we use in managing our foreign currency exposures contain an element of risk in that the counterparties may be unable to meet the terms of the agreements.  However, we minimize this risk by limiting the counterparties to a diverse group of highly-rated major domestic and international financial institutions with which we have other financial relationships.  We are exposed to potential losses in the event of non-performance by these counterparties.  However, we do not expect to record any losses as a result of such counterparty default.  Neither we nor our counterparties are required to post collateral for these financial instruments.

Cash Flow Hedges
Our cash flow hedging activities utilize foreign exchange forward contracts to reduce the risk that movements in exchange rates will adversely affect the eventual net cash flows resulting from the sale of products to foreign customers and purchases from foreign suppliers.  Our cash flow hedging activity also utilizes interest rate forwards to reduce the risk of changes in benchmark interest rate from the probable forecasted issuance of debt.  Corning uses a regression analysis to monitor the effectiveness of its cash flow hedges both prospectively and retrospectively.  Corning defers net gains and losses from cash flow hedges into accumulated other comprehensive income on the consolidated balance sheet until such time as the hedged item impacts earnings.  At September 30, 2012, the amount of net gain expected to be reclassified into earnings within the next 12 months is $9 million.

Undesignated Hedges
Corning uses other foreign exchange forward contracts that are not designated as hedging instruments for accounting purposes.  The undesignated hedges limit exposures to foreign currency fluctuations related to certain monetary assets, monetary liabilities and net earnings in foreign currencies.

 
-18-

 


The following tables summarize the notional amounts and respective fair values of Corning’s derivative financial instruments for September 30, 2012 and December 31, 2011 (in millions):
     
Asset derivatives
 
Liability derivatives
 
Notional amount
 
Balance
sheet location
 
Fair value
 
Balance
sheet location
 
Fair value
 
2012
 
2011
   
2012
 
2011
   
2012
 
2011
                               
Derivatives designated as hedging instruments
                             
                               
Foreign exchange contracts
$  576
 
$  402
 
Other current assets
 
$12
 
$  6
 
Other accrued liabilities
 
$  (3)
 
$  (41)
Benchmark interest rate
   
$  500
 
Other assets
 
$  1
     
Other liabilities
 
$  (1)
   
                               
Derivatives not designated as hedging instruments
                             
                               
Foreign exchange contracts
$2,419
 
$3,094
 
Other current assets
 
$12
 
$  6
 
Other accrued liabilities
 
$(33)
 
$(122)
                     
Other liabilities
 
$  (4)
 
$   (6)
                               
Total derivatives
$2,995
 
$3,996
     
$25
 
$12
     
$(41)
 
$(169)

The following table summarizes the effect of derivative financial instruments on Corning’s consolidated financial statements for the three and nine months ended September 30, 2012 (in millions):
   
(Loss)/gain recognized in OCI
 
Gain reclassified from accumulated OCI
into income (effective) (1)
Derivatives in hedging relationships
 
Three months
ended
September 30, 2012
 
Nine months
ended
September 30, 2012
 
Location
 
Three months
ended
September 30, 2012
 
Nine months
ended
September 30, 2012
                     
Cash flow hedges
                   
           
Cost of sales
 
$3
 
$  6
                     
Foreign exchange contracts
 
$(7)
 
$10
 
Royalties
     
$  6
                     
Total cash flow hedges
 
$(7)
 
$10
     
$3
 
$12
                     
                     
           
(Loss)/gain recognized in income
Undesignated derivatives
         
Location
 
Three months
ended
September 30, 2012
 
Nine months
ended
September 30, 2012
                     
Foreign exchange contracts
         
Other income, net
 
$(8)
 
$89
                     
Total undesignated
             
$(8)
 
$89

(1)
The amount of hedge ineffectiveness for the three and nine months ended September 30, 2012 was insignificant.

 
-19-

 

The following table summarizes the effect of derivative financial instruments on Corning’s consolidated financial statements for the three and nine months ended September 30, 2011 (in millions):
   
Loss recognized in OCI
 
Loss reclassified from accumulated OCI
into income (effective) (1)
Derivatives in hedging relationships
 
Three months
ended
September 30, 2011
 
Nine months
ended
September 30, 2011
 
Location
 
Three months
ended
September 30, 2011
 
Nine months
ended
September 30, 2011
                     
Cash flow hedges
                   
           
Cost of sales
 
$  (3)
 
$  (7)
                     
Foreign exchange contracts
 
$(5)
 
$(24)
 
Royalties
 
$(14)
 
$(28)
                     
Total cash flow hedges
 
$(5)
 
$(24)
     
$(17)
 
$(35)
                     
                     
           
(Loss)/gain recognized in income
Undesignated derivatives
         
Location
 
Three months
ended
September 30, 2011
 
Nine months
ended
September 30, 2011
                     
Foreign exchange contracts
         
Other income, net
 
$(61)
 
$73
                     
Total undesignated
             
$(61)
 
$73

(1)
The amount of hedge ineffectiveness for the three and nine months ended September 30, 2011 was insignificant.

13.      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.  As of September 30, 2012 and December 31, 2011, the Company did not have any financial assets or liabilities that were measured using unobservable (or Level 3) inputs.

 
-20-

 


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
 
September 30,
 2012
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
               
Current assets:
             
Short-term investments
$1,399
 
$1,399
       
Other current assets  (1)
$     24
     
$24
   
Non-current assets:
             
Other assets  (1)(2)
$     41
     
$41
   
               
Current liabilities:
             
Other accrued liabilities  (1)
$     36
     
$36
   
Non-current liabilities:
             
Other liabilities  (1)
$       5
     
$  5
   

(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 $40 million of asset-backed securities which are measured using observable quoted prices for similar assets.

     
Fair value measurements at reporting date using
 
December 31,
 2011
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
               
Current assets:
             
Short-term investments
$1,164
 
$1,155
 
$    9  (1)
   
Other current assets  (2)
$    12
     
$  12     
   
Non-current assets:
             
Other assets  (3)
$    35
     
$  35     
   
               
Current liabilities:
             
Other accrued liabilities  (2)
$  163
     
$163    
   
Non-current liabilities:
             
Other liabilities  (2)
$      6
     
$    6    
   

(1)
Short-term investments 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 asset-backed securities which are measured using observable quoted prices for similar assets.

 
-21-

 


14.      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 $16 million and $21 million for the three months ended September 30, 2012 and 2011, respectively, and approximately $56 million and $66 million for the nine months ended September 30, 2012 and 2011, respectively.  Amounts for all periods presented included compensation expense for employee stock options and time-based restricted stock and restricted stock units.  Performance-based restricted stock and restricted stock units fully vested in the first quarter of 2012.  Compensation expense for performance-based restricted stock units is included in periods ended prior to April 1, 2012.

Stock Options

Our Stock Option Plans provide non-qualified and incentive stock options to purchase authorized but unissued shares or treasury shares at the market price on the grant date and generally become exercisable in installments from one to five years from the grant date.  The maximum term of non-qualified and incentive stock options is 10 years from the grant date.

The following table summarizes information concerning stock options outstanding including the related transactions under the Stock Option Plans for the nine months ended September 30, 2012:
 
Number
of Shares
(in thousands)
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term in
Years
 
Aggregate
Intrinsic
Value
(in thousands)
Options Outstanding as of December 31, 2011
65,027 
 
$15.91
       
Granted
7,701 
 
12.98
       
Exercised
(4,364)
 
6.07
       
Forfeited and Expired
(1,404)
 
17.85
       
Options Outstanding as of September 30, 2012
66,960 
 
16.18
 
4.89
 
$92,589
Options Exercisable as of September 30, 2012
53,747 
 
16.21
 
3.96
 
  92,260

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 September 30, 2012, which would have been received by the option holders had all option holders exercised their options as of that date.

As of September 30, 2012, there was approximately $32 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 two years.  Compensation cost related to stock options was approximately $30 million and $37 million for the nine months ended September 30, 2012 and 2011, respectively, and approximately $9 million and $12 million for the three months ended September 30, 2012 and 2011 respectively.

Proceeds received from the exercise of stock options were $26 million and $82 million for the nine months ended September 30, 2012 and 2011, respectively and $7 million and $9 million for the three months ended September 30, 2012 and 2011, 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 nine months ended September 30, 2012 and 2011 was approximately $31 million and $71 million, and $11 million and $3 million for the three months ended September 30, 2012 and 2011, respectively, which is currently deductible for tax purposes. However, these tax benefits were not recognized due to net operating loss carryforwards available to the Company.  Refer to Note 4 (Income Taxes) to the consolidated financial statements.

 
-22-

 


The following inputs were used for the valuation of option grants under our Stock Option Plans:
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2012
 
2011
 
2012
 
2011
Expected volatility
48%
 
48-49%
 
48-49%
 
47-49%
Weighted-average volatility
48%
 
48%
 
48-49%
 
47-48%
Expected dividends
2.59%
 
1.05%
 
2.28-2.59%
 
1.10%
Risk-free rate
1.0-1.3%
 
1.0-1.5%
 
0.9-1.3%
 
1.0-2.7%
Average risk-free rate
1.2%
 
1.5%
 
1.2-1.3%
 
1.5-2.6%
Expected term (in years)
5.7-7.1
 
5.1-6.7
 
5.7-7.1
 
5.1-6.7
Pre-vesting departure rate
0.4-4.2%
 
0.4-3.9%
 
0.4-4.2%
 
0.4-3.9%

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.  The ranges given above result from different groups of employees exhibiting different exercise behavior.

Incentive Stock Plans

The Corning Incentive Stock Plan permits stock grants, either determined by specific performance goals or issued directly, in most instances, subject to the possibility of forfeiture and without cash consideration.  Shares under the Incentive Stock Plan are granted at the market price on the grant date, contingently vest over a period of 1 to 10 years, and have contractual lives of 1 to 10 years.  The fair value of each restricted stock grant under the Incentive Stock Plans was estimated on the date of grant.

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 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, 2011, and changes which occurred during the nine months ended September 30, 2012:
 
Shares
(000’s)
 
Weighted
Average
Grant-Date
Fair Value
Non-vested shares at December 31, 2011
4,104 
 
$
18.16
Granted
2,011 
   
13.07
Vested
(662)
   
19.43
Forfeited
(72)
   
15.10
Non-vested shares at September 30, 2012
5,381 
 
$
16.14


 
-23-

 


As of September 30, 2012, there was approximately $26 million of unrecognized compensation cost related to non-vested time-based restricted stock granted under the Plan.  The cost is expected to be recognized over a weighted-average period of 1.8 years.  Compensation cost related to time-based restricted stock and restricted stock units was approximately $24 million and $23 million for the nine months ended September 30, 2012 and 2011, respectively, and $7 million for the three months ended September 30, 2012 and 2011.

Performance-Based Restricted Stock and Restricted Stock Units:

Performance-based restricted stock and restricted stock units are earned upon the achievement of certain targets, and are payable in shares of the Company’s common stock upon vesting, typically over a three-year period.  The fair value is based on the market price of the Company’s stock on the grant date and assumes that the target payout level will be achieved.  Compensation cost is recognized over the requisite vesting period and adjusted for actual forfeitures before vesting.  During the performance period, compensation cost may be adjusted based on changes in the expected outcome of the performance-related target.

The following table represents a summary of the status of the Company’s non-vested performance-based restricted stock and restricted stock units as of December 31, 2011, and changes which occurred during the nine months ended September 30, 2012:
 
Shares
(000’s)
 
Weighted-
Average
Grant-Date
Fair Value
Non-vested restricted stock and restricted stock units at December 31, 2011
5,134 
 
$
8.67
Vested
(5,134)
   
8.67
Non-vested restricted stock and restricted stock units at September 30, 2012
 
$
0

The performance-based restricted stock and restricted stock unit compensation program was terminated in 2010.  All performance-based restricted stock and stock units were fully vested in the first quarter of 2012.

As of September 30, 2012, there is no unrecognized compensation cost related to non-vested performance-based restricted stock and restricted stock units compensation arrangements granted under the Plan.  Compensation cost related to performance-based restricted stock and restricted stock units was approximately $2 million and $6 million for the nine months ended September 30, 2012 and 2011, respectively, and $2 million for the three months ended September 30, 2011.

15.      Significant Customers

For the three months ended September 30, 2012, Corning did not have a customer that individually accounted for more than 10% of the Company’s consolidated net sales.  For the three months ended September 30, 2011, Corning’s sales to Sharp Electronics Corporation, a customer of the Display Technologies segments, were greater than 10% of the Company’s consolidated net sales.
 
 
For the nine months ended September 30, 2012 and 2011, Corning did not have a customer that individually accounted for more than 10% of the Company’s consolidated net sales, respectively.

 
-24-

 


16.      Reportable Segments

Our reportable segments are as follows:

·  
Display Technologies – manufactures liquid crystal display (LCD) glass for flat panel displays.
·  
Telecommunications – manufactures optical fiber and cable, and hardware and equipment components for the telecommunications industry.
·  
Environmental Technologies – manufactures ceramic substrates and filters for automotive and diesel applications.  This reportable segment is an aggregation of our Automotive and Diesel operating segments as these two segments share similar economic characteristics, products, customer types, production processes and distribution methods.
·  
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 consumables for scientific applications.

All other segments that do not meet the quantitative threshold for separate reporting are grouped as “All Other.”  This group is primarily comprised of development projects and results for new product lines.

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 segments differently than we would for stand-alone financial information prepared in accordance with U.S. GAAP.  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.

 
-25-

 


Reportable Segments (in millions)

 
Display
Technologies
 
Telecom-
munications
 
Environmental
Technologies
 
Specialty
Materials
 
Life
Sciences
 
All
Other
 
Total
Three months ended September 30, 2012
                                       
   Net sales
$
763 
 
$
523 
 
$
233 
 
$
363 
 
$
155 
 
$
 
$
2,038 
   Depreciation  (1)
$
123 
 
$
34 
 
$
30 
 
$
40 
 
$
11 
 
$
 
$
243 
   Amortization of purchased intangibles
     
$
             
$
       
$
   Research, development and engineering expenses  (2)
$
24 
 
$
35 
 
$
23 
 
$
28 
 
$
 
$
36 
 
$
151 
   Equity in earnings of affiliated companies
$
187 
 
$
                   
$
 
$
189 
   Income tax (provision) benefit
$
(83)
 
$
(17)
 
$
(13)
 
$
(29)
 
$
(4)
 
$
15 
 
$
(131)
   Net income (loss)  (3)
$
440 
 
$
35 
 
$
26 
 
$
59 
 
$
 
$
(30)
 
$
539 
                                         
Three months ended September 30, 2011
                                       
   Net sales
$
815 
 
$
560 
 
$
247 
 
$
299 
 
$
153 
 
$
 
$
2,075 
   Depreciation  (1)
$
131 
 
$
31 
 
$
27 
 
$
41 
 
$
 
$
 
$
241 
   Amortization of purchased intangibles
     
$
             
$
       
$
   Research, development and engineering expenses  (2)
$
21 
 
$
29 
 
$
27 
 
$
35 
 
$
 
$
22 
 
$
137 
   Equity in earnings of affiliated companies
$
222 
 
$
   
$
   
$
       
$
 
$
231 
   Income tax (provision) benefit
$
(118)
 
$
(30)
 
$
(15)
 
$
(16)
 
$
(10)
 
$
 
$
(180)
   Net income (loss)  (3)
$
593 
 
$
82 
 
$
32 
 
$
38 
 
$
21 
 
$
(17)
 
$
749 
                                         
Nine months ended September 30, 2012
                                       
   Net sales
$
2,109 
 
$
1,590 
 
$
745 
 
$
947 
 
$
472 
 
$
 
$
5,866 
   Depreciation  (1)
$
377 
 
$
98 
 
$
87 
 
$
110 
 
$
31 
 
$
11 
 
$
714 
   Amortization of purchased intangibles
     
$
             
$
       
$
13 
   Research, development and engineering expenses  (2)
$
77 
 
$
105 
 
$
75 
 
$
102 
 
$
16 
 
$
92 
 
$
467 
   Equity in earnings (loss) of affiliated companies
$
553 
 
$
(1)
 
$
             
$
14 
 
$
567 
   Income tax (provision) benefit
$
(257)
 
$
(46)
 
$
(50)
 
$
(57)
 
$
(15)
 
$
37 
 
$
(388)
   Net income (loss)  (3)
$
1,232 
 
$
92 
 
$
100 
 
$
114 
 
$
32 
 
$
(66)
 
$
1,504 
                                         
Nine months ended September 30, 2011
                                       
   Net sales
$
2,365 
 
$
1,582 
 
$
764 
 
$
836 
 
$
452 
 
$
 
$
6,003 
   Depreciation  (1)
$
378 
 
$
91 
 
$
79 
 
$
120 
 
$
25 
 
$
 
$
701 
   Amortization of purchased intangibles
     
$
             
$
       
$
10 
   Research, development and engineering expenses  (2)
$
73 
 
$
90 
 
$
73 
 
$
100 
 
$
12 
 
$
68 
 
$
416 
   Equity in earnings of affiliated companies
$
835 
 
$
 
$
 
$
13 
       
$
13 
 
$
866 
   Income tax (provision) benefit
$
(375)
 
$
(71)
 
$
(44)
 
$
(28)
 
$
(24)
 
$
28 
 
$
(514)
   Net income (loss)  (3)
$
1,857 
 
$
169 
 
$
93 
 
$
69 
 
$
51 
 
$
(52)
 
$
2,187 

(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.  In the three and nine months ended September 30, 2011, the Telecommunications segment included a credit of $22 million from the reduction to a contingent liability associated with an acquisition recorded in the first quarter of 2011.

 
-26-

 


A reconciliation of reportable segment net income to consolidated net income follows (in millions):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2012
 
2011
 
2012
 
2011
Net income of reportable segments
$
569 
 
$
766 
 
$
1,570 
 
$
2,239 
Non-reportable segments
 
(30)
   
(17)
   
(66)
   
(52)
Unallocated amounts: