SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ | 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)
NewYork | |||||
| 16-0393470 | ||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
OneRiverfrontPlaza,Corning,NewYork |
| 14831 | |||
(Address of principal executive offices) | (Zip Code) |
607-974-9000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.50 par value per share | GLW | New York Stock Exchange | ||
3.875% Notes due 2026 | GLW26 | New York Stock Exchange | ||
4.125% Notes due 2031 | GLW31 | New York Stock Exchange |
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.
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Yes | ☒ | 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).
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Yes | ☒ | No | ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large | ☒ | Accelerated | ☐ | |||
| ☐ |
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Smaller | ☐ | |||||
Emerging | ☐ |
If an emerging growth company, indicatedindicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.
| ☐ |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes | ☐ | No | ☒ |
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 | |||
Corning’s Common Stock, $0.50 par value per share |
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IndexINDEX
| Corning Incorporated and Subsidiary Companies |
(Unaudited; in millions, except per share amounts) |
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Net sales | $ | 3,173 | $ | 3,488 | $ | 9,594 | $ | 10,783 | ||||||||
Cost of sales | 2,169 | 2,426 | 6,574 | 7,192 | ||||||||||||
Gross margin | 1,004 | 1,062 | 3,020 | 3,591 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative expenses | 468 | 461 | 1,329 | 1,381 | ||||||||||||
Research, development and engineering expenses | 270 | 278 | 787 | 766 | ||||||||||||
Amortization of purchased intangibles | 30 | 31 | 92 | 92 | ||||||||||||
Operating income | 236 | 292 | 812 | 1,352 | ||||||||||||
Interest income | 10 | 3 | 25 | 9 | ||||||||||||
Interest expense | (82 | ) | (73 | ) | (239 | ) | (216 | ) | ||||||||
Translated earnings contract gain (loss), net (Note 10) | 20 | (68 | ) | 128 | 257 | |||||||||||
Other income, net | 33 | 106 | 128 | 391 | ||||||||||||
Income before income taxes | 217 | 260 | 854 | 1,793 | ||||||||||||
Provision for income taxes (Note 3) | (35 | ) | (34 | ) | (178 | ) | (380 | ) | ||||||||
Net income | 182 | 226 | 676 | 1,413 | ||||||||||||
Net income attributable to non-controlling interest | (18 | ) | (18 | ) | (55 | ) | (61 | ) | ||||||||
Net income attributable to Corning Incorporated | $ | 164 | $ | 208 | $ | 621 | $ | 1,352 | ||||||||
Earnings per common share available to common shareholders: | ||||||||||||||||
Basic (Note 4) | $ | 0.19 | $ | 0.25 | $ | 0.73 | $ | 1.60 | ||||||||
Diluted (Note 4) | $ | 0.19 | $ | 0.24 | $ | 0.72 | $ | 1.58 |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Comprehensive (Loss) Income | Corning Incorporated and Subsidiary Companies |
(Unaudited; in millions) |
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in millions, except per share amounts)
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Net sales |
| $ | 2,607 |
| $ | 2,507 |
| $ | 7,479 |
| $ | 6,914 |
Cost of sales |
|
| 1,551 |
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| 1,466 |
|
| 4,481 |
|
| 4,158 |
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Gross margin |
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| 1,056 |
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| 1,041 |
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| 2,998 |
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| 2,756 |
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Operating expenses: |
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| . |
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Selling, general and administrative expenses |
|
| 372 |
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| 302 |
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| 1,067 |
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| 1,104 |
Research, development and engineering expenses |
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| 213 |
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| 187 |
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| 620 |
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| 569 |
Amortization of purchased intangibles |
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| 18 |
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| 17 |
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| 53 |
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| 46 |
Restructuring, impairment and other charges |
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| 78 |
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Operating income |
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| 453 |
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| 535 |
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| 1,258 |
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| 959 |
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Equity in earnings of affiliated companies |
|
| 31 |
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| 19 |
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| 148 |
|
| 119 |
Interest income |
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| 10 |
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| 9 |
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| 33 |
|
| 21 |
Interest expense |
|
| (37) |
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| (41) |
|
| (112) |
|
| (122) |
Translated earnings contract gain (loss), net |
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| 26 |
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| (237) |
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| (193) |
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| (2,295) |
Gain on realignment of equity investment |
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| 2,676 |
Other expense, net |
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| (4) |
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| (28) |
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| (43) |
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| (70) |
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Income before income taxes |
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| 479 |
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| 257 |
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| 1,091 |
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| 1,288 |
(Provision) benefit for income taxes (Note 4) |
|
| (89) |
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| 27 |
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| (176) |
|
| 835 |
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Net income attributable to Corning Incorporated |
| $ | 390 |
| $ | 284 |
| $ | 915 |
| $ | 2,123 |
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Earnings per common share attributable to |
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Basic (Note 5) |
| $ | 0.41 |
| $ | 0.27 |
| $ | 0.93 |
| $ | 1.96 |
Diluted (Note 5) |
| $ | 0.39 |
| $ | 0.26 |
| $ | 0.89 |
| $ | 1.81 |
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Dividends declared per common share |
| $ | 0.155 |
| $ | 0.135 |
| $ | 0.465 |
| $ | 0.405 |
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Net income | $ | 182 | $ | 226 | $ | 676 | $ | 1,413 | ||||||||
Foreign currency translation adjustments and other | (191 | ) | (685 | ) | (593 | ) | (1,535 | ) | ||||||||
Unamortized (losses) gains and prior service costs for postretirement benefit plans | (1 | ) | 3 | (9 | ) | (49 | ) | |||||||||
Realized and unrealized (losses) gains on derivatives | (11 | ) | (15 | ) | 30 | (32 | ) | |||||||||
Other comprehensive loss, net of tax | (203 | ) | (697 | ) | (572 | ) | (1,616 | ) | ||||||||
Comprehensive (loss) income | (21 | ) | (471 | ) | 104 | (203 | ) | |||||||||
Comprehensive income attributable to non-controlling interest | (18 | ) | (18 | ) | (55 | ) | (61 | ) | ||||||||
Comprehensive (loss) income attributable to Corning Incorporated | $ | (39 | ) | $ | (489 | ) | $ | 49 | $ | (264 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
© 2017 Corning Incorporated. All Rights Reserved.
3
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Net income attributable to Corning Incorporated |
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| $ | 390 |
| $ | 284 |
| $ | 915 |
| $ | 2,123 |
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Foreign currency translation adjustments and other |
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| 53 |
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| 245 |
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| 457 |
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| 869 |
Net unrealized (losses) gains on investments |
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| (2) |
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| 14 |
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| (3) |
Unamortized (losses) gains and prior service credits |
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| (5) |
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| 17 |
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| 260 |
Net unrealized gains (losses) on designated hedges |
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| 4 |
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| 11 |
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| 42 |
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| (30) |
Other comprehensive income, net of tax (Note 13) |
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| 55 |
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| 251 |
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| 530 |
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| 1,096 |
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Comprehensive income attributable to Corning Incorporated |
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| $ | 445 |
| $ | 535 |
| $ | 1,445 |
| $ | 3,219 |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Balance Sheets | Corning Incorporated and Subsidiary Companies |
(Unaudited; in millions, except share and per share amounts) |
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except share and per share amounts)
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| September 30, |
| December 31, | September 30, | December 31, | ||||||||
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| 2017 |
| 2016 | 2023 | 2022 | ||||||||
Assets |
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Current assets: |
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Cash and cash equivalents |
| $ | 3,865 |
| $ | 5,291 | $ | 1,639 | $ | 1,671 | ||||
Trade accounts receivable, net of doubtful accounts and allowances - $63 and $59 |
| 1,748 |
| 1,481 | ||||||||||
Inventories, net of inventory reserves - $162 and $151 (Note 6) |
| 1,693 |
| 1,471 | ||||||||||
Trade accounts receivable, net of doubtful accounts - $30 and $40 | 1,725 | 1,721 | ||||||||||||
Inventories (Note 5) | 2,655 | 2,904 | ||||||||||||
Other current assets |
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| 948 |
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| 805 | 1,279 | 1,157 | ||||||
Total current assets |
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| 8,254 |
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| 9,048 | 7,298 | 7,453 | ||||||
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Investments (Note 7) |
| 352 |
| 336 | ||||||||||
Property, plant and equipment, net of accumulated depreciation - $10,684 and $9,884 |
| 13,344 |
| 12,546 | ||||||||||
Goodwill, net (Note 8) |
| 1,684 |
| 1,577 | ||||||||||
Other intangible assets, net (Note 8) |
| 891 |
| 796 | ||||||||||
Deferred income taxes (Note 4) |
| 2,641 |
| 2,325 | ||||||||||
Property, plant and equipment, net of accumulated depreciation - $14,257 and $14,147 | 14,407 | 15,371 | ||||||||||||
Goodwill, net | 2,372 | 2,394 | ||||||||||||
Other intangible assets, net | 938 | 1,029 | ||||||||||||
Deferred income taxes (Note 3) | 1,037 | 1,073 | ||||||||||||
Other assets |
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| 928 |
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| 1,271 | 2,226 | 2,179 | ||||||
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Total Assets |
| $ | 28,094 |
| $ | 27,899 | $ | 28,278 | $ | 29,499 | ||||
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Liabilities and Equity |
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Current liabilities: |
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Current portion of long-term debt and short-term borrowings (Note 3) |
| $ | 631 |
| $ | 256 | ||||||||
Current portion of long-term debt and short-term borrowings | $ | 297 | $ | 224 | ||||||||||
Accounts payable |
| 1,179 |
| 1,079 | 1,459 | 1,804 | ||||||||
Other accrued liabilities (Note 2 and Note 10) |
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| 1,255 |
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| 1,416 | ||||||||
Other accrued liabilities (Notes 6 and 9) | 2,529 | 3,147 | ||||||||||||
Total current liabilities |
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| 3,065 |
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| 2,751 | 4,285 | 5,175 | ||||||
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Long-term debt |
| 3,994 |
| 3,646 | ||||||||||
Postretirement benefits other than pensions (Note 9) |
| 712 |
| 737 | ||||||||||
Other liabilities (Note 2 and Note 10) |
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| 2,940 |
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| 2,805 | ||||||||
Long-term debt (Note 7) | 7,210 | 6,687 | ||||||||||||
Postretirement benefits other than pensions (Note 8) | 406 | 407 | ||||||||||||
Other liabilities (Notes 6 and 9) | 4,633 | 4,955 | ||||||||||||
Total liabilities |
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| 10,711 |
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| 9,939 | 16,534 | 17,224 | ||||||
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Commitments, contingencies and guarantees (Note 2) |
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Shareholders’ equity (Note 13): |
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Convertible preferred stock, Series A – Par value $100 per share; |
| 2,300 |
| 2,300 | ||||||||||
Common stock – Par value $0.50 per share; Shares authorized 3.8 billion; |
| 853 |
| 846 | ||||||||||
Commitments and contingencies (Note 9) | ||||||||||||||
Shareholders’ equity (Note 12): | ||||||||||||||
Common stock – Par value $0.50 per share; Shares authorized 3.8 billion; Shares issued: 1.8 billion and 1.8 billion | 915 | 910 | ||||||||||||
Additional paid-in capital – common stock |
| 14,013 |
| 13,695 | 16,877 | 16,682 | ||||||||
Retained earnings |
| 17,533 |
| 16,880 | 16,673 | 16,778 | ||||||||
Treasury stock, at cost; Shares held: 837 million and 765 million |
| (16,236) |
| (14,152) | ||||||||||
Treasury stock, at cost; Shares held: 980 million and 977 million | (20,633 | ) | (20,532 | ) | ||||||||||
Accumulated other comprehensive loss |
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| (1,146) |
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| (1,676) | (2,402 | ) | (1,830 | ) | ||||
Total Corning Incorporated shareholders’ equity |
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| 17,317 |
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| 17,893 | 11,430 | 12,008 | ||||||
Noncontrolling interests |
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| 66 |
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| 67 | ||||||||
Non-controlling interest | 314 | 267 | ||||||||||||
Total equity |
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| 17,383 |
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| 17,960 | 11,744 | 12,275 | ||||||
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Total Liabilities and Equity |
| $ | 28,094 |
| $ | 27,899 | $ | 28,278 | $ | 29,499 |
The accompanying notes are an integral part of these consolidated financial statements.
© 2017 Corning Incorporated. All Rights Reserved.
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| Nine Months Ended | ||||
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| September 30, | ||||
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| 2017 |
| 2016 | ||
Cash Flows from Operating Activities: |
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Net income |
| $ | 915 |
| $ | 2,123 |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
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| 799 |
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| 844 |
Amortization of purchased intangibles |
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| 53 |
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| 46 |
Restructuring, impairment and other charges |
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| 78 |
Equity in earnings of affiliated companies |
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| (148) |
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| (119) |
Dividends received from affiliated companies |
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| 101 |
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| 20 |
Deferred tax benefit |
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| (62) |
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| (1,047) |
Translated earnings contract loss |
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| 193 |
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| 2,295 |
Unrealized translation gains on transactions |
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| (264) |
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| (177) |
Gain on realignment of equity investment |
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| (2,676) |
Changes in certain working capital items: |
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Trade accounts receivable |
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| (190) |
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| (184) |
Inventories |
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| (166) |
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| (69) |
Other current assets |
|
| (109) |
|
| (42) |
Accounts payable and other current liabilities |
|
| (123) |
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| 28 |
Other, net |
|
| 117 |
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| (11) |
Net cash provided by operating activities |
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| 1,116 |
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| 1,109 |
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Cash Flows from Investing Activities: |
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Capital expenditures |
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| (1,247) |
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| (815) |
Acquisition of business, net of cash received |
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| (171) |
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| (279) |
Cash received on realignment of equity investment |
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| 4,818 |
Short-term investments – acquisitions |
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| (20) |
Short-term investments – liquidations |
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| 29 |
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| 121 |
Realized gains on translated earnings contracts |
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| 199 |
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| 146 |
Other, net |
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| (28) |
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| (15) |
Net cash (used in) provided by investing activities |
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| (1,218) |
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| 3,956 |
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Cash Flows from Financing Activities: |
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Net repayments of short-term borrowings and current portion of long-term debt |
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| (85) |
Proceeds from issuance of long-term debt, net |
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| 702 |
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Principal payments under capital lease obligations |
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| (1) |
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| (1) |
Payments of employee withholding tax on stock awards |
|
| (14) |
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| (14) |
Proceeds from issuance of commercial paper |
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| (481) |
Proceeds from the exercise of stock options |
|
| 275 |
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| 86 |
Repurchases of common stock for treasury |
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| (2,064) |
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| (3,884) |
Dividends paid |
|
| (493) |
|
| (493) |
Net cash used in financing activities |
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| (1,595) |
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| (4,872) |
Effect of exchange rates on cash |
|
| 271 |
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| 128 |
Net (decrease) increase in cash and cash equivalents |
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| (1,426) |
|
| 321 |
Cash and cash equivalents at beginning of period |
|
| 5,291 |
|
| 4,500 |
Cash and cash equivalents at end of period |
| $ | 3,865 |
| $ | 4,821 |
Consolidated Statements of Cash Flows | Corning Incorporated and Subsidiary Companies |
(Unaudited; in millions) |
Nine months ended | ||||||||
September 30, | ||||||||
2023 | 2022 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 676 | $ | 1,413 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 932 | 1,014 | ||||||
Amortization of purchased intangibles | 92 | 92 | ||||||
Loss on disposal of assets, net | 72 | 110 | ||||||
Severance charges | 86 | 8 | ||||||
Severance payments | (82 | ) | (5 | ) | ||||
Gain on sale of business | (53 | ) | ||||||
Share-based compensation expense | 168 | 145 | ||||||
Translation gain on Japanese yen-denominated debt | (162 | ) | (321 | ) | ||||
Deferred tax provision | 37 | 58 | ||||||
Translated earnings contract gain, net | (128 | ) | (257 | ) | ||||
Unrealized translation loss on transactions | 58 | 140 | ||||||
Tax deposit refund | 99 | |||||||
Changes in assets and liabilities: | ||||||||
Trade accounts receivable | (137 | ) | 161 | |||||
Inventories | 131 | (637 | ) | |||||
Other current assets | (58 | ) | (5 | ) | ||||
Accounts payable and other current liabilities | (263 | ) | 25 | |||||
Customer deposits and government incentives | (17 | ) | 144 | |||||
Deferred income | (11 | ) | (15 | ) | ||||
Other, net | (201 | ) | (19 | ) | ||||
Net cash provided by operating activities | 1,292 | 1,998 | ||||||
Cash Flows from Investing Activities: | ||||||||
Capital expenditures | (1,111 | ) | (1,201 | ) | ||||
Proceeds from sale of equipment to related party | 67 | |||||||
Proceeds from sale of business | 77 | |||||||
Realized gains on translated earnings contracts and other | 270 | 209 | ||||||
Other, net | 4 | (54 | ) | |||||
Net cash used in investing activities | (770 | ) | (969 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Repayments of short-term borrowings and other long-term debt | (180 | ) | (87 | ) | ||||
Proceeds from issuance of short-term borrowings | 30 | 70 | ||||||
Proceeds from issuance of euro bonds and other long-term debt | 968 | 37 | ||||||
Proceeds from other financing arrangements | 54 | |||||||
Repayment of other financing arrangements | (54 | ) | ||||||
Payment for redemption of preferred stock | (507 | ) | (507 | ) | ||||
Payments of employee withholding tax on stock awards | (103 | ) | (44 | ) | ||||
Proceeds from exercise of stock options | 39 | 35 | ||||||
Purchases of common stock for treasury | (221 | ) | ||||||
Dividends paid | (741 | ) | (696 | ) | ||||
Other, net | (26 | ) | (17 | ) | ||||
Net cash used in financing activities | (520 | ) | (1,430 | ) | ||||
Effect of exchange rates on cash | (34 | ) | (117 | ) | ||||
Net decrease in cash and cash equivalents | (32 | ) | (518 | ) | ||||
Cash and cash equivalents at beginning of period | 1,671 | 2,148 | ||||||
Cash and cash equivalents at end of period | $ | 1,639 | $ | 1,630 |
The accompanying notes are an integral part of these consolidated financial statements.
© 2017 Corning Incorporated. All Rights Reserved.
6
Consolidated Statements of Changes in Shareholders’ Equity | Corning Incorporated and Subsidiary Companies |
(Unaudited; in millions, except per share amounts) |
Common stock | Additional paid-in capital common | Retained earnings | Treasury stock | Accumulated other comprehensive loss | Total Corning Incorporated shareholders' equity | Non-controlling interest | Total | |||||||||||||||||||||||||
Balance as of December 31, 2022 | $ | 910 | $ | 16,682 | $ | 16,778 | $ | (20,532 | ) | $ | (1,830 | ) | $ | 12,008 | $ | 267 | $ | 12,275 | ||||||||||||||
Net income | 176 | 176 | 15 | 191 | ||||||||||||||||||||||||||||
Other comprehensive loss | (67 | ) | (67 | ) | (67 | ) | ||||||||||||||||||||||||||
Shares issued to benefit plans and for option exercises | 1 | 64 | 65 | 65 | ||||||||||||||||||||||||||||
Common dividends ($0.28 per share) | (241 | ) | (241 | ) | (241 | ) | ||||||||||||||||||||||||||
Other, net (1) | (16 | ) | (16 | ) | (16 | ) | ||||||||||||||||||||||||||
Balance as of March 31, 2023 | $ | 911 | $ | 16,746 | $ | 16,713 | $ | (20,548 | ) | $ | (1,897 | ) | $ | 11,925 | $ | 282 | $ | 12,207 | ||||||||||||||
Net income | 281 | 281 | 22 | 303 | ||||||||||||||||||||||||||||
Other comprehensive loss | (302 | ) | (302 | ) | (1 | ) | (303 | ) | ||||||||||||||||||||||||
Shares issued to benefit plans and for option exercises | 4 | 71 | 75 | 75 | ||||||||||||||||||||||||||||
Common dividends ($0.56 per share) | (485 | ) | (485 | ) | (485 | ) | ||||||||||||||||||||||||||
Other, net (1) | (82 | ) | (82 | ) | (5 | ) | (87 | ) | ||||||||||||||||||||||||
Balance as of June 30, 2023 | $ | 915 | $ | 16,817 | $ | 16,509 | $ | (20,630 | ) | $ | (2,199 | ) | $ | 11,412 | $ | 298 | $ | 11,710 | ||||||||||||||
Net income | 164 | 164 | 18 | 182 | ||||||||||||||||||||||||||||
Other comprehensive loss | (203 | ) | (203 | ) | (1 | ) | (204 | ) | ||||||||||||||||||||||||
Shares issued to benefit plans and for option exercises | 60 | 60 | 60 | |||||||||||||||||||||||||||||
Other, net (1) | (3 | ) | (3 | ) | (1 | ) | (4 | ) | ||||||||||||||||||||||||
Balance, September 30, 2023 | $ | 915 | $ | 16,877 | $ | 16,673 | $ | (20,633 | ) | $ | (2,402 | ) | $ | 11,430 | $ | 314 | $ | 11,744 |
Common stock | Additional paid-in capital common | Retained earnings | Treasury stock | Accumulated other comprehensive loss | Total Corning Incorporated shareholders' equity | Non-controlling interest | Total | |||||||||||||||||||||||||
Balance as of December 31, 2021 | $ | 907 | $ | 16,475 | $ | 16,389 | $ | (20,263 | ) | $ | (1,175 | ) | $ | 12,333 | $ | 212 | $ | 12,545 | ||||||||||||||
Net income | 581 | 581 | 22 | 603 | ||||||||||||||||||||||||||||
Other comprehensive loss | (187 | ) | (187 | ) | (187 | ) | ||||||||||||||||||||||||||
Purchase of common stock for treasury | (151 | ) | (151 | ) | (151 | ) | ||||||||||||||||||||||||||
Shares issued to benefit plans and for option exercises | 1 | 56 | 57 | 57 | ||||||||||||||||||||||||||||
Common dividends ($0.27 per share) | (233 | ) | (233 | ) | (233 | ) | ||||||||||||||||||||||||||
Other, net (1) | (5 | ) | (5 | ) | (5 | ) | ||||||||||||||||||||||||||
Balance as of March 31, 2022 | $ | 908 | $ | 16,531 | $ | 16,737 | $ | (20,419 | ) | $ | (1,362 | ) | $ | 12,395 | $ | 234 | $ | 12,629 | ||||||||||||||
Net income | 563 | 563 | 21 | 584 | ||||||||||||||||||||||||||||
Other comprehensive loss | (732 | ) | (732 | ) | (2 | ) | (734 | ) | ||||||||||||||||||||||||
Purchase of common stock for treasury | (53 | ) | (53 | ) | (53 | ) | ||||||||||||||||||||||||||
Shares issued to benefit plans and for option exercises | 2 | 59 | 61 | 61 | ||||||||||||||||||||||||||||
Common dividends ($0.54 per share) | (463 | ) | (463 | ) | (463 | ) | ||||||||||||||||||||||||||
Other, net (1) | (37 | ) | (37 | ) | (5 | ) | (42 | ) | ||||||||||||||||||||||||
Balance as of June 30, 2022 | $ | 910 | $ | 16,590 | $ | 16,837 | $ | (20,509 | ) | $ | (2,094 | ) | $ | 11,734 | $ | 248 | $ | 11,982 | ||||||||||||||
Net income | 208 | 208 | 18 | 226 | ||||||||||||||||||||||||||||
Other comprehensive loss | (697 | ) | (697 | ) | (2 | ) | (699 | ) | ||||||||||||||||||||||||
Purchase of common stock for treasury | (17 | ) | (17 | ) | (17 | ) | ||||||||||||||||||||||||||
Shares issued to benefit plans and for option exercises | 59 | 59 | 59 | |||||||||||||||||||||||||||||
Other, net (1) | (1 | ) | (2 | ) | (3 | ) | (3 | ) | ||||||||||||||||||||||||
Balance, September 30, 2022 | $ | 910 | $ | 16,649 | $ | 17,044 | $ | (20,528 | ) | $ | (2,791 | ) | $ | 11,284 | $ | 264 | $ | 11,548 |
(1) | Treasury stock includes the deemed surrender to the Company of common stock to satisfy employee tax withholding obligations. |
The accompanying notes are an integral part of these consolidated financial statements.
COR
NINGCORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
In these notes, the terms “Corning,” “Company,” “we,” “us,” or “our” mean Corning Incorporated and its subsidiary companies.
The consolidated financial statements include the consolidated accounts of Corning Incorporated and its subsidiaries consolidated in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to state fairly the financial position, results of operations and cash flows for the periods presented. All intercompany accounts, transactions and profits 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.eliminated. Certain information and notefootnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted or condensed.pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). These interim consolidated financial statements should be read in conjunction with Corning’s consolidatedthe audited financial statements and notes thereto included in itsthe Company’s Annual Report on Form 10-K10-K for the year ended December 31, 20162022 (“20162022 Form 10-K”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, ImprovementsThe preparation of financial statements in conformity with GAAP requires management to Employee Share-Based Payment Accounting,make estimates and assumptions that affect the impactsreported amounts of which includeassets, liabilities, revenues, expenses and the recordingdisclosure of cumulative tax benefitscontingent assets and liabilities in the consolidated financial statements and related notes. Significant estimates and assumptions in these consolidated financial statements require the exercise of $233 millionjudgment. Due to the inherent uncertainty involved in beginning retained earningsmaking estimates, actual results reported in future periods may be different from these estimates.
The non-controlling interest as recorded in the consolidated financial statements represents amounts attributable to the minority shareholders of Hemlock Semiconductor Group (“Hemlock”) and cash flow reclassifications that were not significant. other less-than-wholly-owned consolidated subsidiaries.
Certain prior year amounts have been reclassified to conform to the current-yearcurrent year presentation. These reclassifications had no material impact on ourthe results of operations, financial position or changes in shareholders’ equity.
New Accounting Standards
2. Revenue
In May 2014,Disaggregated Revenue
The following table presents revenues by product category (in millions):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Telecommunication products | $ | 918 | $ | 1,317 | $ | 3,109 | $ | 3,828 | ||||||||
Display products | 727 | 558 | 2,061 | 2,223 | ||||||||||||
Specialty glass products | 560 | 516 | 1,384 | 1,494 | ||||||||||||
Environmental substrate and filter products | 420 | 393 | 1,260 | 1,130 | ||||||||||||
Life science products | 221 | 297 | 690 | 908 | ||||||||||||
Polycrystalline silicon products | 230 | 288 | 765 | 877 | ||||||||||||
All other products | 97 | 119 | 325 | 323 | ||||||||||||
Total revenue | $ | 3,173 | $ | 3,488 | $ | 9,594 | $ | 10,783 |
Customer Deposits
As of September 30, 2023 and December 31, 2022, Corning had customer deposits of approximately $1.2 billion and $1.3 billion, respectively. Most of these customer deposits were non-refundable and allowed customers to secure rights to products produced by Corning under long-term supply agreements. The duration of these long-term supply agreements ranges up to 10 years. As products are delivered to customers, Corning will recognize revenue and reduce the Financial Accounting Standards Boardamount of the customer deposit liability.
For the three months ended September 30, 2023 and 2022, customer deposits recognized were $6 million and $24 million, respectively. For the nine months ended September 30, 2023 and 2022, customer deposits recognized were $88 million and $155 million, respectively.
Refer to Note 6 (Other Liabilities) for additional information.
Deferred Revenue
As of September 30, 2023 and December 31, 2022, Corning had deferred revenue of approximately $854 million and $869 million, respectively. Deferred revenue was primarily related to the performance obligations of non-refundable consideration previously received by Hemlock from its customers under long-term supply agreements.
Deferred revenue is tracked on a per-customer contract-unit basis. As customers take delivery of the committed volumes under the terms of the contract, a per-unit amount of deferred revenue is recognized when control of the promised goods is transferred to the customer based upon the units delivered compared to the remaining contractual units. For the three and nine months ended September 30, 2023 and 2022, the amount of deferred revenue recognized in the consolidated statements of income was not material.
Refer to Note 6 (Other Liabilities) for additional information.
3. Income Taxes
The following table presents the provision for income taxes and the related effective tax rate (in millions, except percentages):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Provision for income taxes | $ | (35 | ) | $ | (34 | ) | $ | (178 | ) | $ | (380 | ) | ||||
Effective tax rate | 16.1 | % | 13.1 | % | 20.8 | % | 21.2 | % |
For the three months ended September 30, 2023, the effective tax rate differed from the United States (“FASB”U.S.”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenuestatutory rate of 21%, primarily due to differences arising from Contractsforeign earnings partially offset by changes in estimates based on the final 2022 U.S. Federal Income Tax Return. For the nine months ended September 30, 2023, the effective tax rate differed from the U.S. statutory rate of 21%, primarily due to differences arising from foreign earnings, changes in estimates based on the final 2022 U.S. Federal Income Tax Return and adjustments related to share-based compensation, partially offset by changes in valuation allowance assessments.
For the three months ended September 30, 2022, the effective tax rate differed from the U.S. statutory rate of 21%, primarily due to the net impact of changes in tax legislation and changes in estimates based on the final 2021 U.S. Federal Income Tax Return, partially offset by changes in tax reserves. For the nine months ended September 30, 2022, the effective tax rate differed from the U.S. statutory rate of 21%, primarily due to differences arising from foreign earnings and changes in tax reserves, partially offset by the net impact of changes in tax legislation, changes in estimates based on the final 2021 U.S. Federal Income Tax Return and adjustments related to share-based compensation.
Corning Precision Materials, a South Korean subsidiary, is currently appealing certain tax assessments and tax refund claims for tax years 2010 through 2019. The Company was required to deposit the disputed tax amounts with Customers,the South Korean government as a new Topic, Accounting Standards Codification (“ASC”) Topic 606.condition of its appeal of any tax assessment. During the second quarter of 2023, $99 million was no longer under dispute and was refunded to the Company. The new revenue recognition standard relatesnon-current receivable balance was $255 million and $349 million as of September 30, 2023 and December 31, 2022, respectively, for the amount on deposit with the South Korean government. Corning believes that it is more likely than not the Company will prevail in the appeals process relating 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 analysisthese matters.
4. Earnings Per Common Share
Corning’s equity affiliates are currently evaluating their material contracts,The following table presents the reconciliation of the amounts used to compute basic and have not concluded on the potential impact of adopting ASU 2014-09 on their financial statements and related disclosure.diluted earnings per common share (in millions, except per share amounts):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Net income attributable to Corning Incorporated | $ | 164 | $ | 208 | $ | 621 | $ | 1,352 | ||||||||
Weighted-average common shares outstanding – basic | 850 | 843 | 848 | 843 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Stock options and other awards | 9 | 12 | 10 | 14 | ||||||||||||
Weighted-average common shares outstanding – diluted | 859 | 855 | 858 | 857 | ||||||||||||
Basic earnings per common share | $ | 0.19 | $ | 0.25 | $ | 0.73 | $ | 1.60 | ||||||||
Diluted earnings per common share | $ | 0.19 | $ | 0.24 | $ | 0.72 | $ | 1.58 | ||||||||
Anti-dilutive potential shares excluded from diluted earnings | ||||||||||||||||
Stock options and other awards | 3 | 3 | 3 | 2 |
5. Inventories
In February 2016,Inventories consisted of 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 patternfollowing (in millions):
September 30, | December 31, | |||||||
2023 | 2022 | |||||||
Finished goods | $ | 1,226 | $ | 1,315 | ||||
Work in process | 513 | 571 | ||||||
Raw materials and accessories | 479 | 537 | ||||||
Supplies and packing materials | 437 | 481 | ||||||
Inventories | $ | 2,655 | $ | 2,904 |
6. Other Liabilities
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 aspectsOther liabilities consisted 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.
September 30, | December 31, | |||||||
2023 | 2022 | |||||||
Current liabilities: | ||||||||
Wages and employee benefits | $ | 505 | $ | 727 | ||||
Income taxes | 125 | 127 | ||||||
Derivative instruments (Note 10) | 150 | 174 | ||||||
Deferred revenue (Note 2) | 185 | 144 | ||||||
Customer deposits (Note 2) | 162 | 132 | ||||||
Share repurchase liability (Note 12) | 506 | |||||||
Short-term operating leases | 108 | 111 | ||||||
Other current liabilities | 1,294 | 1,226 | ||||||
Other accrued liabilities | $ | 2,529 | $ | 3,147 | ||||
Non-current liabilities: | ||||||||
Defined benefit pension plan liabilities | $ | 685 | $ | 668 | ||||
Derivative instruments (Note 10) | 65 | 17 | ||||||
Deferred revenue (Note 2) | 669 | 725 | ||||||
Customer deposits (Note 2) | 1,044 | 1,137 | ||||||
Deferred tax liabilities | 201 | 243 | ||||||
Long-term operating leases | 842 | 795 | ||||||
Other non-current liabilities | 1,127 | 1,370 | ||||||
Other liabilities | $ | 4,633 | $ | 4,955 |
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.7. Debt
In January 2017, the FASB issued ASU 2017-04, Intangibles – GoodwillBased on borrowing rates currently available to us for loans with similar terms 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 comparingmaturities, the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by whichlong-term debt was $6.5 billion and $6.1 billion as of September 30, 2023 and December 31, 2022, respectively, compared to the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amountvalue 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 $7.2 billion and $6.7 billion as of September 30, 2023 and 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, 2017.31, 2022, respectively. The Company adoptedmeasures the ASUfair value of its long-term debt using Level 2 inputs based primarily on January 1, 2017.current market yields for its existing debt traded in the secondary market.
In March 2017, On May 15, 2023, the FASBCompany issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost€300 million 3.875% Notes due 2026 (“2026 Notes”) and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires entities to (1) disaggregate the current-service-cost component€550 million 4.125% Notes due 2031 (“2031 Notes”). The proceeds from the other2026 Notes and 2031 Notes were received in euros and converted to U.S. dollars on the date of issuance. The net proceeds received were approximately $918 million and will be used for general corporate purposes. As of September 30, 2023, the U.S. dollar equivalent carrying value of the euro-denominated long-term debt was $892 million.
The full amounts of the 2026 Notes and 2031 Notes have been designated as net investment hedges against our investments in certain European subsidiaries with euro functional currencies. Refer to Note 10 (Hedging Activities) for additional information.
Corning had no outstanding commercial paper as of September 30, 2023 or December 31, 2022.
8. Employee Retirement Plans
Corning has defined benefit pension plans covering certain domestic and international employees. The Company may contribute, as necessary, an amount exceeding the minimum requirements to achieve the Company’s long-term funding targets. During 2023, the Company made cash contributions of $25 million to its international pension plans. The Company does not expect to make additional contributions in the fourth quarter of 2023.
The following table presents the components of net periodic benefit cost (the “other components”) and present it withexpense (income) for employee retirement plans, which 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 ofthan the service cost component and prospectively foris recorded in other income, net in the capitalizationconsolidated statements 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, but the impact is not expected to be material.income (in millions):
2. 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, 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. (“PCE”) in the total amount of $238 million, as required by the Plan. A payment for $70 million was made in June 2017. At September 30, 2017, the total amount of payments due in years 2018 through 2022 is $220 million. A $35 million payment is due in the second quarter of 2018 and is classified as a current liability. The remaining $185 million is classified as a non-current liability.
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 September 30, 2017 and December 31, 2016, the amount of the reserve for these non-PCC asbestos claims was $148 million and $149 million, respectively.
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.
Pension benefits | Postretirement benefits | |||||||||||||||||||||||||||||||
Three months ended | Nine months ended | Three months ended | Nine months ended | |||||||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Service cost | $ | 25 | $ | 32 | $ | 75 | $ | 96 | $ | 1 | $ | 3 | $ | 4 | $ | 7 | ||||||||||||||||
Interest cost | 45 | 28 | 133 | 82 | 6 | 3 | 17 | 11 | ||||||||||||||||||||||||
Expected return on plan assets | (46 | ) | (55 | ) | (138 | ) | (164 | ) | ||||||||||||||||||||||||
Amortization of actuarial net gain | (6 | ) | (17 | ) | ||||||||||||||||||||||||||||
Amortization of prior service cost (credit) | 2 | 1 | 5 | 4 | (2 | ) | (2 | ) | (4 | ) | (4 | ) | ||||||||||||||||||||
Recognition of actuarial loss (gain) | 12 | (16 | ) | 22 | (2 | ) | (3 | ) | ||||||||||||||||||||||||
Special termination benefit charge | 5 | |||||||||||||||||||||||||||||||
Total pension and postretirement benefit expense (income) | $ | 38 | $ | 6 | $ | 64 | $ | 40 | $ | (1 | ) | $ | 2 | $ | — | $ | 11 |
Other9. 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 September 30, 2017 and December 31, 2016, contingent guarantees totaled a notional value of $317 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 $230 million and $231 million, at September 30, 2017 and December 31, 2016, respectively.
Product warranty liability accruals were considered insignificant at September 30, 2017 and December 31, 2016.
Corning is a defendant in various lawsuits including environmental and product-related suits, and is subject to various claims that arise in the normal course of business.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. Other than
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. Following the realignment, Corning no longer owned any interest in Dow Corning. With the realignment, Corning agreed to indemnify Dow 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, subject to certain asbestos relatedconditions and limits. Corning does not believe that its indemnity obligation will be material.
Dow Corning Environmental Claims
In September 2019, Dow formally notified Corning of certain environmental matters for which Dow asserts that it has, or will, experience losses arising from remediation and response at a number of sites. In the event Dow is liable for these claims, there are no other material loss contingencies relatedCorning may be required to litigation.indemnify Dow for up to 50% of that liability, subject to certain conditions and limits. As of September 30, 2023, Corning has determined a potential liability for these environmental matters is probable and the amount reserved was not material.
Environmental Litigation
Corning has been nameddesignated by the Environmental Protection Agency (“the Agency”) under the Superfund Act,federal or by state governments under similar stateenvironmental laws, including Superfund, as a potentially responsible party that may be liable for 16 activecleanup costs associated with 19 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 Superfundsuch hazardous waste 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 As of September 30, 20172023 and December 31, 2016,2022, Corning had accrued approximately $40$90 million (undiscounted) and $43$109 million, (undiscounted), respectively, for the estimated undiscounted 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 liabilityliability.
10. Hedging Activities
Designated Hedges
Corning uses over-the-counter (“OTC”) foreign exchange forward contracts designated as cash flow hedges to reduce the risk that movements in exchange rates will adversely affect the net cash flows resulting from the sale of products to customers and thatpurchases from suppliers. The total notional amounts for foreign currency cash flow hedges are $301 million and $419 million as of September 30, 2023 and December 31, 2022, respectively, with maturities through 2024. Corning defers gains and losses related to cash flow hedges into accumulated other comprehensive loss on the consolidated balance sheets until the hedged item impacts earnings. As of September 30, 2023, the amount expected to be reclassified into earnings within the next 12 months is a pre-tax gain of $43 million.
Corning has entered into leases of precious metals, with maturities through 2025. To offset the risk of an additional losschanges 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 September 30, 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.
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 $4.4 billionthe Company’s separate accounting pool of leased precious metals due to adverse changes in the respective market prices, Corning designated the bifurcated embedded derivatives included in these leases as fair value hedges. The gain or loss on the derivatives, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings. The amounts representing the time value component of the derivatives are excluded from the assessment of effectiveness and $3.9 billion at amortized in earnings. The impact of the excluded component on Corning’s other comprehensive loss and earnings is not material. The carrying amount of the leased precious metals pool, which is included within property, plant and equipment, net of accumulated depreciation in the consolidated balance sheets, is $89 million and $278 million, respectively, as of September 30, 20172023 and December 31, 2016, respectively, compared to recorded book values2022. The carrying amount of $4.0 billion at the leased precious metals pool includes cumulative fair value losses of $261 million and $95 million as of September 30, 20172023 and $3.6 billion at December 31, 2016. The Company measures2022, respectively. These losses are offset by changes in the fair value of the derivatives.
Net Investment Hedges
In May 2023, the Company designated the full amount of its long-term debt using Level 2 inputs based primarily on current market yields for its existing debt traded2026 Notes and 2031 Notes with a total notional amount of €850 million, which are non-derivative financial instruments, as net investment hedges against our investments in certain European subsidiaries with euro functional currencies. Changes in the secondary market.
Corning did not have outstanding commercial paper at September 30, 2017 and December 31, 2016.
Debt Issuances
2017
In the third quartervalue of 2017, Corning issued three Japanese yen-denominated debt securities (the “Notes”), as follows:
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The proceeds from these Notes were receivedhedging instruments due to foreign currency gains or losses are deferred in Japanese yen and converted to U.S. dollarsother comprehensive loss on the dateconsolidated statements of issuance. The net proceeds received in U.S. dollars, after deducting offering expenses, was approximately $700 million. Payments of principle and interest oncomprehensive (loss) income, within the Notes will be in Japanese yen, or should yen be unavailable due to circumstances beyond Corning’s control, a U.S. dollar equivalent.
On a quarterly basis, Corning will recognize the transaction gains and losses resulting from changes in the JPY/USD exchange rate in the Other expense, net line of the Consolidated Statements of Income. Cash proceeds from the offerings and payments for debt issuance costs are disclosed as financing activities, and cash payments to bondholders for interest will be disclosed as operating activities, in the Consolidated Statements of Cash Flows.
4. Income Taxes
Our (provision) benefit for income taxes and the related effective income tax rates were as follows (in millions):
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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(Provision) benefit for income taxes |
| $ | (89) |
| $ | 27 |
| $ | (176) |
| $ | 835 |
Effective tax rate |
|
| 18.6% |
|
| (10.5%) |
|
| 16.1% |
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| (64.8%) |
For the three months ended September 30, 2017, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following benefits:
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For the nine months ended September 30, 2017, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following benefits:
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For the three months ended September 30, 2016, the effective income tax benefit differed from the U.S. statutory rate of 35% primarily due to the following benefit:
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For the nine months ended September 30, 2016, the effective income tax benefit differed from the U.S. statutory rate of 35% primarily due to the following benefits:
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Corning continues to indefinitely reinvest substantially all of its foreign earnings, with the exception of an immaterial amount of current earnings that have very low or no tax cost associated with their repatriation. Our current analysis indicates that we have sufficient U.S. liquidity, including borrowing capacity, to fund foreseeable U.S. cash needs without requiring the repatriation of foreign cash. One time or unusual items may impact our ability or intent to keep our foreign earnings and cash indefinitely reinvested. 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.
5. Earnings per Common Share
The following table sets forth the computation of basic and diluted earnings per common share (in millions, except per share amounts):
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Net income attributable to Corning Incorporated |
| $ | 390 |
| $ | 284 |
| $ | 915 |
| $ | 2,123 |
Less: Series A convertible preferred stock dividend |
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| 24 |
|
| 24 |
|
| 73 |
|
| 73 |
Net income available to common stockholders – basic |
|
| 366 |
|
| 260 |
|
| 842 |
|
| 2,050 |
Plus: Series A convertible preferred stock dividend |
|
| 24 |
|
| 24 |
|
| 73 |
|
| 73 |
Net income available to common stockholders – diluted |
| $ | 390 |
| $ | 284 |
| $ | 915 |
| $ | 2,123 |
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Weighted-average common shares outstanding – basic |
|
| 883 |
|
| 978 |
|
| 905 |
|
| 1,046 |
Effect of dilutive securities: |
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Stock options and other dilutive securities |
|
| 11 |
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| 9 |
|
| 11 |
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| 9 |
Series A convertible preferred stock |
|
| 115 |
|
| 115 |
|
| 115 |
|
| 115 |
Weighted-average common shares outstanding – diluted |
|
| 1,009 |
|
| 1,102 |
|
| 1,031 |
|
| 1,170 |
Basic earnings per common share |
| $ | 0.41 |
| $ | 0.27 |
| $ | 0.93 |
| $ | 1.96 |
Diluted earnings per common share |
| $ | 0.39 |
| $ | 0.26 |
| $ | 0.89 |
| $ | 1.81 |
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Antidilutive potential shares excluded from |
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Series A convertible preferred stock |
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Employee stock options and awards |
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| 1 |
|
| 13 |
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| 2 |
|
| 18 |
Accelerated share repurchase forward contract |
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| 14 |
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| 14 |
Total |
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| 1 |
|
| 27 |
|
| 2 |
|
| 32 |
6. Inventories, Net of Inventory Reserves
Inventories, net of inventory reserves comprise the following (in millions):
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| September 30, |
| December 31, | ||
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| 2017 |
| 2016 | ||
Finished goods |
| $ | 720 |
| $ | 606 |
Work in process |
|
| 328 |
|
| 303 |
Raw materials and accessories |
|
| 314 |
|
| 270 |
Supplies and packing materials |
|
| 331 |
|
| 292 |
Total inventories, net of inventory reserves |
| $ | 1,693 |
| $ | 1,471 |
7. 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.
Prior 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.
Corning’s financial statements as of June 30, 2016 include the positive impact of the release of a deferred tax liability of $105 million related to Corning’s tax on Dow Corning’s earnings that were not distributed as of the date of the transaction and a non-taxable gain of $2,676 million on the realignment. Details of the gain are illustrated below (in millions):
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Investments comprise the following (in millions):
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| Ownership |
| September 30, |
| December 31, | ||||
| interest |
| 2017 |
| 2016 | ||||
Affiliated companies accounted for by the equity method (1) | 20% | to | 50% |
| $ | 284 |
| $ | 269 |
Other investments |
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|
| 68 |
|
| 67 |
Subtotal Investment Assets |
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| $ | 352 |
| $ | 336 |
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Affiliated companies accounted for by the equity method |
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HSG (1)(2) |
| 50% |
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| $ | 202 |
| $ | 241 |
Subtotal Investment Liabilities |
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| $ | 202 |
| $ | 241 |
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Hemlock Semiconductor Group
HSG’s results of operations follow (in millions):
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 (1) |
| 2016 (2) | ||||
Statement of Operations: |
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Net sales |
| $ | 286 |
| $ | 217 |
| $ | 887 |
| $ | 397 |
Gross profit |
| $ | 72 |
| $ | 61 |
| $ | 180 |
| $ | 113 |
Net income attributable to HSG |
| $ | 59 |
| $ | 44 |
| $ | 285 |
| $ | 87 |
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8. Goodwill and Other Intangible Assets
The carrying amount of goodwill by segment for the periods ended September 30, 2017 and December 31, 2016 is as follows (in millions):
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| Display |
| Optical |
| Specialty |
| Life |
| All |
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| |||||
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| Technologies |
| Communications |
| Materials |
| Sciences |
| Other |
| Total | ||||||
Balance at December 31, 2016 |
| $ | 126 |
| $ | 645 |
| $ | 150 |
| $ | 558 |
| $ | 98 |
| $ | 1,577 |
Acquired goodwill (1) |
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|
|
| 22 |
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|
|
| 43 |
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| 34 |
|
| 99 |
Measurement period |
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|
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|
| (28) |
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| (28) |
Foreign currency translation |
|
| 4 |
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| 7 |
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|
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| 18 |
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| 7 |
|
| 36 |
Balance at September 30, 2017 |
| $ | 130 |
| $ | 674 |
| $ | 150 |
| $ | 619 |
| $ | 111 |
| $ | 1,684 |
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Corning’s gross goodwill balances for the periods ended September 30, 2017 and December 31, 2016 each were $8.2 billion and $8.1 billion, respectively. Accumulated impairment losses were $6.5 billion for the periods ended September 30, 2017 and December 31, 2016, and were generated primarily through goodwill impairments related to the Optical Communications segment.
Other intangible assets are as follows (in millions):
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| September 30, 2017 |
| December 31, 2016 | ||||||||||||||
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| Accumulated |
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|
| Accumulated |
|
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| ||
|
| Gross |
| amortization |
| Net |
| Gross |
| amortization |
| Net | ||||||
Amortized intangible assets: |
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|
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Patents, trademarks, and |
| $ | 382 |
| $ | 192 |
| $ | 190 |
| $ | 360 |
| $ | 176 |
| $ | 184 |
Customer lists and other |
|
| 892 |
|
| 191 |
|
| 701 |
|
| 761 |
|
| 149 |
|
| 612 |
Total |
| $ | 1,274 |
| $ | 383 |
| $ | 891 |
| $ | 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 in the first nine months of 2017, primarily due to acquisitions of $132 million of other intangible assets and foreign currency translation adjustments and other line, and will remain in accumulated other comprehensive loss until the hedged investment is sold or substantially liquidated. We evaluate the effectiveness of $16the net investment hedges each quarter using the critical terms match method. As of September 30, 2023, the net investment hedges are deemed to be effective. During the three and nine months ended September 30, 2023, foreign currency gains of $29 million offset by amortization of $53 million.and $36 million, respectively, associated with these net investment hedges were recognized in other comprehensive loss.
Amortization expense relatedRefer to these intangible assets is estimated to be $71 millionNote 7 (Debt) for 2017, $74 million annually for 2018 and 2019, and $70 million annually from 2020 to 2022.additional information.
9. 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):
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| Pension benefits |
| Postretirement benefits | ||||||||||||||||||||
|
| Three months ended |
| Nine months ended |
| Three months ended |
| Nine months ended | ||||||||||||||||
|
| September 30, |
| September 30, |
| September 30, |
| September 30, | ||||||||||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||
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Service cost |
| $ | 22 |
| $ | 22 |
| $ | 69 |
| $ | 65 |
| $ | 2 |
| $ | 3 |
| $ | 7 |
| $ | 7 |
Interest cost |
|
| 32 |
|
| 31 |
|
| 94 |
|
| 93 |
|
| 7 |
|
| 6 |
|
| 20 |
|
| 19 |
Expected return on plan assets |
|
| (43) |
|
| (41) |
|
| (130) |
|
| (124) |
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Amortization of net loss |
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| (1) |
Amortization of prior service |
|
| 1 |
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| 1 |
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| 4 |
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| 4 |
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| (1) |
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| (1) |
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| (2) |
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| (3) |
Recognition of actuarial loss |
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| 26 |
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| 15 |
|
| 60 |
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Total pension and postretirement |
| $ | 12 |
| $ | 39 |
| $ | 52 |
| $ | 98 |
| $ | 8 |
| $ | 8 |
| $ | 25 |
| $ | 22 |
The impact of the finalization of our 2016 benefit plan valuations resulted in a charge of $15 million in the nine months ended September 30, 2017. The recognition of actuarial loss of $26 million in the three months ended September 30, 2016 resulted from small settlements in several of our benefit plans which triggered plan remeasurements. In addition to the settlements occurring in the third quarter of 2016, results in the nine months ended September 30, 2016 also included the impact of the finalization of our 2015 benefit plan valuations.
10. Other Liabilities
Other liabilities follow (in millions):
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| September 30, |
| December 31, | ||
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| 2017 |
| 2016 | ||
Current liabilities: |
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Wages and employee benefits |
| $ | 513 |
| $ | 487 |
Income taxes |
|
| 135 |
|
| 150 |
Derivative instruments |
|
| 58 |
|
| 88 |
Asbestos and other litigation |
|
| 39 |
|
| 70 |
Other current liabilities |
|
| 510 |
|
| 621 |
Other accrued liabilities |
| $ | 1,255 |
| $ | 1,416 |
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Non-current liabilities: |
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|
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Defined benefit pension plan liabilities |
| $ | 743 |
| $ | 692 |
Derivative instruments |
|
| 343 |
|
| 282 |
Asbestos and other litigation |
|
| 342 |
|
| 369 |
Investment in Hemlock Semiconductor Group (1) |
|
| 202 |
|
| 241 |
Other non-current liabilities |
|
| 1,310 |
|
| 1,221 |
Other liabilities |
| $ | 2,940 |
| $ | 2,805 |
|
|
Asbestos ClaimsUndesignated Hedges
Corning uses OTC foreign exchange forward and PPG each owned 50%option contracts to offset economic currency risks. These contracts are not designated as hedging instruments for accounting purposes. The undesignated hedges limit exposure to foreign currency fluctuations related to certain subsidiaries’ monetary assets, monetary liabilities and net earnings in foreign currencies.
A significant portion of the capital stock of PCC. Over a period of more than two decades, PCCCompany’s non-U.S. revenue and several other defendants were namedexpenses are denominated in numerous lawsuits involving claims alleging personal injury from exposureJapanese yen, South Korean won, new Taiwan dollar, Chinese yuan and euro. When this revenue and expenses are translated to asbestos. ReferU.S. dollars, the Company is exposed to Note 2 (Commitments, Contingencies and Guarantees) to the consolidated financial statements for additional information on the asbestos claims.
11. Hedging Activities
Undesignated Hedges
The table below includes a total gross notional value forforeign exchange rate movements. To protect translated earnings contractsagainst movements in these currencies, the Company has entered into a series of $15.2 billion and $16.7 billion at September 30, 2017 and December 31, 2016, respectively. The translated earnings contracts include average rate forwards and option contracts. Most of $14.1 billion and $14.7 billion and zero-cost collars of $1.1 billion and $2.0 billion at September 30, 2017 and December 31, 2016, respectively. The majority of the average rate forwardthese contracts hedge a significant portion of the Company’s exposure to the Japanese yen with maturities spanningand South Korean won. The Company has contracts through 2024 for the years 2017-2022Japanese yen and with gross notional values of $12.4 billion and $13.6 billion at September 30, 2017 and December 31, 2016, respectively. The average rate forward contracts also partially hedge the impacts of2026 for the South Korean won, New Taiwan dollar, Chinese yuan, Euro and British pound translationwon.
The fair values of these derivative contracts are recorded as either assets (gain position) or liabilities (loss position) on the Company’s projected net income. With respect toconsolidated balance sheets. Changes in 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 notionalfair value of the zero-cost collars was $0.7 billion and $1.0 billion at September 30, 2017 and December 31, 2016, respectively.derivative contracts are recorded in earnings within translated earnings contract gain (loss), net in the consolidated statements of income.
The following tables summarizetable summarizes the notional amounts and respective fair values of Corning’s derivative financial instruments on a gross basis for as of September 30, 20172023 and December 31, 20162022 (in millions):
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| Asset derivatives |
| Liability derivatives | ||||||||||||||||
| Gross notional amount |
| Balance |
| Fair value |
| Balance |
| Fair value | ||||||||||||
| Sept. 30, |
| Dec. 31, |
| sheet |
| Sept. 30, |
| Dec. 31, |
| sheet |
| Sept. 30, |
| Dec. 31, | ||||||
| 2017 |
| 2016 |
| location |
| 2017 |
| 2016 |
| location |
| 2017 |
| 2016 | ||||||
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Derivatives |
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|
|
|
|
|
|
|
|
|
|
|
Foreign exchange | $ | 381 |
| $ | 458 |
| Other current |
| $ | 12 |
| $ | 1 |
| Other accrued |
| $ | (3) |
| $ | (29) |
|
|
|
|
|
|
| Other assets |
|
| 8 |
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|
|
Interest rate |
| 550 |
|
| 550 |
|
|
|
|
|
|
|
|
| Other liabilities |
|
| (5) |
|
| (5) |
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|
Derivatives not |
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|
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|
|
|
|
|
|
|
|
Foreign exchange |
| 676 |
|
| 890 |
| Other current |
|
| 7 |
|
| 11 |
| Other accrued |
|
| (3) |
|
| (7) |
|
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|
|
|
|
Translated earnings |
| 15,211 |
|
| 16,711 |
| Other current |
|
| 175 |
|
| 423 |
| Other accrued |
|
| (52) |
|
| (52) |
|
|
|
|
|
|
| Other assets |
|
| 82 |
|
| 146 |
| Other liabilities |
|
| (338) |
|
| (277) |
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Total derivatives | $ | 16,818 |
| $ | 18,609 |
|
|
| $ | 284 |
| $ | 581 |
|
|
| $ | (401) |
| $ | (370) |
Asset derivatives | Liability derivatives | |||||||||||||||||||||||||
Notional amount | Balance | Fair value | Balance | Fair value | ||||||||||||||||||||||
September | December | sheet | September | December | sheet | September | December | |||||||||||||||||||
30, 2023 | 31, 2022 | location | 30, 2023 | 31, 2022 | location | 30, 2023 | 31, 2022 | |||||||||||||||||||
Derivatives designated as hedging instruments (1) | ||||||||||||||||||||||||||
Foreign exchange and precious metals lease contracts (2) | $ | 301 | $ | 419 | Other current assets | $ | 165 | $ | 26 | Other accrued liabilities | $ | (1 | ) | |||||||||||||
Other assets | 139 | 78 | ||||||||||||||||||||||||
Derivatives not designated as hedging instruments | ||||||||||||||||||||||||||
Foreign exchange contracts | 1,486 | 2,231 | Other current assets | 18 | 44 | Other accrued liabilities | $ | (23 | ) | (49 | ) | |||||||||||||||
Translated earnings contracts | 5,128 | 7,543 | Other current assets | 380 | 384 | Other accrued liabilities | (127 | ) | (124 | ) | ||||||||||||||||
Other assets | 71 | 146 | Other liabilities | (65 | ) | (17 | ) | |||||||||||||||||||
Total derivatives | $ | 6,915 | $ | 10,193 | $ | 773 | $ | 678 | $ | (215 | ) | $ | (191 | ) |
(1) | The amounts above do not include €850 million of euro-denominated debt ($892 million equivalent as of September 30, 2023), which is a non-derivative financial instrument designated as a net investment hedge. | ||
(2) |
|
|
The following table summarizes the effecttotal notional amounts for translated earnings contracts as of derivative financial instruments on Corning’s consolidated financial statements for the three and nine months ended September 30, 20172023 and 2016December 31, 2022 (in millions)billions):
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| Effect of derivative instruments on the consolidated financial statements | ||||||||||||
|
| for the three months ended September 30, | ||||||||||||
|
| Gain 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 | ||||
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| Sales |
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|
|
| $ | 1 |
Foreign exchange contracts |
| $ | 3 |
| $ | 1 |
| Cost of sales |
| $ | (1) |
|
| (13) |
|
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Total cash flow hedges |
| $ | 3 |
| $ | 1 |
|
|
| $ | (1) |
| $ | (12) |
September 30, | December 31, | |||||||
2023 | 2022 | |||||||
Average rate forward contracts: | ||||||||
Japanese yen-denominated | $ | 0.2 | $ | 0.1 | ||||
South Korean won-denominated | 1.7 | 2.1 | ||||||
Other foreign currencies (1) | 1.1 | 0.7 | ||||||
Option contracts: | ||||||||
Japanese yen-denominated (2) | 2.1 | 4.6 | ||||||
Total notional amount for translated earning contracts | $ | 5.1 | $ | 7.5 |
(1) | Denominational currencies for other average rate forward contracts include the Chinese yuan, New Taiwan dollar, euro and British pound. |
(2) | Japanese yen-denominated option contracts include purchased put and call options, knock-out options and zero-cost collars. With respect to the zero-cost collars, the total notional amount includes the value of the put and call options. However, due to the nature of the zero-cost collars, only the put or call option can be exercised at maturity. |
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| Effect of derivative instruments on the consolidated financial statements | ||||||||||||
|
| for the nine months ended September 30, | ||||||||||||
|
| Gain (loss) recognized in |
| Location of gain/(loss) |
| Gain/(loss) reclassified from | ||||||||
|
| other comprehensive income |
| reclassified from |
| accumulated OCI into | ||||||||
Derivatives in hedging |
| (OCI) |
| accumulated OCI into |
| income ineffective/effective (1) | ||||||||
relationships |
| 2017 |
| 2016 |
| income (effective) |
| 2017 |
| 2016 | ||||
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|
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| Sales |
| $ | 1 |
| $ | 2 |
|
|
|
|
|
|
|
| Cost of sales |
|
| (11) |
|
| (27) |
Foreign exchange contracts |
| $ | 36 |
| $ | (63) |
| Other expense, net |
|
| (1) |
|
| (1) |
|
|
|
|
|
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|
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|
|
|
|
|
Total cash flow hedges |
| $ | 36 |
| $ | (63) |
|
|
| $ | (11) |
| $ | (26) |
|
|
The following table summarizestables summarize the effect onin the consolidated financial statements of income relating to Corning’s derivative financial instruments (in millions):. The accumulated derivative gain included in accumulated other comprehensive loss on the consolidated balance sheets as of September 30, 2023 and December 31, 2022 is $91 million and $19 million, respectively.
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| Gain (loss) recognized in income | ||||||||||
|
|
| Three months ended |
| Nine months ended | ||||||||
| Location of gain/(loss) |
| September 30, |
| September 30, | ||||||||
Undesignated derivatives | recognized in income |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
|
|
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|
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|
|
Foreign exchange contracts | Other expense, net |
| $ | (7) |
| $ | (4) |
| $ | (19) |
| $ | (78) |
Foreign currency hedges | Translated earnings |
|
| 26 |
|
| (237) |
|
| (193) |
|
| (2,295) |
|
|
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|
|
Total undesignated |
|
| $ | 19 |
| $ | (241) |
| $ | (212) |
| $ | (2,373) |
Three months ended September 30, | |||||||||||||||||
Location of gain (loss) | |||||||||||||||||
Gain recognized | reclassified from | Gain (loss) reclassified | |||||||||||||||
Derivative hedging | in other comprehensive | accumulated | from accumulated | ||||||||||||||
relationships for cash | loss (OCL) | OCL into income | OCL into income | ||||||||||||||
flow and fair value hedges | 2023 | 2022 | effective (ineffective) | 2023 | 2022 | ||||||||||||
Net sales | $ | 15 | |||||||||||||||
Cost of sales | $ | 14 | 6 | ||||||||||||||
Foreign exchange contracts and other | $ | 28 | $ | 4 | Other income, net | (1 | ) | (1 | ) | ||||||||
Total cash flow and fair value hedges | $ | 28 | $ | 4 | $ | 13 | $ | 20 |
Nine months ended September 30, | |||||||||||||||||
Location of gain (loss) | |||||||||||||||||
Gain recognized | reclassified from | Gain (loss) reclassified | |||||||||||||||
Derivative hedging | in other comprehensive | accumulated | from accumulated | ||||||||||||||
relationships for cash | loss (OCL) | OCL into income | OCL into income | ||||||||||||||
flow and fair value hedges | 2023 | 2022 | effective (ineffective) | 2023 | 2022 | ||||||||||||
Net sales | $ | 38 | |||||||||||||||
Cost of sales | $ | 32 | 19 | ||||||||||||||
Foreign exchange contracts and other | $ | 102 | $ | 24 | Other income, net | (3 | ) | (3 | ) | ||||||||
Total cash flow and fair value hedges | $ | 102 | $ | 24 | $ | 29 | $ | 54 |
12.
Gain (loss) recognized in income | |||||||||||||||||
Three months ended | Nine months ended | ||||||||||||||||
Location of gain (loss) | September 30, | September 30, | |||||||||||||||
Undesignated derivatives | recognized in income | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Foreign exchange contracts | Other income, net | $ | (5 | ) | $ | 11 | $ | 23 | $ | 70 | |||||||
Translated earnings contracts | Translated earnings contract gain (loss), net | 20 | (68 | ) | 128 | 257 | |||||||||||
Total undesignated | $ | 15 | $ | (57 | ) | $ | 151 | $ | 327 |
11. Fair Value Measurements
Fair value standards under U.S. GAAP define fair value, establish a framework for measuring fair value in applying generally accepted accounting principles, and require disclosures about fair value measurements. The standards also identify two kinds of inputs that are used to determine the fair value of assets and liabilities: observable and unobservable. Observable inputs are based on market data or independent sources while unobservable inputs are based on the Company’s own market assumptions. Once inputs have been characterized, the inputs are prioritized into one of three broad levels (provided in the table below) used to measure fair value. Fair value standards apply whenever an entity is measuring fair value under other accounting pronouncements that require or permit fair value measurement and require the use of observable market data when available.
The following tables providetable provides fair value measurement information for the Company’s major categories of financial assets and liabilities measured on a recurring basis (in millions):
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| Fair value measurements at reporting date using | |||||||||||||||||||||||||||||||||||||||
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| Quoted prices in |
| Significant other |
| Significant | |||||||||||||||||||||||||||||||||||
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| active markets for |
| observable |
| unobservable | |||||||||||||||||||||||||||||||||||
|
| September 30, |
| identical assets |
| inputs |
| inputs | ||||||||||||||||||||||||||||||||||||
|
| 2017 |
| (Level 1) |
| (Level 2) |
| (Level 3) | September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
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| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
Current assets: |
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| ||||||||||||||||||||||||||||||||||||
Other current assets (1)(2) |
| $ | 488 |
|
|
| $ | 194 |
| $ | 294 | |||||||||||||||||||||||||||||||||
Other current assets (1) | $ | 617 | $ | 4 | $ | 563 | $ | 50 | $ | 505 | $ | 2 | $ | 454 | $ | 49 | ||||||||||||||||||||||||||||
Non-current assets: |
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| ||||||||||||||||||||||||||||||||||||
Other assets (1) |
| $ | 90 |
|
|
| $ | 90 |
|
| $ | 212 | $ | 2 | $ | 210 | $ | 225 | $ | 224 | $ | 1 | ||||||||||||||||||||||
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Current liabilities: |
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| ||||||||||||||||||||||||||||||||||||
Other accrued liabilities (1)(3) |
| $ | 63 |
|
|
| $ | 58 |
| $ | 5 | |||||||||||||||||||||||||||||||||
Other accrued liabilities (1) | $ | 150 | $ | 150 | $ | 174 | $ | 174 | ||||||||||||||||||||||||||||||||||||
Non-current liabilities: |
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| ||||||||||||||||||||||||||||||||||||
Other liabilities (1)(3) |
| $ | 363 |
|
|
| $ | 343 |
| $ | 20 | |||||||||||||||||||||||||||||||||
Other liabilities (1) | $ | 82 | $ | 82 | $ | 34 | $ | 34 |
(1) |
| Derivative assets and liabilities include foreign exchange and precious metals lease contracts which |
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| Fair value measurements at reporting date using | |||||||
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| Quoted prices in |
| Significant other |
| Significant | |||
|
|
|
|
| active markets for |
| observable |
| unobservable | |||
|
| December 31, |
| identical assets |
| inputs |
| inputs | ||||
|
| 2016 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
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Current assets: |
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|
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Other current assets (1) |
| $ | 435 |
|
|
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| $ | 435 |
|
|
|
Non-current assets: |
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|
|
Other assets (1)(2) |
| $ | 464 |
|
|
|
| $ | 175 |
| $ | 289 |
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Current liabilities: |
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|
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|
|
Other accrued liabilities (1) |
| $ | 88 |
|
|
|
| $ | 88 |
|
|
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities (1) |
| $ | 282 |
|
|
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| $ | 282 |
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|
|
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 September 30, 2017 and December 31, 2016, the fair value of the potential receipt of the contingent consideration in 2018 was $294 million and $289 million, respectively.
There were no significant financial assets and liabilities measured on a nonrecurringnon-recurring basis as of September 30, 20172023 and December 31, 2016.2022.
12. Shareholders’ Equity
13. Shareholders’ Equity
Fixed Rate Cumulative Convertible Preferred Stock, Series A
Corning hasWe had 2,300 outstanding shares of Fixed Rate Cumulative Convertible Preferred Stock, Series A. The Preferred Stock is convertible at the optionA (the “Preferred Stock”) as 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 September 30, 2017, December 31, 2020. On January 16, 2021, the Preferred Stock has not beenbecame convertible into 115 million common shares. On April 5, 2021, we executed a Share Repurchase Agreement (“SRA”) with Samsung Display Co., Ltd. (“SDC”) and the Preferred Stock was fully converted as of April 8, 2021. Immediately following the conversion, we repurchased and noneretired 35 million of the anti-dilution provisions have been triggered. common shares held by SDC for an aggregate purchase price of approximately $1.5 billion, of which approximately $507 million was paid in April 2022 and 2021. The remaining payment of approximately $507 million was made in April 2023.
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 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 addition2019, the Board authorized the repurchase of up to $5.0 billion of common stock (“2019 Authorization”).
During the 2016 ASR agreement, during the yearthree and nine months ended December 31, 2016,September 30, 2022, the Company repurchased 110.40.5 million shares and 6.0 million shares, respectively, of common stock on the open market for approximately $2.2 billion$17 million and $221 million, respectively, as part of its 2015 Repurchase Programs, resulting in a total of 197.1 million2019 Authorization. No shares repurchased for $4.2 billionwere purchased on the open market during 2016.the three and nine months ended September 30, 2023.
2017 Share RepurchasesAs of September 30, 2023, approximately $3.3 billion remains available under the Company’s 2019 Authorization.
In December 2016,
Common Stock Dividends
On October 4, 2023, Corning’s Board of Directors approveddeclared a $4 billiondividend of $0.28 per share repurchase program with no expiration (the “2016 Repurchase Program”). In the nine months ended September 30, 2017, Corning entered into two separate accelerated share repurchase agreements under this program (the “2017 ASR agreements”). In the second quarter of 2017, Corning entered into and finalized an accelerated share repurchase agreement under which we paid $500 million for a total of 17.1 million shares. In the third quarter of 2017, Corning entered into and finalized an additional accelerated share repurchase agreement under which we paid $500 million for a total of 17.2 million shares.common stock. The dividend will be payable on December 15, 2023.
In addition to the 2017 ASR agreements, during the three and nine months ended September 30, 2017, the Company repurchased 17.2 million and 37.6 million shares of common stock on the open market for approximately $507.7 million and $1.1 billion, respectively.
Accumulated Other Comprehensive Loss
InFor the three and nine months ended September 30, 2017 2023 and 2016,2022, the primary changeschange in accumulated other comprehensive loss werewas primarily related to the foreign currency translation adjustment and unamortized actuarial gains (losses) for postretirement benefit plan components.adjustments.
A summary ofThe following table presents the changes in the foreign currency translation adjustment component of accumulated other comprehensive loss, is as followsincluding the proportionate share of equity method affiliates’ accumulated other comprehensive loss (in millions) (1)(1):
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| ||||||||||||||||||||
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| ||||||||||||||||||||
|
| Three months ended |
| Nine months ended | Three months ended | Nine months ended | ||||||||||||||||||||||
|
| September 30, |
| September 30, | September 30, | September 30, | ||||||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
Beginning balance |
| $ | (871) |
| $ | (547) |
| $ | (1,275) |
| $ | (1,171) | $ | (2,114 | ) | $ | (1,783 | ) | $ | (1,712 | ) | $ | (933 | ) | ||||
Other comprehensive income (2) |
| 49 |
| 235 |
| 435 |
| 860 | ||||||||||||||||||||
Loss on foreign currency translation (2) | (195 | ) | (664 | ) | (588 | ) | (1,497 | ) | ||||||||||||||||||||
Equity method affiliates (3) |
| 4 |
| 10 |
| 22 |
| 9 | 4 | (21 | ) | (5 | ) | (38 | ) | |||||||||||||
Net current-period other comprehensive income |
| 53 |
| 245 |
| 457 |
| 869 | ||||||||||||||||||||
Net current-period other comprehensive loss | (191 | ) | (685 | ) | (593 | ) | (1,535 | ) | ||||||||||||||||||||
Ending balance |
| $ | (818) |
| $ | (302) |
| $ | (818) |
| $ | (302) | $ | (2,305 | ) | $ | (2,468 | ) | $ | (2,305 | ) | $ | (2,468 | ) |
(1) |
|
|
| (2) | For the three and nine months ended September 30, |
| (3) | Tax effects are not significant. |
In the second quarter of 2016, a $45 million cumulative foreign currency translation gain was released as a result of the realignment of Dow Corning and included in the gain on realignment of equity investment.13. Share-Based Compensation
InTotal share-based compensation cost was $57 million and $168 million for the second quarter of 2016, a $22three and nine months ended September 30, 2023, respectively, and $52 million cumulative foreign currency translation loss was released as a result ofand $145 million for the contribution of our investment in PCE to the PCC litigation trustthree and included in selling, general and administrative expenses.
A summary of changes in the unamortized actuarial gains (losses) for postretirement benefit plan component of accumulated other comprehensive loss is as follows (in millions) (1):
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|
|
| Three months ended |
| Nine months ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Beginning balance |
| $ | (330) |
| $ | (323) |
| $ | (347) |
| $ | (588) |
Other comprehensive loss before |
|
|
|
|
| (31) |
|
|
|
|
| (64) |
Amounts reclassified from accumulated other |
|
|
|
|
| 26 |
|
| 17 |
|
| 60 |
Equity method affiliates (3) |
|
|
|
|
|
|
|
|
|
|
| 264 |
Net current-period other comprehensive (loss) income |
|
|
|
|
| (5) |
|
| 17 |
|
| 260 |
Ending balance |
| $ | (330) |
| $ | (328) |
| $ | (330) |
| $ | (328) |
nine months ended September 30, 2022, respectively.
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|
In the second quarter of 2016, a $260 million cumulative unamortized actuarial loss, net of tax of $19 million, was released as a result of the realignment of Dow Corning and included in the gain on realignment of equity investment.Incentive Stock Plans
In addition, for the nine months ended September 30, 2017, in the investment component of accumulated other comprehensive loss, a cumulative loss of $14 million, mainly comprising income tax, was reclassified to the income statement.
Time-Based Restricted Stock Compensation Plansand Restricted Stock Units
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 for employee stock options andfollowing table summarizes the changes in non-vested time-based restricted stock and restricted stock units was approximately $10 millionfor the nine months ended September 30, 2023:
Weighted | ||||||||
Number | average | |||||||
of shares | grant-date | |||||||
(in thousands) | fair value | |||||||
Non-vested shares and share units as of December 31, 2022 | 11,299 | $ | 29.19 | |||||
Granted | 7,221 | 35.06 | ||||||
Vested | (4,462 | ) | 23.71 | |||||
Forfeited | (534 | ) | 33.97 | |||||
Non-vested shares and share units as of September 30, 2023 | 13,524 | $ | 33.94 |
Performance-Based Restricted Stock Units
The following table summarizes the changes in non-vested performance-based restricted stock units for the threenine months ended September 30, 2017 and 2016, respectively, and approximately $35 million and $33 million for the nine months ended September 30, 2017 and 2016, respectively. The income tax (expense) benefit from share-based compensation was not significant for the three and nine months ended September 30, 2017 and 2016.2023:
Weighted | ||||||||
Number | average | |||||||
of shares | grant-date | |||||||
(in thousands) | fair value | |||||||
Non-vested share units as of December 31, 2022 | 4,696 | $ | 35.41 | |||||
Granted | 1,674 | 35.08 | ||||||
Vested | (3,586 | ) | 33.37 | |||||
Performance adjustments | (406 | ) | 36.40 | |||||
Forfeited | (37 | ) | 36.08 | |||||
Non-vested share units as of September 30, 2023 | 2,341 | $ | 38.62 |
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 includingas of September 30, 2023 and the related transactions under the stock option plansactivity for the nine months ended September 30, 2017:2023:
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| Weighted- |
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| Weighted- |
| Remaining |
| Aggregate | ||
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| Number |
| Average |
| Contractual |
| Intrinsic | ||
|
| of Shares |
| Exercise |
| Term in |
| Value | ||
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| (in thousands) |
| Price |
| Years |
| (in thousands) | ||
Options Outstanding as of December 31, 2016 |
| 31,507 |
| $ | 19.40 |
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Granted |
| 1,505 |
|
| 27.01 |
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|
|
Exercised |
| (12,915) |
|
| 21.26 |
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|
|
|
Forfeited and Expired |
| (254) |
|
| 23.21 |
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|
|
|
Options Outstanding as of September 30, 2017 |
| 19,843 |
|
| 18.72 |
| 4.66 |
| $ | 222,313 |
Options Expected to Vest as of September 30, 2017 |
| 19,801 |
|
| 18.71 |
| 4.65 |
|
| 222,056 |
Options Exercisable as of September 30, 2017 |
| 15,173 |
|
| 17.47 |
| 3.47 |
|
| 188,890 |
Weighted- | ||||||||||||||||
average | ||||||||||||||||
Weighted- | remaining | Aggregate | ||||||||||||||
Number | average | contractual | intrinsic | |||||||||||||
of shares | exercise | term | value | |||||||||||||
(in thousands) | price | (in years) | (in thousands) | |||||||||||||
Options outstanding as of December 31, 2022 | 9,665 | $ | 22.92 | |||||||||||||
Exercised | (1,981 | ) | 19.74 | |||||||||||||
Forfeited and expired | (48 | ) | 19.65 | |||||||||||||
Options outstanding as of September 30, 2023 | 7,636 | 23.76 | 5.20 | $ | 55,832 | |||||||||||
Options vested and exercisable as of September 30, 2023 | 7,636 | 23.76 | 5.20 | 55,832 |
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, 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 September 30, 2017, there was approximately $8 million of unrecognized compensation cost related toThere were no stock options granted underduring the plans. The cost is expected to be recognized over a weighted-average period of 2 years. Compensation cost related to stock options was approximately $1 million and $2 million for the threenine months ended September 30, 2017 and 2016, respectively, and approximately $11 million and $10 million for the nine months ended September 30, 2017 and 2016, respectively.2023 or 2022.
Proceeds received from the exercise of stock options were $275 million and $86 million for the nine months ended September 30, 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 nine months ended September 30, 2017 and 2016 was approximately $83 million and $36 million, respectively. 14. Reportable Segments
The following inputs were used for the valuation of option grants under our stock option plans:
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| September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Expected volatility |
| 34.2% |
| 38.6% |
| 34.2 | - | 36.1% |
| 38.6 | - | 43.1% |
Weighted-average volatility |
| 34.2% |
| 38.6% |
| 34.2 | - | 36.1% |
| 38.6 | - | 43.1% |
Expected dividends |
| 2.18% |
| 2.34% |
| 2.11 | - | 2.28% |
| 2.34 | - | 2.94% |
Risk-free rate |
| 2.1% |
| 1.4% |
| 2.1 | - | 2.3% |
| 1.4 | - | 1.6% |
Average risk-free rate |
| 2.1% |
| 1.4% |
| 2.1 | - | 2.3% |
| 1.4 | - | 1.6% |
Expected term (in years) |
| 7.4 |
| 7.4 |
| 7.4 | - | 7.4 |
| 7.4 | - | 7.4 |
Pre-vesting departure rate |
| 0.6% |
| 0.6% |
| 0.6 | - | 0.6% |
| 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.
Incentive Stock Plans
Corning’s incentive stock plan permits restricted stock and restricted stock unit grants, eitherCompany has determined by specific performance goals or issued directly, in most instances, subject to the possibility of forfeiture and without cash consideration. Restricted stock and restricted stock units under the incentive stock plan are granted at the closing market price on the grant date, contingently vest over a period of generally 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 nine months ended September 30, 2017:
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| Weighted | |
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| Average | |
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| Shares |
| Grant-Date | |
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| (000’s) |
| Fair Value | |
Non-vested shares and share units at December 31, 2016 |
|
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|
| 4,640 |
| $ | 20.15 |
Granted |
|
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|
|
| 1,576 |
|
| 27.67 |
Vested |
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| (1,243) |
|
| 20.65 |
Forfeited |
|
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|
|
| (88) |
|
| 22.13 |
Non-vested shares and share units at September 30, 2017 |
|
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| 4,885 |
| $ | 22.42 |
As of September 30, 2017, there was approximately $51 million of unrecognized compensation cost related to non-vested time-based restricted stock and restricted stock units compensation arrangements granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.5 years. Compensation cost related to time-based restricted stock and restricted stock units was approximately $9 million and $8 million for the three months ended September 30, 2017 and 2016, respectively, and approximately $24 million and $23 million for the nine months ended September 30, 2017 and 2016, respectively.
15. Reportable Segments
Ourthat it has five reportable segments arefor financial reporting purposes, as follows:
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| Optical Communications – manufactures carrier network and enterprise network components for the telecommunications |
● |
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| Specialty Materials – manufactures products that provide |
● |
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● | Life Sciences – develops, manufactures, |
All other segmentsbusinesses that do not meet the quantitative threshold for separate reporting have been grouped as “All Other.” ThisHemlock and Emerging Growth Businesses. The net sales for this group are primarily attributable to Hemlock, which is an operating segment that produces solar and semiconductor products. The emerging growth businesses primarily comprisedconsist of Pharmaceutical Technologies, Auto Glass Solutions and the results of the pharmaceutical technologies business and new product lines and development projects, as well as certain corporate investments such as Eurokera and Keraglass equity affiliates.Emerging Innovations Group.
We prepared the financialFinancial results for ourthe reportable segments and Hemlock and Emerging Growth Businesses are prepared on a basis that is consistent with the manner in which we internally disaggregateinternal disaggregation of financial information to assist the chief operating decision maker (“CODM”) in making internal operating decisions. We includedAs a significant portion of segment revenues and expenses are denominated in currencies other than the earningsU.S. dollar, management believes it is important to understand the impact on segment net sales and segment net income of equity affiliates thattranslating these currencies into U.S. dollars. Therefore, the Company utilizes constant-currency reporting for the Display Technologies, Specialty Materials, Environmental Technologies and Life Sciences segments to exclude the impact on segment sales and segment net income from the Japanese yen, South Korean won, Chinese yuan, new Taiwan dollar and euro, as applicable to the segment. The most significant constant-currency adjustment relates to the Japanese yen exposure within the Display Technologies segment. Management utilizes constant-currency reporting based on internally-derived rates, as detailed below, which are closely associatedaligned with our reportable segmentsthe currencies we have hedged.
The Company believes that the use of constant-currency reporting allows management to understand segment results without the volatility of currency fluctuation, analyze underlying trends in the respective segment’sbusinesses and establish operational goals and forecasts. Further, it reflects the underlying economics of the translated earnings contracts used to mitigate the impact of changes in currency exchange rates on our earnings and cash flows.
Constant-currency rates are as follows and are applied to all periods presented:
Currency | Japanese yen | Korean won | Chinese yuan | New Taiwan dollar | Euro | ||||||
Rate | ¥107 | ₩1,175 | ¥6.7 | NT$31 | €.81 |
In addition, certain income and expenses are excluded from segment net income and included in the unallocated amounts in the reconciliation of reportable segment net income to consolidated net income. We haveThese items are not used by the CODM in allocating resources or evaluating the results of the segments and include the following: the impact of translating the Japanese yen-denominated debt; the impact of the translated earnings contracts; acquisition-related costs; certain discrete tax items and other tax-related adjustments; restructuring, impairment and other charges and credits; certain litigation, regulatory and other legal matters; pension mark-to-market adjustments; and other non-recurring non-operational items. Although these amounts are excluded from segment results, they are included in reported consolidated results.
Corning’s administrative and staff functions are performed on a centralized basis and such costs and expenses are allocated certain common expenses among reportablethe segments differently than wethey would be for stand-alone financial information.reporting purposes. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. Expenses that are not allocated to the segments are included in the reconciliation of reportable segment net income to consolidated net income. Segment net income (loss) 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.
Reportable Segments (in millions)
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| Display |
| Optical |
| Environmental |
| Specialty |
| Life |
| All |
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| ||||||
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| Technologies |
| Communications |
| Technologies |
| Materials |
| Sciences |
| Other |
| Total | |||||||
Three months ended |
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September 30, 2017 |
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Net sales |
| $ | 768 |
| $ | 917 |
| $ | 277 |
| $ | 373 |
| $ | 223 |
| $ | 49 |
| $ | 2,607 |
Depreciation (1) |
| $ | 134 |
| $ | 49 |
| $ | 31 |
| $ | 34 |
| $ | 14 |
| $ | 12 |
| $ | 274 |
Amortization of purchased |
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| $ | 11 |
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| $ | 6 |
| $ | 1 |
| $ | 18 |
Research, development and |
| $ | 21 |
| $ | 44 |
| $ | 28 |
| $ | 37 |
| $ | 5 |
| $ | 52 |
| $ | 187 |
Income tax (provision) |
| $ | (82) |
| $ | (52) |
| $ | (17) |
| $ | (36) |
| $ | (8) |
| $ | 28 |
| $ | (167) |
Net income (loss) (3) |
| $ | 203 |
| $ | 102 |
| $ | 34 |
| $ | 72 |
| $ | 17 |
| $ | (55) |
| $ | 373 |
Segment Information (in millions):
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| Display |
| Optical |
| Environmental |
| Specialty |
| Life |
| All |
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| ||||||
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| Technologies |
| Communications |
| Technologies |
| Materials |
| Sciences |
| Other |
| Total | |||||||
Three months ended |
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September 30, 2016 |
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Net sales |
| $ | 902 |
| $ | 795 |
| $ | 264 |
| $ | 295 |
| $ | 214 |
| $ | 37 |
| $ | 2,507 |
Depreciation (1) |
| $ | 152 |
| $ | 41 |
| $ | 32 |
| $ | 26 |
| $ | 14 |
| $ | 12 |
| $ | 277 |
Amortization of purchased |
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| $ | 10 |
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| $ | 5 |
| $ | 2 |
| $ | 17 |
Research, development and |
| $ | 14 |
| $ | 37 |
| $ | 24 |
| $ | 31 |
| $ | 6 |
| $ | 47 |
| $ | 159 |
Income tax (provision) |
| $ | (98) |
| $ | (49) |
| $ | (17) |
| $ | (21) |
| $ | (8) |
| $ | 21 |
| $ | (172) |
Net income (loss) (3) |
| $ | 279 |
| $ | 84 |
| $ | 35 |
| $ | 42 |
| $ | 16 |
| $ | (47) |
| $ | 409 |
© 2017 Corning Incorporated. All Rights Reserved.
22
Hemlock | ||||||||||||||||||||||||||||
and | ||||||||||||||||||||||||||||
Emerging | ||||||||||||||||||||||||||||
Optical | Display | Specialty | Environmental | Life | Growth | |||||||||||||||||||||||
Communications | Technologies | Materials | Technologies | Sciences | Businesses | Total | ||||||||||||||||||||||
Three months ended September 30, 2023 | ||||||||||||||||||||||||||||
Segment net sales | $ | 918 | $ | 972 | $ | 563 | $ | 449 | $ | 230 | $ | 327 | $ | 3,459 | ||||||||||||||
Depreciation (1) | $ | 65 | $ | 119 | $ | 37 | $ | 32 | $ | 18 | $ | 37 | $ | 308 | ||||||||||||||
Research, development and engineering expenses (2) | $ | 60 | $ | 26 | $ | 62 | $ | 26 | $ | 7 | $ | 41 | $ | 222 | ||||||||||||||
Income tax provision (3) | $ | (24 | ) | $ | (64 | ) | $ | (19 | ) | $ | (27 | ) | $ | (4 | ) | $ | (2 | ) | $ | (140 | ) | |||||||
Segment net income (loss) | $ | 91 | $ | 242 | $ | 72 | $ | 99 | $ | 13 | $ | (8 | ) | $ | 509 |
Hemlock | ||||||||||||||||||||||||||||
and | ||||||||||||||||||||||||||||
Emerging | ||||||||||||||||||||||||||||
Optical | Display | Specialty | Environmental | Life | Growth | |||||||||||||||||||||||
Communications | Technologies | Materials | Technologies | Sciences | Businesses | Total | ||||||||||||||||||||||
Three months ended September 30, 2022 | ||||||||||||||||||||||||||||
Segment net sales | $ | 1,317 | $ | 686 | $ | 519 | $ | 425 | $ | 312 | $ | 407 | $ | 3,666 | ||||||||||||||
Depreciation (1) | $ | 58 | $ | 124 | $ | 36 | $ | 31 | $ | 14 | $ | 38 | $ | 301 | ||||||||||||||
Research, development and engineering expenses (2) | $ | 60 | $ | 31 | $ | 66 | $ | 25 | $ | 10 | $ | 43 | $ | 235 | ||||||||||||||
Income tax provision (3) | $ | (50 | ) | $ | (35 | ) | $ | (26 | ) | $ | (23 | ) | $ | (11 | ) | $ | (8 | ) | $ | (153 | ) | |||||||
Segment net income | $ | 183 | $ | 134 | $ | 96 | $ | 87 | $ | 43 | $ | 18 | $ | 561 |
Hemlock | ||||||||||||||||||||||||||||
and | ||||||||||||||||||||||||||||
Emerging | ||||||||||||||||||||||||||||
Optical | Display | Specialty | Environmental | Life | Growth | |||||||||||||||||||||||
Communications | Technologies | Materials | Technologies | Sciences | Businesses | Total | ||||||||||||||||||||||
Nine months ended September 30, 2023 | ||||||||||||||||||||||||||||
Segment net sales | $ | 3,109 | $ | 2,663 | $ | 1,392 | $ | 1,337 | $ | 717 | $ | 1,090 | $ | 10,308 | ||||||||||||||
Depreciation (1) | $ | 195 | $ | 362 | $ | 111 | $ | 97 | $ | 52 | $ | 105 | $ | 922 | ||||||||||||||
Research, development and engineering expenses (2) | $ | 176 | $ | 73 | $ | 172 | $ | 73 | $ | 25 | $ | 121 | $ | 640 | ||||||||||||||
Income tax provision (3) | $ | (105 | ) | $ | (161 | ) | $ | (38 | ) | $ | (77 | ) | $ | (9 | ) | $ | (22 | ) | $ | (412 | ) | |||||||
Segment net income | $ | 390 | $ | 610 | $ | 144 | $ | 288 | $ | 33 | $ | 34 | $ | 1,499 |
Hemlock | ||||||||||||||||||||||||||||
and | ||||||||||||||||||||||||||||
Emerging | ||||||||||||||||||||||||||||
Optical | Display | Specialty | Environmental | Life | Growth | |||||||||||||||||||||||
Communications | Technologies | Materials | Technologies | Sciences | Businesses | Total | ||||||||||||||||||||||
Nine months ended September 30, 2022 | ||||||||||||||||||||||||||||
Segment net sales | $ | 3,828 | $ | 2,523 | $ | 1,497 | $ | 1,190 | $ | 934 | $ | 1,200 | $ | 11,172 | ||||||||||||||
Depreciation (1) | $ | 185 | $ | 426 | $ | 118 | $ | 98 | $ | 44 | $ | 111 | $ | 982 | ||||||||||||||
Research, development and engineering expenses (2) | $ | 173 | $ | 92 | $ | 163 | $ | 74 | $ | 28 | $ | 121 | $ | 651 | ||||||||||||||
Income tax provision (3) | $ | (146 | ) | $ | (157 | ) | $ | (70 | ) | $ | (59 | ) | $ | (32 | ) | $ | (19 | ) | $ | (483 | ) | |||||||
Segment net income | $ | 531 | $ | 598 | $ | 262 | $ | 223 | $ | 122 | $ | 35 | $ | 1,771 |
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| Display |
| Optical |
| Environmental |
| Specialty |
| Life |
| All |
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|
| Technologies |
| Communications |
| Technologies |
| Materials |
| Sciences |
| Other |
| Total | |||||||
Nine Months Ended |
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September 30, 2017 |
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Net sales |
| $ | 2,252 |
| $ | 2,617 |
| $ | 815 |
| $ | 1,010 |
| $ | 654 |
| $ | 131 |
| $ | 7,479 |
Depreciation (1) |
| $ | 393 |
| $ | 142 |
| $ | 93 |
| $ | 94 |
| $ | 39 |
| $ | 34 |
| $ | 795 |
Amortization of purchased |
|
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| $ | 33 |
|
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|
| $ | 16 |
| $ | 4 |
| $ | 53 |
Research, development and |
| $ | 63 |
| $ | 121 |
| $ | 80 |
| $ | 110 |
| $ | 17 |
| $ | 156 |
| $ | 547 |
Income tax (provision) |
| $ | (270) |
| $ | (149) |
| $ | (47) |
| $ | (88) |
| $ | (23) |
| $ | 83 |
| $ | (494) |
Net income (loss) (3) |
| $ | 663 |
| $ | 285 |
| $ | 97 |
| $ | 176 |
| $ | 48 |
| $ | (166) |
| $ | 1,103 |
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| Display |
| Optical |
| Environmental |
| Specialty |
| Life |
| All |
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| ||||||
|
| Technologies |
| Communications |
| Technologies |
| Materials |
| Sciences |
| Other |
| Total | |||||||
Nine Months Ended |
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September 30, 2016 |
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Net sales |
| $ | 2,408 |
| $ | 2,186 |
| $ | 787 |
| $ | 788 |
| $ | 633 |
| $ | 112 |
| $ | 6,914 |
Depreciation (1) |
| $ | 452 |
| $ | 125 |
| $ | 97 |
| $ | 81 |
| $ | 42 |
| $ | 34 |
| $ | 831 |
Amortization of purchased |
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|
|
| $ | 25 |
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|
|
|
|
|
| $ | 15 |
| $ | 6 |
| $ | 46 |
Research, development and |
| $ | 49 |
| $ | 110 |
| $ | 75 |
| $ | 96 |
| $ | 18 |
| $ | 139 |
| $ | 487 |
Income tax (provision) |
| $ | (277) |
| $ | (99) |
| $ | (52) |
| $ | (52) |
| $ | (22) |
| $ | 87 |
| $ | (415) |
Net income (loss) (3) |
| $ | 692 |
| $ | 178 |
| $ | 106 |
| $ | 106 |
| $ | 45 |
| $ | (187) |
| $ | 940 |
(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) |
|
The following table presents a reconciliation of net sales of reportable segments to consolidated net sales (in millions):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Net sales of reportable segments | $ | 3,132 | $ | 3,259 | $ | 9,218 | $ | 9,972 | ||||||||
Net sales of Hemlock and Emerging Growth Businesses | 327 | 407 | 1,090 | 1,200 | ||||||||||||
Impact of constant currency reporting (1) | (286 | ) | (178 | ) | (714 | ) | (389 | ) | ||||||||
Consolidated net sales | $ | 3,173 | $ | 3,488 | $ | 9,594 | $ | 10,783 |
(1) |
|
AThe following table presents a reconciliation of reportable segment net income of reportable segments to consolidated net income follows (in millions):
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| Three months ended |
| Nine months ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Net income of reportable segments |
| $ | 428 |
| $ | 456 |
| $ | 1,269 |
| $ | 1,127 |
Net loss of All Other |
|
| (55) |
|
| (47) |
|
| (166) |
|
| (187) |
Unallocated amounts: |
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|
|
Net financing costs (1) |
|
| (27) |
|
| (26) |
|
| (79) |
|
| (84) |
Stock-based compensation expense |
|
| (10) |
|
| (10) |
|
| (35) |
|
| (33) |
Exploratory research |
|
| (24) |
|
| (27) |
|
| (71) |
|
| (82) |
Corporate contributions |
|
| (7) |
|
| (15) |
|
| (29) |
|
| (38) |
Gain on realignment of equity investment |
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|
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|
|
| 2,676 |
Equity in earnings of affiliated companies (2) |
|
| 30 |
|
| 22 |
|
| 140 |
|
| 126 |
Unrealized loss on foreign currency hedges |
|
| (24) |
|
| (239) |
|
| (392) |
|
| (2,441) |
Resolution of Department of Justice investigation |
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|
|
|
|
|
|
|
|
| (98) |
Income tax benefit |
|
| 66 |
|
| 193 |
|
| 299 |
|
| 1,247 |
Other corporate items |
|
| 13 |
|
| (23) |
|
| (21) |
|
| (90) |
Net income |
| $ | 390 |
| $ | 284 |
| $ | 915 |
| $ | 2,123 |
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Net income of reportable segments | $ | 517 | $ | 543 | $ | 1,465 | $ | 1,736 | ||||||||
Net (loss) income of Hemlock and Emerging Growth Businesses | (8 | ) | 18 | 34 | 35 | |||||||||||
Unallocated amounts: | ||||||||||||||||
Impact of constant currency reporting | (212 | ) | (136 | ) | (535 | ) | (319 | ) | ||||||||
Gain (loss) on foreign currency hedges related to translated earnings | 20 | (68 | ) | 128 | 257 | |||||||||||
Translation gain on Japanese yen-denominated debt | 35 | 84 | 162 | 321 | ||||||||||||
Litigation, regulatory and other legal matters | (32 | ) | (23 | ) | (44 | ) | (65 | ) | ||||||||
Research, development, and engineering expenses (1) | (40 | ) | (43 | ) | (127 | ) | (115 | ) | ||||||||
Amortization of intangibles | (30 | ) | (31 | ) | (92 | ) | (92 | ) | ||||||||
Interest expense, net | (62 | ) | (59 | ) | (179 | ) | (180 | ) | ||||||||
Income tax benefit | 105 | 119 | 234 | 103 | ||||||||||||
Severance charges (2) | (13 | ) | (8 | ) | (86 | ) | (8 | ) | ||||||||
Disposal of assets and other charges and credits (3) | (59 | ) | (130 | ) | (184 | ) | (209 | ) | ||||||||
Gain on sale of business | 53 | |||||||||||||||
Other corporate items | (57 | ) | (58 | ) | (155 | ) | (165 | ) | ||||||||
Net income attributable to Corning Incorporated | $ | 164 | $ | 208 | $ | 621 | $ | 1,352 |
(1) | Amount does not include research, development and engineering expense related to severance charges and disposal of assets and other charges and credits. |
(2) | For the three and nine months ended September 30, 2023, the amount recorded in cost of sales in the consolidated statements of income was $10 million and $51 million, respectively. For the three and nine months ended September 30, 2022, the amount recorded in cost of sales in the consolidated statements was not material. |
(3) | For the three and nine months ended September 30, 2023, the amount recorded in cost of sales in the consolidated statements of income was $53 million and $145 million, respectively. The activity primarily related to asset write-offs during the period. For the three and nine months ended September 30, 2022, the amount recorded in cost of sales in the consolidated statements of income was $124 million and $192 million, respectively. The activity primarily related to capacity optimization of an emerging growth business. |
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© 2017 Corning Incorporated. All Rights Reserved.
24Incorporated and its consolidated subsidiaries are hereinafter sometimes referred to as the “Company,” the “Registrant,” “Corning,” “we,” “our,” or “us.”
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThis report contains forward-looking statements that involve a number of risks and uncertainties. These statements relate to plans, objectives, expectations and estimates and may contain words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “seek,” “see,” “would,” “target,” “estimate,” “forecast,” or similar expressions. Actual results could differ materially from what is expressed or forecasted in forward-looking statements. Some of the factors that could contribute to these differences include those discussed under “Forward-Looking Statements,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this report.
ORGANIZATION OF INFORMATION
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provideswas prepared to provide a historical and prospective narrative on the Company’sour financial condition and results of operations. This interim MD&Aoperations through the eyes of management and should be read in conjunction with theour MD&A in our 2016 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 basedAnnual Report 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 2016 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 reflectfor the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of September 30, 2017.year ended December 31, 2022 (“2022 Form 10-K”).
Our MD&A includes the following sections:is organized as follows:
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| Results of Operations |
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● | Core Performance Measures |
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| Liquidity and Capital Resources |
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● | Critical Accounting Estimates |
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| Forward-Looking Statements |
OVERVIEW
StrategyCorning Incorporated is central to the advancement of the industries we serve and Capital Allocation Framework
In October 2015,secular trends touching many facets of daily life. It all starts with our focused and cohesive portfolio. We maintain clear leadership in three core technologies and four proprietary manufacturing and engineering platforms. We apply new combinations of our assets and capabilities to solve a broad range of significant challenges and shape new industries in tandem with our customers. By reapplying and repurposing our insights and assets across multiple opportunities and markets, we increase our profitably. Importantly, as we partner closely with our customers to realize their visions and help solve their toughest technology challenges, we unlock new ways to integrate more of our content into their ecosystems. This “More Corning” approach provides a powerful value-creation lever. We’re not just relying on people buying more stuff; we’re driving more Corning announced a strategy and capital allocation framework (the “Framework”) that reflectscontent into 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.products they’re already buying.
Our probabilityaccomplishments over the past several years illustrate the efficacy of success increasesour approach. Despite the challenging external environment, we have advanced fiber-to-the-home and data center solutions in Optical Communications, delivered on our gasoline particulate filter content opportunity in Environmental Technologies, introduced Ceramic Shield with Apple in Specialty Materials and ramped our Gen 10.5 plants to extend our leadership in Display Technologies. In addition, we made major progress on our emerging innovations; we gained significant traction in our Automotive Glass Solutions business; and our pharmaceutical packaging portfolio played a central role in combatting the global pandemic. These achievements have helped extend our leadership positions across our markets and pave the way for future growth.
At the same time, profitability and cash flow have lagged sales growth. Since 2020, the external environment has been characterized by the impact of the pandemic and its resulting effects including supply chain disruptions, large swings in consumer spending and inflation. Our core priorities throughout this period were protecting our people and delivering for our customers, and as a result, we operated with elevated staffing and higher-than-normal inventory levels during this period leading to reduced productivity. In addition, persistent inflation added to the cost of raw materials we purchased, the cost to produce and ship our products and the inventory we maintained.
In response, we took a series of actions to improve profitability and cash generation throughout 2022 and 2023. These actions included raising prices across our businesses to more appropriately share inflationary costs with our customers; restoring our productivity to pre-pandemic levels without impacting our ability to supply and capture future growth; and normalizing inventory levels. As expected, these actions delivered improved profitability and cash flow as we investprogressed through 2023.
Overall, we will continue to focus on operating each of our businesses well and adjusting to meet the needs of the moment while simultaneously advancing growth initiatives and capabilities that will drive continued success as the global economy stabilizes. Our focused and cohesive portfolio provides strategic resilience that is evident in our world-class capabilities. Corning is concentrating approximately 80% of its research, developmentresults, even in the current environment. We remain confident in our relevance to long-term secular trends and engineering investmentour “More Corning” approach, 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 uswe are well positioned to quickly apply our talents and repurpose our assetscapture durable, profitable growth as needed.the global economy improves.
SummaryFourth-Quarter 2023 Corporate Outlook
We expect core net sales of resultsapproximately $3.25 billion for the three months and nine months ended September 30, 2017fourth quarter of 2023.
RESULTS OF OPERATIONS
The following table presents selected highlights from our operations (in millions):
Three months ended | % | Nine months ended | % | |||||||||||||||||||||
September 30, | change | September 30, | change | |||||||||||||||||||||
2023 | 2022 | 23 vs. 22 | 2023 | 2022 | 23 vs. 22 | |||||||||||||||||||
Net sales | $ | 3,173 | $ | 3,488 | (9 | %) | $ | 9,594 | $ | 10,783 | (11 | %) | ||||||||||||
Gross margin | $ | 1,004 | $ | 1,062 | (5 | %) | $ | 3,020 | $ | 3,591 | (16 | %) | ||||||||||||
(gross margin %) | 32 | % | 30 | % | 31 | % | 33 | % | ||||||||||||||||
Selling, general and administrative expenses | $ | 468 | $ | 461 | 2 | % | $ | 1,329 | $ | 1,381 | (4 | %) | ||||||||||||
(as a % of net sales) | 15 | % | 13 | % | 14 | % | 13 | % | ||||||||||||||||
Research, development and engineering expenses | $ | 270 | $ | 278 | (3 | %) | $ | 787 | $ | 766 | 3 | % | ||||||||||||
(as a % of net sales) | 9 | % | 8 | % | 8 | % | 7 | % | ||||||||||||||||
Translated earnings contract gain (loss), net | $ | 20 | $ | (68 | ) | (129 | %) | $ | 128 | $ | 257 | (50 | %) | |||||||||||
Income before income taxes | $ | 217 | $ | 260 | (17 | %) | $ | 854 | $ | 1,793 | (52 | %) | ||||||||||||
Provision for income taxes | $ | (35 | ) | $ | (34 | ) | 3 | % | $ | (178 | ) | $ | (380 | ) | (53 | %) | ||||||||
Effective tax rate | 16 | % | 13 | % | 21 | % | 21 | % | ||||||||||||||||
Net income attributable to Corning Incorporated | $ | 164 | $ | 208 | (21 | %) | $ | 621 | $ | 1,352 | (54 | %) | ||||||||||||
Comprehensive (loss) income attributable to Corning Incorporated | $ | (39 | ) | $ | (489 | ) | (92 | %) | $ | 49 | $ | (264 | ) | (119 | %) |
Net Sales
Net sales in the three and nine months ended September 30, 2017 were $2,607 million and $7,479 million, respectively, compared to $2,507 million and $6,914 million in the same periods in 2016. The increase in both periods was driven by higher sales in the Optical Communications and Specialty Materials segments. Optical Communications segment sales increased $122 million and $431 million, respectively, due to higher sales of carrier and enterprise network products. Specialty Materials segment sales increased $78 million and $222 million, respectively, driven by higher sales of Corning Gorilla Glass and advanced optics products.
In the third quarter of 2017, we generated net income of $390 million, or $0.39 per share, compared to net income of $284 million, or $0.26 per share, for the same period in 2016. The increase in net income of $106 million, or 37%, was primarily driven by the following items (amounts presented after-tax):
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Partially offsetting these items was a decrease of $76 million in net income in the Display Technologies segment, driven by LCD glass price declines of approximately 10%, the absence of a $41 million gain resulting from the contingent consideration fair value adjustment recorded in the third quarter of 2016 and the impact of the weakening of the Japanese yen in the amount of $25 million, partially offset by a small increase in volume, an increase of $31 million from realized gains on our yen-denominated currency hedges and improvements in manufacturing efficiency.
The translation impact of fluctuations in foreign currency exchange rates, including the impact of hedges realized in the current quarter, did not materially impact Corning’s consolidated net income in the three months ended September 30, 2017 when compared to the same period in 2016.
In the first three quarters of 2017, we generated net income of $9152023 decreased $315 million, or $0.89 per share, compared to net income of $2,123 million or $1.81 per share for the same period in 2016. The decrease in net income of $1,208 million was primarily driven by the following items (amounts presented after-tax):
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Partially offsetting these events were the following items:
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The translation impact of fluctuations in foreign currency exchange rates, including the impact of hedges realized in the current quarter, did not materially impact Corning’s consolidated net income in the nine months ended September 30, 2017 when compared to the same period in 2016.
2017 Corporate Outlook
In 2017, Corning will continue to advance 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 the full-year 2017 LCD glass pricing environment will be favorable and better than last year, with expectations of price declines of approximately 10% or even less. In the Optical Communications segment, we anticipate sales to increase by more than 15% over 2016. In the Environmental Technologies segment, we expect sales to be up mid-single digits in percentage terms from 2016. We expect growth in the Specialty Materials segment to be more than 20% year-over-year, reflecting very strong customer deployment of Corning® 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.
RESULTS OF OPERATIONS
Selected highlights for the three and nine months ended September 30, 2017 and 2016 follow (in millions):
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| Three months ended |
| % |
| Nine months ended |
| % | ||||||||
|
| September 30, |
| change |
| September 30, |
| change | ||||||||
|
| 2017 |
| 2016 |
| 17 vs. 16 |
| 2017 |
| 2016 |
| 17 vs. 16 | ||||
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Net sales |
| $ | 2,607 |
| $ | 2,507 |
| 4% |
| $ | 7,479 |
| $ | 6,914 |
| 8% |
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Gross margin |
| $ | 1,056 |
| $ | 1,041 |
| 1% |
| $ | 2,998 |
| $ | 2,756 |
| 9% |
(gross margin %) |
|
| 41% |
|
| 42% |
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|
|
| 40% |
|
| 40% |
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Selling, general and |
| $ | 372 |
| $ | 302 |
| 23% |
| $ | 1,067 |
| $ | 1,104 |
| (3%) |
(as a % of net sales) |
|
| 14% |
|
| 12% |
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| 14% |
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| 16% |
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Research, development and |
| $ | 213 |
| $ | 187 |
| 14% |
| $ | 620 |
| $ | 569 |
| 9% |
(as a % of net sales) |
|
| 8% |
|
| 7% |
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| 8% |
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| 8% |
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Equity in earnings of |
| $ | 31 |
| $ | 19 |
| 63% |
| $ | 148 |
| $ | 119 |
| 24% |
(as a % of net sales) |
|
| 1% |
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| 1% |
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| 2% |
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| 2% |
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Translated earnings contract gain |
| $ | 26 |
| $ | (237) |
| * |
| $ | (193) |
| $ | (2,295) |
| (92%) |
(as a % of net sales) |
|
| 1% |
|
| * |
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| * |
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| * |
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Gain on realignment |
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| $ | 2,676 |
| (100%) |
(as a % of net sales) |
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| 39% |
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Income before income taxes |
| $ | 479 |
| $ | 257 |
| 86% |
| $ | 1,091 |
| $ | 1,288 |
| (15%) |
(as a % of net sales) |
|
| 18% |
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| 10% |
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| 15% |
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| 19% |
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(Provision) benefit for income taxes |
| $ | (89) |
| $ | 27 |
| * |
| $ | (176) |
| $ | 835 |
| * |
(as a % of net sales) |
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| * |
|
| 1% |
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| * |
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| 12% |
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Net income attributable to |
| $ | 390 |
| $ | 284 |
| 37% |
| $ | 915 |
| $ | 2,123 |
| (57%) |
(as a % of net sales) |
|
| 15% |
|
| 11% |
|
|
|
| 12% |
|
| 31% |
|
|
*Percent change is not meaningful.
Net Sales
The following table presents net sales by reportable segment (in millions):
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| Three months ended |
| % |
| Nine months ended |
| % | ||||||||
|
| September 30, |
| change |
| September 30, |
| change | ||||||||
|
| 2017 |
| 2016 |
| 17 vs. 16 |
| 2017 |
| 2016 |
| 17 vs. 16 | ||||
Display Technologies |
| $ | 768 |
| $ | 902 |
| (15%) |
| $ | 2,252 |
| $ | 2,408 |
| (6%) |
Optical Communications |
|
| 917 |
|
| 795 |
| 15% |
|
| 2,617 |
|
| 2,186 |
| 20% |
Environmental Technologies |
|
| 277 |
|
| 264 |
| 5% |
|
| 815 |
|
| 787 |
| 4% |
Specialty Materials |
|
| 373 |
|
| 295 |
| 26% |
|
| 1,010 |
|
| 788 |
| 28% |
Life Sciences |
|
| 223 |
|
| 214 |
| 4% |
|
| 654 |
|
| 633 |
| 3% |
All Other |
|
| 49 |
|
| 37 |
| 32% |
|
| 131 |
|
| 112 |
| 17% |
Total net sales |
| $ | 2,607 |
| $ | 2,507 |
| 4% |
| $ | 7,479 |
| $ | 6,914 |
| 8% |
For the three months ended September 30, 2017, net sales increased by $100 million, or 4% when compared to the same period in 2016. The primary sales drivers by segment were as follows:
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For the nine months ended September 30, 2017, net sales increased by $565 million, or 8%9%, when compared to the same period in 2016.2022. The primarydecrease was primarily driven by decreased segment sales driversof $399 million in Optical Communications, $82 million in Life Sciences and $80 million in Hemlock and Emerging Growth Businesses, partially offset by increased segment were as follows:
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Movementssales in Display Technologies of $286 million, Specialty Materials of $44 million and Environmental Technologies of $24 million. In addition, movements in foreign exchange rates did not materially impactadversely impacted Corning’s consolidated net sales inby $92 million for the three andmonths ended September 30, 2023, when compared to the same period in 2022.
Net sales for the nine months ended September 30, 2017, respectively,2023 decreased $1,189 million, or 11%, when compared to the same periodsperiod in 2016.2022. The decrease was primarily driven by decreased segment sales of $719 million in Optical Communications, $217 million in Life Sciences, $110 million in Hemlock and Emerging Businesses and $105 million in Specialty Materials, partially offset by increased segment sales in Environmental Technologies of $147 million and Display Technologies of $140 million. In addition, movements in foreign exchange rates adversely impacted Corning’s consolidated net sales by $287 million for the nine months ended September 30, 2023, when compared to the same period in 2022.
Refer to the “Segment Analysis” section of our MD&A below for a discussion of net sales by segment.
Cost of Sales / Gross Margin
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; freight and logistics costs; and other production overhead.
Gross Margin
InFor the three months ended September 30, 2017,2023, gross margin dollars increased $15decreased by $58 million, or 1%5%, but gross marginand improved as a percentage of net sales declined slightlyby 2 percentage points when compared to the same period in 2016, driven by LCD glass price declines2022. The increase in gross margin as a percentage of approximately 10% and the impact of the weakening of the Japanese yen in the amount of $34 million, which negatively impacted the Display Technologies segment. Gross margin increased in the remainder of our segments, up $102 million,sales was primarily driven by higher sales volumethe actions taken by management to improve profitability, including raising prices, restoring our productivity levels and normalizing inventory levels. These improvements were partially offset by movements in foreign exchange rates which adversely impacted Corning’s consolidated gross margin by $58 million for the Specialty Materials and Optical Communications segments. three months ended September 30, 2023 when compared to the same period in 2022.
InFor the nine months ended September 30, 2017,2023, gross margin dollars increaseddecreased by $242$571 million, or 9%16%, and declined as a percentage of sales by 2 percentage points when compared to the same period in 2022. The decline in gross margin as a percentage of net sales remained consistent,was primarily driven by higher inflationary and production costs, partially offset by the benefits from the actions taken by management to improve profitability. In addition, movements in foreign exchange rates adversely impacted Corning’s consolidated gross margin by $175 million for the nine months ended September 30, 2023 when compared to the same period last year. Gross margin increased in the remainder of our segments, up $328 million, primarily driven by higher sales volume in the Specialty Materials and Optical Communications segments. LCD glass price declines of approximately 10% and the impact of the weakening of the Japanese yen and South Korean won in the amount of $44 million, which negatively impacted the Display Technologies segment, partially offset the increase.2022.
Selling, General and Administrative Expenses
When compared to the third quarter of 2016, selling, general and administrative expenses increased by $70 million, or 23%, in the three months ended September 30, 2017. The increase was due to the following items:
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When compared to the first three quarters of 2016, selling, general and administrative expenses decreased by $37 million, or 3%, in the nine months ended September 30, 2017. The decrease was due to the following items:
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Offsetting these events were the following items:
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The types of expenses included in the selling, general and administrative expenses line item are:are salaries, wages and benefits; stock-basedshare-based compensation expense; travel; sales commissions; professional fees; and depreciation and amortization, utilities and rent for administrative facilities.
For the three and nine months ended September 30, 2023, selling, general and administrative expenses increased by $7 million and decreased $52 million, or 2% and 4%, respectively, and were fairly consistent as a percentage of sales when compared to the same periods in 2022.
Research, Development and Engineering Expenses
For the three and nine months ended September 30, 2017,2023, research, development and engineering expenses decreased by $8 million and increased by $26$21 million, or 14%,3% and $51 million, or 9%3%, respectively, and were fairly consistent as a percentage of sales when compared to the same periods last year, driven by the absence of the impact of a 2016 joint development agreement in the Display Technologies segment, as well as higher costs associated with new product launches and our emerging businesses. As a percentage of sales, these expenses increased slightly in the third quarter, and remained consistent in the first nine months of 2017, when compared to the same periods last year.
Equity in Earnings of Affiliated Companies
The following provides a summary of equity in earnings of affiliated companies (in millions):2022.
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| Three months ended |
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Dow Corning Corporation (1) |
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| $ | 82 |
Hemlock Semiconductor Group |
| $ | 29 |
| $ | 22 |
| $ | 139 |
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| 44 |
All other |
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| 2 |
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| (3) |
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| 9 |
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| (7) |
Total equity earnings |
| $ | 31 |
| $ | 19 |
| $ | 148 |
| $ | 119 |
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Refer to Note 7 (Investments) to the consolidated financial statements for additional information.
Translated earnings contract gain (loss), net
Included in the line item Translatedtranslated earnings contract gain (loss), net, is the impact of foreign currency hedgescontracts which economically hedge ourthe translation exposure arising from movements in the Japanese yen, South Korean won, euro, Newnew Taiwan dollar, andeuro, Chinese yuan against the U.S. dollarand British pound and its impact on our net earnings. income.
The following table provides detailed information on the impact of our translated earnings contract losses and gains:gain (loss), net (in millions):
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| Three Months Ended |
| Three Months Ended |
| Change | ||||||||||||
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| September 30, 2017 |
| September 30, 2016 |
| 2017 vs. 2016 | ||||||||||||
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| Income |
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| Income |
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| Income |
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| Net |
| income |
| Net |
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(in millions) |
| taxes |
| income |
| taxes |
| income |
| taxes |
| income | ||||||
Hedges related to translated earnings: |
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Realized gain, net |
| $ | 50 |
| $ | 31 |
| $ | 2 |
| $ | 1 |
| $ | 48 |
| $ | 30 |
Unrealized loss, net |
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| (24) |
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| (15) |
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| (239) |
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| (150) |
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| 215 |
|
| 135 |
Total translated earnings contract |
| $ | 26 |
| $ | 16 |
| $ | (237) |
| $ | (149) |
| $ | 263 |
| $ | 165 |
Three months ended | Three months ended | Change | ||||||||||||||||||||||
September 30, 2023 | September 30, 2022 | 2023 vs. 2022 | ||||||||||||||||||||||
Income | Income | Income | ||||||||||||||||||||||
before | Net | before | Net | before | Net | |||||||||||||||||||
tax | income | tax | income | tax | income | |||||||||||||||||||
Hedges related to translated earnings: | ||||||||||||||||||||||||
Realized gain, net (1) (2) | $ | 73 | $ | 59 | $ | 100 | $ | 76 | $ | (27 | ) | $ | (17 | ) | ||||||||||
Unrealized loss, net (3) | (53 | ) | (43 | ) | (168 | ) | (128 | ) | 115 | 85 | ||||||||||||||
Total translated earnings contract gain (loss), net | $ | 20 | $ | 16 | $ | (68 | ) | $ | (52 | ) | $ | 88 | $ | 68 |
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| Nine Months Ended |
| Nine Months Ended |
| Change | ||||||||||||
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| September 30, 2017 |
| September 30, 2016 |
| 2017 vs. 2016 | ||||||||||||
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| Income |
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| Income |
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| Income |
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| before |
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| before |
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| income |
| Net |
| income |
| Net |
| income |
| Net | ||||||
(in millions) |
| taxes |
| income |
| taxes |
| income |
| taxes |
| income | ||||||
Hedges related to translated earnings: |
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Realized gain, net |
| $ | 199 |
| $ | 124 |
| $ | 146 |
| $ | 92 |
| $ | 53 |
| $ | 32 |
Unrealized loss, net |
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| (392) |
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| (247) |
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| (2,441) |
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| (1,539) |
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| 2,049 |
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| 1,292 |
Total translated earnings contract |
| $ | (193) |
| $ | (123) |
| $ | (2,295) |
| $ | (1,447) |
| $ | 2,102 |
| $ | 1,324 |
Nine months ended | Nine months ended | Change | ||||||||||||||||||||||
September 30, 2023 | September 30, 2022 | 2023 vs. 2022 | ||||||||||||||||||||||
Income | Income | Income | ||||||||||||||||||||||
before | Net | before | Net | before | Net | |||||||||||||||||||
tax | income | tax | income | tax | income | |||||||||||||||||||
Hedges related to translated earnings: | ||||||||||||||||||||||||
Realized gain, net (1) (2) | $ | 211 | $ | 168 | $ | 218 | $ | 166 | $ | (7 | ) | $ | 2 | |||||||||||
Unrealized (loss) gain, net (4) | (83 | ) | (65 | ) | 39 | 31 | (122 | ) | (96 | ) | ||||||||||||||
Total translated earnings contract gain, net | $ | 128 | $ | 103 | $ | 257 | $ | 197 | $ | (129 | ) | $ | (94 | ) |
(1) | For the three and nine months ended September 30, 2023, amount includes pre-tax realized losses of $20 million and $48 million, respectively, related to the expiration of option contracts. For the three and nine months ended September 30, 2022, amount includes pre-tax realized gains of $23 million and $9 million, respectively, related to the expiration of option contracts. These amounts were reflected within operating activities in the consolidated statements of cash flows. |
(2) | For the nine months ended September 30, 2023, amount excludes $11 million related to a forward contract designated as a net investment hedge, which was reflected within investing activities in the consolidated statements of cash flows. |
(3) | The impact to income for the three months ended September 30, 2023 was primarily driven by unrealized losses from our South Korean won and Japanese yen-denominated hedges. The impact to income for the three months ended September 30, 2022 was primarily driven by unrealized losses from our South Korean won-denominated hedges. |
(4) | The impact to income for the nine months ended September 30, 2023 was primarily driven by unrealized losses from our South Korean won and Chinese yuan-denominated hedges partially offset by unrealized gains from our Japanese yen-denominated hedges. The impact to income for the nine months ended September 30, 2022 was primarily driven by unrealized gains from our Japanese yen-denominated hedges partially offset by unrealized losses from our South Korean won-denominated hedges. |
The gross notional value outstanding on our translated earnings contracts at September 30, 2017 and December 31, 2016 were as follows (in billions):
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| September 30, |
| December 31, | |||||
Japanese yen-denominated hedges | $ | 13.5 |
| $ | 14.9 | |||
South Korean won-denominated hedges |
| 1.1 |
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| 1.2 | |||
Euro-denominated hedges |
| 0.4 |
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| 0.3 | |||
Chinese yuan-denominated hedges |
| 0.2 |
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| 0.3 | |||
Total gross notional value outstanding | $ | 15.2 |
| $ | 16.7 |
Income Before Income Taxes
In
The translation impact of fluctuations in foreign currency exchange rates offset by the impact of hedges realized in the current period, adversely impacted Corning’s consolidated income before income taxes by $87 million and $182 million for the three and nine months ended September 30, 2017, the impact of fluctuations in foreign exchange rates did not materially impact Corning’s consolidated income before income taxes2023, respectively, when compared to the same periods in 2016. 2022.
(Provision)BenefitProvision for Income Taxes
Our (provision) benefit for income taxes and
For the relatedthree months ended September 30, 2023, the effective income tax rate were as follows (in millions):differed from the United States (“U.S.”) statutory rate of 21%, primarily due to differences arising from foreign earnings partially offset by changes in estimates based on the final 2022 U.S. Federal Income Tax Return. For the nine months ended September 30, 2023, the effective tax rate differed from the U.S. statutory rate of 21%, primarily due to differences arising from foreign earnings, changes in estimates based on the final 2022 U.S. Federal Income Tax Return and adjustments related to share-based compensation, partially offset by changes in valuation allowance assessments.
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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(Provision) benefit for income taxes |
| $ | (89) |
| $ | 27 |
| $ | (176) |
| $ | 835 |
Effective tax rate |
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| 18.6% |
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| (10.5%) |
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| 16.1% |
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| (64.8%) |
For the three months ended September 30, 2017,2022, the effective income tax rate differed from the U.S. statutory rate of 35%21%, primarily due to the following benefits:
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net impact of changes in tax legislation and changes in estimates based on the final 2021 U.S. Federal Income Tax Return, partially offset by changes in tax reserves. For the nine months ended September 30, 2017,2022, the effective income tax rate differed from the U.S. statutory rate of 35%21%, primarily due to differences arising from foreign earnings and changes in tax reserves, partially offset by the following benefits:
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For the three months ended September 30, 2016, the effective income tax benefit differed from thefinal 2021 U.S. statutory rate of 35% primarily dueFederal Income Tax Return and adjustments related to the following benefit:
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For the nine months ended September 30, 2016, the effective income tax benefit differed from the U.S. statutory rate of 35% primarily due to the following benefits:
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Refer to Note 4 (Income Taxes) to the consolidated financial statements for additional information.share-based compensation.
Net Income Attributable to Corning Incorporated
As a result of the items discussed above, our net income attributable to Corning Incorporated and per share data iswere as follows (in millions, except per share amounts):
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| Three months ended |
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| September 30, |
| September 30, | September 30, | September 30, | ||||||||||||||||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
Net income attributable to Corning Incorporated |
| $ | 390 |
| $ | 284 |
| $ | 915 |
| $ | 2,123 | $ | 164 | $ | 208 | $ | 621 | $ | 1,352 | ||||||||
Net income attributable to Corning Incorporated used |
| $ | 366 |
| $ | 260 |
| $ | 842 |
| $ | 2,050 | ||||||||||||||||
Net income attributable to Corning Incorporated used |
| $ | 390 |
| $ | 284 |
| $ | 915 |
| $ | 2,123 | ||||||||||||||||
Basic earnings per common share |
| $ | 0.41 |
| $ | 0.27 |
| $ | 0.93 |
| $ | 1.96 | $ | 0.19 | $ | 0.25 | $ | 0.73 | $ | 1.60 | ||||||||
Diluted earnings per common share |
| $ | 0.39 |
| $ | 0.26 |
| $ | 0.89 |
| $ | 1.81 | $ | 0.19 | $ | 0.24 | $ | 0.72 | $ | 1.58 | ||||||||
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Weighted-average common shares outstanding - basic |
| 883 |
| 978 |
| 905 |
| 1,046 | 850 | 843 | 848 | 843 | ||||||||||||||||
Weighted-average common shares outstanding - diluted |
| 1,009 |
| 1,102 |
| 1,031 |
| 1,170 | 859 | 855 | 858 | 857 |
Comprehensive (Loss) Income attributable to Corning Incorporated |
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Comprehensive Income
Forloss attributable to Corning Incorporated for the three months ended September 30, 2017, comprehensive income decreased by $902023 was $39 million when compared to $489 million for the same period in 2016,three months ended September 30, 2022. This movement is primarily due to the negative impact of the change$44 million decrease in net income attributable to Corning Incorporated and a decrease in net losses on foreign currency translation gains and lossesadjustments of $192$494 million, primarily driven primarily by the Japanese yen, partially offset by the increase in net income of $106 million.South Korean won, Chinese yuan and euro.
ForComprehensive income attributable to Corning Incorporated for the nine months ended September 30, 2017, comprehensive income decreased by $1.8 billion, when2023 was $49 million compared to the same period in 2016, driven by the following items:
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Offsetting these decreases was an increase in net unrealized gains on designated hedges in the amount of $72 million.
Refer to Note 13 (Shareholders’ Equity) to the consolidated financial statements for additional information.
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):
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| change |
| September 30, |
| change | ||||||||
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| 2017 |
| 2016 |
| 17 vs. 16 |
| 2017 |
| 2016 |
| 17 vs. 16 | ||||
Core net sales |
| $ | 2,700 |
| $ | 2,548 |
| 6% |
| $ | 7,775 |
| $ | 7,159 |
| 9% |
Core equity in earnings of affiliated companies |
| $ | 32 |
| $ | 19 |
| 68% |
| $ | 78 |
| $ | 138 |
| (43)% |
Core earnings |
| $ | 433 |
| $ | 466 |
| (7)% |
| $ | 1,271 |
| $ | 1,240 |
| 3% |
Core Net Sales
The following table presents core net sales by reportable segment (in millions):
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| Nine months ended |
| % | ||||||||
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| September 30, |
| change |
| September 30, |
| change | ||||||||
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| 2017 |
| 2016 |
| 17 vs. 16 |
| 2017 |
| 2016 |
| 17 vs. 16 | ||||
Display Technologies |
| $ | 860 |
| $ | 943 |
| (9)% |
| $ | 2,547 |
| $ | 2,652 |
| (4)% |
Optical Communications |
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| 917 |
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| 795 |
| 15% |
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| 2,617 |
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| 2,186 |
| 20% |
Environmental Technologies |
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| 277 |
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| 264 |
| 5% |
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| 815 |
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| 787 |
| 4% |
Specialty Materials |
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| 373 |
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| 295 |
| 26% |
|
| 1,010 |
|
| 788 |
| 28% |
Life Sciences |
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| 223 |
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| 214 |
| 4% |
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| 654 |
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| 633 |
| 3% |
All Other |
|
| 50 |
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| 37 |
| 35% |
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| 132 |
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| 113 |
| 17% |
Total core net sales |
| $ | 2,700 |
| $ | 2,548 |
| 6% |
| $ | 7,775 |
| $ | 7,159 |
| 9% |
Core net sales increased by $152 million, or 6%, and $616 million, or 9%, in the three months and nine months ended September 30, 2017, respectively, when compared to the same periods in 2016. In all segments except Display Technologies, core net sales are consistent with GAAP net sales. Because a significant portion of revenues in the Display Technologies segment are denominated in Japanese yen, this segment’s net sales are adjusted to remove the impact of translating yen into dollars.
When compared to the third quarter of 2016, core net sales in the Display Technologies segment decreased by $83 million, or 9%, in the third quarter of 2017, driven by LCD glass price declines of approximately 10%, partially offset by a small increase in volume. When compared to the first nine months of 2016, core net sales in the Display Technologies segment decreased by $105 million, or 4%, in the first nine months of 2017, driven by LCD glass price declines of approximately 10%, partially offset by an increase in volume in the high-single digits in percentage terms.
Core Equity in Earnings of Affiliated Companies
The following provides a summary of core equity in earnings of affiliated companies (in millions):
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| Three months ended |
| Nine months ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Dow Corning Corporation (1) |
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| $ | 98 |
Hemlock Semiconductor Group |
| $ | 29 |
| $ | 22 |
| $ | 67 |
|
| 44 |
All other |
|
| 3 |
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| (3) |
|
| 11 |
|
| (4) |
Total core equity earnings |
| $ | 32 |
| $ | 19 |
| $ | 78 |
| $ | 138 |
|
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Core Earnings
In the three months ended September 30, 2017, we generated core earnings of $433 million or $0.43 per share, compared to core earnings generated in the three months ended September 30, 2016 of $466 million, or $0.42 per share. The decrease of $33 million was primarily due to lower core earnings in the Display Technologies segment, down $43 million, and in emerging businesses, down $10 million, combined with an increase in corporate spending of approximately $20 million. Higher core earnings in the Optical Communications and Specialty Materials segments, up $13 million and $27 million, respectively, partially offset the decrease.
In the nine months ended September 30, 2017, we generated core earnings2022. This movement is primarily due to the $731 million decrease in net income attributable to Corning Incorporated and a decrease in net losses on foreign currency translation adjustments of $1,271$942 million, or $1.23 per share, compared to core earnings generated in the nine months ended September 30, 2016 of $1,240 million, or $1.06 per share. The increase of $31 million, or $0.17 per share, wasprimarily driven by the following items:Japanese yen, South Korean won, Chinese yuan and euro.
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Offsetting these increases were the absence of the equity earnings of $102 million from Dow Corning’s silicones business due to our 2016 realignment of our ownership interest in Dow Corning, and lower core earnings in the Display Technologies and Environmental Technologies segments. SEGMENT ANALYSIS
Included in core earningsFinancial results for the three months and nine months ended September 30, 2017 is net periodic pension expense in the amounts of $12 million and $37 million, respectively, and for the same periods in 2016, $13 million and $38 million, respectively.
Refer to Note 9 (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):
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| Three months ended |
| Nine months ended | ||||||||
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| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Core earnings attributable to Corning Incorporated |
| $ | 433 |
| $ | 466 |
| $ | 1,271 |
| $ | 1,240 |
Less: Series A convertible preferred stock dividend |
|
| 24 |
|
| 24 |
|
| 73 |
|
| 73 |
Core earnings available to common stockholders - basic |
|
| 409 |
|
| 442 |
|
| 1,198 |
|
| 1,167 |
Add: Series A convertible preferred stock dividend |
|
| 24 |
|
| 24 |
|
| 73 |
|
| 73 |
Core earnings available to common stockholders - diluted |
| $ | 433 |
| $ | 466 |
| $ | 1,271 |
| $ | 1,240 |
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Weighted-average common shares outstanding - basic |
|
| 883 |
|
| 978 |
|
| 905 |
|
| 1,046 |
Effect of dilutive securities: |
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Stock options and other dilutive securities |
|
| 11 |
|
| 9 |
|
| 11 |
|
| 9 |
Series A convertible preferred stock |
|
| 115 |
|
| 115 |
|
| 115 |
|
| 115 |
Weighted-average common shares outstanding - diluted |
|
| 1,009 |
|
| 1,102 |
|
| 1,031 |
|
| 1,170 |
Core basic earnings per common share |
| $ | 0.46 |
| $ | 0.45 |
| $ | 1.32 |
| $ | 1.12 |
Core diluted earnings per common share |
| $ | 0.43 |
| $ | 0.42 |
| $ | 1.23 |
| $ | 1.06 |
Reconciliation of Non-GAAP Measures
We utilize certain financial measures and key performance indicators that are not calculated in accordance with GAAP to assess our financial and operating performance. A non-GAAP financial measure is defined as a numerical measure of a company’s financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the statement of income or statement of cash flows, or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure as calculated and presented in accordance with GAAP in the statement of income or statement of cash flows.
Core net sales, core equity in earnings of affiliated companies and core earnings are non-GAAP financial measures utilized by our management to analyze financial performance without the impact of items that are driven by general economic conditions and events that do not reflect the underlying fundamentals and trends in the Company’s operations.
The following tables reconcile our non-GAAP financial measures to their most directly comparable GAAP financial measure (amounts in millions except percentages and per share amounts):
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| Three Months Ended September 30, 2017 | |||||||||||||||
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| Income |
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| before |
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| Effective |
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| |
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| Net |
| Equity |
| income |
| Net |
| tax |
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| Per | ||||
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| sales |
| earnings |
| taxes |
| income |
| rate (a) |
|
| share | ||||
As reported - GAAP |
| $ | 2,607 |
| $ | 31 |
| $ | 479 |
| $ | 390 |
| 18.6% |
| $ | 0.39 |
Constant-yen (1) |
|
| 92 |
|
| 1 |
|
| 81 |
|
| 62 |
|
|
|
| 0.06 |
Constant-won (1) |
|
| 1 |
|
|
|
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| (6) |
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| (4) |
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|
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|
|
Translated earnings contract gain (2) |
|
|
|
|
|
|
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| (28) |
|
| (18) |
|
|
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| (0.02) |
Acquisition-related costs (3) |
|
|
|
|
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|
| 21 |
|
| 14 |
|
|
|
| 0.01 |
Discrete tax items and other tax-related |
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| (2) |
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Translation gain on Japanese yen-denominated |
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| (14) |
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| (9) |
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|
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| (0.01) |
Core performance measures |
| $ | 2,700 |
| $ | 32 |
| $ | 533 |
| $ | 433 |
| 18.8% |
| $ | 0.43 |
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| Three Months Ended September 30, 2016 | |||||||||||||||
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| Income |
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| before |
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| Effective |
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| |
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| Net |
| Equity |
| income |
| Net |
| tax (benefit) |
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| Per | ||||
|
| sales |
| earnings |
| taxes |
| income |
| rate (a) |
|
| share | ||||
As reported - GAAP |
| $ | 2,507 |
| $ | 19 |
| $ | 257 |
| $ | 284 |
| (10.5%) |
| $ | 0.26 |
Constant-yen (1) |
|
| 40 |
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|
|
|
| 47 |
|
| 30 |
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|
|
| 0.03 |
Constant-won (1) |
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| 1 |
|
|
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| (4) |
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| (3) |
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Translated earnings contract loss (2) |
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|
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| 237 |
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| 149 |
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| 0.14 |
Acquisition-related costs (3) |
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| 15 |
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| 11 |
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| 0.01 |
Discrete tax items and other tax-related |
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| 6 |
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| 0.01 |
Restructuring, impairment and other charges (6) |
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| 11 |
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| 9 |
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| 0.01 |
Impacts from the acquisition of Samsung |
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|
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| (49) |
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| (41) |
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|
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| (0.04) |
Pension mark-to-market adjustment (9) |
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| 26 |
|
| 17 |
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| 0.02 |
Taiwan power outage (11) |
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| 5 |
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| 4 |
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Core performance measures |
| $ | 2,548 |
| $ | 19 |
| $ | 545 |
| $ | 466 |
| 14.5% |
| $ | 0.42 |
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|
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.
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):
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| Nine Months Ended September 30, 2017 | |||||||||||||||
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| Income |
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| before |
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| Effective |
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| |
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| Net |
| Equity |
| income |
| Net |
| tax |
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| Per | ||||
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| sales |
| earnings |
| taxes |
| income |
| rate (a) |
|
| share | ||||
As reported – GAAP |
| $ | 7,479 |
| $ | 148 |
| $ | 1,091 |
| $ | 915 |
| 16.1% |
| $ | 0.89 |
Constant-yen (1) |
|
| 294 |
|
| 2 |
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| 266 |
|
| 201 |
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|
|
| 0.19 |
Constant-won (1) |
|
| 2 |
|
|
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| (20) |
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| (15) |
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| (0.01) |
Translated earnings contract loss (2) |
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|
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| 198 |
|
| 124 |
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|
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| 0.12 |
Acquisition-related costs (3) |
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|
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| 60 |
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| 41 |
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| 0.04 |
Discrete tax items and other tax-related |
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| 28 |
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| 0.03 |
Litigation, regulatory and other legal matters (5) |
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|
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| (12) |
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| (9) |
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|
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| (0.01) |
Restructuring, impairment and other charges (6) |
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|
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|
| 50 |
|
| 35 |
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|
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| 0.03 |
Equity in earnings of affiliated companies (7) |
|
|
|
|
| (72) |
|
| (72) |
|
| (46) |
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|
|
| (0.04) |
Impacts from the acquisition of Samsung |
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|
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| (5) |
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| (3) |
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|
Pension mark-to-market adjustment (9) |
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| 15 |
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| 9 |
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| 0.01 |
Translation gain on Japanese yen-denominated |
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| (14) |
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| (9) |
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| (0.01) |
Core performance measures |
| $ | 7,775 |
| $ | 78 |
| $ | 1,557 |
| $ | 1,271 |
| 18.4% |
| $ | 1.23 |
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| Nine Months Ended September 30, 2016 | |||||||||||||||
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| Income |
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| |
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| before |
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| Effective |
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| |
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| Net |
| Equity |
| income |
| Net |
| tax (benefit) |
|
| Per | ||||
|
| sales |
| earnings |
| taxes |
| income |
| rate (a) |
|
| share | ||||
As reported |
| $ | 6,914 |
| $ | 119 |
| $ | 1,288 |
| $ | 2,123 |
| (64.8%) |
| $ | 1.81 |
Constant-yen (1) |
|
| 242 |
|
| 4 |
|
| 232 |
|
| 164 |
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|
|
| 0.14 |
Constant-won (1) |
|
| 3 |
|
| (1) |
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| (36) |
|
| (26) |
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|
|
| (0.02) |
Translated earnings contract loss (2) |
|
|
|
|
|
|
|
| 2,295 |
|
| 1,447 |
|
|
|
| 1.24 |
Acquisition-related costs (3) |
|
|
|
|
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|
|
| 109 |
|
| 95 |
|
|
|
| 0.08 |
Discrete tax items and other tax-related |
|
|
|
|
|
|
|
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|
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| (83) |
|
|
|
| (0.07) |
Litigation, regulatory and other legal matters (5) |
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|
|
|
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|
|
| 55 |
|
| 70 |
|
|
|
| 0.06 |
Restructuring, impairment and other charges (6) |
|
|
|
|
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|
|
| 131 |
|
| 91 |
|
|
|
| 0.08 |
Equity in earnings of affiliated companies (7) |
|
|
|
|
| 16 |
|
| 16 |
|
| 15 |
|
|
|
| 0.01 |
Impacts from the acquisition of Samsung |
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|
|
|
|
|
|
| (45) |
|
| (38) |
|
|
|
| (0.03) |
Pension mark-to-market adjustment (9) |
|
|
|
|
|
|
|
| 60 |
|
| 39 |
|
|
|
| 0.03 |
Gain on realignment of equity investment (10) |
|
|
|
|
|
|
|
| (2,676) |
|
| (2,676) |
|
|
|
| (2.29) |
Taiwan power outage (11) |
|
|
|
|
|
|
|
| 25 |
|
| 19 |
|
|
|
| 0.02 |
Core performance measures |
| $ | 7,159 |
| $ | 138 |
| $ | 1,454 |
| $ | 1,240 |
| 14.7% |
| $ | 1.06 |
|
|
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.
Items which we exclude from GAAP measures to arrive at core performance measures are as follows:
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REPORTABLE SEGMENTS
Our reportable segments and Hemlock and Emerging Growth Businesses are as follows:
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All other segments that do not meet the quantitative threshold for separate reporting have been grouped as “All Other.” This group is primarily comprised of the results of the pharmaceutical technologies business and new product lines and development projects, as well as certain corporate investments such as Eurokera and Keraglass equity affiliates.
We prepared the financial results for our reportable segments on a basis that is consistent with the manner in which we internally disaggregateinternal disaggregation of financial information to assist the Chief Operating Decision Maker (“CODM”) in making internal operating decisions. We included the earnings of equity affiliates that are closely associated with our reportable segmentsdecisions, which is more fully discussed within Note 14 (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-aloneaccompanying notes to the consolidated 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 performancestatements 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. Forincludes a reconciliation of non-GAAP performance measuresour segment information to their most directly comparable GAAP financial measure, please see “Reconciliationthe corresponding amounts in our consolidated statements of Non-GAAP Measures” above. income.
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.
The following table presents segment net sales by reportable segment and Hemlock and Emerging Growth Businesses (in millions):
Three months ended | $ | % | Nine months ended | $ | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, | change | change | September 30, | change | change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2023 | 2022 | 23 vs. 22 | 23 vs. 22 | 2023 | 2022 | 23 vs. 22 | 23 vs. 22 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Optical Communications | $ | 918 | $ | 1,317 | $ | (399 | ) | (30 | )% | $ | 3,109 | $ | 3,828 | $ | (719 | ) | (19 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 918 | $ | 1,317 | $ | (399 | ) | (30 | )% | $ | 3,109 | $ | 3,828 | $ | (719 | ) | (19 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Optical Communications | $ | 918 | $ | 1,317 | $ | (399 | ) | (30 | )% | $ | 3,109 | $ | 3,828 | $ | (719 | ) | (19 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 972 | 686 | 286 | 42 | % | 2,663 | 2,523 | 140 | 6 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Specialty Materials
| 563 | 519 | 44 | 8 | % | 1,392 | 1,497 | (105 | ) | (7 | )% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 563 | 519 | 44 | 8 | % | 1,392 | 1,497 | (105 | ) | (7 | )% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Specialty Materials | 563 | 519 | 44 | 8 | % | 1,392 | 1,497 | (105 | ) | (7 | )% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 449 | 425 | 24 | 6 | % | 1,337 | 1,190 | 147 | 12 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Life Sciences
| 230 | 312 | (82 | ) | (26 | )% | 717 | 934 | (217 | ) | (23 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net sales of | 3,132 | 3,259 | (127 | ) | (4 | )% | 9,218 | 9,972 | (754 | ) | (8 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hemlock and | 327 | 407 | (80 | ) | (20 | )% | 1,090 | 1,200 | (110 | ) | (9 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net sales of | $ | 3,459 | $ | 3,666 | $ | (207 | ) | (6 | )% | $ | 10,308 | $ | 11,172 | $ | (864 | ) | (8 | )% |
CAPITAL RESOURCES AND LIQUIDITY
Financing and Capital Resources
The following items impacted Corning’s financing and capital structure in the periods ended September 30, 2017 and 2016:
Debt Issuances
In the third quarter of 2017, Corning issued three Japanese yen-denominated debt securities (the “Notes”), as follows:
Refer to Note
|
Optical Communications
The decrease in segment net sales for both the three and nine month periods was primarily driven by a decline in volume due to lower order rates from carriers as they continue to draw down inventory.
Display Technologies
The increase in segment net sales during the three and nine month periods is due to higher volumes, primarily attributable to the recovery of panel maker utilization to normal ranges.
Specialty Materials
The increase in segment net sales for the three month period was primarily driven by higher volumes due to customer product launches and continued demand for semiconductor materials. The decrease in segment net sales for the nine month period was primarily driven by lower demand in the smartphone, tablet and notebook markets, partially offset by continued demand for semiconductor materials.
Environmental Technologies
The increase in segment net sales for both the three and nine month periods was primarily driven by increased demand of automotive products, including gasoline particulate filter adoption in China, partially offset by softness in heavy-duty markets in North America.
Life Sciences
The decrease in segment net sales for both the three and nine month periods was impacted by the lower demand for COVID-related products in China and the impact of customers drawing down inventory.
Hemlock and Emerging Growth Businesses
The decrease for both the three and nine month periods was primarily driven by a decrease in our Hemlock business due to declines in solar-grade polysilicon prices and lower sales in our Pharmaceutical Technologies business as the last of the volume commitments for COVID-related products were completed in the second quarter.
The following table presents segment net income by reportable segment and Hemlock and Emerging Growth Businesses (in millions):
Three months ended | $ | % | Nine months ended | $ | % | |||||||||||||||||||||||||||
September 30, | change | change | September 30, | change | change | |||||||||||||||||||||||||||
2023 | 2022 | 23 vs. 22 | 23 vs. 22 | 2023 | 2022 | 23 vs. 22 | 23 vs. 22 | |||||||||||||||||||||||||
Optical Communications | $ | 91 | $ | 183 | $ | (92 | ) | (50 | )% | $ | 390 | $ | 531 | $ | (141 | ) | (27 | )% | ||||||||||||||
Display Technologies | 242 | 134 | 108 | 81 | % | 610 | 598 | 12 | 2 | % | ||||||||||||||||||||||
Specialty Materials | 72 | 96 | (24 | ) | (25 | )% | 144 | 262 | (118 | ) | (45 | )% | ||||||||||||||||||||
Environmental Technologies | 99 | 87 | 12 | 14 | % | 288 | 223 | 65 | 29 | % | ||||||||||||||||||||||
Life Sciences | 13 | 43 | (30 | ) | (70 | )% | 33 | 122 | (89 | ) | (73 | )% | ||||||||||||||||||||
Net income of reportable segments | 517 | 543 | (26 | ) | (5 | )% | 1,465 | 1,736 | (271 | ) | (16 | )% | ||||||||||||||||||||
Hemlock and Emerging Growth Businesses | (8 | ) | 18 | (26 | ) | * | 34 | 35 | (1 | ) | (3 | )% | ||||||||||||||||||||
Net income of reportable segments and Hemlock and Emerging Growth Businesses (1) | $ | 509 | $ | 561 | $ | (52 | ) | (9 | )% | $ | 1,499 | $ | 1,771 | $ | (272 | ) | (15 | )% |
* Not meaningful
(1) | Refer to Note 14 (Reportable Segments) in the accompanying notes to the consolidated financial statements for the reconciliation to consolidated net income. |
Optical Communications
The decrease in segment net income for both the three and nine month periods was primarily driven by a decline in sales volume, as outlined above, partially offset by improvements from pricing and productivity actions.
Display Technologies
The increase in segment net income for the three and nine month periods was primarily driven by the increase in sales, as outlined above.
Specialty Materials
The decrease in segment net income for the three month period was primarily driven by higher production costs, partially offset by the increase in sales volume, as outlined above. The decrease in segment net income for the nine month period was primarily driven by the decline in sales volume, as outlined above, and impacted by continued development costs for new product launches.
Environmental Technologies
The increase in segment net income for both the three and nine month periods was primarily driven by the increase in sales, as outlined above, and as a result of productivity-improvement actions.
Life Sciences
The decrease in segment net income for both the three and nine month periods was primarily driven by lower sales volume, as outlined above.
Hemlock and Emerging Growth Businesses
The decrease for the three month period was primarily driven by our Hemlock business due to lower sales, as outlined above.
CORE PERFORMANCE MEASURES
In managing the Company and assessing our financial performance, we adjust certain measures provided by our consolidated financial statements to exclude specific items to arrive at our core performance measures. These items include the impact of translating the Japanese yen-denominated debt, the impact of the translated earnings contracts, acquisition-related costs, certain discrete tax items and other tax-related adjustments, restructuring, impairment and other charges and credits, certain litigation, regulatory and other legal matters, pension mark-to-market adjustments and other items which do not reflect the ongoing operating results of the Company.
In addition, because a significant portion of our revenues and expenses are denominated in currencies other than the U.S. dollar, management believes it is important to understand the impact on sales and net income of translating these currencies into U.S. dollars. Therefore, management utilizes constant-currency reporting for the Display Technologies, Specialty Materials, Environmental Technologies and Life Sciences segments to exclude the impact from the Japanese yen, South Korean won, Chinese yuan, new Taiwan dollar and euro, as applicable to the segment. The most significant constant-currency adjustment relates to the Japanese yen exposure within the Display Technologies segment. We establish constant-currency rates based on internally derived management estimates, which are closely aligned with the currencies we have hedged. For details of the rates used, please see the footnotes to the “Reconciliation of Non-GAAP Measures” section.
We believe that the use of constant-currency reporting allows management to understand our results without the volatility of currency fluctuation, analyze underlying trends in the businesses and establish operational goals and forecasts. Further, we believe it reflects the underlying economics of the translated earnings contracts used to mitigate the impact of changes in currency exchange rates on our earnings and cash flows.
Core performance measures are not prepared in accordance with GAAP, but management believes that reporting core performance measures provides investors with greater transparency to the information used by our management team to make financial and operational decisions. We believe investors should consider these non-GAAP measures in evaluating results as they are more indicative of our core operating performance and how management evaluates operational results and trends. These measures are not, and should not be viewed as a substitute for, GAAP reporting measures. With respect to the outlook for future periods, it is not possible to provide reconciliations for these non-GAAP measures because management does not forecast the movement of foreign currencies 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 management’s control. As a result, management is unable to provide outlook information on a GAAP basis.
For a reconciliation of non-GAAP performance measures to their most directly comparable GAAP financial measure, please see “Reconciliation of Non-GAAP Measures.”
Results of Operations – Core Performance Measures
The following table presents selected highlights from our operations, excluding certain items (in millions):
Three months ended | % | Nine months ended | % | |||||||||||||||||||||
September 30, | change | September 30, | change | |||||||||||||||||||||
2023 | 2022 | 23 vs. 22 | 2023 | 2022 | 23 vs. 22 | |||||||||||||||||||
Core net sales | $ | 3,459 | $ | 3,666 | (6 | )% | $ | 10,308 | $ | 11,172 | (8 | )% | ||||||||||||
Core net income | $ | 386 | $ | 438 | (12 | )% | $ | 1,124 | $ | 1,392 | (19 | )% |
Core Net Sales
Core net sales are consistent with net sales by reportable segment and Hemlock and Emerging Growth Businesses. Segment and Hemlock and Emerging Growth Businesses net sales and variances are discussed in detail in the “Segment Analysis” section of our MD&A.
Core Net Income
For the three months ended September 30, 2023, we generated core net income of $386 million, or $0.45 per core diluted share, compared to core net income generated for the three months ended September 30, 2022 of $438 million, or $0.51 per core diluted share. The decrease of $52 million, or $0.06 per core diluted share, was primarily due to lower segment net income for Optical Communications of $92 million, Life Sciences of $30 million and Specialty Materials of $24 million. This was partially offset by higher segment net income for Display Technologies of $108 million. Segment and Hemlock and Emerging Growth Businesses net income and variances are discussed in detail in the “Segment Analysis” section of our MD&A.
For the nine months ended September 30, 2023, we generated core net income of $1,124 million, or $1.31 per core diluted share, compared to core net income generated for the nine months ended September 30, 2022 of $1,392 million, or $1.62 per core diluted share. The decrease of $268 million, or $0.31 per core diluted share, was primarily due to lower segment net income for Optical Communications of $141 million, Specialty Materials of $118 million and Life Sciences of $89 million. This was partially offset by higher segment net income for Environmental Technologies of $65 million. Segment and Hemlock and Emerging Growth Businesses net income and variances are discussed in detail in the “Segment Analysis” section of our MD&A.
Core Earnings per Common Share
Core earnings per share decreased for the three and nine months ended September 30, 2023 to $0.45 and $1.31 per share, respectively, primarily as a result of the changes in core net income, outlined above.
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 | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Core net income | $ | 386 | $ | 438 | $ | 1,124 | $ | 1,392 | ||||||||
Weighted-average common shares outstanding - basic | 850 | 843 | 848 | 843 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Stock options and other awards | 9 | 12 | 10 | 14 | ||||||||||||
Weighted-average common shares outstanding - diluted | 859 | 855 | 858 | 857 | ||||||||||||
Core basic earnings per common share | $ | 0.45 | $ | 0.52 | $ | 1.33 | $ | 1.65 | ||||||||
Core diluted earnings per common share | $ | 0.45 | $ | 0.51 | $ | 1.31 | $ | 1.62 |
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 consolidated statements of income or statements 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 consolidated statements of income or statements of cash flows.
Core net sales and core net income and the related per share numbers are non-GAAP financial measures utilized by 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 our operations.
See “Items Excluded from GAAP Measures” for the descriptions of the footnoted reconciling items.
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 September 30, 2023 | ||||||||||||||||||||
Net income | ||||||||||||||||||||
attributable | ||||||||||||||||||||
Net | Income before | to Corning | Effective tax | Per | ||||||||||||||||
sales | income taxes | Incorporated | rate (a)(b) | share | ||||||||||||||||
As reported – GAAP | $ | 3,173 | $ | 217 | $ | 164 | 16.1 | % | $ | 0.19 | ||||||||||
Constant-currency adjustment (1) | 286 | 212 | 164 | 0.19 | ||||||||||||||||
Translation gain on Japanese yen-denominated debt (2) | (35 | ) | (29 | ) | (0.03 | ) | ||||||||||||||
Translated earnings contract gain (3) | (20 | ) | (16 | ) | (0.02 | ) | ||||||||||||||
Acquisition-related costs (4) | 33 | 25 | 0.03 | |||||||||||||||||
Discrete tax items and other tax-related adjustments (5) | (3 | ) | (0.00 | ) | ||||||||||||||||
Restructuring, impairment and other charges and credits (6) | 72 | 58 | 0.07 | |||||||||||||||||
Litigation, regulatory and other legal matters (7) | 32 | 25 | 0.03 | |||||||||||||||||
Pension mark-to-market adjustment (8) | 7 | 6 | 0.01 | |||||||||||||||||
Gain on investments (9) | (8 | ) | (8 | ) | (0.01 | ) | ||||||||||||||
Core performance measures | $ | 3,459 | $ | 510 | $ | 386 | 20.5 | % | $ | 0.45 |
(a) | Based upon statutory tax rates in the specific jurisdiction for each event. |
(b) | The calculation of the effective tax rate (“ETR”) excludes net income attributable to non-controlling interests (“NCI”). |
Three months ended September 30, 2022 | ||||||||||||||||||||
Net income | ||||||||||||||||||||
attributable | ||||||||||||||||||||
Net | Income before | to Corning | Effective tax | Per | ||||||||||||||||
sales | income taxes | Incorporated | rate (a)(b) | share | ||||||||||||||||
As reported - GAAP | $ | 3,488 | $ | 260 | $ | 208 | 13.1 | % | $ | 0.24 | ||||||||||
Constant-currency adjustment (1) | 178 | 136 | 79 | 0.09 | ||||||||||||||||
Translation gain on Japanese yen-denominated debt (2) | (84 | ) | (64 | ) | (0.07 | ) | ||||||||||||||
Translated earnings contract loss (3) | 68 | 52 | 0.06 | |||||||||||||||||
Acquisition-related costs (4) | 33 | 25 | 0.03 | |||||||||||||||||
Discrete tax items and other tax-related adjustments (5) | 22 | 0.03 | ||||||||||||||||||
Restructuring, impairment and other charges and credits (6) | 138 | 106 | 0.12 | |||||||||||||||||
Litigation, regulatory and other legal matters (7) | 23 | 17 | 0.02 | |||||||||||||||||
Pension mark-to-market adjustment (8) | (9 | ) | (7 | ) | (0.01 | ) | ||||||||||||||
Core performance measures | $ | 3,666 | $ | 565 | $ | 438 | 19.3 | % | $ | 0.51 |
(a) | Based upon statutory tax rates in the specific jurisdiction for each event. |
(b) | The calculation of the ETR excludes net income attributable to NCI. |
See “Items Excluded from GAAP Measures” for the descriptions of the footnoted reconciling items.
Nine months ended September 30, 2023 | ||||||||||||||||||||
Net income | ||||||||||||||||||||
attributable | ||||||||||||||||||||
Net | Income before | to Corning | Effective tax | Per | ||||||||||||||||
sales | income taxes | Incorporated | rate (a)(b) | share | ||||||||||||||||
As reported – GAAP | $ | 9,594 | $ | 854 | $ | 621 | 20.8 | % | $ | 0.72 | ||||||||||
Constant-currency adjustment (1) | 714 | 535 | 403 | 0.47 | ||||||||||||||||
Translation gain on Japanese yen-denominated debt (2) | (162 | ) | (131 | ) | (0.15 | ) | ||||||||||||||
Translated earnings contract gain (3) | (128 | ) | (103 | ) | (0.12 | ) | ||||||||||||||
Acquisition-related costs (4) | 99 | 70 | 0.08 | |||||||||||||||||
Discrete tax items and other tax-related adjustments (5) | 26 | 0.03 | ||||||||||||||||||
Restructuring, impairment and other charges and credits (6) | 270 | 216 | 0.25 | |||||||||||||||||
Litigation, regulatory and other legal matters (7) | 44 | 35 | 0.04 | |||||||||||||||||
Pension mark-to-market adjustment (8) | 1 | 1 | 0.00 | |||||||||||||||||
Loss on investments (9) | 1 | 1 | 0.00 | |||||||||||||||||
Gain on sale of assets (10) | (20 | ) | (15 | ) | (0.02 | ) | ||||||||||||||
Core performance measures | $ | 10,308 | $ | 1,494 | $ | 1,124 | 20.5 | % | $ | 1.31 |
(a) | Based upon statutory tax rates in the specific jurisdiction for each event. |
(b) | The calculation of the ETR excludes net income attributable to NCI. |
Nine months ended September 30, 2022 | ||||||||||||||||||||
Net income | ||||||||||||||||||||
attributable | ||||||||||||||||||||
Net | Income before | to Corning | Effective tax | Per | ||||||||||||||||
sales | income taxes | Incorporated | rate (a)(b) | share | ||||||||||||||||
As reported - GAAP | $ | 10,783 | $ | 1,793 | $ | 1,352 | 21.2 | % | $ | 1.58 | ||||||||||
Constant-currency adjustment (1) | 389 | 319 | 221 | 0.26 | ||||||||||||||||
Translation gain on Japanese yen-denominated debt (2) | (321 | ) | (246 | ) | (0.29 | ) | ||||||||||||||
Translated earnings contract gain (3) | (257 | ) | (197 | ) | (0.23 | ) | ||||||||||||||
Acquisition-related costs (4) | 107 | 84 | 0.10 | |||||||||||||||||
Discrete tax items and other tax-related adjustments (5) | 38 | 0.04 | ||||||||||||||||||
Restructuring, impairment and other charges and credits (6) | 217 | 166 | 0.19 | |||||||||||||||||
Litigation, regulatory and other legal matters (7) | 65 | 49 | 0.06 | |||||||||||||||||
Pension mark-to-market adjustment (8) | (19 | ) | (15 | ) | (0.02 | ) | ||||||||||||||
Loss on investments (9) | 8 | 6 | 0.01 | |||||||||||||||||
Contingent consideration (11) | (32 | ) | (25 | ) | (0.03 | ) | ||||||||||||||
Gain on sale of business (12) | (53 | ) | (41 | ) | (0.05 | ) | ||||||||||||||
Core performance measures | $ | 11,172 | $ | 1,827 | $ | 1,392 | 20.5 | % | $ | 1.62 |
(a) | Based upon statutory tax rates in the specific jurisdiction for each event. |
(b) | The calculation of the ETR excludes net income attributable to NCI. |
See “Items Excluded from GAAP Measures” for the descriptions of the footnoted reconciling items.
Items Excluded from GAAP Measures
Items which we exclude from GAAP measures to arrive at core performance measures were as follows:
(1) | Constant-currency adjustment: As a significant portion of revenues and
Constant currency rates used are as follows: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency | Japanese yen | Korean won | Chinese yuan | New Taiwan dollar | Euro | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Rate | ¥107 | ₩1,175 | ¥6.7 | NT$31 | €.81 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(2) | Translation of Japanese yen-denominated debt: Amount reflects the | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(3) | Translated earnings contract: Amount reflects the impact of
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(4) | Acquisition-related costs: Amount reflects intangible amortization, inventory valuation adjustments and external acquisition-related deal costs, as well as other transaction related costs. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(5) | Discrete tax items and other tax-related adjustments: Amount reflects certain discrete period tax items such as changes in tax law, the | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(6) | Restructuring, impairment and
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(7) | Litigation, regulatory and other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(8) | Pension mark-to-market adjustment: Amount primarily reflects defined benefit pension mark-to-market gains and losses, which arise from changes in actuarial assumptions and the | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(9) | (Gain) loss on investments: Amount primarily reflects the gain or loss recognized on investment due to | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(10) | Gain on sale of assets: Amount represents the | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(11) | Contingent consideration: Amount reflects the fair value mark-to-market cost adjustment of | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(12) | Gain on sale of business: Amount represents the gain recognized for the sale of a business. |
LIQUIDITY AND CAPITAL RESOURCES
Our financial condition and liquidity are strong. We are not aware of any known trends, 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 of such resources.
Our major source of funding for 2023 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 to fund operations and meet our obligations for the foreseeable future. Such obligations include requirements for acquisitions, capital expenditures, debt repayments, dividend payments and share repurchase programs. We will continue to generate cash from operations and maintain access to our revolving credit facilities and commercial paper programs as discussed in more detail below.
Key Balance Sheet Data
We fund our working capital with cash from operations and short-term borrowings, including commercial paper, when necessary. In addition, we receive upfront cash from customers relating to long-term supply agreements, as well as cash incentives from government entities generally for capital expansion and related expenses.
The following table presents balance sheet and working capital measures (in millions):
September 30, | December 31, | |||||||
2023 | 2022 | |||||||
Working capital | $ | 3,013 | $ | 2,278 | ||||
Current ratio | 1.7:1 | 1.4:1 | ||||||
Trade accounts receivable, net of doubtful accounts | $ | 1,725 | $ | 1,721 | ||||
Days sales outstanding | 49 | 45 | ||||||
Inventories | $ | 2,655 | $ | 2,904 | ||||
Inventory turns | 3.2 | 3.4 | ||||||
Days payable outstanding (1) | 48 | 52 | ||||||
Long-term debt | $ | 7,210 | $ | 6,687 | ||||
Total debt | $ | 7,507 | $ | 6,911 | ||||
Total debt to total capital | 39 | % | 36 | % |
(1) | Includes trade payables only. |
We perform 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 to identify potential customer credit issues. We are not aware of any customer credit issues that could have a material impact on our liquidity.
We participate in accounts receivable management programs, including factoring arrangements to sell certain accounts receivable to third-party financial institutions or accelerate collections through our customer’s supply chain financing arrangements. Sales of accounts receivable are reflected as a reduction of accounts receivable in the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. By utilizing these types of programs, we have accelerated the collection of $435 million, $423 million, and $350 million of accounts receivable during the three months ended March 31, 2023, June 30, 2023 and September 30, 2023, respectively. We believe these accounts receivables would have been collected during the normal course of business in the following quarter.
Cash Flows
The following table presents a summary of cash flow data (in millions):
Nine months ended | ||||||||
September 30, | ||||||||
2023 | 2022 | |||||||
Net cash provided by operating activities | $ | 1,292 | $ | 1,998 | ||||
Net cash used in investing activities | $ | (770 | ) | $ | (969 | ) | ||
Net cash used in financing activities | $ | (520 | ) | $ | (1,430 | ) |
Net cash provided by operating activities decreased by $706 million in the nine months ended September 30, 2023, when compared to the same period in the prior year primarily driven by a decrease in net income of $737 million.
Net cash used in investing activities for the nine months ended September 30, 2023 improved by $199 million when compared to the same period last year, primarily driven by lower capital expenditures of $90 million and higher realized gains on translated earnings contracts of $61 million.
Net cash used in financing activities for the nine months ended September 30, 2023 improved by $910 million when compared to the same period last year, primarily driven by the $918 million proceeds received from the issuance of euro-denominated notes in May 2023.
Sources of Liquidity
As of September 30, 2023, our cash and cash equivalents and available credit capacity included (in millions):
September 30, | ||||
2023 | ||||
Cash and cash equivalents | $ | 1,639 | ||
Available credit capacity: | ||||
U.S. dollar revolving credit facility | $ | 1,500 | ||
Japanese yen liquidity facility | $ | 167 | ||
Chinese yuan facilities | $ | 404 |
Cash and Cash Equivalents
As of September 30, 2023, we had $1.6 billion of cash and cash equivalents. Our cash and cash equivalents are held in various locations throughout the world and are generally unrestricted. We utilize a variety of strategies to ensure that our worldwide cash is available in the locations in which it is needed. As of September 30, 2023, approximately 54% of the consolidated cash and cash equivalents were held outside the U.S.
If we distribute our foreign cash balances to the U.S. or to other foreign subsidiaries, we could be required to accrue and pay withholding taxes. We do not foresee a need to repatriate any earnings for which we asserted permanent reinvestment. However, to help fund cash needs of the U.S. or other international subsidiaries as they arise, we repatriate available cash from certain foreign subsidiaries whose earnings are not permanently reinvested.
Debt Facilities and Other Sources of Liquidity
We have a commercial paper program pursuant to which we may issue short-term, unsecured commercial paper notes up to a maximum aggregate principal amount outstanding at any one time of $1.5 billion. Under this program, we may issue paper from time to time and will use the proceeds for general corporate purposes. As of September 30, 2023, we did not have outstanding commercial paper.
Our $1.5 billion Revolving Credit Agreement is available to support obligations under the commercial paper program and for general corporate purposes, if needed. In addition, we have a 25 billion Japanese yen liquidity facility, equivalent to approximately $167 million. As of September 30, 2023, there were no amounts outstanding under these facilities.
Our Revolving Credit Agreement includes affirmative and negative covenants with which we must comply, including a leverage (debt to capital ratio) financial covenant. The required leverage ratio is a maximum of 60%. As of September 30, 2023, our leverage using this measure was approximately 39%. As of September 30, 2023, we were in compliance.
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 exceeding a specified amount on one debt obligation, also would be considered a default under the terms of another debt instrument. As of September 30, 2023, we were in compliance with all such provisions.
We have access to certain unsecured variable rate loan facilities, with an aggregate capacity of 5,045 million Chinese yuan, equivalent to approximately $691 million, whose proceeds are used for capital investment and general corporate purposes. As of September 30, 2023, borrowings totaled $287 million.
As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the SEC on December 4, 2020. Under this shelf registration we may offer, from time to time, debt securities, common stock, preferred stock, depositary shares and warrants. We plan to file a new shelf registration statement in the fourth quarter of 2023, prior to the expiration of the shelf registration statement currently in effect.
On May 15, 2023, the Company issued €300 million 3.875% Notes due 2026 (“2026 Notes”) and €550 million 4.125% Notes due 2031 (“2031 Notes”). The proceeds from the 2026 Notes and 2031 Notes were received in euros and converted to U.S. dollars on the date of issuance. The net proceeds received were approximately $918 million and will be used for general corporate purposes. As of September 30, 2023, the U.S. dollar equivalent carrying value of the euro-denominated long-term debt was $892 million.
Uses of Cash
Fixed Rate Cumulative Convertible Preferred Stock, Series A
We had 2,300 outstanding shares of Fixed Rate Cumulative Convertible Preferred Stock, Series A (the “Preferred Stock”) as of December 31, 2020. On January 16, 2021, the Preferred Stock became convertible into 115 million common shares. On April 5, 2021, we executed a Share Repurchase Agreement (“SRA”) with Samsung Display Co., Ltd. (“SDC”) and the Preferred Stock was fully converted as of April 8, 2021. Immediately following the conversion, we repurchased and retired 35 million of the common shares held by SDC for an aggregate purchase price of approximately $1.5 billion, of which approximately $507 million was paid in April 2022 and 2021. The remaining payment of approximately $507 million was made in April 2023.
Stock Repurchases
In 2019, the Board authorized the repurchase of up to $5.0 billion of common stock (“2019 Authorization”). As of September 30, 2023, approximately $3.3 billion remains available under our 2019 Authorization, which does not have an expiration date and may be amended or terminated by the Board of Directors at any time without prior notice.
Common Stock Dividends
On October 4, 2023, Corning’s Board of Directors declared a dividend of $0.28 per share of common stock. The dividend will be payable on December 15, 2023.
Capital Expenditures
Capital expenditures were $1.1 billion for the nine months ended September 30, 2023. We expect our 2023 full year capital expenditures to be slightly lower than 2022.
Defined Benefit Pension Plans
Our global pension plans, including our unfunded and non-qualified plans, were 82% funded as of December 31, 2022. Our largest single pension plan is our U.S. qualified plan, which accounted for 77% of our consolidated defined benefit pension plans’ projected benefit obligation, was 93% funded as of December 31, 2022.
The funded status of our pension plans is dependent upon multiple factors including actuarial assumptions, interest rates at year-end, prior investment returns and contributions made to the plans. During 2023, the Company made cash contributions of $25 million to its international pension plans. The Company does not expect to make additional contributions in the fourth quarter of 2023.
Commitments, Contingencies and Guarantees
There were no material changes outside the ordinary course of business in the obligations disclosed in the 2022 Form 10-K under the caption “Commitments, Contingencies and Guarantees.”
Off Balance Sheet Arrangements
There were no material changes outside the ordinary course of business in off balance sheet arrangements as disclosed in the 2022 Form 10-K under the caption “Off Balance Sheet Arrangements.”
ENVIRONMENT
Refer to Item 1. Legal Proceedings or Note 9 (Commitments and Contingencies) in the accompanying notes to the consolidated financial statements for information.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. This requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. The estimates that are considered by management to be the most critical to the understanding of the consolidated financial statements as they require significant judgments that could materially impact our results of operations, financial position and cash flows are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Since the date of the Company’s most recent Annual Report, there were no material changes in the Company’s critical accounting estimates or assumptions.
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 10-Q and 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,” “target,” “estimate,” “forecast” or 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, the Company’s expected capital expenditure 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, there can be no assurance that these forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. The Company undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws.
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:
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