CORNING INC /NY - Quarter Report: 2018 March (Form 10-Q)

UNITED STATES

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 March 31, 2018



OR



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





Commission file number:  1-3247



CORNING INCORPORATED

(Exact name of registrant as specified in its charter)





607-974-9000

(Registrant’s telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.



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).



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.



If an emerging growth company, indicated 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.



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

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



 

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INDEX



 

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CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(Unaudited; in millions, except per share amounts)









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

 

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CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited; in millions)









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

 

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CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited; in millions, except share and per share amounts)







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

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CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in millions)









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

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CORNING INCORPORATED AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.   Significant Accounting Policies



Basis of Presentation



In these notes, the terms “Corning,” “Company,” “we,” “us,” or “our” mean Corning Incorporated and its subsidiary companies.



The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information.  Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been omitted or condensed.  These interim consolidated financial statements should be read in conjunction with Corning’s consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Form 10-K”).



The unaudited consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows for the interim periods presented.  All such adjustments are of a normal recurring nature.  The results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.



On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09 ASC (Topic 606), Revenue from Contracts with Customers, and applied the modified retrospective method of accounting to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605 “Revenue Recognition”.  Because the impact of adopting the standard on Corning’s financial statements was immaterial, we have not made an adjustment to opening retained earnings.



One of Corning’s equity affiliates is currently assessing the potential impact of adopting ASU 2014-09 on its financial statements and will adopt the standard on January 1, 2019.  Preliminary analysis indicates that the impact of adoption will not have a material impact on Corning’s financial statements.



On January 1, 2018, Corning adopted ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which refines the classification of certain aspects of the cash flow statement in regards to debt prepayment, settlement of debt instruments, contingent consideration payments, proceeds from insurance claims and life insurance policies, distribution from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows.  The impact of adopting the standard on Corning’s financial statements was not material.  



On January 1, 2018, we adopted ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The service cost component of net periodic pension and postretirement benefit cost is presented with other current compensation costs in operating income.  The remaining components are included in the line item Other expense, net, in the consolidated statements of (loss) income.  Corning has applied the practical expedient which permits it to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements.  The impact of adopting the standard on Corning’s financial statements was not material.  



Certain prior year amounts have been reclassified to conform to the current-year presentation.  These reclassifications had no impact on our results of operations, financial position, or changes in shareholders’ equity. 



New Accounting Standards



In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes all existing guidance on accounting for leases in ASC Topic 840.  ASU 2016-02 will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income.  This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  ASU 2016-02 is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients.  We are currently assessing the potential impact of adopting this standard on our financial statements and related disclosures.

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One of Corning’s equity affiliates is currently assessing the potential impact of adopting this standard on its financial statements and elected to adopt the standard on January 1, 2020.



In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income, which allows for reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.  ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods.  Early adoption is permitted. We are currently assessing the potential impact of adopting ASU 2018-02 on our financial statements.



2.   Revenue



On January 1, 2018, we adopted ASC Topic 606 “Revenue from Contracts with Customer”, and all related amendments, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.  Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605 “Revenue Recognition”. 



We have determined that the impact of transition to the new standard is immaterial to our revenue recognition model since the vast majority of our recognition is based on point in time transfer of control.  Accordingly, we have not made any adjustment to opening retained earnings.



Product Revenue (Point in Time)



The majority of our revenues are generated by delivery of products to our customers and recognized at a point in time based on our evaluation of when the customer obtains control of the products.  Revenue is recognized when all performance obligations under the terms of a contract with our customer are satisfied, and control of the product has been transferred to the customer.  If customer acceptance clauses are present and it cannot be objectively determined that control has been transferred, revenue is only recorded when customer acceptance is received and all performance obligations have been satisfied.  Sales of goods typically do not include multiple product and/or service elements.



Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales tax, value-added tax, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.  Incidental contract costs that are not material in the context of the delivery of goods and services are recognized as expense.



At the time revenue is recognized, allowances are recorded, with the related reduction to revenue, for estimated product returns, allowances and price discounts based upon historical experience and related terms of customer arrangements.  Where we have offered product warranties, we also establish liabilities for estimated warranty costs based upon historical experience and specific warranty provisions.  Warranty liabilities are adjusted when experience indicates the expected outcome will differ from initial estimates of the liability.  Product warranty liabilities are not material at March 31, 2018 and December 31, 2017.



Other Revenue (Over Time)



Corning’s over time revenues are mainly related to Telecommunications products, and are comprised of design, install, training and software maintenance services.    The performance obligations under these contracts generally require services to be performed over time, resulting in either a straight-line amortization method or an input method using incurred and forecasted expense to predict revenue recognition patterns which follows satisfaction of the performance obligation.  Corning’s other revenue is inconsequential to our results.



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Revenue Disaggregation Table



The following table shows revenues by major product categories, similar to our reportable segment disclosure.  Within each product category, contract terms, conditions and economic factors affecting the nature, amount, timing and uncertainty around revenue recognition and cash flows are substantially similar.  The commercial markets and selling channels are also similar. With the exception of an inconsequential amount of Telecommunications products, our product category revenues are recognized at point in time when control transfers to the customer.  Prior year amounts are presented under the ASC 605 basis of revenue recognition. 









Contract Assets and Liabilities



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



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



Customer Deposits



As of March 31, 2018, Corning has customer deposits of $682 million, of which $276 million was received in the first quarter of 2018.  These represent non-refundable cash deposits for customers to secure rights to an amount of glass produced by Corning under long-term supply agreements.  The duration of these long term supply agreements range up to ten years. As glass is shipped to customers, Corning will recognize revenue and issue credit memoranda to reduce the amount of the customer deposit liability, which are applied against customer receivables resulting from the sale of glass.  In 2018, 2017 and 2016, no credit memoranda were issued.

Practical Expedients and Exemptions



We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.



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

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3.   Commitments, Contingencies and Guarantees



Asbestos Claims



Corning and PPG Industries, Inc. each owned 50% of the capital stock of Pittsburgh Corning Corporation (“PCC”).  PCC filed for Chapter 11 reorganization in 2000 and the Modified Third Amended Plan of Reorganization for PCC (the “Plan”) became effective in April 2016.  At December 31, 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 of $70 million was made in June 2017.  At March 31, 2018, 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 March 31, 2018 and December 31, 2017, the amount of the reserve for these non-PCC asbestos claims was $147 million.



Several of Corning’s insurers have commenced litigation in state courts for a declaration of the rights and obligations of the parties under insurance policies related to Corning’s asbestos claims.  Corning has resolved these issues with a majority of its relevant insurers, and is vigorously contesting these cases with the remaining relevant insurers.  Management is unable to predict the outcome of the litigation with these remaining insurers.



Dow Corning Chapter 11 Related Matters



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



Dow Corning Breast Implant Litigation



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



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

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Dow Corning Bankruptcy Pendency Interest Claims



As a separate matter arising from the bankruptcy proceedings, Dow Corning is defending claims asserted by a number of commercial creditors who claim additional interest at default rates and enforcement costs, during the period from May 1995 through June 2004.  At March 31, 2018 and December 31, 2017, Dow Corning estimated the liability to commercial creditors to be within the range of $77 million to $260 million.  As of May 31, 2016, Dow Corning had recorded a reserve for these claims of $107 million.  In the event Dow Corning’s liability for these claims exceeds such amount, Corning may be required to indemnify Dow Corning for up 50% of the excess liability, subject to certain conditions and limits. 





Other Commitments and Contingencies



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.  In the opinion of management, the likelihood that the ultimate disposition of these matters will have a material adverse effect on Corning’s consolidated financial position, liquidity, or results of operations, is remote.  Other than certain asbestos related claims, there are no other material loss contingencies related to litigation.



Corning has been named by the Environmental Protection Agency (“the Agency”) under the Superfund Act, or by state governments under similar state laws, as a potentially responsible party for 15 active hazardous waste sites.  Under the Superfund Act, all parties who may have contributed any waste to a hazardous waste site, identified by the Agency, are jointly and severally liable for the cost of cleanup unless the Agency agrees otherwise.  It is Corning’s policy to accrue for its estimated liability related to Superfund sites and other environmental liabilities related to property owned by Corning based on expert analysis and continual monitoring by both internal and external consultants.  At March 31, 2018 and December 31, 2017, Corning had accrued approximately $38 million (undiscounted) for the estimated liability for environmental cleanup and related litigation.  Based upon the information developed to date, management believes that the accrued reserve is a reasonable estimate of the Company’s liability and that the risk of an additional loss in an amount materially higher than that accrued is remote.



The ability of certain subsidiaries and affiliated companies to transfer funds is limited by provisions of foreign government regulations, affiliate agreements and certain loan agreements.  At March 31, 2018, the amount of equity subject to such restrictions for consolidated subsidiaries and affiliated companies was not significant.  While this amount is legally restricted, it does not result in operational difficulties since we have generally permitted subsidiaries to retain a majority of equity to support their growth programs.

 

4.   Debt



Based on borrowing rates currently available to us for loans with similar terms and maturities, the fair value of long-term debt was $5.1 billion at March 31, 2018 and December 31, 2017, compared to recorded book values of $4.8 billion at March 31, 2018 and $4.7 billion at December 31, 2017.  The Company measures the fair value of its long-term debt using Level 2 inputs based primarily on current market yields for its existing debt traded in the secondary market.



Corning did not have outstanding commercial paper at March 31, 2018 and December 31, 2017.



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5.   Income Taxes



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





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





For the three months ended March 31, 2017, the effective income tax benefit differed from the U.S. statutory rate of 35% primarily due to the following benefits:





The Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted on December 22, 2017.  The 2017 Tax Act reduces the U.S. federal corporate income tax rate from 35% to 21%, and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.  We are applying the guidance in SAB 118 when accounting for the enactment-date effects of the Act.  At March 31, 2018, we have not completed our accounting for all of the tax effects of the 2017 Tax Act.  We have made a reasonable estimate of certain effects of the 2017 Tax Act.  However, in other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment.  In all cases, we will continue to make and refine our calculations as additional analysis is completed.  Our estimates may also be affected as we gain a more thorough understanding of the tax law.  These changes could be material to income tax expense.



At year end December 31, 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%.  We recorded a provisional amount of $347 million at that time.  At December 31, 2017, we recorded a one-time toll charge based on our unrepatriated earnings of certain foreign subsidiaries that were previously deferred.  This charge resulted in a provisional tax expense amount of $1.1 billion.  We will continue to analyze and refine our calculations related to the measurement of these balances.



As of March 31, 2018, Corning has not made sufficient progress on estimating the impact of tax reform on its assertion regarding its indefinitely reinvested foreign earnings; therefore, the Company will continue to follow its historic position while it continues to analyze this issue.  While Corning is not changing its assertion at this time, the Company distributed approximately $2 billion in January 2018 from two of its foreign subsidiaries to the U.S. parent of those subsidiaries.  There are no incremental taxes beyond the toll charge due with respect to this distribution of cash.



Under its historic policy, Corning will continue to indefinitely reinvest substantially all of its foreign earnings, with the exception of an immaterial amount of current earnings that have very low or no tax cost associated with their repatriation.  Our current analysis indicates that we have sufficient U.S. liquidity, including borrowing capacity, to fund foreseeable U.S. cash needs without requiring the repatriation of foreign cash.



Under new guidance, a company can make a policy election to account for tax on global intangible low-taxed income (“GILTI”) as a period cost only or to also recognize deferred tax assets and liabilities when basis differences exist that are expected to affect the amount of GILTI inclusion upon reversal.  Corning’s accounting for the impact of the GILTI provisions of the 2017 Tax Act is incomplete and, as a result, it has not yet elected a policy to account for the GILTI provisions.

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We will continue to monitor future guidance and to assess the impacts of the 2017 Tax Act.

Corning has reached a preliminary agreement with the IRS Exam team to resolve the 2013 and 2014 audits.  This agreement resulted in $172 million of additional tax expense in the first quarter of 2018, of which $12 million relates to interest expense, net of tax benefit.  Corning will use tax attributes to cover most of the tax expense. 



6.   (Loss) Earnings per Common Share



The following table sets forth the computation of basic and diluted (loss) earnings per common share (in millions, except per share amounts):







 

7.   Inventories, Net of Inventory Reserves



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





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8.  Goodwill and Other Intangible Assets



The carrying amount of goodwill by segment for the periods ended March 31, 2018 and December 31, 2017 is as follows (in millions):



Corning’s gross goodwill balances for the periods ended March 31, 2018 and December 31, 2017 each were $8.2 billion, respectively. Accumulated impairment losses were $6.5 billion for the periods ended March 31, 2018 and December 31, 2017, and were generated primarily through goodwill impairments related to the Optical Communications segment.



Other intangible assets are as follows (in millions):





Corning’s amortized intangible assets are primarily related to the Optical Communications and Life Sciences segments.  The net carrying amount of intangible assets decreased in the first quarter of 2018, primarily due to amortization of $19 million, offset by foreign currency translation adjustments of $1 million.



Amortization expense related to these intangible assets is estimated to be $72 million annually for 2019, $71 million annually from 2020 to 2022, and $70 million annually for 2023.

 

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):



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



On January 1, 2018, we adopted Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The service cost component of net periodic pension and postretirement benefit cost is presented with other current compensation costs in operating income.  The remaining components are included in the line item Other expense, net, in the consolidated statements of (loss) income. 

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Corning has applied the practical expedient which permits it to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements.  See Note 1 (Significant Accounting Policies) for additional information.



10.  Other Liabilities



Other liabilities follow (in millions):





 

11.  Hedging Activities



Undesignated Hedges

The table below includes a total gross notional value for translated earnings contracts of $14.3 billion at March 31, 2018 and December 31, 2017.  The translated earnings contracts include average rate forwards of $13.1 billion and $13.0 billion and zero-cost collars of $1.2 billion and $1.3 billion at March 31, 2018 and December 31, 2017, respectively.  The majority of the average rate forward contracts hedge a significant portion of the Company’s exposure to the Japanese yen with maturities spanning the years 2017-2022 and with gross notional values of $11.0 billion and $11.7 billion at March 31, 2018 and December 31, 2017, respectively.  The average rate forward contracts also partially hedge the impacts of the South Korean won, New Taiwan dollar, Chinese yuan, Euro and British pound translation on the Company’s projected net income.  With respect to the zero-cost collars, the gross notional amount includes the value of both the put and call options.  However, due to the nature of the zero-cost collars, only the put or the call option can be exercised at maturity. 



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The following tables summarize the notional amounts and respective fair values of Corning’s derivative financial instruments on a gross basis for March 31, 2018 and December 31, 2017 (in millions):





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The following table summarizes the effect of derivative financial instruments on Corning’s consolidated financial statements for the three months ended March 31, 2018 and 2017 (in millions):







 



The following table summarizes the effect on the consolidated financial statements relating to Corning’s derivative financial instruments (in millions):



 

12.  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. 



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The following tables provide fair value measurement information for the Company’s major categories of financial assets and liabilities measured on a recurring basis (in millions):













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 in an option pricing model.  The fair value of the potential receipt of the contingent consideration was calculated to be $300 million as of December 31, 2017.  As of March 31, 2018, the value of this contingent consideration is based on a contractual value and no longer calculated using unobservable (Level 3) inputs in an option pricing model.  The contractual value of this contingent consideration as of March 31, 2018 was $300 million.



There were no significant financial assets and liabilities measured on a nonrecurring basis as of March 31, 2018 and December 31, 2017.

 

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13.  Shareholders’ Equity



Fixed Rate Cumulative Convertible Preferred Stock, Series A



Corning has 2,300 outstanding shares of Fixed Rate Cumulative Convertible Preferred Stock, Series A.  The Preferred Stock is convertible at the option of the holder and the Company upon certain events, at a conversion rate of 50,000 shares of Corning’s common stock per one share of Preferred Stock, subject to certain anti-dilution provisions.  As of March 31, 2018, the Preferred Stock has not been converted, and none of the anti-dilution provisions have been triggered. 



Share Repurchases



2017 Share Repurchases

In December 2016, Corning’s Board of Directors approved a $4 billion share repurchase program with no expiration (the “2016 Repurchase Program”).  In the year ended December  31, 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.



In addition to the 2017 ASR agreements, during the year ended December  31, 2017, the Company repurchased 50.1 million shares of common stock on the open market for approximately $1.4 billion, resulting in a total of 84.4 million shares repurchased for approximately $2.4 billion during 2017.



2018 Share Repurchases

In the three months ended March 31, 2018, the Company repurchased 27.1 million shares of common stock on the open market for approximately $814.3 million as part of its 2016 Repurchase Program. 



On April 26, 2018, Corning’s Board of Directors approved a $2 billion share repurchase program with no expiration (the “2018 Repurchase Program”).  The 2018 Repurchase Program will commence when the authorization under the 2016 Repurchase Program is exhausted.



Accumulated Other Comprehensive Loss 



In the three months ended March 31, 2018 and 2017, the change in accumulated other comprehensive loss  was primarily related to the foreign currency translation adjustment.



A summary of changes in the foreign currency translation adjustment component of accumulated other comprehensive loss is as follows (in millions) (1):













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14.  Reportable Segments



Our reportable segments are as follows:





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. 

Effective beginning in the first quarter of 2018, the Company has changed its measurement of segment sales and segment net income, and has recast prior periods presented based on the new methodology.  Included in this new measurement is a change in our segment tax rate to 21% to better reflect our new corporate tax rate under U.S. tax reform.  Additionally, the impact of changes in the Japanese yen, Korean won, Chinese yuan and New Taiwan dollar will be excluded from segment sales and segment net income for the Display Technologies and Specialty Materials segments, and certain income and expenses that were previously allocated to our segments are now included in the unallocated amounts in the reconciliation of reportable segment net income to consolidated net income.  These include items that are not used by our chief operating decision maker (“CODM”) in evaluating the results of or in allocating resources to our segments and include the following items:  the impact of our translated earnings contracts; acquisition-related costs; discrete tax items and other tax-related adjustments; litigation, regulatory and other legal matters; restructuring, impairment and other charges; adjustments relating to acquisitions; and other non-recurring non-operational items.  Although we exclude these amounts from segment results, they are included in reported consolidated results.



We prepared the financial results for our reportable segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist the CODM in making internal operating decisions.  We included the earnings of equity affiliates that are closely associated with our reportable segments in the respective segment’s net income.  We have allocated certain common expenses among reportable segments differently than we would for stand-alone financial information.  Segment net income may not be consistent with measures used by other companies. 

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Reportable Segments (in millions)

















A reconciliation of reportable segment and All Other net sales to consolidated net sales follows (in millions):





(1)This amount primarily represents the impact of foreign currency adjustments in the Display Technologies segment.

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A reconciliation of reportable segment net income to consolidated net (loss) income follows (in millions):





 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



ORGANIZATION OF INFORMATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides a historical and prospective narrative on the Company’s financial condition and results of operations.  This interim MD&A should be read in conjunction with the MD&A in our 2017 Form 10-K.  The various sections of this MD&A contain a number of forward-looking statements that involve a number of risks and uncertainties.  Words such as “anticipates,” “expects,” “intends,” “plans,” “goals,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “should,” and variations of such words and similar expressions are intended to identify such forward-looking statements.  In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements.  Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in “Risk Factors” in Part I, Item 1A of our 2017 Form 10-K, and as may be updated in our Forms 10-Q.  Our actual results may differ materially, and these forward-looking statements do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of March 31, 2018.



Our MD&A includes the following sections:





OVERVIEW



Strategy and Capital Allocation Framework 



In October 2015, Corning announced a strategy and capital allocation framework (the “Framework”) that reflects the Company’s financial and operational strengths, as well as its ongoing commitment to increasing shareholder value.  The Framework outlines our leadership priorities and articulates the opportunities we see across our businesses.  We designed the Framework to create significant value for shareholders by focusing our portfolio and leveraging our financial strength.  Under our Framework, we target generating $26 billion to $30 billion of cash through 2019, returning more than $12.5 billion to shareholders and investing $10 billion to sustain our leadership positions and deliver growth.



Our probability of success increases as we invest in our world-class capabilities.  Corning is concentrating approximately 80% of its research, development and engineering investment and capital spending on a cohesive set of three core technologies, four manufacturing and engineering platforms, and five market-access platforms.  This strategy allows us to quickly apply our talents and repurpose our assets as needed.



Summary of results for the three months ended March 31, 2018



Net sales in the three months ended March 31, 2018 were $2,500 million, compared to $2,375 million in the same period in 2017.  The increase was driven by higher sales in the Optical Communications, Environmental Technologies and Life Sciences segments, up $68 million, $47 million and $22 million, respectively.    



In the first quarter of 2018, we generated a net loss of $589 million, or $(0.72) per share, compared to net income of $86 million, or $0.07 per share, for the same period in 2017.  The decrease in net income of $675 million was primarily driven by the following items (amounts presented after-tax):



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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 loss in the three months ended March 31, 2018 when compared to the same period in 2017.



2018 Corporate Outlook



We believe 2018 will be another year of strong growth and investment, consistent with our Strategy and Capital Allocation Framework, and anticipate that segment net sales will grow to approximately $11 billion.  In our Display Technologies segment, we expect pricing to continue to improve, with year-over-year declines reaching mid-single digits, an important milestone toward our goal of stabilizing returns.  We anticipate Corning’s LCD glass volume will grow faster than the expected LCD glass market growth of mid-single digits, driven by the ramp of our Gen 10.5 facility in China.  In the Optical Communications segment, we expect sales to increase by about 10%, excluding any contribution from the pending acquisition of 3M’s Communications Market Division, driven by strong demand from carrier and enterprise network customers, supported by our planned capacity additions.  We expect growth in the Specialty Materials segment, the rate of which will depend on new model launches and the adoption of our innovations. We expect sales growth of approximately 10% in our Environmental Technologies segment, driven by continued strength in automotive product sales, on-going improvements in the heavy-duty diesel market and from the commercial launch of gas-particulate filters.  We anticipate mid-single digit growth in the Life Sciences segment.



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RESULTS OF OPERATIONS



Selected highlights for the three months ended March 31, 2018 and 2017 follow (in millions):





*Percent change is not meaningful.

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Net Sales

The following table presents net sales by reportable segment (in millions):





For the three months ended March 31, 2018, net sales of reportable segments increased by $92 million, or 4% when compared to the same period in 2017.  The primary sales drivers by segment were as follows:





Movements in foreign exchange rates impacted Corning’s consolidated net sales in the amount of $87 million in the three months ended March 31, 2018, when compared to the prior year.

 

Cost of Sales

The types of expenses included in the cost of sales line item are: raw materials consumption, including direct and indirect materials; salaries, wages and benefits; depreciation and amortization; production utilities; production-related purchasing; warehousing (including receiving and inspection); repairs and maintenance; inter-location inventory transfer costs; production and warehousing facility property insurance; rent for production facilities; and other production overhead.



Gross Margin

In the three months ended March 31, 2018, gross margin dollars remained relatively consistent, but gross margin as a percentage of net sales declined by 2% when compared to the same period in 2017, driven by LCD glass price declines in the high single-digits in percentage terms and manufacturing inefficiencies in the Display Technologies segment, combined with spending for capacity expansions for optical fiber and cable and gasoline particulate filter products.



Selling, General and Administrative Expenses

When compared to the first quarter of 2017, selling, general and administrative expenses increased by $182 million, or 57%, in the three months ended March 31, 2018.  The increase was due to the following items:





The types of expenses included in the selling, general and administrative expenses line item are: salaries, wages and benefits; stock-based compensation expense; travel; sales commissions; professional fees; and depreciation and amortization, utilities and rent for administrative facilities.

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Research, Development and Engineering Expenses

For the three months ended March 31, 2018, research, development and engineering expenses increased by $39 million, or 19%, when compared to the same period last year, driven by higher costs associated with new product launches and our emerging businesses.  As a percentage of sales, these expenses increased slightly in the first quarter, when compared to the same period last year.



Equity in Earnings of Affiliated Companies

The following provides a summary of equity in earnings of affiliated companies (in millions):





Equity in earnings of affiliated companies decreased by $41 million, driven largely by the absence of a $46 million gain recorded in the first quarter of 2017 resulting from the modification of long-term sales agreements with a customer of HSG.



Translated earnings contract loss, net

Included in the line item Translated earnings contract loss, net, is the impact of foreign currency hedges which hedge our translation exposure arising from movements in the Japanese yen, South Korean won, euro, New Taiwan dollar, Chinese yuan and British pound and its impact on our net earnings.  The following table provides detailed information on the impact of our translated earnings contract losses and gains:





The gross notional value outstanding on our translated earnings contracts at March 31, 2018 and December 31, 2017 were as follows (in billions):









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(Loss) Income Before Income Taxes

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 loss before income taxes in the three months ended March 31, 2018 when compared to the same period in 2017.



(Provision) Benefit for Income Taxes

Our (provision) benefit for income taxes and the related effective income tax rate were as follows (in millions):





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





For the three months ended March 31, 2017, the effective income tax benefit differed from the U.S. statutory rate of 35% primarily due to the following benefits:





Refer to Note 5 (Income Taxes) to the consolidated financial statements for additional information.

 

Net (Loss) Income Attributable to Corning Incorporated

As a result of the items discussed above, our net (loss) income and per share data is as follows (in millions, except per share amounts):





 

Comprehensive (Loss) Income

For the three months ended March 31, 2018 comprehensive (loss) income decreased by $890 million when compared to the same period in 2017, due to a decrease in net income of $675 million, the negative impact of the change in foreign currency translation gains and losses of $186 million, driven primarily by the Japanese yen and the euro, and a decrease in net unrealized gains of designated hedges of $26 million.



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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 adjust certain measures provided by our consolidated financial statements to exclude specific items to arrive at core performance measures.  These items include gains and losses on our translated earnings contracts, acquisition-related costs, certain discrete tax items, restructuring and restructuring-related charges, certain litigation-related expenses, pension mark-to-market adjustments and other items which do not reflect on-going operating results of the Company or our equity affiliates.  Additionally, Corning has adopted the use of constant currency reporting for our Display Technologies and Specialty Materials segments for the Japanese yen, South Korean won, Chinese yuan and New Taiwan dollar currencies.  The Company believes that the use of constant currency reporting allows investors to understand our results without the volatility of currency fluctuations, and reflects the underlying economics of the translated earnings contracts used to mitigate the impact of changes in currency exchange rates on our earnings and cash flows.  Corning also believes that reporting core performance measures provides investors greater transparency to the information used by our management team to make financial and operational decisions. 



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 possible to provide reconciliations for these non-GAAP measures because the Company does not forecast the movement of the Japanese yen, South Korean won, Chinese yuan or New Taiwan dollar 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):





Core Net Sales

Core net sales are consistent with net sales by reportable segment.  Net sales by reportable segment are presented below (in millions):





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Core Equity in Earnings of Affiliated Companies

The following provides a summary of core equity in earnings of affiliated companies (in millions):





Core Earnings

In the three months ended March 31, 2018, we generated core earnings of $299 million or $0.31 per share, compared to core earnings generated in the three months ended March 31, 2017 of $376 million, or $0.36 per share.  The decrease of $77 million was primarily due to lower net income in the Display Technologies and Specialty Materials segments, down $60 million and $11 million, respectively, as well as lower earnings in emerging businesses, down $14 million.  An increase in net income of $8 million in the Environmental Technologies segment partially offset the decrease.  



Included in core earnings for the three months ended March 31, 2018 and 2017 is net periodic pension expense in the amounts of $12 million and $13 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):



 

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.

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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): 













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.





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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 are as follows:





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. 

Effective beginning in the first quarter of 2018, the Company has changed its measurement of segment sales and segment net income, and has recast prior periods presented based on the new methodology.  Included in this new measurement is a change in our segment tax rate to 21% to better reflect our new corporate tax rate under U.S. tax reform  Additionally,  the impact of changes in the Japanese yen, Korean won, Chinese yuan and New Taiwan dollar will be excluded from segment sales and segment net income for the Display Technologies and Specialty Materials segments, and certain income and expenses that were previously allocated to our segments are now included in the unallocated amounts in the reconciliation of reportable segment net income to consolidated net income.  These include items that are not used by our chief operating decision maker (“CODM”) in evaluating the results of or in allocating resources to our segments and include the following items:  the impact of our translated earnings contracts; acquisition-related costs; discrete tax items and other tax-related adjustments; litigation, regulatory and other legal matters; restructuring, impairment and other charges; adjustments relating to acquisitions; and other non-recurring non-operational items.  Although we exclude these amounts from segment results, they are included in reported consolidated results.



We prepared the financial results for our reportable segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist the CODM in making internal operating decisions.  We included the earnings of equity affiliates that are closely associated with our reportable segments in the respective segment’s net income.  We have allocated certain common expenses among reportable segments differently than we would for stand-alone financial information.  Segment net income may not be consistent with measures used by other companies. 



Display Technologies

The following table provides net sales and net income for the Display Technologies segment (in millions):







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Net sales in the Display Technologies segment decreased by $37 million, or 5%, in the first quarter of 2018, when compared to the first quarter of 2017.  The decrease was driven by LCD glass price declines in the high-single digits in percentage terms, partially offset by an increase in volume in the mid-single digits in line with the overall glass market.  First-quarter sequential price declines were the best first quarter since 2010.  Net income decreased by $60 million, or 24%, due to the LCD glass price declines described above and an increase of $12 million in manufacturing costs primarily driven by the impact of the start-up of our facility in Hefei, China.  These items were partially offset by the increase in volume described above.



Outlook:

In the second quarter, we expect the LCD glass market volume to grow low-single digits sequentially, and for our volume to grow faster than the market.  We expect second-quarter sequential price declines to be less than the first quarter, and the best price decline performance for a second quarter we have seen in well over a decade.



Optical Communications

The following table provides net sales and net income for the Optical Communications segment (in millions):







Net sales in the Optical Communications segment increased by $68 million, or 8%, in the first quarter of 2018, due to higher sales of carrier and enterprise network products, up $49 million and $19 million, respectively.  Strong growth in the North American and European fiber-to-the-home market drove the increase in carrier network products, and an increase in hyper-scale data centers drove the increase in enterprise network.



Net income in the first quarter of 2018 decreased by $1 million, or 1%, driven by costs associated with our planned capacity expansions, plus investments in new customers and technology, offset by the increase in sales described above. 



Outlook:

In the second quarter, Optical Communications sales are expected to increase by a low-teens percentage on a year-over-year basis.



Specialty Materials

The following table provides net sales and net income for the Specialty Materials segment (in millions):







Net sales in the Specialty Materials segment decreased by $22 million, or 7%, in the first quarter of 2018 when compared to the same period in 2017, driven by a decrease in volume.  Net income decreased by $11 million, or 19%, primarily driven by lower volume and development costs for new technology.  Improvements in manufacturing efficiency partially offset the decline.



Outlook:

In the second quarter of 2018, Specialty Materials sales are expected to be down mid-to-high single digits year-over-year.

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Environmental Technologies

The following table provides net sales and net income for the Environmental Technologies segment (in millions): 







Net sales in the Environmental Technologies segment increased $47 million, or 17%, in the first quarter of 2018 when compared to the same period in 2017.  Automotive product sales increased by $22 million, due to market strength in Europe, China and North America, and continued sales growth of gas particulate filters.  Diesel product sales increased $25 million, driven by higher demand for heavy-duty diesel products in North America and Europe. Movements in foreign exchange rates impacted net sales in the amount of $20 million when compared to the same period in 2017.



Net income in the first quarter of 2018 increased by $8 million, or 18%, driven by the sales increase outlined above and improved manufacturing efficiencies.  Movements in foreign exchange rates impacted net income in the amount of $3 million when compared to the same period in 2017.



Outlook:

In the second quarter, we expect sales to increase in the high-teens in percentage terms.





Life Sciences

The following table provides net sales and net income for the Life Sciences segment (in millions):







Net sales in the Life Sciences segment increased by $22 million, or 10%, in the first quarter of 2018 when compared to the same period in 2017, driven by higher sales in North America and China.  Movements in foreign exchange rates impacted net sales in the amount of $9 million in the three months ended March 31, 2018 when compared to the same period in 2017.



Net income in the first quarter of 2018 increased by $3 million, or 13%, driven by the increase in sales described above.  Movements in foreign exchange rates did not materially impact net income in the three months ended March 31, 2018 when compared to the same period in 2017.



Outlook:

Second-quarter sales are expected to grow in the high-single digits on a year-over-year basis. 



All Other

All other segments that do not meet the quantitative threshold for separate reporting have been grouped as “All Other.”  This group is primarily comprised of the results of the pharmaceutical technologies business and new product lines and development projects, as well as certain corporate investments such as Eurokera and Keraglass equity affiliates. 

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The following table provides net sales and other data for All Other (in millions):







Net sales of this segment increased by $14 million, or 39%, in the three months ended March 31, 2018, when compared to the same period in 2017, driven by an increase in sales in our emerging businesses.  The increase in the net loss in the first quarter of $14 million, or 23%, reflects higher losses in our development projects. 

 

CAPITAL RESOURCES AND LIQUIDITY



Financing and Capital Resources

There were no significant items that impacted Corning’s financing and capital resources in the three months ended March 31, 2018 and 2017.



Common Stock Dividends

On February 7, 2018, Corning’s Board of Directors declared a 16% increase in the Company’s quarterly common stock dividend, which increased the quarterly dividend from $0.155 to $0.18 per share of common stock, beginning with the dividend to be paid in the first quarter of 2018.  This increase marks the seventh dividend increase since October 2011. 



Share Repurchase Program

During 2017, Corning repurchased 84.4 million shares for approximately $2.4 billion through accelerated share repurchase agreements and open market repurchases under the 2016 Repurchase Program.



In the three months ended March 31, 2018, the Company repurchased 27.1 million shares of common stock on the open market for approximately $814.3 million as part of its 2016 Repurchase Program. 



On April 26, 2018, Corning’s Board of Directors approved a $2 billion share repurchase program with no expiration (the “2018 Repurchase Program”).  The 2018 Repurchase Program will commence when the authorization under the 2016 Repurchase Program is exhausted.



Refer to Note 13 (Shareholders’ Equity) for additional information.



Capital Spending

Capital spending totaled $655 million and $364 million in the three months ended March 31, 2018 and 2017, respectively.  We expect our 2018 capital expenditures to be slightly more than $2.0 billion, driven by expansions related to the Gen 10.5 glass manufacturing facility, the addition of capacity to support the new gas-particulate filters business in the Environmental Technologies segment and investment to support growth in customer demand in the Optical Communications and Specialty Materials segments.



Cash Flow

Summary of cash flow data (in millions):





Net cash provided by operating activities increased by $129 million in the three months ended March 31, 2018 when compared to the same period last year, driven by customer deposits received of $276 million and a decrease of $94 million in accounts receivable in the Specialty Materials segment, partially offset by an increase in payments for variable compensation, a decrease of $34 million in dividends received from affiliated companies and an increase in inventory of $69 million in the Specialty Materials segment.

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Net cash used in investing activities increased by $318 million in the three months ended March 31, 2018 when compared to the same period last year, driven by an increase of $291 million in capital expenditures largely due to capacity expansion projects in our Display Technologies and Optical Communications segments.



Net cash used in financing activities in the three months ended March 31, 2018 increased by $571 million when compared to the same period last year, driven by higher share repurchases, up $400 million, and a decrease of $161 million in proceeds from the exercise of stock options



Key Balance Sheet Data

Balance sheet and working capital measures are provided in the following table (in millions):







Credit Rating

Our credit ratings remain the same as those disclosed in our 2017 Form 10-K.





Management Assessment of Liquidity

We ended the first quarter of 2018 with approximately $3 billion of cash and cash equivalents.  Our cash and cash equivalents are held in various locations throughout the world, with approximately 47% held outside of the United States, and are generally unrestricted.  We utilize a variety of financing strategies to ensure that our worldwide cash is available in the locations in which it is needed. In January 2018, the Company distributed approximately $2 billion from two of its foreign subsidiaries to the U.S. parent of those subsidiaries.  There were no incremental taxes beyond the toll charge due with the respect to this distribution of cash. 



To manage interest rate exposure, the Company, from time to time, enters into interest rate swap agreements.  We are currently party to two interest rate swaps that are designated as fair value hedges and economically exchange a notional amount of $550 million of previously issued fixed rate long-term debt to floating rate debt.  Under the terms of the swap agreements, we pay the counterparty a floating rate that is indexed to the one-month LIBOR rate. 



Corning also has a commercial paper program pursuant to which we may issue short-term, unsecured commercial paper notes up to a maximum aggregate principal amount outstanding at any one time of $2 billion.  Under this program, the Company may issue the paper from time to time and will use the proceeds for general corporate purposes.  The Company’s $2 billion revolving credit facility is available to support obligations under the commercial paper program, if needed.  At March 31, 2018 and December 31, 2017 Corning did not have outstanding commercial paper.

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Other

We complete comprehensive reviews of our significant customers and their creditworthiness by analyzing their financial strength at least annually or more frequently for customers where we have identified a measure of increased risk.  We closely monitor payments and developments which may signal possible customer credit issues.  We currently have not identified any potential material impact on our liquidity resulting from customer credit issues.



Our major source of funding for 2018 and beyond will be our operating cash flow, our existing balances of cash and cash equivalents and proceeds from any issuances of debt.  We believe we have sufficient liquidity for the next several years to fund operations, acquisitions, asbestos litigation, capital expenditures, scheduled debt repayments, dividend payments and share repurchase programs.



Corning has access to a $2 billion unsecured committed revolving credit facility.  This credit facility includes a leverage ratio financial covenant.  The required leverage ratio, which measures debt to total capital, is a maximum of 50%.  At March 31, 2018, our leverage using this measure was approximately 26% and we are in compliance with the financial covenant.



Our debt instruments contain customary event of default provisions, which allow the lenders the option of accelerating all obligations upon the occurrence of certain events.  In addition, some of our debt instruments contain a cross default provision, whereby an uncured default in excess of a specified amount on one debt obligation of the Company, also would be considered a default under the terms of another debt instrument.    As of March 31, 2018, we were in compliance with all such provisions.



Management is not aware of any known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in a material decrease in our liquidity.  In addition, other than items discussed, there are no known material trends, favorable or unfavorable, in our capital resources and no expected material changes in the mix and relative cost of such resources.



Off Balance Sheet Arrangements

There have been no material changes outside the ordinary course of business in our off balance sheet arrangements as disclosed in our 2017 Form 10-K under the caption “Off Balance Sheet Arrangements.”



Contractual Obligations

There have been no material changes outside the ordinary course of business in the contractual obligations disclosed in our 2017 Form 10-K under the caption “Contractual Obligations.”



CRITICAL ACCOUNTING ESTIMATES



The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein.  The estimates that require management’s most difficult, subjective or complex judgments are described in our 2017 Form 10-K and remain unchanged through the first three months of 2018.  For certain items, additional details are provided below.



Impairment of Assets Held for Use

We are required to assess the recoverability of the carrying value of long-lived assets when an indicator of impairment has been identified.  We review our long-lived assets in each quarter in which impairment indicators are present.  We must exercise judgment in assessing whether an event of impairment has occurred.



Manufacturing equipment includes certain components of production equipment that are constructed of precious metals, primarily platinum and rhodium.  These metals are not depreciated because they have very low physical losses and are repeatedly reclaimed and reused in our manufacturing process and have a very long useful life.  Precious metals are reviewed for impairment as part of our assessment of long-lived assets.  This review considers all of the Company’s precious metals that are either in place in the production process; in reclamation, fabrication, or refinement in anticipation of re-use; or awaiting use to support increased capacity.  Precious metals are only acquired to support our manufacturing operations and are not held for trading or other purposes.



At March 31, 2018 and December 31, 2017, the carrying value of precious metals was higher than the fair market value by $661 million and $711 million, respectively.  These precious metals are utilized by the Display Technologies and Specialty Materials segments.  Corning believes these precious metal assets to be recoverable due to the significant positive cash flow in both segments.  The potential for impairment exists in the future if negative events significantly decrease the cash flow of these segments.  Such events include, but are not limited to, a significant decrease in demand for products or a significant decrease in profitability in our Display Technologies or Specialty Materials segments.



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NEW ACCOUNTING STANDARDS



Refer to Note 1 (Significant Accounting Policies) to the Consolidated Financial Statements.



ENVIRONMENT



Corning has been named by the Environmental Protection Agency (“the Agency”) under the Superfund Act, or by state governments under similar state laws, as a potentially responsible party for 15 active hazardous waste sites.  Under the Superfund Act, all parties who may have contributed any waste to a hazardous waste site, identified by the Agency, are jointly and severally liable for the cost of cleanup unless the Agency agrees otherwise.  It is Corning’s policy to accrue for its estimated liability related to Superfund sites and other environmental liabilities related to property owned by Corning based on expert analysis and continual monitoring by both internal and external consultants.  At March 31, 2018 and December 31, 2017, Corning had accrued approximately $38 million (undiscounted) for the estimated liability for environmental cleanup and related litigation.  Based upon the information developed to date, management believes that the accrued reserve is a reasonable estimate of the Company’s liability and that the risk of an additional loss in an amount materially higher than that accrued is remote.

 

FORWARD-LOOKING STATEMENTS



The statements in this Quarterly Report on Form 10-Q, in reports subsequently filed by Corning with the Securities and Exchange Commission (“SEC”) on Forms 8-K, and related comments by management that are not historical facts or information and contain words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “seek,” “see,” “would,” and “target” and similar expressions are forward-looking statements.  Such statements relate to future events that by their nature address matters that are, to different degrees, uncertain.  These forward-looking statements relate to, among other things, the company’s future operating performance, the company's share of new and existing markets, the company's revenue and earnings growth rates, the company’s ability to innovate and commercialize new products, and the company’s implementation of cost-reduction initiatives and measures to improve pricing, including the optimization of the company’s manufacturing capacity.



Although the company believes that these forward-looking statements are based upon reasonable assumptions regarding, among other things, current estimates and forecasts, general economic conditions, its knowledge of its business, and key performance indicators that impact the company, actual results could differ materially.   The company does not undertake to update forward-looking statements.  Some of the risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements include, but are not limited to:



 

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Market Risk Disclosures



As noted in our 2017 Form 10-K, we operate and conduct business in many foreign countries and as a result are exposed to fluctuations between the U.S. dollar and other currencies.  Volatility in the global financial markets could increase the volatility of foreign currency exchange rates which would, in turn, impact our sales and net income.  For a discussion of our exposure to market risk and how we mitigate that risk, refer to Part II, Item 1A, Risk Factors in this Quarterly Report on Form 10-Q and Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risks, contained in our 2017 Form 10-K.

 

ITEM 4.  CONTROLS AND PROCEDURES



Under the supervision of and with the participation of Corning’s management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of March 31, 2018, the end of the period covered by this report.  Based on that evaluation, we have concluded that the Company’s disclosure controls and procedures were effective as of that date.  Corning’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by Corning in the reports that it files or submits under the Exchange Act is accumulated and communicated to Corning’s management, including Corning’s principal executive and principal financial officers, or other persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.



An evaluation of our internal controls over financial reporting was also performed to determine whether any changes have occurred during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  The chief executive officer and chief financial officer concluded that there was no change in Corning’s internal control over financial reporting that materially affected, or is reasonably likely to materially affect, internal control over financial reporting.   

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Part II – Other Information



ITEM 1.  LEGAL PROCEEDINGS



Environmental Litigation. See our 2017 Form 10-K, Part I, Item 3.  For additional information and updates to estimated liabilities as of March 31, 2018, see Part I, Item 1, Financial Statements, Note 3 (Commitments, Contingencies and Guarantees) of the Notes to Unaudited Consolidated Financial Statements included under Item 1 of this quarterly report, which is incorporated herein by reference.



ITEM 1A.  RISK FACTORS



In addition to other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our 2017 Form 10-K, which could materially impact our business, financial condition or future results.  Risks disclosed in our 2017 Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem immaterial may materially adversely impact our business, financial condition or operating results.  There have been no material changes to Part I, Item 1A. Risk Factors in our 2017 Form 10-K.

 

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ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



This table provides information about our purchases of our common stock during the first quarter of 2018:



Issuer Purchases of Equity Securities







 

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ITEM 6.  EXHIBITS







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SIGNATURES





Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.







 

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