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MarketScreener Homepage  >  Equities  >  Nyse  >  Corning Incorporated    GLW

CORNING INCORPORATED

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Corning Incorporated : INC /NY Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

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02/12/2019 | 01:06pm EST

Organization of Information

Management's Discussion and Analysis provides a historical and prospective narrative on the Company's financial condition and results of operations. This discussion includes the following sections:



 ·  Overview


 ·  Results of Operations


 ·  Core Performance Measures


 ·  Reportable Segments


 ·  Liquidity and Capital Resources


 ·  Environment


 ·  Critical Accounting Estimates


 ·  New Accounting Standards


 ·  Forward-Looking Statements




OVERVIEW



Strategy and Capital Allocation Framework




In October 2015, Corning announced a strategy and capital allocation framework
(the "Framework") that reflects the Company's financial and operational
strengths, as well as its ongoing commitment to increasing shareholder
value. The Framework outlines our leadership priorities, and articulates the
opportunities we see across our businesses. We designed the Framework to create
significant value for shareholders by focusing our portfolio and leveraging our
financial strength. Under the 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 extend 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 will allow us to quickly apply our
talents and repurpose our assets as needed.



Performance against the Framework




Since introducing the Framework, we have distributed $11.8 billion to
shareholders through share repurchases and dividends, and increased the annual
dividend by 11.1% in 2019, 16.1% in 2018, 14.8% in 2017 and 12.5% in 2016 as
part of our ongoing commitment to return cash to our investors.



Highlights of progress in Corning's market-access platforms include:

· Securing contracts with industry leaders in the carrier and data center

segments that will add significant sales in 2019 and beyond, and completing the

acquisition of CMD in Optical Communications;

· Extending the company's leadership in mobile consumer electronics with the

launch and adoption of Gorilla Glass 6 as well as other cover glass and sensing

technology innovations;

· Gaining significant new sales and platforms for gasoline particulate filters

and strong pull for Gorilla Glass for Automotive solutions, particularly the

industry's first AutoGrade Glass Solutions for automotive interiors, reaching

more than 55 platforms to date;

· Increasing our shipments of Valor Glass by four times year-over-year,

indicating progress toward certification across more pharmaceutical companies

in Life Sciences Vessels; and

· Reaching stable returns in Display Technologies as the glass pricing

environment continued to improve and Corning extended global leadership by

    successfully ramping the world's first Gen 10.5 LCD glass plant.


               © 2019 Corning Incorporated. All Rights Reserved.



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2018 Results



Net sales in the year ended December 31, 2018 were $11.3 billion, an increase of
$1.2 billion, or 12%, when compared to the year ended December 31, 2017, driven
by sales increases across all segments.



For the year ended December 31, 2018, we generated net income of $1.1 billion,
or $1.13 per share, compared to a net loss of $0.5 billion, or $(0.66) per
share, for 2017. When compared to 2017, the $1.6 billion increase in net income
was primarily due to the following items (amounts presented after tax):



· The absence of $1.5 billion in tax reform adjustments related to the 2017 Tax

Act;

· Higher segment net income in our Optical Communications, Environmental

Technologies, Specialty Materials and Life Sciences segments, up $123 million,

$43 million, $12 million and $22 million, respectively; and

· The positive impact of $48 million in tax adjustments, primarily related to

changes in the valuation allowances on deferred tax assets offset by the

    preliminary 2013-2014 IRS audit settlement.



Partially offsetting these events were the following items:

· An increase of $105 million in legal expenses, driven by a ruling in an

intellectual property lawsuit and developments in civil litigation matters;

· An impact of $99 million resulting from an increase of mark-to-market loss for

our defined benefit pension plans; and

· Lower segment net income in our Display Technologies and All Other segments in

    the amount of $53 million and $22 million, respectively.




Diluted earnings per share increased by $1.79 per share, or 271%, when compared
to 2017, driven by the increase in net income described above, coupled with the
repurchase of 74.8 million shares of common stock over the last twelve months.



The translation impact of fluctuations in foreign currency exchange rates, including the impact of hedges realized in 2018, did not materially impact Corning's consolidated net income in the year ended December 31, 2018 when compared to the year ended December 31, 2017.

2019 Corporate Outlook


We believe 2019 will be another year of strong growth and investment, consistent
with our Strategy and Capital Allocation Framework.  In our Display Technologies
segment, we expect full year 2019 price declines to improve further to a
mid-single digit percentage. We anticipate Corning's display glass volume will
grow faster than the expected display glass market growth of mid-single digits,
driven by television screen size growth and the ramp of our Gen 10.5 facility in
China.  In the Optical Communications segment, we expect sales to increase by
low-teens in percentage terms, including the impact of a full year of sales from
the acquisition of 3M's Communication Markets Division.  We expect high-single
digit sales growth in our Environmental Technologies segment. We expect growth
in the Specialty Materials segment, the rate of which will depend on the
adoption of our innovations.  We anticipate low to mid-single digit percentage
growth in sales for the Life Sciences segment.

               © 2019 Corning Incorporated. All Rights Reserved.



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RESULTS OF OPERATIONS


Selected highlights from our operations follow (in millions):





                                                                               % change
                                        2018        2017        2016     18 vs. 17   17 vs. 16

Net sales                             $ 11,290$ 10,116$ 9,390       12           8

Gross margin                          $  4,461$  4,020$ 3,763       11           7
(gross margin %)                           40%         40%        40%

Selling, general and administrative
expenses                              $  1,799$  1,473$ 1,462       22           1
(as a % of net sales)                      16%         15%        16%

Research, development and engineering
expenses                              $    993$    864$   736       15          17
(as a % of net sales)                       9%          9%         8%

Equity in earnings of affiliated
companies                             $    390$    361$   284        8          27
(as a % of net sales)                       3%          4%         3%

Translated earnings contract loss,
net                                   $    (93)$   (121)$  (448)      23          73
(as a % of net sales)                      (1)%        (1)%       (5)%

Gain on realignment of equity
investment                                                    $ 2,676        *           *
(as a % of net sales)                                             28%

Income before income taxes            $  1,503$  1,657$ 3,692       (9)        (55)
(as a % of net sales)                      13%         16%        39%

(Provision) benefit for income taxes $ (437)$ (2,154)$ 3 80

           *
(as a % of net sales)                      (4)%       (21)%          *

Net income (loss) attributable to
Corning Incorporated                  $  1,066$   (497)$ 3,695        *           *
(as a % of net sales)                       9%         (5)%       39%




*  Percent change not meaningful.



Segment Net Sales



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





                                                                  %           %
                               Years ended December 31,        change      change
                             2018        2017        2016     18 vs. 17   17 vs. 16
Display Technologies       $  3,276$  3,137$ 3,288       4%         (5)%
Optical Communications        4,192       3,545      3,005       18%         18%
Specialty Materials           1,479       1,403      1,124       5%          25%

Environmental Technologies 1,289 1,106 1,032 17%

 7%
Life Sciences                   946         879        839       8%          5%
All Other                       216         188        152       15%         24%
Total segment net sales    $ 11,398$ 10,258$ 9,440       11%         9%


               © 2019 Corning Incorporated. All Rights Reserved.



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For the year ended December 31, 2018, segment net sales increased by $1.1 billion, or 11%, when compared to the same period in 2017. The primary sales drivers by segment were as follows:

· Display Technologies segment net sales increased $139 million compared to the

prior year. Total display glass market volume was up in 2018. Our volume

growth in this market more than offset price declines on a year-over-year

basis. 2018 was the best pricing environment in more than a decade, achieving

the important milestone of mid-single digit year-over-year declines during the

second half of the year;

· An increase of $647 million in the Optical Communications segment, due to

higher sales of carrier and enterprise network products, up $364 million and

$283 million, respectively. The acquisition of CMD driving $200 million of the

increase in sales;

· An increase of $76 million in the Specialty Materials segment driven by higher

net sales of Gorilla Glass products, advanced optics and other specialty glass;

· An increase of $183 million in the Environmental Technologies segment, driven

by sales growth in all categories including sales of gas particulate filters;

and

· An increase of $67 million in the Life Sciences segment, as the business

    continued to outpace the market.



Movements in foreign exchange rates did not materially impact Corning's consolidated net sales in the year ended December 31, 2018, respectively, when compared to the same period in 2017.

For the year ended December 31, 2017, net sales increased by $818 million, or 9%, when compared to the same period in 2016. The primary sales drivers by segment were as follows:

· A decrease of $151 million in the Display Technologies segment, driven by price

declines of approximately 10%, partially offset by an increase in volume in the

mid-single digits in percentage terms;

· An increase of $540 million in the Optical Communications segment, due to

higher sales of carrier and enterprise network products, up $446 million and

$94 million, respectively, combined with the absence of production issues

related to the implementation of new manufacturing software in the first

quarter of 2016. Strong growth in the North American market drove the increase

in carrier network products;

· An increase of $279 million in the Specialty Materials segment, driven by

strong growth in segment net sales of Corning Gorilla Glass products, combined

with an increase of $42 million in advanced optics products;

· An increase of $74 million in the Environmental Technologies segment, driven by

higher net sales of automotive products, up $42 million, due to market strength

in Europe, China and Asia, and initial commercial sales of gas particulate

filters. Diesel product sales increased $32 million with higher demand for

heavy-duty diesel products in North America and Asia;

· An increase of $40 million in the Life Sciences segment, driven by higher sales

in North America and China; and

· An increase of $36 million in the All Other segment, driven by an increase in

    sales in our emerging businesses.



Movements in foreign exchange rates did not materially impact Corning's consolidated net sales in the year ended December 31, 2017, respectively, when compared to the same period in 2016.

In 2018, 2017 and 2016, sales in international markets accounted for 69%, 69% and 72%, respectively, of total net sales.



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.



               © 2019 Corning Incorporated. All Rights Reserved.



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Gross Margin


In the year ended December 31, 2018, gross margin dollars increased by $441 million, or 11%, and gross margin as a percentage of net sales was consistent when compared to the same period last year. The increase in gross margin dollars was primarily driven by the following items:

· Higher sales in the Optical Communications segment, driven by growth in Carrier

and Enterprise products, resulting in increased gross margin of $291 million;

· An increase in Gorilla Glass and advanced optics product volume which

contributed $48 million to gross margin; and

· Higher sales in the Environmental technologies segment drove an $85 million

    increase.



Gross margin increases were partially offset by higher costs related to capacity expansions across multiple business segments and display glass price declines.

Movements in foreign exchange rates did not materially impact Corning's consolidated gross margin in the year ended December 31, 2018, respectively, when compared to the same period in 2017.

In the year ended December 31, 2017, gross margin dollars increased by $257 million, or 7%, and gross margin as a percentage of net sales remained consistent at 40%, when compared to the same period last year. The increase in gross margin dollars was primarily driven by the following items:

· Higher volume in the Display Technologies segment, offset by higher costs

related to capacity expansion;

· Higher volume in the Optical Communications segment, driven by growth in North

America and Europe, partially offset by higher manufacturing expenses related

to capacity expansion;

· An increase in Gorilla Glass and advanced optics product volume, slightly

offset by higher raw materials costs; and

· Higher light-duty substrate demand in Europe, China and Asia, offset somewhat

by lower North America demand, as well as an increase in demand for heavy-duty

diesel products in North America and Asia. Partially offsetting the increase in

demand was a decline in manufacturing efficiency due to the use of higher-cost

    manufacturing facilities and sales of lower margin products.




Display glass price declines of approximately 10% and the negative impact of
movements in the Japanese yen and South Korean won in the amount of $73 million,
which primarily impacted the Display Technologies segment, partially offset the
increase.


Movements in foreign exchange rates did not materially impact Corning's consolidated net sales in the year ended December 31, 2017, respectively, when compared to the same period in 2016.

Selling, General and Administrative Expenses




When compared to the year ended December 31, 2017, selling, general and
administrative expenses increased by $326 million, or 22%, in the year ended
December 31, 2018. Selling, general and administrative expenses increased by 1%
as a percentage of sales.  The increase was primarily driven by the following
items:


· An increase of $137 million in litigation and other legal expenses, driven by a

ruling in an intellectual property lawsuit and developments in commercial

litigation matters;

· An increase in the Optical Communications segment, up $65 million, largely

driven by the acquisition of CMD;

· Increased corporate expenses of $55 million;

· Increased acquisition related costs of $25 million; and

· Increased costs in our emerging businesses, up $20 million, driven by

    investments in new customers and new business growth.




               © 2019 Corning Incorporated. All Rights Reserved.



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When compared to the year ended December 31, 2016, selling, general and administrative expenses increased by $11 million in the year ended December 31, 2017. The increase was due to the following items:

· A decrease of $52 million in acquisition-related costs, driven by the absence

of costs related to the realignment of our equity interests in Dow Corning

completed in the second quarter of 2016, offset slightly by several small

acquisitions occurring in 2017;

· A decrease of $64 million in litigation, regulatory and other legal costs,

primarily driven by the absence of events occurring in the second quarter of

2016. In this period, we recorded litigation and other expenses related to the

resolution of an investigation by the U.S. Department of Justice and an

environmental matter in the amount of $98 million, offset somewhat by the gain

on the contribution of our equity interests in PCC and PCE as partial

settlement of the asbestos litigation in the amount of $56 million; and

· A decrease of $46 million in the mark-to-market of our defined benefit pension

    plans.



Offsetting these events were the following items:

· A decrease of $32 million in gains from the contingent consideration fair value

adjustment;

· An increase of $51 million in the Optical Communications segment due to costs

associated with acquisitions and growth initiatives; and

· An increase of $24 million in the Specialty Materials segment in support of new

    product launches.



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

Research, Development and Engineering Expenses




For year ended December 31, 2018, research, development and engineering expenses
increased by $129 million, or 15%, when compared to 2017, driven by higher costs
associated with new product launches and our emerging businesses. As a
percentage of sales, these expenses were flat when compared to the same period
last year.



In the year ended December 31, 2017, research, development and engineering
expenses increased by $128 million, or 17%, when compared to the same period
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 in the Optical Communications, Specialty
Materials and Environmental Technologies segments, up $20 million, $11 million
and $7 million, respectively. As a percentage of sales, these expenses decreased
one percent when compared to the same period last year.



Equity in Earnings of Affiliated Companies




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





                                   Years ended December 31,
                                  2018         2017       2016

Dow Corning Corporation (1)                              $  82
Hemlock Semiconductor Group (2) $    388$    352      212
All other                              2            9      (10)
Total equity earnings           $    390$    361$ 284

(1) Results include equity earnings for Dow Corning, which includes the silicones

business and Hemlock Semiconductor business, through May 31, 2016, the date

      of the realignment of our ownership interest in Dow Corning.


 (2)  Results include equity earnings for HSG beginning on June 1, 2016.


               © 2019 Corning Incorporated. All Rights Reserved.



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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 on December 10, 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 held an
equity interest in Hemlock Semiconductor Group (HSG) and approximately
$4.8 billion in cash.



The equity in earnings line on our income statement for the year ended
December 31, 2016 reflects both the equity earnings from the silicones and
polysilicones (HSG) businesses of Dow Corning from January 1, 2016 through
May 31, 2016. Prior to the realignment of Dow Corning, equity earnings from the
HSG business were reported on the equity in earnings line in Corning's income
statement, net of Dow Corning's 35% U.S. tax. Additionally, Corning reported its
tax on equity earnings from Dow Corning on the tax provision line on its income
statement at a U.S. tax provision rate of 7%. As part of the realignment, HSG
was converted to a partnership. Each of the partners is responsible for the
taxes on their portion of equity earnings. Therefore, post-realignment, HSG's
equity earnings is reported before tax on the equity in earnings line and
Corning's tax is reported on the tax provision line.



Refer to Note 12 (Commitments, Contingencies and Guarantees) to the consolidated financial statements for additional information.



Translated earnings contracts



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, Chinese yuan and British
pound against the U.S. dollar and its impact on our net income (loss). The
following table provides detailed information on the gains and losses associated
with our translated earnings contracts:





                                     Year ended               Year ended                Change
                                 December 31, 2018        December 31, 2017          2018 vs. 2017
                                 Income                   Income                  Income
                                 before                   before                  before
                                 income        Net        income        Net       income        Net
(in millions)                    taxes        income      taxes        income      taxes      income
Hedges related to translated
earnings:
Realized gain, net             $      97$    78$     270$   169$   (173)$    (91)
Unrealized loss                     (190)       (189)        (391)       (247)        201          58
Total translated earnings
contract loss, net             $     (93)$  (111)$    (121)$   (78)$     28$    (33)








                                     Year ended               Year ended                Change
                                 December 31, 2017        December 31, 2016          2017 vs. 2016
                                 Income                   Income                  Income
                                 before                   before                  before
                                 income        Net        income        Net       income        Net
(in millions)                    taxes        income      taxes        income      taxes      income
Hedges related to translated
earnings:
Realized gain, net             $     270$   169$     201$   127$     69$     42
Unrealized loss                     (391)       (247)        (649)       (409)        258         162
Total translated earnings
contract loss, net             $    (121)$   (78)$    (448)$  (282)$    327$    204


               © 2019 Corning Incorporated. All Rights Reserved.



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The gross notional value outstanding for our translated earnings contracts at December 31, 2018, 2017 and 2016 were as follows (in billions):





                                          Years ended December 31,
                                         2018         2017      2016

Japanese yen-denominated hedges $ 11.6$ 13.0$ 14.9 South Korean won-denominated hedges 0.1 0.8 1.2 Euro-denominated hedges

                     1.2         0.3       0.3
Chinese yuan-denominated hedges             0.6         0.2       0.3
British pound-denominated hedges            0.1

Total gross notional value outstanding $ 13.6$ 14.3$ 16.7




Income Before Income Taxes



The translation impact of fluctuations in foreign currency exchange rates,
including the impact of hedges realized in 2018, did not impact Corning's income
before income taxes in the years ended December 31, 2018 and 2017, respectively,
when compared to the same period in the prior year.



(Provision) Benefit for Income Taxes

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





                                        Years ended December 31,
                                       2018       2017        2016

(Provision) benefit for income taxes $ (437)$ (2,154)$ 3 Effective tax rate (benefit)

           29.1%      130.0%      (0.1)%




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

· Additional taxes of $55 million related primarily to the global intangible

low-taxed income ("GILTI") provisions of the 2017 Tax Act; and

· Incremental tax expense of $172 million related to a preliminary agreement with

    the IRS for the income tax audit of years 2013 and 2014.



These items were partially offset by the following:

· A benefit of $35 million related to the finalization of the one-time toll

charge recorded in 2017; and

· An $82 million benefit from the release of a valuation allowance on deferred

    tax assets that are now considered realizable.



For the year ended December 31, 2017, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following:

· As a result of the 2017 Tax Act, a provisional tax expense of $1.1 billion for

the one-time toll charge on unrepatriated earnings of certain foreign

subsidiaries that were previously deferred;

· The result of a provisional tax expense of $347 million recorded for the U.S.

deferred tax assets and liabilities re-measured at the reduced rate of 21%; and

· Rate differences on income (loss) of consolidated foreign companies.


               © 2019 Corning Incorporated. All Rights Reserved.



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The effective income tax rate for 2016 differed from the U.S. statutory rate of 35% primarily due to the following items:

· Rate differences on income (loss) of consolidated foreign companies, including

the benefit of excess foreign tax credits resulting from the inclusion of

foreign earnings in U.S. income; and

· The tax-free nature of the realignment of our equity interest in Dow Corning

during the period, as well as the release of the deferred tax liability related

to Corning's tax on Dow Corning's undistributed earnings as of the date of the

    transaction.




In December 2017, the U.S. enacted the 2017 Tax Act which resulted in
significant changes for our financial results, including, but not limited to,
(1) reducing the U.S. federal corporate income tax rate to 21%, and (2) imposing
a one-time toll charge tax on certain unrepatriated earnings of foreign
subsidiaries of U.S. companies that had not been previously taxed in the U.S.



Given the significant complexity of the 2017 Tax Act and the lack of clear tax
and accounting regulatory guidance for this new law, the Securities Exchange
Commission issued its Staff Accounting Bulletin 118 ("SAB 118") to provide
registrants additional time to analyze and report the effects of tax reform
during the "measurement period". Under SAB 118, the registrant was required to
record those items where ASC 740 analysis was complete; include reasonable
estimates and label them as provisional where ASC 740 analysis was incomplete;
and if reasonable estimates could not be made, record items under the previous
tax law. The measurement period, not to exceed one year, ended on the date the
entity had obtained, prepared, and analyzed the information that was needed to
complete the accounting requirements under ASC Topic 740.



The 2017 Tax Act also established new tax provisions affecting our 2018 results,
including, but not limited to: (1) Creating a new provision to tax global
intangible low-taxed income (GILTI); (2) generally eliminating U.S. federal
taxes on dividends from foreign subsidiaries; (3) eliminating the corporate
alternative minimum tax ("AMT"); (4) creating the base erosion anti-abuse tax
("BEAT"); (5) establishing a deduction for foreign derived intangible income
("FDII"); (6) establishing new limitations on deductible interest expense; and
(7) establishing new limitations on the deductibility of certain executive
compensation.



For the year ended December 31, 2018, Corning's results included a worldwide tax
provision of $437 million, inclusive of tax on ongoing operations of $412
million and the impacts of the 2017 Tax Act of $25 million. The impacts of the
2017 Tax Act include: GILTI tax of $55 million, FDII benefit of $10 million, and
a $20 million benefit related to truing up the toll charge and our measurement
of U.S. deferred taxes, offset by the recording of a provision related to
lifting our assertion of indefinite reinvestment on certain foreign earnings.
As of December 31, 2018, Corning has completed its analysis of the impact of the
2017 Tax Act as required by SAB 118. The GILTI tax of $55 million was largely
driven by the receipt of customer deposits.  See Note 2  (Revenue) to these
Consolidated Financial Statements for more information.



Corning has completed its analysis on the impact of the 2017 Tax Act on its
assertion regarding its indefinitely reinvested foreign earnings.  Corning has
determined that it will no longer assert indefinite asset reinvestment on $15.4
billion of unremitted foreign earnings accumulated prior to 2018.  This
represents approximately 94% of Corning's unremitted foreign earnings as of the
end of 2017.  Corning will continue to indefinitely reinvest the remaining 6% of
historic foreign earnings as of December 31, 2017.



Beginning in 2018, Corning will indefinitely reinvest the foreign earnings of:
(1) any of its subsidiaries located in jurisdictions where Corning lacks the
ability to repatriate its earnings, (2) any of its subsidiaries where Corning's
intention is to reinvest those earnings in operations, (3) legal entities for
which Corning holds a non-controlling interest, (4) any subsidiaries with an
accumulated deficit in earnings and profits and (5) any subsidiaries which have
a positive earnings and profits balance but for which the entity lacks
sufficient local statutory earnings or stock basis from which to make a
distribution.

               © 2019 Corning Incorporated. All Rights Reserved.



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During 2018, the Company distributed approximately $4.2 billion from foreign
subsidiaries to their respective U.S. parent companies.  There are no
incremental taxes beyond the toll charge due with respect to these
distributions.  As of December 31, 2018, Corning has approximately $1.5 billion
of indefinitely reinvested foreign earnings.  It remains impracticable to
calculate the tax cost of repatriating our unremitted earnings which are
considered indefinitely reinvested.



Refer to Note 4 (Income Taxes) to the Consolidated Financial Statements for further details regarding income tax matters.

Net Income (Loss) Attributable to Corning Incorporated

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





                                                      Years ended December 31,
                                                   2018          2017         2016

Net income (loss) attributable to Corning
Incorporated                                    $    1,066$    (497)$   3,695
Net income (loss) attributable to Corning
Incorporated used in
 basic earnings per common share
calculation (1)                                 $      968$    (595)$   3,597
Net income (loss) attributable to Corning
Incorporated used in
 diluted earnings per common share
calculation (1)                                 $    1,066$    (595)$   3,695
Basic earnings (loss) per common share          $     1.19$   (0.66)$    3.53
Diluted earnings (loss) per common share        $     1.13$   (0.66)$    3.23

Weighted-average common shares outstanding -
basic                                                  816          895     

1,020

Weighted-average common shares outstanding -
diluted                                                941          895        1,144



(1) Refer to Note 16 (Earnings per Common Share) to the Consolidated Financial

      Statements for additional information.




Comprehensive Income







                                                      Years ended December 31,
(In millions)                                      2018          2017         2016

Net income (loss) attributable to Corning
Incorporated                                    $    1,066$    (497)

$ 3,695


Foreign currency translation adjustments and
other                                                 (185)         746     

(104)

Net unrealized (loss) gain on investments               (1)          14     

(3)

Unamortized gains (losses) and prior service
credits (costs) for
 postretirement benefit plans                           19           30     

241

Net unrealized (loss) gain on designated hedges (1) 44

1

Other comprehensive (loss) income, net of tax (168) 834

135


Comprehensive income attributable to Corning
Incorporated                                    $      898$     337$   3,830




2018 vs. 2017

For the year ended December 31, 2018, comprehensive income increased by
$0.6 billion, when compared to the same period in 2017, driven by an increase in
net income of $1.6 billion largely driven by the absence of $1.5 billion in tax
reform adjustments related to the 2017 Tax Act.

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Partially offsetting this increase was a decrease in the gain on foreign
currency translation adjustments in the amount of $0.9 billion (after-tax),
largely driven by the strengthening of foreign currencies, most significantly
the South Korean won, euro and the Chinese yuan, which impacted comprehensive
income in the amounts of $556 million, $156 million and $114 million,
respectively.



2017 vs. 2016

For the year ended December 31, 2017, comprehensive income decreased by
$3.5 billion, when compared to the same period in 2016, driven by a decrease in
net income of $4.2 billion and a decrease in unamortized actuarial gains for
postretirement benefit plans. The significant decrease in net income was largely
driven by the absence of a $2.7 billion non-taxable gain and a $105 million
positive tax adjustment on the strategic realignment of our ownership interest
in Dow Corning recorded in the second quarter of 2016, combined with the impact
of the passage of the 2017 Tax Act, which included a provisional toll charge of
$1.1 billion and a provisional charge of $347 million as a result of the
remeasurement of U.S. deferred tax assets and liabilities. Our unamortized
actuarial gains decreased driven by a decrease in the discount rates used to
value our postretirement benefit obligations.



Partially offsetting these decreases was an increase in the gain on foreign
currency translation adjustments in the amount of $850 million (after-tax),
largely driven by the weakening of foreign currencies, most significantly the
South Korean won, Japanese yen and the euro, which impacted comprehensive income
in the amounts of $420 million, $164 million and $115 million, respectively.



See Note 11 (Employee Retirement Plans) and Note 15 (Shareholders' Equity) to the Consolidated Financial Statements for additional details.



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.



Core performance 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
outlook 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.


For a reconciliation of non-GAAP performance measures to their most directly comparable GAAP financial measure, please see "Reconciliation of Non-GAAP Measures" below.

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RESULTS OF OPERATIONS - CORE PERFORMANCE MEASURES




Selected highlights from our continuing operations, excluding certain items,
follow (in millions):





                                          Years ended December 31,             % change
                                        2018        2017        2016     18 vs. 17   17 vs. 16

Core net sales                        $ 11,398$ 10,258$ 9,440       11%         9%
Core equity in earnings of affiliated
companies                             $    241$    211$   249       14%        (15)%
Core earnings                         $  1,673$  1,634$ 1,651       2%         (1)%




Core Net Sales

Core net sales are consistent with net sales by reportable segment. The
following table presents segment net sales by reportable segment (in millions):





                                Years ended December 31,             % change
                              2018        2017        2016     18 vs. 17   17 vs. 16
Display Technologies        $  3,276$  3,137$ 3,288       4%         (5)%
Optical Communications         4,192       3,545      3,005       18%         18%
Specialty Materials            1,479       1,403      1,124       5%          25%

Environmental Technologies 1,289 1,106 1,032 17%

  7%
Life Sciences                    946         879        839       8%          5%
All Other                        216         188        152       15%         24%

Total segment net sales (1) $ 11,398$ 10,258$ 9,440 11%

  9%



(1) Segment net sales and variances are discussed in detail in the Reportable

      Segments section of our MD&A.



Core Equity in Earnings of Affiliated Companies


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





                                   Years ended December 31,             % change
                                  2018         2017       2016    18 vs. 17   17 vs. 16

Dow Corning Corporation (1)                              $  98                 (100)%

Hemlock Semiconductor Group (2) $ 236$ 201 154 17%

     31%
All other                              5           10       (3)     (50)%       433%
Total core equity earnings      $    241$    211$ 249       14%        (15)%



(1) Results include equity earnings for Dow Corning, which includes the silicones

business and Hemlock Semiconductor business, through May 31, 2016, the date

      of the realignment of our ownership interest in Dow Corning.


 (2)  Results include equity earnings for HSG beginning on June 1, 2016.


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Core Earnings



2018 vs. 2017

In the year ended December 31, 2018, we generated core earnings of $1,673 million or $1.78 per share, compared to core earnings generated in the year ended December 31, 2017 of $1,634 million, or $1.60 per share. The increase in core earnings of $39 million was driven by the following items:

· An increase in the Optical Communications segment of $123 million, driven by

higher sales of carrier and enterprise network products;

· An increase in the Environmental Technologies segment of $43 million resulting

from sales growth across all product lines;

· An increase of $22 million in the Life Sciences segment resulting from higher

sales, as well as improved manufacturing efficiencies; and

· An increase of $12 million in the Specialty Materials segment driven by higher

    sales of Gorilla Glass, advanced optics and other specialty glass.



Partially offsetting these increases in earnings were the following:

· A decrease in the Display Technologies segment of $53 million, with the costs

of expanding Gen 10.5 capacity, ramping production and rebuilding tanks for

fleet optimization during the first half of the year more than offsetting

increased sales;

· A decrease of $22 million in the All Other segment resulting from increased

investment in development projects;

· Increased financing expenses of $30 million; and

· Increased corporate project expenses $39 million.

Core earnings per share increased in the year ended December 31, 2018 to $1.78 per share, driven by the increase in core income and lower weighted average shares outstanding due to repurchases of our common stock during 2018.

2017 vs. 2016


In the year ended December 31, 2017, we generated core earnings of
$1,634 million or $1.60 per share, compared to core earnings generated in the
year ended December 31, 2016 of $1,651million, or $1.44 per share. The decrease
in core earnings of $17 million was driven by the following items:



· The absence of equity earnings of $98 million from Dow Corning's silicones

business due to our 2016 realignment of our ownership interest in Dow Corning;

· A decrease of $65 million in the Display Technologies segment, driven by

display glass price declines of approximately 10%, partially offset by an

increase in volume in the mid-single digits in percentage terms; and

· An increase in corporate project expenses and variable compensation of

    $29 million and $25 million, respectively.




The decline was offset by an increase in core earnings in the Optical
Communications segment of $118 million, due to higher sales of carrier and
enterprise network products, combined with the absence of the production issues
in the first half of 2016 related to the implementation of new software and an
increase in the Specialty Materials segment of $73 million, driven by an
increase in Corning Gorilla Glass and advanced optics products.



Although core net earnings decreased in the year ended December 31, 2017, core
earnings per share increased $0.16 per share, driven by lower weighted average
shares outstanding due to repurchases of our common stock in 2017.



Included in core earnings for the years ended December 31, 2018, 2017 and 2016
is net periodic pension expense in the amount of $52 million, $49 million and
$51 million, respectively, which excludes the annual pension mark-to-market
adjustments. In the years ended December 31, 2018, 2017 and 2016, the
mark-to-market adjustments pre-tax losses of $145 million, $21 million and $67
million, respectively.


Refer to Note 11 (Employee Retirement Plans) to the Consolidated Financial Statements for additional information.

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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):





                                                           2018       2017       2016

Core earnings attributable to Corning Incorporated$ 1,673$ 1,634

    $ 1,651
Less: Series A convertible preferred stock dividend           98         98 

98

Core earnings available to common stockholders - basic 1,575 1,536

1,553

Add: Series A convertible preferred stock dividend            98         98 

98

Core earnings available to common stockholders - diluted $ 1,673$ 1,634

$ 1,651


Weighted-average common shares outstanding - basic           816        895 

1,020

Effect of dilutive securities:
Stock options and other dilutive securities                   10         11 

9

Series A convertible preferred stock                         115        115 

115

Weighted-average common shares outstanding - diluted 941 1,021

1,144

Core basic earnings per common share                     $  1.93$  1.72$  1.52
Core diluted earnings per common share                   $  1.78$  1.60$  1.44

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):






                                                         Year ended December 31, 2018
                                                             Income
                                                             before               Effective
                                      Net        Equity      income      Net         tax       Earnings per
                                     Sales      earnings     taxes      income    rate (a)        share
As reported                        $ 11,290$     390$ 1,503$ 1,066      29.1%     $        1.13
Constant-currency adjustment (1)        108            2        156        127                         0.13

Translation loss on Japanese

 yen-denominated debt (2)                                        18         15                         0.02
Translated earnings contract loss,
net (3)                                                          73         97                         0.10
Acquisition-related costs (4)                                   132        103                         0.11
Discrete tax items and other
tax-related
 adjustments (5)                                                            79                         0.08
Litigation, regulatory and other
legal matters (6)                                               124         96                         0.10
Restructuring, impairment and
other charges (7)                                               130         96                         0.10
Equity in earnings of affiliated
companies (8)                                       (151)      (151)      (119)                       (0.13)
Pension mark-to-market
adjustment (10)                                                 145        113                         0.12
Core performance measures          $ 11,398$     241$ 2,130$ 1,673      21.5%     $        1.78

(a)Based upon statutory tax rates in the specific jurisdiction for each event.

See "Items Excluded from GAAP Measures" below for the descriptions of the footnoted reconciling items.








                                                         Year ended December 31, 2017
                                                             Income                                 (Loss)
                                                             before                   Effective    earnings
                                      Net        Equity      income     Net (loss)       tax         per
                                     sales      earnings     taxes        income      rate (a)      share
As reported                        $ 10,116$     361$ 1,657$      (497)    130.0%     $   (0.66)
Constant-currency adjustment (1)        142            2        168            138                     0.15

Translation gain on Japanese

 yen-denominated debt (2)                                       (14)            (9)                   (0.01)
Translated earnings contract loss,
net (3)                                                         125             78                     0.09
Acquisition-related costs (4)                                    84             59                     0.07
Discrete tax items and other
tax-related
 adjustments (5)                                                               127                     0.14
Litigation, regulatory and other
legal matters (6)                                               (12)            (9)                   (0.01)
Restructuring, impairment and
other charges (7)                                                72             62                     0.07
Equity in earnings of affiliated
companies (8)                                       (152)      (152)           (97)                   (0.11)
Adjustments related to
acquisitions (9)                                                 10             13                     0.01
Pension mark-to-market
adjustment (10)                                                  22             14                     0.02
Adjustments resulting from the
2017 Tax Act (13)                                                            1,755                     1.96

Core performance measures $ 10,258$ 211$ 1,960 $

1,634 16.6% $ 1.60

(a)Based upon statutory tax rates in the specific jurisdiction for each event.

See "Items Excluded from GAAP Measures" below for the descriptions of the footnoted reconciling items.



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                                                       Year ended December 31, 2016
                                                            Income
                                                            before                 Effective   Earnings
                                     Net        Equity      income        Net         tax         per
                                    sales      earnings      taxes      income     rate (a)      share
As reported                        $ 9,390$     284$  3,692$  3,695       0%       $   3.23
Constant-currency adjustment (1)        50            1          85          65                    0.06
Translated earnings contract loss,
net (3)                                                         448         282                    0.25
Acquisition-related costs (4)                                   127         107                    0.09
Discrete tax items and other
tax-related
 adjustments (5)                                                            (27)                  (0.02)
Litigation, regulatory and other
legal matters (6)                                                55          70                    0.06
Restructuring, impairment and
other charges (7)                                               199         138                    0.12
Equity in earnings of affiliated
companies (8)                                       (37)        (37)        (18)                  (0.02)
Adjustments related to
acquisitions (9)                                                (49)        (42)                  (0.04)
Pension mark-to-market
adjustment (10)                                                  67          44                    0.04
Gain on realignment of equity
investment (11)                                              (2,676)     (2,676)                  (2.34)
Taiwan power outage (12)                                         17          13                    0.01
Core performance measures          $ 9,440$     248$  1,928$  1,651      14.4%     $   1.44

(a)Based upon statutory tax rates in the specific jurisdiction for each event.

See "Items Excluded from GAAP Measures" below 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:

(1) Constant-currency adjustments: Because a significant portion of Display

Technologies segment revenues are denominated in Japanese yen, and a

significant portion of Display Technologies and Specialty Materials segment

manufacturing costs are denominated in Japanese Yen, Korean won, New Taiwan

dollar and Chinese yuan, management believes it is important to understand

the impact on earnings of translating these currencies into U.S.

dollars. Presenting results on a constant-currency basis mitigates the

translation impact and allows management to evaluate performance period

over period, analyze underlying trends in our businesses, and establish

operational goals and forecasts.

Constant-yen: As of January 1, 2018, we use an internally derived

management rate of ¥107, which is closely aligned to our current yen

portfolio of foreign currency hedges, and have recast all periods presented

     based on this rate to effectively remove the impact of changes in the
     Japanese yen.
     Constant-won: As of January 1, 2018, we use an internally derived
     management rate of ?1,175, which is closely aligned to our current won

portfolio of foreign currency hedges, and have recast all periods presented

based on this rate.

Constant-yuan: In January 2018, we began presenting results of the Display

     Technologies and Specialty Materials segments on a constant-yuan basis to
     mitigate the translation impact of this currency on these segments. We use

an internally derived management rate of yuan 6.7, which is closely aligned

to our current yuan portfolio of foreign currency hedges and consistent

with historical prior period averages.

Constant-Taiwan dollar: In January 2018, we began presenting results of the

Display Technologies and Specialty Materials segments on a constant-Taiwan

dollar basis to mitigate the translation impact of this currency on these

segments. We use an internally derived management rate of New Taiwan dollar

31, which is closely aligned to our current New Taiwan dollar portfolio of

cash flow hedges, and approximates the 10-year historical average of the

currency.

(2) Translation (gain) loss on Japanese yen-denominated debt: We have excluded

the gain or loss on the translation of our yen-denominated debt to U.S.

dollars.

(3) Translated earnings contract (gain) loss: We have excluded the impact of

the realized and unrealized gains and losses of our Japanese yen, South

Korean won, Chinese yuan and New Taiwan dollar-denominated foreign currency

hedges related to translated earnings, as well as the unrealized gains and

losses of our euro and British pound-denominated foreign currency hedges

related to translated earnings. (4) Acquisition-related costs: These expenses include intangible amortization,

inventory valuation adjustments and external acquisition-related deal

costs.

(5) Discrete tax items and other tax-related adjustments: For 2018, this amount

primarily relates to the preliminary IRS audit settlement offset by changes

in judgment about the realizability of certain deferred tax assets. For

2017, this amount represents the removal of discrete adjustments (e.g.,

changes in tax law, other than those of the 2017 Tax Act which are set

forth separately, and changes in judgment about the realizability of

certain deferred tax assets) as well as other non-operational tax-related

     adjustments.
(6)  Litigation, regulatory and other legal matters:  Includes amounts that
     reflect developments in commercial litigation, intellectual property
     disputes and other legal matters.
(7)  Restructuring, impairment and other charges:  This amount includes
     restructuring, impairment and other charges, as well as other expenses
     which are not related to continuing operations and are not classified as
     restructuring expense.
(8)  Equity in earnings of affiliated companies: These adjustments relate to

costs not related to continuing operations of our affiliated companies,

such as restructuring, impairment and other charges and settlements, or

modifications, under "take-or-pay" contracts. (9) Adjustments related to acquisitions: Includes fair value adjustments to the

Corning Precision Materials indemnity asset related to contingent

consideration, post-combination expenses and other acquisition and disposal

adjustments.

(10) Pension mark-to-market adjustment: Defined benefit pension mark-to-market

gains and losses, which arise from changes in actuarial assumptions and the

difference between actual and expected returns on plan assets and discount

rates.

(11) Gain on realignment of equity investment: Gain recorded upon the completion

of the strategic realignment of our ownership interest in Dow Corning. (12) Taiwan power outage: Impact of the power outage that temporarily halted

production at our Tainan, Taiwan manufacturing location in the second

quarter of 2016. The impact includes asset write-offs and charges for

facility repairs, offset somewhat by partial reimbursement through our

insurance program. (13) Adjustments resulting from the 2017 Tax Act: Includes a provisional amount

related to the one-time mandatory tax on unrepatriated foreign earnings, a

provisional amount related to the remeasurement of U.S. deferred tax assets

and liabilities, changes in valuation allowances as a result of the 2017

Tax Act, and adjustments for the elimination of excess foreign tax credit

     planning.






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REPORTABLE SEGMENTS


Our reportable segments are as follows:

· Display Technologies - manufactures glass substrates primarily for flat panel

liquid crystal displays.

· Optical Communications - manufactures carrier and enterprise network components

for the telecommunications industry.

· Environmental Technologies - manufactures ceramic substrates and filters for

automotive and diesel emission control applications.

· Specialty Materials - manufactures products that provide more than 150 material

formulations for glass, glass ceramics and fluoride crystals to meet demand for

unique customer needs.

· Life Sciences - manufactures glass and plastic labware, equipment, media and

    reagents enabling workflow solutions for scientific applications.




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



We prepared the financial results for our reportable segments on a basis that is
consistent with the manner in which we internally disaggregate financial
information to assist in making internal operating decisions. We included the
earnings of equity affiliates that are closely associated with our reportable
segments in the respective segment's net income. We have allocated certain
common expenses among our reportable segments differently than we would for
stand-alone financial information prepared in accordance with GAAP. Our
reportable segments include non-GAAP measures which are not prepared in
accordance with GAAP. We believe investors should consider these non-GAAP
measures in evaluating our results as they are more indicative of our core
operating performance and how management evaluates our operational results and
trends. These measures are not, and should not be viewed as a substitute for
GAAP reporting measures. For a reconciliation of non-GAAP performance measures
to their most directly comparable GAAP financial measure, please see
"Reconciliation of Non-GAAP Measures" above. Segment net income may not be
consistent with measures used by other companies. The accounting policies of our
reportable segments are the same as those applied in the consolidated financial
statements.



Display Technologies


The following table provides net sales and net income for the Display Technologies segment:





                        Years ended December 31,         % change      % change
                       2018        2017        2016      18 vs. 17     17 vs. 16

Segment net sales     $ 3,276$ 3,137$ 3,288         4%           (5%)
Segment net income    $   835$   888$   953        (6%)          (7%)




2018 vs. 2017

Display Technologies segment net sales increased $139 million compared to the
prior year.  Total display glass market volume was up in 2018.  Our volume
growth in this market more than offset price declines on a year-over-year
basis.  2018 was the best pricing environment in more than a decade, achieving
the important milestone of mid-single digit year-over-year declines during the
second half of the year.


Net income decreased by $53 million, or 6%, mainly driven by the costs of expanding Gen 10.5 capacity, ramping production and rebuilding tanks for fleet optimization during the first half of the year.

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2017 vs. 2016

Net sales decreased by $151 million, or 5%, in the year ended December 31, 2017,
when compared to the same period in 2016, driven by price declines of
approximately 10%, partially offset by an increase in volume in the mid-single
digits in percentage terms.


Net income decreased by $65 million, or 7%, driven by the following items:

· The impact of price declines of approximately 10%; and

· An increase of $40 million in research, development and engineering expenses,

primarily driven by the absence of the impact of a 2016 joint development

    agreement.



The decrease in net income was partially offset by the following items:

· A mid-single digit percentage increase in volume; and

· Improvements in manufacturing efficiency, which added $68 million.




Outlook:

For full-year 2019, Corning expects the display glass market to grow by a

 mid-single digit percentage, consistent with 2018.  The Company expects
Corning's volume to grow faster than the market due to expansion of our Gen 10.5
manufacturing capacity in China.  2018 was the best pricing environment in more
than a decade achieving the important milestone of mid-single digit
year-over-year declines in the second half of the year.  We expect our full year
2019 price declines to improve further to a mid-single digit percentage and to
be even better than they were in 2018.



Optical Communications

The following table provides net sales and net income for the Optical Communications segment:





                        Years ended December 31,         % change      % change
                       2018        2017        2016      18 vs. 17     17 vs. 16

Segment net sales     $ 4,192$ 3,545$ 3,005         18%           18%
Segment net income    $   592$   469$   351         26%           34%




2018 vs. 2017

Net sales increased by $647 million, or 18%, in the year ended December 31,
2018, when compared to the same period in 2017, due to higher sales of carrier
and enterprise network products.  The acquisition of CMD drove $200 million of
increased sales.


Net income in the year ended December 31, 2018 increased by $123 million, or 26%, driven by the increase in sales described above, partially offset by capacity expansion spending.




Movements in foreign currency exchange rates did not materially impact net sales
or net income in this segment in the year ended December 31, 2018 when compared
to the same period in 2017.



2017 vs. 2016


Net sales increased by $540 million, or 18%, in the year ended December 31,
2017, when compared to the same period in 2016, due to higher sales of carrier
and enterprise network products, combined with the absence of production issues
related to the implementation of new manufacturing software in the first half of
2016 and the impact of several small acquisitions completed in the 2017. Strong
growth in the North American fiber-to-the-home market drove the increase in
carrier network products.



Net income in the year ended December 31, 2017 increased by $118 million, or 34%, driven by the increase in sales described above, partially offset by capacity expansion spending.

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Movements in foreign currency exchange rates did not materially impact net sales
or net income in this segment in the year ended December 31, 2017 when compared
to the same period in 2016.



Outlook:

Full-year 2019 Optical Communications sales are expected to increase by a low-teens percentage on a year-over-year basis, including the impact of a full year of sales from the acquisition of CMD.



Specialty Materials



The following table provides net sales and net income for the Specialty
Materials segment:





                        Years ended December 31,         % change      % change
                       2018        2017        2016      18 vs. 17     17 vs. 16

Segment net sales     $ 1,479$ 1,403$ 1,124         5%            25%
Segment net income    $   313$   301$   228         4%            32%




2018 vs. 2017

Net sales in the Specialty Materials segment increased by $76 million, or 5%, in the year ended December 31, 2018, when compared to the same period in 2017, driven by an increase in sales of Gorilla Glass products, combined with an increase in sales of advanced optics products.




Net income in year ended December 31, 2018 increased by $12 million, or 4%, when
compared to the same period in 2017, primarily due to the increase in net sales
outlined above.



Movements in foreign currency exchange rates did not materially impact net sales
or net income in this segment in the year ended December 31, 2018 when compared
to the same period in 2017.



2017 vs. 2016

Net sales in the Specialty Materials segment increased by $279 million, or 25%,
in the year ended December 31, 2017, when compared to the same period in 2016,
driven by an increase in sales of Gorilla Glass products in support of new
product launches, combined with an increase in advanced optics products.



Net income in year ended December 31, 2017 increased by $73 million, or 32%,
when compared to the same period in 2016, primarily due to the increase in net
sales.



Movements in foreign currency exchange rates did not materially impact net sales
or net income in this segment in the year ended December 31, 2017 when compared
to the same period in 2016.



Outlook:

The company expects year-over-year sales growth for Specialty Materials in 2019, with the rate dependent upon customer adoptions of our innovations.



Environmental Technologies


The following table provides net sales and net income for the Environmental Technologies segment:





                        Years ended December 31,         % change      % change
                       2018        2017        2016      18 vs. 17     17 vs. 16

Segment net sales     $ 1,289$ 1,106$ 1,032         17%           7%
Segment net income    $   208$   165$   159         26%           4%


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2018 vs. 2017

Net sales increased $183 million, or 17% in the year ended December 31, 2018
driven by growth in all product categories, including more than $50 million in
sales of gasoline particulate filters.



Net income in the year ended December 31, 2018 increased by $43 million, or 26%, driven by the reasons outlined above and improved manufacturing efficiencies.




Movements in foreign currency exchange rates did not materially impact net sales
or net income in this segment for the year ended December 31, 2018 when compared
to the same period in 2017.



2017 vs. 2016

Net sales increased $74 million, or 7% in the year ended December 31, 2017. Automotive product sales increased by $42 million, due to market strength in Europe, China and Asia, and initial commercial sales of gas particulate filters. Diesel product sales increased $32 million with higher demand for heavy-duty diesel products in North America and Asia.

Net income in the year ended December 31, 2017 increased by $6 million, or 4%, with offsets driven by expenses in support of new product launches.




Movements in foreign currency exchange rates did not materially impact net sales
or net income in this segment in the year ended December 31, 2017 when compared
to the same period in 2016.



Outlook:

We expect high-single digit sales growth on a year-over-year basis in our Environmental Technologies segment in 2019.



Life Sciences



The following table provides net sales and net income for the Life Sciences
segment:





                        Years ended December 31,         % change      % change
                       2018         2017        2016     18 vs. 17     17 vs. 16

Segment net sales     $   946$   879$ 839         8%            5%
Segment net income    $   117$    95$  90         23%           6%




2018 vs. 2017

Net sales in the Life Sciences segment increased by $67 million, or 8%, in the
year ended December 31, 2018, when compared to the same period in 2017, driven
by strong performance across all product categories.



Net income increased by $22 million, or 23%, in the year ended December 31, 2018, driven by the reasons outlined above and improved manufacturing efficiencies.

Movements in foreign exchange rates did not materially impact net sales or net income in this period when compared to the same period in the prior year.

2017 vs. 2016


Net sales in the Life Sciences segment increased by $40 million, or 5%, in the
year ended December 31, 2017, when compared to the same period in 2016, driven
by strong performance in North America and China, combined with a small
acquisition completed in 2017.

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Net income increased by $5 million, or 6%, in the year ended December 31, 2017,
driven by an increase in volume, offset somewhat by higher raw materials
costs. Movements in foreign exchange rates did not materially impact net sales
or net income in this period when compared to the same period in the prior year.



Outlook:

For full-year 2019, sales are expected to grow by a low to mid-single-digit percentage 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, auto glass, new product
lines and development projects, as well as certain corporate investments such as
Eurokera and Keraglass equity affiliates.



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





                        Years ended December 31,         % change      % change
                       2018         2017       2016      18 vs. 17     17 vs. 16

Segment net sales     $   216$  188$  152         15%           24%
Segment net income    $  (281)$ (259)$ (220)       (8%)          (18%)




2018 vs. 2017

Net sales of this segment increased by $28 million, or 15%, in the year ended
December 31, 2018, respectively, when compared to the same period in 2018,
driven by an increase in sales in our emerging businesses. The increase in the
net loss of $22 million, a decline of 8%, in the year ended December 31, 2017
reflects increased spending on our development projects when compared to 2017.



2017 vs. 2016

Net sales of this segment increased by $36 million, or 24%, in the year ended
December 31, 2017, respectively, when compared to the same period in 2016,
driven by an increase in sales in our emerging businesses. The increase in the
net loss in the year ended December 31, 2017 reflects increased spending on our
development projects versus the prior year.



LIQUIDITY AND CAPITAL RESOURCES

Financing and Capital Structure

The following items discuss Corning's financing and changes in capital structure during 2018 and 2017:




2018

In the second quarter of 2018, Corning issued ¥65.5 billion Japanese
yen-denominated debt securities in tranches of 7, 10 and 12 years. The proceeds
from these notes were received in Japanese yen and immediately converted to U.S.
dollars on the date of issuance. The net proceeds received in U.S. dollars,
after deducting offering expenses, was $596 million. Payments of principal and
interest on the notes will be in Japanese yen, or should yen be unavailable due
to circumstances beyond Corning's control, a U.S. dollar equivalent. The net
proceeds of $596 million will be used for general corporate purposes.



In the third quarter of 2018, Corning amended and restated its revolving credit
agreement (the "Revolving Credit Agreement"). The Revolving Credit Agreement
provides a $1.5 billion unsecured multi-currency line of credit and expires
August 15, 2023. The Revolving Credit Agreement includes affirmative and
negative covenants with which Corning must comply, including a leverage (debt to
capital ratio) financial covenant. The required leverage ratio is a maximum of
60%.

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In the fourth quarter of 2018, Corning issued $900 millionU.S. dollar-denominated unsecured long-term notes in tranches of 19, 30, and 50 years. The net proceeds of $889 million will be used for general corporate purposes. We can redeem these notes at any time, subject to certain terms and conditions.

In the fourth quarter of 2018, Corning redeemed $250 million of 6.625% Notes due 2019, paying a nominal call premium. The bond redemption incurred an insignificant loss during the fourth quarter of 2018.

2017


In the third quarter of 2017, Corning issued ¥78 billion Japanese
yen-denominated debt securities in tranches of 7, 10 and 20 years. The proceeds
from these notes were received in Japanese yen and immediately converted to U.S.
dollars on the date of issuance. The net proceeds received in U.S. dollars,
after deducting offering expenses, was approximately $700 million. Payments of
principal and interest on the notes will be in Japanese yen, or should yen be
unavailable due to circumstances beyond Corning's control, a U.S. dollar
equivalent. The net proceeds of $700 million were made available for general
corporate purposes.


In the fourth quarter of 2017, Corning issued $750 million of 4.375% senior unsecured notes that mature on November 15, 2057. The net proceeds of $743 million will be used for general corporate purposes. We can redeem these notes at any time, subject to certain terms and conditions.




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.



Common Stock Dividends



On February 1, 2017, Corning's Board of Directors declared a 14.8% increase in
the Company's quarterly common stock dividend, which increased the quarterly
dividend from $0.135 to $0.155 per share of common stock, beginning with the
dividend to be paid in the first quarter of 2017.



On February 6, 2018, Corning's Board of Directors declared a 16.1% 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.



On February 6, 2019, Corning's Board of Directors declared an 11.1% increase in
the Company's quarterly common stock dividend, which increased the quarterly
dividend from $0.18 to $0.20 per share of common stock, beginning with the
dividend paid in the first quarter of 2019. This increase marks the eighth
dividend increase since October 2011.



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 December 31, 2018, the preferred stock
has not been converted, and none of the anti-dilution provisions have been
triggered.

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Customer Deposits



As of December 31, 2018 and 2017, Corning had customer deposits of approximately
$1.0 billion and $0.4 billion, respectively. The majority of these represent
non-refundable cash deposits for customers to secure rights to an amount of
glass produced by Corning under long-term supply agreements. The duration of
these long-term supply agreements ranges up to ten years. As glass is shipped to
customers, Corning will recognize revenue and issue credit memoranda to reduce
the amount of the customer deposit liability, which are applied against customer
receivables resulting from the sale of glass. No credit memoranda were issued in
2018 and 2017.



Capital Spending



Capital spending totaled $2.2 billion in 2018, an increase of approximately $0.4
billion when compared to 2017, driven by expansions related to the Gen 10.5
glass manufacturing facilities in China, the addition of capacity to support the
new gas particulate filters business in the Environmental Technologies segment,
fiber and cable capacity in the Optical Communications segment and general
business growth in the Specialty Materials segment. We expect our 2019 capital
expenditures to be slightly more than $2.0 billion.



Cash Flows


Summary of cash flow data (in millions):





                                                        Years ended December 31,
                                                      2018        2017        2016
Net cash provided by operating activities           $  2,919$  2,004$  2,537
Net cash (used in) provided by investing activities $ (2,887)$ (1,710)$  3,662
Net cash used in financing activities               $ (1,995)$ (1,624)$ (5,322)




2018 vs. 2017

Net cash provided by operating activities increased by $915 million in the year
ended December 31, 2018 when compared to the same period last year, primarily
driven by an increase in customer incentives and deposits of $600
million. Favorable movements of $189 million in accounts payable and other
current liabilities were driven largely by an increase in accounts payable in
the Optical Communications segment and higher current liabilities in the
Specialty Materials segment. Cash received of $104 million, which represents the
excess of the fair value of the contingent consideration asset related to the
acquisition of Samsung Corning Precision Materials (refer to Note 14 (Fair Value
Measurements) to the Consolidated Financial Statements for additional
information), also increased cash provided by operating activities.



Net cash used in investing activities increased by $1,177 million in the year
ended December 31, 2018, when compared to the same period last year, driven by
increased capital expenditures of $438 million due to capacity expansions,
increased acquisition spending of $671million and lower gains realized on
translated earnings contracts of $162 million. Cash received of $196 million,
which represents the original fair value of the contingent consideration asset
related to the acquisition of Samsung Corning Precision Materials (refer to Note
14 (Fair Value Measurements) to the Consolidated Financial Statements for
additional information), partially offset the net cash used in investing
activities.



Net cash used in financing activities in the year ended December 31, 2018
increased by $371 million when compared to the same period last year, driven by
higher debt repayments, up $377 million and a decrease of $228 million for
proceeds from the exercise of stock options. A decrease of $225 million in share
repurchases partially offset the negative cash impact of these items.

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2017 vs. 2016

Net cash provided by operating activities decreased by $533 million in the year
ended December 31, 2017 when compared to the same period last year, driven by
$501 million of unfavorable movements in working capital. The negative impact of
working capital changes was largely driven by an increase of $143 million in VAT
receivables in Asia, a payment of $70 million related to our obligation under
the plan of reorganization for PCC (refer to Note 12 (Commitments, Contingencies
and Guarantees) to the Consolidated Financial Statements for additional
information), an increase in accounts receivable and inventory to support growth
in the Optical Communications, Environmental Technologies and Specialty
Materials segments.



Net cash used in investing activities increased by $5.4 billion in the year
ended December 31, 2017, when compared to the same period last year, driven by
the absence of $4.8 billion of cash received in the second quarter of 2016 on
the realignment of Dow Corning, coupled with an increase of $674 million in
capital expenditures largely due to capacity expansions and a decline of
$92 million in liquidations of short-term investments. A decline of $162 million
in acquisition spending partially offset these events.



Net cash used in financing activities in the year ended December 31, 2017
decreased by $3.7 billion when compared to the same period last year, driven by
lower share repurchases, down $1.8 billion, proceeds from the issuance of
long-term debt of $1.4 billion, the absence of $481 million of commercial paper
repayments made in 2016 and an increase of $171 million in proceeds from the
exercise of stock options.



Defined Benefit Pension Plans

We have defined benefit pension plans covering certain domestic and international employees. Our largest single pension plan is Corning's U.S. qualified plan. At December 31, 2018, this plan accounted for 76% of our consolidated defined benefit pension plans' projected benefit obligation and 85% of the related plans' assets.




In 2018, we made voluntary cash contributions of $105 million to our domestic
defined benefit pension plan and $12 million to our international pension
plans. In 2017, we made no voluntary cash contributions to our domestic defined
benefit pension plan and $29 million to our international pension plans. During
2019, we anticipate making cash contributions of $75 million to our U.S.
qualified pension plan and $31 million to our international pension plans.



Refer to Note 11 (Employee Retirement Plans) to the Consolidated Financial Statements for additional information.



Key Balance Sheet Data



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





                                                December 31,
                                               2018       2017

Working capital                              $ 3,723$ 5,618
Current ratio                                  2.1:1      2.8:1

Trade accounts receivable, net of allowances $ 1,940$ 1,807 Days sales outstanding

                            58         62
Inventories                                  $ 2,037$ 1,712
Inventory turns                                  3.6        3.7
Days payable outstanding (1)                      55         51
Long-term debt                               $ 5,994$ 4,749
Total debt to total capital                      30%        25%




(1) Includes trade payables only.




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Management Assessment of Liquidity




We ended the fourth quarter of 2018 with approximately $2.4 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. At December 31, 2018, approximately 56% of the consolidated
amount was held outside of the United States. During 2018, the Company
distributed approximately $2.2 billion in cash from foreign subsidiaries to the
U.S. parent.  There were no incremental taxes beyond the toll charge due with
respect to this distribution of cash.



To manage interest rate exposure, the Company, from time to time, enters into
interest rate swap agreements. As of December 31, 2018, there are no interest
rate swaps outstanding.


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 $1.5 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 Revolving Credit Agreement is available to support obligations under the commercial paper program, if needed. At December 31, 2018 Corning did not have outstanding commercial paper.




Share Repurchases



During 2016, Corning repurchased 197.1 million shares for approximately
$4.2 billion through an accelerated share repurchase agreement and open market
repurchases as part of the 2015 Repurchase Programs. In December 2016, Corning's
Board of Directors approved a $4 billion share repurchase program with no
expiration (the "2016 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.

During 2018, Corning repurchased 74.8 million shares for approximately $2.2 billion through open market repurchases under the 2016 and 2018 Repurchase Programs.

Refer to Note 15 (Shareholders' Equity) to the Consolidated Financial Statements for additional information.



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 2019 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,
acquisitions, capital expenditures, scheduled debt repayments, dividend payments
and share repurchase programs.



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%. At December 31, 2018,
our leverage using this measure was approximately 30%. As of December 31, 2018,
we were in compliance with this financial covenant.

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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 December 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.



Translated Earnings Contracts



Corning has hedged a significant portion of its projected yen exposure for the
period 2018 through 2022, with average rate forwards, collars and puts. In the
years ended December 31, 2018, 2017 and 2016, we recorded pre-tax net losses of
$96 million, $201 million and $459 million related to changes in the fair value
of these instruments. Included in these amounts are realized gains of $64
million, $268 million and $207 million, respectively. The gross notional value
outstanding for these instruments which hedge our exposure to the Japanese yen
at December 31, 2018, 2017 and 2016 was $11.6 billion, $13 billion and
$14.9 billion, respectively.



We have entered into zero-cost collars and average rate forwards to hedge our
translation exposure resulting from movements in the South Korean won and its
impact on our net income. In the year ended December 31, 2018, we recorded a
pre-tax net loss of $26 million, and in the years ended December 31, 2017 and
2016, we recorded pre-tax net gains of $95 million and $7 million, respectively,
related to changes in the fair value of these instruments. Included in these
amounts is a realized gain of $46 million, and realized losses of $1 million and
$7 million, respectively. These instruments had a gross notional value
outstanding at December 31, 2018, 2017 and 2016 of $0.1 billion, $0.8 billion
and $1.2 billion, respectively.



We have entered into a portfolio average rate forwards to hedge against our euro
translation exposure. In the years ended December 31, 2018, 2017 and 2016, we
recorded a pre-tax gain of $43 million, a net pre-tax loss of $40 million, and a
net pre-tax gain of $15 million, respectively. Included in these amounts are
realized losses of $14 million and $2 million, and a realized gain of
$1 million, respectively. At December 31, 2018, the euro-denominated average
rate instruments had a gross notional amount of $1.2 billion, and at 2017 and
2016, a gross notional amount of $0.3 billion.



These derivative instruments are not designated as accounting hedges, and changes in fair value are recorded in earnings in the translated earnings contract loss, net line of the Consolidated Statements of Income (Loss).

Off Balance Sheet Arrangements

Off balance sheet arrangements are transactions, agreements, or other contractual arrangements with an unconsolidated entity for which Corning has an obligation to the entity that is not recorded in our consolidated financial statements.




Corning's off balance sheet arrangements include guarantee contracts. At the
time a guarantee is issued, the Company is required 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, 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. These guarantees
have various terms, and none of these guarantees are individually significant.



Refer to Note 12 (Commitments, Contingencies and Guarantees) to the Consolidated Financial Statements for additional information.

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For variable interest entities, we assess the terms of our interest in each
entity to determine if we are the primary beneficiary. The primary beneficiary
of a variable interest entity is the party that absorbs a majority of the
entity's expected losses, receives a majority of its expected residual returns,
or both, as a result of holding variable interests, which are the ownership,
contractual, or other pecuniary interests in an entity that change with changes
in the fair value of the entity's net assets excluding variable interests.



Corning has identified ten entities that qualify as a variable interest entity
and are not consolidated. These entities are not considered to be significant to
Corning's consolidated statements of position.



Corning does not have retained interests in assets transferred to an unconsolidated entity that serve as credit, liquidity or market risk support to that entity.




Contractual Obligations



The amounts of our obligations follow (in millions):







                                                       Amount of commitment

and contingency expiration per period

                                                   Less than           1 to 3             3 to 5           5 years and
                                      Total         1 year              years              years           thereafter
Performance bonds and guarantees    $    152    $           23     $            4     $            2     $          123
Stand-by letters of credit (1)            84                71                  8                                     5
Credit facility to equity company          4                 4
Subtotal of commitment expirations
per
 period                             $    240    $           98     $           12     $            2     $          128

Purchase obligations (2)            $    339    $          214     $           56     $           28     $           41
Capital expenditure obligations (3)      412               412
Total debt (4)                         5,642                                  362                670              4,610
Interest on long-term debt (5)         5,117               231                450                408              4,028
Capital leases and financing
obligations                              393                 4                 11                132                246
Imputed interest on capital leases
and
 financing obligations                   205                20                 38                 37                110
Minimum rental commitments               581                82                133                111                255
Amended PCC Plan                         185                50                 85                 50
Uncertain tax positions (6)               95
Subtotal of contractual obligation
payments
 due by period (6)                  $ 12,969$        1,013$        1,135$        1,436$        9,290
Total commitments and
contingencies (6)                   $ 13,209$        1,111$        1,147$        1,438$        9,418

(1) At December 31, 2018, $39 million of the $84 million was included in other

accrued liabilities on our consolidated balance sheets.

(2) Purchase obligations are enforceable and legally binding obligations which

primarily consist of raw material and energy-related take-or-pay contracts.

(3) Capital expenditure obligations primarily reflect amounts associated with our

capital expansion activities.

(4) Total debt above is stated at maturity value, and excludes interest rate swap

gains/losses and bond discounts.

(5) The estimate of interest payments assumes interest is paid through the date

of maturity or expiration of the related debt, based upon stated rates in the

respective debt instruments.

(6) At December 31, 2018, $95 million was included on our balance sheet related

      to uncertain tax positions.



We believe a significant majority of these guarantees and contingent liabilities will expire without being funded.



ENVIRONMENT


Refer to Item 3. Legal Proceedings or Note 12 (Commitments, Contingencies and Guarantees) to the Consolidated Financial Statements for information.







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CRITICAL ACCOUNTING ESTIMATES



The preparation of financial statements requires us to make estimates and
assumptions that affect amounts reported therein. The estimates that required us
to make difficult, subjective or complex judgments, including future projections
of performance and relevant discount rates, are set forth below.



Acquired assets and liabilities




We account for the acquisition of a business using the purchase method of
accounting, which requires us to estimate the fair values of the assets acquired
and liabilities assumed.  This includes acquired intangible assets such as
customer-related intangibles and patents, fixed assets and
inventories. Liabilities assumed may include litigation and other contingency
reserves existing at the time of acquisition and require judgment in
ascertaining the related fair values.  Independent appraisals may be used to
assist in the determination of the fair value of certain assets and
liabilities.  Such appraisals are based on significant estimates provided by us,
such as forecasted revenues and profits utilized in determining the fair value
of contract-related acquired intangible assets or liabilities.  Significant
changes in assumptions and estimates subsequent to completing the allocation of
the purchase price to the assets and liabilities acquired, as well as
differences in actual and estimated results could result in impacts to our
financial results.  Additional information related to the acquisition date fair
value of acquired assets and liabilities obtained during the allocation period,
not to exceed one year, may result in changes to the recorded values of acquired
assets and liabilities, resulting in an offsetting adjustment to the goodwill
associated with the business acquired.



In 2018 we acquired CMD from 3M in a business combination. Included in the
acquisition were other intangible assets consisting primarily of $434 million of
customer relationships and $91 million of other intangibles that are amortized
over the weighted average useful life of approximately 14 and 11 years,
respectively.  The customer relationship intangible asset was valued using the
Multi-Period Excess Earnings Valuation Method, which is an income approach
method that estimates fair value of revenue based upon the present value of cash
flows that are expected to be generated from the acquired customer base. Key
assumptions used in this valuation include a discount rate of 12.5%, revenue
growth rates in the range of 0% to 3% and a customer attrition rate of 6%.



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 to assess whether 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 over a very long
useful life. Precious metals are reviewed for impairment as part of our
assessment of long-lived assets. This review considers all 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 operations and are not held for trading or other non-manufacturing related
purposes.



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Examples of events or circumstances that may be indicative of impairments include, but are not limited to:



 ·  A significant decrease in the market price of an asset;

· A significant change in the extent or manner in which a long-lived asset is

being used or in its physical condition;

· A significant adverse change in legal factors or in the business climate that

could affect the value of the asset, including an adverse action or assessment

by a regulator;

· An accumulation of costs significantly in excess of the amount originally

expected for the acquisition or construction of an asset;

· A current-period operating or cash flow loss combined with a history of

operating or cash flow losses or a projection or forecast that demonstrates

continuing losses associated with the use of an asset; and

· A current expectation that, more likely than not, an asset will be sold or

otherwise disposed of significantly before the end of its previously estimated

    useful life.




For purposes of recognition and measurement of an impairment loss, a long-lived
asset or assets is grouped with other assets and liabilities at the lowest level
for which identifiable cash flows are largely independent of the cash flows of
other assets and liabilities. We must exercise judgment in assessing the lowest
level for which identifiable cash flows are largely independent of the cash
flows of other assets and liabilities. Our assessment is performed at the
reportable segment level. For the majority of our reportable segments, we
concluded that locations or businesses within these segments which share
production along the supply chain must be combined to appropriately identify
cash flows that are largely independent of the cash flows of other assets and
liabilities.



For long-lived assets, when impairment indicators are present, we compare
estimated undiscounted future cash flows, including the eventual disposition of
the asset group at market value, to the assets' carrying value to determine if
the asset group is recoverable. This assessment requires the exercise of
judgment in assessing the future use of and projected value to be derived from
the assets to be held and used. Assessments also consider changes in asset
utilization, including the temporary idling of capacity and the expected timing
for placing this capacity back into production. If there is an impairment, a
loss is recorded to reflect the difference between the assets' fair value and
carrying value. This may require judgment in estimating future cash flows and
relevant discount rates and residual values in estimating the current fair value
of the impaired assets to be held and used.



For an asset group that fails the test of recoverability, the estimated fair
value of long-lived assets is determined using an "income approach" that starts
with the forecast of all the expected future net cash flows including the
eventual disposition at market value of long-lived assets, and considers the
fair market value of all precious metals. We assess the recoverability of the
carrying value of long-lived assets at the lowest level for which identifiable
cash flows are largely independent of the cash flows of other assets and
liabilities. If there is an impairment, a loss is recorded to reflect the
difference between the assets' fair value and carrying value. Our estimates are
based upon our historical experience, our commercial relationships, and
available external information about future trends. We believe fair value
assessments are most sensitive to market growth and the corresponding impact on
volume and selling prices and that these are also more subjective than
manufacturing cost and other assumptions. The Company believes its current
assumptions and estimates are reasonable and appropriate.



At December 31, 2018 and December 31, 2017, the carrying value of precious
metals was higher than the fair market value by $719 million and $711 million,
respectively. The majority of 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.



               © 2019 Corning Incorporated. All Rights Reserved.



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Impairment of Goodwill



We are required to make certain subjective and complex judgments in assessing
whether an event of impairment of goodwill has occurred, including assumptions
and estimates used to determine the fair value of our reporting units. Goodwill
is tested for impairment at the reporting unit level.  A reporting unit is
equivalent to an operating segment or a component of an operating segment which
constitutes a business and for which discrete financial information is regularly
reviewed by segment management.  An impairment loss generally would be
recognized when the carrying amount of a reporting unit's net assets exceeds the
estimated fair value of the reporting unit.



Corning has recorded goodwill in the Display Technologies, Optical
Communications, Specialty Materials, Life Sciences and All Other operating
segments.  Each of these operating segments is a separate reporting unit;
however, Specialty Materials and All Other are each made up of two separate
reporting units.    On a quarterly basis, or if an event occurs or circumstances
change that indicate the carrying amount may be impaired, management performs a
qualitative assessment of factors in each reporting unit within these operating
segments to determine if there have been any triggering events.  We also perform
a detailed quantitative impairment test every three years if no indicators
suggest a test should be performed in the interim.  We use this calculation as a
quantitative validation of the qualitative process; this process does not
represent an election to perform the quantitative impairment test in place of
the qualitative review.


The qualitative assessment is performed by assessing various factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. These factors include, but are not limited to, changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, or a sustained decrease in share price.




In 2018, we performed a quantitative goodwill impairment assessment in addition
to assessing the qualitative factors each quarter.  Our assessment is based on
our annual strategic planning process.  This process includes an extensive
review of expectations for the long-term growth of our businesses and forecasted
future cash flows. Our valuation method is an "income approach" using a
discounted cash flow model in which cash flows anticipated over several periods,
plus a terminal value at the end of that time horizon, are discounted to present
value using an appropriate discount rate.  Our estimates are based upon our
historical experience, our current knowledge from our commercial relationships,
and available external information about future trends.  The quantitative
assessment requires the exercise of significant judgment, including judgment
about appropriate discount rates, growth rates and the timing of expected future
cash flows of the respective reporting unit.



The quantitative assessment of goodwill resulted in fair values significantly
exceeding the carrying values for all of our reporting units. We also performed
a sensitivity analysis, using a range between 7-10% for the discount rate and
0%-3% for the growth rate, which had no material impact on our results.  Based
on the quantitative test performed in 2018, no goodwill impairment was required.



Income taxes



We are required to exercise judgment about our future results in assessing the
realizability of our deferred tax assets. Inherent in this estimation process is
the requirement for us to estimate future book and taxable income and possible
tax planning strategies. These estimates require us to exercise judgment about
our future results, the prudence and feasibility of possible tax planning
strategies, and the economic environments in which we do business. It is
possible that actual results will differ from assumptions and require
adjustments to allowances.



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Corning accounts for uncertain tax positions in accordance with ASC Topic 740,
Income Taxes, which requires that companies only record tax benefits for
technical positions that are believed to have a greater than 50% likelihood of
being sustained on their technical merits and then only to the extent of the
amount of tax benefit that is greater than 50% likely of being realized upon
settlement. In estimating these amounts, we must exercise judgment around
factors such as the weighting of the tax law in our favor, the willingness of a
tax authority to aggressively pursue a particular position, or alternatively,
consider a negotiated compromise, and our willingness to dispute a tax
authorities' assertion to the level of appeal we believe is required to sustain
our position. As a result, it is possible that our estimate of the benefits we
will realize for uncertain tax positions may change when we become aware of new
information affecting these judgments and estimates.



As of December 31, 2018, Corning has completed its analysis of the impact of the 2017 Tax Act as required by SAB 118.




Beginning in 2018, Corning will indefinitely reinvest the foreign earnings of:
(1) any of its subsidiaries located in jurisdictions where Corning lacks the
ability to repatriate its earnings, (2) any of its subsidiaries where Corning's
intention is to reinvest those earnings in operations, (3) legal entities for
which Corning holds a non-controlling interest, (4) any subsidiaries with an
accumulated deficit in earnings and profits and (5) any subsidiaries which have
a positive earnings and profits balance but for which the entity lacks
sufficient local statutory earnings or stock basis from which to make a
distribution.



Under the 2017 Tax Act, a company can make a policy election to account for the
tax on GILTI as a period cost or to recognize deferred tax assets and
liabilities when basis differences exist that are expected to affect the amount
of GILTI inclusion upon reversal.  Corning has elected to account for the GILTI
provisions as a period cost.



Fair value measures



As required, Corning uses two kinds of inputs 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, we
prioritize the inputs used to measure fair value into one of three broad
levels. Characterization of fair value inputs is required for those accounting
pronouncements that prescribe or permit fair value measurement. In addition,
observable market data must be used when available and the highest-and-best-use
measure should be applied to non-financial assets. Corning's major categories of
financial assets and liabilities required to be measured at fair value are
short-term and long-term investments, certain pension asset investments and
derivatives. These categories use observable inputs only and are measured using
a market approach based on quoted prices in markets considered active or in
markets in which there are few transactions.



Derivative assets and liabilities may include interest rate swaps and forward
exchange contracts that are measured using observable quoted prices for similar
assets and liabilities. Included in our forward exchange contracts are foreign
currency hedges that hedge our translation exposure resulting from movements in
the Japanese yen, South Korean won, euro, New Taiwan dollar, Chinese yuan and
British pound. These contracts are not designated as accounting hedges, and
changes in fair value are recorded in earnings in the translated earnings
contract loss, net line of the Consolidated Statements of Income (Loss). In
arriving at the fair value of Corning's derivative assets and liabilities, we
have considered the appropriate valuation and risk criteria, including such
factors as credit risk of the relevant party to the transaction. Amounts related
to credit risk are not material.



Refer to Note 14 (Fair Value Measurements) to the Consolidated Financial Statements for additional information.



               © 2019 Corning Incorporated. All Rights Reserved.



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Probability of litigation outcomes




We are required to make judgments about future events that are inherently
uncertain. In making determinations of likely outcomes of litigation matters, we
consider the evaluation of legal counsel knowledgeable about each matter, case
law, and other case-specific issues. See Part II - Item 3. Legal Proceedings for
a discussion of Corning's material litigation matters.



Other possible liabilities


We are required to make judgments about future events that are inherently uncertain. In making determinations of likely outcomes of certain matters, including certain tax planning and environmental matters, these judgments require us to consider events and actions that are outside our control in determining whether probable or possible liabilities require accrual or disclosure. It is possible that actual results will differ from assumptions and require adjustments to accruals.

Pension and other postretirement employee benefits (OPEB)




Corning offers employee retirement plans consisting of defined benefit pension
plans covering certain domestic and international employees and postretirement
plans that provide health care and life insurance benefits for eligible retirees
and dependents. The costs and obligations related to these benefits reflect the
Company's assumptions related to general economic conditions (particularly
interest rates), expected return on plan assets, rate of compensation increase
for employees and health care trend rates. The cost of providing plan benefits
depends on demographic assumptions including retirements, mortality, turnover
and plan participation. While management believes that the assumptions used are
appropriate, differences in actual experience or changes in assumptions may
affect Corning's employee pension and other postretirement obligations, and
current and future expense.



Costs for our defined benefit pension plans consist of two elements: 1) on-going
costs recognized quarterly, which are comprised of service and interest costs,
expected return on plan assets and amortization of prior service costs; and 2)
mark-to-market gains and losses outside of the corridor, where the corridor is
equal to 10% of the greater of the benefit obligation or the market-related
value of plan assets at the beginning of the year, which are recognized annually
in the fourth quarter of each year. These gains and losses result from changes
in actuarial assumptions and the differences between actual and expected return
on plan assets. Any interim remeasurements triggered by a curtailment,
settlement or significant plan changes, as well as any true-up to the annual
valuation, are recognized as a mark-to-market adjustment in the quarter in which
such event occurs.



Costs for our OPEB plans consist of on-going costs recognized quarterly, and are
comprised of service and interest costs, amortization of prior service costs and
amortization of actuarial gains and losses. We recognize the actuarial gains and
losses resulting from changes in actuarial assumptions as a component of
Stockholders' Equity on our consolidated balance sheets on an annual basis and
amortize them into our operating results over the average remaining service
period of employees expected to receive benefits under the plans, to the extent
such gains and losses are outside of the corridor.



On January 1, 2018, Corning adopted ASU No. 2017-07, Compensation Retirement
Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost
and Net Periodic Post-Retirement Benefit Cost, which presents the service cost
component 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 Income (Loss). Corning applied the practical
expedient as the estimation basis for applying the retrospective presentation
requirements.



               © 2019 Corning Incorporated. All Rights Reserved.



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The following tables present our actual and expected return on assets, as well as the corresponding percentage, for the years ended 2018, 2017 and 2016:





                                                            December 31,
(In millions)                                      2018         2017         2016

Actual return on plan assets - Domestic plans $ (202)$ 393 $

235

Expected return on plan assets - Domestic plans 178 163

153

Actual return on plan assets - International
plans                                                   1           18      

75

Expected return on plan assets - International
plans                                                  11           11           12

                                                            December 31,
                                                   2018         2017         2016
Weighted-average actual and expected return on
assets:
Actual return on plan assets - Domestic plans      (6.83)%      14.92%      

9.62%

Expected return on plan assets - Domestic plans 6.00% 6.00%

6.00%

Actual return on plan assets - International
plans                                              (0.06)%       3.93%      

19.06%

Expected return on plan assets - International
plans                                               2.13%        3.97%        3.92%



As of December 31, 2018, the Projected Benefit Obligation (PBO) for U.S. pension plans was $3.4 billion.

The following information illustrates the sensitivity to a change in certain assumptions for U.S. pension plans:





                                                     Effect on 2019        Effect on
                                                     pre-tax pension   December 31, 2018
Change in assumption                                     expense              PBO

25 basis point decrease in each spot rate              - 2 million       + 91 million
25 basis point increase in each spot rate              + 2 million       - 

87 million 25 basis point decrease in expected return on assets + 7 million 25 basis point increase in expected return on assets - 7 million

The above sensitivities reflect the impact of changing one assumption at a time. Note that economic factors and conditions often affect multiple assumptions simultaneously and the effects of changes in key assumptions are not necessarily linear. These changes in assumptions would have no effect on Corning's funding requirements.




In addition, at December 31, 2018, a 25 basis point decrease in each spot rate
would decrease stockholders' equity by $112 million before tax, and a 25 basis
point increase in each spot rate would increase stockholders' equity by
$107 million. In addition, the impact of greater than a 25 basis point decrease
in each spot rate would not be proportional to the first 25 basis point decrease
in each spot rate.


The following table illustrates the sensitivity to a change in each spot rate assumption related to Corning's U.S. OPEB plans:





                                          Effect on 2019       Effect on
                                           pre-tax OPEB    December 31, 2018
Change in assumption                         expense             APBO*

25 basis point decrease in each spot rate - 0 million + 21 million 25 basis point increase in each spot rate + 0 million - 20 million

* Accumulated Postretirement Benefit Obligation (APBO).

The above sensitivities reflect the impact of changing one assumption at a time. Note that economic factors and conditions often affect multiple assumptions simultaneously and the effects of changes in key assumptions are not necessarily linear.

               © 2019 Corning Incorporated. All Rights Reserved.



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Revenue recognition



The Company recognizes revenue 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. Corning also has contractual
arrangements with certain customers in which we recognize revenue over time. 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.



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.



NEW ACCOUNTING STANDARDS


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

               © 2019 Corning Incorporated. All Rights Reserved.



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FORWARD-LOOKING STATEMENTS



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



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



 -  global business, financial, economic and political conditions;


 -  tariffs and import duties;

- currency fluctuations between the U.S. dollar and other currencies, primarily

the Japanese yen, New Taiwan dollar, euro, Chinese yuan and South Korean won;


 -  product demand and industry capacity;


 -  competitive products and pricing;


 -  availability and costs of critical components and materials;


 -  new product development and commercialization;


 -  order activity and demand from major customers;

- the amount and timing of our cash flows and earnings and other conditions,

which may affect our ability to pay our quarterly dividend at the planned level

    or to repurchase shares at planned levels;


 -  possible disruption in commercial activities due to terrorist activity,

cyber-attack, armed conflict, political or financial instability, natural

disasters, or major health concerns;

- loss of intellectual property due to theft, cyber-attack, or disruption to our

information technology infrastructure;

- unanticipated disruption to equipment, facilities, IT systems or operations;


 -  effect of regulatory and legal developments;

- ability to pace capital spending to anticipated levels of customer demand;


 -  rate of technology change;

- ability to enforce patents and protect intellectual property and trade secrets;


 -  adverse litigation;


 -  product and components performance issues;


 -  retention of key personnel;

- customer ability, most notably in the Display Technologies segment, to maintain

profitable operations and obtain financing to fund ongoing operations and

manufacturing expansions and pay receivables when due;

- loss of significant customers;

- changes in tax laws and regulations including the 2017 Tax Act;

- the impacts of audits by taxing authorities;

- the potential impact of legislation, government regulations, and other

government action and investigations; and

- other risks detailed in Corning's SEC filings.




               © 2019 Corning Incorporated. All Rights Reserved.



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