CORNING INCORPORATED For discussion of 2018 results year-over-year comparison with 2017 results refer to "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 .
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 and recently introduced Strategy & Growth Framework
OnJune 14, 2019 , Corning introduced its 2020-2023 Strategy & Growth Framework. From 2020 to 2023, the company plans to invest$10 billion to$12 billion for growth and to return$8 billion to$10 billion to shareholders. InOctober 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 outlined our leadership priorities and articulated the opportunities we saw 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 targeted 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. As ofJune 30, 2019 , Corning met its goal of returning more than$12.5 billion to shareholders. As ofDecember 31, 2019 , Corning had invested almost$11 billion for growth and extended leadership. Corning's Frameworks outline the company's leadership priorities. With the completed Strategy and Capital Allocation Framework and new Strategy & Growth Framework, Corning plans to focus its portfolio and utilize its financial strength. 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 along with capital spending on a cohesive set of three core technologies, four manufacturing and engineering platforms, and five market-access platforms. This strategy allows us to quickly apply our talents and repurpose our assets across the company, as needed, to capture high-return opportunities. ? © 2020Corning Incorporated . All Rights Reserved. 24
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Index 2019 Results Net sales in the year endedDecember 31, 2019 were$11.5 billion , an increase of$213 million , or 2%, when compared to the year endedDecember 31, 2018 , driven by increased sales in the Specialty Materials, Environmental Technologies and Life Sciences segments offset by decreased sales in theDisplay Technologies and Optical Communications segments. For the year endedDecember 31, 2019 , we generated net income of$960 million , or$1.07 per share, compared to a net income of$1,066 million , or$1.13 per share, for 2018. When compared to 2018, the$106 million decrease in net income was primarily due to the following items (amounts presented after tax): ?Lower equity earnings in affiliated companies of$284 million when compared to the prior period, primarily driven by asset impairments and an inventory provision, partially offset by the deferred revenue recognition associated with adoption of the new revenue standard, as well as one-time settlement gains from revenue contracts;
?Higher costs of
?Lower segment net income of
Partially offsetting these events were the following items:
?Translated earnings contract gains in the current period were
?Costs related to litigation, regulatory and other legal matters were
?A positive impact of
?The positive impact of$42 million in tax adjustments primarily relating to the absence of a$172 million IRS audit settlement, or approximately$40 million of taxes payable after the utilization of tax attributes, recorded in the first quarter of 2018, netted against changes in tax reserves, changes in foreign valuation allowances and changes in the estimate of 2018 tax expense due to new tax reform guidance. Diluted earnings per share decreased by$0.06 per share, or 5%, when compared to 2018, driven by the decrease in net income described above, partially offset by the repurchase of 31.0 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 the current year, negatively impacted Corning's net income by approximately$44 million in the year endedDecember 31, 2019 , when compared to the same period in 2018.
2020 Corporate Outlook
We believe 2020 will be another year of growth in several segments and continued investment in innovations, consistent with our Strategy & Growth Framework. Corning expects its display glass volume to grow by a mid-single digit percentage, similar to the mid-single digit percentage growth expected in the display glass market. The company expects glass price declines to remain moderate, down a mid-single digit percentage for the full year. The company expectsOptical Communications full-year sales to decline by 5% to 10%. We expect mid-single digit percentage sales growth in our Environmental Technologies and Life Sciences segments. We expect high-single digit percentage sales growth in the Specialty Materials segment. © 2020Corning Incorporated . All Rights Reserved. 25
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We have been closely monitoring the outbreak of the coronavirus that originated inWuhan, China . We have operations inWuhan and other areas ofChina . We have taken steps to protect our employees and operations. The coronavirus may impact the global economy, our ability, as well as the ability of our customers and suppliers, to manufacture products and may reduce demand in our markets which could result in an impact to our financial results. We are taking steps to mitigate potential financial impacts, including supplying customers from other regions when appropriate. Currently, it is not possible for us to determine the financial impact of the coronavirus, if any. Our 2020 corporate outlook, outlined above, does not include any potential impact for the coronavirus.
RESULTS OF OPERATIONS
Selected highlights from our operations follow (in millions):
% change
2019 2018 2017 19 vs. 18 18 vs. 17
Net sales $ 11,503 $ 11,290 $ 10,116 2 12
Gross margin $ 4,035 $ 4,461 $ 4,020 (10) 11
(gross margin %) 35% 40% 40%
Selling, general and administrative
expenses $ 1,585 $ 1,799 $ 1,473 (12) 22
(as a % of net sales) 14% 16% 15%
Research, development and engineering
expenses $ 1,031 $ 993 $ 864 4 15
(as a % of net sales) 9% 9% 9%
Equity in earnings of affiliated
companies $ 17 $ 390 $ 361 (96) 8
(as a % of net sales) 3% 4%
Translated earnings contract gain
(loss), net $ 248 $ (93) $ (121) * 23
(as a % of net sales) 2% (1)% (1)%
Income before income taxes $ 1,216 $ 1,503 $ 1,657 (19) (9)
(as a % of net sales) 11% 13% 16%
Provision for income taxes $ (256) $ (437) $ (2,154) 41 80
(as a % of net sales) (2)% (4)% (21)%
Net income (loss) attributable to
Corning Incorporated $ 960 $ 1,066 $ (497) (10) *
(as a % of net sales) 8% 9% (5)%
* Percent change not meaningful.
?
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Index SegmentNet Sales The following table presents segment net sales by reportable segment (in millions): % % Years ended December 31, change change 2019 2018 2017 19 vs. 18 18 vs. 17 Display Technologies$ 3,254 $ 3,276 $ 3,137 (1)% 4% Optical Communications 4,064 4,192 3,545 (3)% 18% Specialty Materials 1,594 1,479 1,403 8% 5% Environmental Technologies 1,499 1,289 1,106 16% 17% Life Sciences 1,015 946 879 7% 8% All Other 230 216 188 6% 15% Net sales of reportable segments and All Other$ 11,656 $ 11,398 $ 10,258 2% 11% Constant-currency adjustment (153) (108) (142) (42)% 24% Consolidated net sales$ 11,503 $ 11,290 $ 10,116 2% 12%
For the year ended
?Net sales in the Display Technologies segment decreased by$22 million , with glass volume up a mid-single digit percentage and low-single digit percentage display glass price declines; the combination of finished goods volume, unfinished glass sold to our equity affiliates and a low-single-digit percentage price decline resulted in a one percent sales decline; ?Optical Communications net sales decreased$128 million , primarily due to lower sales in carrier products, down$199 million , partially offset by an increase of$71 million in enterprise network sales;
?Specialty Materials segment net sales increased by
?Net sales for Environmental Technologies increased
?Life Sciences net sales increased by
Movements in foreign exchange rates negatively impacted Corning's consolidated net sales by$45 million in the year endedDecember 31, 2019 , when compared to the same period in 2018.
In 2019, sales in international markets accounted for 68% 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. Gross Margin In the year endedDecember 31, 2019 , gross margin dollars decreased by$426 million , or 10%, and gross margin as a percentage of net sales declined by 5% when compared to the same period last year. Negative impacts to gross margin were primarily driven by accelerated depreciation, asset write-offs and lower sales in ourDisplay Technologies and Optical Communications segments during 2019. As volume declined in the second half of 2019, factory utilization was less efficient and negatively impacted gross margin. © 2020Corning Incorporated . All Rights Reserved. 27
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Movements in foreign exchange rates had a
Selling, General and Administrative Expenses
When compared to the year endedDecember 31, 2018 , selling, general and administrative expenses decreased by$214 million , or 12%, in the year endedDecember 31, 2019 . Selling, general and administrative expenses decreased by 2% as a percentage of sales. The decrease was primarily driven by the following items:
?The absence of a
?Reduced variable compensation expenses of
Research, Development and Engineering Expenses
For the year endedDecember 31, 2019 , research, development and engineering expenses increased by$38 million , or 4%, when compared to the same period in prior year, driven by higher costs associated with new product launches and our emerging businesses. As a percentage of sales, these expenses were consistent when compared to the same period in the previous year.
Equity in Earnings of Affiliated Companies
The following provides a summary of equity earnings (losses) of affiliated companies (in millions):
Years ended December 31,
2019 2018 2017
Hemlock Semiconductor Group $ 27 $ 388 $ 352
All other (10) 2 9
Total equity earnings $ 17 $ 390 $ 361
In 2016, Corning realigned its ownership interest in Dow Corning , exchanging its
50% interest in the joint venture between Corning and Dow Chemical for a newly
formed company that holds a 49.9% interest in Hemlock Semiconductor LLC and a
40.25% interest in Hemlock Semiconductor Operations LLC which are recorded as
equity method investments of Corning and are affiliated companies of HSG. HSG
manufactures polysilicon products for the semiconductor and solar industries.
HSG's solar business primarily serves the solar power panel industry.
In prior years, HSG's solar and semiconductor customers entered into long-term
"take or pay" contracts which included up-front cash payments to secure
capacity. During the last few years, and more significantly in 2019, the solar
power panel industry experienced significant over-capacity in the market,
resulting in declining sales volumes and market prices. As a result, HSG's solar
business experienced lower market penetration, overall price declines, and
settled contracts with customers that had committed volume and fixed pricing
above the current market price. While these settlements positively impacted
HSG's cash flow in 2019, they reduced expectations for future sales in HSG's
solar business.
Due to the adverse change in HSG's solar business, HSG was required to assess
the recoverability of its long-lived assets in the fourth quarter. Based on this
assessment, HSG determined that the carrying values of HSG's solar asset group
significantly exceeded its fair values. HSG engaged a third-party appraiser to
assist in determining the fair value of the assets within in the solar asset
group based on the highest and best use of the asset group. As a result of the
fair value determination, HSG recognized a pre-tax asset impairment charge of
$916 million for the year ended December 31, 2019 . Corning's share of the
pre-tax impairment was $369 million .
Due to the adverse changes above, the carrying values of HSG's solar business
inventories were also affected resulting in an inventory write-down of
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HSG adopted the new revenue standard onJanuary 1, 2019 and the timing of HSG's revenue recognition for certain remaining performance obligations measured atJanuary 1, 2019 was deferred for recognition. This deferral reduced the carrying amount of Corning's investment in HSG by$239 million . During the fourth quarter, a significant number of the performance obligations were satisfied and$434 million was recognized into HSG's net income. Corning's share of the equity earnings was$208 million .
In addition, HSG settled certain revenue contracts in the fourth quarter,
resulting in settlement gains of
Additional information about corporate investments is presented in Note 6 (Investments) to the consolidated financial statements.
Translated earnings contracts
Included in the line item translated earnings contract gain (loss), net, is the impact of foreign currency hedges which hedge our translation exposure arising from movements in the Japanese yen, South Korean won, newTaiwan dollar, euro, Chinese yuan and British pound and its impact on our net income (loss). The following table provides detailed information on the impact of our translated earnings contracts gains and losses for the years endedDecember 31, 2019 , 2018 and 2017: Net Loss Income (loss) ?income before Income (in millions) ?before tax (loss) tax
Net loss before tax Net Income
2019 2018 2019 vs. 2018
Hedges related to translated
earnings:
Realized gain, net $ 18 $ 14 $ 97 $ 78 $ (79) $ (64)
Unrealized gain (loss) 230 179 (190) (189) 420 368
Total translated earnings
contract gain (loss), net $ 248 $ 193 $ (93) $ (111) $ 341 $ 304
2018 2017 2018 vs. 2017
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)
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The gross notional value outstanding on our translated earnings contracts and foreign currency cash flow hedges were as follows (in billions):
Years ended
2019 2018 2017
Japanese yen-denominated translated earnings
contracts $ 10.2 $ 11.6 $ 13.0
South Korean won -denominated translated
earnings contracts 0.4 0.1 0.8
Euro -denominated translated earnings contracts 1.3 1.2 0.3
Other translated earnings contracts 0.3 0.7 0.2
Total gross notional value outstanding for
translated earnings contracts 12.2 13.6 14.3
Japanese yen-denominated foreign currency cash flow hedges 1.5 Other foreign currency cash flow hedges 0.6 0.4 0.3 Total gross notional value for foreign currency cash flow hedges 2.1
0.4 0.3
Total gross notional value outstanding$ 14.3 $ 14.0 $ 14.6 Income Before Income Taxes
The translation impact of fluctuations in foreign currency exchange rates,
including the impact of hedges realized in the current year, negatively impacted
Corning's income before income taxes by
Provision for Income Taxes
Our provision for income taxes and the related effective income tax rates were as follows (dollars in millions):
Years ended December 31,
2019 2018 2017
Provision for income taxes
21.1% 29.1% 130.0%
For the year ended
?Additional net provision of
?A net benefit of
?Additional net benefit, including a change in estimate from prior year, from the 2017 Tax Act attributable to foreign intangible income (FDII) deduction of$103 million offset by taxes for global intangible low-taxed income (GILTI) of$15 million .
For the year ended
?Additional taxes of
?Incremental tax expense of
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These items were partially offset by the following:
?A benefit of
?An
Generally, 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, (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, and (6) future distribution would trigger a significant federal income inclusion to theU.S. shareholder. During 2019, the Company distributed approximately$424 million from foreign subsidiaries to their respectiveU.S. parent companies. As ofDecember 31, 2019 , Corning has approximately$2.5 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 5 (Income Taxes) to the consolidated financial statements for further details regarding income tax matters.
Net Income (Loss) Attributable to
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,
2019 2018 2017
Net income (loss) attributable to Corning
Incorporated $ 960 $ 1,066 $ (497)
Net income (loss) attributable to Corning
Incorporated used in
? basic earnings per common share
calculation (Note 17) $ 862 $ 968 $ (595)
Net income (loss) attributable to Corning
Incorporated used in
? diluted earnings (loss) per common share
calculation (Note 17) $ 960 $ 1,066 $ (595)
Basic earnings (loss) per common share $ 1.11 $ 1.19 $ (0.66)
Diluted earnings (loss) per common share $ 1.07 $ 1.13 $ (0.66)
Weighted-average common shares outstanding -
basic 776 816 895
Weighted-average common shares outstanding -
diluted 899 941 895
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Comprehensive Income
Years ended December 31,
(In millions) 2019 2018 2017
Net income (loss) attributable to Corning
Incorporated $ 960 $
1,066
Foreign currency translation adjustments and other (143) (185) 746 Net unrealized gains (losses) on investments 1 (1) 14 Unamortized (losses) gains and prior service (costs) credits for postretirement benefit plans (64) 19 30 Net unrealized gains (losses) on designated hedges 45 (1) 44 Other comprehensive (loss) income, net of tax (Note 16) (161)
(168) 834
Comprehensive income attributable to Corning Incorporated$ 799 $ 898 $ 337 2019 vs. 2018
For the year ended
?A decrease in net income of
?An$83 million increase in unamortized actuarial losses for post-retirement benefit plans,$53 million of which was related to the adoption of the new standard for reclassification of stranded tax effects in AOCI with the remainder of the impact driven by decreases in the discount rates used to value our post-retirement obligations.
These losses were partially offset by the following:
?A decrease in the loss on foreign currency translation adjustments in the
amount of
?The impact of a change to net unrealized gains on designated hedges of
Refer to Note 12 (Employee Retirement Plans) and Note 16 (Shareholders' Equity) to the consolidated financial statements for additional details.
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Index 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 report core performance measures. These items include gains and losses on our translated earnings contracts, acquisition-related costs, certain discrete tax items and other tax-related adjustments, restructuring, impairment, and other charges or credits, 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. Corning utilizes constant-currency reporting for our Display Technologies and Specialty Materials segments for the Japanese yen, South Korean won, Chinese yuan and newTaiwan dollar currencies. EffectiveJanuary 1, 2019 , Corning also began using constant-currency reporting for our Environmental Technologies and Life Sciences segments for the euro, Japanese yen and Chinese yuan. 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 inthe 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 foreign currencies against theU.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.
Effective
For a reconciliation of non-GAAP performance measures to their most directly comparable GAAP financial measure, please see "Reconciliation of Non-GAAP Measures".
RESULTS OF OPERATIONS - CORE PERFORMANCE MEASURES
Selected highlights from our continuing operations, excluding certain items,
follow (in millions):
Years ended December 31, % change
2019 2018 2017 19 vs. 18 18 vs. 17
Core net sales $ 11,656 $ 11,398 $ 10,258 2% 11%
Core equity in earnings of affiliated
companies $ 237 $ 241 $ 211 (2)% 14%
Core net income $ 1,578 $ 1,673 $ 1,634 (6)% 2%
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Index CoreNet 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 2019 2018 2017 19 vs. 18 18 vs. 17 Display Technologies$ 3,254 $ 3,276 $ 3,137 (1)% 4% Optical Communications 4,064 4,192 3,545 (3)% 18% Specialty Materials 1,594 1,479 1,403 8% 5% Environmental Technologies 1,499 1,289 1,106 16% 17% Life Sciences 1,015 946 879 7% 8% All Other 230 216 188 6% 15% Total segment net sales *$ 11,656 $ 11,398 $ 10,258 2% 11%
* 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
2019 2018 2017 19 vs. 18 18 vs. 17
Hemlock Semiconductor Group $ 229 $ 236 $ 201 (3)% 17%
All other 8 5 10 60%
(50)%
Total core equity earnings$ 237 $ 241 $ 211 (2)% 14% Core Net Income 2019 vs. 2018 In the year endedDecember 31, 2019 , we generated core net income of$1,578 million or$1.76 per share, compared to core net income generated in the year endedDecember 31, 2018 of$1,673 million , or$1.78 per share. The decrease in core net income of$95 million was driven by the following items:
?A decrease in the
?A decrease in the Display Technologies segment of$49 million primarily driven by decreases in volume and glass shipments during the second half of 2019, resulting in lower factory utilization and negatively impacting profitability; and ?A decrease of$11 million in the Specialty Materials segment, largely driven by the absence of customer support for new product development costs for the launch of new product innovations in 2019.
Partially offsetting these decreases in core net income were the following:
?An increase in the Environmental Technologies segment of
?An increase of
Core earnings per share decreased in the year endedDecember 31, 2019 to$1.76 per share, driven by the decrease in core net income and partially offset by the repurchase of 31.0 million shares of common stock over the last twelve months.
Included in core net income for the years ended
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Refer to Note 12 (Employee Retirement Plans) to the consolidated financial statements for additional information.
Core Earnings per Common Share
The following table sets forth the computation of core basic and core diluted earnings per common share (in millions, except per share amounts):
2019 2018 2017
Core net income attributable to
$ 1,634 Less: Series A convertible preferred stock dividend 98 98
98
Core net income available to common stockholders - basic 1,480 1,575
1,536
Add: Series A convertible preferred stock dividend 98 98
98
Core net income available to common stockholders - diluted
Weighted-average common shares outstanding - basic 776 816
895
Effect of dilutive securities: Stock options and other dilutive securities 8 10
11
Series A convertible preferred stock 115 115
115
Weighted-average common shares outstanding - diluted 899 941
1,021
Core basic earnings per common share$ 1.91 $ 1.93 $ 1.72 Core diluted earnings per common share$ 1.76 $ 1.78
Reconciliation of Non-GAAP Measures
We utilize certain financial measures and key performance indicators that are
not calculated in accordance with GAAP to assess our financial and operating
performance. A non-GAAP financial measure is defined as a numerical measure of a
company's financial performance that (i) excludes amounts, or is subject to
adjustments that have the effect of excluding amounts, that are included in the
comparable measure calculated and presented in accordance with GAAP in the
consolidated statements of income (loss) 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 consolidated statements of income
(loss) or statement of cash flows.
Core net sales, core equity in earnings of affiliated companies and core net
income 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, 2019
Income
?before Effective
Net Equity ?income Net ?tax ?Earnings per
?Sales ?earnings ?taxes ?income ?rate (a) ?share
As reported $ 11,503 $ 17 $ 1,216 $ 960 21.1% $ 1.07
Constant-currency adjustment (1) 153 1 115 115 0.13
Translation loss on Japanese
? yen-denominated debt (2) 3 2 0.00
Translated earnings contract gain,
net (3) (245) (190) (0.21)
Acquisition-related costs (4) 130 99 0.11
Discrete tax items and other
tax-related
? adjustments (5) 37 0.04
Litigation, regulatory and other
legal matters (6) (17) (13) (0.01)
Restructuring, impairment and
other charges (7) 6 439 334 0.37
Equity in losses of affiliated
companies (8) 213 213 165 0.18
Pension mark-to-market
adjustment (10) 95 69 0.08
Core performance measures $ 11,656 $ 237 $ 1,949 $ 1,578 19.0% $ 1.76
(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, 2018
Income
?before Effective Earnings
Net Equity ?income Net ?tax ?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
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 (11) 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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Items which we exclude from GAAP measures to arrive at core performance measures are as follows:
(1) Constant-currency adjustment: Because a significant portion of segment revenues and
expenses are denominated in currencies other than the
is important to understand the impact on core net income of translating these currencies
into
denominated in Japanese yen, but also impacted by the South Korean won, Chinese yuan, and
new
Science segments sales and net income are impacted by the euro, Chinese yuan and Japanese
yen, these segments will also be presented on a constant-currency basis. We have not
recast the prior periods for these two segments as the impact of fluctuations in these
currencies are not material for prior periods. 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. We establish constant-currency rates based on
internally derived management estimates which are closely aligned with the currencies we
have hedged.
Constant-currency rates are as follows:
Currency Japanese yen Korean won Chinese yuan New Taiwan dollar Euro
Rate ¥107 ?1,175 ¥6.7 NT$31 €.81
(2) Translation (gain) loss on Japanese yen-denominated debt: We have excluded the gain or
loss on the translation of our yen-denominated debt to
unrealized gains and losses of our Japanese yen, South Korean won, Chinese yuan and new
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 2019, these include discrete
period tax items such as changes in tax law, the impact of tax audits, changes in
judgement about the realizability of certain deferred tax assets and other tax-related
adjustments. For 2018, this amount primarily relates to the preliminary
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, adjustments to our
estimated liability for environmental-related items and other legal matters. (7) Restructuring, impairment and other charges or credits: This amount includes
restructuring, impairment and other charges or credits, as well as other expenses,
primarily accelerated depreciation and asset write-offs, which are not related to
continuing operations and are not classified as restructuring expense. (8) Equity in (earnings) losses 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 ("CPM") 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) 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
allowances resulting from the 2017 Tax Act, and adjustments for the elimination of excess
foreign tax credit planning.
?
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Index REPORTABLE SEGMENTS
Our reportable segments are as follows:
?Display Technologies - manufactures glass substrates for flat panel liquid crystal displays and other high-performance display panels.
?
?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.
?Environmental Technologies - manufactures ceramic substrates and filters for automotive and diesel applications.
?Life Sciences - manufactures glass and plastic labware, equipment, media, serum and reagents enabling workflow solutions for drug discovery and bioproduction.
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. We prepared the financial results for our reportable segments on a basis consistent with our internal disaggregation of financial information to assist in making internal operating decisions. We use a segment tax rate of 21% when presenting segment information. The impact of changes in the Japanese yen, euro, South Korean won, Chinese yuan and newTaiwan dollar are excluded from segment sales and segment net income for the Display Technologies, Specialty Materials, Environmental Technologies and Life Science segments. Certain corporate income and expenses are included in the unallocated amounts in the reconciliation of reportable segment net income to consolidated net income. These include items that are not used by our CODM in evaluating the results of, or in allocating resources to, our segments and include the following items: the impact of our translated earnings contracts; acquisition-related costs; discrete tax items and other tax-related adjustments; certain litigation, regulatory and other legal matters; restructuring, impairment and other charges or credits; adjustments relating to acquisitions; and other non-recurring non-operational items. Although we exclude these amounts from segment results, they are included in reported consolidated results. We included the earnings of equity affiliates that are closely associated with our reportable segments in the respective segment's net income. We have allocated certain common expenses among reportable segments differently than we would for stand-alone financial information. Segment net income may not be consistent with measures used by other companies.
Display Technologies
The following table provides net sales and net income for the Display
Technologies segment:
Years ended December 31, % change % change
2019 2018 2017 19 vs. 18 18 vs. 17
Segment net sales $ 3,254 $ 3,276 $ 3,137 (1%) 4%
Segment net income $ 786 $ 835 $ 888 (6%) (6%)
2019 vs. 2018
Net sales in the Display Technologies segment decreased by $22 million , or 1%,
for the year ended December 31, 2019 , when compared to the prior year.
Corning's glass volume increased by a mid-single digit percentage, higher than
the overall market, driven by increased Gen 10.5 output during the year. The
combination of finished goods volume, unfinished glass sold to our equity
affiliates and a low-single-digit percentage price decline resulted in a one
percent sales decline.
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Net income in the Display Technologies segment decreased by$49 million in the year endedDecember 31, 2019 , driven by the decrease in sales outlined above. Display Technologies shipped more glass in the first half of 2019 than in the latter half. Due to lower glass volumes in the second half of 2019, factory utilization declined impacting profitability.
Outlook:
For full-year 2020, Corning expects its display glass volume to grow by a mid-single digit percentage, similar to the mid-single digit percentage growth expected in the display glass market. The company expects display glass price declines to remain moderate, down a mid-single percentage for the full year.
The following table provides net sales and net income for the
Years ended December 31, % change % change
2019 2018 2017 19 vs. 18 18 vs. 17
Segment net sales $ 4,064 $ 4,192 $ 3,545 (3%) 18%
Segment net income $ 489 $ 592 $ 469 (17%) 26%
2019 vs. 2018
Net sales declined by $128 million , or 3%, in the year ended December 31, 2019 ,
when compared to the same period in 2018, primarily due to lower sales in
carrier products, down $199 million , partially offset by an increase of $71
million in enterprise network sales. Sales were lower than expected due to
weakness in the optical market, highlighted by capital spending reductions at
two of our significant customers in the latter half of 2019.
Net income in the year ended December 31, 2019 decreased by $103 million , or
17%. Lower sales volumes in the latter half of 2019 drove less efficient factory
utilization negatively impacting profitability.
Movements in foreign currency exchange rates did not materially impact net
income in this segment in the year ended
Outlook:
Full-year 2020
Specialty Materials
The following table provides net sales and net income for the Specialty
Materials segment:
Years ended December 31, % change % change
2019 2018 2017 19 vs. 18 18 vs. 17
Segment net sales $ 1,594 $ 1,479 $ 1,403 8% 5%
Segment net income $ 302 $ 313 $ 301 (4%) 4%
2019 vs. 2018
Net sales in the Specialty Materials segment increased by $115 million , or 8%,
in the year ended December 31, 2019 , when compared to the same period in 2019,
primarily driven by strong demand for Gorilla® Glass.
Net income in the year ended December 31, 2019 decreased by $11 million , or 4%,
when compared to the same period in 2018. The decrease was primarily related to
the absence of customer support for new product development costs for the launch
of new product innovations in 2019.
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Index Outlook:
The company expects high-single digit percentage growth for the Specialty Materials segment on a year-over-year basis for full-year 2020.
Environmental Technologies
The following table provides net sales and net income for the Environmental
Technologies segment:
Years ended December 31, % change % change
2019 2018 2017 19 vs. 18 18 vs. 17
Segment net sales $ 1,499 $ 1,289 $ 1,106 16% 17%
Segment net income $ 263 $ 208 $ 165 26% 26%
2019 vs. 2018
Net sales increased
Net income in the year endedDecember 31, 2019 increased by$55 million , or 26%, driven by the sales increase outlined above and strong operational performance and successful ramping of additional gasoline particulate filter capacity inChina . Outlook:
We expect mid-single digit sales growth on a year-over-year basis in our Environmental Technologies segment for full-year 2020.
Life Sciences
The following table provides net sales and net income for the Life Sciences
segment:
Years ended December 31, % change % change
2019 2018 2017 19 vs. 18 18 vs. 17
Segment net sales $ 1,015 $ 946 $ 879 7% 8%
Segment net income $ 150 $ 117 $ 95 28% 23%
2019 vs. 2018
Net sales in the Life Sciences segment increased by $69 million , or 7%, in the
year ended December 31, 2019 , when compared to the same period in 2018, driven
by strong performance across all product categories and sales that continued to
outpace market growth.
Net income increased by
Outlook:
For full-year 2020, sales are expected to grow by a 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.
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The following table provides net sales and net loss for All Other (in millions):
Years ended December 31, % change % change
2019 2018 2017 19 vs. 18 18 vs. 17
Segment net sales $ 230 $ 216 $ 188 6% 15%
Segment net loss $ (289) $ (281) $ (259) (3%) (8%)
2019 vs. 2018
Net sales of this segment increased by $14 million , or 6%, in the year ended
December 31, 2019 , 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 $8 million , a decline of 3%, reflects increased spending on our
development projects when compared to 2018.
LIQUIDITY AND CAPITAL RESOURCES
Financing and Capital Structure
The following items discuss Corning's financing and changes in capital structure during 2019 and 2018:
2019
In the third quarter of 2019, Corning issued
?¥31.3 billion 1.153% senior unsecured notes with a maturity of 12 years; and
?¥5.9 billion 1.513% senior unsecured notes with a maturity of 20 years.
The proceeds from the Notes were received in Japanese yen and converted toU.S. dollars on the date of issuance. The net proceeds received inU.S. dollars, after deducting offering expenses, were approximately$349 million and will be used for general corporate purposes. 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, aU.S. dollar equivalent.
In the fourth quarter of 2019, Corning issued
?
?
The net proceeds, after deducting offering expenses, were approximately$1.5 billion and 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 2019, Corning redeemed$300 million of 4.25% notes due in 2020, paying a premium of$4.7 million by exercising our make-whole call. The bond redemption resulted in an$8.4 million loss during the same quarter.
Common Stock Dividends
OnFebruary 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. OnFebruary 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. © 2020Corning Incorporated . All Rights Reserved. 42
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OnFebruary 5, 2020 , Corning's Board of Directors declared an 10.0% increase in the Company's quarterly common stock dividend, which increased the quarterly dividend from$0.20 to$0.22 per share of common stock, beginning with the dividend paid in the first quarter of 2020. This increase marks the ninth dividend increase sinceOctober 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 ofDecember 31, 2019 , the preferred stock has not been converted, and none of the anti-dilution provisions have been triggered.
Customer Deposits
As ofDecember 31, 2019 and 2018, Corning had customer deposits of approximately$1.0 billion . The majority of these represent non-refundable cash deposits for customers to secure rights to an amount of glass produced by Corning under long-term supply agreements. The duration of these long-term supply agreements ranges up to ten years. As glass is shipped to customers, Corning will recognize revenue and issue credit memoranda to reduce the amount of the customer deposit liability, which are applied against customer receivables resulting from the sale of glass. Credit memoranda of$37 million were issued in 2019; no such memoranda were issued in 2018.
Capital Spending
Capital spending totaled$1,978 million in 2019, a decrease of$264 million when compared to 2018, primarily driven by lower spending in theOptical Communications and Display Technologies segments. We expect our 2020 capital expenditures to be approximately$1.5 billion .
Cash Flows
Summary of cash flow data (in millions):
Years ended December 31,
2019 2018 2017
Net cash provided by operating activities
2019 vs. 2018
Net cash provided by operating activities decreased by$888 million in the year endedDecember 31, 2019 , when compared to the same period last year, primarily driven by a decrease in customer deposits received of$558 million and net unfavorable movements in working capital of$352 million . In the year endedDecember 31, 2019 , net cash used in investing activities decreased by$996 million , primarily driven by lower acquisition and capital expenditures of$842 million and$264 million , respectively, partially offset by the absence of cash received of$196 million for a contingent consideration asset, when compared to the prior year. Net cash used in financing activities decreased by$1,948 million in the year endedDecember 31, 2019 , when compared to the same period last year. The primary drivers were lower share repurchases, down$1,287 million , lower debt repayments, down$329 million and increased borrowing, up$346 million .
Defined Benefit Pension Plans
We have defined benefit pension plans covering certain domestic and
international employees. Our largest single pension plan is Corning's
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In 2019, we made no voluntary contributions to our domestic defined benefit pension plan and cash contributions of$2 million to our international pension plans. During 2020, we anticipate making cash contributions of$85 million to ourU.S. qualified pension plan and$54 million to our international pension plans.
Refer to Note 12 (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,
2019 2018
Working capital $ 3,942 $ 3,723
Current ratio 2.1:1 2.1:1
Trade accounts receivable, net of allowances $ 1,836 $ 1,940
Days sales outstanding 59 58
Inventories $ 2,320 $ 2,037
Inventory turns 3.3 3.6
Days payable outstanding (1) 48 55
Long-term debt $ 7,729 $ 5,994
Total debt to total capital 37% 30%
(1)Includes trade payables only.
Management Assessment of Liquidity
We ended the fourth quarter of 2019 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. AtDecember 31, 2019 , approximately 51% of the consolidated amount was held outside ofthe United States . To manage interest rate exposure, the Company, from time to time, enters into interest rate swap agreements. As ofDecember 31, 2019 , there are no interest rate swaps outstanding.
Our Revolving Credit Agreement provides a committed
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. AtDecember 31, 2019 , Corning did not have outstanding commercial paper.
Share Repurchases
During 2018, Corning repurchased 74.8 million shares for approximately
During the year endedDecember 31, 2019 , the Company repurchased 31.0 million shares of common stock on the open market for approximately$0.9 billion as part of its 2018 and 2019 Repurchase Programs.
Refer to Note 16 (Shareholders' Equity) to the consolidated financial statements for additional information.
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Index 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. From time to time, we factor accounts receivable. During 2019, Corning participated in customer-initiated payment programs which resulted in accelerated collections of$143 million in accounts receivable. We currently have not identified any potential material impact on our liquidity resulting from customer credit issues. Our major source of funding for 2020 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%. AtDecember 31, 2019 , our leverage using this measure was approximately 37%. As ofDecember 31, 2019 , we were in compliance with this financial covenant. Our debt instruments contain customary event of default provisions, which allow the lenders the option of accelerating all obligations upon the occurrence of certain events. In addition, some of our debt instruments contain a cross default provision, whereby an uncured default exceeding a specified amount on one debt obligation of the Company, also would be considered a default under the terms of another debt instrument. As ofDecember 31, 2019 , 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 2019 through 2023, with average rate forwards and options. In the years endedDecember 31, 2019 and 2018, we recorded pre-tax net gains of$201 million and pre-tax net losses of$96 million , respectively, related to changes in the fair value of these instruments. Included in these amounts are realized losses of$7 million and realized gains of$64 million , respectively. The gross notional value outstanding for these instruments which hedge our exposure to the Japanese yen atDecember 31, 2019 and 2018, was$10.2 billion and$11.6 billion , respectively. We have entered into 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 years endedDecember 31, 2019 and 2018, we recorded a pre-tax net gain of$6 million and a pre-tax net loss of$26 million , respectively, related to changes in the fair value of these instruments. Included in these amounts is a realized loss of$1 million and a realized gain of$46 million , respectively. These instruments had a gross notional value outstanding atDecember 31, 2019 and 2018, of$0.4 and$0.1 billion , respectively. We have entered into a portfolio of average rate forwards to hedge against our euro translation exposure. In the years endedDecember 31, 2019 and 2018, we recorded pre-tax gains of$37 million and$43 million , respectively. Included in these amounts are realized gains of$29 million and realized losses of$14 million , respectively. AtDecember 31, 2019 and 2018, the euro-denominated average rate instruments had a gross notional amount of$1.3 billion and$1.2 billion , respectively.
These derivative instruments are not designated as accounting hedges, and changes in fair value are recorded in earnings in the translated earnings contract gain (loss), net line of the consolidated statements of income (loss).
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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 and indemnity 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 13 (Commitments, Contingencies and Guarantees) to the consolidated financial statements for additional information.
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 financial statements.
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.
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Index 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 $ 163 $ 30 $ 4 $ 1 $ 128
Stand-by letters of credit (1) 43 31 8 3 1
Subtotal of commitment expirations
? per period $ 206 $ 61 $ 12 $ 4 $ 129
Purchase obligations (2) $ 554 $ 190 $ 199 $ 75 $ 90
Capital expenditure obligations (3) 592 592
Total debt (4) 7,195 437 588 6,170
Finance leases and financing obligations 600 11 30 160 399
Interest on long-term debt (5) 8,948 298 583 543 7,524
Imputed interest on finance leases and
? financing obligations 296 27 53 43 173
Operating Lease Obligations 755 98 153 116 388
Uncertain tax positions (6) 58
Subtotal of contractual obligation
? payments due by period (6) $ 18,998 $ 1,216 $ 1,455 $ 1,525 $ 14,744 Total commitments and contingencies (6)
$ 1,467 $ 1,529 $ 14,873
(1)At
(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 or 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
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 13 (Commitments, Contingencies and Guarantees) to the consolidated financial statements for information.
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.
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. 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, if applicable. 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. AtDecember 31, 2019 and 2018, the carrying value of precious metals was lower than the fair market value by$849 million and higher than the fair market value by$719 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.
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.
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 cash flow and translation exposure resulting from movements in the Japanese yen, South Korean won, euro, newTaiwan dollar, Chinese yuan and British pound. Changes in the fair value of contracts designated as cash flow hedges are recorded in accumulated other comprehensive income in shareholders' equity and reclassified into income when the underlying hedged item impacts earnings. For contracts that are not designated as accounting hedges, changes in fair value are recorded in earnings in the translated earnings contract gain (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 15 (Fair Value Measurements) to the consolidated financial statements for additional information.
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.
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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 accumulated other comprehensive income in shareholders' equity 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.
The following table presents our actual and expected return on assets, as well as the corresponding percentages:
December 31,
(In millions) 2019 2018 2017
Actual return on plan assets - Domestic plans
161 178 163
Actual return on plan assets - International plans 39 1
18
Expected return on plan assets - International plans 10 11
11
Weighted-average actual and expected return on assets: Actual return on plan assets - Domestic plans
21.89% (6.83)% 14.92%
Expected return on plan assets - Domestic plans 6.00% 6.00%
6.00%
Actual return on plan assets - International plans 7.99% (0.06)%
3.93%
Expected return on plan assets - International plans 2.01% 2.13%
3.97%
As of
The following information illustrates the sensitivity to a change in certain
assumptions for
Effect on 2020 Effect on
?pre-tax pension ?December 31, 2019
Change in assumption ?expense ?PBO
25 basis point decrease in each spot rate - 3 million + 110 million
25 basis point increase in each spot rate + 2 million - 105 million 25 basis point decrease in expected return on assets + 8 million 25 basis point increase in expected return on assets - 8 million
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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, atDecember 31, 2019 , a 25 basis point decrease in each spot rate would decrease shareholders' equity by$133 million before tax, and a 25 basis point increase in each spot rate would increase shareholders' equity by$127 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
Effect on 2020 Effect on
?pre-tax OPEB ?December 31, 2019
Change in assumption ?expense ?APBO*
25 basis point decrease in each spot rate - 0 million + 23 million 25 basis point increase in each spot rate + 0 million - 22 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. 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. OnJanuary 1, 2018 , we adopted the new revenue standard and applied the modified retrospective method of accounting to those contracts which were not completed as ofJanuary 1, 2018 . Results for reporting periods beginning afterJanuary 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605 "Revenue Recognition". Because the impact of adopting the standard on Corning's financial statements was immaterial, we have not made an adjustment to opening retained earnings. One of Corning's equity affiliates adopted the new revenue standard onJanuary 1, 2019 . The impact of adopting the new standard to Corning's financial statements was a net reduction of$186 million to 2019 beginning retained earnings. Timing of revenue recognition for certain open performance obligations as measured atJanuary 1, 2019 under the new standard was approximately$239 million with offsetting deferred tax impacts of$53 million .
NEW ACCOUNTING STANDARDS
Refer to Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements.
?
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Index FORWARD-LOOKING STATEMENTS The statements in this Annual Report on Form 10-K, in reports subsequently filed by Corning with theSecurities 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
?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
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