10-Q 1 q12011form10q.htm Q1, 2011 FORM 10-Q q12011form10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

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

For the quarterly period ended March 31, 2011

OR

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

For the transition period from ___________to____________

Commission file number:  1-3247

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


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

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

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

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

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

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

 
Large accelerated filer
x
 
Accelerated filer
¨
 
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
 

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

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

Class
 
Outstanding as of April 15, 2011
Corning’s Common Stock, $0.50 par value per share
 
1,569,905,964 shares

 

 


PART I – FINANCIAL INFORMATION
   
   
Page
Item 1.  Financial Statements
   
     
 
3
     
 
4
     
 
5
     
 
6
     
 
30
     
 
45
     
 
45
     
PART II – OTHER INFORMATION
   
     
 
46
     
 
49
     
 
49
     
 
50
     
 
51


-2-

 




 
           
 
Three months
ended March 31,
 
 
2011
 
2010
           
Net sales
$
1,923 
 
$
1,553 
Cost of sales
 
1,049 
   
822 
           
Gross margin
 
874 
   
731 
           
Operating expenses:
         
Selling, general and administrative expenses
 
250 
   
235 
Research, development and engineering expenses
 
156 
   
145 
Amortization of purchased intangibles
 
   
Restructuring, impairment and other credits (Note 2)
       
(2)
Asbestos litigation charge (credit) (Note 3)
 
   
(52)
           
Operating income
 
460 
   
403 
           
Equity in earnings of affiliated companies (Note 9)
 
398 
   
469 
Interest income
 
   
Interest expense
 
(27)
   
(26)
Other income, net (Note 1)
 
27 
   
64 
           
Income before income taxes
 
862 
   
913 
Provision for income taxes (Note 5)
 
(114)
   
(97)
           
Net income attributable to Corning Incorporated
$
748 
 
$
816 
           
Earnings per common share attributable to Corning Incorporated:
         
Basic (Note 6)
$
0.48 
 
$
0.52 
Diluted (Note 6)
$
0.47 
 
$
0.52 
           
Dividends declared per common share
$
0.05 
 
$
0.05 
 
The accompanying notes are an integral part of these consolidated financial statements.



-3-

 



           
 
March 31,
2011
 
December 31,
2010
Assets
         
           
Current assets:
         
Cash and cash equivalents
$
4,570 
 
$
4,598 
Short-term investments, at fair value (Note 7)
 
1,733 
   
1,752 
Total cash, cash equivalents and short-term investments
 
6,303 
   
6,350 
Trade accounts receivable, net of doubtful accounts and allowances - $20 and $20
 
1,107 
   
973 
Inventories (Note 8)
 
841 
   
738 
Deferred income taxes (Note 5)
 
433 
   
431 
Other current assets
 
353 
   
367 
Total current assets
 
9,037 
   
8,859 
           
Investments (Note 9)
 
4,569 
   
4,372 
Property, net of accumulated depreciation - $6,565 and $6,420 (Note 10)
 
9,235 
   
8,943 
Goodwill and other intangible assets, net (Note 11)
 
885 
   
716 
Deferred income taxes (Note 5)
 
2,760 
   
2,790 
Other assets
 
174 
   
153 
           
Total Assets
$
26,660 
 
$
25,833 
           
Liabilities and Equity
         
           
Current liabilities:
         
Current portion of long-term debt
$
26 
 
$
57 
Accounts payable
 
949 
   
798 
Other accrued liabilities (Notes 3 and 12)
 
919 
   
1,131 
Total current liabilities
 
1,894 
   
1,986 
           
Long-term debt (Note 4)
 
2,245 
   
2,262 
Postretirement benefits other than pensions
 
915 
   
913 
Other liabilities (Notes 3 and 12)
 
1,251 
   
1,246 
Total liabilities
 
6,305 
   
6,407 
           
Commitments and contingencies (Note 3)
         
Shareholders’ equity:
         
Common stock – Par value $0.50 per share; Shares authorized: 3.8 billion;
Shares issued: 1,633 million and 1,626 million
 
817 
   
813 
Additional paid-in capital
 
12,954 
   
12,865 
Retained earnings
 
7,550 
   
6,881 
Treasury stock, at cost; Shares held: 66 million and 65 million
 
(1,240)
   
(1,227)
Accumulated other comprehensive income (Note 17)
 
223 
   
43 
Total Corning Incorporated shareholders’ equity
 
20,304 
   
19,375 
Noncontrolling interests
 
51 
   
51 
Total equity
 
20,355 
   
19,426 
           
Total Liabilities and Equity
$
26,660 
 
$
25,833 

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


-4-

 




           
 
Three months ended
March 31,
 
 
2011
 
2010
Cash Flows from Operating Activities:
         
Net income
$
748 
 
$
816 
Adjustments to reconcile net income to net cash provided by operating activities:
         
Depreciation
 
226 
   
206 
Amortization of purchased intangibles
 
   
Asbestos litigation charges (credits)
 
   
(52)
Restructuring, impairment and other credits
       
(2)
Cash received from settlement of insurance claims
 
66 
     
Stock compensation charges
 
23 
   
29 
Earnings of affiliated companies in excess of dividends received
 
(78)
   
(241)
Deferred tax provision
 
15 
   
50 
Restructuring payments
 
(9)
   
(31)
Credits issued against customer deposits
 
(7)
   
(30)
Employee benefit expense, net of payments
 
34 
   
26 
Changes in certain working capital items:
         
Trade accounts receivable
 
(121)
   
(120)
Inventories
 
(79)
   
(31)
Other current assets
 
(26)
   
32 
Accounts payable and other current liabilities, net of restructuring payments
 
(83)
   
(74)
Other, net
 
(144)
   
63 
Net cash provided by operating activities
 
573 
   
643 
           
Cash Flows from Investing Activities:
         
Capital expenditures
 
(532)
   
(173)
Acquisitions of business, net of cash received
 
(148)
     
Net proceeds from sale or disposal of assets
 
     
Short-term investments – acquisitions
 
(883)
   
(224)
Short-term investments – liquidations
 
903 
   
472 
Other,  net
 
   
Net cash (used in) provided by investing activities
 
(657)
   
77 
           
Cash Flows from Financing Activities:
         
Net repayments of short-term borrowings and current portion of long-term debt
 
(10)
   
(58)
Principal payments under capital lease obligations
 
(32)
     
Proceeds from issuance of common stock, net
       
Proceeds from the exercise of stock options
 
64 
   
21 
Dividends paid
 
(79)
   
(78)
Net cash used in financing activities
 
(57)
   
(111)
Effect of exchange rates on cash
 
113 
   
(75)
Net (decrease) increase in cash and cash equivalents
 
(28)
   
534 
Cash and cash equivalents at beginning of period
 
4,598 
   
2,541 
           
Cash and cash equivalents at end of period
$
4,570 
 
$
3,075 

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


-5-

 



1.      Significant Accounting Policies

Basis of Presentation

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

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in accordance with U.S. GAAP for interim financial information.  Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted or condensed.  These interim consolidated financial statements should be read in conjunction with Corning’s consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K).

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

Effective January 1, 2010, the Company adopted required changes to consolidation guidance for variable interest entities which require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity.  This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.  In addition, the required changes provide guidance on shared power and joint venture relationships, remove the scope exemption for qualified special purpose entities, revise the definition of a variable interest entity, and require additional disclosures.  The adoption of this standard was not material to Corning’s consolidated results of operations or financial condition.

Property, Net of Accumulated Depreciation

Land, buildings, and equipment, including precious metals, are recorded at cost.  Depreciation is based on estimated useful lives of properties using the straight-line method.  Except as described in Note 10 (Property, Net of Accumulated Depreciation), related to the depletion of precious metals, the estimated useful lives range from 10 to 40 years for buildings and 2 to 20 years for equipment.

Included in the subcategory of equipment are the following types of assets:
Asset type
Range of useful life
   
Computer hardware and software
3 to 7 years
Manufacturing equipment (excluding precious metals)
2 to 15 years
Furniture and fixtures
5 to 10 years
Transportation equipment
5 to 20 years

Manufacturing equipment includes certain components of production equipment that are constructed of precious metals.  These assets 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.  We treat the physical loss of precious metals in the manufacturing and reclamation process as depletion and account for these losses as a period expense based on actual units lost.  Precious metals are integral to many of our glass production processes.  They are only acquired to support our operations and are not held for trading or other purposes.

-6-

 


Fair Value Measurements

Major categories of financial assets and liabilities, including short-term investments, other assets and derivatives are measured at fair value on a recurring basis.  Certain assets and liabilities including long-lived assets, goodwill, asset retirement obligations, and cost and equity investments are measured at fair value on a nonrecurring basis.

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

Other Income, Net

“Other income, net” in Corning’s consolidated statements of income includes the following (in millions):
           
 
Three months ended
March 31,
 
 
2011
 
2010
Royalty income from Samsung Corning Precision
$
61 
 
$
65 
Foreign currency transaction and hedge gains/(losses), net
 
(10)
   
Net income attributable to noncontrolling interests
 
   
Other, net
 
(25)
   
(11)
Total
$
27 
 
$
64 

New Accounting Standards

At March 31, 2011, there are no recently issued accounting standards that will have a material impact on Corning when adopted in a future period.

2.      Restructuring, Impairment and Other Charges (Credits)

2011 Activity

The following table summarizes the restructuring reserve activity for the three months ended March 31, 2011 (in millions):
                 
 
Reserve at
January 1,
2011
 
Cash
payments
 
Reserve at
March 31,
2011
Restructuring:
               
Employee related costs
$
15
 
$
(8)
 
$
7
Other charges (credits)
 
12
   
(1)
   
11
Total restructuring charges
$
27
 
$
(9)
 
$
18

Cash payments for employee-related costs were substantially completed by the end of 2010, while payments for exit activities will be substantially complete by the end of 2011.

-7-

 


2010 Activity

The following table summarizes the restructuring reserve activity for the three months ended March 31, 2010 (in millions):
                             
 
Reserve at
January 1,
2010
 
Non-cash
adjustments
 
Net
reversals
 
Cash
payments
 
Reserve at
March 31,
2010
Restructuring:
                           
Employee related costs
$
80
 
$
(2)
 
$
(2)
 
$
(28)
 
$
48
Other charges (credits)
 
20
               
(3)
   
17
Total restructuring charges
$
100
 
$
(2)
 
$
(2)
 
$
(31)
 
$
65

3.      Commitments and Contingencies

Asbestos Litigation

Pittsburgh Corning Corporation.  Corning and PPG Industries, Inc. (PPG) each own 50% of the capital stock of Pittsburgh Corning Corporation (PCC).  Over a period of more than two decades, PCC and several other defendants have been named in numerous lawsuits involving claims alleging personal injury from exposure to asbestos.  On April 16, 2000, PCC filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Western District of Pennsylvania.  At the time PCC filed for bankruptcy protection, there were approximately 11,800 claims pending against Corning in state court lawsuits alleging various theories of liability based on exposure to PCC’s asbestos products and typically requesting monetary damages in excess of one million dollars per claim.  Corning has defended those claims on the basis of the separate corporate status of PCC and the absence of any facts supporting claims of direct liability arising from PCC’s asbestos products.  Corning is also currently involved in approximately 10,300 other cases (approximately 38,700 claims) alleging injuries from asbestos and similar amounts of monetary damages per case.  Those cases have been covered by insurance without material impact to Corning to date.  As described below, several of Corning’s insurance carriers have filed a legal proceeding concerning the extent of any insurance coverage for these claims.  Asbestos litigation is inherently difficult, and past trends in resolving these claims may not be indicators of future outcomes.

On March 28, 2003, Corning announced that it had reached agreement with the representatives of asbestos claimants for the resolution of all current and future asbestos claims against it and PCC, which might arise from PCC products or operations (the 2003 Plan).  The 2003 Plan would have required Corning to relinquish its equity interest in PCC, contribute its equity interest in Pittsburgh Corning Europe N.V. (PCE), a Belgian corporation, contribute 25 million shares of Corning common stock, and pay a total of $140 million in six annual installments (present value $131 million at March 2003), beginning one year after the plan’s effective date, with 5.5 percent interest from June 2004.  In addition, the 2003 Plan provided that Corning would assign certain insurance policy proceeds from its primary insurance and a portion of its excess insurance.

On December 21, 2006, the Bankruptcy Court issued an order denying confirmation of the 2003 Plan for reasons it set out in a memorandum opinion.  Several parties, including Corning, filed motions for reconsideration.  These motions were argued on March 5, 2007, and the Bankruptcy Court reserved decision.  On January 29, 2009, a proposed plan of reorganization (the Amended PCC Plan) resolving issues raised by the Court in denying confirmation of the 2003 Plan was filed with the Bankruptcy Court.


-8-

 


As a result, Corning believes the Amended PCC Plan, modified as indicated below, now represents the most probable outcome of this matter and expects that the Amended PCC Plan will be confirmed by the Court.  At the same time, Corning believes the 2003 Plan no longer serves as the basis for the Company’s best estimate of liability.  Key provisions of the Amended PCC Plan address the concerns expressed by the Bankruptcy Court.  Accordingly, in the first quarter of 2008, Corning adjusted its asbestos litigation liability to reflect components of the Amended PCC Plan.  The proposed resolution of PCC asbestos claims under the Amended PCC Plan requires Corning to contribute its equity interests in PCC and PCE and to contribute a fixed series of payments, recorded at present value.  Corning will have the option to use its shares rather than cash to make these payments, but the liability is fixed by dollar value and not the number of shares.  The Amended PCC Plan would require Corning to make (1) one payment of $100 million one year from the date the Amended PCC Plan becomes effective and certain conditions are met and (2) five additional payments of $50 million, on each of the five subsequent anniversaries of the first payment, the final payment of which is subject to reduction based on the application of credits under certain circumstances.  Documents were filed with the Bankruptcy Court further modifying the Amended PCC Plan by reducing Corning’s initial payment by $30 million and reducing its second and fourth payments by $15 million each.  In return, Corning will relinquish its claim for reimbursement of its payments and contributions under the Amended PCC Plan from the insurance carriers involved in the bankruptcy proceeding with certain exceptions.  These modifications are expected to resolve objections to the Amended PCC Plan filed by some of the insurance carriers.  Confirmation hearings on the Amended PCC Plan were held in June 2010 and briefs discussing the legal issues have been filed.  The Bankruptcy Court’s opinion on the Amended Plan is pending.

The Amended PCC Plan does not include non-PCC asbestos claims that may be or have been raised against Corning.  Corning has recorded an additional $150 million for such claims in its estimated asbestos litigation liability.  The liability for non-PCC claims was estimated based upon industry data for asbestos claims since Corning does not have recent claim history due to the injunction issued by the Bankruptcy Court.  The estimated liability represents the undiscounted projection of claims and related legal fees over the next 20 years.  The amount may need to be adjusted in future periods as more Company-specific data becomes available.

The liability for the Amended PCC Plan and the non-PCC asbestos claims was estimated to be $638 million at March 31, 2011, compared with an estimate of the liability of $633 million at December 31, 2010.  In the three months ended March 31, 2011, Corning recorded asbestos litigation expense of $5 million compared to a credit of $52 million in the three months ended March 31, 2010 to reflect the change in the terms of the proposed settlement.  The entire obligation is classified as a non-current liability as installment payments for the cash portion of the obligation are not planned to commence until more than 12 months after the Amended PCC Plan becomes effective and the PCE portion of the obligation will be fulfilled through the direct contribution of Corning’s investment in PCE (currently recorded as a non-current other equity method investment).

The Amended PCC Plan is subject to a number of contingencies.  Payment of the amounts required to fund the Amended PCC Plan from insurance and other sources are subject to a number of conditions which may not be achieved.  The approval of the Amended PCC Plan by the Bankruptcy Court is not certain and faces objections by some parties.  Any approval of the Amended PCC Plan by the Bankruptcy Court is subject to appeal.  For these and other reasons, Corning’s liability for these asbestos matters may be subject to changes in subsequent quarters.  The estimate of the cost of resolving the non-PCC asbestos claims may also be subject to change as developments occur.  Management continues to believe that the likelihood of the uncertainties surrounding these proceedings causing a material adverse impact to Corning’s financial statements is remote.

Several of Corning’s insurers have commenced litigation in state courts for a declaration of the rights and obligations of the parties under insurance policies, including rights that may be affected by the potential resolutions described above.  Corning is vigorously contesting these cases.  Management is unable to predict the outcome of this insurance litigation and therefore cannot estimate the range of any possible loss.

-9-

 


Other Commitments and Contingencies

In the normal course of our business, we do not routinely provide significant third-party guarantees.  When provided, these guarantees have various terms, and none of these guarantees are individually significant.  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.

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

As of March 31, 2011 and December 31, 2010, contingent guarantees totaled a notional value of $230 million.  We believe a significant majority of these contingent guarantees will expire without being funded.  We also were contingently liable for purchase obligations of $404 million and $408 million, at March 31, 2011 and December 31, 2010, respectively.

Product warranty liability accruals were $25 million at March 31, 2011 and $24 million at December 31, 2010.

Corning is a defendant in various lawsuits, including environmental litigation, product-related suits, the Dow Corning and PCC matters, discussed in Part II – Item 1, Legal Proceedings, and is subject to various claims which arise in the normal course of business.  In the opinion of management, the likelihood that the ultimate disposition of these matters will have a material adverse effect on Corning’s consolidated financial position, liquidity, or results of operations, is remote.

Corning has been named by the Environmental Protection Agency (the Agency) under the Superfund Act, or by state governments under similar state laws, as a potentially responsible party for 18 active hazardous waste sites.  Under the Superfund Act, all parties who may have contributed any waste to a hazardous waste site, identified by the Agency, are jointly and severally liable for the cost of cleanup unless the Agency agrees otherwise.  It is Corning’s policy to accrue for its estimated liability related to Superfund sites and other environmental liabilities related to property owned by Corning based on expert analysis and continual monitoring by both internal and external consultants.  At March 31, 2011, and December 31, 2010, Corning had accrued approximately $29 million (undiscounted) and $30 million (undiscounted), respectively, for the estimated liability for environmental cleanup and related litigation.  Based upon the information developed to date, management believes that the accrued reserve is a reasonable estimate of the Company’s liability and that the risk of an additional loss in an amount materially higher than that accrued is remote.

4.      Debt

Based on borrowing rates currently available to us for loans with similar terms and maturities, the fair value of long-term debt was $2.4 billion at March 31, 2011 and December 31, 2010.

In the first quarter of 2011, there was no significant debt activity.

In the first quarter of 2010, Corning repaid $58 million of debt which included the redemption of $48 million principal amount of our 6.25% notes due February 18, 2010.

-10-

 


5.      Income Taxes

Our provision for income taxes and the related effective income tax rates were as follows (in millions):
           
 
Three months
ended March 31,
 
 
2011
 
2010
           
Provision for income taxes
$
(114)  
 
$
(97)  
Effective tax rate
 
13.2%
   
10.6%

For the three months ended March 31, 2011, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:
·  
Rate differences on income/(losses) of consolidated foreign companies;
·  
The impact of equity in earnings of affiliated companies; and
·  
The benefit of tax holidays and investment credits in foreign jurisdictions.

For the three months ended March 31, 2010, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:
·  
Rate differences on income/(losses) of consolidated foreign companies;
·  
The impact of equity in earnings of affiliated companies;
·  
The benefit of tax holidays and investment credits in foreign jurisdictions;
·  
The benefit of excess foreign tax credits that resulted from the repatriation of current year earnings of certain foreign subsidiaries; and
·  
The impact of discrete items including a $56 million charge from the reversal of the deferred tax asset associated with a subsidy for certain retiree medical benefits.  Discrete items increased our effective tax rate by 8.3 percentage points.

We currently provide income taxes on the earnings of foreign subsidiaries and affiliated companies to the extent these earnings are currently taxable or expected to be remitted.  In 2010, $1.1 billion of certain foreign subsidiaries and affiliated companies’ current year earnings were remitted and the tax benefit of the related excess foreign tax credits was included in 2010 annual effective tax rate utilized for the three months ended March 31, 2010.  As of December 31, 2010, taxes have not been provided on approximately $8.9 billion of accumulated foreign unremitted earnings that are expected to remain invested indefinitely.  It is not practical to calculate the unrecognized deferred tax liability on those earnings.  Our cash, cash equivalents, and short-term investments are held in various locations throughout the world.  At December 31, 2010, about half of the consolidated amount was held outside of the U.S.  Almost all of the amounts held outside of the U.S. are available for repatriation subject to relevant tax consequences.  We utilize a variety of tax planning and financing strategies to ensure that our worldwide cash is available in the locations in which it is needed.

Certain foreign subsidiaries in China and Taiwan are operating under tax holiday arrangements.  The nature and extent of such arrangements vary, and the benefits of such arrangements phase out through 2015 according to the specific terms and schedules of the relevant taxing jurisdictions.  The impact of the tax holidays on our effective tax rate is a reduction in the rate of 1.6 and 4.7 percentage points for the three months ended March 31, 2011 and 2010, respectively.

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

-11-

 


6.      Earnings per Common Share
 
The reconciliation of the amounts used in the basic and diluted earnings per common share computations follows (in millions, except per share amounts):
                               
 
Three months ended March 31,
 
2011
 
2010
 
Net
income
attributable
to Corning
Incorporated
 
Weighted-
average
shares
 
Per
share
amount
 
Net
income
attributable
to Corning
Incorporated
 
Weighted-
average
shares
 
Per
share
amount
           
           
                               
Basic earnings per common share
$
748
 
1,565
 
$
0.48
 
$
816
 
1,555
 
$
0.52
                               
Effect of dilutive securities:
                             
Stock options and other dilutive securities
     
24
             
24
     
                               
Diluted earnings per common share
$
748
 
1,589
 
$
0.47
 
$
816
 
1,579
 
$
0.52

The following potential common shares were excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive (in millions):
       
 
Three months ended
March 31,
 
 
2011
 
2010
Stock options and other dilutive securities excluded from the calculation of diluted earnings per common share
22
 
51
 
7.      Available-for-Sale Investments

The following is a summary of the fair value of available-for-sale investments (in millions):
                       
 
Amortized cost
 
Fair value
 
March 31,
2011
 
December 31,
2010
 
March 31,
2011
 
December 31,
2010
Bonds, notes and other securities:
                     
U.S. government and agencies
$
1,720
 
$
1,734
 
$
1,722
 
$
1,737
Other debt securities
 
5
   
11
   
11
   
15
Total short-term investments
$
1,725
 
$
1,745
 
$
1,733
 
$
1,752
Asset-backed securities
$
63
 
$
64
 
$
44
 
$
45
Total long-term investments
$
63
 
$
64
 
$
44
 
$
45
We do not intend to sell, nor do we believe it is more likely than not that we would be required to sell, the long-term investment asset-backed securities (which are collateralized by mortgages) before recovery of their amortized cost basis.  It is possible that a significant degradation in the delinquency or foreclosure rates in the underlying assets could cause further temporary or other-than-temporary impairments in the future.

-12-

 


The following table summarizes the contractual maturities of available-for-sale securities at March 31, 2011 (in millions):
Less than one year
$1,371
Due in 1-5 years
351
Due in 5-10 years
0
Due after 10 years (1)
55
Total
$1,777

(1)
Includes $44 million of asset-based securities that mature over time and are being reported at their final maturity dates.

The following tables provide the fair value and gross unrealized losses of the Company’s investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2011 and December 31, 2010 (in millions):
                           
     
March 31, 2011
     
12 months or greater
 
Total
 
Number
of
securities
in a loss
position
 
Fair
value
 
Unrealized
losses (1)
 
Fair
value
 
Unrealized
losses
Asset-backed securities
22
 
$
44
 
$
(18)
 
$
44
 
$
(18)
Total long-term investments
22
 
$
44
 
$
(18)
 
$
44
 
$
(18)

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

                           
     
December 31, 2010
     
12 months or greater
 
Total
 
Number
of
securities
in a loss
position
 
Fair
value
 
Unrealized
losses (1)
 
Fair
value
 
Unrealized
losses
Asset-backed securities
22
 
$
45
 
$
(20)
 
$
45
 
$
(20)
Total long-term investments
22
 
$
45
 
$
(20)
 
$
45
 
$
(20)

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

Gross realized gains and losses for the three months ended March 31, 2011 and 2010 were not significant.

A reconciliation of the changes in credit losses recognized in earnings for the three months ended March 31, 2011 and March 31, 2010 (in millions):
       
 
March 31,
 
2011
 
2010
Beginning balance of credit losses, January 1
$4
 
$2
Additions for credit losses not previously recognized in earnings
     
Ending balance of credit losses, for the three months ended March 31
$4
 
$2

The $4 million loss represents management’s estimate of credit losses inherent in the securities considering projected cash flows using assumptions of delinquency rates, loss severities, and other estimates of future collateral performance.  These credit losses are limited to asset-backed securities in our investment portfolio.

As of March 31, 2011 and December 31, 2010, for securities that have credit losses, an other than temporary impairment loss of $15 million and $16 million, respectively, is recognized in accumulated other comprehensive income.

Proceeds from sales and maturities of short-term investments totaled $0.9 billion and $0.5 billion for the three months ended March 31, 2011 and 2010, respectively.

-13-

 


8.      Inventories

Inventories comprise the following (in millions):
           
 
March 31,
2011
 
December 31,
2010
Finished goods
$
255
 
$
208
Work in process
 
217
   
207
Raw materials and accessories
 
190
   
155
Supplies and packing materials
 
179
   
168
Total inventories
$
841
 
$
738

9.      Investments

Investments comprise the following (in millions):
               
 
Ownership
Interest (1)
 
March 31,
2011
 
December 31,
2010
Affiliated companies accounted for by the equity method
             
Samsung Corning Precision Glass Co., Ltd.
50%
 
$
3,116
 
$
2,943
Dow Corning Corporation
50%
   
1,193
   
1,186
All other
20-50%
   
257
   
240
       
4,566
   
4,369
Other investments
     
3
   
3
Total
   
$
4,569
 
$
4,372

(1)
Amounts reflect Corning’s direct ownership interests in the respective affiliated companies.  Corning does not control any of these entities.

Related party information for these investments in affiliates follows (in millions):
           
 
Three months ended
March 31,
 
2011
 
2010
Related Party Transactions:
         
Corning sales to affiliated companies
$
6
 
$
5
Corning purchases from affiliated companies
$
37
 
$
25
Corning transfers of assets, at cost, to affiliated companies
$
34
 
$
27
Dividends received from affiliated companies
$
320
 
$
228
Royalty income from affiliated companies
$
62
 
$
65
Corning services to affiliates
$
8
 
$
7

As of March 31, 2011, balances due to and due from affiliates were $23 million and $104 million, respectively.  As of December 31, 2010, balances due to and due from affiliates were $7 million and $101 million, respectively.

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

-14-

 


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

Samsung Corning Precision Materials Co., Ltd. (Samsung Corning Precision)
Samsung Corning Precision is a South Korea-based manufacturer primarily of liquid crystal display (LCD) glass for flat panel displays.  In the second quarter of 2010, Samsung Corning Precision changed its name from Samsung Corning Precision Glass Co., Ltd. to Samsung Corning Precision Materials Co., Ltd.

Samsung Corning Precision’s results of operations follow (in millions):
           
 
Three months ended
March 31,
 
 
2011
 
2010
           
Statement of Operations:
         
Net sales
$
1,141
 
$
1,198
Gross profit
$
855
 
$
925
Net income attributable to Samsung Corning Precision
$
611
 
$
701
Corning’s equity in earnings of Samsung Corning Precision
$
299
 
$
350
           
Related Party Transactions:
         
Corning purchases from Samsung Corning Precision
$
30
 
$
18
Dividends received from Samsung Corning Precision
$
205
 
$
173
Royalty income from Samsung Corning Precision
$
61
 
$
65
Corning transfers of machinery and equipment to Samsung Corning Precision at cost (1)
$
34
 
$
27

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

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

As of March 31, 2011, balances due from Samsung Corning Precision were $37 million and balances due to Samsung Corning Precision were $19 million.  As of December 31, 2010, balances due from Samsung Corning Precision were $29 million and balances due to Samsung Corning Precision were $5 million.

On December 31, 2007, Samsung Corning Precision acquired all of the outstanding shares of Samsung Corning Co., Ltd. (Samsung Corning).  After the transaction, Corning retained its 50% interest in Samsung Corning Precision.  Samsung Corning Precision accounted for the transaction at fair value while Corning accounted for the transaction at historical cost.

Prior to their merger, Samsung Corning Precision and Samsung Corning were two of approximately thirty co-defendants in a lawsuit filed by Seoul Guarantee Insurance Co. and thirteen other creditors (SGI and Creditors) for alleged breach of an agreement that approximately twenty-eight affiliates of the Samsung group (Samsung Affiliates) entered into with SGI and Creditors on August 24, 1999 (the Agreement).  The lawsuit is pending in the courts of South Korea.  Under the Agreement it is alleged that the Samsung Affiliates agreed to sell certain shares of Samsung Life Insurance Co., Ltd. (SLI), which had been transferred to SGI and Creditors in connection with the petition for court receivership of Samsung Motor Inc.  In the lawsuit, SGI and Creditors allege a breach of the Agreement by the Samsung Affiliates and are seeking the loss of principal (approximately $1.95 billion) for loans extended to Samsung Motors Inc., default interest and a separate amount for breach.  On January 31, 2008, the Seoul District Court ordered the Samsung Affiliates: to pay approximately $1.30 billion by disposing of 2,334,045 shares of SLI less 1,165,955 shares of SLI previously sold by SGI and Creditors and paying the proceeds to SGI and Creditors; to satisfy any shortfall by participating in the purchase of equity or subordinate debentures issued by them; and pay default interest of 6% per annum.  The ruling has been appealed.  On November 10, 2009, the Appellate Court directed the parties to attempt to resolve this matter through mediation.  The parties agreed not to accept the court’s attempt at mediation.  A portion of an escrow account established upon completion of SLI’s initial public offering (“IPO”) on May 7, 2010 was used to pay court ordered interest for the delay of the IPO.  Samsung Corning Precision has concluded that no provision for loss should be reflected in its financial statements.  Other than as described above, no claim in these matters has been asserted against Corning or any of its affiliates.

-15-

 


In connection with an investigation by the Commission of the European Communities, Competition DG, of alleged anticompetitive behavior relating to the worldwide production of LCD glass, Corning and Samsung Corning Precision received a request on March 30, 2009, for certain information from the Competition DG.  Corning and Samsung Corning Precision have responded to those requests for information.  On October 9, 2009, in connection with its investigation, the Competition DG made a further request for information from both Corning and Samsung Corning Precision to which each party has responded.  Samsung Corning Precision has also responded to the Competition DG and authorities in other jurisdictions, including the United States in connection with similar investigations of alleged anticompetitive behavior relating to worldwide production of cathode ray tube glass.

In September 2009, Corning and Samsung Corning Precision formed Corsam Technologies LLC (Corsam), a new equity affiliate established to provide glass technology research for future product applications.  Samsung Corning Precision invested $124 million in cash and Corning contributed intellectual property with a corresponding value.  Corning and Samsung Corning Precision each own 50% of the common stock of Corsam and Corning has agreed to provide research and development services at arms length to Corsam.  Corning does not control Corsam because Samsung Corning Precision’s other investors maintain significant participating voting rights.  In addition, Corsam has sufficient equity to finance its activities, the voting rights of investors in Corsam are considered substantive, and the risks and rewards of Corsam’s research are shared only by those investors noted.  As a result, Corsam is accounted for under the equity method of accounting for investments.

Dow Corning Corporation (Dow Corning)
Dow Corning is a U.S.-based manufacturer of silicone products.  Dow Corning’s results of operations follow (in millions):
           
 
Three months ended
March 31,
 
2011
 
2010
           
Statement of Operations:
         
Net sales
$
1,579
 
$
1,354
Gross profit
$
539
 
$
506
Net income attributable to Dow Corning
$
179
 
$
218
Corning’s equity in earnings of Dow Corning
$
91
 
$
112
           
Related Party Transactions:
         
Corning purchases from Dow Corning
$
6
 
$
5
Dividends received from Dow Corning
$
115
 
$
56

Amounts owed to Dow Corning totaled $3 million as of March 31, 2011.  At December 31, 2010, amounts owed to Dow Corning were not significant.

At March 31, 2011, Dow Corning’s marketable securities included approximately $366 million of auction rate securities, net of a temporary impairment of $17 million.  As a result of the temporary impairment, unrealized losses of $13 million, net of $4 million for a minority interests’ share, were included in accumulated other comprehensive income in Dow Corning’s consolidated balance sheet.  Corning’s share of this unrealized loss was $7 million and is included in Corning’s accumulated other comprehensive income.

In February 2011, Dow Corning amended and restated its revolving credit agreement to provide $1 billion senior, unsecured revolving line of credit through February 2016.  Dow Corning believes it has adequate liquidity to fund operations, its capital expenditure plans, breast implant settlement liabilities, and shareholder dividends.

In 1995, Corning fully impaired its investment in Dow Corning after it filed for bankruptcy protection.  Corning did not recognize net equity earnings from the second quarter of 1995 through the end of 2002.  Corning began recognizing equity earnings in the first quarter of 2003 when management concluded that Dow Corning’s emergence from bankruptcy was probable.  Corning considers the $249 million difference between the carrying value of its investment in Dow Corning and its 50% share of Dow Corning’s equity to be permanent.

-16-

 


Corning and The Dow Chemical Company (Dow Chemical) each own 50% of the common stock of Dow Corning.  In May 1995, Dow Corning filed for bankruptcy protection to address pending and claimed liabilities arising from many thousands of breast implant product lawsuits.  On June 1, 2004, Dow Corning emerged from Chapter 11 with a Plan of Reorganization (the Plan) which provided for the settlement or other resolution of implant claims.  The Plan also includes releases for Corning and Dow Chemical as shareholders in exchange for contributions to the Plan.

Under the terms of the Plan, Dow Corning has established and is funding a Settlement Trust and a Litigation Facility to provide a means for tort claimants to settle or litigate their claims.  Inclusive of insurance, Dow Corning has paid approximately $1.7 billion to the Settlement Trust.  As of March 31, 2011, Dow Corning had recorded a reserve for breast implant litigation of $1.6 billion and anticipates insurance receivables of $3 million.  As a separate matter arising from the bankruptcy proceedings, Dow Corning is defending claims asserted by a number of commercial creditors who claim additional interest at default rates and enforcement costs, during the period from May 1995 through June 2004.  As of March 31, 2011, Dow Corning has estimated the liability to commercial creditors to be within the range of $82 million to $270 million.  As Dow Corning management believes no single amount within the range appears to be a better estimate than any other amount within the range, Dow Corning has recorded the minimum liability within the range.  Should Dow Corning not prevail in this matter, Corning’s equity earnings would be reduced by its 50% share of the amount in excess of $82 million, net of applicable tax benefits.  In addition, the London Market Insurers (the LMI Claimants) claimed a reimbursement right with respect to a portion of insurance proceeds previously paid by the LMI Claimants to Dow Corning.  This claim was based on a theory that the LMI Claimants overestimated Dow Corning’s liability for the resolution of implant claims pursuant to the Plan.  Based on settlement negotiations, Dow Corning had estimated that the most likely outcome would result in payment to the LMI Claimants in a range of $10 million to $20 million.  As of March 31, 2011, Dow Corning and the LMI Claimants have reached an agreement to settle the claim for an amount within that range.  There are a number of other claims in the bankruptcy proceedings against Dow Corning awaiting resolution by the U.S. District Court, and it is reasonably possible that Dow Corning may record bankruptcy-related charges in the future.  The remaining tort claims against Corning are expected to be channeled by the Plan into facilities established by the Plan or otherwise defended by the Litigation Facility.

Pittsburgh Corning Corporation (PCC)
Corning and PPG Industries, Inc. (PPG) each own 50% of the capital stock of Pittsburgh Corning Corporation (PCC).  Over a period of more than two decades, PCC and several other defendants have been named in numerous lawsuits involving claims alleging personal injury from exposure to asbestos.  Corning also has an equity interest in Pittsburgh Corning Europe N.V. (PCE), a Belgian Corporation which is a component of the Company’s proposed settlement for asbestos litigation.  At March 31, 2011 and December 31, 2010, the fair value of PCE significantly exceeded its carrying value of $135 million and $129 million, respectively.  There have been no impairment indicators for our investment in PCE and we continue to recognize equity earnings of this affiliate.  PCC filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Western District of Pennsylvania on April 16, 2000.  At that time, Corning determined that it lacked the ability to recover the carrying amount of its investment in PCC and its investment was other-than-temporarily impaired.  As a result, we reduced our investment in PCC to zero.  Refer to Note 3 (Commitments and Contingencies) for additional information about PCC and PCE.

Variable Interest Entities
For variable interest entities, we routinely assess the terms of our interest in each entity to determine if we are the primary beneficiary as prescribed by U.S. GAAP.  Corning leases certain transportation equipment from two Trusts that qualify as variable interest entities.  The sole purpose of these entities is to lease transportation equipment to Corning.  None of these entities are considered 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.

-17-

 

10.      Property, Net of Accumulated Depreciation
 
Property, net (in millions):
           
 
March 31,
2011
 
December 31,
2010
   
Land
$
103 
 
$
105 
Buildings
 
3,665 
   
3,692 
Equipment
 
11,065 
   
10,744 
Construction in progress
 
967 
   
822 
   
15,800 
   
15,363 
Accumulated depreciation
 
(6,565)
   
(6,420)
Total
$
9,235 
 
$
8,943 

In the three months ended March 31, 2011 and 2010, interest costs capitalized as part of property, net, were $7 million and $4 million, respectively.

Manufacturing equipment includes certain components of production equipment that are constructed of precious metals.  At March 31, 2011 and December 31, 2010, the recorded value of precious metals totaled $2.2 billion and $2.0 billion, respectively.  Depletion expense for precious metals in the three months ended March 31, 2011 and 2010 totaled $4 million and $3 million, respectively.
 
11.      Goodwill and Other Intangible Assets
 
The carrying amount of goodwill for the three months ended March 31, 2011 by segment is as follows (in millions):
 
Telecom-
munications
 
Display
Technologies
 
Specialty
Materials
 
Life
Sciences
 
Total
                   
Balance at December 31, 2010
$118            
 
$9            
 
$150         
 
$260         
 
$537         
Acquired goodwill (1)
91           
             
91         
Foreign currency translation adjustment
           
2         
 
2         
Balance at March 31, 2011
$209           
 
$9            
 
$150         
 
$262         
 
$630        

(1)
The Company recorded goodwill associated with a small acquisition completed in the first quarter of 2011.

Corning’s gross goodwill balances for the periods ended March 31, 2011 and December 31, 2010 were $7.1 billion and $7.0 billion, respectively.  Accumulated impairment losses were $6.5 billion for the periods ended March 31, 2011 and December 31, 2010, and were generated entirely through goodwill impairments related to the Telecommunications segment.

Other intangible assets are as follows (in millions):
                                   
 
March 31, 2011
 
December 31, 2010
 
Gross
 
Accumulated
amortization
 
Net
 
Gross
 
Accumulated
amortization
 
Net
Amortized intangible assets:
                                 
Patents, trademarks, and trade names (1)
$
230
 
$
125
 
$
105
 
$
205
 
$
124
 
$
81
Non-competition agreements
 
100
   
98
   
2
   
97
   
94
   
3
Other (1)
 
151
   
3
   
148
   
98
   
3
   
95
                                   
Total
$
481
 
$
226
 
$
255
 
$
400
 
$
221
 
$
179

(1)
The Company recorded identifiable intangible assets associated with a small acquisition completed in the first quarter of 2011.

-18-

 


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

Amortization expense related to these intangible assets is estimated to be approximately $13 million for 2011 and $14 million annually, thereafter.
 
12.      Customer Deposits
 
In 2005 and 2004, several of Corning’s customers entered into long-term purchase and supply agreements in which Corning’s Display Technologies segment would supply large-size glass substrates to these customers over periods of up to six years.  As part of the agreements, these customers agreed to advance cash deposits to Corning for a portion of the contracted glass to be purchased.  Between 2004 and 2007, we received a total of $937 million for customer deposit agreements.  We do not expect to receive additional deposits related to these agreements.

Upon receipt of the cash deposits made by customers, we recorded a customer deposit liability.  This liability is reduced at the time of future product sales over the life of the agreements.  As product is shipped to a customer, Corning recognizes revenue at the selling price and issues credit memoranda for an agreed amount of the customer deposit liability.  The credit memoranda are applied against customer receivables resulting from the sale of product, thus reducing operating cash flows in later periods as these credits are applied for cash deposits received in earlier periods.

During the three months ended March 31, 2011 and 2010, we issued $7 million and $30 million, respectively, in credit memoranda.  Customer deposit liabilities were $20 million and $27 million at March 31, 2011 and December 31, 2010, respectively, which are recorded in the current portion of other accrued liabilities in our consolidated balance sheets.  Because these liabilities are denominated in Japanese yen, changes in the balances include the impact of movements in the Japanese yen–U.S. dollar exchange rate.

In the event customers do not purchase the agreed upon quantities of product, subject to specific conditions outlined in the agreements, Corning may retain certain amounts of the customer deposits.  If Corning does not deliver agreed upon product quantities, subject to specific conditions outlined in the agreements, Corning may be required to return certain amounts of customer deposits.
 
 
13.      Employee Retirement Plans
 
The following table summarizes the components of net periodic benefit cost for Corning’s defined benefit pension and postretirement health care and life insurance plans (in millions):
                       
 
Pension benefits
 
Postretirement benefits
 
Three months ended
March 31,
 
Three months ended
March 31,
   
 
2011
 
2010
 
2011
 
2010
                       
Service cost
$
14 
 
$
12 
 
$
 
$
Interest cost
 
38 
   
39 
   
12 
   
13 
Expected return on plan assets
 
(41)
   
(42)
           
Amortization of net loss
 
18 
   
13 
   
   
Amortization of prior service cost
 
   
   
(1)
   
(1)
Total pension and postretirement benefit expense
$
31 
 
$
24 
 
$
20 
 
$
19 


-19-

 


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

14.      Hedging Activities

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

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

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

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

The amount of hedge ineffectiveness at March 31, 2011 and at December 31, 2010 was insignificant.

Cash Flow Hedges
Our cash flow hedging activities utilize foreign exchange forward contracts to reduce the risk that movements in exchange rates will adversely affect the eventual net cash flows resulting from the sale of products to foreign customers and purchases from foreign suppliers.  Corning uses a regression analysis to monitor the effectiveness of its cash flow hedges both prospectively and retrospectively.  Corning defers net gains and losses from cash flow hedges into accumulated other comprehensive income on the consolidated balance sheet until such time as the hedged item impacts earnings.  At March 31, 2011, the amount of net losses expected to be reclassified into earnings within the next 12 months is $18 million.

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

-20-

 


Net Investment in Foreign Operations
In February 2000, we issued $500 million of Euro-denominated notes that were designated as a hedge of a net investment in foreign operations.  The effective portion of the changes in fair value of the outstanding debt balance has been included as a component of the foreign currency translation adjustment (CTA) within accumulated other comprehensive income (loss).  In February 2010, we repaid the remaining $48 million balance of this debt.  At that time, the cumulative amount of CTA related to this debt was a net loss of $140 million, which will remain in accumulated other comprehensive income until ultimate disposition of the underlying Euro investment.

The following tables summarize the notional amounts and respective fair values of Corning’s derivative financial instruments for March 31, 2011 and December 31, 2010 (in millions):
                               
     
Asset derivatives
 
Liability derivatives
 
Notional amount
 
Balance
sheet location
 
Fair value
 
Balance
sheet location
 
Fair value
 
2011
 
2010
   
2011
 
2010
   
2011
 
2010
                               
Derivatives designated as hedging instruments
                             
                               
Foreign exchange contracts
$   478 
 
$   602 
 
Other current assets
 
$ 4
 
$4
 
Other accrued liabilities
 
$(22)
 
$  (33)
                               
Derivatives not designated as hedging instruments
                             
                               
Foreign exchange contracts
$2,812 
 
$2,946 
 
Other current assets
 
$21
 
$1
 
Other accrued liabilities
 
$(43)
 
$(122)
                     
Other liabilities
 
$(20)
 
$  (45)
                               
Total derivatives
$3,290 
 
$3,548 
     
$25
 
$5
     
$(85)
 
$(200)


-21-

 


The following tables summarize the effect of derivative financial instruments on Corning’s consolidated financial statements (in millions):
                       
 
Effect of derivative instruments on the consolidated financial statements
for the quarter ended March 31
Derivatives in hedging relationships
Gain recognized in other
comprehensive income
(OCI)
 
Location of gain/(loss)
reclassified from
accumulated OCI into
income (effective)
 
Gain reclassified from
accumulated OCI into
income (effective)
2011
 
2010
   
2011
 
2010
                   
Cash flow hedges
                 
                   
         
Cost of sales
 
$2
 
$2
Foreign exchange contracts
$(18)
 
$5
 
Royalties
 
$7
 
$2
                   
Total cash flow hedges
$(18)
 
$5
     
$9
 
$4
                   
Net investment hedges
                 
Foreign denominated debt
$    0 
 
$2
           
Other
$    0 
               
                   
Total net investment hedges
$    0 
 
$2
           
                   
               
Undesignated derivatives
Location of gain/ (loss)
recognized in income
 
Gain/(loss) recognized in
income
       
 
2011
 
2010
       
                   
Foreign exchange contracts
Other income/(expense)
 
$143
 
$(1)
       
                   
Total undesignated
   
$143
 
$(1)
       
 
 
15.      Fair Value Measurements

Fair value standards under U.S. GAAP define fair value, establish a framework for measuring fair value in applying generally accepted accounting principles, and require disclosures about fair value measurements.  The standards also identify two kinds of inputs that are used to determine the fair value of assets and liabilities: observable and unobservable.  Observable inputs are based on market data or independent sources while unobservable inputs are based on the Company’s own market assumptions.  Once inputs have been characterized, the inputs are prioritized into one of three broad levels (provided in the table below) used to measure fair value.

Fair value standards apply whenever an entity is measuring fair value under other accounting pronouncements that require or permit fair value measurement and require the use of observable market data when available.  As of March 31, 2011 and December 31, 2010, the Company did not have any financial assets or liabilities that were measured using unobservable (or Level 3) inputs.

-22-

 


The following tables provide fair value measurement information for the Company’s major categories of financial assets and liabilities measured on a recurring basis (in millions):
               
     
Fair value measurements at reporting date using
 
March
31, 2011
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
               
Current assets:
             
Short-term investments
$1,733      
 
$1,722
 
  $11 (1) 
   
Other current assets (2)
$     25      
     
$25    
   
Non-current assets:
             
Other assets
$     44      
     
$44    
   
               
Current liabilities:
             
Other accrued liabilities (2)
$     65      
     
$65    
   
Non-current liabilities:
             
Other liabilities (2)
$     20      
     
$20    
   

(1)
Short-term investments are measured using observable quoted prices for similar assets.
(2)
Derivative assets and liabilities include foreign exchange contracts which are measured using observable quoted prices for similar assets and liabilities.

               
     
Fair value measurements at reporting date using
 
December
31, 2010
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
               
Current assets:
             
Short-term investments
$1,752     
 
$1,737
 
  $ 15 (1) 
   
Other current assets (2)
$       5     
     
$   5    
   
Non-current assets:
             
Other assets
$     45     
     
$  45   
   
               
Current liabilities:
             
Other accrued liabilities (2)
$   155     
     
$155    
   
Non-current liabilities:
             
Other liabilities (2)
$     45     
     
$  45   
   

(1)
Short-term investments are measured using observable quoted prices for similar assets.
(2)
Derivative assets and liabilities include foreign exchange contracts which are measured using observable quoted prices for similar assets and liabilities.

-23-

 


16.      Share-based Compensation

Stock Compensation Plans

The Company measures and recognizes compensation cost for all share-based payment awards made to employees and directors, including grants of employee stock options and employee stock purchases related to the Worldwide Employee Share Purchase Plan (WESPP), based on estimated fair values.  Fair values for stock options granted prior to January 1, 2010 were estimated using a lattice-based binomial valuation model.  In 2010, Corning began estimating fair values for stock options granted using a multiple-point Black-Scholes model.  Both models incorporate the required assumptions and meet the fair value measurement objective under U.S. GAAP.

Share-based compensation cost was approximately $23 million and $29 million for the three months ended March 31, 2011 and 2010, respectively.  Amounts for all periods presented included (1) employee stock options, (2) time-based restricted stock and restricted stock units, and (3) performance-based restricted stock and restricted stock units.  On February 3, 2010, Corning’s Board of Directors approved the recommendation to terminate on-going WESPP contributions effective March 31, 2010.  Compensation expense for the WESPP is included in periods ended prior to April 1, 2010.

Stock Options

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

The following table summarizes information concerning options outstanding including the related transactions under the Stock Option Plans for the three months ended March 31, 2011:
 
Number
of Shares
(in thousands)
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term in
Years
 
Aggregate
Intrinsic
Value
(in thousands)
Options Outstanding as of December 31, 2010
72,461  
 
$16.22
       
Granted
5,086
 
$21.27
       
Exercised
(5,750)
 
$11.29
       
Forfeited and Expired
(2,829)
 
$45.74
       
Options Outstanding as of March 31, 2011
68,968  
 
$15.79
 
5.27
 
$455,509
Options Exercisable as of March 31, 2011
53,849  
 
$15.28
 
4.36
 
$387,418

The aggregate intrinsic value (market value of stock less option exercise price) in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price on March 31, 2011, which would have been received by the option holders had all option holders exercised their options as of that date.

As of March 31, 2011, there was approximately $60 million of unrecognized compensation cost related to stock options granted under the Plans.  The cost is expected to be recognized over a weighted-average period of 2 years.  Compensation cost related to stock options was approximately $12 million and $15 million for the three months ended March 31, 2011 and 2010, respectively.

Proceeds received from the exercise of stock options were $64 million and $21 million for the three months ended March 31, 2011 and 2010, respectively.  Proceeds received from the exercise of stock options were included in financing activities on the Company’s Consolidated Statements of Cash Flows.  The total intrinsic value of options exercised for the three months ended March 31, 2011 and 2010 was approximately $62 million and $20 million, respectively, which is currently deductible for tax purposes.  However, these tax benefits were not realized due to net operating loss carryforwards available to the Company.  Refer to Note 5 (Income Taxes) to the consolidated financial statements.

-24-

 


Corning used a binomial lattice model to estimate the fair values of stock option grants through December 31, 2009.  Effective January 1, 2010, Corning began using a multiple-point Black-Scholes model to estimate the fair value of stock option grants.  The financial impact of the change in valuation models is insignificant.

The following inputs were used for the valuation of option grants under our Stock Option Plans:
       
 
Three months ended
March 31,
 
 
2011
 
2010
Expected volatility
47-48%
 
48-49%
Weighted-average volatility
48%
 
49%
Dividend yield
1.10%
 
1.40%
Risk-free rate
2.1-2.7%
 
2.7-3.2%
Average risk-free rate
2.6%
 
3.2%
Expected term (in years)
5.1-6.7
 
5.1-6.5
Pre-vesting departure rate
0.4-3.9%
 
1.4-3.6%

Expected volatility is based on a blended approach defined as the weighted average of the short-term implied volatility, the most recent volatility for the period equal to the expected term and the most recent 15-year historical volatility.  The expected term assumption is the period of time the options are expected to be outstanding, and is calculated using a combination of historical exercise experience adjusted to reflect the current vesting period of options being valued, and partial life cycles of outstanding options.  The risk-free rate assumption is the implied rate for a zero-coupon U.S. Treasury bond with a term equal to the option’s expected term.  The ranges given above result from separate groups of employees exhibiting different exercise behavior.

Incentive Stock Plans

The Corning Incentive Stock Plan permits stock grants, either determined by specific performance goals or issued directly, in most instances, subject to the possibility of forfeiture and without cash consideration.  Shares under the Incentive Stock Plan are generally granted “at the money”, contingently vest over a period of 1 to 10 years, and have contractual lives of 1 to 10 years.

The fair value of each restricted stock grant under the Incentive Stock Plans was estimated on the date of grant for performance based grants assuming that performance goals will be achieved.  The expected term for grants under the Incentive Stock Plans is 1 to 10 years.

Time-Based Restricted Stock and Restricted Stock Units:

Time-based restricted stock and restricted stock units are issued by the Company on a discretionary basis, and are payable in shares of the Company’s common stock upon vesting.  The fair value is based on the market price of the Company’s stock on the grant date.  Compensation cost is recognized over the requisite vesting period and adjusted for actual forfeitures before vesting.

The following table represents a summary of the status of the Company’s nonvested time-based restricted stock and restricted stock units as of December 31, 2010, and changes during the three months ended March 31, 2011:
 
Shares
(000’s)
 
Weighted-
Average
Grant-Date
Fair Value
Nonvested shares at December 31, 2010
3,698  
 
$18.33
Granted
1,201  
 
$19.69
Vested
(141)
 
$19.38
Forfeited
(255)
 
$23.52
Nonvested shares at March 31, 2011
4,503  
 
$18.36


-25-

 


As of March 31, 2011, there was approximately $39 million of unrecognized compensation cost related to non-vested time-based restricted stock compensation arrangements granted under the Plan.  The cost is expected to be recognized over a weighted-average period of 2.2 years.  Compensation cost related to time-based restricted stock and restricted stock units was approximately $9 million and $6 million for the three months ended March 31, 2011 and 2010, respectively.

Performance-Based Restricted Stock and Restricted Stock Units:

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

The following table represents a summary of the status of the Company’s nonvested performance-based restricted stock and restricted stock units as of December 31, 2010, and changes during the three months ended March 31, 2011:
 
Shares
(000’s)
 
Weighted-
Average
Grant-Date
Fair Value
Nonvested restricted stock and restricted stock units at December 31, 2010
6,072  
 
$ 9.24
Granted
     
Vested
(592)
 
$14.49
Forfeited and cancelled
(226)
 
$ 8.67
Nonvested restricted stock and restricted stock units at March 31, 2011
5,254  
 
$ 8.67

As of March 31, 2011, there was approximately $8 million of unrecognized compensation cost related to non-vested performance-based restricted stock and restricted stock units compensation arrangements granted under the Plan.  The cost is expected to be recognized over a weighted-average period of 1 year.  Compensation cost related to performance-based restricted stock and restricted stock units was approximately $2 million and $6 million for the three months ended March 31, 2011 and 2010, respectively.

Worldwide Employee Stock Purchase Plan

In addition to the Stock Option Plan and Incentive Stock Plans, Corning offered a Worldwide Employee Share Purchase Plan (WESPP).  Under the WESPP, substantially all employees could elect to have up to 10% of their annual wages withheld to purchase our common stock.  The purchase price of the stock was 85% of the end-of-quarter closing market price.  Compensation cost related to the WESPP for all periods presented is immaterial.

On February 3, 2010, Corning’s Board of Directors approved the recommendation to terminate on-going WESPP contributions effective March 31, 2010 and the WESPP terminated in May 2010.

-26-

 


17.      Comprehensive Income

Components of comprehensive income on an after-tax basis, where applicable, follow (in millions):
           
 
Three months ended
March 31,
 
 
2011
 
2010
           
Net income
$
747
 
$
815 
Other comprehensive income, net of taxes (1):
         
Net change in unrealized gain on investments securities
 
12
   
11 
Net change in unrealized gain on derivative hedging instruments
 
8
   
Foreign currency translation adjustment and other
 
139
   
(22)
Amortization of postretirement benefit plan losses and prior service costs
 
21
   
(9)
Comprehensive income
$
927
 
$
797 
Comprehensive income attributable to noncontrolling interests
 
1
   
Comprehensive income attributable to Corning
$
928
 
$
798 

(1)
Other comprehensive income items for the three months ended March 31, 2011 and 2010 include net tax effects of ($14) million and $5 million, respectively.

18.      Significant Customers

For the three months ended March 31, 2011, Corning’s sales to Sharp Electronics Corporation, a customer of the Display Technologies segment, was greater than ten percent of the Company’s consolidated net sales.  For the three months ended March 31, 2010, Corning’s sales to each of the following three customers of the Display Technologies segment were equal to or greater than ten percent of the Company’s consolidated net sales:  AU Optronics Corporation (AUO), Chimei Innolux Corporation, and Sharp Electronics Corporation.

19.      Operating Segments

Our reportable operating segments are as follows:

·  
Display Technologies – manufactures liquid crystal display (LCD) glass for flat panel displays.
·  
Telecommunications – manufactures optical fiber and cable and hardware and equipment components for the telecommunications industry.
·  
Environmental Technologies – manufactures ceramic substrates and filters for automotive and diesel applications.  This reportable operating segment is an aggregation of our Automotive and Diesel operating segments as these two segments share similar economic characteristics, products, customer types, production processes and distribution methods.
·  
Specialty Materials – manufactures products that provide more than 150 material formulations for glass, glass ceramics and fluoride crystals to meet demand for unique customer needs.
·  
Life Sciences – manufactures glass and plastic consumables for scientific applications.

-27-

 


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

We prepared the financial results for our reportable segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions.  We included the earnings of equity affiliates that are closely associated with our operating segments in the respective segment’s net income.  We have allocated certain common expenses among segments differently than we would for stand-alone financial information. 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
 
Telecom-
munications
 
Environmental
Technologies
 
Specialty
Materials
 
Life
Sciences
 
All
Other
 
Total
Three months ended March 31, 2011
                                       
Net sales
$
790 
 
$
474 
 
$
259 
 
$
254 
 
$
144 
 
$
 
$
1,923 
Depreciation (1)
$
124 
 
$
28 
 
$
25 
 
$
37 
 
$
 
$
 
$
224 
Amortization of purchased intangibles
     
$
             
$
       
$
Research, development and engineering expenses (2)
$
25 
 
$
29 
 
$
23 
 
$
29 
 
$
 
$
22 
 
$
132 
Equity in earnings of affiliated companies
$
294 
 
$
       
$
       
$
 
$
307 
Income tax (provision) benefit
$
(139)
 
$
(19)
 
$
(14)
 
$
(3)
 
$
(7)
 
$
 
$
(173)
Net income (loss) (3)
$
638 
 
$
41 
 
$
29 
 
$
 
$
15 
 
$
(15)
 
$
716 
                                         
Three months ended March 31, 2010
                                       
Net sales
$
782 
 
$
364 
 
$
192 
 
$
96 
 
$
118 
 
$
 
$
1,553 
Depreciation (1)
$
128 
 
$
30 
 
$
26 
 
$
11 
 
$
 
$
 
$
206 
Amortization of purchased intangibles
     
$
             
$
       
$
Research, development and engineering expenses (2)
$
23 
 
$
29 
 
$
23 
 
$
16 
 
$
 
$
28 
 
$
123 
Restructuring, impairment and other charges
                 
$
(2)
             
$
(2)
Equity in earnings (loss) of affiliated companies
$
344 
       
$
             
$
11 
 
$
358 
Income tax (provision) benefit
$
(132)
 
$
(4)
 
$
(5)
 
$
 
$
(8)
 
$
11 
 
$
(135)
Net income (loss)(3)
$
703 
 
$
 
$
11 
 
$
(7)
 
$
17 
 
$
(15)
 
$
717 

(1)
Depreciation expense for Corning’s reportable segments includes an allocation of depreciation of corporate property not specifically identifiable to a segment.
(2)
Research, development, and engineering expense includes direct project spending which is identifiable to a segment.
(3)
Many of Corning’s administrative and staff functions are performed on a centralized basis.  Where practicable, Corning charges these expenses to segments based upon the extent to which each business uses a centralized function.  Other staff functions, such as corporate finance, human resources and legal are allocated to segments, primarily as a percentage of sales.


-28-

 


A reconciliation of reportable segment net income to consolidated net income follows (in millions):
           
 
Three months ended
March 31,
 
 
2011
 
2010
Net income of reportable segments
$
731 
 
$
732 
Non-reportable segments
 
(15)
   
(15)
Unallocated amounts:
         
Net financing costs (1)
 
(52)
   
(46)
Stock-based compensation expense
 
(23)
   
(29)
Exploratory research
 
(17)
   
(15)
Corporate contributions
 
(21)
   
(12)
Equity in earnings of affiliated companies, net of impairments (2)
 
91 
   
111 
Asbestos settlement (3)
 
(5)
   
52 
Other corporate items (4)
 
59 
   
38 
Net income
$
748 
 
$
816 

(1)
Net financing costs include interest income, interest expense, and interest costs and investment gains associated with benefit plans.
(2)
Primarily represents the equity earnings of Dow Corning Corporation.  In the first quarter of 2010, equity earnings of affiliated companies, net of impairments, includes a credit of $21 million for our share of U.S. advanced energy manufacturing tax credits at Dow Corning Corporation.
(3)
In the first quarter of 2011, Corning recorded a charge of $5 million to adjust the asbestos liability for the change in value of components of the Modified PCC Plan.  In the first quarter of 2010, Corning recorded a net credit of $52 million primarily reflecting the change in the terms of the proposed asbestos settlement.
(4)
In the first quarter of 2010, other corporate items included a tax charge of $56 million from the reversal of the deferred tax asset associated with a Medicare subsidy.

In the Telecommunications operating segment, assets increased from $1.0 billion at December 31, 2010 to $1.1 billion at March 31, 2011.  The increase is due primarily to increases of certain working capital balances, the result of a small acquisition completed in the first quarter of 2011.  In the Specialty Materials operating segment, assets increased from $900 million at December 31, 2010 to $1.4 billion at March 31, 2011.  The increase is due primarily to the reallocation of certain assets from the Display Technologies operating segment and capital expenditures of approximately $100 million.

The sales of each of our reportable operating segments are concentrated across a relatively small number of customers.  In the first quarter of 2011, the following number of customers, which individually accounted for 10% or more of each segment’s sales, represented the following concentration of segment sales:

·  
In the Display Technologies segment, three customers accounted for 70% of total segment sales.
·  
In the Telecommunications segment, one customer accounted for 12% of total segment sales.
·  
In the Environmental Technologies segment, three customers accounted for 79% of total segment sales.
·  
In the Specialty Materials segment, two customers accounted for 31% of total segment sales.
·  
In the Life Sciences segment, two customers accounted for 43% of total segment sales.

A significant amount of specialized manufacturing capacity for our Display Technologies segment is concentrated in Asia.  It is at least reasonably possible that the use of a facility could be disrupted.  Due to the specialized nature of the assets, it would not be possible to find replacement capacity quickly.  Accordingly, loss of these facilities could produce a near-term severe impact to our display business and the Company as a whole.

In our 2010 Form 10-K, reported sales in our geographic disclosures from Japan for the year ended December 31, 2010 excluded sales in the amount of approximately $365 million.  Sales in Japan for the three months ended March 31, 2011 and year ended December 31, 2010 were $342 million and $1.1 billion, respectively.



-29-

 



ORGANIZATION OF INFORMATION
Management’s Discussion and Analysis provides a historical and prospective narrative on the Company’s financial condition and results of operations.  The discussion includes the following sections:

·  
Overview
·  
Results of Operations
·  
Operating Segments
·  
Liquidity and Capital Resources
·  
Critical Accounting Estimates
·  
New Accounting Standards
·  
Environment
·  
Forward Looking Statements

OVERVIEW

Our results for the first quarter of 2011 reflected an increase in sales in all of our operating segments when compared to the first quarter of 2010, offset primarily by a decrease in equity earnings from affiliated companies, higher taxes and the absence of the benefit of a favorable change to our estimated liability for asbestos litigation taken in the first quarter of 2010.

Continued robust retail demand in the first quarter of 2011 for portable display devices which utilize our CorningÒ GorillaÒ glass resulted in significantly higher sales in our Specialty Materials segment when compared to the same period last year.  Sales in our Environmental Technologies segment in the first quarter of 2011 reflected increased demand worldwide for automotive and diesel products, compared to the same period last year.  When compared to the first quarter of last year, sales in our Telecommunications segment in the first quarter of 2011 were also higher driven by strength in demand for our fiber-to-the-premise products, optical fiber and cable products, and enterprise networks products.

Equity earnings from Samsung Corning Precision decreased in the first quarter of 2011, driven by price declines and higher tax rates, when compared to the first quarter of last year.  Equity earnings from Dow Corning also decreased in the first quarter when compared to the same period last year, due to the absence of our share of U.S. advanced energy manufacturing tax credits recorded in the first quarter of 2010 and higher raw materials costs.

When compared to the fourth quarter of 2010, results in the first quarter of 2011 primarily reflected an increase in sales in the Specialty Materials, Display Technologies, Telecommunications and Environmental Technologies segments.

Our production facilities located in Japan did not sustain damage or production disruptions as a result of the earthquake which occurred in northern Japan in March, 2011, and our glass-making operations in this area continue to operate normally.  While the supply chain has sustained some short term disruptions due to the earthquake, we feel that the long term market fundamentals remain sound.  We plan to maintain our full production levels at our facilities in Japan even though some of our customers have temporarily curtailed their production schedules.  In doing so, we intend to replenish our LCD glass inventories and provide glass to other geographic regions.  We will continue to closely monitor the market and our customer’s production schedules and capabilities.

Our key priorities for 2011 remain similar to those from previous years:  protect our financial health and invest in the future.  During the first quarter of 2011, we made the following progress toward these priorities:

Protecting Financial Health
Our balance sheet remains strong, and we generated positive cash flow from operating activities.
·  
Our debt to capital ratio of 10% at March 31, 2011 is down from 11% reported at December 31, 2010.
·  
Operating cash flow in the three months ended March 31, 2011 was $573 million.
·  
Our cash, cash equivalents and short-term investments balance at March 31, 2011 of $6.3 billion is essentially unchanged from December 31, 2010, and remained well above our debt balance of $2.3 billion.

-30-

 


For the three months ended March 31, 2011, we generated net income of $748 million or $0.47 per share compared to net income of $816 million or $0.52 per share for the same period in 2010.  When compared to the same period last year, the decrease in net income in the first quarter of 2011 was due largely to the following items:

·  
Lower equity in earnings from our equity affiliates, Samsung Corning Precision and Dow Corning.  Price declines and higher taxes drove equity earnings lower at Samsung Corning Precision, and the absence of a tax credit taken in 2010 and higher raw materials costs caused equity earnings to decrease at Dow Corning Corporation.
·  
The absence of the benefit of a decrease to the asbestos settlement liability of $52 million recorded in the first quarter of 2010, compared to a charge of $5 million for the same period this year.  The net decrease in the first quarter of 2010 was due largely to a change in the terms of the proposed settlement.  For additional information on asbestos litigation, refer to Note 3 (Commitments and Contingencies) to the consolidated financial statements and Part II – Other Information, Item 1. Legal Proceedings.
·  
An increase in our effective tax rate due to the following:
o  
The absence of the favorable tax impact from the decision to repatriate earnings from certain foreign subsidiaries in 2010.
o  
The expiration of tax holidays in Taiwan.

The decrease in net income for the three months ended March 31, 2011, was offset somewhat by approximately $50 million from the favorable impact of movements in foreign exchange rates and the absence of a $56 million charge for the reversal of the deferred tax asset associated with a subsidy for certain retiree medical benefits recorded in the first quarter of 2010.

Investing In Our Future
We continue to focus on the future and on what we do best – creating and making keystone components that enable high-technology systems.  Our spending levels for research, development and engineering increased in the first quarter of 2011 when compared to the same period last year, as we remain committed to investing in research, development, and engineering to drive innovation.  We continue to concentrate on technologies for glass substrates for active matrix LCDs, thin sheet glass, diesel filters and substrates in response to tightening emissions control standards, and the optical fiber and cable and hardware and equipment that enable fiber-to-the-premises.  In 2011, we are maintaining our innovation strategy which focuses on opportunities that are adjacent or closely related to our existing capabilities.  These opportunities, which include products such as thin-film photovoltaics for solar applications, leverage existing materials or manufacturing processes with slight modifications.

Capital spending totaled $532 million and $173 million for the three months ended March 31, 2011 and 2010, respectively.  Spending increased in the first quarter of 2011 largely as a result of several multi-year investment plans announced in 2010 which will increase manufacturing capacity in several of our operating segments.  Specifically, the increase in spending in the first quarter of 2011 was driven by construction costs for a LCD glass substrate facility in China for our Display Technologies segment and a capacity expansion project for Specialty Materials’ CorningÒ GorillaÒ glass in Japan.  We expect our 2011 capital spending to be approximately $2.4 billion to $2.7 billion.  Approximately $1.2 billion to $1.5 billion will be directed toward our Display Technologies segment.

Corporate Outlook
Corning expects significant sales growth in 2011, led by strong demand for our CorningÒ GorillaÒ glass products.  We believe worldwide demand for LCD glass in 2011 will increase from 3.15 billion square feet to approximately 3.5 to 3.7 billion square feet when compared to 2010, driven by continued strength in demand for LCD televisions, computer notebooks, slates and desktop monitors.  Earnings will be negatively impacted by higher taxes due to the absence of the 2010 tax benefits resulting from our repatriation actions, increased income in higher tax rate jurisdictions and tax holiday expirations.  Equity earnings from Samsung Corning Precision will also be impacted by higher taxes in 2011.  Cash flow from operations may decline as we expect lower dividends from equity affiliates.  We will also use more cash for investing activities as we expand our capacity to meet growing demand.  We may take advantage of acquisition opportunities that support the long-term strategies of our businesses.  We remain confident that our strategy to grow through global innovation, while preserving our financial stability, will enable our continued long-term success.

-31-

 


RESULTS OF OPERATIONS
Selected highlights for the first quarter follow (dollars in millions):
               
 
Three months ended
March 31,
 
%
Change
   
 
2011
 
2010
 
11 vs. 10
               
Net sales
$
1,923
 
$
1,553
 
24
               
Gross margin
$
874
 
$
731
 
20
(gross margin %)
 
45%
   
47%
   
               
Selling, general and administrative expenses
$
250
 
$
235
 
6
(as a % of net sales)
 
13%
   
15%
   
               
Research, development and engineering expenses
$
156
 
$
145
 
8
(as a % of net sales)
 
8%
   
9%
   
               
Restructuring, impairment and other credits
$
0
 
$
(2)
 
*
(as a % of net sales)
 
0%
   
0%
   
               
Asbestos litigation charge (credit)
$
5
 
$
(52)
 
*
(as a % of net sales)
 
0%
   
(3)%
   
               
Equity in earnings of affiliated companies
$
398
 
$
469
 
(15)
(as a % of net sales)
 
21%
   
30%
   
               
Income before income taxes
$
862
 
$
913
 
(6)
(as a % of net sales)
 
45%
   
59%
   
               
Provision for income taxes
$
(114)
 
$
(97)
 
18
(as a % of net sales)
 
(6)%
   
(6)%
   
               
Net income attributable to Corning Incorporated
$
748
 
$
816
 
(8)
(as a % of net sales)
 
39%
   
53%
   

* The percentage change calculation is not meaningful.

Net Sales
For the three months ended March 31, 2011, net sales increased in all of our segments when compared to the same period in 2011, with the largest increases occurring in our Specialty Materials and Telecommunications segments.  In the first quarter of 2011, net sales were favorably impacted by $73 million from the movement in foreign exchange rates.

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
As a percentage of net sales, gross margin for the first quarter of 2011 decreased slightly when compared to the same period last year due primarily to the impact of capacity start-up costs in our Specialty Materials segment.

-32-

 


Selling, General and Administrative Expenses
For the three months ended March 31, 2011, selling, general, and administrative expenses increased by $15 million.  As a percentage of net sales, these expenses for the three months ended March 31, 2011 were lower when compared to the same period last year due to the 24% increase in net sales.

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

Research, Development and Engineering Expenses
For the three months ended March 31, 2011, research, development and engineering expenses increased by $11 million when compared to the same period last year.  As a percentage of net sales, these expenses for the three months ended March 31, 2011, were down slightly when compared to the first quarter of 2010 due to the increase in net sales.

Corning’s research, development and engineering expenses are currently focused on baseline research for new business development, as well as on our Display Technologies, Environmental Technologies, Telecommunications and Specialty Materials segments as we strive to capitalize on growth opportunities in those segments.

Asbestos Litigation
In the first quarter of 2011, we recorded a $5 million charge to our asbestos litigation liability compared to a $52 million credit for the same period last year.  The net decrease in the asbestos settlement liability in the three months ended March 31, 2010 was due to a change in the terms of the proposed settlement that reduced the amount of cash expected to be contributed to the settlement.  For additional information on this matter, refer to Note 3 (Commitments and Contingencies) to the consolidated financial statements and Part II – Other Information, Item 1. Legal Proceedings.

Equity in Earnings of Affiliated Companies
The following provides a summary of equity in earnings of associated companies (in millions):
           
 
Three months ended
March 31,
 
2011
 
2010
Samsung Corning Precision
$
299
 
$
350
Dow Corning Corporation
 
91
   
112
All other
 
8
   
7
Total equity earnings
$
398
 
$
469

When compared to the same period last year, equity earnings for the three months ended March 31, 2011, primarily reflected the following:

·  
A decline in price of 13% at Samsung Corning Precision, coupled with higher taxes due to the partial expiration of a Korean tax holiday.  Equity earnings for Samsung Corning Precision are explained more fully in the discussion of the performance of our Display Technologies segment.
·  
The absence of advanced energy manufacturing tax credits approved by the U.S. government for Dow Corning’s manufacturing expansion projects which support the solar industry.  Corning’s share of these credits was $21 million in the first quarter of 2010.  Additionally, equity earnings were negatively impacted by an increase in raw materials costs.

In the second quarter of 2011, we expect equity earnings to be up when compared to the first quarter of 2011, driven by an increase in volume at Samsung Corning Precision.  Dow Corning’s equity earnings are also expected to be up slightly on significantly higher sales of silicone products, offset by the higher cost of petroleum based materials.

Equity earnings for Samsung Corning Precision for the three months ended March 31, 2011 were favorably impacted by $34 million from movements in foreign exchange rates when compared to the same period last year.  Equity earnings for Dow Corning for the three months ended March 31, 2011 were not significantly impacted from movements in foreign exchange rates when compared to the same period last year.

-33-

 


Other Income, Net
“Other income, net” in Corning’s consolidated statements of income includes the following (in millions):
           
 
Three months ended
March 31,
 
 
2011
 
2010
Royalty income from Samsung Corning Precision
$
61 
 
$
65 
Foreign currency exchange and hedge (losses)/gains, net
 
(10)
   
Net income attributable to noncontrolling interests
 
   
Other, net
 
(25)
   
(11)
Total
$
27 
 
$
64 

Income Before Income Taxes
Income before income taxes for the three months ended March 31, 2011, was positively impacted by $52 million due to movements in foreign exchange rates when compared to the same period last year.

Provision for Income Taxes
Our provision for income taxes and the related effective income tax rates were as follows (in millions):
           
 
Three months ended
March 31,
 
 
2011
 
2010
           
Provision for income taxes
$
(114)  
 
$
(97)  
Effective tax rate
 
13.2%
   
10.6%

For the three months ended March 31, 2011, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:
·  
Rate differences on income/(losses) of consolidated foreign companies;
·  
The impact of equity in earnings of affiliated companies; and
·  
The benefit of tax holidays and investment credits in foreign jurisdictions.

For the three months ended March 31, 2010, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:
·  
Rate differences on income/(losses) of consolidated foreign companies;
·  
The impact of equity in earnings of affiliated companies;
·  
The benefit of tax holidays and investment credits in foreign jurisdictions;
·  
The benefit of excess foreign tax credits that resulted from the repatriation of current year earnings of certain foreign subsidiaries; and
·  
The impact of discrete items including a $56 million charge from the reversal of the deferred tax asset associated with a subsidy for certain retiree medical benefits.  Discrete items increased our effective tax rate by 8.3 percentage points.

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

-34-

 


Net Income Attributable to Corning Incorporated
As a result of the above, our net income and per share data is as follows (in millions, except per share amounts):
           
 
Three months ended
March 31,
 
2011
 
2010
Net income attributable to Corning Incorporated
$
748
 
$
816
Basic earnings per common share
$
0.48
 
$
0.52
Diluted earnings per common share
$
0.47
 
$
0.52
Shares used in computing per share amounts
         
Basic earnings per common share
 
1,565
   
1,555
Diluted earnings per common share
 
1,589
   
1,579

OPERATING SEGMENTS

Our reportable operating segments are as follows:

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