UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

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

For the quarterly period ended March 31, 2018

OR

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

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 ☒ 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 ☒ No ☐

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

Large accelerated filer	☒		Accelerated filer	☐
Non‑accelerated filer	☐	(Do not check if a smaller reporting company)
Smaller reporting company	☐		Emerging growth company	☐

If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.

Yes ☐ No ☐

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

Yes ☐ No ☒

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

Class	Outstanding as of April 13, 2018
Corning’s Common Stock, $0.50 par value per share	830,348,853 shares

© 2018 Corning Incorporated. All Rights Reserved.

1

INDEX

PART I – FINANCIAL INFORMATION
	Page
Item 1. Financial Statements
Consolidated Statements of (Loss) Income (Unaudited) for the three months ended March 31, 2018 and 2017	3
Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the three months ended March 31, 2018 and 2017	4
Consolidated Balance Sheets (Unaudited) at March 31, 2018 and December 31, 2017	5
Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2018 and 2017	6
Notes to Consolidated Financial Statements (Unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures About Market Risk	40
Item 4. Controls and Procedures	40
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	41
Item 1A.  Risk Factors	41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 6. Exhibits	43
Signatures	44

© 2018 Corning Incorporated. All Rights Reserved.

2

CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(Unaudited; in millions, except per share amounts)

	Three Months Ended
	March 31,
	2018		2017
Net sales	$	2,500	$	2,375
Cost of sales		1,545		1,424
Gross margin		955		951
Operating expenses:
Selling, general and administrative expenses		501		319
Research, development and engineering expenses		241		202
Amortization of purchased intangibles		19		17
Operating income		194		413
Equity in earnings of affiliated companies		39		80
Interest income		13		12
Interest expense		(52)		(37)
Translated earnings contract loss, net		(622)		(438)
Other expense, net		(37)		(10)
(Loss) income before income taxes		(465)		20
(Provision) benefit for income taxes (Note 5)		(124)		66
Net (loss) income attributable to Corning Incorporated	$	(589)	$	86
(Loss) earnings per common share attributable to Corning Incorporated:
Basic (Note 6)	$	(0.72)	$	0.07
Diluted (Note 6)	$	(0.72)	$	0.07
Dividends declared per common share	$	0.18	$	0.155

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

© 2018 Corning Incorporated. All Rights Reserved.

3

CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited; in millions)

	Three Months Ended
	March 31,
	2018		2017
Net (loss) income attributable to Corning Incorporated	$	(589)	$	86
Foreign currency translation adjustments and other		264		450
Net unrealized gains on investments				3
Unamortized gains (losses) and prior service credits   for postretirement benefit plans		1		1
Net unrealized gains on designated hedges				26
Other comprehensive income, net of tax (Note 13)		265		480
Comprehensive (loss) income attributable to Corning Incorporated	$	(324)	$	566

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

© 2018 Corning Incorporated. All Rights Reserved.

4

CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

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

	March 31,		December 31,
	2018		2017
Assets
Current assets:
Cash and cash equivalents	$	3,096	$	4,317
Trade accounts receivable, net of doubtful accounts and allowances - $61 and $60		1,747		1,807
Inventories, net of inventory reserves - $161 and $169 (Note 7)		1,834		1,712
Other current assets		986		991
Total current assets		7,663		8,827
Investments		345		340
Property, plant and equipment, net of accumulated depreciation - $11,265 and $10,809		14,416		14,017
Goodwill, net (Note 8)		1,698		1,694
Other intangible assets, net (Note 8)		851		869
Deferred income taxes (Note 5)		909		813
Other assets		952		934
Total Assets	$	26,834	$	27,494
Liabilities and Equity
Current liabilities:
Current portion of long-term debt and short-term borrowings	$	380	$	379
Accounts payable		1,164		1,439
Other accrued liabilities (Note 3 and Note 10)		1,451		1,391
Total current liabilities		2,995		3,209
Long-term debt (Note 4)		4,808		4,749
Postretirement benefits other than pensions (Note 9)		746		749
Other liabilities (Note 3 and Note 10)		3,797		3,017
Total liabilities		12,346		11,724
Commitments, contingencies and guarantees (Note 3)
Shareholders’ equity (Note 13):
Convertible preferred stock, Series A – Par value $100 per share;   Shares authorized 3,100; Shares issued: 2,300		2,300		2,300
Common stock – Par value $0.50 per share; Shares authorized 3.8 billion;   Shares issued: 1,709 million and 1,708 million		854		854
Additional paid-in capital – common stock		14,119		14,089
Retained earnings		15,166		15,930
Treasury stock, at cost; Shares held: 877 million and 850 million		(17,449)		(16,633)
Accumulated other comprehensive loss		(577)		(842)
Total Corning Incorporated shareholders’ equity		14,413		15,698
Noncontrolling interests		75		72
Total equity		14,488		15,770
Total Liabilities and Equity	$	26,834	$	27,494

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

© 2018 Corning Incorporated. All Rights Reserved.

5

CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in millions)

	Three Months Ended
	March 31,
	2018		2017
Cash Flows from Operating Activities:
Net (loss) income	$	(589)	$	86
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation		304		260
Amortization of purchased intangibles		19		17
Equity in earnings of affiliated companies		(39)		(80)
Dividends received from affiliated companies				34
Deferred tax provision (benefit)		16		(121)
Customer incentives and deposits		276
Translated earnings contract loss		622		438
Unrealized translation gains on transactions		(63)		(67)
Changes in certain working capital items:
Trade accounts receivable		94		(54)
Inventories		(98)		(49)
Other current assets		(92)		(60)
Accounts payable and other current liabilities		(162)		(230)
Other, net		32		17
Net cash provided by operating activities		320		191
Cash Flows from Investing Activities:
Capital expenditures		(655)		(364)
Acquisition of business, net of cash received				(35)
Realized gains on translated earnings contracts		13		80
Other, net		(2)		(7)
Net cash used in investing activities		(644)		(326)
Cash Flows from Financing Activities:
Principal payments under capital lease obligations		(1)
Payments of employee withholding tax on stock awards		(2)		(2)
Proceeds from the exercise of stock options		21		182
Repurchases of common stock for treasury		(800)		(400)
Dividends paid		(177)		(168)
Net cash used in financing activities		(959)		(388)
Effect of exchange rates on cash		62		76
Net decrease in cash and cash equivalents		(1,221)		(447)
Cash and cash equivalents at beginning of period		4,317		5,291
Cash and cash equivalents at end of period	$	3,096	$	4,844

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

© 2018 Corning Incorporated. All Rights Reserved.

6

CORNING INCORPORATED AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.   Significant Accounting Policies

Basis of Presentation

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

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

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

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

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

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

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

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

New Accounting Standards

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

© 2018 Corning Incorporated. All Rights Reserved.

7

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

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

2.   Revenue

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

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

Product Revenue (Point in Time)

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

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

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

Other Revenue (Over Time)

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

© 2018 Corning Incorporated. All Rights Reserved.

8

Revenue Disaggregation Table

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

	Three Months Ended
	March 31,
Revenues by Product Category	2018		2017
Display products	$	732	$	736
Telecommunication products		886		818
Specialty glass products		278		300
Environmental substrate and filter products		322		275
Life science products		232		210
All Other		50		36
	$	2,500	$	2,375

Contract Assets and Liabilities

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

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

Customer Deposits

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

Practical Expedients and Exemptions

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

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

© 2018 Corning Incorporated. All Rights Reserved.

9

3.   Commitments, Contingencies and Guarantees

Asbestos Claims

Corning and PPG Industries, Inc. each owned 50% of the capital stock of Pittsburgh Corning Corporation (“PCC”).  PCC filed for Chapter 11 reorganization in 2000 and the Modified Third Amended Plan of Reorganization for PCC (the “Plan”) became effective in April 2016.  At December 31, 2016, this estimated liability was $290 million, due to the Company’s contribution, in the second quarter of 2016, of its equity interests in PCC and Pittsburgh Corning Europe N.V. (“PCE”) in the total amount of $238 million, as required by the Plan.  A payment of$70 million was made in June 2017.  At March 31, 2018, the total amount of payments due in years 2018 through 2022 is $220 million.  A $35 million payment is due in the second quarter of 2018 and is classified as a current liability.  The remaining $185 million is classified as a non-current liability.

Non-PCC Asbestos Claims Insurance Litigation

Corning is a defendant in certain cases alleging injuries from asbestos unrelated to PCC (the “non-PCC asbestos claims”) which had been stayed pending the confirmation of the Plan.  The stay was lifted on August 25, 2016.  Corning previously established a $150 million reserve for these non-PCC asbestos claims.  The estimated reserve represents the undiscounted projection of claims and related legal fees over the next 20 years.  The amount may need to be adjusted in future periods as more data becomes available; however, we cannot estimate any lesser or greater liabilities at this time.  At March 31, 2018 and December 31, 2017, the amount of the reserve for these non-PCC asbestos claims was $147 million.

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

Dow Corning Chapter 11 Related Matters

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

Dow Corning Breast Implant Litigation

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

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

© 2018 Corning Incorporated. All Rights Reserved.

10

Dow Corning Bankruptcy Pendency Interest Claims

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

Other Commitments and Contingencies

Corning is a defendant in various lawsuits, including environmental and product-related suits, and is subject to various claims that arise in the normal course of business.  In the opinion of management, the likelihood that the ultimate disposition of these matters will have a material adverse effect on Corning’s consolidated financial position, liquidity, or results of operations, is remote.  Other than certain asbestos related claims, there are no other material loss contingencies related to litigation.

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

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

4.   Debt

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

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

© 2018 Corning Incorporated. All Rights Reserved.

11

5.   Income Taxes

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

	Three Months Ended
	March 31,
	2018		2017
(Provision) benefit for income taxes	$	(124)	$	66
Effective tax rate (benefit)		26.7%		(330.0%)

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

· Additional tax expense of $172 million related to a preliminary agreement with the Internal Revenue Service (“IRS”) to settle the income tax audit of years 2013 and 2014; and

· A reduction in the tax benefit of $37 million from domestic losses attributable to foreign exchange and losses on translated earnings contracts due to the impacts of the base erosion and anti-deferral tax (“BEAT”).

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

· Rate differences on income (loss) of consolidated foreign companies, including the benefit of excess foreign tax credits resulting from the inclusion of foreign earnings in U.S. income; and

· The impact from domestic losses attributable to foreign exchange and losses on translated earnings contracts.

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

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

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

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

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

© 2018 Corning Incorporated. All Rights Reserved.

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

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

6.   (Loss) Earnings per Common Share

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

	Three Months Ended
	March 31,
	2018		2017
Net (loss) income attributable to Corning Incorporated	$	(589)	$	86
Less:  Series A convertible preferred stock dividend		24		24
Net (loss) income available to common stockholders – basic		(613)		62
Net (loss) income available to common stockholders – diluted	$	(613)	$	62
Weighted-average common shares outstanding – basic		848		925
Effect of dilutive securities:
Stock options and other dilutive securities				11
Weighted-average common shares outstanding – diluted		848		936
Basic (loss) earnings per common share	$	(0.72)	$	0.07
Diluted (loss) earnings per common share	$	(0.72)	$	0.07
Antidilutive potential shares excluded from   diluted earnings per common share:
Series A convertible preferred stock (1)		115		115
Employee stock options and awards		11		2
Total		126		117

(1) In the three months ended March 31, 2018 and 2017, the Series A convertible preferred stock was anti-dilutive and therefore was excluded from the calculation of diluted earnings per share.

7.   Inventories, Net of Inventory Reserves

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

	March 31,		December 31,
	2018		2017
Finished goods	$	786	$	739
Work in process		340		322
Raw materials and accessories		350		306
Supplies and packing materials		358		345
Total inventories, net of inventory reserves	$	1,834	$	1,712

© 2018 Corning Incorporated. All Rights Reserved.

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8.  Goodwill and Other Intangible Assets

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

	Display		Optical		Specialty		Life		All
	Technologies		Communications		Materials		Sciences		Other		Total
Balance at December 31, 2017	$	136	$	671	$	150	$	623	$	114	$	1,694
Foreign currency translation    adjustment				(2)				4		2		4
Balance at March 31, 2018	$	136	$	669	$	150	$	627	$	116	$	1,698

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

Other intangible assets are as follows (in millions):

	March 31, 2018						December 31, 2017
			Accumulated						Accumulated
	Gross		amortization		Net		Gross		amortization		Net
Amortized intangible assets:
Patents, trademarks, and    trade names	$	380	$	191	$	189	$	382	$	188	$	194
Customer lists and other		886		224		662		884		209		675
Total	$	1,266	$	415	$	851	$	1,266	$	397	$	869

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

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

9.  Employee Retirement Plans

The following table summarizes the components of net periodic benefit cost for Corning’s defined benefit pension and postretirement health care and life insurance plans (in millions):

	Pension Benefits				Postretirement benefits
	Three months ended				Three months ended
	March 31,				March 31,
	2018		2017		2018		2017
Service cost	$	25	$	24	$	3	$	3
Interest cost		32		31		6		7
Expected return on plan assets		(47)		(43)
Amortization of prior service    cost (credit)		2		1		(1)		(1)
Total pension and postretirement    benefit expense	$	12	$	13	$	8	$	9

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

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

© 2018 Corning Incorporated. All Rights Reserved.

14

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

10.  Other Liabilities

Other liabilities follow (in millions):

	March 31,		December 31,
	2018		2017
Current liabilities:
Wages and employee benefits	$	374	$	620
Income taxes		192		148
Derivative instruments		122		42
Asbestos and other litigation (Note 3)		179		41
Other current liabilities		584		540
Other accrued liabilities	$	1,451	$	1,391
Non-current liabilities:
Defined benefit pension plan liabilities	$	724	$	713
Derivative instruments		830		333
Asbestos and other litigation (Note 3)		330		338
Investment in Hemlock Semiconductor Group ("HSG") (1)		66		105
Customer deposits (Note 2)		682		382
Deferred tax liabilities		514		451
Other non-current liabilities		651		695
Other liabilities	$	3,797	$	3,017

(1) The negative carrying value resulted from a one-time charge to this entity in 2014 for the permanent abandonment of certain assets.

11.  Hedging Activities

Undesignated Hedges

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

© 2018 Corning Incorporated. All Rights Reserved.

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

					Asset derivatives					Liability derivatives
	Gross notional amount				Balance	Fair value				Balance	Fair value
	March 31,		Dec. 31,		sheet	March 31,		Dec. 31,		sheet	March 31,		Dec. 31,
	2018		2017		location	2018		2017		location	2018		2017
Derivatives   designated as   hedging   instruments
Foreign exchange   contracts (1)	$	313	$	294	Other current assets	$	16	$	20
					Other assets		3		1
Interest rate   contracts		550		550						Other liabilities	$	(11)	$	(8)
Derivatives not   designated as   hedging   instruments
Foreign exchange   contracts, other		1,431		599	Other current assets		3		2	Other accrued liabilities		(14)		(7)
Translated earnings   contracts		14,280		14,275	Other current assets		106		176	Other accrued liabilities		(108)		(34)
					Other assets		69		66	Other liabilities		(819)		(325)
Total derivatives	$	16,574	$	15,718		$	197	$	265		$	(952)	$	(374)

(1) Cash flow hedges with a typical duration of 24 months or less.

© 2018 Corning Incorporated. All Rights Reserved.

16

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

	Effect of  derivative instruments on the consolidated financial statements
	for the three months ended March 31,
	Gain recognized in other				Location of gain/(loss)	Gain/(loss) reclassified from
	comprehensive income				reclassified from	accumulated OCI into
Derivatives in hedging	(OCI)				accumulated OCI into	income (effective) (1)
relationships	2018		2017		income (effective)	2018		2017
					Cost of sales	$	4	$	(6)
Foreign exchange contracts	$	2	$	23
Total cash flow hedges	$	2	$	23		$	4	$	(6)

(1) The amount of hedge ineffectiveness at March 31, 2018 and 2017 was insignificant.

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

		Gain (loss) recognized in income
		Three months ended
	Location of gain/(loss)	March 31,
Undesignated derivatives	recognized in income	2018		2017
Foreign exchange contracts   – balance sheet and loans	Other expense, net	$	(19)	$	2
Foreign currency hedges   related to translated earnings	Translated earnings   contract loss, net		(622)		(438)
Total undesignated		$	(641)	$	(436)

12.  Fair Value Measurements

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

© 2018 Corning Incorporated. All Rights Reserved.

17

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
Quoted prices in	Significant other	Significant