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 June 30, 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 July13, 2018
Corning’s Common Stock, $0.50 par value per share	810,015,005 shares

© 2018 Corning Incorporated. All Rights Reserved.

1

INDEX

PART I – FINANCIAL INFORMATION
	Page
Item 1. Financial Statements
Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2018 and 2017	3
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and six months ended June 30, 2018 and 2017	4
Consolidated Balance Sheets (Unaudited) at June 30, 2018 and December 31, 2017	5
Consolidated Statements of Cash Flows (Unaudited) for the three and six months ended June 30, 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	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	44
Item 4. Controls and Procedures	44
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	45
Item 1A.  Risk Factors	45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 6. Exhibits	47
Signatures	48

© 2018 Corning Incorporated. All Rights Reserved.

2

CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited; in millions, except per share amounts)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Net sales	$	2,747	$	2,497	$	5,247	$	4,872
Cost of sales		1,675		1,510		3,220		2,934
Gross margin		1,072		987		2,027		1,938
Operating expenses:
Selling, general and administrative expenses		412		378		913		697
Research, development and engineering expenses		243		206		484		408
Amortization of purchased intangibles		22		18		41		35
Operating income		395		385		589		798
Equity in earnings of affiliated companies		31		37		70		117
Interest income		9		11		22		23
Interest expense		(43)		(38)		(95)		(75)
Translated earnings contract gain (loss), net		458		219		(164)		(219)
Other income (expense), net		14		(22)		(23)		(32)
Income before income taxes		864		592		399		612
Provision for income taxes (Note 5)		(126)		(153)		(250)		(87)
Net income attributable to Corning Incorporated	$	738	$	439	$	149	$	525
Earnings per common share attributable to Corning Incorporated:
Basic (Note 6)	$	0.87	$	0.46	$	0.12	$	0.52
Diluted (Note 6)	$	0.78	$	0.42	$	0.12	$	0.50
Dividends declared per common share	$	0.18	$	0.155	$	0.36	$	0.31

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 INCOME (LOSS)

(Unaudited; in millions)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Net income attributable to Corning Incorporated	$	738	$	439	$	149	$	525
Foreign currency translation adjustments and other (Note 14)		(428)		(46)		(164)		404
Net unrealized (losses) gains on investments		(1)		13				16
Unamortized gains (losses) and prior service credits   for postretirement benefit plans		(6)		16		(5)		17
Net unrealized (losses) gains on designated hedges		(23)		12		(24)		38
Other comprehensive (loss) income, net of tax		(458)		(5)		(193)		475
Comprehensive income (loss) attributable to Corning Incorporated	$	280	$	434	$	(44)	$	1,000

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)

	June 30,		December 31,
	2018		2017
Assets
Current assets:
Cash and cash equivalents	$	2,023	$	4,317
Trade accounts receivable, net of doubtful accounts and allowances - $65 and $60		1,842		1,807
Inventories, net of inventory reserves - $167 and $169 (Note 7)		1,896		1,712
Other current assets		723		991
Total current assets		6,484		8,827
Investments		339		340
Property, plant and equipment, net of accumulated depreciation - $11,259 and $10,809		14,201		14,017
Goodwill, net (Note 9)		1,918		1,694
Other intangible assets, net (Note 9)		1,332		869
Deferred income taxes (Note 5)		859		813
Other assets		1,007		934
Total Assets	$	26,140	$	27,494
Liabilities and Equity
Current liabilities:
Current portion of long-term debt and short-term borrowings	$	252	$	379
Accounts payable		1,111		1,439
Other accrued liabilities (Note 3 and Note 11)		1,545		1,391
Total current liabilities		2,908		3,209
Long-term debt (Note 4)		5,099		4,749
Postretirement benefits other than pensions (Note 10)		702		749
Other liabilities (Note 3 and Note 11)		3,480		3,017
Total liabilities		12,189		11,724
Commitments, contingencies and guarantees (Note 3)
Shareholders’ equity (Note 14):
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: 1,711 million and 1,708 million		855		854
Additional paid-in capital – common stock		14,158		14,089
Retained earnings		15,731		15,930
Treasury stock, at cost; Shares held: 902 million and 850 million		(18,132)		(16,633)
Accumulated other comprehensive loss		(1,035)		(842)
Total Corning Incorporated shareholders’ equity		13,877		15,698
Noncontrolling interests		74		72
Total equity		13,951		15,770
Total Liabilities and Equity	$	26,140	$	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)

	Six Months Ended
	June 30,
	2018		2017
Cash Flows from Operating Activities:
Net income	$	149	$	525
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		604		523
Amortization of purchased intangibles		41		35
Equity in earnings of affiliated companies		(70)		(117)
Dividends received from affiliated companies		5		67
Deferred tax expense (benefit) provision		46		(76)
Customer incentives and deposits		576
Translated earnings contract loss		164		219
Unrealized translation loss (gain) on transactions		38		(194)
Changes in certain working capital items:
Trade accounts receivable		(41)		(98)
Inventories		(193)		(110)
Other current assets		(30)		(100)
Accounts payable and other current liabilities		(146)		(317)
Other, net		(108)		114
Net cash provided by operating activities		1,035		471
Cash Flows from Investing Activities:
Capital expenditures		(1,177)		(761)
Acquisition of business, net of cash received		(794)		(38)
Proceeds from settlement of initial contingent consideration asset		196
Short-term investments – liquidations				29
Realized gains on translated earnings contracts		36		149
Other, net		(16)		(13)
Net cash used in investing activities		(1,755)		(634)
Cash Flows from Financing Activities:
Net repayments of short-term borrowings and current portion of long-term debt		(375)
Proceeds from issuance of long-term debt, net		596
Principal payments under capital lease obligations		(1)		(1)
Payments of employee withholding tax on stock awards		(10)		(11)
Proceeds from the exercise of stock options		43		252
Repurchases of common stock for treasury		(1,483)		(1,045)
Dividends paid		(348)		(333)
Net cash used in financing activities		(1,578)		(1,138)
Effect of exchange rates on cash		4		199
Net decrease in cash and cash equivalents		(2,294)		(1,102)
Cash and cash equivalents at beginning of period		4,317		5,291
Cash and cash equivalents at end of period	$	2,023	$	4,189

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 income (expense), net, in the Consolidated Statements of 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 June 30, 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. 

Our revenues by product category are as follows (in millions):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
Revenues by Product Category	2018		2017		2018		2017
Display products	$	768	$	747	$	1,500	$	1,483
Telecommunication products		1,023		882		1,909		1,700
Specialty glass products		343		337		621		637
Environmental substrate and filter products		317		263		639		538
Life science products		245		221		477		431
All Other		51		47		101		83
	$	2,747	$	2,497	$	5,247	$	4,872

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 June 30, 2018, Corning has customer deposits of approximately $1.0 billion, of which $576 million was received in the first half 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 and 2017, 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, the Company’s liability under the Plan was $290 million, which is required to be paid through a series of fixed payments beginning in the second quarter of 2017.  Paymentsof$35 million and $70 million were made in June 2018 and June 2017, respectively.  At June 30, 2018, the total amount of payments due in years 2019 through 2022 is $185 million, of which $50million is due in the second quarter of 2019 and is classified as a current liability.  The remaining $135 million is classified as a non-current liability.

Non-PCC Asbestos Claims and 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 liability at this time.  At June 30, 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 June1, 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 to 50% of the excess liability.   At June 30, 2018, Dow Corning had recorded a reserve for breast implant litigation of $263 million.

© 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.  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 to 50% of the excess liability, subject to certain conditions and limits.  At June 30, 2018, Dow Corning estimated the liability to commercial creditors to be within the range of $77 million to $260 million. 

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 June 30, 2018 and December31, 2017, Corning had accrued approximately $35 million and $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 June 30, 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 $5.2 billion and $5.1 billion at June 30, 2018 and December 31, 2017, respectively, compared to recorded book values of $5.1 billion at June 30, 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 June 30, 2018 and December 31, 2017.

Debt Issuances

2018

In the second quarter of 2018, Corning issued three Japanese yen-denominated debt securities (the “Notes”), as follows:

· ¥10 billion 0.722% senior unsecured notes with a maturity of 7  years;

· ¥30.5billion 1.043% senior unsecured notes with a maturity of 10 years; and

· ¥25 billion 1.219% senior unsecured notes with a maturity of 12 years.

The proceeds from the Notes were received in Japanese yen and converted to U.S. dollars on the date of issuance. The net proceeds received in U.S. dollars, after deducting offering expenses, were $596 million.Payments of principle and interest on the Notes will be in Japanese yen, or should yen be unavailable due to circumstances beyond Corning’s control, a U.S. dollar equivalent.

On a quarterly basis, Corning will recognize the transaction gains and losses resulting from changes in the JPY/USD exchange rate in the Other expense, net line of the Consolidated Statements of Income. Cash proceeds from the offerings and payments for debt issuance costs are disclosed as financing activities, and cash payments to bondholders for interest will be disclosed as operating activities, in the Consolidated Statements of Cash Flows.

© 2018 Corning Incorporated. All Rights Reserved.

11

5.   Income Taxes

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Provision for income taxes	$	(126)	$	(153)	$	(250)	$	(87)
Effective tax rate		14.6%		25.8%		62.7%		14.2%

For the three months ended June 30, 2018, the effective income tax rate differed from the U.S. statutory rate of 21% primarily due to the following:

· A reduction in the estimated impact of the base erosion and anti-deferral tax (“BEAT”) attributable to year-to-date losses from foreign exchange and translated earnings contracts;

· Additional tax amounts related to global intangible low-taxed income (“GILTI”); and

· A $28 million benefit from the release of a valuation allowance on deferred tax assets that are now considered realizable.  

For the six months ended June 30, 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 for the years 2013 and 2014;

· Additional tax amounts related to global intangible low-taxed income (“GILTI”); and

· A $28 million benefit from the release of a valuation allowance on deferred tax assets that are now considered realizable.  

For the three and six months ended June 30, 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; and

· The benefit of excess foreign tax credits resulting from the inclusion of foreign earnings in U.S. income.

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 June 30, 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 June 30, 2018, Corning has not yet completed its analysis 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 $2.2 billion during 2018 from 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.

© 2018 Corning Incorporated. All Rights Reserved.

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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.

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.   Earnings per Common Share

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Net income attributable to Corning Incorporated	$	738	$	439	$	149	$	525
Less:  Series A convertible preferred stock dividend		24		24		49		49
Net income available to common stockholders – basic		714		415		100		476
Plus:  Series A convertible preferred stock dividend (1)		24		24				49
Net income available to common stockholders – diluted	$	738	$	439	$	100	$	525
Weighted-average common shares outstanding – basic		819		908		833		917
Effect of dilutive securities:
Stock options and other dilutive securities		9		11		10		11
Series A convertible preferred stock		115		115				115
Weighted-average common shares outstanding – diluted		943		1,034		843		1,043
Basic earnings per common share	$	0.87	$	0.46	$	0.12	$	0.52
Diluted earnings per common share	$	0.78	$	0.42	$	0.12	$	0.50
Antidilutive potential shares excluded from   diluted earnings per common share:
Series A convertible preferred stock (1)						115
Employee stock options and awards		2				2		2
Total		2				117		2

(1) In the six months ended June 30, 2018, 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):

	June 30,		December 31,
	2018		2017
Finished goods	$	810	$	739
Work in process		356		322
Raw materials and accessories		364		306
Supplies and packing materials		366		345
Total inventories, net of inventory reserves	$	1,896	$	1,712

© 2018 Corning Incorporated. All Rights Reserved.

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8.   Acquisition

On June 1, 2018, Corning acquired substantially all of 3M’s Communications Market Division including a manufacturing facility and certain other assets (collectively referred to as “Purchased Assets”) for approximately $794 million.  The Purchased Assets constitute a business, which designs, manufactures and markets high bandwidth and optical fiber products. The acquisition was accounted for as a business combination.

A summary of the preliminary allocation of the total purchase price to the net tangible and other intangible assets acquired, with the remainder recorded as goodwill on the basis of fair value as follows (in millions):

Fixed assets	$	32
Other net assets		9
Other intangible assets		511
Net tangible and intangible assets	$	552
Purchase price		794
Goodwill (1)	$	242

(1)The goodwill recognized is deductible for U.S. income tax purposes.  The goodwill was allocated to the Optical Communications segment.

Goodwill is primarily related to the value of the Communications Market Division product and customer portfolio and its combination with Corning’s existing optical communications platform, as well as synergies and other intangibles that do not qualify for separate recognition.  Other intangible assets consist mainly of customer relationships, trade names and developed technology and are amortized over various useful lives ranging from 3 to 14 years.  Acquisition-related costs of $15 million in the six months ended June 30, 2018 included costs for legal, accounting, valuation and other professional services and were included in selling, general and administrative expense in the Consolidated Statements of Income.  Supplemental pro forma information was not provided because the Purchased Assets are not material to Corning’s consolidated financial statements.

9.  Goodwill and Other Intangible Assets

The carrying amount of goodwill by segment for the periods ended June 30, 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
Acquired goodwill (1)				242								242
Foreign currency translation    adjustment		(4)		(6)				(5)		(3)		(18)
Balance at June 30, 2018	$	132	$	907	$	150	$	618	$	111	$	1,918

(1)The Company completed the acquisition of 3M in the Optical Communications segment during the second quarter of 2018.  Refer to Note 8 (Acquisitions) to the Consolidated Financial Statements for additional information on this acquisition.

Corning’s gross goodwill balances for the periods ended June 30, 2018 and December 31, 2017 were $8.4 and $8.2 billion, respectively. Accumulated impairment losses were $6.5 billion for the periods ended June 30, 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):

	June 30, 2018						December 31, 2017
			Accumulated						Accumulated
	Gross		amortization		Net		Gross		amortization		Net
Amortized intangible assets:
Patents, trademarks, and    trade names	$	468	$	195	$	273	$	382	$	188	$	194
Customer lists and other		1,297		238		1,059		884		209		675
Total	$	1,765	$	433	$	1,332	$	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 increased during the first six months of 2018, primarily due to the acquisition of 3M of $511 million of other intangible assets, offset by amortization of $41 million and foreign currency translation adjustments of $7 million.

© 2018 Corning Incorporated. All Rights Reserved.

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Amortization expense related to all intangible assets is estimated to be $112 million annually for 2019, $111 million annually for 2020, $110 million annually for 2021, $109 million annually for 2022, and $108 million annually for 2023.

10.  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				Six months ended				Three months ended				Six months ended
	June 30,				June 30,				June 30,				June 30,
	2018		2017		2018		2017		2018		2017		2018		2017
Service cost	$	26	$	23	$	51	$	47	$	3	$	2	$	6	$	5
Interest cost		33		31		65		62		6		6		12		13
Expected return on plan assets		(48)		(44)		(95)		(87)
Amortization of prior service    cost (credit)		2		2		4		3		(2)				(3)		(1)
Recognition of actuarial loss		1		15		1		15
Total pension and postretirement    benefit expense	$	14	$	27	$	26	$	40	$	7	$	8	$	15	$	17

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 income.

On January 1, 2018, we adopted Compensation—Retirement Benefits: 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 income (expense), net, in the consolidated statements of 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.  See Note 1 (Significant Accounting Policies) for additional information.

© 2018 Corning Incorporated. All Rights Reserved.

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11.  Other Liabilities

Other liabilities follow (in millions):

	June 30,		December 31,
	2018		2017
Current liabilities:
Wages and employee benefits	$	411	$	620
Income taxes		247		148
Derivative instruments		42		42
Asbestos and other litigation (Note 3)		192		41
Other current liabilities		653		540
Other accrued liabilities	$	1,545	$	1,391
Non-current liabilities: