Note 15 - Hedging Activities

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Corning is primarily exposed to foreign currency risks due to fluctuations in exchange rates. These fluctuations affect the Company's financial instruments and transactions denominated in foreign currencies, which impact earnings.

The most significant foreign currency exposures relate to the Japanese yen, South Korean won, new Taiwan dollar, Chinese yuan, the euro and British pound. Corning seeks to mitigate the impact of exchange rate movements in our income statement by using over-the-counter ("OTC") derivative instruments including foreign exchange forward and option contracts. In general, the expirations of these contracts coincide with the timing of the underlying foreign currency commitments and transactions.

Corning is exposed to potential losses in the event of non-performance by counterparties to these derivative contracts. However, this risk is minimized by maintaining a portfolio with a diverse group of highly-rated major financial institutions. The Company does not expect to record any losses due to counterparty default. Neither the Company nor its counterparties are required to post collateral for these financial instruments. The Company qualified for and elected the end-user exception to the mandatory swap clearing requirement of the Dodd-Frank Act.

Designated Hedges

Corning uses OTC foreign exchange forward contracts designated as cash flow hedges to reduce the risk that movements in exchange rates will adversely affect the net cash flows resulting from the sale of products to customers and purchases from suppliers. The total gross notional values for foreign currency cash flow hedges are $780 million and $1.1 billion at December 31, 2021 and 2020, respectively, with maturities spanning the years 2022 through 2023. Corning defers gains and losses related to the cash flow hedges into accumulated other comprehensive loss on the consolidated balance sheets until the hedged item impacts earnings. At December 31, 2021, the amount expected to be reclassified into earnings within the next 12 months is a pre-tax gain of $47 million.

In 2021, Corning entered into leases of precious metals, with maturities through 2025. To offset the risk of changes in the fair value of the Company's separate accounting pool of leased precious metals due to adverse changes in the respective market prices, Corning designated the bifurcated embedded derivatives included in these leases as fair value hedges. The gain or loss on the derivatives, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings. The amounts representing the time value component of the derivatives are excluded from the assessment of effectiveness and amortized in earnings. The impact of the excluded component on Corning's other comprehensive income and earnings is not material. The carrying amount of the leased precious metals pool, which is included in the property, plant and equipment, net of accumulated depreciation line of the consolidated balance sheets, is $107 million at December 31, 2021. The cumulative amount of fair value changes included in the carrying amount of the leased precious metals pool is not material.

Corning uses regression analysis or the critical term match method to assess initial hedge effectiveness. Following the inception of a hedging relationship, hedge effectiveness is assessed quarterly based on qualitative factors. 

Undesignated Hedges

Corning uses OTC foreign exchange forward and option contracts not designated as hedging instruments for accounting purposes to offset economic currency risks. The undesignated hedges limit exposure to foreign functional currency fluctuations related to certain subsidiaries’ monetary assets, monetary liabilities and net earnings in foreign currencies. 

A significant portion of the Company's non-U.S. revenue and expenses are denominated in Japanese yen, South Korean won, new Taiwan dollar, Chinese yuan, and euro. When this revenue and these expenses are translated back to U.S. dollars, the Company is exposed to foreign exchange rate movements. To protect translated earnings against movements in these currencies, the Company has entered into a series of average rate forwards and option contracts. Most of these contracts hedge a significant portion of the Company’s exposure to the Japanese yen with maturities spanning years 2022 through 2024.  

The following table summarizes the total gross notional value for translated earnings contracts at December 31, 2021 and 2020 (in billions):

	Year ended December 31,
	2021		2020
Average rate forward contracts:
Japanese yen-denominated	$	2.9	$	4.5
South Korean won-denominated		1.2		0.4
Euro-denominated		0.2		0.5
Other foreign currencies (1)		0.1		0.1
Option contracts:
Japanese yen-denominated (2)		3.6		2.0
Other foreign currencies (3)		0.9
Total gross notional value outstanding	$	8.9	$	7.5

(1)	Denominated currencies for average rate forward contracts include the Chinese yuan and British pound.
(2)	Japanese yen-denominated option contracts include zero-cost collars, purchased put and call options. With respect to zero-cost collars, the gross notional amount includes the value of the put and call options. However, due to the nature of zero-cost collars, only the put or the call option can be exercised at maturity.
(3)	Other foreign currencies option contracts are purchased basket options that include a basket of underlying currencies, including the Japanese yen, South Korean won, Chinese yuan, euro, and British pound, and each basket option will be settled against USD.

The fair values of these derivative contracts are recorded as either assets (gain position) or liabilities (loss position) on the consolidated balance sheets. Changes in the fair value of the derivative contracts are recorded currently in earnings in the translated earnings contract gain (loss), net line of the consolidated statements of income.

The following table summarizes the notional amounts and respective fair values of Corning’s derivative financial instruments on a gross basis for  December 31, 2021 and 2020 (in millions):

					Asset derivatives					Liability derivatives
	Notional amount					Fair value					Fair value
	2021		2020		Balance sheet location	2021		2020		Balance sheet location	2021			2020
Derivatives designated as hedging instruments (1)
Foreign exchange contracts and other	$	780	$	1,143	Other current assets	$	49	$	37	Other accrued liabilities	$	(2	)	$	(3	)
					Other assets		10		21	Other liabilities		(9	)		(1	)
Derivatives not designated as hedging instruments
Foreign exchange contracts		3,864		6,144	Other current assets		91		45	Other accrued liabilities		(95	)		(76	)
					Other assets				41	Other liabilities					(59	)
Translated earnings contracts		8,899		7,453	Other current assets		196		66	Other accrued liabilities		(47	)		(110	)
					Other assets		154		61	Other liabilities		(40	)		(95	)
Total derivatives	$	13,543	$	14,740		$	500	$	271		$	(193	)	$	(344	)

(1) At December 31, 2021, derivatives designated as hedging instruments include foreign exchange cash flow hedges with gross notional amounts of $780 million and fair value hedges of leased precious metals with a gross notional amount of 7,559 troy ounces. At December 31, 2020, derivatives designated as hedging instruments include foreign currency contracts with notional amounts of $892 million and $251 million, respectively, for cash flow hedges and net investment hedges.

The following tables summarize the effect on the consolidated statements of income relating to Corning’s derivative financial instruments (in millions). The accumulated derivative gain included in accumulated other comprehensive loss on the consolidated balance sheets at  December 31, 2021 and 2020 is $52 million and $60 million, respectively. 

Derivatives in hedging relationships	Gain (loss) recognized in other comprehensive income (OCI)							Location of gain (loss) reclassified from accumulated OCI into income	Gain (loss) reclassified from accumulated OCI into income
for cash flow and fair value hedges	2021		2020			2019		effective (ineffective)	2021		2020			2019
								Net sales	$	14	$	(6	)
								Cost of sales		39		13		$	11
Foreign exchange contracts and other	$	47	$	(19	)		72	Other expense, net (1)				(14	)
Total cash flow and fair value hedges	$	47	$	(19	)	$	72		$	53	$	(7	)	$	11

		Gain (loss) recognized in income
Undesignated derivatives	Location of gain (loss) recognized in income	2021		2020			2019
Foreign exchange contracts	Other income (expense), net (1)	$	38	$	(93	)	$	21
Translated earnings contracts	Translated earnings contract gain (loss), net		354		(38	)		248
Total undesignated		$	392	$	(131	)	$	269

(1) A loss of $14 million was reclassified from accumulated other comprehensive loss into other expense, net, resulting from the de-designation of certain cash flow hedges during the year ended December 31, 2020.