q310q2011.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

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

 
For the quarterly period ended September 30, 2011

 
OR

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

For the transition period from
 
to
   

 
Commission file number:  1-3247

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

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

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

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

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

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

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

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

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

Class
 
Outstanding as of October 17, 2011
Corning’s Common Stock, $0.50 par value per share
 
1,571,579,112 shares


 
 



INDEX

PART I – FINANCIAL INFORMATION
   
Page
Item 1. Financial Statements
   
     
 
3
     
 
4
     
 
5
     
 
6
     
 
34
     
 
53
     
 
53
     
PART II – OTHER INFORMATION
   
     
 
54
     
 
58
     
 
58
     
 
59
     
 
60


 
-2-


CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in millions, except per share amounts)


 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
                       
Net sales
$
2,075 
 
$
1,602 
 
$
6,003 
 
$
4,867 
Cost of sales
 
1,097 
   
878 
   
3,262 
   
2,585 
                       
Gross margin
 
978 
   
724 
   
2,741 
   
2,282 
                       
Operating expenses:
                     
Selling, general and administrative expenses
 
216 
   
250 
   
750 
   
731 
Research, development and engineering expenses
 
166 
   
148 
   
494 
   
437 
Amortization of purchased intangibles
 
   
   
11 
   
Restructuring, impairment and other credits (Note 2)
       
(1)
         
(3)
Asbestos litigation charge (credit) (Note 3)
 
   
   
15 
   
(41)
                       
Operating income
 
587 
   
319 
   
1,471 
   
1,152 
                       
Equity in earnings of affiliated companies (Note 9)
 
324 
   
504 
   
1,150 
   
1,447 
Interest income
 
   
   
15 
   
Interest expense
 
(23)
   
(29)
   
(72)
   
(81)
Other income, net (Note 1)
 
27 
   
   
97 
   
130 
                       
Income before income taxes
 
921 
   
799 
   
2,661 
   
2,656 
Provision for income taxes (Note 5)
 
(110)
   
(14)
   
(347)
   
(142)
                       
Net income attributable to Corning Incorporated
$
811 
 
$
785 
 
$
2,314 
 
$
2,514 
                       
Earnings per common share attributable to Corning Incorporated:
                     
Basic (Note 6)
$
0.52 
 
$
0.50 
 
$
1.48 
 
$
1.61 
Diluted (Note 6)
$
0.51 
 
$
0.50 
 
$
1.46 
 
$
1.59 
                       
Dividends declared per common share
$
0.05 
 
$
0.05 
 
$
0.15 
 
$
0.15 

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


 
-3-


CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except per share amounts)

 
September 30,
2011
 
December 31,
2010
Assets
         
           
Current assets:
         
Cash and cash equivalents
$
4,901 
 
$
4,598 
Short-term investments, at fair value (Note 7)
 
1,520 
   
1,752 
Total cash, cash equivalents and short-term investments
 
6,421 
   
6,350 
Trade accounts receivable, net of doubtful accounts and allowances - $23 and $20
 
1,189 
   
973 
Inventories (Note 8)
 
939 
   
738 
Deferred income taxes (Note 5)
 
356 
   
431 
Other current assets
 
359 
   
367 
Total current assets
 
9,264 
   
8,859 
           
Investments (Note 9)
 
4,890 
   
4,372 
Property, net of accumulated depreciation - $7,089 and $6,420 (Note 10)
 
10,266 
   
8,943 
Goodwill and other intangible assets, net (Note 11)
 
881 
   
716 
Deferred income taxes (Note 5)
 
2,715 
   
2,790 
Other assets
 
157 
   
153 
           
Total Assets
$
28,173 
 
$
25,833 
           
Liabilities and Equity
         
           
Current liabilities:
         
Current portion of long-term debt (Note 4)
$
27 
 
$
57 
Accounts payable
 
938 
   
798 
Other accrued liabilities (Notes 3 and 12)
 
1,044 
   
1,131 
Total current liabilities
 
2,009 
   
1,986 
           
Long-term debt (Note 4)
 
2,282 
   
2,262 
Postretirement benefits other than pensions
 
891 
   
913 
Other liabilities (Notes 3 and 12)
 
1,300 
   
1,246 
Total liabilities
 
6,482 
   
6,407 
           
Commitments and contingencies (Note 3)
         
Shareholders’ equity:
         
Common stock – Par value $0.50 per share; Shares authorized 3.8 billion; Shares issued: 1,635 million and 1,626 million
 
818 
   
813 
Additional paid-in capital
 
13,014 
   
12,865 
Retained earnings
 
8,958 
   
6,881 
Treasury stock, at cost; Shares held: 66 million and 65 million
 
(1,243)
   
(1,227)
Accumulated other comprehensive income (Note 17)
 
93 
   
43 
Total Corning Incorporated shareholders’ equity
 
21,640 
   
19,375 
Noncontrolling interests
 
51 
   
51 
Total equity
 
21,691 
   
19,426 
           
Total Liabilities and Equity
$
28,173 
 
$
25,833 

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

 
-4-


CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)

 
Nine months ended
September 30,
 
2011
 
2010
Cash Flows from Operating Activities:
         
Net income
$
2,314 
 
$
2,514 
Adjustments to reconcile net income to net cash provided by operating activities:
         
Depreciation
 
699 
   
624 
Amortization of purchased intangibles
 
11 
   
Asbestos litigation charges (credits)
 
15 
   
(41)
Restructuring, impairment and other credits
       
(3)
Cash received from settlement of insurance claims
 
66 
     
Loss on retirement of debt
       
30 
Stock compensation charges
 
66 
   
77 
Earnings of affiliated companies in excess of dividends received
 
(686)
   
(1,096)
Deferred tax provision (benefit)
 
118 
   
(15)
Restructuring payments
 
(15)
   
(58)
Credits issued against customer deposits
 
(21)
   
(76)
Employee benefit payments less than (in excess of) expense
 
105 
   
(81)
Changes in certain working capital items:
         
Trade accounts receivable
 
(182)
   
(62)
Inventories
 
(170)
   
(147)
Other current assets
 
(49)
   
25 
Accounts payable and other current liabilities, net of restructuring payments
 
(107)
   
Other, net
 
(132)
   
38 
Net cash provided by operating activities
 
2,032 
   
1,743 
           
Cash Flows from Investing Activities:
         
Capital expenditures
 
(1,666)
   
(534)
Acquisition of business, net of cash received
 
(148)
     
Net proceeds from sale or disposal of assets
 
   
Short-term investments – acquisitions
 
(2,193)
   
(2,000)
Short-term investments – liquidations
 
2,426 
   
1,318 
Other, net
 
(1)
   
Net cash used in investing activities
 
(1,580)
   
(1,209)
           
Cash Flows from Financing Activities:
         
Net repayments of short-term borrowings and current portion of long-term debt
 
(22)
   
(70)
Principal payments under capital lease obligations
 
(32)
   
(1)
Proceeds from issuance of long-term debt, net
 
34 
   
689 
Retirements of long-term debt, net
       
(264)
Proceeds from issuance of common stock, net
       
15 
Proceeds from the exercise of stock options
 
82 
   
39 
Dividends paid
 
(237)
   
(235)
Net cash (used in) provided by financing activities
 
(175)
   
173 
Effect of exchange rates on cash
 
26 
   
54 
Net increase in cash and cash equivalents
 
303 
   
761 
Cash and cash equivalents at beginning of period
 
4,598 
   
2,541 
           
Cash and cash equivalents at end of period
$
4,901 
 
$
3,302 

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

 
-5-


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 subsidiary companies.

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

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

Fair Value Measurements

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

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

Other Income, Net

“Other income, net” in Corning’s consolidated statements of income includes the following (in millions):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
Royalty income from Samsung Corning Precision
$
51 
 
$
73 
 
$
176 
 
$
204 
Foreign currency exchange and hedge gains, net
 
(15)
   
(32)
   
(31)
   
(20)
Loss on retirement of debt
       
(30)
         
(30)
Net loss attributable to noncontrolling interests
             
   
Other, net
 
(9)
   
(9)
   
(50)
   
(26)
Total
$
27 
 
$
 
$
97 
 
$
130 


 
-6-



New Accounting Standards

In May, 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.  This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS.  ASU 2011-04 is required to be applied prospectively in interim and annual periods beginning after December 15, 2011.  Early application is not permitted.  Corning does not expect adoption of this standard to have a material impact on its consolidated results of operations and financial condition.

In June, 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.  This statement requires companies to present the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements of net income and other comprehensive income.  This statement is effective for interim and annual periods beginning after December 15, 2011.  Early adoption is permitted and the amendments in this update will be applied retrospectively.  Corning will adopt this standard in the first quarter of 2012.

In September 2011, FASB issued Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment.  This update simplifies how an entity tests goodwill for impairment.  It provides an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  Given this option, an entity no longer would be required to calculate the fair value of a reporting unit unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.  The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted.  Corning will early adopt this standard during its fourth quarter impairment review process.  Corning does not expect adoption of this standard to have a material impact on its consolidated results of operations and financial condition.

In September 2011, the FASB issued Accounting Standards Update No. 2011-09, Compensation—Retirement Benefits—Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan.  The ASU 2011-09 amendments require additional disclosures about an employer's participation in a multiemployer plan.  ASU 2011-09 is required to be applied retrospectively for all prior periods presented and is effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted.  Corning will not early adopt this standard and does not expect adoption of this standard to have a material impact on its consolidated results of operations and financial condition.

2.      Restructuring, Impairment and Other Charges (Credits)

2011 Activities

The following table summarizes the restructuring reserve activity for the nine months ended September 30, 2011 (in millions):
 
Reserve at
January 1,
2011
 
Cash
payments
 
Reserve at
September 30,
2011
Restructuring:
               
Employee related costs
$
15   
 
$
(12)
 
$
3
Other charges (credits)
 
12   
   
(3)
   
9
Total restructuring activity
$
27   
 
$
(15)
 
$
12

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

 
-7-



2010 Activities

The following table summarizes the restructuring reserve activity for the nine months ended September 30, 2010 (in millions):
 
Reserve at
January 1,
2010
 
Non-cash
adjustments
 
Net
charges/
(reversals)
 
Cash
payments
 
Reserve at
September 30,
2010
Restructuring:
                           
Employee related costs
$
80
 
$
(2)
 
$
(3)
 
$
(52)
 
$
23
Other charges (credits)
 
20
               
(6)
   
14
Total restructuring activity
$
100
 
$
(2)
 
$
(3)
 
$
(58)
 
$
37

3.      Commitments and Contingencies

Asbestos Litigation

Pittsburgh Corning Corporation.  Corning and PPG Industries, Inc. (PPG) each own 50% of the capital stock of Pittsburgh Corning Corporation (PCC).  Over a period of more than two decades, PCC and several other defendants have been named in numerous lawsuits involving claims alleging personal injury from exposure to asbestos.  On April 16, 2000, PCC filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Western District of Pennsylvania.  At the time PCC filed for bankruptcy protection, there were approximately 11,800 claims pending against Corning in state court lawsuits alleging various theories of liability based on exposure to PCC’s asbestos products and typically requesting monetary damages in excess of one million dollars per claim.  Corning has defended those claims on the basis of the separate corporate status of PCC and the absence of any facts supporting claims of direct liability arising from PCC’s asbestos products.  Corning is also currently involved in approximately 10,200 other cases (approximately 38,600 claims) alleging injuries from asbestos and similar amounts of monetary damages per case.  Those cases have been covered by insurance without material impact to Corning to date.  As described below, several of Corning’s insurance carriers have filed a legal proceeding concerning the extent of any insurance coverage for these claims.  Asbestos litigation is inherently difficult, and past trends in resolving these claims may not be indicators of future outcomes.

Corning, with other relevant parties, has been involved in ongoing efforts to develop a Plan of Reorganization that would resolve the concerns and objections of the relevant courts and parties.  In 2003, a plan was agreed to by various parties (the 2003 Plan), but, on December 21, 2006, the Bankruptcy Court issued an order denying the confirmation of that 2003 Plan.  On January 29, 2009, an amended plan of reorganization (the Amended PCC Plan) – which addressed the issues raised by the Court when it denied confirmation of the 2003 Plan – was filed with the Bankruptcy Court.

The proposed resolution of PCC asbestos claims under the Amended PCC Plan would have required Corning to contribute its equity interests in PCC and Pittsburgh Corning Europe N.V. (PCE), a Belgian corporation, and to contribute a fixed series of payments, recorded at present value.  Corning would have had the option to use its shares rather than cash to make these payments, but the liability would have been fixed by dollar value and not the number of shares.  The Amended PCC Plan would, originally, have required Corning to make (1) one payment of $100 million one year from the date the Amended PCC Plan becomes effective and certain conditions are met and (2) five additional payments of $50 million, on each of the five subsequent anniversaries of the first payment, the final payment of which is subject to reduction based on the application of credits under certain circumstances.  Documents were filed with the Bankruptcy Court further modifying the Amended PCC Plan by reducing Corning’s initial payment by $30 million and reducing its second and fourth payments by $15 million each.  In return, Corning would relinquish its claim for reimbursement of its payments and contributions under the Amended PCC Plan from the insurance carriers involved in the bankruptcy proceeding with certain exceptions.

 
-8-



On June 16, 2011, the Court entered an Order denying confirmation of the Amended PCC Plan.  The Court’s memorandum opinion accompanying the order rejected some objections to the Amended PCC Plan and made suggestions regarding modifications to the Amended PCC Plan that would allow the Plan to be confirmed.  Corning and other parties have filed a motion for reconsideration, objecting to certain points of this order.  Certain parties to the proceeding filed specific plan modifications in response to the Court’s opinion and Corning supported these filings.  Objections to the modifications are to be filed by October 28, 2011 and responses to the objections by November 16, 2011.  The Court has set a hearing on the objections for November 30, 2011.

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

The liability for the Amended PCC Plan and the non-PCC asbestos claims was estimated to be $649 million at September 30, 2011, compared with an estimate of the liability of $633 million at December 31, 2010.  In the three and nine months ended September 30, 2011, Corning recorded asbestos litigation expense of $5 million and $15 million, respectively.  In the three months and nine months ended September 30, 2010, Corning recorded asbestos litigation expense of $6 million and $13 million, respectively.  In addition, during the first quarter of 2010, Corning recorded a $54 million credit to the asbestos litigation reserve related to the change in terms of the proposed settlement of the PCC asbestos claims.  The entire obligation is classified as a non-current liability as installment payments for the cash portion of the obligation are not planned to commence until more than 12 months after the Amended PCC Plan becomes effective and the PCE portion of the obligation will be fulfilled through the direct contribution of Corning’s investment in PCE (currently recorded as a non-current other equity method investment).

The Amended PCC Plan with the modifications addressing issues raised by the Court’s June 16 opinion remains subject to a number of contingencies.  Payment of the amounts required to fund the Amended PCC Plan from insurance and other sources are subject to a number of conditions that may not be achieved.  The approval of the (further modified) Amended PCC Plan by the Bankruptcy Court is not certain and faces objections by some parties.  If the modified Amended PCC Plan is approved by the Bankruptcy Court, that approval will be subject to appeal.  For these and other reasons, Corning’s liability for these asbestos matters may be subject to changes in subsequent quarters.  The estimate of the cost of resolving the non-PCC asbestos claims may also be subject to change as developments occur.  Management continues to believe that the likelihood of the uncertainties surrounding these proceedings causing a material adverse impact to Corning’s financial statements is remote.

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

Other Commitments and Contingencies

In the normal course of our business, we do not routinely provide significant third-party guarantees.  When provided, these guarantees have various terms, and none of these guarantees are individually significant.  Generally, third party guarantees provided by Corning are limited to certain financial guarantees including stand-by letters of credit and performance bonds, and the incurrence of contingent liabilities in the form of purchase price adjustments related to attainment of milestones.  These guarantees have various terms, and none of these guarantees are individually significant.

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

 
-9-



As of September 30, 2011 and December 31, 2010, contingent guarantees totaled a notional value of $176 million and $230 million, respectively.  We believe a significant majority of these contingent guarantees will expire without being funded.  We also were contingently liable for purchase obligations of $265 million and $408 million, at September 30, 2011 and December 31, 2010, respectively.

Product warranty liability accruals were $25 million at September 30, 2011 and $24 million at December 31, 2010.

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

Corning has been named by the Environmental Protection Agency (the Agency) under the Superfund Act, or by state governments under similar state laws, as a potentially responsible party for 18 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 September 30, 2011, and December 31, 2010, Corning had accrued approximately $30 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.

4.      Debt

Based on borrowing rates currently available to us for loans with similar terms and maturities, the fair value of long-term debt was $2.6 billion at September 30, 2011 and $2.4 billion at December 31, 2010.

Third Quarter
In the third quarter of 2011, Corning borrowed approximately $34 million on the credit facility that a wholly-owned subsidiary entered into in the second quarter of 2011.

In the third quarter of 2010, we issued $400 million of 5.75% senior unsecured notes and $300 million of 4.25% senior unsecured notes for net proceeds of approximately $394 million and $295 million, respectively.  The 5.75% notes mature on August 15, 2040 and the 4.25% notes mature on August 15, 2020.  We may redeem these notes at any time.

In the third quarter of 2010, we repurchased $126 million of 6.2% senior unsecured notes due March 15, 2016 and $100 million of 5.9% senior unsecured notes due March 15, 2014.  The net carrying amount of the debt repurchased was $234 million.  We recognized a pre-tax loss of $30 million upon early redemption of these notes.

Second Quarter
In the second quarter of 2011, a wholly-owned subsidiary entered into a credit facility that allows Corning to borrow up to Chinese Renminbi (RMB) 4.0 billion, or approximately $627 million when translated to United States Dollars.  Corning may request advances during the eighteen month period beginning on June 30, 2011 (the “Availability Period”).  Corning will repay the aggregate principal amount and accrued interest outstanding at the end of the Availability Period in six installments, with the final payment due five years from the date of the first advance.

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

 
-10-



5.      Income Taxes

Our provision for income taxes and the related effective income tax rates were as follows (in millions):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
                       
Provision for income taxes
$
(110)
 
$
(14)
 
$
(347)
 
$
(142)
Effective tax rate
 
11.9%
   
1.8%
   
13.0%
   
5.3%

For the three and nine months ended September 30, 2011, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:
·  
Rate differences on income/(losses) of consolidated foreign companies;
·  
The impact of equity in earnings of affiliated companies;
·  
The benefit of tax holidays and investment credits in foreign jurisdictions; and
·  
The impact of discrete items, including a $22 million non-taxable reduction to a contingent liability associated with an acquisition recorded in the first quarter of 2011 and a $41 million tax benefit from amending our 2006 U.S. Federal return to claim foreign tax credits.  Discrete items decreased our effective tax rate by 4.1 and 1.4 percentage points for the three and nine months ended September 30, 2011, respectively.

For the three months ended September 30, 2010, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:
·  
Rate differences on income/(losses) of consolidated foreign companies;
·  
The impact of equity in earnings of affiliated companies;
·  
The benefit of tax holidays and investment credits in foreign jurisdictions;
·  
The benefit of excess foreign tax credits from repatriation of current year earnings of certain foreign subsidiaries; and
·  
The impact of discrete items, including a $30 million loss from early redemption of debt.  Refer to Note 4 (Debt) for additional information about Corning’s debt redemption loss.  Discrete items decreased our effective tax rate by 0.6 percentage points.

In addition to the items noted above, the tax provision for the nine months ended September 30, 2010 reflected the impact of discrete items, including a $56 million charge from the reversal of the deferred tax asset associated with a subsidy for certain retiree medical benefits.  Discrete items in the nine months ended September 30, 2010 increased our effective tax rate by 2.5 percentage points.

Certain foreign subsidiaries in China and Taiwan are operating under tax holiday arrangements.  The nature and extent of such arrangements vary, and the benefits of such arrangements phase out through 2015 according to the specific terms and schedules of the relevant taxing jurisdictions.  The impact of the tax holiday on our effective tax rate is a reduction in the rate of 2.3 and 2.8 percentage points for the three months ended September 30, 2011 and 2010, respectively.  The impact of the tax holidays on our effective tax rate is a reduction in the rate of 1.7 and 3.2 percentage points for the nine months ended September 30, 2011 and 2010, respectively.

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

Under U.S. GAAP, a deferred tax liability should be recorded for any book basis greater than tax basis in a foreign subsidiary attributable to unremitted book earnings under the presumption that such earnings will ultimately be distributed and that such distribution would be subject to additional tax at the parent company level.  However, such presumption is rebuttable and no tax would be accrued to the extent the temporary difference is not expected to reverse in the foreseeable future because the unremitted foreign earnings are expected to be reinvested indefinitely.

 
-11-



As required by U.S. GAAP, Corning completes an annual detailed analysis to determine the extent to which its foreign unremitted earnings are indefinitely reinvested considering various factors including the following:
·  
U.S. cash needs and liquidity;
·  
International working capital, debt service and capital expansion needs;
·  
Local regulatory, statutory or other legally enforceable restrictions on the distribution of foreign subsidiary and affiliate earnings;
·  
Foreign joint venture agreement limitations on distributions; and
·  
The current and/or future tax costs associated with repatriation, including potential legislative changes that could impact such costs.

Quarterly, Corning updates its analysis for material changes.

In the quarter ended March 31, 2010, Corning included in the computation of its estimated annual effective tax rate a tax benefit of $265 million related to an expected fourth quarter repatriation of $1.1 billion of 2010 foreign earnings.  The repatriated earnings represented a portion of the current year earnings of certain foreign subsidiaries and affiliates located in Asia and thus were not previously permanently reinvested.

There were two factors influencing Corning’s decision to consider repatriating these 2010 earnings.  One was Corning’s decision, as announced early in 2010, to pursue acquisitions that were expected to require cash to be available in the U.S. in excess of amounts expected to be generated from domestic sources.  The second factor was proposed federal tax legislation which, if enacted, could significantly increase the tax cost of repatriation after 2010.  Because there had been no change in our longer term international capital expansion plans as of the first quarter, our intent to indefinitely reinvest foreign earnings accumulated through the year ended December 31, 2009 was not changed by these factors.

As of the year ended December 31, 2010, Corning had $8.9 billion of foreign unremitted earnings that it intends to keep indefinitely reinvested.  It is not practical to calculate the unrecognized deferred tax liability on those earnings with reasonable accuracy.

Of this amount, nearly 70% consists of:
·  
Non-liquid operating assets or short term liquidity required to meet current international working capital needs; and
·  
SCP or other joint venture unremitted earnings that require a joint determination with our partners to remove any indefinitely reinvested representation.

Additionally, in the third quarter of 2010, Corning announced a significant multi-year investment plan that was expected to result in 2011 capital investment of $2.4 billion to $2.7 billion, the substantial majority of which would be spent internationally and would include over the term of the plan: $800 million for additional LCD capacity in China; capacity expansion for Eagle XG LCD glass and CorningÒ GorillaÒ Glass in Asia; expansion of automotive substrate facilities in China and Germany; and a new manufacturing and distribution center in China for our Life Sciences businesses.  These factors in addition to the fact that Corning has sufficient access to funds in the U.S. to fund currently anticipated domestic needs result in our ability and intent to indefinitely reinvest our foreign unremitted earnings of $8.9 billion as of December 31, 2010.

 
-12-



6.      Earnings per Common Share

The reconciliation of the amounts used in the basic and diluted earnings per common share computations follows (in millions, except per share amounts):
 
Three months ended September 30,
 
2011
 
2010
 
Net
income
attributable
to Corning
Incorporated
 
Weighted-
average
shares
 
Per
share
amount
 
Net
income
attributable
to Corning
Incorporated
 
Weighted-
average
shares
 
Per
share
amount
                       
Basic earnings per common share
$811
 
1,569     
 
$0.52
 
$785
 
1,557     
 
$0.50
                       
Effect of dilutive securities:
                     
Stock options and other dilutive securities
   
19     
         
23     
   
                       
Diluted earnings per common share
$811
 
1,588     
 
$0.51
 
$785
 
1,580     
 
$0.50


 
Nine months ended September 30,
 
2011
 
2010
 
Net
income
attributable
to Corning
Incorporated
 
Weighted-
average
shares
 
Per
share
amount
 
Net
income
attributable
to Corning
Incorporated
 
Weighted-
average
shares
 
Per
share
amount
                       
Basic earnings per common share
$2,314
 
1,567     
 
$1.48
 
$2,514
 
1,558     
 
$1.61
                       
Effect of dilutive securities:
                     
Stock options and other dilutive securities
   
22     
         
23     
   
                       
Diluted earnings per common share
$2,314
 
1,589     
 
$1.46
 
$2,514
 
1,581     
 
$1.59

The following potential common shares were excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive (in millions):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
Stock options and other dilutive securities excluded from the calculation of diluted earnings per common share
34
 
41
 
81
 
45


 
-13-



7.      Available-for-Sale Investments

The following is a summary of the fair value of available-for-sale investments (in millions):
 
Amortized cost
 
Fair value
 
September 30,
2011
 
December 31,
2010
 
September 30,
2011
 
December 31,
2010
Bonds, notes and other securities:
                     
U.S. government and agencies
$
1,507
 
$
1,734
 
$
1,512
 
$
1,737
Other debt securities
 
6
   
11
   
8
   
15
Total short-term investments
$
1,513
 
$
1,745
 
$
1,520
 
$
1,752
Asset-backed securities
$
59
 
$
64
 
$
38
 
$
45
Total long-term investments
$
59
 
$
64
 
$
38
 
$
45

We do not intend to sell, nor do we believe it is more likely than not that we would be required to sell, the long-term investment asset-backed securities (which are collateralized by mortgages) before recovery of their amortized cost basis.  It is possible that a significant degradation in the delinquency or foreclosure rates in the underlying assets could cause further temporary or other-than-temporary impairments in the future.

The following table summarizes the maturities at market value of available-for-sale securities at September 30, 2011 (in millions):
Less than one year
$1,193
Due in 1-5 years
319
Due in 5-10 years
 
Due after 10 years (1)
46
Total
$1,558

(1)
Includes $38 million of asset-based securities that mature over time and are being reported at their final maturity dates.

The following tables provide the fair value and gross unrealized losses of the Company’s investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2011 and December 31, 2010 (in millions):
     
September 30, 2011
     
12 months or greater
 
Total
 
Number of
securities
in a loss
position
 
Fair
value
 
Unrealized
losses (1)
 
Fair
value
 
Unrealized
losses
Asset-backed securities
22
 
$
38
 
$
(21)
 
$
38
 
$
(21)
Total long-term investments
22
 
$
38
 
$
(21)
 
$
38
 
$
(21)

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

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

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

 
-14-



Gross realized gains and losses for the three and nine months ended September 30, 2011 and 2010 were not significant.

A reconciliation of the changes in credit losses recognized in earnings for the nine months ended September 30, 2011 and nine months ended September 30, 2010 (in millions):
 
2011
 
2010
Beginning balance of credit losses, January 1
$ 4
 
$ 2
Additions for credit losses not previously recognized in earnings
   
   
Balance of credit losses, March 31
$ 4
 
$ 2
Additions for credit losses not previously recognized in earnings
   1
 
   1
Ending balance of credit losses, June 30
$ 5
 
$ 3
Additions for credit losses not previously recognized in earnings
   
   
Ending balance of credit losses, September 30
$ 5
 
$ 3

The $5 million loss represents management’s estimate of credit losses inherent in the securities considering projected cash flows using assumptions of delinquency rates, loss severities, and other estimates of future collateral performance.  These credit losses are limited to asset-backed securities in our investment portfolio.

As of September 30, 2011 and December 31, 2010, for securities that have credit losses, an other than temporary impairment loss of $16 million in both periods is recognized in accumulated other comprehensive income.

Proceeds from sales and maturities of short-term investments totaled $2.4 billion and $1.3 billion for the nine months ended September 30, 2011 and 2010, respectively.

8.      Inventories

Inventories comprise the following (in millions):
 
September 30,
2011
 
December 31,
2010
Finished goods
$
283
 
$
208
Work in process
  
186
 
  
207
Raw materials and accessories
  
273
 
  
155
Supplies and packing materials
  
197
 
  
168
Total inventories
$
939
 
$
738

9.      Investments

Investments comprise the following (in millions):
 
Ownership
interest (1)
 
September 30,
2011
 
December 31,
2010
Affiliated companies accounted for by the equity method
             
Samsung Corning Precision Materials Co., Ltd.
50%
 
$
3,392
 
$
2,943
Dow Corning Corporation
50%
   
1,250
   
1,186
All other
20-50%
   
245
   
240
       
4,887
   
4,369
Other investments
     
3
   
3
Total
   
$
4,890
 
$
4,372

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

 
-15-



Related party information for these investments in affiliates follows (in millions):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
Related Party Transactions:
                     
Corning sales to affiliated companies
$
11
 
$
5
 
$
23
 
$
16
Corning purchases from affiliated companies
$
8
 
$
18
 
$
64
 
$
52
Corning transfers of assets, at cost, to affiliated companies
$
34
 
$
26
 
$
95
 
$
87
Dividends received from affiliated companies
$
75
 
$
66
 
$
464
 
$
351
Royalty income from affiliated companies
$
51
 
$
73
 
$
178
 
$
205
Corning services to affiliates
$
15
 
$
10
 
$
36
 
$
25

As of September 30, 2011, balances due to and due from affiliates were $15 million and $91 million, respectively.  As of December 31, 2010, balances due to and due from affiliates were $7 million and $101 million, respectively.

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

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

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

Samsung Corning Precision’s results of operations follow (in millions):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
                       
Statement of Operations:
                     
Net sales
$
954
 
$
1,324
 
$
3,304
 
$
3,730
Gross profit
$
644
 
$
1,039
 
$
2,391
 
$
2,891
Net income attributable to Samsung Corning Precision
$
457
 
$
791
 
$
1,705
 
$
2,207
Corning’s equity in earnings of Samsung Corning Precision
$
229
 
$
394
 
$
853
 
$
1,102
                       
Related Party Transactions:
                     
Corning purchases from Samsung Corning Precision
     
$
12
 
$
41
 
$
33
Dividends received from Samsung Corning Precision
           
$
205
 
$
173
Royalty income from Samsung Corning Precision
$
51
 
$
73
 
$
176
 
$
204
Corning transfers of machinery and equipment to Samsung Corning Precision at cost (1)
$
34
 
$
25
 
$
95
 
$
86

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

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

As of September 30, 2011, balances due from Samsung Corning Precision were $35 million and balances due to Samsung Corning Precision were $11 million.  As of December 31, 2010, balances due from Samsung Corning Precision were $29 million and balances due to Samsung Corning Precision were $5 million.

 
-16-



In April 2011, Korean tax authorities completed a tax audit of Samsung Corning Precision.  As a result, the tax authorities issued a pre-assessment of approximately $45 million for an asserted underpayment of withholding tax on dividends paid from September 2006 through March 2009.  Our first level of appeal was denied on October 5, 2011 and a formal assessment was issued.  The assessment will be paid in full by the end of 2011, which will allow us to continue the appeal process.  Samsung Corning Precision and Corning believe we will maintain our position when all available appeal remedies have been exhausted.

Additionally, the Korean Board of Audit and Inspection (the “BOAI”) has recently initiated a review of tax exemptions previously granted to Samsung Corning Precision by the National Tax Service.  The BOAI has the authority to reverse part or all of the tax exemption granted, at which time the decision may be appealed.  We believe that SCP should sustain its entire tax exemption.  SCP is unable to make a reasonable estimate of additional tax that could potentially result from the BOAI review.

On December 31, 2007, Samsung Corning Precision acquired all of the outstanding shares of Samsung Corning Co., Ltd. (Samsung Corning).  After the transaction, Corning retained its 50% interest in Samsung Corning Precision.  Prior to their merger, Samsung Corning Precision Materials Co., Ltd. (Samsung Corning Precision) and Samsung Corning Co. Ltd. (Samsung Corning) were two of approximately thirty co-defendants in a lawsuit filed by Seoul Guarantee Insurance Co. and thirteen other creditors (SGI and Creditors) for alleged breach of an agreement that approximately twenty-eight affiliates of the Samsung group (Samsung Affiliates) entered into with SGI and Creditors on August 24, 1999 (the Agreement).  The lawsuit is pending in the courts of South Korea.  Under the Agreement, it is alleged that the Samsung Affiliates agreed to sell certain shares of Samsung Life Insurance Co., Ltd. (SLI), which had been transferred to SGI and Creditors in connection with the petition for court receivership of Samsung Motors Inc.  In the lawsuit, SGI and Creditors allege a breach of the Agreement by the Samsung Affiliates and are seeking the loss of principal (approximately $1.95 billion) for loans extended to Samsung Motors Inc., default interest and a separate amount for breach.  On January 31, 2008, the Seoul District Court ordered the Samsung Affiliates: to pay approximately $1.3 billion by disposing of 2,334,045 shares of SLI less 1,165,955 shares of SLI previously sold by SGI and Creditors and paying the proceeds to SGI and Creditors; to satisfy any shortfall by participating in the purchase of equity or subordinate debentures issued by them; and pay default interest of 6% per annum.  The ruling was appealed.  On November 10, 2009, the Appellate Court directed the parties to attempt to resolve this matter through mediation.  On January 11, 2011, the Appellate Court ordered the Samsung Affiliates to pay 600 billion won in principal and 20 billion won in delayed interest to SGI and Creditors.  Samsung promptly paid those amounts, which approximated $550 million when translated to United States Dollars, from a portion of an escrow account established upon completion of SLI’s initial public offering (“IPO”) on May 7, 2010.  On February 7, 2011, the Samsung Affiliates appealed the Appellate Court’s ruling to the Supreme Court of Korea and the appeal is currently in progress.  Samsung Corning Precision has not contributed to any payment related to these disputes, and has concluded that no provision for loss should be reflected in its financial statements.  Other than as described above, no claim in these matters has been asserted against Corning or any of its affiliates.

In connection with an investigation by the Commission of the European Communities, Competition DG, of alleged anticompetitive behavior relating to the worldwide production of LCD glass, Corning and Samsung Corning Precision received requests for information from the Competition DG on March 30, 2009 and October 9, 2009.  Each party has responded to these requests.  Samsung Corning Precision has also responded to the Competition DG and authorities in other jurisdictions, including the United States, in connection with similar investigations of alleged anticompetitive behavior relating to worldwide production of cathode ray tube glass.  On October 7, 2011, Samsung Corning Precision was informed by the Antitrust Division of the U.S. Department of Justice (“DOJ”) that the DOJ had closed its investigation of cathode ray tube glass.  On October 19, 2011, the European Commission announced that it had settled its cartel investigation of cathode ray tube glass.  Samsung Corning Precision received full immunity, and no fines were imposed on it, because of its early cooperation in the Commission’s investigation.  The Commission fined three other makers of cathode ray tube glass.


 
-17-



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

Dow Corning Corporation (Dow Corning)
Dow Corning is a U.S.-based manufacturer of silicone products.  Dow Corning’s results of operations follow (in millions):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
                       
Statement of Operations:
                     
Net sales
$
1,661
 
$
1,515
 
$
4,908
 
$
4,413
Gross profit
$
527
 
$
540
 
$
1,599
 
$
1,600
Net income attributable to Dow Corning
$
177
 
$
176
 
$
547
 
$
615
Corning’s equity in earnings of Dow Corning
$
89
 
$
97
 
$
275
 
$
320
                       
Related Party Transactions:
                     
Corning purchases from Dow Corning
$
5
 
$
5
 
$
17
 
$
15
Dividends received from Dow Corning
$
65
 
$
56
 
$
245
 
$
167

Amounts owed to Dow Corning totaled $2 million as of September 30, 2011.  At December 31, 2010, amounts owed to Dow Corning were not significant.

At September 30, 2011, Dow Corning’s marketable securities included approximately $255 million of auction rate securities, net of a temporary impairment of $36 million.  As a result of the temporary impairment, unrealized losses of $30 million, net of $6 million for a minority interest’s share, were included in accumulated other comprehensive income in Dow Corning’s consolidated balance sheet.  Corning’s share of this unrealized loss was $15 million and is included in Corning’s accumulated other comprehensive income.

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

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

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

 
-18-



Under the terms of the Plan, Dow Corning has established and is funding a Settlement Trust and a Litigation Facility to provide a means for tort claimants to settle or litigate their claims.  Inclusive of insurance, Dow Corning has paid approximately $1.7 billion to the Settlement Trust.  As of September 30, 2011, Dow Corning had recorded a reserve for breast implant litigation of $1.6 billion.  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 September 30, 2011, Dow Corning has estimated the liability to commercial creditors to be within the range of $84 million to $277 million.  As Dow Corning management believes no single amount within the range appears to be a better estimate than any other amount within the range, Dow Corning has recorded the minimum liability within the range.  Should Dow Corning not prevail in this matter, Corning’s equity earnings would be reduced by its 50% share of the amount in excess of $84 million, net of applicable tax benefits.  In addition, the London Market Insurers (the LMI Claimants) claimed a reimbursement right with respect to a portion of insurance proceeds previously paid by the LMI Claimants to Dow Corning.  This claim was based on a theory that the LMI Claimants overestimated Dow Corning’s liability for the resolution of implant claims pursuant to the Plan.  Based on settlement negotiations, Dow Corning had estimated that the most likely outcome would result in payment to the LMI Claimants in a range of $10 million to $20 million.  As of September 30, 2011, Dow Corning and the LMI Claimants have settled the claim for an amount within that range.  There are a number of other claims in the bankruptcy proceedings against Dow Corning awaiting resolution by the U.S. District Court, and it is reasonably possible that Dow Corning may record bankruptcy-related charges in the future.  The remaining tort claims against Corning are expected to be channeled by the Plan into facilities established by the Plan or otherwise defended by the Litigation Facility.

Hemlock Semiconductor Corporation, of which Dow Corning owns 63%, brought an action against one of its customers to enforce supply agreements requiring the customer to purchase or pay for large quantities of polycrystalline silicon used in the solar power industry.  The customer had previously announced its decision to exit the solar power business and denied its liability to purchase further products under existing supply agreements.

Pittsburgh Corning Corporation (PCC)
Corning and PPG Industries, Inc. (PPG) each own 50% of the capital stock of Pittsburgh Corning Corporation (PCC).  Over a period of more than two decades, PCC and several other defendants have been named in numerous lawsuits involving claims alleging personal injury from exposure to asbestos.  Corning also has an equity interest in Pittsburgh Corning Europe N.V. (PCE), a Belgian Corporation that is a component of the Company’s proposed settlement for asbestos litigation.  At September 30, 2011 and December 31, 2010, the fair value of PCE significantly exceeded its carrying value of $137 million and $129 million, respectively.  There have been no impairment indicators for our investment in PCE and we continue to recognize equity earnings of this affiliate.  PCC filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Western District of Pennsylvania on April 16, 2000.  At that time, Corning determined that it lacked the ability to recover the carrying amount of its investment in PCC and its investment was other-than-temporarily impaired.  As a result, we reduced our investment in PCC to zero.  Refer to Note 3 (Commitments and Contingencies) for additional information about PCC and PCE.

Variable Interest Entities
For variable interest entities, we routinely assess the terms of our interest in each entity to determine if we are the primary beneficiary as prescribed by U.S. GAAP.  We currently have four variable interest entities that are not considered significant to Corning’s consolidated financial statements.  Corning does not have retained interests in assets transferred to an unconsolidated entity that serve as credit, liquidity or market risk support to that entity.

 
-19-



10.      Property, Net of Accumulated Depreciation

Property, net follows (in millions):
 
September 30,
2011
 
December 31,
2010
Land
$
109 
 
$
105 
Buildings
 
3,879 
   
3,692 
Equipment
 
11,705 
   
10,744 
Construction in progress
 
1,662 
   
822 
   
17,355 
   
15,363 
Accumulated depreciation
 
(7,089)
   
(6,420)
Total
$
10,266 
 
$
8,943 

In the three months ended September 30, 2011 and 2010, interest costs capitalized as part of property, net, were $11 million and $5 million, respectively.  In the nine months ended September 30, 2011 and 2010, interest costs capitalized as part of property, net, were $28 million and $12 million, respectively.

Manufacturing equipment includes certain components of production equipment that are constructed of precious metals.  At September 30, 2011 and December 31, 2010, the recorded value of precious metals totaled $2.3 billion and $2.0 billion, respectively.  Depletion expense for precious metals in the three months ended September 30, 2011 and 2010 totaled $6 million and $6 million, respectively.  Depletion expense for precious metals in the nine months ended September 30, 2011 and 2010 totaled $16 million and $12 million, respectively.

11.      Goodwill and Other Intangible Assets

The carrying amount of goodwill by segment for the nine months ended September 30, 2011 is as follows (in millions):
 
Telecom-
munications
 
Display
Technologies
 
Specialty
Materials
 
Life
Sciences
 
Total
                   
Balance at December 31, 2010
$118      
 
$9
 
$150
 
$260    
 
$537  
Acquired goodwill (1)
91      
             
91  
Foreign currency translation adjustment
           
1    
 
1  
Balance at September 30, 2011
$209      
 
$9
 
$150
 
$261    
 
$629  

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

Corning’s gross goodwill balances for the periods ended September 30, 2011 and December 31, 2010 were $7.1 billion and $7.0 billion, respectively.  Accumulated impairment losses were $6.5 billion for the periods ended September 30, 2011 and December 31, 2010, and were generated entirely through goodwill impairments related to the Telecommunications segment.

 
-20-



Other intangible assets are as follows (in millions):
 
September 30, 2011
 
December 31, 2010
 
Gross
 
Accumulated
amortization
 
Net
 
Gross
 
Accumulated
amortization
 
Net
Amortized intangible assets:
                                 
Patents, trademarks, and trade names (1)(2)
$
227
 
$
118
 
$
109
 
$
205
 
$
124
 
$
81
Non-competition agreements (2)
                   
97
   
94
   
3
Customer lists and other (1)
 
155
   
12
   
143
   
98
   
3
   
95
                                   
Total
$
382
 
$
130
 
$
252
 
$
400
 
$
221
 
$
179

(1)
The Company recorded identifiable intangible assets associated with two small acquisitions completed in 2011.
(2)
Certain intangible assets were fully amortized as of September 30, 2011.

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

Amortization expense related to these intangible assets is estimated to be $14 million for 2011 and $16 million thereafter.

12.      Customer Deposits

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

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

During the three and nine months ended September 30, 2011, we issued $7 million and $21 million, respectively, in credit memoranda.  During the three and nine months ended September 30, 2010, we issued $8 million and $76 million, respectively, in credit memoranda.  Customer deposit liabilities were $7 million and $27 million at September 30, 2011 and December 31, 2010, respectively, which are recorded in the current portion of other accrued liabilities in our consolidated balance sheets.  Because these liabilities are denominated in Japanese yen, changes in the balances include the impact of movements in the Japanese yen-U.S. dollar exchange rate.

In the event customers do not purchase the agreed upon quantities of product, subject to specific conditions outlined in the agreements, Corning may retain certain amounts of the customer deposits.  If Corning does not deliver agreed upon product quantities, subject to specific conditions outlined in the agreements, Corning may be required to return certain amounts of customer deposits.

 
-21-



13.      Employee Retirement Plans

The following table summarizes the components of net periodic benefit cost for Corning’s defined benefit pension and postretirement health care and life insurance plans (in millions):
 
Pension benefits
 
Postretirement benefits
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
 
2011
 
2010
 
2011
 
2010
                                               
Service cost
$
13 
 
$
11 
 
$
40 
 
$
34 
 
$
 
$
 
$
11 
 
$
Interest cost
 
39 
   
39 
   
116 
   
116 
   
12 
   
13 
   
36 
   
38 
Expected return on plan assets
 
(41)
   
(42)
   
(122)
   
(126)
                       
Amortization of net loss
 
20 
   
12 
   
57 
   
37 
   
   
   
13 
   
12 
Amortization of prior service cost
 
   
   
   
   
(1)
   
(1)
   
(4)
   
(5)
Total pension and postretirement benefit expense
$
33 
 
$
22 
 
$
97 
 
$
68 
 
$
18 
 
$
17 
 
$
56 
 
$
54 

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

14.      Hedging Activities

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

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

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

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

The amount of hedge ineffectiveness at September 30, 2011 and at December 31, 2010 was insignificant.

 
-22-



Cash Flow Hedges
Our cash flow hedging activities utilize foreign exchange forward contracts to reduce the risk that movements in exchange rates will adversely affect the eventual net cash flows resulting from the sale of products to foreign customers and purchases from foreign suppliers.  Corning uses a regression analysis to monitor the effectiveness of its cash flow hedges both prospectively and retrospectively.  Corning defers net gains and losses from cash flow hedges into accumulated other comprehensive income on the consolidated balance sheet until such time as the hedged item impacts earnings.  At September 30, 2011, the amount of net losses expected to be reclassified into earnings within the next 12 months is $24 million.

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

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

The following tables summarize the notional amounts and respective fair values of Corning’s derivative financial instruments for September 30, 2011 and December 31, 2010 (in millions):
     
Asset derivatives
 
Liability derivatives
 
Notional amount
 
Balance
sheet location
 
Fair value
 
Balance
sheet location
 
Fair value
 
2011
 
2010
   
2011
 
2010
   
2011
 
2010
                               
Derivatives designated as hedging instruments
                             
                               
Foreign exchange contracts
$  613
 
$  602
 
Other current assets
 
$ 3
 
$4
 
Other accrued liabilities
 
$ (27)
 
$ (33)
         
Other assets
 
$ 1
     
Other liabilities
 
$   (2)
   
                               
Derivatives not designated as hedging instruments
                             
                               
Foreign exchange contracts
$2,603
 
$2,946
 
Other current assets
 
$ 6
 
$1
 
Other accrued liabilities
 
$(142)
 
$(122)
                     
Other liabilities
 
$ (24)
 
$ (45)
                               
Total derivatives
$3,216
 
$3,548
     
$10
 
$5
     
$(195)
 
$(200)


 
-23-



The following table summarizes the effect of derivative financial instruments on Corning’s consolidated financial statements for the three and nine months ended September 30, 2011 (in millions):
   
Gain/(loss) recognized
in OCI
 
Gain/(loss) reclassified from
accumulated OCI
 
Gain/(loss) related to ineffectiveness
Derivatives in hedging relationships
 
Three
months
ended
 
Nine
months
ended
 
Location
 
Three
months
ended
 
Nine
months
ended
 
Location
 
Three
months
ended
 
Nine
months
ended
 
September 30,
 2011
   
September 30,
 2011
   
September 30,
 2011
                                 
Cash flow hedges
                               
           
Cost of sales
 
$ (3)
 
$ (7)
           
                                 
Foreign exchange contracts
 
$(5)
 
$(24)
 
Royalties
 
$(14)
 
$(28)
 
Other income, net
 
$0
 
$0
                                 
Total cash flow hedges
 
$(5)
 
$(24)
     
$(17)
 
$(35)
     
$0
 
$0
                                 
Net investment hedges
                               
Foreign denominated debt
 
$ 0  
 
$   0  
                       
                                 
Total net investment hedges
 
$ 0  
 
$   0  
                       
                                 
           
Gain/(loss) recognized in income
           
Undesignated derivatives
         
Location
 
Three
months
ended
 
Nine
months
ended
           
           
September 30,
 2011
           
                                 
Foreign exchange contracts
         
Other income, net
 
$(61)
 
$73
           
                                 
Total undesignated
             
$(61)
 
$73
           


 
-24-



The following table summarizes the effect of derivative financial instruments on Corning’s consolidated financial statements for the three and nine months ended September 30, 2010 (in millions):
   
Gain/(loss) recognized
in OCI
 
Gain/(loss) reclassified from
accumulated OCI
 
Gain/(loss) related to ineffectiveness
Derivatives in hedging relationships
 
Three
months
ended
 
Nine
months
ended
 
Location
 
Three
months
ended
 
Nine
months
ended
 
Location
 
Three
months
ended
 
Nine
months
ended
 
September 30,
 2010
   
September 30,
 2010
   
September 30,
 2010
                                 
Cash flow hedges
                               
           
Cost of sales
 
$ 2 
 
$ 7 
           
                                 
Foreign exchange contracts
 
$(34)
 
$(40)
 
Royalties
 
$(8)
 
$(4)
 
Other income, net
 
$0
 
$0
                                 
Total cash flow hedges
 
$(34)
 
$(40)
     
$(6)
 
$ 3 
     
$0
 
$0
                                 
Net investment hedges
                               
Foreign denominated debt
 
$   0 
 
$   2  
                       
                                 
Total net investment hedges
 
$   0 
 
$   2  
                       
                                 
           
Gain/(loss) recognized in income
           
Undesignated derivatives
         
Location
 
Three
months
ended
 
Nine
months
ended
           
           
September 30,
 2010
           
                                 
Foreign exchange contracts
         
Other income, net
 
$(97)
 
$(197)
           
                                 
Total undesignated
             
$(97)
 
$(197)
           

15.      Fair Value Measurements

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

Fair value standards apply whenever an entity is measuring fair value under other accounting pronouncements that require or permit fair value measurement and require the use of observable market data when available.  As of September 30, 2011 and December 31, 2010, the Company did not have any financial assets or liabilities that were measured using unobservable (or Level 3) inputs.

 
-25-



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
 
September 30,
 2011
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
               
Current assets:
             
Short-term investments (1)
$1,520          
 
$1,512
 
$   8          
   
Other current assets (2)
$       9          
     
$   9          
   
Non-current assets:
             
Other assets
$     38          
     
$ 38          
   
Non-current assets:
             
Other assets (2)
$       1          
     
$   1          
   
               
Current liabilities:
             
Other accrued liabilities (2)
$  170           
     
$170          
   
Non-current liabilities:
             
Other liabilities (2)
$    25           
     
$  25          
   

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

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

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

16.      Share-based Compensation

Stock Compensation Plans

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

 
-26-



Share-based compensation cost was approximately $21 million and $22 million for the three months ended September 30, 2011 and 2010, respectively, and approximately $66 million and $77 million for the nine months ended September 30, 2011 and 2010, respectively.  Amounts for all periods presented included (1) employee stock options, (2) time-based restricted stock and restricted stock units, and (3) performance-based restricted stock and restricted stock units.  On February 3, 2010, Corning’s Board of Directors approved the recommendation to terminate on-going WESPP contributions effective March 31, 2010.  Compensation expense for the WESPP is included in periods ended prior to April 1, 2010.

Stock Options

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

The following table summarizes information concerning stock options outstanding including the related transactions under the Stock Option Plans for the nine months ended September 30, 2011:
 
Number
of Shares
(in thousands)
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term in
Years
 
Aggregate
Intrinsic
Value
(in thousands)
Options Outstanding as of December 31, 2010
72,461 
 
$16.22
       
Granted
 5,288 
 
  21.15
       
Exercised
(7,228)
 
  11.49
       
Forfeited and Expired
(4,255)
 
  36.79
       
Options Outstanding as of September 30, 2011
66,266 
 
  15.81
 
4.95
 
114,629
Options Exercisable as of September 30, 2011
52,372 
 
  15.52
 
4.09
 
102,861

The aggregate intrinsic value (market value of stock less option exercise price) in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price on September 30, 2011, which would have been received by the option holders had all option holders exercised their options as of that date.

As of September 30, 2011, there was approximately $36 million of unrecognized compensation cost related to stock options granted under the Plans.  The cost is expected to be recognized over a weighted-average period of 2 years.  Compensation cost related to stock options was approximately $37 million and $41 million for the nine months ended September 30, 2011 and 2010, respectively, and approximately $12 million for the three months ended September 30, 2011 and 2010.

Proceeds received from the exercise of stock options were $82 million and $39 million for the nine months ended September 30, 2011 and 2010, respectively, and $9 million and $10 million for the three months ended September 30, 2011 and 2010, respectively.  Proceeds received from the exercise of stock options were included in financing activities on the Company’s Consolidated Statements of Cash Flows.  The total intrinsic value of options exercised for the nine months ended September 30, 2011 and 2010 was approximately $71 million and $41 million, respectively, and $3 million and $9 million for the three months ended September 30, 2011 and 2010, respectively, which is currently deductible for tax purposes.  However, these tax benefits were not recognized due to net operating loss carryforwards available to the Company.  Refer to Note 5 (Income Taxes) to the consolidated financial statements.

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

 
-27-



The following inputs were used for the valuation of option grants under our Stock Option Plans:
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
Expected volatility
48-49%
 
49%
 
47-49%
 
48-49%
Weighted-average volatility
48%
 
49%
 
47-48%
 
49%
Expected dividends
1.05%
 
1.15%
 
1.10%
 
1.15-1.40%
Risk-free rate
1.0-1.5%
 
1.5-1.9%
 
1.0-2.7%
 
1.5-3.2%
Average risk-free rate
1.5%
 
1.9%
 
1.5-2.6%
 
1.9-3.2%
Expected term (in years)
5.1-6.7
 
5.1-6.5
 
5.1-6.7
 
5.1-6.5
Pre-vesting departure rate
0.4-3.9%
 
1.4-3.6%
 
0.4-3.9%
 
1.4-3.6%

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

Incentive Stock Plans

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

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

Time-Based Restricted Stock and Restricted Stock Units:

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

The following table represents a summary of the status of the Company’s non-vested time-based restricted stock and restricted stock units as of December 31, 2010, and changes during the nine months ended September 30, 2011:
 
Shares
(000’s)
 
Weighted
Average
Grant-Date
Fair Value
Non-vested shares at December 31, 2010
3,698 
 
$18.33
Granted
1,466 
 
  19.44
Vested
(535)
 
  21.31
Forfeited
(272)
 
  23.03
Non-vested shares at September 30, 2011
4,357 
 
$18.04



 
-28-



As of September 30, 2011, there was approximately $30 million of unrecognized compensation cost related to non-vested time-based restricted stock compensation arrangements granted under the Plan.  The cost is expected to be recognized over a weighted-average period of 2 years.  Compensation cost related to time-based restricted stock and restricted stock units was approximately $23 million and $22 million for the nine months ended September 30, 2011 and 2010, respectively, and $7 million for the three months ended September 30, 2011 and 2010.

Performance-Based Restricted Stock and Restricted Stock Units:

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

The following table represents a summary of the status of the Company’s non-vested performance-based restricted stock and restricted stock units as of December 31, 2010, and changes during the nine months ended September 30, 2011:
 
Shares
(000’s)
 
Weighted-
Average
Grant-Date
Fair Value
Non-vested restricted stock and restricted stock units at December 31, 2010
6,072 
 
$ 9.24
Granted
     
Vested
(637)
 
 14.09
Forfeited and cancelled
(226)
 
   8.67
Non-vested restricted stock and restricted stock units at September 30, 2011
5,209 
 
$ 8.67

As of September 30, 2011, there was approximately $4 million of unrecognized compensation cost related to non-vested performance-based restricted stock and restricted stock units compensation arrangements granted under the Plan.  The cost is expected to be recognized over a weighted-average period of 0.3 year.  Compensation cost related to performance-based restricted stock and restricted stock units was approximately $6 million and $12 million for the nine months ended September 30, 2011 and 2010, respectively, and $2 million and $3 million for the three months ended September 30, 2011 and 2010, respectively.

Worldwide Employee Stock Purchase Plan

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

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

 
-29-



17.      Comprehensive Income

Components of comprehensive income on an after-tax basis, where applicable, follow (in millions):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
                       
Net income
$
811 
 
$
785 
 
$
2,312 
 
$
2,512 
Other comprehensive income, net of taxes (1):
                     
Net change in unrealized (loss) gain on investment securities
 
(11)
   
   
(1)
   
Net change in unrealized (loss) gain on derivative hedging instruments
 
(4)
   
(16)
   
   
(25)
Foreign currency translation adjustment
 
(377)
   
688 
   
(12)
   
469 
Amortization of postretirement benefit plan losses and prior service costs
 
21 
   
14 
   
59 
   
32 
Comprehensive income
$
440 
 
$
1,473 
 
$
2,362 
 
$
2,995 
Comprehensive income attributable to noncontrolling interests
             
   
Comprehensive income attributable to Corning
$
440 
 
$
1,473 
 
$
2,364 
 
$
2,997 

(1)
Other comprehensive income items for the three months ended September 30, 2011 and 2010 include net tax effects of $(6) million and $(1) million, respectively, and for the nine months ended September 30, 2011 and 2010 include net tax effects of $(36) million and $(16) million, respectively.

18.      Significant Customers

For the three months ended September 30, 2011, Corning’s sales to Sharp Electronics Corporation, a customer of the Display Technologies segment, were greater than 10% of the Company’s consolidated net sales.  For the three months ended September 30, 2010, Corning’s sales to each of the following two customers of the Display Technologies segment were equal to or greater than 10% of the Company’s consolidated net sales: AU Optronics Corporation (AUO), and Sharp Electronics Corporation.

For the nine months ended September 30, 2011, there were no customers that were equal to or greater than 10% of the Company’s consolidated net sales.  For the nine months ended September 30, 2010, Corning’s sales to each of the following three customers of the Display Technologies segment were equal to or greater than 10% of the Company’s consolidated net sales:  AUO, Chimei Innolux Corporation, and Sharp Electronics Corporation.

19.      Operating Segments

Our reportable operating segments are as follows:

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

 
-30-



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

We prepared the financial results for our reportable segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions.  We included the earnings of equity affiliates that are closely associated with our operating segments in the respective segment’s net income.  We have allocated certain common expenses among segments differently than we would for stand-alone financial information prepared in accordance with U.S. GAAP.  Segment net income may not be consistent with measures used by other companies.  The accounting policies of our reportable segments are the same as those applied in the consolidated financial statements.

Operating Segments (in millions)

 
Display
Technologies
 
Telecom-
munications
 
Environmental
Technologies
 
Specialty
Materials
 
Life
Sciences
 
All
Other
 
Total
Three months ended September 30, 2011
                                       
Net sales
$
815 
 
$
560 
 
$
247 
 
$
299 
 
$
153 
 
$
 
$
2,075 
Depreciation (1)
$
131 
 
$
31 
 
$
27 
 
$
41 
 
$
 
$
 
$
241 
Amortization of purchased intangibles
     
$
             
$
       
$
Research, development and engineering expenses (2)
$
21 
 
$
29 
 
$
27 
 
$
35 
 
$
 
$
22 
 
$
137 
Equity in earnings of affiliated companies
$
222 
             
$
       
$
 
$
231 
Income tax (provision) benefit
$
(118)
 
$
(30)
 
$
(15)
 
$
(16)
 
$
(10)
 
$
 
$
(180)
Net income (loss) (3)
$
593 
 
$
82 
 
$
32 
 
$
38 
 
$
21 
 
$
(17)
 
$
749 
                                         
Three months ended September 30, 2010
                                       
Net sales
$
645 
<