q2form10q.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 June 30, 2012

 
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 July 16, 2012
Corning’s Common Stock, $0.50 par value per share
  
1,489,018,162 shares


 
 


INDEX

PART I – FINANCIAL INFORMATION
   
Page
Item 1. Financial Statements
    
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
PART II – OTHER INFORMATION
    
     
 
     
 
     
 
     
 
     
 


 
-2-

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


 
Three months
ended June 30,
  
Six months
ended June 30,
 
2012
  
2011
  
2012
  
2011
                       
Net sales
$
1,908 
  
$
2,005 
  
$
3,828 
  
$
3,928 
Cost of sales
  
1,111 
    
1,116 
    
2,217 
    
2,165 
                       
Gross margin
  
797 
    
889 
    
1,611 
    
1,763 
                       
Operating expenses:
                      
Selling, general and administrative expenses
  
291 
    
284 
    
570 
    
534 
Research, development and engineering expenses
  
188 
    
172 
    
375 
    
328 
Amortization of purchased intangibles
  
4 
    
4 
    
9 
    
7 
Asbestos litigation charge
  
5 
    
5 
    
6 
    
10 
                       
Operating income
  
309 
    
424 
    
651 
    
884 
                       
Equity in earnings of affiliated companies (Note 8)
  
259 
    
428 
    
477 
    
826 
Interest income
  
3 
    
5 
    
7 
    
9 
Interest expense
  
(24)
    
(22)
    
(44)
    
(49)
Other income, net (Note 1)
  
8 
    
43 
    
37 
    
70 
                       
Income before income taxes
  
555 
    
878 
    
1,128 
    
1,740 
Provision for income taxes (Note 4)
  
(93)
    
(123)
    
(204)
    
(237)
                       
Net income attributable to Corning Incorporated
$
462 
  
$
755 
  
$
924 
  
$
1,503 
                       
Earnings per common share attributable to Corning Incorporated:
                      
Basic (Note 5)
$
0.31 
  
$
0.48 
  
$
0.61 
  
$
0.96 
Diluted (Note 5)
$
0.30 
  
$
0.47 
  
$
0.61 
  
$
0.95 
                       
Dividends declared per common share
$
0.075 
  
$
0.05 
  
$
0.15 
  
$
0.10 

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






 
-3-

CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; in millions)


 
Three months ended
June 30,
  
Six months ended
June 30,
   
 
2012
  
2011
  
2012
  
2011
                       
Net income attributable to Corning Incorporated
$
462
  
$
755
  
$
924 
  
$
1,503
Other comprehensive income (loss), net of tax
  
4
    
241
    
(47)
    
421
                       
Comprehensive income attributable to Corning Incorporated
$
466
  
$
996
  
$
877 
  
$
1,924

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

 
-4-

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

 
June 30,
2012
  
December 31,
2011
Assets
          
           
Current assets:
          
Cash and cash equivalents
$
5,008 
  
$
4,661 
Short-term investments, at fair value (Note 6)
  
1,337 
    
1,164 
Total cash, cash equivalents and short-term investments
  
6,345 
    
5,825 
Trade accounts receivable, net of doubtful accounts and allowances - $24 and $19
  
1,157 
    
1,082 
Inventories (Note 7)
  
999 
    
975 
Deferred income taxes (Note 4)
  
441 
    
448 
Other current assets
  
436 
    
347 
Total current assets
  
9,378 
    
8,677 
           
Investments (Note 8)
  
4,870 
    
4,726 
Property, net of accumulated depreciation - $7,486 and $7,204 (Note 9)
  
10,751 
    
10,671 
Goodwill and other intangible assets, net (Note 10)
  
916 
    
926 
Deferred income taxes (Note 4)
  
2,565 
    
2,652 
Other assets
  
274 
    
196 
           
Total Assets
$
28,754 
  
$
27,848 
           
Liabilities and Equity
          
           
Current liabilities:
          
Current portion of long-term debt (Note 3)
$
 29 
  
$
27 
Accounts payable
  
929 
    
977 
Other accrued liabilities (Note 2)
  
934 
    
1,093 
Total current liabilities
  
1,892 
    
2,097 
           
Long-term debt (Note 3)
  
3,229 
    
2,364 
Postretirement benefits other than pensions
  
900 
    
897 
Other liabilities (Note 2)
  
1,331 
    
1,361 
Total liabilities
  
7,352 
    
6,719 
           
Commitments and contingencies (Note 2)
          
Shareholders’ equity:
          
Common stock – Par value $0.50 per share; Shares authorized 3.8 billion; Shares issued: 1,645 million and 1,636 million
  
823 
    
818 
Additional paid-in capital
  
13,096 
    
13,041 
Retained earnings
  
10,029 
    
9,332 
Treasury stock, at cost; Shares held: 155 million and 121 million
  
(2,458)
    
(2,024)
Accumulated other comprehensive loss
  
(136)
    
(89)
Total Corning Incorporated shareholders’ equity
  
21,354 
    
21,078 
Noncontrolling interests
  
48 
    
51 
Total equity
  
21,402 
    
21,129 
           
Total Liabilities and Equity
$
28,754 
  
$
27,848 

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

 
-5-

CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
 
Six months ended
June 30,
 
2012
  
2011
Cash Flows from Operating Activities:
          
Net income
$
924 
  
$
1,503 
Adjustments to reconcile net income to net cash provided by operating activities:
          
Depreciation
  
473 
    
458 
Amortization of purchased intangibles
  
9 
    
7 
Cash received from settlement of insurance claims
        
66 
Stock compensation charges
  
40 
    
45 
Earnings of affiliated companies less than (in excess of) dividends received
  
44 
    
(437)
Deferred tax provision
  
21 
    
96 
Employee benefit payments (in excess of) less than expense
  
(33)
    
68 
Changes in certain working capital items:
          
Trade accounts receivable
  
(68)
    
(243)
Inventories
  
(35)
    
(143)
Other current assets
  
(54)
    
(42)
Accounts payable and other current liabilities, net of restructuring payments
  
(45)
    
(43)
Other, net
  
56 
    
(216)
Net cash provided by operating activities
  
1,332 
    
1,119 
           
Cash Flows from Investing Activities:
          
Capital expenditures
  
(853)
    
(1,026)
Acquisition of business, net of cash received
        
(148)
Investment in affiliates
  
(111)
      
Short-term investments – acquisitions
  
(1,168)
    
(1,845)
Short-term investments – liquidations
  
989 
    
1,852 
Other, net
  
4 
    
5 
Net cash used in investing activities
  
(1,139)
    
(1,162)
           
Cash Flows from Financing Activities:
          
Net repayments of short-term borrowings and current portion of long-term debt
  
(13)
    
(12)
Principal payments under capital lease obligations
  
(1)
    
(32)
Proceeds from issuance of long-term debt, net
  
886 
      
Payments to settle interest rate hedges
  
(18)
      
Proceeds from the exercise of stock options
  
19 
    
73 
Repurchases of common stock for treasury
  
(386)
      
Dividends paid
  
(227)
    
(158)
Net cash provided by (used in) financing activities
  
260 
    
(129)
Effect of exchange rates on cash
  
(106)
    
183 
Net increase in cash and cash equivalents
  
347 
    
11 
Cash and cash equivalents at beginning of period
  
4,661 
    
4,598 
           
Cash and cash equivalents at end of period
$
5,008 
  
$
4,609 

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

Certain amounts for prior periods were reclassified to conform to the 2012 presentation.

 
-6-

CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.      Significant Accounting Policies

Basis of Presentation

In these notes, the terms “Corning,” “Company,” “we,” “us,” or “our” mean Corning Incorporated and 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, 2011 (2011 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.

Other Income, Net

“Other income, net” in Corning’s consolidated statements of income includes the following (in millions):
 
Three months ended
June 30,
  
Six months ended
June 30,
 
2012
  
2011
  
2012
  
2011
Royalty income from Samsung Corning Precision
$
21 
  
$
64 
  
$
43 
  
$
125 
Foreign currency exchange and hedge gains/(losses), net
  
(1)
    
(7)
    
5 
    
(17)
Net loss attributable to noncontrolling interests
  
1 
          
3 
    
1 
Other, net
  
(13)
    
(14)
    
(14)
    
(39)
Total
$
8 
  
$
43 
  
$
37 
  
$
70 

New Accounting Standards

In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.  The ASU 2011-11 amendments require companies to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.  ASU 2011-11 is required to be applied retrospectively for all prior periods presented and is effective for annual periods for fiscal years beginning on or after January 1, 2013, and interim periods within those annual fiscal years.  Corning does not expect adoption of this standard to have a material impact on its consolidated financial condition.

 
-7-


2.      Commitments, Contingencies, and Guarantees

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.  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 parties.  A proposed PCC plan of reorganization (Amended PCC Plan) filed in the U.S. Bankruptcy Court for the Western District of Pennsylvania was not confirmed by the Court.  Further changes to the Amended PCC Plan are expected to be filed by August 20, 2012.  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 resolution of the PCC asbestos litigation.  At June 30, 2012 and December 31, 2011, the fair value of PCE significantly exceeded its carrying value of $136 million and $138 million, respectively.

The Amended PCC Plan does not include certain non-PCC asbestos claims that may be or have been raised against Corning.  Corning has recorded in its estimated asbestos litigation liability an additional $150 million for the approximately 9,900 current non-PCC cases alleging injuries from asbestos, and for any future non-PCC cases.  The liability for the Amended PCC Plan and the non-PCC asbestos claims was estimated to be $663 million at June 30, 2012, compared with an estimate of the liability of $657 million at December 31, 2011.  In the three and six months ended June 30, 2012, Corning recorded asbestos litigation expense of $5 million and $6 million, respectively.  In the three and six months ended June 30, 2011, Corning recorded asbestos litigation expense of $5 million and $10 million, respectively.  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).

Other Commitments and Contingencies

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

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

As of June 30, 2012 and December 31, 2011, contingent guarantees totaled a notional value of $140 million and $170 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 $75 million and $72 million, at June 30, 2012 and December 31, 2011, respectively.

Product warranty liability accruals were $22 million at June 30, 2012 and $23 million at December 31, 2011.

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.

 
-8-


In March of 2012, Corning received a grand jury subpoena issued in the United States District Court for the Eastern District of Michigan from the U.S. Department of Justice in connection with an investigation into conduct relating to possible antitrust law violations involving certain automotive products, including catalytic converters, diesel particulate filters, substrates and monoliths. Antitrust investigations can result in significant penalties being imposed by the antitrust authorities. Currently Corning can not estimate the ultimate financial impact, if any, resulting from the investigation.  Such potential impact, if an antitrust violation by Corning is found, could however, be material to the results of operations of Corning in a particular period.

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 June 30, 2012, and December 31, 2011, Corning had accrued approximately $24 million (undiscounted) and $25 million (undiscounted), respectively, for the estimated liability for environmental cleanup and related litigation.  Based upon the information developed to date, management believes that the accrued reserve is a reasonable estimate of the Company’s liability and that the risk of an additional loss in an amount materially higher than that accrued is remote.

3.      Debt

Based on borrowing rates currently available to us for loans with similar terms and maturities, the fair value of long-term debt was $3.6 billion at June 30, 2012 and $2.6 billion at December 31, 2011.  The Company measures the fair value of its long-term debt using Level 2 inputs based primarily on current market yields for its existing debt traded in the secondary market.

2012
In the first quarter of 2012, we issued $250 million of 4.70% senior unsecured notes and $500 million of 4.75% senior unsecured notes for net proceeds of approximately $247 million and $495 million, respectively.  The 4.70% notes mature on March 15, 2037 and the 4.75% notes mature on March 15, 2042.

2011
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 $633 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 in August, 2016, five years from the date of the first advance.

4.      Income Taxes

Our provision for income taxes and the related effective income tax rates were as follows (in millions):
 
Three months ended
June 30,
  
Six months ended
June 30,
 
2012
  
2011
  
2012
  
2011
                       
Provision for income taxes
$
(93)
  
$
(123)
  
$
(204)
  
$
(237)
Effective tax rate
  
16.8%
    
14.0%
    
18.1%
    
13.6%



 
-9-


For the three and six months ended June 30, 2012, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:

·  
Rate differences on income (loss) of consolidated foreign companies;
·  
The impact of equity in earnings of nonconsolidated affiliates reported in the financials net of tax;
·  
The expiration of favorable U.S. tax provisions; and
·  
The benefit of tax incentives in foreign jurisdictions, primarily Taiwan.

For the three and six months ended June 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 (loss) of consolidated foreign companies;
·  
The impact of equity in earnings of affiliated companies; and
·  
The benefit of tax incentives in foreign jurisdictions, primarily Taiwan.

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 1.4 and 1.3 percentage points for the three months ended June 30, 2012 and 2011, respectively.  The impact of the tax holiday on our effective tax rate is a reduction in the rate of 1.4 percentage points for the six months ended June 30, 2012 and 2011.

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.

5.      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 June 30,
 
2012
  
2011
 
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
$462
  
1,506
  
$0.31
  
$755
  
1,568
  
$0.48
                       
Effect of dilutive securities:
                      
Stock options and other dilutive securities
    
     12
          
     23
    
                       
Diluted earnings per common share
$462
  
1,518
  
$0.30
  
$755
  
1,591
  
$0.47


 
-10-


 
Six months ended June 30,
 
2012
  
2011
 
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
$924
  
1,511
  
$0.61
  
$1,503
  
1,566
  
$0.96
                       
Effect of dilutive securities:
                      
Stock options and other dilutive securities
    
     13
          
     24
    
                       
Diluted earnings per common share
$924
  
1,524
  
$0.61
  
$1,503
  
1,590
  
$0.95

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
June 30,
  
Six months ended
June 30,
 
2012
  
2011
  
2012
  
2011
Stock options and other dilutive securities excluded from the calculation of diluted earnings per common share
42
  
26
  
42
  
48

6.      Available-for-Sale Investments

The following is a summary of the fair value of available-for-sale investments (in millions):
 
Amortized cost
  
Fair value
 
June 30,
2012
  
December 31,
2011
  
June 30,
2012
  
December 31,
2011
Bonds, notes and other securities:
                      
U.S. government and agencies
$
1,333
  
$
1,150
  
$
1,337
  
$
1,155
Other debt securities
        
6
          
9
Total short-term investments
$
1,333
  
$
1,156
  
$
1,337
  
$
1,164
Asset-backed securities
$
54
  
$
57
  
$
35
  
$
35
Total long-term investments
$
54
  
$
57
  
$
35
  
$
35

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 June 30, 2012 (in millions):
Less than one year
$1,031
Due in 1-5 years
306
Due in 5-10 years
  
Due after 10 years (1)
35
Total
$1,372

(1)
Includes $35 million of asset-based securities that mature over time and are being reported at their final maturity dates.

 
-11-


Unrealized gains and losses, net of tax, are computed on a specific identification basis and are reported as a separate component of accumulated other comprehensive loss in shareholders’ equity until realized.

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 June 30, 2012 and December 31, 2011 (in millions):
     
June 30, 2012
     
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
  
$
35
  
$
(19)
  
$
35
  
$
(19)
Total long-term investments
22
  
$
35
  
$
(19)
  
$
35
  
$
(19)

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

     
December 31, 2011
     
12 months or greater
  
Total
 
Number of
securities
in a loss
position
  
Fair
value
  
Unrealized
losses (1)
  
Fair
value
  
Unrealized
losses
Asset-backed securities
22
  
$
35
  
$
(23)
  
$
35
  
$
(23)
Total long-term investments
22
  
$
35
  
$
(23)
  
$
35
  
$
(23)

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

As of June 30, 2012 and December 31, 2011, for securities that have credit losses, an other than temporary impairment loss of $15 and $18 million, respectively, is recognized in accumulated other comprehensive loss.

Proceeds from sales and maturities of short-term investments totaled $1.0 billion and $1.9 billion for the six months ended June 30, 2012 and 2011, respectively.

7.      Inventories

Inventories comprise the following (in millions):
 
June 30,
2012
  
December 31,
2011
Finished goods
$
326
  
$
312
Work in process
  
234
  
  
199
Raw materials and accessories
  
230
  
  
268
Supplies and packing materials
  
209
  
  
196
Total inventories
$
999
  
$
975


 
-12-


8.      Investments

Investments comprise the following (in millions):
 
Ownership
interest (1)
  
June 30,
2012
  
December 31,
2011
Affiliated companies accounted for by the equity method
              
Samsung Corning Precision Materials Co., Ltd.
50%
  
$
3,259
  
$
3,315
Dow Corning Corporation
50%
    
1,256
    
1,160
All other
20-50%
    
352
    
248
       
4,867
    
4,723
Other investments
      
3
    
3
Total
    
$
4,870
  
$
4,726

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

Related party information for these investments in affiliates follows (in millions):
 
Three months ended
June 30,
  
Six months ended
June 30,
 
2012
  
2011
  
2012
  
2011
Related Party Transactions:
                      
Corning sales to affiliated companies
$
6
  
$
6
  
$
13
  
$
12
Corning purchases from affiliated companies
$
50
  
$
19
  
$
68
  
$
56
Corning transfers of assets, at cost, to affiliated companies
$
25
  
$
27
  
$
40
  
$
61
Dividends received from affiliated companies
$
3
  
$
69
  
$
521
  
$
389
Royalty income from affiliated companies
$
22
  
$
66
  
$
44
  
$
127
Corning services to affiliates
$
6
  
$
13
  
$
16
  
$
21

As of June 30, 2012, balances due to and due from affiliates were $33 million and $67 million, respectively.  As of December 31, 2011, balances due to and due from affiliates were $14 million and $77 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:

 
-13-


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.  Samsung Corning Precision’s results of operations follow (in millions):
 
Three months ended
June 30,
  
Six months ended
June 30,
 
2012
  
2011
  
2012
  
2011
                       
Statement of Operations:
                      
Net sales
$
785
  
$
1,209
  
$
1,569
  
$
2,350
Gross profit
$
540
  
$
892
  
$
1,064
  
$
1,747
Net income attributable to Samsung Corning Precision
$
402
  
$
638
  
$
773
  
$
1,248
Corning’s equity in earnings of Samsung Corning Precision
$
193
  
$
325
  
$
376
  
$
624
                       
Related Party Transactions:
                      
Corning purchases from Samsung Corning Precision
$
42
  
$
11
  
$
52
  
$
41
Dividends received from Samsung Corning Precision
            
$
518
  
$
205
Royalty income from Samsung Corning Precision
$
21
  
$
64
  
$
43
  
$
125
Corning transfers of machinery and equipment to Samsung Corning Precision at cost (1)
$
25
  
$
27
  
$
40
  
$
61

(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.

As of June 30, 2012, balances due from Samsung Corning Precision were $12 million and balances due to Samsung Corning Precision were $30 million.  As of December 31, 2011, balances due from Samsung Corning Precision were $16 million and balances due to Samsung Corning Precision were $11 million.

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

In June 2011, the Korean tax authorities completed an audit of Samsung Corning Precision.  As a result, Samsung Corning Precision was issued a pre-assessment of approximately $46 million for an asserted underpayment of withholding tax on dividends paid from September 2006 through March 2009.  In April 2011, we appealed for a reversal of the assessment. In October 2011, that appeal was denied and a formal assessment was issued.  Corning paid the assessment in the fourth quarter of 2011, allowing us to appeal to the Korean Tax Tribunal.  Once a ruling from the Korean Tax Tribunal is received, Corning may continue the Korean appeals process and/or access the Competent Authority under the U.S./Korea tax treaty, which allows the U.S. tax authorities’ involvement in resolving the matter.  Samsung Corning Precision and Corning believe it is more likely than not we will receive a favorable ruling when all of the available appeals have been exhausted.

 
-14-


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
June 30,
  
Six months ended
June 30
 
2012
  
2011
  
2012
  
2011
                       
Statement of Operations:
                      
Net sales
$
1,571
  
$
1,668
  
$
3,093
  
$
3,247
Gross profit
$
395
  
$
533
  
$
732
  
$
1,072
Net income attributable to Dow Corning
$
121
  
$
191
  
$
192
  
$
370
Corning’s equity in earnings of Dow Corning
$
61
  
$
95
  
$
96
  
$
186
                       
Related Party Transactions:
                      
Corning purchases from Dow Corning
$
6
  
$
6
  
$
12
  
$
12
Dividends received from Dow Corning
      
$
65
        
$
180

Amounts owed to Dow Corning totaled $1 million as of June 30, 2012.  At December 31, 2011, amounts owed to Dow Corning were not significant.

At June 30, 2012, Dow Corning’s marketable securities included approximately $138 million of auction rate securities, net of a temporary impairment of $6 million.

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.  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 June 30, 2012, 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 June 30, 2012, Dow Corning has estimated the liability to commercial creditors to be within the range of $88 million to $287 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 $88 million, net of applicable tax benefits.

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 three variable interest entities that are not considered significant to Corning’s consolidated financial statements.  Corning does not have retained interests in assets transferred to any unconsolidated entity that serves as credit, liquidity or market risk support to such entity.

 
-15-


9.      Property, Net of Accumulated Depreciation

Property, net follows (in millions):
 
June 30,
2012
  
December 31,
2011
Land
$
111 
  
$
113 
Buildings
  
3,986 
    
3,957 
Equipment
  
11,986 
    
11,886 
Construction in progress
  
2,154 
    
1,919 
   
18,237 
    
17,875 
Accumulated depreciation
  
(7,486)
    
(7,204)
Total
$
10,751 
  
$
10,671 

In the three months ended June 30, 2012 and 2011, interest costs capitalized as part of property, net, were $22 million and $10 million, respectively.  In the six months ended June 30, 2012 and 2011, interest costs capitalized as part of property, net, were $43 million and $17 million, respectively.

Manufacturing equipment includes certain components of production equipment that are constructed of precious metals.  At June 30, 2012 and December 31, 2011, the recorded value of precious metals totaled $2.5 billion.  Depletion expense for precious metals in the three months ended June 30, 2012 and 2011 totaled $5 million and $6 million, respectively.  Depletion expense for precious metals in the six months ended June 30, 2012 and 2011 totaled $10 million in both periods.

10.      Goodwill and Other Intangible Assets

The carrying amount of goodwill by segment for the six months ended June 30, 2012 is as follows (in millions):
 
Telecom-
munications
  
Display
Technologies
  
Specialty
Materials
  
Life
Sciences
  
Total
                   
Balance at December 31, 2011
$209
  
$9
  
$150
  
$296
  
$664
Foreign currency translation adjustment
            
      (1)
  
      (1)
Balance at June 30, 2012
$209
  
$9
  
$150
  
$295
  
$663

Corning’s gross goodwill balances for the periods ended June 30, 2012 and December 31, 2011 were $7.1 billion.  Accumulated impairment losses were $6.5 billion for the periods ended June 30, 2012 and December 31, 2011, and were generated entirely through goodwill impairments related to the Telecommunications segment.

Other intangible assets are as follows (in millions):
 
June 30, 2012
  
December 31, 2011
 
Gross
  
Accumulated
amortization
  
Net
  
Gross
  
Accumulated
amortization
  
Net
Amortized intangible assets:
                                  
Patents, trademarks, and trade names 
$
231
  
$
124
  
$
107
  
$
228
  
$
119
  
$
109
Customer lists and other 
  
165
    
19
    
146
    
169
    
16
    
153
                                   
Total
$
396
  
$
143
  
$
253
  
$
397
  
$
135
  
$
262

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

Amortization expense related to these intangible assets is estimated to be $16 million for 2012 through 2015 and $15 million for 2016 and 2017.

 
-16-


11.      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
June 30,
  
Six months
ended
June 30,
  
Three months
ended
June 30,
  
Six months
ended
June 30,
 
2012
  
2011
  
2012
  
2011
  
2012
  
2011
  
2012
  
2011
                                               
Service cost
$
15 
  
$
13 
  
$
30 
  
$
27 
  
$
3 
  
$
4 
  
$
6 
  
$
8 
Interest cost
  
38 
    
39 
    
76 
    
77 
    
11 
    
12 
    
22 
    
24 
Expected return on plan assets
  
(40)
    
(40)
    
(80)
    
(81)
                        
Amortization of net loss
  
18 
    
19 
    
35 
    
37 
    
4 
    
4 
    
8 
    
9 
Amortization of prior service cost
  
1 
    
2 
    
2 
    
4 
    
(1)
    
(2)
    
(2)
    
(3)
Total pension and postretirement benefit expense
$
32 
  
$
33 
  
$
63 
  
$
64 
  
$
17 
  
$
18 
  
$
34 
  
$
38 

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.  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 and going forward.  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.

12.      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 exposures, which include forecasted transactions, 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.

 
-17-


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 such counterparty default.  Neither we nor our counterparties are required to post collateral for these financial instruments.

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.  Our cash flow hedging activity also utilizes interest rate forwards to reduce the risk of changes in benchmark interest rate from the probable forecasted issuance of debt.  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 June 30, 2012, the amount of net gain expected to be reclassified into earnings within the next 12 months is $15 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.

The following tables summarize the notional amounts and respective fair values of Corning’s derivative financial instruments for June 30, 2012 and December 31, 2011 (in millions):
     
Asset derivatives
  
Liability derivatives
 
Notional amount
  
Balance
sheet location
  
Fair value
  
Balance
sheet location
  
Fair value
 
2012
  
2011
    
2012
  
2011
    
2012
  
2011
                               
Derivatives designated as hedging instruments
                              
                               
Foreign exchange contracts
$  484
  
$  402
  
Other current assets
  
$17
  
$ 6
  
Other accrued liabilities
  
$  (2)
  
$   (8)
Benchmark interest rate
    
$  500
  
Other assets
  
$ 2
      
Other liabilities
      
$ (33)
                               
Derivatives not designated as hedging instruments
                              
                               
Foreign exchange contracts
$2,595
  
$3,094
  
Other current assets
  
$30
  
$ 6
  
Other accrued liabilities
  
$(32)
  
$(122)
                     
Other liabilities
  
$  (4)
  
$   (6)
                               
Total derivatives
$3,079
  
$3,996
      
$49
  
$12
      
$(38)
  
$(169)


 
-18-


The following table summarizes the effect of derivative financial instruments on Corning’s consolidated financial statements for the three and six months ended June 30, 2012 (in millions):
   
(Loss)/gain recognized in OCI
  
Gain reclassified from accumulated OCI
into income (effective) (1)
Derivatives in hedging relationships
  
Three months
ended
June 30, 2012
  
Six months
ended
June 30, 2012
  
Location
  
Three months
ended
June 30, 2012
  
Six months
ended
June 30, 2012
                     
Cash flow hedges
                    
           
Cost of sales
  
$2
  
$3
                     
Foreign exchange contracts
  
$(14)
  
$17
  
Royalties
  
$3
  
$6
                     
Total cash flow hedges
  
$(14)
  
$17
      
$5
  
$9
                     
                     
           
(Loss)/gain recognized in income
Undesignated derivatives
          
Location
  
Three months
ended
June 30, 2012
  
Six months
ended
June 30, 2012
                     
Foreign exchange contracts
          
Other income, net
  
$(41)
  
$97
                     
Total undesignated
              
$(41)
  
$97

(1)
The amount of hedge ineffectiveness for the three and six months ended June 30, 2012 was insignificant.

The following table summarizes the effect of derivative financial instruments on Corning’s consolidated financial statements for the three and six months ended June 30, 2011 (in millions):
   
Loss recognized in OCI
  
Loss reclassified from accumulated OCI
into income (effective) (1)
Derivatives in hedging relationships
  
Three months
ended
June 30, 2011
  
Six months
ended
June 30, 2011
  
Location
  
Three months
ended
June 30, 2011
  
Six months
ended
June 30, 2011
                     
Cash flow hedges
                    
           
Cost of sales
  
$(2)
  
$  (4)
                     
Foreign exchange contracts
  
$(1)
  
$(19)
  
Royalties
  
$(7)
  
$(14)
                     
Total cash flow hedges
  
$(1)
  
$(19)
      
$(9)
  
$(18)
                     
                     
           
(Loss)/gain recognized in income
Undesignated derivatives
          
Location
  
Three months
ended
June 30, 2011
  
Six months
ended
June 30, 2011
                     
Foreign exchange contracts
          
Other income, net
  
$(10)
  
$133
                     
Total undesignated
              
$(10)
  
$133

(1)
The amount of hedge ineffectiveness for the three and six months ended June 30, 2011 was insignificant.

 
-19-


13.      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 June 30, 2012 and December 31, 2011, the Company did not have any financial assets or liabilities that were measured using unobservable (or Level 3) inputs.

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
 
June 30,
 2012
  
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
$1,337
  
$1,337
        
Other current assets (1)
$     47
      
$47
    
Non-current assets:
              
Other assets (1)(2)
$     37
      
$37
    
               
Current liabilities:
              
Other accrued liabilities (1)
$     34
      
$34
    
Non-current liabilities:
              
Other liabilities (1)
$       4
      
$  4
    

(1)
Derivative assets and liabilities include foreign exchange contracts which are measured using observable quoted prices for similar assets and liabilities.
(2)
Other assets include $35 million of asset-backed securities which are measured using observable quoted prices for similar assets.

 
-20-


     
Fair value measurements at reporting date using
 
December 31,
 2011
  
Quoted prices in
active markets for
identical assets
(Level 1)
  
Significant other
observable
inputs
(Level 2)
  
Significant
unobservable
inputs
(Level 3)
               
Current assets:
              
Short-term investments
$1,164
  
$1,155
  
$    9 (1)
    
Other current assets (2)
$    12
      
$  12     
    
Non-current assets:
              
Other assets (3)
$    35
      
$  35     
    
               
Current liabilities:
              
Other accrued liabilities (2)
$  163
      
$163    
    
Non-current liabilities:
              
Other liabilities (2)
$      6
      
$    6    
    

(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.
(3)
Other assets include asset-backed securities which are measured using observable quoted prices for similar assets.

14.      Share-based Compensation

Stock Compensation Plans

The Company measures and recognizes compensation cost for all share-based payment awards made to employees and directors based on estimated fair values.  Fair values for stock options were estimated using a multiple-point Black-Scholes valuation model.  Share-based compensation cost was approximately $16 million and $22 million for the three months ended June 30, 2012 and 2011, respectively, and approximately $40 million and $45 million for the six months ended June 30, 2012 and 2011, 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.

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.

 
-21-


The following table summarizes information concerning stock options outstanding including the related transactions under the Stock Option Plans for the six months ended June 30, 2012:
 
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, 2011
65,027 
  
$15.91
        
Granted
7,623 
  
12.99
        
Exercised
(2,839)
  
6.76
        
Forfeited and Expired
(1,162)
  
18.07
        
Options Outstanding as of June 30, 2012
68,649 
  
15.93
  
5.05
  
94,692
Options Exercisable as of June 30, 2012
55,406 
  
15.89
  
4.12
  
94,459

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 June 30, 2012, which would have been received by the option holders had all option holders exercised their options as of that date.

As of June 30, 2012, there was approximately $41 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 two years.  Compensation cost related to stock options was approximately $21 million and $25 million for the six months ended June 30, 2012 and 2011, respectively, and approximately $9 million and $13 million for the three months ended June 30, 2012 and 2011 respectively.

Proceeds received from the exercise of stock options were $19 million and $73 million for the six months ended June 30, 2012 and 2011, respectively and $3 million and $9 million for the three months ended June 30, 2012 and 2011, 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 six months ended June 30, 2012 and 2011 was approximately $20 million and $68 million, and $5 million and $6 million for the three months ended June 30, 2012 and 2011, 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 4 (Income Taxes) to the consolidated financial statements.

The following inputs were used for the valuation of option grants under our Stock Option Plans:
 
Three months ended
June 30,
  
Six months ended
June 30,
 
2012
  
2011
  
2012
  
2011
Expected volatility
48%
  
47-48%
  
48-49%
  
47-48%
Weighted-average volatility
48%
  
47%
  
48-49%
  
47-48%
Expected dividends
2.28%
  
1.06%
  
2.28-2.33%
  
1.1%
Risk-free rate
0.9-1.2%
  
1.9-2.4%
  
0.9-1.3%
  
1.9-2.7%
Average risk-free rate
1.2%
  
2.4%
  
1.2-1.3%
  
2.4-2.6%
Expected term (in years)
5.7-7.1
  
5.1-6.7
  
5.7-7.1
  
5.1-6.7
Pre-vesting departure rate
0.4-4.2%
  
0.4-3.9%
  
0.4-4.2%
  
0.4-3.9%


 
-22-


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 different 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, 2011, and changes which occurred during the six months ended June 30, 2012:
 
Shares
(000’s)
  
Weighted
Average
Grant-Date
Fair Value
Non-vested shares at December 31, 2011
4,104 
  
$
18.16
Granted
1,953 
    
13.09
Vested
(411)
    
21.08
Forfeited
(65)
    
15.16
Non-vested shares at June 30, 2012
5,581 
  
$
16.20

As of June 30, 2012, there was approximately $32 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 1.8 years.  Compensation cost related to time-based restricted stock and restricted stock units was approximately $17 million and $16 million for the six months ended June 30, 2012 and 2011, respectively, and $7 million for the three months ended June 30, 2012 and 2011.

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.

 
-23-


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, 2011, and changes which occurred during the six months ended June 30, 2012:
 
Shares
(000’s)
  
Weighted-
Average
Grant-Date
Fair Value
Non-vested restricted stock and restricted stock units at December 31, 2011
5,134 
  
$
8.67
Vested
(5134)
    
8.67
Non-vested restricted stock and restricted stock units at June 30, 2012
0
  
$
0

The performance-based restricted stock and restricted stock unit compensation program was terminated in 2010.  All performance-based restricted stock and stock units are vested as of June 30, 2012.

As of June 30, 2012, there is no unrecognized compensation cost related to non-vested performance-based restricted stock and restricted stock units compensation arrangements granted under the Plan.  Compensation cost related to performance-based restricted stock and restricted stock units was approximately $2 million and $4 million for the six months ended June 30, 2012 and 2011, respectively, and $2 million for the three months ended June 30, 2011.

15.      Significant Customers

For the three and six months ended June 30, 2012 and 2011, Corning did not have a customer that individually accounted for more than 10% of the Company’s consolidated net sales, respectively.

16.      Reportable Segments

Our reportable 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 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.

All other 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 reportable 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.

 
-24-


Reportable Segments (in millions)

 
Display
Technologies
  
Telecom-
munications
  
Environmental
Technologies
  
Specialty
Materials
  
Life
Sciences
  
All
Other
  
Total
Three months ended June 30, 2012
                                        
  Net sales
$
641 
  
$
559 
  
$
249 
  
$
296 
  
$
162 
  
$
1 
  
$
1,908 
  Depreciation (1)
$
125 
  
$
34 
  
$
29 
  
$
36 
  
$
10 
  
$
3 
  
$
237 
  Amortization of purchased intangibles
      
$
2 
              
$
2 
        
$
4 
  Research, development and engineering expenses (2)
$
26 
  
$
35 
  
$
26 
  
$
37 
  
$
5 
  
$
29 
  
$
158 
  Equity in earnings of affiliated companies
$
184 
  
$
2 
                    
$
9 
  
$
195 
  Income tax (provision) benefit
$
(78)
  
$
(17)
  
$
(17)
  
$
(17)
  
$
(5)
  
$
12 
  
$
(122)
  Net income (loss) (3)
$
371 
  
$
36 
  
$
34 
  
$
34 
  
$
11 
  
$
(16)
  
$
470 
                                         
Three months ended June 30, 2011
                                        
  Net sales
$
760 
  
$
548 
  
$
258 
  
$
283 
  
$
155 
  
$
1 
  
$
2,005 
  Depreciation (1)
$
123 
  
$
32 
  
$
27 
  
$
42 
  
$
9 
  
$
3 
  
$
236 
  Amortization of purchased intangibles
      
$
2 
              
$
2 
        
$
4 
  Research, development and engineering expenses (2)
$
27 
  
$
32 
  
$
23 
  
$
36 
  
$
5 
  
$
24 
  
$
147 
  Equity in earnings of affiliated companies
$
319 
  
$
1 
  
$
1
  
$
5 
        
$
2 
  
$
328 
  Income tax (provision) benefit
$
(118)
  
$
(22)
  
$
(15)
  
$
(9)
  
$
(7)
  
$
10 
  
$
(161)
  Net income (loss) (3)
$
626 
  
$
46 
  
$
32 
  
$
23 
  
$
15 
  
$
(20)
  
$
722
                                         
Six months ended June 30, 2012
                                        
  Net sales
$
1,346 
  
$
1,067 
  
$
512 
  
$
584 
  
$
317 
  
$
2 
  
$
3,828 
  Depreciation (1)
$
254 
  
$
64 
  
$
57 
  
$
70 
  
$
20 
  
$
6 
  
$
471 
  Amortization of purchased intangibles
      
$
5 
              
$
4 
        
$
9 
  Research, development and engineering expenses (2)
$
53 
  
$
70 
  
$
52 
  
$
74 
  
$
11 
  
$
56 
  
$
316 
  Equity in earnings (loss) of affiliated companies
$
366 
  
$
(2)
  
$
1 
              
$
13 
  
$
378 
  Income tax (provision) benefit
$
(174)
  
$
(29)
  
$
(37)
  
$
(28)
  
$
(11)
  
$
22 
  
$
(257)
  Net income (loss) (3)
$
792 
  
$
57 
  
$
74 
  
$
55 
  
$
23 
  
$
(36)
  
$
965 
                                         
Six months ended June 30, 2011
                                        
  Net sales
$
1,550 
  
$
1,022 
  
$
517 
  
$
537 
  
$
299 
  
$
3 
  
$
3,928 
  Depreciation (1)
$
247 
  
$
60 
  
$
52 
  
$
79 
  
$
17 
  
$
5 
  
$
460 
  Amortization of purchased intangibles
      
$
3 
              
$
4 
        
$
7 
  Research, development and engineering expenses (2)
$
52 
  
$
61 
  
$
46 
  
$
65 
  
$
9 
  
$
46 
  
$
279 
  Equity in earnings of affiliated companies
$
613 
  
$
4 
  
$
1 
  
$
8 
        
$
9 
  
$
635 
  Income tax (provision) benefit
$
(257)
  
$
(41)
  
$
(29)
  
$
(12)
  
$
(14)
  
$
19 
  
$
(334)
  Net income (loss) (3)
$
1,264 
  
$
87 
  
$
61 
  
$
31 
  
$
30 
  
$
(35)
  
$
1,438 

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

 
-25-


A reconciliation of reportable segment net income to consolidated net income follows (in millions):
 
Three months ended
June 30,
  
Six months ended
June 30,
 
2012
  
2011
  
2012
  
2011
Net income of reportable segments
$
486 
  
$
742 
  
$
1,001 
  
$
1,473 
Non-reportable segments
  
(16)
    
(20)
    
(36)
    
(35)
Unallocated amounts:
                      
Net financing costs (1)
  
(44)
    
(47)
    
(84)
    
(99)
Stock-based compensation expense
  
(16)
    
(22)
    
(40)
    
(45)
Exploratory research
  
(24)
    
(19)
    
(47)
    
(36)
Corporate contributions
  
(10)
    
(11)
    
(23)
    
(32)
Equity in earnings of affiliated companies, net of impairments (2)
  
64 
    
100 
    
99 
    
191 
Asbestos settlement (3)
  
(5)
    
(5)
    
(6)
    
(10)
Other corporate items 
  
27 
    
37 
    
60 
    
96 
Net income
$
462 
  
$
755 
  
$
924 
  
$
1,503 

(1)
Net financing costs include interest income, interest expense, and interest costs and investment gains associated with benefit plans.
(2)
Primarily represents the equity earnings of Dow Corning Corporation.
(3)
In the three and six months ended June 30, 2012, Corning recorded a charge of $5 million and $6 million, respectively, to adjust the asbestos liability for the change in value of the components of the Amended PCC Plan. In the three and six months ended June 30, 2011, Corning recorded a charge of $5 million and $10 million, respectively, to adjust the asbestos liability for the change in value of the components of the Amended PCC Plan.

In the Telecommunications operating segment, assets increased from $1.2 billion at December 31, 2011 to $1.4 billion at June 30, 2012.  The increase is due primarily to increase of capital expenditures of approximately $170 million.

The sales of each of our reportable segments are concentrated across a relatively small number of customers.  In the second quarter of 2012, the following number of customers, which individually accounted for 10% or more of each segment’s sales, represented the following concentration of segment sales:

·  
In the Display Technologies segment, 4 customers accounted for 78% of total segment sales.
·  
In the Telecommunications segment, 1 customer accounted for 12% of total segment sales.
·  
In the Environmental Technologies segment, 3 customers accounted for 87% of total segment sales.
·  
In the Specialty Materials segment, 2 customers accounted for 48% of total segment sales.
·  
In the Life Sciences segment, 2 customers accounted for 45% of total segment sales.

In the first half of 2012, the following number of customers, which individually accounted for 10% or more of each segment’s sales, represented the following concentration of segment sales:

·  
In the Display Technologies segment, 4 customers accounted for 79% of total segment sales.
·  
In the Telecommunications segment, 1 customer accounted for 12% of total segment sales.
·  
In the Environmental Technologies segment, 3 customers accounted for 87% of total segment sales.
·  
In the Specialty Materials segment, 2 customers accounted for 49% of total segment sales.
·  
In the Life Sciences segment, 2 customers accounted for 42% of total segment sales.

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


 
-26-


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

OVERVIEW
The decrease in Corning’s results in the three and six months ended June 30, 2012, when compared to the same periods in 2011, is largely the result of significant price declines in our Display Technologies segment.  Although sequential price declines were much more moderate in the second quarter of 2012, year-over-year prices declined in the double digits in the Display Technologies segment, due to customer and competitive pressures in a period of excess capacity, which was driven by a smaller glass market and a reduction in the amount of inventory in the supply chain beginning in the latter half of 2011 and continuing into 2012.  In addition to price declines in the Display Technologies segment, Corning’s results were also negatively impacted by sharply lower equity earnings from our equity affiliates, lower royalty income and higher taxes.

Results in our remaining reportable segments in the three and six months ended June 30, 2012 were mixed when compared to the same periods in 2011.  Operating results increased in our Specialty Materials segment, driven by double digit sales growth of our Corning® Gorilla® Glass used in portable display devices.  Results also increased in the Environmental Technologies segment in these periods, driven by improved manufacturing performance and lower air freight expenses.  Although sales increased in the Telecommunications segment in the second quarter and first half of 2012 driven by strong sales of optical fiber and cable products, results declined when compared to the prior year due to an increase in manufacturing and operating expenses and higher project spending.  Sales in the Life Sciences segment increased slightly, largely as a result of a small acquisition completed in the fourth quarter of 2011, but results declined due to an increase in operating expenses related to a pending acquisition announced in April, 2012.

In the second quarter of 2012, we generated net income of $462 million or $0.30 per share, compared to net income of $755 million or $0.47 per share for the same period in 2011.  In the six months ended June 30, 2012, we reported net income of $924 million or $0.61 per share compared to net income of $1,503 million or $0.95 per share for the first half of 2011. When compared to the same periods last year, the decrease in net income was due largely to the following items:

 
-27-


·  
Lower net income in the Display Technologies segment driven by the price declines described above, and a decrease in equity earnings from Samsung Corning Precision, our equity affiliate located in Korea;
·  
A decline in equity earnings from Dow Corning due to a decrease in prices for silicone products and a significant decrease in earnings at Hemlock Semiconductor Group (Hemlock), Dow Corning’s consolidated subsidiary that manufactures high purity polycrystalline silicon for the semiconductor and solar industries, driven by price declines and lower volume;
·  
Lower royalty income from our equity affiliate Samsung Corning Precision due to the combination of lower sales at Samsung Corning Precision and the reduction of the applicable royalty rate which took effect in December, 2011;
·  
An increase in our effective tax rate due to the following:
o  
Expiration of favorable U.S. tax provisions;
o  
The partial expiration of tax holidays in Taiwan; and
o  
Change in our mix of earnings.

The decrease in net income for the three and six months ended June 30, 2012 was offset somewhat by the positive impact of movements in foreign exchange rates and improvements in net income in the Specialty Materials and Environmental Technologies segments.

Our key priorities for 2012 remain similar to those from previous years:  protect our financial health and invest in the future.  During the second quarter of 2012, we made the following progress toward these priorities:

Protecting Financial Health
Our balance sheet remains strong, and we generated positive cash flow from operating activities:

·  
We ended the second quarter of 2012 with $6.3 billion of cash, cash equivalents and short-term investments, up from the balance at December 31, 2011 of $5.8 billion, and well above our debt balance at June 30, 2012 of $3.3 billion.
·  
Although our debt to capital ratio increased from 10% reported at December 31, 2011 to 13% at June 30, 2012 due to the issuance of unsecured notes in the first quarter of 2012, our debt to capital ratio remains at a low level.
·  
We repurchased 25.7 million shares of common stock in the second quarter of 2012 as part of a $1.5 billion repurchase program announced in the fourth quarter of 2011.  This action reflects our significant cash balance, our expectation that we will continue to achieve strong cash flows in the future, and our belief that Corning’s stock is a good value.
·  
Operating cash flow in the six months ended June 30, 2012 was $1,332 million, an increase of $213 million when compared to the same period in 2011.

Investing In Our Future
We continue to focus on the future and on what we do best – creating and making keystone components that enable high-technology systems.  Our spending levels for research, development, and engineering increased slightly in the second quarter of 2012 when compared to the same period last year, as we remain committed to investing in research, development, and engineering to drive innovation.

In 2012, we are maintaining a balanced innovation strategy that is focused on: growing our existing businesses; developing opportunities adjacent or closely related to our existing technical and manufacturing capabilities; and investing in long range opportunities in each of our market segments.

 
-28-


We continue to work on new products, including glass substrates for high performance displays, LCD applications, diesel filters and substrates, and the optical fiber, cable, hardware and equipment that enable fiber-to-the-premises and next generation data centers.  In addition, we are focusing on wireless solutions for diverse venue applications, such as distributed antenna systems, fiber to the cell site and fiber to the antenna.  We have increased our research, development and engineering spending to support the advancement of new product attributes for our Corning Gorilla Glass suite of products.  We will continue to focus on adjacent glass opportunities which leverage existing materials or manufacturing processes, including products such as glass substrates for thin-film photovoltaics in solar applications and Corning® Willow™ Glass, our ultra-slim flexible glass for use in next-generation consumer electronic technologies.

Capital spending totaled $853 million and $1.0 billion for the six months ended June 30, 2012 and 2011, respectively.  Spending in the first half of 2012 was driven primarily by capacity expansion projects in several of our reportable segments that were started in 2011.  We expect our 2012 capital spending to be $1.8 to $1.9 billion.  Approximately $900 million will be directed toward our Display Technologies segment, of which approximately $300 million is related to 2011 capital projects.

Corporate Outlook
Corning expects sales in 2012 to remain relatively consistent with 2011, with higher sales in our Telecommunications, Specialty Materials, Life Sciences and Environmental Technologies segments offset by lower sales in the Display Technologies segment.  We expect the overall LCD glass retail market to increase from 3.3 billion square feet in 2011 to approximately 3.6 billion square feet in 2012, driven by the combination of an increase in retail sales of LCD televisions, the demand for larger television screen sizes and growth in the personal computer market.  We expect that sequential quarterly price declines during the remainder of 2012 will be moderate.  Net income will be negatively impacted by lower equity earnings from our equity affiliates Samsung Corning Precision, driven by lower prices, and Dow Corning, driven by lower demand and price declines at Hemlock Semiconductor Group, Dow Corning’s consolidated subsidiary that makes high purity polycrystalline silicon for the semiconductor and solar industries.  We may take advantage of acquisition opportunities that support the long-term strategies of our businesses.  We remain confident that our strategy to grow through global innovation, while preserving our financial stability, will enable our continued long-term success.

 
-29-


RESULTS OF OPERATIONS

Selected highlights for the second quarter follow (dollars in millions):
 
Three months ended
June 30,
  
%
change
  
Six months ended
June 30,
  
%
change
 
2012
  
2011
  
12 vs. 11
  
2012