CORNING INC /NY (GLW) FY 2022 MD&A

OVERVIEW

We introduced our 2020-to-2023 Strategy & Growth Framework with a focus on capturing opportunities to sell more Corning content through each of our Market-Access Platforms. Our goals included core sales growth at a compound annual growth rate of 6 to 8 percent. From 2019, when we first introduced the new framework, through 2022, we grew core sales at a greater than 8 percent CAGR, even in the face of ongoing external challenges. Over the past four years, we advanced significant strategic initiatives, including fiber-to-the-home and data center solutions in Optical Communications, delivering on our gasoline particulate filter content opportunity in Environmental Technologies, introducing Ceramic Shield with Apple in Specialty Materials and ramping our Gen 10.5 plants to extend our leadership in Display Technologies. In addition, we made major progress on our emerging innovations; we gained significant traction in our Automotive Glass Solutions business; and our pharmaceutical packaging portfolio played a central role in combatting the global pandemic and supported the delivery of more than 8 billion COVID-19 doses. These achievements have helped extend our leadership positions across our markets and pave the way for future growth.

Since 2020, the external environment has been characterized by the impact of the pandemic and its resulting effects including supply chain disruptions, depressed productivity, large swings in consumer spending and inflation. Our 2022 results are a prime example of our resilience in this complex operating environment. Building off a strong 2021, we outperformed our consumer-facing end markets, we captured growth in the solar market and we delivered record sales of $5 billion dollars in Optical Communications.

However, our profitability and cash flow have lagged sales growth as a number of pandemic-driven effects continue to ripple across the global economy. Our core priorities throughout this period were protecting our people and delivering for our customers, and as a result, we operated with elevated staffing and higher-than-normal inventory levels during this period. In addition, persistent inflation added to the cost of raw materials we purchased, the cost to produce and ship our products and the inventory we maintained.

In response, we took a series of actions to improve profitability and cash generation throughout 2022. In the fourth quarter of 2022, we took multiple additional actions, including raising prices across our businesses to more appropriately share inflationary costs with our customers; adjusting our productivity ratios closer to historical metrics without impacting our ability to supply and capture future growth; and normalizing inventory levels.

Overall, we will continue to focus on operating each of our businesses well and adjusting to meet the needs of the moment while simultaneously advancing growth initiatives and capabilities that will drive continued success as the global economy stabilizes. Our focused and cohesive portfolio provides strategic resilience that is evident in our results, even in the current environment. We remain confident in our ability to deliver durable multiyear growth with improved margins and cash generation.

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2022 Results

Net sales for the year ended December 31, 2022 were $14.2 billion, a net increase of $107 million, or 1%, when compared to the year ended December 31, 2021. This is driven by 15% growth in segment net sales in Optical Communications of $674 million and 34% growth in Hemlock and Emerging Growth Businesses of $419 million, which helped offset a $394 million decrease in Display Technologies. In addition, movements in foreign exchange rates adversely impacted Corning’s consolidated net sales by $616 million for the year ended December 31, 2022, when compared to the same period in 2021.

For the year ended December 31, 2022, we generated net income attributable to Corning Incorporated of $1,316 million, or $1.54 per diluted share, compared to net income attributable to Corning Incorporated of $1,906 million, or $1.28 per diluted share, for the year ended December 31, 2021. When compared to 2021, the $590 million decrease was primarily driven by a $238 million increase in severance, accelerated depreciation, asset write-offs and other related charges, a $50 million increase in litigation, regulatory and other legal matters and a $120 million adverse impact from foreign currency translation.

Diluted earnings per share for the year ended December 31, 2022 increased by $0.26 per diluted share, or 20%, when compared to the year ended December 31, 2021, primarily driven by the immediate repurchase and retirement of 35 million common shares which resulted in an $803 million one-time reduction to net income available to common shareholders in 2021, partially offset by the decrease in net income attributable to Corning Incorporated as described above.  Refer to Note 16 (Shareholders’ Equity) and Note 17 (Earnings per Common Share) in the accompanying notes to the consolidated financial statements for additional information.

2023 Corporate Outlook

For the first quarter 2023, we anticipate core sales in the range of $3.2 billion to $3.4 billion.

RESULTS OF OPERATIONS

The following table presents selected highlights from our operations (in millions):

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Net Sales

Net sales for the year ended December 31, 2022 increased by $107 million, or 1%, when compared to the same period in 2021. The increase was primarily driven by sales growth in Optical Communications of $674 million and Hemlock and Emerging Growth Businesses of $419 million, offset by the adverse impact of volume declines in Display Technologies resulting in a decrease in segment net sales of $394 million. In addition, movements in foreign exchange rates adversely impacted Corning’s consolidated net sales by $616 million for the year ended December 31, 2022, when compared to the same period in 2021. Refer to the “Segment Analysis” section of our MD&A below for a discussion of net sales by segment.

In 2022 and 2021, sales in international markets accounted for 65% and 68% of total net sales, respectively.

Cost of Sales / Gross Margin

The types of expenses included in cost of sales are: raw materials consumption, including direct and indirect materials; salaries, wages and benefits; depreciation and amortization; production utilities; production-related purchasing; warehousing (including receiving and inspection); repairs and maintenance; inter-location inventory transfer costs; production and warehousing facility property insurance; rent for production facilities; freight and logistics costs; and other production overhead.

Gross margin decreased by $557 million, or 11% and gross margin as a percentage of sales decreased by 4 percentage points when compared to 2021.  The decrease in gross margin was primarily driven by higher production, material and freight costs as well as incremental severance, accelerated depreciation, asset write-offs and other related charges of $257 million. In addition, movements in foreign exchange rates had an adverse impact of $422 million on Corning’s consolidated gross margin for the year ended December 31, 2022, when compared to the same period in 2021.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $71 million, or 4%, and were consistent as a percentage of sales when compared to 2021.

The types of expenses included in selling, general and administrative expenses are: salaries, wages and benefits; stock-based compensation expense; travel; sales commissions; professional fees; and depreciation and amortization, utilities and rent for administrative facilities.

Research, Development and Engineering Expenses

Research, development and engineering expenses increased by $52 million, or 5%, and were consistent as a percentage of sales when compared to 2021.

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Translated earnings contract gain, net

Included in translated earnings contract gain, net, is the impact of foreign currency contracts which economically hedge the translation exposure arising from movements in the Japanese yen, South Korean won, new Taiwan dollar, euro, Chinese yuan and British pound and its impact on net income.

The following table provides detailed information on the impact of translated earnings contracts gain, net for the years ended December 31, 2022 and 2021 (in millions):

Income Before Income Taxes

The translation impact of fluctuations in foreign currency exchange rates, including the impact of hedges realized in the current year, adversely impacted Corning’s income before income taxes by $142 million for the year ended December 31, 2022, when compared to the same period in 2021.

Provision for Income Taxes

For the year ended December 31, 2022, the effective tax rate differed from the U.S. statutory rate of 21% primarily due to the following:

For the year ended December 31, 2021, the effective tax rate differed from the U.S. statutory rate of 21% primarily due to the following:

The U.S. enacted the Inflation Reduction Act of 2022 (“IRA”) in August 2022, which, among other sections, creates a new book minimum tax of at least 15% of consolidated pre-tax income for corporations with average book income in excess of $1 billion. This provision of the IRA will first apply to the Company in 2024. We do not expect the IRA to have a material impact on our effective tax rate. In addition, we are currently evaluating the various credits available under IRA and its impact to Corning’s financial position and results of operations, including the effective tax rate.

Refer to Note 7 (Income Taxes) in the accompanying notes to the consolidated financial statements for further details regarding income tax matters.

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Net Income Attributable to Corning Incorporated

As a result of the items discussed above, net income attributable to Corning Incorporated and per share data were as follows (in millions, except per share amounts):

Comprehensive Income attributable to Corning Incorporated

The $810 million decrease in comprehensive income attributable to Corning Incorporated was primarily due to the $549 million decrease in net income attributable to Corning Incorporated and a $175 million increase in net losses on foreign currency translation adjustments, driven by the Japanese yen, Chinese yuan and South Korean won.

Refer to Note 16 (Shareholders’ Equity) in the accompanying notes to the consolidated financial statements for additional information.

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SEGMENT ANALYSIS

Financial results for the reportable segments and Hemlock and Emerging Growth Businesses are prepared on a basis consistent with the internal disaggregation of financial information to assist the Chief Operating Decision Maker (“CODM”) in making internal operating decisions, which is more fully discussed within Note 19 (Reportable Segments) in the accompanying notes to the consolidated financial statements and includes a reconciliation of our segment information to the corresponding amounts in our consolidated statements of income.

Segment net income (loss) may not be consistent with measures used by other companies.

The following table presents segment net sales by reportable segment and Hemlock and Emerging Growth Businesses (in millions):

Optical Communications

The increase in segment net sales was primarily driven by higher sales volumes of carrier and enterprise products for 5G, broadband and the cloud.

Display Technologies

The decrease in segment net sales was due to lower volumes, primarily attributable to decreased panel maker utilization, while price remained consistent with the prior year.

Specialty Materials

Segment net sales remained relatively flat compared to prior year. Demand for advanced optics products grew, including next generation semiconductor equipment materials, and demand for premium glasses remained strong, helping offset lower demand in the smartphone, tablet and notebook markets.

Environmental Technologies

Segment net sales remained flat compared to prior year, due to constrained production as automotive producers experienced prolonged component shortages for semiconductor chips, as well as negative impacts from COVID-related shutdowns in China.

Life Sciences

Segment net sales remained relatively flat compared to prior year, primarily due to lower demand for COVID-related products, offset by growth in pharmaceutical research and bioproduction products.

Hemlock and Emerging Growth Businesses

The increase was primarily driven by HSG, as demand for semiconductor and solar-grade polysilicon remain strong in addition to higher solar prices as compared to the prior year.  The increase is also attributable to year-over-year growth from Pharmaceutical Technologies and Auto Glass Solutions.

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The following table presents segment net income (loss) by reportable segment and Hemlock and Emerging Growth Businesses (in millions):

Optical Communications

The increase in segment net income was primarily driven by the increases in sales, outlined above, partially offset by higher inflationary costs and manufacturing costs.

Display Technologies

The decrease in segment net income was primarily driven by the lower glass volume, impacting sales, as outlined above.

Specialty Materials

The decrease in segment net income was primarily driven by the relatively flat level of sales, as outlined above, and impacted by continued development spending related to next-generation products.

Environmental Technologies

The increase in segment net income was primarily due to improved operational efficiencies.

Life Sciences

The decrease in segment net income was primarily driven by the relatively flat level of sales, as outlined above, and impacted by inflationary costs and higher manufacturing costs that were not completely offset by pricing actions.

Hemlock and Emerging Growth Businesses

The increase was primarily driven by HSG due to higher solar prices.

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CORE PERFORMANCE MEASURES

In managing the Company and assessing our financial performance, we adjust certain measures provided by our consolidated financial statements to exclude specific items to arrive at our core performance measures. These items include the impact of translating the Japanese yen-denominated debt, the impact of the translated earnings contracts, acquisition-related costs, certain discrete tax items and other tax-related adjustments, restructuring, impairment and other charges and credits, certain litigation, regulatory and other legal matters, pension mark-to-market adjustments and other items which do not reflect the ongoing operating results of the Company.

In addition, because a significant portion of our revenues and expenses are denominated in currencies other than the U.S. dollar, management believes it is important to understand the impact on sales and net income of translating these currencies into U.S. dollars. Therefore, management utilizes constant-currency reporting for Display Technologies, Specialty Materials, Environmental Technologies and Life Sciences segments to exclude the impact from the Japanese yen, South Korean won, Chinese yuan, new Taiwan dollar and the euro, as applicable to the segment. The most significant constant-currency adjustment relates to the Japanese yen exposure within the Display Technologies segment. We establish constant-currency rates based on internally derived management estimates, which are closely aligned with the currencies we have hedged. For details of the rates used, please see the footnotes to the “Reconciliation of Non-GAAP Measures” section.

We believe that the use of constant-currency reporting allows management to understand our results without the volatility of currency fluctuation, analyze underlying trends in the businesses and establish operational goals and forecasts. Further, we believe it reflects the underlying economics of the translated earnings contracts used to mitigate the impact of changes in currency exchange rates on our earnings and cash flows.

Core performance measures are not prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), but management believes that reporting core performance measures provides investors with greater transparency to the information used by our management team to make financial and operational decisions. We believe investors should consider these non-GAAP measures in evaluating our results as they are more indicative of our core operating performance and how management evaluates our operational results and trends. These measures are not, and should not be viewed as a substitute for, GAAP reporting measures. With respect to the outlook for future periods, it is not possible to provide reconciliations for these non-GAAP measures because management does not forecast the movement of foreign currencies against the U.S. dollar, or other items that do not reflect ongoing operations, nor does it forecast items that have not yet occurred or are out of management's control. As a result, management is unable to provide outlook information on a GAAP basis.

For a reconciliation of non-GAAP performance measures to their most directly comparable GAAP financial measure, please see “Reconciliation of Non-GAAP Measures”.

RESULTS OF OPERATIONS – CORE PERFORMANCE MEASURES

The following table presents selected highlights from our operations, excluding certain items, (in millions):

Core Net Sales

Core net sales are consistent with net sales by reportable segment and Hemlock and Emerging Growth Businesses. Segment and Hemlock and Emerging Growth Businesses net sales and variances are discussed in detail in the “Segment Analysis” section of our MD&A.

Core Net Income

For the year ended December 31, 2022, we generated core net income of $1.8 billion, or $2.09 per share, compared to core net income generated for the year ended December 31, 2021 of $1.8 billion, or $2.07 per share. The decrease in core net income of $17 million was driven by lower reportable segment net income of $132 million, as discussed in the “Segment Analysis” section of our MD&A, offset by an increase in $90 million in Hemlock and Emerging Growth Businesses, primarily driven by HSG.

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Core Earnings per Common Share

Core earnings per share increased for the year ended December 31, 2022 to $2.09 per share, as result of a decrease in the weighted-average common shares outstanding offset by lower core net income.

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

RECONCILIATION OF NON-GAAP MEASURES

We utilize certain financial measures and key performance indicators that are not calculated in accordance with GAAP to assess our financial and operating performance. A non-GAAP financial measure is defined as a numerical measure of a company’s financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the consolidated statements of income or statements of cash flows, or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure as calculated and presented in accordance with GAAP in the consolidated statements of income or statements of cash flows.

Core net sales, core net income and the related per share numbers are non-GAAP financial measures utilized by our management to analyze financial performance without the impact of items that are driven by general economic conditions and events that do not reflect the underlying fundamentals and trends in our operations.

See “Items Excluded from GAAP Measures” for the descriptions of the footnoted reconciling items.

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The following tables reconcile our non-GAAP financial measures to their most directly comparable GAAP financial measure (amounts in millions except percentages and per share amounts):

See “Items Excluded from GAAP Measures” for the descriptions of the footnoted reconciling items.

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Items Excluded from GAAP Measures

Items we exclude from GAAP measures to arrive at core performance measures are as follows:

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LIQUIDITY AND CAPITAL RESOURCES

Our financial condition and liquidity are strong. We are not aware of any known trends, demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in a material decrease in our liquidity. In addition, other than items discussed, there are no known material trends, favorable or unfavorable, in our capital resources and no expected material changes in the mix of such resources.

Our major source of funding for 2023 and beyond will be our operating cash flow, our existing balances of cash and cash equivalents and proceeds from any issuances of debt. We believe we have sufficient liquidity to fund operations, acquisitions, capital expenditures, scheduled debt repayments, dividend payments and share repurchase programs through 2023. We will continue to generate cash from operations and maintain access to our revolving credit facilities and commercial paper programs as discussed in more detail below.

Key Balance Sheet Data

We fund our working capital with cash from operations and short-term borrowings, including commercial paper, when necessary. In addition, we receive upfront cash from customers relating to long-term supply agreements, as well as cash incentives from government entities generally for capital expansion and related expenses.

The following table presents balance sheet and working capital measures (in millions):

We perform comprehensive reviews of our significant customers and their creditworthiness by analyzing their financial strength at least annually or more frequently for customers where we have identified a measure of increased risk. We closely monitor payments and developments to identify potential customer credit issues. We are not aware of any customer credit issues that could have a material impact on our liquidity.

We participate in accounts receivable management programs, including factoring arrangements to sell certain accounts receivable to third-party financial institutions or accelerate collections through our customer's supply chain financing arrangements. Sales of accounts receivable are reflected as a reduction of accounts receivable in the consolidated balance sheets and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. By utilizing these types of programs, we have accelerated the collection of $1.6 billion and $0.6 billion of accounts receivable cumulatively throughout the years ended December 31, 2022 and 2021, respectively. Of these amounts, we believe $1.2 billion and $0.4 billion would have been collected during the normal course of business within 2022 and 2021, respectively.

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Cash Flows

The following table presents a summary of cash flow data (in millions):

Net cash provided by operating activities decreased by $797 million for the year ended December 31, 2022, when compared to the same period in the prior year, primarily driven by the decrease in net income.

Net cash used in investing activities decreased by $64 million for the year ended December 31, 2022, when compared to the same period last year, primarily driven by an increase in realized gains on translated earnings contracts of $233 million.

Net cash used in financing activities decreased by $803 million for the year ended December 31, 2022, when compared to the same period last year, primarily driven by lower repayments of short-term borrowings and long-term debt of $773 million.

Sources of Liquidity

We generate strong ongoing cash flows from operations, which is our principal source of liquidity. During the years ended December 31, 2022 and 2021, cash flows provided by operating activities were $2.6 billion and $3.4 billion, respectively.

As of December 31, 2022, our cash and cash equivalents and available credit capacity included (in millions):

Cash and Cash Equivalents

We ended 2022 with $1.7 billion of cash and cash equivalents. Our cash and cash equivalents are held in various locations throughout the world and are generally unrestricted. We utilize a variety of strategies to ensure that our worldwide cash is available in the locations in which it is needed. As of December 31, 2022, approximately 56% of the consolidated cash and cash equivalents were held outside the U.S.

During the year ended December 31, 2022, we distributed approximately $534 million from foreign subsidiaries to their respective U.S. parent companies. As of December 31, 2022, Corning has approximately $1.3 billion of indefinitely reinvested foreign earnings. If we distribute our foreign cash balances to the U.S. or to other foreign subsidiaries, we could be required to accrue and pay withholding taxes. We do not foresee a need to repatriate any earnings for which we asserted permanent reinvestment. However, to help fund cash needs of the U.S. or other international subsidiaries as they arise, we repatriate available cash from certain foreign subsidiaries whose earnings are not permanently reinvested.

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Debt Facilities and Other Sources of Liquidity

We have a commercial paper program pursuant to which we may issue short-term, unsecured commercial paper notes up to a maximum aggregate principal amount outstanding at any one time of $1.5 billion. Under this program, we may issue the paper from time to time and will use the proceeds for general corporate purposes.  As of December 31, 2022, we did not have outstanding commercial paper.

Our $1.5 billion Revolving Credit Agreement is available to support obligations under the commercial paper program and for general corporate purposes, if needed. During 2022, we amended and restated our existing Revolving Credit Agreement, primarily to extend the term to 2027.  Additionally, we amended and restated our 25 billion Japanese yen liquidity facility, equivalent to approximately $191 million, primarily to extend the term to 2025.  As of December 31, 2022 and 2021, there were no outstanding amounts under either of these facilities.

Our Revolving Credit Agreement includes affirmative and negative covenants with which we must comply, including a leverage (debt to capital ratio) financial covenant. The required leverage ratio is a maximum of 60%. As of December 31, 2022, our leverage using this measure was approximately 36%. As of December 31, 2022, we were in compliance.

Our debt instruments contain customary event of default provisions, which allow the lenders the option of accelerating all obligations upon the occurrence of certain events. In addition, some of our debt instruments contain a cross default provision, whereby an uncured default exceeding a specified amount on one debt obligation, also would be considered a default under the terms of another debt instrument. As of December 31, 2022, we were in compliance with all such provisions.

We have access to certain unsecured variable rate loan facilities, with an aggregate capacity of 4,645 million Chinese yuan, equivalent to approximately $673 million, whose proceeds are used for capital investment and general corporate purposes.  As of December 31, 2022 and 2021, these facilities had variable rates ranging from 3.3% to 4.3% and maturities ranging from 2023 to 2032.  As of December 31, 2022 and 2021, borrowings totaled $352 million and $277 million, respectively.

As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the SEC on December 4, 2020. Under this shelf registration we may offer, from time to time, debt securities, common stock, preferred stock, depositary shares and warrants. We plan to file a new shelf registration statement in the fourth quarter of 2023, prior to the expiration of the shelf registration statement currently in effect.

Customer Deposits, Deferred Revenue and Government Incentives

We receive cash deposits or consideration, generally non-refundable, from customers under long-term supply agreements. In addition, we receive cash incentives from government entities primarily to offset capital expenditures or related expenses. For the year ended December 31, 2022, the amount received from these types of arrangements was $420 million.

Refer to Note 1 (Summary of Significant Accounting Policies) and Note 4 (Revenue) in the accompanying notes to the consolidated financial statements for additional information.

Uses of Cash

Fixed Rate Cumulative Convertible Preferred Stock, Series A

We had 2,300 outstanding shares of Fixed Rate Cumulative Convertible Preferred Stock, Series A (the “Preferred Stock”) as of December 31, 2020. On January 16, 2021, the Preferred Stock became convertible into 115 million common shares. On April 5, 2021 we executed the Share Repurchase Agreement (“SRA”) with Samsung Display Co., Ltd. (“SDC”) and the Preferred Stock was fully converted as of April 8, 2021. Immediately following the conversion, we repurchased and retired 35 million of the common shares held by SDC for an aggregate purchase price of approximately $1.5 billion, of which approximately $507 million was paid on both April 8, 2022 and 2021. The remaining payment of approximately $507 million will be paid on April 8, 2023.

Refer to Note 16 (Shareholders’ Equity) in the accompanying notes to the consolidated financial statements for additional information.

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Stock Repurchases

In 2019, the Board authorized the repurchase of up to $5.0 billion of additional common stock upon the completion of the 2018 repurchase plan (“2019 Authorization”).

In addition to the common shares repurchased under the SRA, as discussed above, we repurchased 6.0 million and 7.3 million shares of common stock under our 2019 Authorization for approximately $221 million and $274 million, respectively, during the years ended December 31, 2022 and 2021, respectively.

As of December 31, 2022, approximately $3.3 billion remains available under our 2019 Authorization, which does not have an expiration date and may be amended or terminated by the Board of Directors at any time without prior notice.

Common Stock Dividends

During the years ended December 31, 2022, 2021 and 2020, total dividends paid to common shareholders were $932 million, $871 million and $787 million, respectively. The Board’s decision to declare and pay future dividends will depend on our income and liquidity position, among other factors. We expect to declare quarterly dividends and fund payments with cash from operations.

On February 8, 2023, our Board of Directors declared a quarterly dividend of $0.28 per share of common stock, beginning with the dividend paid in the first quarter of 2023. The dividend will be payable on March 30, 2023.

Capital Expenditures

Capital expenditures were $1.6 billion, $1.6 billion and $1.4 billion during the years ended December 31, 2022, 2021 and 2020, respectively. We continue to invest in capacity expansions and new product lines across our businesses. We expect our 2023 capital expenditures to be consistent with 2022.

Current Maturities of Short and Long-Term Debt

As of December 31, 2022, we had $224 million of short-term borrowings that mature in less than one year. The maturity schedule of our existing long-term debt does not require significant cash outflows, with approximately $1.1 billion due over the next five years.

Defined Benefit Pension Plans

Our global pension plans, including our unfunded and non-qualified plans, were 82% funded as of December 31, 2022. Our largest single pension plan is our U.S. qualified plan, which accounted for 77% of our consolidated defined benefit pension plans’ projected benefit obligation, was 93% funded as of December 31, 2022.

The funded status of our pension plans is dependent upon multiple factors including actuarial assumptions, interest rates at year-end, prior investment returns and contributions made to the plans. In 2022, Corning made no voluntary contributions to our domestic defined benefit pension plan and cash contributions to our international pension plans were not material. During 2023, the Company anticipates making cash contributions of $49 million to the international pension plans.

Refer to Note 12 (Employee Retirement Plans) in the accompanying notes to the consolidated financial statements for additional information.

Commitments, Contingencies and Guarantees

A summary of our contractual obligations and other commercial commitments as of December 31, 2022 are detailed within Note 13 (Commitments, Contingencies and Guarantees) in the accompanying notes to the consolidated financial statements.

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Translated Earnings Contracts

We have entered into option and average rate forward contracts to economically hedge our translation exposure resulting from movements in the Japanese yen and its impact on our net income. For the years ended December 31, 2022 and 2021, we recorded a pre-tax net gain of $415 million and $363 million, respectively, related to changes in the fair value of these instruments.  Included in these amounts are realized gains of $360 million and $27 million, respectively.  These instruments had a gross notional value outstanding as of December 31, 2022 and 2021 of $4.7 billion and $6.5 billion, respectively.

We have entered into average rate forward contracts to hedge our translation exposure resulting from movements in the South Korean won and its impact on our net income.  For the years ended December 31, 2022 and 2021, we recorded a pre-tax net loss of $76 million and $33 million, respectively, related to changes in the fair value of these instruments.  Included in these amounts are realized losses of $59 million and gains of $11 million, respectively.  These instruments had a gross notional value outstanding as of December 31, 2022 and 2021 of $2.1 billion and $1.2 billion, respectively.

Off Balance Sheet Arrangements

Off balance sheet arrangements are transactions, agreements, or other contractual arrangements with an unconsolidated entity for which we have an obligation to the entity that is not recorded in our consolidated financial statements.

Our off balance sheet arrangements include guarantee and indemnity contracts. At the time a guarantee is issued, we are required to recognize a liability for the fair value or market value of the obligation it assumes. In the normal course of our business, we do not routinely provide significant third-party guarantees. Generally, third-party guarantees provided by us are limited to certain financial guarantees, including stand-by letters of credit and performance bonds. These guarantees have various terms and none of these guarantees are individually significant. We believe a significant majority of these guarantees and contingent liabilities will expire without being funded.

Refer to Note 13 (Commitments, Contingencies and Guarantees) in the accompanying notes to the consolidated financial statements for additional information.

ENVIRONMENT

Refer to Item 3. Legal Proceedings or Note 13 (Commitments, Contingencies and Guarantees) in the accompanying notes to the consolidated financial statements for information.

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CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. This requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. The following estimates are considered by management to be the most critical to the understanding of the consolidated financial statements as they require significant judgments that could materially impact our results of operations, financial position and cash flows.

Valuation of the Previously Held Equity Interest from the Consolidation of HSG

We account for the change in controlling interest using the acquisition method of accounting, which requires us to estimate the fair values of the assets and liabilities recorded.  Assets would include intangible assets such as developed technologies and know-how, tradenames and customer-related intangibles, fixed assets and inventories. Liabilities would include contract liabilities such as customer deposits and deferred revenue, debt and other liabilities. These assets and liabilities recorded are assessed at the time of the change in control and require judgment in ascertaining the fair values. Any resulting gain or loss would be recognized in earnings. Additional information related to the fair value of the assets and liabilities recorded during the measurement period, not to exceed one year, may result in changes to the recorded values of the assets and liabilities, resulting in an offsetting adjustment to the goodwill associated with the business combination. Changes in assumptions and estimates after completing the allocation of the purchase price to the assets and liabilities acquired, as well as differences in actual and estimated results, could result in impacts our financial results.

In September 2020, HSG redeemed DuPont’s entire ownership interest in HSG for $250 million (the “Redemption”). Upon completion of the Redemption, we recognized a pre-tax gain of $498 million on its previously held equity investment in HSG as a result of the consolidation resulting from the Redemption. The gain was calculated based on the difference between fair value and carrying value of the equity method investment immediately preceding the Redemption. Independent appraisals assisted management in the determination of the fair value of certain assets and liabilities.  Such appraisals are based on acceptable valuation models as well as inputs and assumptions provided by management. The fair value of our equity interest in HSG was estimated by applying the income approach, which was based on significant assumptions such as projected revenue and discount rate. We used a discount rate of 16.5% and terminal growth rate of zero.

Impairment of assets held for use

We are required to assess the recoverability of the carrying value of long-lived assets when an indicator of impairment has been identified. We perform this review each quarter and exercises judgment in assessing whether impairment indicators are present.

Manufacturing equipment includes certain components of production equipment that are constructed of precious metals, primarily platinum and rhodium. These metals are not depreciated because they have very low physical losses and are repeatedly reclaimed and reused in our manufacturing process over a very long useful life. The physical loss of precious metals in the manufacturing and reclamation process is treated as depletion and these losses are accounted for as a period expense based on actual units lost. Precious metals are reviewed for impairment as part of our assessment of long-lived assets. This review considers all our precious metals that are either in place in the production process; in reclamation, fabrication, or refinement in anticipation of re-use; or awaiting use to support increased capacity. Precious metals are only acquired to support our operations and are not held for trading or other non-manufacturing related purposes.

Examples of events or circumstances that may be indicative of impairments include, but are not limited to:

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For purposes of recognition and measurement of an impairment loss, a long-lived asset or assets is grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We must exercise judgment in assessing the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Our assessment is performed at the operating segment level. For most of our operating segments, we concluded that locations or businesses within these segments which share production along the supply chain must be combined to appropriately identify cash flows that are largely independent of the cash flows of other assets and liabilities.

For long-lived assets, when impairment indicators are present, we compare estimated undiscounted future cash flows, including the eventual disposition of the asset group at market value, to the assets’ carrying value to determine if the asset group is recoverable. This assessment requires the exercise of judgment in assessing the future use of and projected value to be derived from the assets to be held and used. Assessments also consider changes in asset utilization, including the temporary idling of capacity and the expected timing for placing this capacity back into production.

For an asset group that fails the test of recoverability, the estimated fair value of long-lived assets is determined using an “income approach” that starts with the forecast of all the expected future net cash flows, including the eventual disposition at market value of long-lived assets, and considers the fair market value of all precious metals, if applicable. If there is an impairment, a loss is recorded to reflect the difference between the assets’ fair value and carrying value. Our estimates are based upon our historical experience, our commercial relationships and available external information about future trends. We believe fair value assessments are most sensitive to market growth and the corresponding impact on volume and selling prices and that these are also more subjective than manufacturing cost and other assumptions. We believe our current assumptions and estimates are reasonable and appropriate.

For the year ended December 31, 2020, we incurred a long-lived asset impairment and disposal loss for an asset group related to the reassessment and reprioritization of research and development programs relating to a business within Hemlock and Emerging Growth Businesses. Given the economic environment and market opportunities, we discontinued our investment in these research and development programs. The impairment analysis and disposition of certain assets resulted in a total pre-tax charge of $217 million, which was substantially all the carrying value, inclusive of an insignificant amount of goodwill. The fair value of the asset group for the impairment analysis was measured using unobservable (Level 3) inputs.

Refer to Note 2 (Restructuring, Impairment and Other Charges and Credits) in the accompanying notes to the consolidated financial statements for additional information.

Income taxes

We are required to exercise judgment about our future results in assessing the realizability of our deferred tax assets. Inherent in this estimation process is the requirement for us to estimate future book and taxable income and possible tax planning strategies. These estimates require us to exercise judgment about our future results, the prudence and feasibility of possible tax planning strategies and the economic environments in which we do business. It is possible that actual results will differ from assumptions and require adjustments to allowances.

We account for uncertain tax positions in accordance with ASC Topic 740, Income Taxes, which requires that companies only record tax benefits for technical positions that are believed to have a greater than 50% likelihood of being sustained on their technical merits and then only to the extent of the amount of tax benefit that is greater than 50% likely of being realized upon settlement. In estimating these amounts, we must exercise judgment around factors such as the weighting of the tax law in our favor, the willingness of a tax authority to aggressively pursue an opposing position, or alternatively, consider a negotiated compromise, and our willingness to dispute a tax authorities’ assertion to the level of appeal we believe is required to sustain our position. As a result, it is possible that our estimate of the benefits we will realize for uncertain tax positions may change when we become aware of new information affecting these judgments and estimates.

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Fair value measures

As required, we use two kinds of inputs 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 our own market assumptions. Once inputs have been characterized, we prioritize the inputs used to measure fair value into one of three broad levels. Characterization of fair value inputs is required for those accounting pronouncements that prescribe or permit fair value measurement. In addition, observable market data must be used when available and the highest-and-best-use measure should be applied to non-financial assets. Our major categories of financial assets and liabilities required to be measured at fair value are short-term and long-term investments, certain pension asset investments and derivatives. These categories use observable inputs only and are measured using a market approach based on quoted prices in markets considered active or in markets in which there are few transactions.

Derivative assets and liabilities may include interest rate swaps and forward exchange contracts that are measured using observable quoted prices for similar assets and liabilities. Included in our forward exchange contracts are foreign currency hedges that hedge our cash flow and translation exposure resulting from movements in the Japanese yen, South Korean won, euro, new Taiwan dollar, Chinese yuan and British pound. Changes in the fair value of contracts designated as cash flow hedges are recorded in accumulated other comprehensive loss in shareholders’ equity and reclassified into income when the underlying hedged item impacts earnings.  For contracts that are not designated as accounting hedges, changes in fair value are recorded in earnings within translated earnings contract gain (loss), net in the consolidated statements of income.  In arriving at the fair value of our derivative assets and liabilities, we have considered the appropriate valuation and risk criteria, including such factors as credit risk of the relevant party to the transaction.  Amounts related to credit risk are not material.

Refer to Note 15 (Fair Value Measurements) in the accompanying notes to the consolidated financial statements for additional information.

Probability of litigation outcomes

We are required to make judgments about future events that are inherently uncertain. In making determinations of likely outcomes of litigation matters, we consider the evaluation of legal counsel knowledgeable about each matter, case law and other case-specific issues. Refer to Item 3. Legal Proceedings or Note 13 (Commitments, Contingencies and Guarantees) in the accompanying notes to the consolidated financial statements for a discussion of Corning’s material litigation matters.

Pension and other postretirement employee benefits (“OPEB”)

We offer employee retirement plans consisting of defined benefit pension plans covering certain domestic and international employees and postretirement plans that provide health care and life insurance benefits for eligible retirees and dependents. The costs and obligations related to these benefits reflect our assumptions related to general economic conditions (particularly interest rates), expected return on plan assets, rate of compensation increase for employees and health care trend rates. The cost of providing plan benefits depends on demographic assumptions including retirements, mortality, turnover and plan participation. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our employee pension and other postretirement obligations, and current and future expense.

Costs for our defined benefit pension plans consist of two elements: 1) on-going costs recognized quarterly, which are comprised of service and interest costs, expected return on plan assets and amortization of prior service costs; and 2) mark-to-market gains and losses outside of the corridor, where the corridor is equal to 10% of the greater of the benefit obligation or the market-related value of plan assets at the beginning of the year, which are recognized annually in the fourth quarter of each year. These gains and losses result from changes in actuarial assumptions and the differences between actual and expected return on plan assets. Any interim remeasurement, such as curtailments, settlements, significant plan changes, or adjustments to the annual valuation, is recognized as a mark-to-market adjustment in the quarter in which such an event occurs.

Costs for OPEB plans consist of on-going costs recognized quarterly, and are comprised of service and interest costs, amortization of prior service costs and amortization of actuarial gains and losses. We recognize the actuarial gains and losses resulting from changes in actuarial assumptions as a component of accumulated other comprehensive loss in shareholders’ equity on an annual basis and amortize them into our operating results over the average remaining service period of employees expected to receive benefits under the plans, to the extent such gains and losses are outside of the corridor.

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The following table presents our actual and expected (loss) return on assets, as well as the corresponding percentages (in millions, except percentages):

As of December 31, 2022, the Projected Benefit Obligation (“PBO”) for U.S. pension plans was $3.2 billion.

The following table presents the estimated increases (decreases) in future ongoing pension expense and projected benefit obligation assuming a 25 basis point change in the key assumptions for our U.S. pension plans (in millions):

The above sensitivities reflect the impact of changing one assumption at a time. Note that economic factors and conditions often affect multiple assumptions simultaneously and the effects of changes in key assumptions are not necessarily linear. These changes in assumptions would have no effect on our funding requirements.

The following table presents the estimated increases (decreases) in future ongoing pension expense and the Accumulated Postretirement Benefit obligation (“APBO”) assuming a 25 basis point change in the key assumptions for our U.S. OPEB plans (in millions):

The above sensitivities reflect the impact of changing one assumption at a time. Note that economic factors and conditions often affect multiple assumptions simultaneously and the effects of changes in key assumptions are not necessarily linear.

NEW ACCOUNTING STANDARDS

Refer to Note 1 (Summary of Significant Accounting Policies) in the accompanying notes to the consolidated financial statements.

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FORWARD-LOOKING STATEMENTS

The statements in this Annual Report on Form 10-K, in reports subsequently filed by Corning with the Securities and Exchange Commission (“SEC”) on Form 10-Q and Form 8-K and related comments by management that are not historical facts or information and contain words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “seek,” “see,” “would,” and “target” and similar expressions are forward-looking statements. Such statements relate to future events that by their nature address matters that are, to different degrees, uncertain. These forward-looking statements relate to, among other things, the Company’s future operating performance, the Company’s share of new and existing markets, the Company’s revenue and earnings growth rates, the Company’s ability to innovate and commercialize new products, the Company’s expected capital expenditure and the Company’s implementation of cost-reduction initiatives and measures to improve pricing, including the optimization of the Company’s manufacturing capacity.

Although the Company believes that these forward-looking statements are based upon reasonable assumptions regarding, among other things, current estimates and forecasts, general economic conditions, its knowledge of its business and key performance indicators that impact the Company, actual results could differ materially.  Some of the risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements include, but are not limited to:

While the Company continually reviews trends and uncertainties affecting the Company’s results of operations and financial condition, the Company does not assume any obligation to update or supplement any particular forward-looking statements contained in this document, unless required by law.

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