Operating Segments

9 Months Ended

Sep. 30, 2011

Operating Segments

Operating Segments

19.      Operating Segments

Our reportable operating segments are as follows:

·   Display Technologies – manufactures liquid crystal display (LCD) glass for flat panel displays.

·   Telecommunications – manufactures optical fiber and cable, and hardware and equipment components for the telecommunications industry.

·   Environmental Technologies – manufactures ceramic substrates and filters for automotive and diesel applications.  This reportable operating segment is an aggregation of our Automotive and Diesel operating segments as these two segments share similar economic characteristics, products, customer types, production processes and distribution methods.

·   Specialty Materials – manufactures products that provide more than 150 material formulations for glass, glass ceramics and fluoride crystals to meet demand for unique customer needs.

·   Life Sciences – manufactures glass and plastic consumables for scientific applications.

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

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

Operating Segments (in millions)

	Display Technologies		Telecom- munications		Environmental Technologies		Specialty Materials		Life Sciences		All Other		Total
Three months ended September 30, 2011
Net sales	$	815	$	560	$	247	$	299	$	153	$	1	$	2,075
Depreciation (1)	$	131	$	31	$	27	$	41	$	8	$	3	$	241
Amortization of purchased intangibles			$	2					$	1			$	3
Research, development and engineering expenses (2)	$	21	$	29	$	27	$	35	$	3	$	22	$	137
Equity in earnings of affiliated companies	$	222					$	5			$	4	$	231
Income tax (provision) benefit	$	(118)	$	(30)	$	(15)	$	(16)	$	(10)	$	9	$	(180)
Net income (loss) (3)	$	593	$	82	$	32	$	38	$	21	$	(17)	$	749
Three months ended September 30, 2010
Net sales	$	645	$	464	$	208	$	159	$	125	$	1	$	1,602
Depreciation (1)	$	129	$	27	$	26	$	20	$	8	$	3	$	213
Amortization of purchased intangibles									$	2			$	2
Research, development and engineering expenses (2)	$	22	$	27	$	24	$	25	$	5	$	24	$	127
Restructuring, impairment and other credits			$	(1)									$	(1)
Equity in earnings of affiliated companies	$	386			$	1					$	16	$	403
Income tax (provision) benefit	$	(108)	$	(20)	$	(5)	$	2	$	(7)	$	10	$	(128)
Net income (loss) (3)	$	648	$	41	$	11	$	(5)	$	13	$	(12)	$	696
Nine months ended September 30, 2011
Net sales	$	2,365	$	1,582	$	764	$	836	$	452	$	4	$	6,003
Depreciation (1)	$	378	$	91	$	79	$	120	$	25	$	8	$	701
Amortization of purchased intangibles			$	5					$	5			$	10
Research, development and engineering expenses (2)	$	73	$	90	$	73	$	100	$	12	$	68	$	416
Equity in earnings of affiliated companies	$	835	$	4	$	1	$	13			$	13	$	866
Income tax (provision) benefit	$	(375)	$	(71)	$	(44)	$	(28)	$	(24)	$	28	$	(514)
Net income (loss) (3)	$	1,857	$	169	$	93	$	69	$	51	$	(52)	$	2,187
Nine months ended September 30, 2010
Net sales	$	2,261	$	1,269	$	584	$	381	$	368	$	4	$	4,867
Depreciation (1)	$	386	$	89	$	77	$	43	$	24	$	9	$	628
Amortization of purchased intangibles			$	1					$	5			$	6
Research, development and engineering expenses (2)	$	66	$	84	$	70	$	61	$	13	$	80	$	374
Restructuring, impairment and other credits				(1)			$	(2)					$	(3)
Equity in earnings of affiliated companies	$	1,083	$	1	$	5					$	32	$	1,121
Income tax (provision) benefit	$	(391)	$	(38)	$	(12)	$	14	$	(24)	$	34	$	(417)
Net income (loss) (3)	$	2,107	$	79	$	27	$	(29)	$	48	$	(46)	$	2,186

(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.  In the three and nine months ended September 30, 2011, the Telecommunications segment included a credit of $22 million from the reduction to a contingent liability associated with an acquisition recorded in the first quarter of 2011.

A reconciliation of reportable segment net income to consolidated net income follows (in millions):

	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Net income of reportable segments	$	766	$	708	$	2,239	$	2,232
Non-reportable segments		(17)		(12)		(52)		(46)
Unallocated amounts:
Net financing costs (1)		(47)		(47)		(146)		(137)
Stock-based compensation expense		(21)		(22)		(66)		(77)
Exploratory research		(23)		(15)		(59)		(44)
Corporate contributions		(6)		(7)		(38)		(26)
Equity in earnings of affiliated companies, net of impairments (2)		93		101		284		326
Asbestos settlement (3)		(5)		(6)		(15)		41
Other corporate items (4)		71		85		167		245
Net income	$	811	$	785	$	2,314	$	2,514

(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.  In the nine months ended September 30, 2010 equity earnings of affiliated companies, net of impairments, includes a credit of $21 million for our share of U.S. advanced energy manufacturing tax credits at Dow Corning Corporation.

(3) In the three and nine months ended September 30, 2011, Corning recorded a charge of $5 million and $15 million, respectively, to adjust the asbestos liability for the change in value of the components of the Amended PCC Plan.  In the three and nine months ended September 30, 2010, Corning recorded a charge of $6 million and a net credit of $41 million, respectively, primarily reflecting the change in the terms of the proposed asbestos settlement.

(4) In the three months ended September 30, 2011, Corning recorded a $41 million tax benefit from the filing of an amended 2006 U.S. Federal Tax return to claim foreign tax credits.  In the three months ended September 30, 2010, Corning recorded a loss of $30 million ($19 million after-tax) from the repurchase of $126 million principal amount of our 6.2% senior unsecured notes due March 15, 2016 and $100 million principal amount of our 5.9% senior unsecured notes due March 15, 2014.  In the nine months ended September 30, 2010, other corporate items included a tax charge of $56 million from the reversal of the deferred tax asset associated with a Medicare subsidy.

In the Display Technologies operating segment, assets increased from $9.1 billion at December 31, 2010 to $10.3 billion at September 30, 2011.  The increase is due primarily to an increase in investments due to earnings from Samsung Corning Precision and capital expenditures of approximately $800 million, offset somewhat by the reallocation of certain assets to the Specialty Materials segment.  In the Telecommunications operating segment, assets increased from $1.0 billion at December 31, 2010 to $1.2 billion at September 30, 2011.  The increase is due primarily to increases of certain working capital balances, the result of a small acquisition completed in the first quarter of 2011 and capital expenditures of approximately $100 million.  In the Specialty Materials operating segment, assets increased from $900 million at December 31, 2010 to $1.6 billion at September 30, 2011.  The increase is due primarily to the reallocation of certain assets from the Display Technologies operating segment and capital expenditures of approximately $300 million.

The sales of each of our reportable operating segments are concentrated across a relatively small number of customers.  In the third quarter of 2011, 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, four customers accounted for 76% of total segment sales.

·   In the Telecommunications segment, one customer accounted for 12% of total segment sales.

·   In the Environmental Technologies segment, three customers accounted for 89% of total segment sales.

·   In the Specialty Materials segment, two customers accounted for 47% of total segment sales.

·   In the Life Sciences segment, two customers accounted for 51% of total segment sales.

In the nine months ended September 2011, 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, three customers accounted for 67% of total segment sales.

·   In the Telecommunications segment, one customer accounted for 12% of total segment sales.

·   In the Environmental Technologies segment, three customers accounted for 85% of total segment sales.

·   In the Specialty Materials segment, two customers accounted for 40% of total segment sales.

·   In the Life Sciences segment, two customers accounted for 43% 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 use 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.