Re:
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Form 10-K for the Year ended December 31, 2012
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Filed February 13, 2013
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File No. 1-3247
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1.
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Where a comment below requests additional disclosures or other revisions to be made, these revisions should be included in your future filings, including your interim filings, if applicable.
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2.
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Please provide a more detailed analysis of the factors that impact your operations, including a complete discussion of known or anticipated trends that may continue to have an impact on sales, profit margins, selling, general and administrative expenses, etc. Your discussion and analysis should provide investors with sufficient information to understand the historical trends and the expectations for the future as seen through the eyes of management. We noted the following issues with regard to your discussion:
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o
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Because the Display Technologies segment consists of one product line, giving precise information on volume and price movements allows customers and competitors to derive conclusions on our pricing, capacity, and cost structure, which puts us in a competitively disadvantageous position.
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The Display Technologies segment has a limited number of competitors, all of which are located in Asia. Because these competitors are not subject to the same level of public disclosure as Corning, we feel disclosing precise amounts or percentages harms us competitively.
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We believe providing a narrow range in percentage terms on volume and price movements gives our investors the information necessary to understand the drivers of our Display segment operating results, while protecting our position in the market place.
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On page 19 you disclose that sales in the Specialty Materials segment increased by double-digits due to the strong demand for Corning Gorilla Glass. On page 24 you disclose that within your Display Technologies segment retail demand for larger- sized LCD televisions drove a double-digit increase in volume. Describing your growth as “double digit” is ambiguous and could imply growth between 10% and 99%. Please quantify percentages, rather than describing amounts as “double digit.”
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Revised disclosure:
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o
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Sales in the Specialty Materials segment increased by 25% due to the strong demand for Corning® Gorilla® Glass that is used as cover glass in portable handheld display devices, tablets and notebook computers.
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Retail demand for larger-sized LCD televisions drove an increase in volume in the low-twenties in percentage terms in our wholly-owned business in 2012, when compared to the prior year, and slightly offset the price declines described above.
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On page 24 you disclose that the Display Technologies segment’s decrease in net sales in 2012 reflects significant price declines which occurred in the fourth quarter of 2011 and the first quarter of 2012. You further indicate the increase in volume resulting from retail demand for your larger-sized LCD televisions “slightly offset” the price declines. Please expand your disclosures to quantitatively describe the dollar impact that price and volume variances had on Display Technologies’ net sales.
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Revised disclosure:
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The decrease in net sales in 2012, when compared to 2011, reflects price declines in the mid-twenties in percentage terms which occurred in the fourth quarter of 2011 and the first quarter of 2012 for the six month period, driven by customer and competitive pressures associated with share shifts at several major customers in a period of excess glass supply. Sequential price declines became much more moderate in the second and third quarters of 2012, reflecting a better matching of supply and demand for glass, and more stable levels of inventory in the LCD supply chain. In the third and fourth quarter of 2012, Corning entered into new supply agreements with key customers. These agreements were intended to stabilize Corning’s share at each of the customers and maintain a fixed relationship between Corning’s pricing and competitive pricing for such customer. Fourth quarter sequential prices declined in the mid-single digit percentage, slightly higher than the prior two quarters, due to some initial adjustments to line up Corning’s prior pricing with the requirements of these new agreements. Retail demand for larger-sized LCD televisions drove an increase in volume in the low-twenties in percentage terms in our wholly-owned business in 2012, when compared to the prior year, and slightly offset the price declines described above. Movements in foreign exchange rates did not significantly impact net sales of this segment.
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On page 25 you disclose that net sales for the Telecommunications segment were up slightly for 2012 as compared for 2011 and you disclose the contributing factors. Please quantify the impact of each contributing factor that you identify.
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Revised disclosure:
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Net sales for the segment were up slightly when compared to 2011, driven by increased demand for optical fiber and cable in China in the amount of $82 million, an increase in sales of $42 million for fiber-to-the-premises products in Australia, and an increase in sales of wireless products of $26 million. This growth was offset somewhat by a decline of $28 million for legacy copper products. The impact of foreign exchange rate movements on net sales of this segment was not significant (approximately 1%).
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On page 26 you disclose that net sales of the Environmental Technologies segment declined, in part, due to the negative impact of foreign exchange rate movements. Please quantify the impact that foreign exchange rates had on Environmental Technologies’ net sales and results of operations.
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Revised disclosure:
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Net sales of this segment decreased in 2012 when compared to 2011, due to a decline in net sales of our diesel products. The impact of movements in foreign exchange rates on net sales of this segment was not significant (approximately 3%).
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As requested by the Staff, and per Section 501.04 of the Financial Reporting Codification and SEC Release 33-8350, in future filings we will include detailed analysis of the factors that impact our operations, including a complete discussion of known or anticipated trends that may continue to have an impact on sales, profit margins, selling, general and administrative expenses, etc., which will provide investors with sufficient information to understand the historical trends and expectations for the future as seen through the eyes of management.
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3.
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You indicate that a net positive change in working capital effected operating cash flow. Please expand your disclosures to discuss the material underlying components of working capital and the reasons for material changes in these components. In addition, please explain how the decrease in your accounts payable and other current liabilities from 2011 to 2012 as reflected in your consolidated balance sheets resulted in $189 net cash provided by operations in 2012.
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4.
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Please report the revenues from external customers for each product and service or each group of similar products. Refer to ASC 280-10-50-40 for guidance.
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Display Technologies – manufactures glass substrates for flat panel liquid crystal displays.
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Telecommunications – manufactures optical fiber and cable and hardware and equipment components for the telecommunications industry.
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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.
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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.
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Life Sciences – manufactures glass and plastic labware, equipment, media and reagents to provide workflow solutions for scientific applications.
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5.
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We note that you have identified your Environmental Technologies reportable segment as being the result of the aggregation of two operating segments. In light of the significance of your Display Technologies segment, please confirm that you do not have operating segments underlying this reportable segment. In addition, in light of your discussion on page 33 regarding your goodwill impairment testing within the Specialty Materials segment, please confirm that the businesses you refer to do not meet the definition of an operating segment. Refer to ASC 280-10-50-1. Please provide us with a representative copy of your monthly CODM reporting packages as well as the financial information that you regularly provide to your Board of Directors.
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6.
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We note that under certain long-term product sales agreements, customers were obligated to purchase minimum quantities of product and make specified payments. Most of these product sales agreements extended over various periods and prior to 2012 the revenue associated with the agreements had been recognized using the average sales price over the life of the agreements. Under the average price methodology, differences between amounts invoiced to customers under the agreements and amounts recognized using the average price methodology were reported as deferred revenue in the consolidated balance sheets. After a series of amendments to the agreements in 2012, you concluded that future sales prices were no longer fixed and determinable and discontinued the use of the average price methodology. For the year ended December 31, 2012 and periods thereafter, the revenue associated with these product sales agreements is recognized using invoice-based pricing with a ratable recognition of existing deferred revenue amounts. Please address the following:
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Provide us with a representative copy of the 2012 amended agreement. With reference to the specific terms of the amended agreement, provide support for your accounting. In this regard, please specifically identify the authoritative literature you are relying on to ratably recognize the existing deferred revenue amounts;
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We are providing, concurrent with the delivery of this letter, a redacted, representative copy of a 2012 amended agreement.
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In the ordinary course of business, Hemlock entered into long-term take-or-pay product sales agreements with certain customers. Most of these agreements require customers to make non-refundable advance cash payments which are carried on the balance sheet as deferred revenue. The deferred revenue related to advanced payments is accounted for in accordance with SAB Topic 13 “Nonrefundable up-front fees”. Dow Corning relied upon ASC 980-605-25-11 and 25-12, by analogy, to determine the appropriate revenue recognition treatment to account for its long-term sales agreements. This guidance requires annual revenue recognized to be the lesser of 1) prices as stated in the agreement or 2) the average price over the life of the agreement. Under the average price methodology, the difference between the invoice price and the calculated average price is recorded as deferred revenue. As of December 31, 2012, the advance payment deferred revenue was $3,346.9 million and the average price deferred revenue was $225.4 million.
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Quantify the amount of deferred revenue recognized in 2012 under this new accounting policy and show us how you determined the appropriateness of the amount to be recognized;
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The amount of deferred revenue recognized in 2012 as a result of ratable recognition based on quantities shipped under the amended agreements was $24.2 million. The amount was determined to be appropriate based upon application of the accounting treatment described above and the quantities shipped during 2012 relative to the total remaining quantities to be shipped under the contract.
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Quantify the current and long-term portion of your deferred revenues as of December 31, 2012 that relate to these amended long-term sales agreements;
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The current and long-term portion of deferred revenues as of December 31, 2012 that relate to amended long-term sales agreements were $23.8 million and $201.6 million, respectively. The remaining deferred revenue balances relate to advance payments received.
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7.
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You indicate under the Equity in Earnings of Affiliated Company section of Management’s Discussion and Analysis on page 35 that overcapacity at all levels of the solar industry supply chain resulted in further declines in volume and price at Hemlock. You further indicate that Dow Corning continues to monitor events and circumstances for potential triggering events for indicators of impairment. Please confirm that the undiscounted cash flow analysis performed by Dow Corning’s management in the fourth quarter of 2012 assumed this further decline in volume and price at Hemlock. If not, please address whether this continued deterioration of financial results is an indicator of impairment such that the Company must assess whether the carrying amount of its investment in Dow Corning is recoverable as of March 31, 2013. Refer to ASC 323-10- 35-31 and 32.
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8.
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We note that in the first quarter of 2013 you elected to change your method of recognizing actuarial gains and losses for your defined benefit pension plans. You state that you will recognize the change in the fair value of plan assets in full and net actuarial gains and losses outside of the corridor annually in the fourth quarter of each year and whenever the plan is remeasured. It appears, based on footnote (8) to your reconciliation of non-GAAP measures, that you intend to adjust certain of your non-GAAP Core Performance measures to remove these actuarial gains and losses. Any future filings which include such adjustments should include the following disclosures to ensure transparency and clarity:
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State qualitatively what the adjustment represents in the context of your pension accounting policy. For example, you should clarify how you account for these actuarial gains or losses in your historical financial statements.
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In our Form 10-Q for the period ended March 31, 2013, we disclosed the current and historical treatment of the actuarial gains and losses for our defined benefit pension plans in the Notes to the Consolidated Financial Statements, Note 1, Significant Accounting Policies, and in a Form 8-K, dated April 5, 2013, which disclosed the effect of the accounting change for the years ended December 31, 2012, 2011, and 2010. In future filings which include such pension adjustments, we will enhance the disclosure within Management’s Discussion and Analysis of Financial Condition and Results of Operations, under Results of Operations, Reconciliation of Non-GAAP Measures, through additional discussion similar to the following:
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Provide quantitative context for the actual and expected plan asset returns. Specifically, disclose the actual return on plan assets amount and corresponding percentage that has been removed in arriving at the non-GAAP financial measure as well as the expected return on plan assets amount and related percentage that is now reflected in the non-GAAP financial measure;
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In future filings in which our Core Performance measures include a pension mark-to-market adjustment, we will enhance our disclosure under Management’s Discussion and Analysis of Financial Condition and Results of Operations, under Critical Accounting Estimates, Employee Retirement Plans, by including information which further details the components of the actuarial gain/loss on pension plan remeasurement, as well as the actual and expect rates of return on assets, for each year presented. An example of such disclosure for the years ended December 31, 2012, 2011, and 2010 follows:
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December 31,
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(In millions)
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2012
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2011
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2010
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Actual return on plan assets – Domestic plans
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$
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299
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$
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216
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$
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211
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Expected return on plan assets – Domestic plans
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150
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155
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148
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Actual return on plan assets – International plans
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10
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16
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21
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Expected return on plan assets – International plans
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10
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11
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12
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December 31,
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2012
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2011
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2010
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Weighted-average actual and expected return on assets:
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Actual return on plan assets – Domestic plans
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12.06%
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9.24%
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10.49%
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Expected return on plan assets – Domestic plans
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6.00%
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6.50%
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7.25%
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Actual return on plan assets – International plans
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6.01%
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8.40%
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10.70%
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Expected return on plan assets – International plans
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6.01%
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5.59%
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6.01%
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Disclose why management believes the inclusion of this adjustment to your non- GAAP measure provides useful information to investors. Refer to Item 10(e)(1)(i)(C) of Regulation S-K and Item 2.02 of Form 8-K.
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In future filings in which our Core Performance measures include a pension mark-to-market adjustment, management will describe why it believes this non-GAAP measure provides useful information to investors through additional disclosure similar to the following:
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9.
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As set forth in footnote (3) to your reconciliation of non-GAAP measures, we note that you eliminate the results of Dow Corning Corporation’s consolidated subsidiary, Hemlock, to remove the non-operating items and events which have caused severe unpredictability and instability in earnings over the past eighteen months, and are expected to continue into the future. Please address the following:
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Please address the appropriateness of identifying the equity in earnings of Dow Corning Corporation that relates to Hemlock as non-operating. Specifically address how the consolidated results of Hemlock, as reflected in Dow Corning’s consolidated financial statements, can be considered non-operating; and
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Provide support for your statement that the events identified are unrelated to Hemlock’s core operations.
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Three months ended March 31, 2013
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Net
sales
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Equity
earnings
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Income
before
income
taxes
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Net
income
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Effective
tax
rate
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|||||||||
As reported
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$
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1,814
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$
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173
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$
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528
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$
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494
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6.4%
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Acquisition-related costs (4)
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18
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13
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Discrete tax items (5)
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(54)
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Equity in earnings of affiliated companies (7)
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2
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2
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2
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Asbestos settlement (6)
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2
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1
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Hemlock Semiconductor Operating (3)
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5
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5
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4
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Hemlock Semiconductor Non Operating (3)
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Purchased collars (2)
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(24)
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(15)
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Core Performance measures
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$
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1,814
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$
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180
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$
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531
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$
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445
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16%
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Three months ended March 31, 2012
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Net
sales
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Equity
earnings
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Income
before
income
taxes
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Net
income
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Effective
tax
rate
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|||||||||
As reported
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$
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1,920
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$
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218
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$
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592
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$
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474
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19.9%
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Asbestos settlement (6)
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1
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1
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|||||||||||
Hemlock Semiconductor Operating (3)
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(3)
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(3)
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(3)
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Hemlock Semiconductor Non Operating (3)
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Constant-yen (1)
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(100)
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(37)
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(92)
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(75)
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Core Performance measures
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$
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1,820
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$
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178
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$
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498
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$
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397
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20%
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(3)
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Results of Dow Corning Corporation’s equity affiliate, Hemlock Semiconductor: We are excluding the results of Dow Corning’s consolidated subsidiary, Hemlock Semiconductor, a producer of polycrystalline silicon, to remove the operating and non-operating items and events which have caused severe unpredictability and instability in earnings over the past eighteen months, and are expected to continue in the future. These events are being primarily driven by the macro-economic environment. Specifically, the uncertainty regarding the anti-dumping and countervailing duty investigation of imports of solar-grade polysilicon from the United States by the Chinese Ministry of Commerce and the impact of potential asset write-offs, offset by the potential benefit of large payments required under Hemlock customers’ “take-or-pay” contracts, are events that are unrelated to Dow Corning’s core operations, and that have, or could have, significant impact to this business.
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We are responsible for the adequacy and accuracy of the disclosure in our filings;
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Staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and
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We may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
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Sincerely,
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/s/ R. Tony Tripeny
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R. Tony Tripeny
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Sr. Vice President & Corporate Controller
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cc:
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Wendell P. Weeks, Chairman, Chief Executive Officer and President
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James B. Flaws, Vice Chairman and Chief Financial Officer
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Vincent P. Hatton, Sr. Vice President and General Counsel
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Marilyn J. Griffin, Director, Accounting, Compliance & Reporting
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Kurt M. Landgraf, Chairman, Corning Board of Directors Audit Committee
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Pierre-Alain Sur, PricewaterhouseCoopers LLP
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Stephen T. Giove, Shearman & Sterling LLP
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