Note 14 - Hedging Activities

9 Months Ended

Sep. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

14.      Hedging Activities

Corning is exposed to interest rate and foreign currency risks due to the movement of these rates.

The areas in which exchange rate fluctuations affect us include:

·   Financial instruments and transactions denominated in foreign currencies, which impact earnings; and

·   The translation of net assets in foreign subsidiaries for which the functional currency is not the U.S. dollar, which impacts our net equity.

Our most significant foreign currency exposures relate to the Japanese yen, South Korean won, New Taiwan dollar, Chinese Renminbi, and the Euro.  We seek to mitigate the impact of exchange rate movements on our operating results by using over-the-counter (OTC) derivative instruments including foreign exchange forward and option contracts typically with durations of 36 months or less.  In general, these hedges expire coincident with the timing of the underlying foreign currency commitments and transactions.

We are exposed to potential losses in the event of non-performance by our counterparties to these derivative contracts.  However, we minimize this risk by limiting the counterparties to a diverse group of highly-rated major international financial institutions with which we have other financial relationships.  We do not expect to record any losses as a result of such counterparty default.  Neither we nor our counterparties are required to post collateral for these financial instruments.  In July 2013, the Finance Committee of the Board of Directors approved the Company’s qualification for and election of the end-user exception to the mandatory swap clearing requirement of the Dodd-Frank Act.

Cash Flow Hedges

Our cash flow hedging activities utilize OTC foreign exchange forward contracts to reduce the risk that movements in exchange rates will adversely affect the net cash flows resulting from the sale of products to foreign customers and purchases from foreign suppliers.  Our cash flow hedging activity also uses interest rate swaps to reduce the risk of increases in benchmark interest rates on the probable issuance of debt and associated interest payments.  Corning uses a regression analysis to monitor the effectiveness of its cash flow hedges both prospectively and retrospectively.  Through September 30, 2013, the hedge ineffectiveness related to these instruments is not material.  Corning defers net gains and losses related to effective portion of cash flow hedges into accumulated other comprehensive (loss) income on the consolidated balance sheet until such time as the hedged item impacts earnings.  At September 30, 2013, the amount of net gain expected to be reclassified into earnings within the next 12 months is $26 million.

Fair Value Hedges

In October of 2012, we entered into two interest rate swaps that are designated as fair value hedges and economically exchange a notional amount of $550 million of previously issued fixed rate long-term debt to floating rate debt.  Under the terms of the swap agreements, we pay the counterparty a floating rate that is indexed to the one-month LIBOR rate.

Corning utilizes the long haul method for effectiveness analysis, both retrospectively and prospectively.  The analysis excludes the impact of credit risk from the assessment of hedge effectiveness.  The amount recorded in current period earnings in the other income, net component, relative to ineffectiveness, is nominal for the three and nine months ended September 30, 2013.  There were no outstanding fair value hedges in the three and nine months ended September 30, 2012.

Net gains and losses from fair value hedges and the effects of the corresponding hedged item are recorded on the same line item of the consolidated statement of operations.

Undesignated Hedges

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

A significant portion of the Company’s non-U.S. revenues are denominated in Japanese yen.  When these revenues are translated back to U.S. dollars, the Company is exposed to foreign exchange rate movements in the Japanese yen.  To protect translated earnings against movements in the Japanese yen, the Company has entered into a series of purchased collars and average rate forwards.

The Company also uses these types of contracts to reduce the potential for unfavorable changes in foreign exchange rates to decrease the U.S. dollar value of translated earnings.  With a purchased collar structure, the Company writes a local currency call option and purchases a local currency put option.  The purchased collars offset the impact of translated earnings above the put price and below the call strike price and that offset is reported in other income, net.  The Company entered into a series of purchased collars, settling quarterly, to hedge the effect of translation impact for each respective quarter, and span up to the fourth quarter of 2014.  Due to the nature of the instruments, only either the put option or the call option can be exercised at maturity.  As of September 30, 2013, the U.S. dollar net notional value of the purchased collars is $3.7 billion.  The Company entered into a series of average rate forwards with no associated premium, which will partially hedge the impact of Japanese yen translation on the Company’s projected 2015 net income.  These forwards settle net without obligation to deliver Japanese yen.

The Company benefits from the increase in the U.S. dollar equivalent value of its foreign currency earnings in translation.  The purchased collar, within other income, would cap the benefit at the strike price of the written call or offset the decline from translation above the strike price of the purchased put.

The fair value of these derivative contracts are recorded as either assets (gain position) or liabilities (loss position) on the Consolidated Balance Sheet.  Changes in the fair value of the derivative contracts are recorded currently in earnings in the other income line of the Consolidated Statement of operations.

The following table summarizes the notional amounts and respective fair values of Corning’s derivative financial instruments on a gross basis for September 30, 2013 and December 31, 2012 (in millions):

	U.S. Dollar		Asset derivatives			Liability derivatives
	Gross notional amount		Balance sheet location	Fair value		Balance sheet location	Fair value
	Sept. 30, 2013	Dec. 31, 2012		Sept. 30, 2013	Dec. 31, 2012		Sept. 30, 2013	Dec. 31, 2012
Derivatives designated as hedging instruments
Foreign exchange contracts	$    308	$  719	Other current assets	$  28	$  57	Other accrued liabilities	$  (2)	$  (3)
Interest rate contracts	$ 1,300	$  550	Other assets	$  40		Other liabilities	$(22)
Derivatives not designated as hedging instruments
Foreign exchange contracts	$    591	$1,939	Other current assets	$    8	$109	Other accrued liabilities	$  (8)	$(10)
Translated earnings contracts	$ 8,174		Other current assets	$172		Other accrued liabilities	$(13)
			Other assets	$  95		Other liabilities	$  (9)
Total derivatives	$10,373	$3,208		$343	$166		$(54)	$(13)

The following table summarizes the effect of derivative financial instruments on Corning’s consolidated financial statements for the three months ended September 30, 2013 and 2012 (in millions):

	Effect of derivative instruments on the consolidated financial statements for the three months ended September 30 (2)
Derivatives in hedging relationships	Gain/(loss) recognized in other comprehensive income (OCI)		Location of gain reclassified from accumulated OCI into income (effective)	Gain reclassified from accumulated OCI into income (effective) (1)
	2013	2012		2013	2012
-			Sales		$1
Interest rate contracts	$3		Cost of sales	$  9	3
Foreign exchange contracts	(3)	$(3)	Royalties	17
Total cash flow hedges	$0	$(3)		$26	$4

(1) The amount of hedge ineffectiveness for the three months ended September 30, 2013 and 2012 was insignificant.

(2) Certain amounts for prior periods were reclassified to conform to the current year presentation.

The following table summarizes the effect of derivative financial instruments on Corning’s consolidated financial statements for the nine months ended September 30, 2013 and 2012 (in millions):

	Effect of derivative instruments on the consolidated financial statements for the nine months ended September 30 (2)
Derivatives in hedging relationships	Gain recognized in other comprehensive income (OCI)		Location of gain reclassified from accumulated OCI into income (effective)	Gain reclassified from accumulated OCI into income (effective) (1)
	2013	2012		2013	2012
-			Sales		$  1
Interest rate contracts	$40	$15	Cost of sales	$28	9
Foreign exchange contracts	48	29	Royalties	48	6
Total cash flow hedges	$88	$44		$76	$16

(1) The amount of hedge ineffectiveness for the nine months ended September 30, 2013 and 2012 was insignificant.

(2) Certain amounts for prior periods were reclassified to conform to the current year presentation.

The following table summarizes the effect on the consolidated financial statements relating to Corning’s derivative financial instruments (in millions):

Undesignated derivatives	Location of gain/(loss) recognized in income	Gain/(loss) recognized in income
		Three months ended September 30,		Nine months ended September 30,
		2013	2012	2013	2012
Foreign exchange contracts	Other income, net	$ 14	$(61)	$219	$73
Translated earnings contracts	Other income, net	(46)		205
Total undesignated		$(32)	$(61)	$424	$73