Note 15 - Hedging Activities

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

15.

   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 yuan, and the euro. We seek to mitigate the impact of exchange rate movements in our income statement by using over-the-counter (OTC) derivative instruments including foreign exchange forward and option contracts. 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 maintaining a diverse group of highly-rated major international financial institutions. 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. The Company qualified for and elected 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 and options 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. In the

fourth

quarter of

2014,

the Company entered into interest rate swap agreements to hedge against the variability in cash flows due to changes in the benchmark interest rate related to an anticipated issuance. The instruments were designated as cash flow hedges.

In the

first

quarter of

2015,

these interest rate swaps were settled prior to the issuance of the anticipated debt. Because the Company continued to anticipate that the debt issuance would occur, it entered into

two

interest rate swap agreements in the

first

quarter of

2015

to hedge against the variability in cash flows due to changes in the benchmark interest rate related to an anticipated issuance. The instruments were designated as cash flow hedges, and were settled on

May

5,

2015.

Concurrent with the settlement of the interest rate swap agreements, Corning issued

$375

million of

1.50%

senior unsecured notes that mature on

May

8,

2018

and

$375

million of

2.90%

senior unsecured notes that mature on

May

15,

2022.

Corning uses a regression analysis to monitor the effectiveness of its cash flow hedges both prospectively and retrospectively. Through

December

31,

2016,

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 income (loss) on the consolidated balance sheet until such time as the hedged item impacts earnings. At

December

31,

2016,

the amount expected to be reclassified into earnings within the next

12

months is a pre-tax net loss of

$28

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 (expense) income, net component, relative to ineffectiveness, is nominal for the year ended

December

31,

2016.

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

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 and expenses are denominated in Japanese yen, South Korean won, New Taiwan dollar, Chinese yuan and euro. When these revenues and expenses are translated back to U.S. dollars, the Company is exposed to foreign exchange rate movements. To protect translated earnings against movements in these currencies, the Company has entered into a series of

zero

-cost collars and average rate forwards.

With a

zero

-cost collar structure, the Company writes a local currency call option and purchases a local currency put option or vice versa. The

zero

-cost collars offset the impact of translated earnings above the put price and below the call strike price and that offset is reported in Translated earnings contract (loss) gain, net. The Company entered into a series of

zero

-cost collars, settling quarterly, to hedge the effect of translation impact for each respective quarter. The

zero

-cost collar program hedges exposures through

2022

and

2017

for the Japanese yen and Korean won, respectively. Due to the nature of the instruments, only either the put option or the call option can be exercised at maturity. As of

December

31,

2016,

the U.S. dollar net notional value of the Japanese yen and Korean won

zero

-cost collars is

$1

billion. 

The Company extended its foreign exchange hedge program in

2016

and entered into a series of average rate forwards. These will hedge a significant portion of its projected yen exposure for the period of

2018

-

2022.

As of

December

31,

2016,

the U.S. dollar net notional value of the yen average rate forwards program is

$14

billion. The average rate forward program was also expanded to partially hedge the impact of the South Korean won, New Taiwan dollar, Chinese yuan and euro translation on the Company’s projected net income. As of

December

31,

2016

these average rate forwards have a total notional value of

$1

billion. The entire average rate forward program will settle net without obligation to deliver Japanese yen, Korean won, New Taiwan dollar, Chinese yuan and euro. 

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 Translated earnings contract (loss) gain, net line of the Consolidated Statement of Income.

The following table summarizes the notional amounts and respective fair values of Corning’s derivative financial instruments on a gross basis for

December

31,

2016

and

December

31,

2015

(in millions):

					Asset derivatives					Liability derivatives
	Notional amount				Balance	Fair value				Balance	Fair value
	2016		2015		sheet location	2016		2015		sheet location	2016			2015
Derivatives designated as hedging instruments
Foreign exchange contracts (1)	$	458	$	782	Other current assets	$	1	$	5	Other accrued liabilities	$	(29	)	$	(10	)
					Other assets				1	Other liabilities					(23	)
Interest rate contracts		550		550	Other assets					Other liabilities		(5	)		(4	)
Derivatives not designated as hedging instruments
Foreign exchange contracts, other		890		1,095	Other current assets		11		6	Other accrued liabilities		(7	)		(12	)
Translated earnings contracts		16,711		11,972	Other current assets		423		511	Other accrued liabilities		(52	)		(33	)
					Other assets		146		472	Other liabilities		(277	)		(61	)
Total derivatives	$	18,609	$	14,399		$	581	$	995		$	(370	)	$	(143	)

(1) Cash flow hedges with a typical duration of 24 months or less.

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

	Effect of derivative instruments on the consolidated financial statements for the years ended December 31
Derivatives in hedging	(Loss)/gain recognized in other comprehensive income (OCI)									Location of gain/(loss) reclassified from accumulated OCI into income	Gain/(loss) reclassified from accumulated OCI into income ineffective/effective (1)
relationships	2016			2015			2014			effective/ineffective	2016			2015		2014
Cash flow hedges
										Net sales	$	4		$	20	$	3
Interest rate hedge				$	(7	)	$	(3	)	Cost of sales		(36	)		6		7
Foreign exchange contracts	$	(33	)		(17	)		20		Other (expense) income, net		(2	)
Total cash flow hedges	$	(33	)	$	(24	)	$	17			$	(34	)	$	26	$	10

		Gain (loss) recognized in income
Undesignated derivatives	Location of gain/(loss) recognized in income	2016			2015			2014
Foreign exchange contracts – balance sheet	Translated earnings contract gain (loss), net	$	4		$	8		$	29
Foreign exchange contracts – loans	Translated earnings contract (loss) gain, net		(31	)		(3	)		13
Translated earnings contracts	Translated earnings contract (loss) gain, net		(448	)		80			1,369
Total undesignated		$	(475	)	$	85		$	1,411

(1) There were no material amounts of ineffectiveness for 2016 and 2015.