Hedging Activities

12 Months Ended

Dec. 31, 2012

Hedging Activities [Abstract]

Hedging Activities

15.      Hedging Activities

Corning operates in many foreign countries and is therefore exposed to movements in foreign currency exchange 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, Korean won, New Taiwan dollar and the Euro.  We manage our foreign currency exposure primarily by entering into foreign exchange forward contracts with durations of generally 18 months or less to hedge foreign currency risk.  The hedges are scheduled to mature coincident with the timing of the underlying foreign currency commitments and transactions.  The objective of these contracts is to reduce the impact of exchange rate movements on our operating results.

The forward and option contracts we use in managing our foreign currency exposures contain an element of risk in that the counterparties may be unable to meet the terms of the agreements.  However, we minimize this risk by limiting the counterparties to a diverse group of highly-rated major domestic and international financial institutions with which we have other financial relationships.  We are exposed to potential losses in the event of non-performance by these counterparties.  However, we do not expect to record any losses as a result of counterparty default.  Neither we nor our counterparties are required to post collateral for these financial instruments.

Cash Flow Hedges

Our cash flow hedging activities utilize foreign exchange forward and option contracts to reduce the risk that movements in exchange rates will adversely affect the eventual net cash flows resulting from the sale of products to foreign customers and purchases from foreign suppliers.  Our cash flow hedging activities also utilize interest rate forwards to reduce the risk of changes in a benchmark interest rate from the probable forecasted issuance of debt.  Corning uses a regression analysis to monitor the effectiveness of its cash flow hedges both prospectively and retrospectively.  Corning defers net gains and losses from cash flow hedges into accumulated other comprehensive income on the consolidated balance sheet until such time as the hedged item impacts earnings.  At December 31, 2012, the amount of net losses expected to be reclassified into earnings within the next 12 months is $54 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.

Net gains or losses recorded in the consolidated statement of operations related to the Company's underlying debt and interest rate swap agreements were not significant.  At December 31, 2012, the fair value of the interest rate swap agreements recorded in the other assets and other liabilities line item and offset in the long-term debt line item of the consolidated balance sheet were not significant.  There were no outstanding fair value hedges in 2011.

Each fair value hedge (swap) was entered into subsequent to the initial recognition of the hedged item; therefore these swaps do not meet the criteria to qualify for the shortcut method.  Therefore, 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 ineffectiveness.  The amount recorded in current period earnings in the other income, net component, relative to ineffectiveness, is nominal for the year ended December 31, 2012.  There were no outstanding fair value hedges in 2011 or 2010.

Corning records net gains and losses from fair value hedges into the same line item of the consolidated statement of operations as where the effects of the hedged item are recorded.

Undesignated Hedges

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

The following table summarizes the notional amounts and respective fair values of Corning's derivative financial instruments (in millions):

					Asset derivatives					Liability derivatives
	Notional amount				Balance sheet location	Fair value				Balance sheet location	Fair value
	2012		2011			2012		2011			2012		2011
Derivatives designated as hedging instruments
Foreign exchange contracts	$	719	$	402	Other current assets	$	57	$	6	Other accrued liabilities	$	(3)	$	(8)
Benchmark interest rate			$	500									$	(33)
Interest rate swap	$	550
Derivatives not designated as hedging instruments
Foreign exchange contracts	$	1,939	$	3,094	Other current assets	$	109	$	6	Other accrued liabilities	$	(10)	$	(122)
										Other liabilities			$	(6)
Total derivatives	$	3,208	$	3,996		$	166	$	12		$	(13)	$	(169)

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 relationships	Gain/(loss) recognized in other comprehensive income (OCI) (2)						Location of gain/(loss) reclassified from  accumulated OCI into income (effective)			Gain/(loss) reclassified from accumulated OCI into income (effective) (1)
	2012		2011		2010					2012		2011		2010
Cash flow hedges
							Sales			$	1			$	(1)
Interest rate hedge	$	15	$	(33)	$	3	Cost of sales			$	16	$	(12)	$	(9)
Foreign exchange contracts	$	85	$	(28)	$	(68)	Royalties			$	11	$	(42)	$	(14)
Total cash flow hedges	$	100	$	(61)	$	(65)				$	28	$	(54)	$	(24)
Net investment hedges
Foreign denominated debt					$	2
Other					$	(3)
Total net investment hedges					$	(1)
							Gain/(loss) recognized in income
Undesignated derivatives	Location						2012	2011	2010
Foreign exchange contracts	Other income/(expense), net						$175	$127	$(291)
Total undesignated							$175	$127	$(291)

(1) The amount of hedge ineffectiveness at December 31, 2012, 2011, and 2010 was insignificant.

(2) Certain amounts for prior periods were reclassified to conform to the 2012 presentation.