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Note 11 - Hedging Activities

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

11. Hedging Activities

Designated Hedges

Corning uses over-the-counter (“OTC”) foreign exchange forward contracts as cash flow hedges to reduce the risk that movements in exchange rates will adversely affect the net cash flows resulting from the sale of products to customers and purchases from suppliers. The total gross notional values for foreign currency cash flow hedges are $578 million and $780 million at September 30, 2022 and December 31, 2021, respectively, with maturities through 2024. Corning defers gains and losses related to the cash flow hedges into accumulated other comprehensive loss on the consolidated balance sheets until the hedged item impacts earnings. At September 30, 2022, the amount expected to be reclassified into earnings within the next 12 months is a pre-tax gain of $30 million.

Corning has entered into leases of precious metals with maturities through 2025. To offset the risk of changes in the fair value of the Company’s separate accounting pool of leased precious metals due to adverse changes in the respective market prices, Corning designated the bifurcated embedded derivatives included in these leases as fair value hedges. The gain or loss on the derivatives, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings. The amounts representing the time value component of the derivatives are excluded from the assessment of effectiveness and amortized in earnings. The impact of the excluded component on Corning’s other comprehensive income and earnings is not material. The carrying amount of the leased precious metals pool, which is included in the property, plant and equipment, net of accumulated depreciation line of the consolidated balance sheets is $324 million and $107 million at September 30, 2022 and December 31, 2021, respectively.

Undesignated Hedges

Corning uses OTC foreign exchange forward and option contracts not designated as hedging instruments for accounting purposes to offset economic currency risks. The undesignated hedges limit exposure 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. revenue and expenses are denominated in Japanese yen, South Korean won, new Taiwan dollar, Chinese yuan, and euro. When this revenue and these 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 average rate forwards and option contracts. Most of these contracts hedge a significant portion of the Company’s exposure to the Japanese yen, with maturities through 2024, and South Korean won, with maturities through 2026.

The following table summarizes the total gross notional value for translated earnings contracts at September 30, 2022 and December 31, 2021 (in billions):

		September 30,				December 31,
		2022				2021
Average rate forward contracts:
Japanese yen-denominated		$	0.8			$	2.9
South Korean won-denominated			2.3				1.2
Euro-denominated			0.1				0.2
Other foreign currencies ⁽¹⁾			0.6				0.1
Option contracts:
Japanese yen-denominated ⁽²⁾			4.5				3.6
Other foreign currencies ⁽³⁾							0.9
Total gross notional value for translated earning contracts		$	8.3			$	8.9

⁽¹⁾	Denominational currencies for other average rate forward contracts include the Chinese yuan, New Taiwan dollar, and British pound.
⁽²⁾	Japanese yen-denominated option contracts include purchased put and call options and zero-cost collars. With respect to the zero-cost collars, the gross notional amount includes the value of the put and call options. However, due to the nature of the zero-cost collars, only the put or call option can be exercised at maturity.
⁽³⁾	Other foreign currency option contracts are purchased basket options that include a basket of underlying currencies, including the Japanese yen, South Korean won, euro and British pound, and each basket option are settled against U.S. dollars.

The following table summarizes the notional amounts and respective fair values of Corning’s derivative financial instruments on a gross basis for September 30, 2022 and December 31, 2021 (in millions):

									Asset derivatives									Liability derivatives
		Notional amount							Balance		Fair value							Balance		Fair value
		September 30,				December 31,			sheet		September 30,				December 31,			sheet		September 30,				December 31,
		2022				2021			location		2022				2021			location		2022				2021

Derivatives designated as hedging instruments (1)

Foreign exchange contracts and other		$	578			$	780		Other current assets		$	36			$	49		Other accrued liabilities		$	(6	)		$	(2	)
									Other assets			40				10		Other liabilities			(15	)			(9	)

Derivatives not designated as hedging instruments

Foreign exchange contracts			3,130				3,864		Other current assets			147				91		Other accrued liabilities			(161	)			(95	)
Translated earnings contracts			8,296				8,899		Other current assets			697				196		Other accrued liabilities			(327	)			(47	)
									Other assets			191				154		Other liabilities			(223	)			(40	)
Total derivatives		$	12,004			$	13,543				$	1,111			$	500				$	(732	)		$	(193	)

⁽¹⁾

At September 30, 2022, derivatives designated as hedging instruments include foreign exchange cash flow hedges with gross notional amounts of $578 million and fair value hedges of leased precious metals with gross notional amounts of 23,152 troy ounces. At December 31, 2021, derivatives designated as hedging instruments include foreign exchange cash flow hedges with gross notional amounts of $780 million and fair value hedges of leased precious metals with gross notional amounts of 7,559 troy ounces.

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

		Three months ended September 30,
		Gain (loss) recognized							Location of gain		Gain reclassified
Derivative hedging		in other comprehensive							reclassified from accumulated		from accumulated
relationships for cash		income (OCI)							OCI into income		OCI into income
flow and fair value hedges		2022				2021			effective (ineffective)		2022				2021

									Net sales		$	15			$	3
Foreign exchange contracts and other		$	4			$	(5	)	Cost of sales			6				11
Total cash flow and fair value hedges		$	4			$	(5	)			$	21			$	14

		Nine months ended September 30,
		Gain recognized							Location of gain		Gain reclassified
Derivative hedging		in other comprehensive							reclassified from accumulated		from accumulated
relationships for cash		income (OCI)							OCI into income		OCI into income
flow and fair value hedges		2022				2021			effective (ineffective)		2022				2021

									Net sales		$	38			$	9
Foreign exchange contracts and other		$	24			$	36		Cost of sales			19				28
Total cash flow and fair value hedges		$	24			$	36				$	57			$	37

			Gain (loss) gain recognized in income
			Three months ended								Nine months ended
	Location of gain (loss)		September 30,								September 30,
Undesignated derivatives	recognized in income		2022				2021				2022				2021

Foreign exchange contracts	Other income, net		$	11			$	(9	)		$	70			$	26
Translated earnings contracts	Translated earnings contract (loss) gain, net			(68	)			(13	)			257				262
Total undesignated			$	(57	)		$	(22	)		$	327			$	288