Note 14 - Hedging Activities

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Corning is primarily exposed to foreign currency risks due to fluctuations in exchange rates. These fluctuations affect the Company’s financial instruments and transactions denominated in foreign currencies, which impact earnings.

The most significant foreign currency exposures relate to the Japanese yen, South Korean won, new Taiwan dollar, Chinese yuan, the euro and British pound. Corning seeks to mitigate the impact of exchange rate movements in the income statement by using over-the-counter (“OTC”) derivative instruments including foreign exchange forward and option contracts. In general, the expirations of these contracts coincide with the timing of the underlying foreign currency commitments and transactions.

Corning is exposed to potential losses in the event of non-performance by counterparties to these derivative contracts. However, this risk is minimized by maintaining a portfolio with a diverse group of highly-rated major financial institutions. The Company does not expect to record any losses due to counterparty default. Neither the Company nor its 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.

Designated Hedges

Corning uses OTC foreign exchange forward contracts designated 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 $419 million and $780 million as of December 31, 2022 and 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. As of December 31, 2022, the amount expected to be reclassified into earnings within the next 12 months is a pre-tax gain of $20 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 within property, plant and equipment, net of accumulated depreciation in the consolidated balance sheets, is $278 million and $107 million, respectively, as of December 31, 2022 and 2021. The carrying amount of the leased precious metals pool includes cumulative fair value losses of $95 million and $5 million as of December 31, 2022 and 2021, respectively.

Corning uses regression analysis or the critical term match method to assess initial hedge effectiveness. Following the inception of a hedging relationship, hedge effectiveness is assessed quarterly based on qualitative factors. 

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 as of December 31, 2022 and 2021 (in billions):

	Year ended December 31,
	2022		2021
Average rate forward contracts:
Japanese yen-denominated	$	0.1	$	2.9
South Korean won-denominated		2.1		1.2
Other foreign currencies (1)		0.7		0.3
Option contracts:
Japanese yen-denominated (2)		4.6		3.6
Other foreign currencies (3)				0.9
Total gross notional value for translated earning contracts	$	7.5	$	8.9

(1)	Denominational currencies for average rate forward contracts include the Chinese yuan, New Taiwan dollar, euro 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 zero-cost collars, only the put or the call option can be exercised at maturity.
(3)	Other foreign currencies option contracts are purchased basket options that include a basket of underlying currencies, including the Japanese yen, South Korean won, Chinese yuan, euro and British pound, and each basket option have been settled against U.S. dollars.

The fair values of these derivative contracts are recorded as either assets (gain position) or liabilities (loss position) on the consolidated balance sheets. Changes in the fair value of the derivative contracts are recorded currently in earnings within translated earnings contract gain (loss), net in the consolidated statements of income.

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

					Asset derivatives					Liability derivatives
	Notional amount					Fair value					Fair value
	2022		2021		Balance sheet location	2022		2021		Balance sheet location	2022			2021
Derivatives designated as hedging instruments
Foreign exchange and precious metals lease contracts (1)	$	419	$	780	Other current assets	$	26	$	49	Other accrued liabilities	$	(1	)	$	(2	)
					Other assets		78		10	Other liabilities					(9	)
Derivatives not designated as hedging instruments
Foreign exchange contracts		2,231		3,864	Other current assets		44		91	Other accrued liabilities		(49	)		(95	)
Translated earnings contracts		7,543		8,899	Other current assets		384		196	Other accrued liabilities		(124	)		(47	)
					Other assets		146		154	Other liabilities		(17	)		(40	)
Total derivatives	$	10,193	$	13,543		$	678	$	500		$	(191	)	$	(193	)

(1) As of December 31, 2022, derivatives designated as hedging instruments include foreign exchange cash flow hedges with gross notional amounts of $419 million and fair value hedges of leased precious metals with a gross notional amount of 23,152 troy ounces. As of 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 a gross notional amount of 7,559 troy ounces. Other assets include designated derivatives pertaining to precious metals lease contracts in the amounts of $64 million and $5 million as of December 31, 2022 and 2021, respectively.

The following tables summarize the effect in the consolidated statements of income relating to Corning’s derivative financial instruments (in millions). The accumulated derivative gain included in accumulated other comprehensive loss on the consolidated balance sheets as of December 31, 2022 and 2021 is $19 million and $52 million, respectively. 

Derivatives hedging relationships	Gain (loss) recognized in other comprehensive income (OCI)							Location of gain (loss) reclassified from accumulated OCI into income	Gain (loss) reclassified from accumulated OCI into income
for cash flow and fair value hedges	2022		2021		2020			effective (ineffective)	2022			2021			2020
								Net sales	$	52		$	14		$	(6	)
								Cost of sales		32			39			13
Foreign exchange and precious metals lease contracts	$	52	$	47	$	(19	)	Other income (expense), net (1)		(3	)		(1	)		(14	)
Total cash flow and fair value hedges	$	52	$	47	$	(19	)		$	81		$	52		$	(7	)

		Gain (loss) recognized in income
Undesignated derivatives	Location of gain (loss) recognized in income	2022		2021		2020
Foreign exchange contracts	Other income (expense), net	$	46	$	38	$	(93	)
Translated earnings contracts	Translated earnings contract gain (loss), net		351		354		(38	)
Total undesignated		$	397	$	392	$	(131	)

(1) A loss of $14 million was reclassified from accumulated other comprehensive loss into other income (expense), net, resulting from the de-designation of certain cash flow hedges during the year ended December 31, 2020.