Note 10 - Hedging Activities

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

10. Hedging Activities

Designated Hedges

Corning uses over-the-counter (“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 notional amounts for foreign currency cash flow hedges are $301 million and $419 million as of  September 30, 2023 and December 31, 2022, respectively, with maturities through 2024. Corning defers gains and losses related to cash flow hedges into accumulated other comprehensive loss on the consolidated balance sheets until the hedged item impacts earnings. As of  September 30, 2023, the amount expected to be reclassified into earnings within the next 12 months is a pre-tax gain of $43 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 loss 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 $89 million and $278 million, respectively, as of  September 30, 2023 and December 31, 2022. The carrying amount of the leased precious metals pool includes cumulative fair value losses of $261 million and $95 million as of  September 30, 2023 and December 31, 2022, respectively. These losses are offset by changes in the fair value of the derivatives.

Net Investment Hedges

In May 2023, the Company designated the full amount of its 2026 Notes and 2031 Notes with a total notional amount of €850 million, which are non-derivative financial instruments, as net investment hedges against our investments in certain European subsidiaries with euro functional currencies. Changes in the value of these hedging instruments due to foreign currency gains or losses are deferred in other comprehensive loss on the consolidated statements of comprehensive (loss) income, within the foreign currency translation adjustments and other line, and will remain in accumulated other comprehensive loss until the hedged investment is sold or substantially liquidated. We evaluate the effectiveness of the net investment hedges each quarter using the critical terms match method.  As of  September 30, 2023, the net investment hedges are deemed to be effective.  During the three and nine months ended September 30, 2023, foreign currency gains of $29 million and $36 million, respectively, associated with these net investment hedges were recognized in other comprehensive loss.

Refer to Note 7 (Debt) for additional information.

Undesignated Hedges

Corning uses OTC foreign exchange forward and option contracts to offset economic currency risks. These contracts are not designated as hedging instruments for accounting purposes. The undesignated hedges limit exposure to foreign 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 expenses are translated 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 and South Korean won. The Company has contracts through 2024 for the Japanese yen and 2026 for the South Korean won.

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 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  September 30, 2023 and December 31, 2022 (in millions):

					Asset derivatives					Liability derivatives
	Notional amount				Balance	Fair value				Balance	Fair value
	September		December		sheet	September		December		sheet	September			December
	30, 2023		31, 2022		location	30, 2023		31, 2022		location	30, 2023			31, 2022
Derivatives designated as hedging instruments (1)
Foreign exchange and precious metals lease contracts (2)	$	301	$	419	Other current assets	$	165	$	26	Other accrued liabilities				$	(1	)
					Other assets		139		78
Derivatives not designated as hedging instruments
Foreign exchange contracts		1,486		2,231	Other current assets		18		44	Other accrued liabilities	$	(23	)		(49	)
Translated earnings contracts		5,128		7,543	Other current assets		380		384	Other accrued liabilities		(127	)		(124	)
					Other assets		71		146	Other liabilities		(65	)		(17	)
Total derivatives	$	6,915	$	10,193		$	773	$	678		$	(215	)	$	(191	)

(1)	The amounts above do not include €850 million of euro-denominated debt ($892 million equivalent as of September 30, 2023), which is a non-derivative financial instrument designated as a net investment hedge.
(2)	As of  September 30, 2023 and December 31, 2022, derivatives designated as hedging instruments include foreign exchange cash flow hedges with total notional amounts of $301 million and $419 million, respectively, and fair value hedges of leased precious metals with total notional amounts of 21,652 troy ounces and 23,152 troy ounces, respectively.

The following table summarizes the total notional amounts for translated earnings contracts as of  September 30, 2023 and December 31, 2022 (in billions):

	September 30,		December 31,
	2023		2022
Average rate forward contracts:
Japanese yen-denominated	$	0.2	$	0.1
South Korean won-denominated		1.7		2.1
Other foreign currencies (1)		1.1		0.7
Option contracts:
Japanese yen-denominated (2)		2.1		4.6
Total notional amount for translated earning contracts	$	5.1	$	7.5

(1)	Denominational currencies for other 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, knock-out options and zero-cost collars. With respect to the zero-cost collars, the total 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.

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 September 30, 2023 and December 31, 2022 is $91 million and $19 million, respectively.

	Three months ended September 30,
					Location of gain (loss)
	Gain recognized				reclassified from	Gain (loss) reclassified
Derivative hedging	in other comprehensive				accumulated	from accumulated
relationships for cash	loss (OCL)				OCL into income	OCL into income
flow and fair value hedges	2023		2022		effective (ineffective)	2023			2022
					Net sales				$	15
					Cost of sales	$	14			6
Foreign exchange contracts and other	$	28	$	4	Other income, net		(1	)		(1	)
Total cash flow and fair value hedges	$	28	$	4		$	13		$	20

	Nine months ended September 30,
					Location of gain (loss)
	Gain recognized				reclassified from	Gain (loss) reclassified
Derivative hedging	in other comprehensive				accumulated	from accumulated
relationships for cash	loss (OCL)				OCL into income	OCL into income
flow and fair value hedges	2023		2022		effective (ineffective)	2023			2022
					Net sales				$	38
					Cost of sales	$	32			19
Foreign exchange contracts and other	$	102	$	24	Other income, net		(3	)		(3	)
Total cash flow and fair value hedges	$	102	$	24		$	29		$	54

		Gain (loss) recognized in income
		Three months ended						Nine months ended
	Location of gain (loss)	September 30,						September 30,
Undesignated derivatives	recognized in income	2023			2022			2023		2022
Foreign exchange contracts	Other income, net	$	(5	)	$	11		$	23	$	70
Translated earnings contracts	Translated earnings contract gain (loss), net		20			(68	)		128		257
Total undesignated		$	15		$	(57	)	$	151	$	327