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Note 15 - Hedging Activities
 12 Months Ended
Dec. 31, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
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 renminbi, 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 with which we have other financial relationships as our counterparties.  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 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.

Corning uses a regression analysis to monitor the effectiveness of its cash flow hedges both prospectively and retrospectively.  Through December 31, 2015, 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 (loss) income on the consolidated balance sheet until such time as the hedged item impacts earnings.  At December 31, 2015, the amount expected to be reclassified into earnings within the next 12 months is a pre-tax net loss of $4.8 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, 2015.

Net gains and losses from fair value hedges and the effects of the corresponding hedged item are recorded on the same line item of the Consolidated Statement 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 are denominated in Japanese yen, South Korean won and euro.  When these revenues are translated back to U.S. dollars, the Company is exposed to foreign exchange rate movements in the Japanese yen, South Korean won and euro.  To protect translated earnings against movements in these currencies, the Company has entered into a series of zero-cost collars and average rate forwards.

The Company also uses these types of contracts to reduce the potential for unfavorable changes in foreign exchange rates to decrease the U.S. dollar value of translated earnings.  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 foreign currency hedge 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, and span up to the fourth quarter of 2017.  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, 2015, the U.S. dollar net notional value of the zero-cost collar is $2.9 billion.  The Company entered into a series of average rate forwards with no associated premium, which will partially hedge the impact of Japanese yen and euro translation on the Company’s projected 2015 through 2017 net income.  These forwards have a notional value of $6.4 billion and will settle net without obligation to deliver Japanese yen and euro.  In January 2016, Corning took advantage of the stronger yen to extend its foreign exchange hedging program to hedge a significant portion of its projected yen exposure for the period 2018 through 2022.

The Company benefits from the increase in the U.S. dollar equivalent value of its foreign currency earnings in translation.  The zero-cost collar would cap the benefit at the strike price of the written call or offset the decline from translation above the strike price of the purchased put.

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 foreign currency hedge 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, 2015 and December 31, 2014 (in millions):

     
Asset derivatives
 
Liability derivatives
 
Notional amount
 
Balance sheet location
 
Fair value
 
Balance sheet location
 
Fair value
 
2015
 
2014
   
2015
 
2014
   
2015
 
2014
                               
Derivatives designated as hedging instruments
                                         
                                           
Foreign exchange contracts
$
782
 
$
487
 
Other current assets
 
$
5
 
$
22
 
Other accrued liabilities
 
$
(10)
 
$
(6)
             
Other assets
   
1
       
Other liabilities
   
(23)
     
                                           
Interest rate contracts
 
550
   
1,300
 
Other assets
         
1
 
Other liabilities
   
(4)
   
(15)
Derivatives not designated as hedging instruments
                                         
                                           
Foreign exchange contracts, other
 
1,095
   
1,285
 
Other current assets
   
6
   
17
 
Other accrued liabilities
   
(12)
   
(5)
                                           
Foreign currency hedges related to translated  earnings
 
11,972
   
12,126
 
Other current assets
   
511
   
649
 
Other accrued liabilities
   
(33)
   
(33)
             
Other assets
   
472
   
846
 
Other liabilities
   
(61)
     
                                           
Total derivatives
$
14,399
 
$
15,198
     
$
995
 
$
1,535
     
$
(143)
 
$
(59)

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
(Loss)/gain recognized in other
comprehensive income (OCI)
 
Location of gain/(loss) reclassified from
accumulated OCI into income
effective/ineffective
 
Gain/(loss) reclassified from
accumulated OCI into income
ineffective/effective (1)
2015
 
2014
 
2013
   
2015
 
2014
 
2013
                                       
Cash flow hedges
                                     
-
                 
Net sales
 
$
20
 
$
3
     
Interest rate hedge
$
(7)
 
$
(3)
 
$
33
 
Cost of sales
   
6
   
7
 
$
38
Foreign exchange contracts
 
(17)
   
20 
   
56
 
Other (expense) income, net
               
91
                                       
Total cash flow hedges
$
(24)
 
$
17 
 
$
89
     
$
26
 
$
10
 
$
129

     
Gain (loss) recognized in income
 
Undesignated
derivatives
Location of gain/(loss)
recognized in income
 
2015
 
2014
 
2013
 
                       
Foreign exchange contracts – balance sheet
Foreign currency hedge gain (loss), net
 
$
8 
 
$
29
 
$
100
 
Foreign exchange contracts – loans
Foreign currency hedge (loss) gain, net
   
(3)
   
13
   
87
 
Foreign currency hedges related to translated earnings
Foreign currency hedge gain (loss), net
   
80 
   
1,369
   
435
 
                       
Total undesignated
   
$
85 
 
$
1,411
 
$
622
 

(1)  
There were no material amounts of ineffectiveness for 2015 and 2014 and the amount of hedge ineffectiveness for the year ended December 31, 2013 was $24 million related to interest rate swaps settled in the fourth quarter.