FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2005
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________to____________
Commission file number 1-3247
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CORNING INCORPORATED
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(Exact name of Registrant as specified in its charter)
New York 16-0393470
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Riverfront Plaza, Corning, New York 14831
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-974-9000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No ___
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ___ No X
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed any documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ___ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
1,557,553,059 shares of Corning's Common Stock, $0.50 Par Value, were
outstanding as of May 3, 2006.
Explanatory Note
On April 25, 2006, Corning Incorporated (Corning) filed a Current Report on Form
8-K with the Securities and Exchange Commission in which it announced that it
was restating its previously issued consolidated financial statements to correct
errors in its accounting for Corning's asbestos settlement liability and the
accounting for its investment in Pittsburgh Corning Europe from March 31, 2003,
through December 31, 2005. Corning also changed the classification of accretion
on a portion of the asbestos settlement liability from interest expense to
asbestos settlement expense in its statement of operations for the same time
period. Corning is filing this Amendment No. 1 on Form 10-Q/A to amend its
Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (the
Original Filing), which was originally filed on October 28, 2005.
As more fully described in Note 2 (Restatement of Previously Issued Financial
Statements) to the consolidated financial statements in this Form 10-Q/A, the
cumulative effect of these adjustments to Corning's September 30, 2005 balance
sheet was to increase its investments in affiliate companies by $30 million,
increase other accrued liabilities by $150 million, increase accumulated deficit
by $122 million, and increase accumulated other comprehensive income by $2
million. The cumulative effect of these adjustments to Corning's December 31,
2004 balance sheet was to increase investments in affiliate companies by $26
million, increase other accrued liabilities by $141 million, increase
accumulated deficit by $123 million, and increase accumulated other
comprehensive income by $8 million.
The restatement adjustments had the following impact on Corning's reported net
income and earnings per share as follows (in millions, except per share
amounts):
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
---- ---- ---- ----
As reported:
Net income (loss) $ 203 $ (2,491) $ 617 $ (2,328)
Basic earnings per share $ 0.14 $ (1.78) $ 0.43 $ (1.69)
Diluted earnings (loss) per share $ 0.13 $ (1.78) $ 0.41 $ (1.69)
As restated:
Net income (loss) $ 203 $ (2,546) $ 618 $ (2,381)
Basic earnings per share $ 0.14 $ (1.82) $ 0.43 $ (1.73)
Diluted earnings (loss) per share $ 0.13 $ (1.82) $ 0.41 $ (1.73)
Increase in net (loss) income $ (55) $ 1 $ (53)
Increase in basic earnings per share
Increase in diluted loss per share $ (0.04) $ (0.04)
As a result of the restatement, the Company's previously issued consolidated
financial statements for the period from March 31, 2003, through December 31,
2005, including those contained in the following filings, should no longer be
relied upon: Annual Report on Form 10-K for the fiscal year ended December 31,
2005; Quarterly Reports on Form 10-Q for the quarters ended September 30, 2005,
June 30, 2005 and March 31, 2005.
Refer to Note 2 (Restatement of Previously Issued Financial Statements) to the
consolidated financial statements in this Form 10-Q/A for additional
information.
In connection with the restatement, Corning concluded that certain material
weaknesses existed in its internal control over financial reporting. See Part I
- Item 4 "Controls and Procedures."
This Form 10-Q/A amends and restates only certain information in Items 1, 2, and
4 of Part I and Items 1 and 6 of Part II of the Original Filing. In addition,
Item 6 of Part II of the Original Filing has been amended to include updated
certifications executed as of the date of this Form 10-Q/A from our Chief
Executive Officer and Chief Financial Officer as required by Sections 302 and
906 of the Sarbanes-Oxley Act of 2002 and an updated Computation of Ratio of
Earnings to Fixed Charges. The certifications of the Chief Executive Officer and
Chief Financial Officer and our Computation of Ratio of Earnings to Fixed
Charges are attached to this Form 10-Q/A as exhibits 12, 31.1, 31.2, and 32.
Except for the amended and restated information, this Form 10-Q/A includes all
of the information contained in the Original Filing, and no attempt has been
made in this Form 10-Q/A to modify or update the disclosures presented in the
Original Filing, except as required to reflect the effects of the restatement.
This Form 10-Q/A continues to describe conditions as of the date of the Original
Filing, and the disclosures contained herein have not been updated to reflect
events, results, or developments that occurred after the Original Filing, or to
modify or update those disclosures affected by subsequent events. Forward
looking statements made in the Original Filing have not been revised to reflect
events, results or developments that have become known to us after the date of
the Original Filing (other than the restatement), and such forward looking
statements should be read in their historical context.
INDEX
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PART I - FINANCIAL INFORMATION
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Page
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ITEM 1. Financial Statements
Consolidated Statements of Operations (Unaudited) for the
three and nine months ended September 30, 2005 and 2004 5
Consolidated Balance Sheets (Unaudited) at September 30, 2005
and December 31, 2004 6
Consolidated Statements of Cash Flows (Unaudited) for the
nine months ended September 30, 2005 and 2004 7
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 34
Item 3. Quantitative and Qualitative Disclosures About Market Risk 57
Item 4. Controls and Procedures 57
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings 59
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 63
Item 6. Exhibits 64
Signatures 65
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share amounts)
Three months Nine months
ended September 30, ended September 30,
------------------------- --------------------------
2005 2004 2005 2004
(Restated) (Restated) (Restated) (Restated)
---------- ---------- ---------- ----------
Net sales $ 1,188 $ 1,006 $ 3,379 $ 2,821
Cost of sales 643 602 1,922 1,771
--------- -------- --------- ---------
Gross margin 545 404 1,457 1,050
Operating expenses:
Selling, general and administrative expenses 178 153 553 479
Research, development and engineering expenses 118 88 320 257
Amortization of purchased intangibles 3 9 11 28
Restructuring, impairment and other charges (Note 3) 28 1,794 46 1,794
Asbestos settlement (Note 4) 73 (45) 204 29
--------- -------- --------- ---------
Operating income (loss) 145 (1,595) 323 (1,537)
Interest income 17 6 40 16
Interest expense (23) (34) (84) (103)
Loss on repurchases and retirement
of debt, net (Note 5) (4) (12) (36)
Other income, net 17 5 28 6
--------- -------- --------- ---------
Income (loss) from continuing operations before
income taxes 156 (1,622) 295 (1,654)
Provision for income taxes (Note 6) (28) (1,040) (91) (1,050)
--------- -------- --------- ---------
Income (loss) from continuing operations before
minority interests and equity earnings 128 (2,662) 204 (2,704)
Minority interests (2) (3) (8) (14)
Equity in earnings of associated companies, net of
impairments (Note 10) 77 99 422 317
--------- -------- --------- ---------
Income (loss) from continuing operations 203 (2,566) 618 (2,401)
Income from discontinued operation (Note 8) 20 20
--------- -------- --------- ---------
Net income (loss) $ 203 $ (2,546) $ 618 $ (2,381)
========= ======== ========= =========
Basic earnings (loss) per common share from (Note 7):
Continuing operations $ 0.14 $ (1.83) $ 0.43 $ (1.74)
Discontinued operation 0.01 0.01
--------- -------- --------- ---------
Basic earnings (loss) per common share $ 0.14 $ (1.82) $ 0.43 $ (1.73)
========= ======== ========= =========
Diluted earnings (loss) per common share from (Note 7):
Continuing operations $ 0.13 $ (1.83) $ 0.41 $ (1.74)
Discontinued operation 0.01 0.01
--------- -------- --------- ---------
Diluted earnings (loss) per common share $ 0.13 $ (1.82) $ 0.41 $ (1.73)
========= ======== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except per share amounts)
September 30, December 31,
2005 2004
(Restated) (Restated)
------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 1,395 $ 1,009
Short-term investments, at fair value 1,023 872
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Total cash, cash equivalents and short-term investments 2,418 1,881
Trade accounts receivable, net of doubtful accounts and allowances - $28 and $30 631 585
Inventories (Note 9) 559 535
Deferred income taxes (Note 6) 87 94
Other current assets 204 188
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Total current assets 3,899 3,283
Investments (Note 10) 1,635 1,510
Property, net of accumulated depreciation - $3,543 and $3,532 4,367 3,941
Goodwill and other intangible assets, net (Note 11) 380 398
Deferred income taxes (Note 6) 487 472
Other assets 145 166
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Total Assets $ 10,913 $ 9,770
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings, including current portion of long-term debt (Note 5) $ 293 $ 478
Accounts payable 554 682
Other accrued liabilities (Notes 4 and 12) 1,534 1,319
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Total current liabilities 2,381 2,479
Long-term debt (Note 5) 1,804 2,214
Postretirement benefits other than pensions 594 600
Other liabilities (Notes 4 and 12) 1,001 747
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Total liabilities 5,780 6,040
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Commitments and contingencies (Note 4)
Minority interests 27 29
Shareholders' equity:
Preferred stock - Par value $100.00 per share; Shares authorized: 10 million
Series C mandatory convertible preferred stock - Shares issued: 5.75 million;
Shares outstanding: 0 and 637 thousand 64
Common stock - Par value $0.50 per share; Shares authorized: 3.8 billion;
Shares issued: 1,534 million and 1,424 million 767 712
Additional paid-in capital 11,280 10,363
Accumulated deficit (6,814) (7,432)
Treasury stock, at cost; Shares held: 16 million (164) (162)
Accumulated other comprehensive income (Note 14) 37 156
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Total shareholders' equity 5,106 3,701
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Total Liabilities and Shareholders' Equity $ 10,913 $ 9,770
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
Nine months ended
September 30,
------------------------
2005 2004
(Restated) (Restated)
---------- ----------
Cash Flows from Operating Activities:
Net income (loss) $ 618 $(2,381)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 373 359
Amortization of purchased intangibles 11 28
Restructuring, impairment and other charges and (credits) 46 1,794
Asbestos settlement 204 29
Gain on sale of discontinued operation (20)
Loss on repurchases and retirement of debt, net 12 36
Undistributed earnings of associated companies (206) (206)
Minority interests, net of dividends paid 7 14
Deferred taxes (11) 992
Interest expense on convertible debentures 3 4
Restructuring payments (21) (75)
Employee retirement plan payments less than (in excess of) expense 44 (12)
Customer deposits, net 376 100
Changes in certain working capital items:
Trade accounts receivable (78) (29)
Inventories (46) (52)
Other current assets (14) (25)
Accounts payable and other current liabilities, net of restructuring payments (91) 29
Other, net 53 58
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Net cash provided by operating activities 1,280 643
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Cash Flows from Investing Activities:
Capital expenditures (1,076) (556)
Net proceeds from sale of businesses 100
Net proceeds from sale or disposal of assets 17 46
Short-term investments - acquisitions (1,313) (1,365)
Short-term investments - liquidations 1,163 1,116
Restricted investments - liquidations 3 6
Other, net 10
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Net cash used in investing activities (1,196) (653)
-------- -------
Cash Flows from Financing Activities:
Net repayments of loans payable (198) (111)
Proceeds from issuance of long-term debt, net 147 442
Repayments of long-term debt (102) (154)
Proceeds from issuance of common stock, net 356 33
Cash dividends to preferred shareholders (3) (6)
Proceeds from the exercise of stock options 142 34
Other, net (9)
-------- -------
Net cash provided by financing activities 333 238
-------- -------
Effect of exchange rates on cash (31) (4)
-------- -------
Net increase in cash and cash equivalents 386 224
Cash and cash equivalents at beginning of period 1,009 688
-------- -------
Cash and cash equivalents at end of period $ 1,395 $ 912
======== =======
Certain amounts for 2004 were reclassified to conform with 2005 presentation.
The accompanying notes are an integral part of these consolidated financial
statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
General
In these notes, the terms "Corning," "Company," "we," "us," or "our" mean
Corning Incorporated and subsidiary companies.
The accompanying unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC) and in accordance with accounting principles generally accepted in the
United States of America (GAAP) for interim financial information. Certain
information and note disclosures normally included in financial statements
prepared in accordance with GAAP have been omitted or condensed. These interim
consolidated financial statements should be read in conjunction with Corning's
consolidated financial statements and notes thereto included in its Annual
Report on Form 10-K for the year ended December 31, 2004 (2004 Form 10-K).
Except as disclosed herein, there has been no material change in the information
disclosed in the notes to the consolidated financial statements included in the
2004 Form 10-K.
The unaudited consolidated financial statements reflect all adjustments which,
in the opinion of management, are necessary for a fair statement of the results
of operations, financial position and cash flows for the interim periods
presented. All such adjustments are of a normal recurring nature. The results
for interim periods are not necessarily indicative of results which may be
expected for any other interim period or for the full year.
Certain amounts for 2004 were reclassified to conform with 2005 classifications.
Additionally, we have reclassified the 2004 interim results to conform to the
2004 year-end classification of auction rate securities as short-term
investments instead of cash equivalents. These reclassifications had no impact
on results of operations or shareholders' equity.
Property, Plant, and Equipment
Included in the subcategory of equipment, as disclosed in Note 8 to the December
31, 2004 Form 10-K, are the following types of assets:
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Asset type Range of useful life
--------------------------------------------------------------------------------
Software 3 years
Manufacturing equipment 3 to 15 years
Furniture and fixtures 5 to 7 years
Transportation equipment 20 years
--------------------------------------------------------------------------------
Included in manufacturing equipment are certain components of production
equipment that are coated with or constructed of precious metals. These metals
have an indefinite useful life as they are returned to their elemental state and
sold at current market value when fixed assets are rebuilt or disposed of.
Foreign Currency Translation and Transactions
The determination of the functional currency for Corning's foreign subsidiaries
is made based on the appropriate economic and management indicators. For most
foreign operations, the local currencies are generally considered to be the
functional currencies. Prior to 2005, non-U.S. operations which do not use the
local currency as the functional currency use the U.S. dollar. Effective January
1, 2005, our Taiwan subsidiary changed its functional currency from the new
Taiwan dollar (its local currency) to the Japanese yen due to the increased
significance of Japanese yen based transactions of that subsidiary. As a result
of this change in functional currency, exchange rate gains and losses are
recognized on transactions in currencies other than the Japanese yen and
included in income for the period in which the exchange rates changed.
For foreign subsidiary functional currency financial statements, balance sheet
accounts are translated at current exchange rates, and statements of operations
accounts are translated at average exchange rates for the year. Translation
gains and losses are recorded as a separate component of accumulated other
comprehensive income (loss) in shareholders' equity. The effects of remeasuring
non-functional currency assets and liabilities into the functional currency are
included in current earnings.
Derivative Instruments
We participate in a variety of foreign exchange forward contracts and foreign
exchange option contracts entered into in connection with the management of our
exposure to fluctuations in foreign exchange and interest rates.
All derivatives are recorded at fair value on the balance sheet. Changes in the
fair value of derivatives designated as cash flow hedges and hedges of net
investments in foreign operations are recorded in accumulated other
comprehensive income (loss). Amounts related to cash flow hedges are
reclassified from accumulated other comprehensive income (loss) when the
underlying hedged item impacts earnings. This reclassification is recorded in
the same line item of the consolidated statement of operations, primarily sales
or cost of sales, where the effects of the hedged item are recorded.
Changes in the fair value of derivatives designated as fair value hedges are
recorded currently in earnings offset, to the extent the derivative was
effective, by the change in the fair value of the hedged item. Corning currently
does not have any fair value hedges. Changes in the fair value of derivatives
not designated as hedging instruments are recorded currently in earnings in the
Other income line of the consolidated statement of operations.
Hedging Activities
We operate and conduct business in many foreign countries and as a result are
exposed to movements in foreign currency exchange rates. Our exposure to
exchange rate effects includes:
.. exchange rate movements on financial instruments and transactions
denominated in foreign currencies which impact earnings, and
.. exchange rate movements upon conversion of net assets in foreign
subsidiaries for which the functional currency is not the U.S. dollar,
which impact our net equity.
Our most significant foreign currency exposures relate to Japan, Korea, Taiwan
and western European countries. We selectively enter into foreign exchange
forward and option contracts with durations generally 15 months or less to hedge
our exposure to exchange rate risk on foreign source income and purchases. 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 neutralize the impact of exchange rate movements on our operating results.
We engage in foreign currency hedging activities to reduce the risk that changes
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. The hedge contracts reduce the exposure to fluctuations in exchange
rate movements because the gains and losses associated with foreign currency
balances and transactions are generally offset with gains and losses of the
hedge contracts. Because the impact of movements in foreign exchange rates on
the value of hedge contracts offsets the related impact on the underlying items
being hedged, these financial instruments help alleviate the risk that might
otherwise result from currency exchange rate fluctuations.
The following table summarizes the notional amounts and respective fair values
of Corning's derivative financial instruments, which mature at varying dates, at
September 30, 2005 (in millions):
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Notional Amount Fair Value
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Foreign exchange forward contracts $1,139 $ 20
Foreign exchange option contracts $1,068 $ 8
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The amount of net gains expected to be reclassified into earnings within the
next 12 months is $27 million.
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. We do not require and are not
required to place collateral for these financial instruments.
In the second quarter of 2005, Corning began using derivative instruments
(forwards) to limit the exposure to foreign currency fluctuations associated
with certain monetary assets and liabilities. These derivative instruments are
not designated as hedging instruments for accounting purposes and, as such, are
referred to as undesignated hedges. Changes in the fair value of undesignated
hedges are recorded in current period results in the other income, net component
on the income statement, along with the foreign currency gains and losses
arising from the underlying monetary assets or liabilities, in the consolidated
statement of operations. At September 30, 2005, the notional amount of the
undesignated derivatives was $444 million.
We have issued foreign currency denominated debt that has been designated as a
hedge of the net investment in a foreign operation. The effective portion of the
changes in fair value of the debt is reflected as a component of other
comprehensive income (loss) as part of the foreign currency translation
adjustment. At September 30, 2005 the amount of net losses included in the
cumulative translation adjustment is $112 million.
Variable Interest Entities
Corning leases certain transportation equipment from a Trust that qualifies as a
variable interest entity under FIN 46R, Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51, Revised (FIN
46R). The sole purpose of this entity is leasing transportation equipment to
Corning. Since Corning is the primary beneficiary of this entity, the financial
statements of the entity are included in Corning's consolidated financial
statements. The entity's assets are primarily comprised of fixed assets which
are collateral for the entity's borrowings. These assets, amounting to
approximately $29.8 million as of September 30, 2005, are classified as
long-term assets in the consolidated balance sheet.
Corning leases certain transportation equipment from two additional Trusts that
qualify as variable interest entities under FIN 46R. The sole purpose of the
entities is leasing transportation equipment to Corning. Corning has been
involved with these entities as lessee since the inception of the Trusts. Lease
revenue generated by these Trusts was $1.6 million for each of the nine month
periods ended September 30, 2005 and 2004, and $0.4 million for each of the
quarters ended September 30, 2005 and 2004. Corning's maximum exposure to loss
as a result of its involvement with the Trusts is estimated at approximately
$16.5 million at September 30, 2005.
Stock-Based Compensation
We apply Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees" (APB 25), for our stock-based compensation plans. The
following table illustrates the effect on income and earnings per share if we
had applied the fair value recognition provisions of Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation" (SFAS 123), to stock-based
employee compensation.
(In millions, except per share amounts)
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Three months Nine months
ended September 30, ended September 30,
------------------------- -------------------------
2005 2004 2005 2004
(Restated) (Restated) (Restated) (Restated)
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Income (loss) from continuing operations - as reported $ 203 $ (2,566) $ 618 $ (2,401)
Add: Stock-based employee compensation expense
determined under APB 25, included in reported
net income (loss), net of tax 12 28 3
Less: Stock-based employee compensation expense
determined under fair value based method, net of tax (23) (20) (65) (77)
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations - pro forma $ 192 $ (2,586) $ 581 $ (2,475)
Earnings (loss) per common share:
Basic - as reported $ 0.14 $ (1.83) $ 0.43 $ (1.74)
Basic - pro forma $ 0.13 $ (1.85) $ 0.40 $ (1.79)
Diluted - as reported $ 0.13 $ (1.83) $ 0.41 $ (1.74)
Diluted - pro forma $ 0.12 $ (1.85) $ 0.38 $ (1.79)
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For purposes of SFAS 123 fair value disclosures, each option grant's fair value
is estimated on the grant date using the Black-Scholes option pricing model. The
following are weighted-average assumptions used for grants under our stock
plans:
--------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------ ------------------------
2005 2004 2005 2004
--------------------------------------------------------------------------------
Expected life in years 4 4 4 4
Risk free interest rate 4.13% 3.62% 3.76% 3.34%
Expected volatility 50% 50% 50% 50%
--------------------------------------------------------------------------------
Changes in the status of outstanding options follow:
--------------------------------------------------------------------------------
Number of Shares Weighted-Average
(in thousands) Exercise Price
--------------------------------------------------------------------------------
Options outstanding December 31, 2004 139,023 $ 20.43
Options granted under plans 7,665 $ 12.87
Options exercised (18,446) $ 8.16
Options terminated (3,337) $ 36.24
---------
Options outstanding September 30, 2005 124,905 $ 21.35
=========
Options exercisable September 30, 2005 96,949 $ 25.05
--------------------------------------------------------------------------------
New Accounting Standards
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS 123(R)), which replaces SFAS 123 and supercedes APB 25. SFAS
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements at fair
value. On April 14, 2005, the SEC issued a new rule that amends the required
adoption dates of SFAS 123(R). Under SFAS 123(R), Corning must determine the
appropriate fair value model to be used for valuing share-based payments, the
attribution method for compensation cost, and the transition method to be used
at date of adoption. We will implement the provisions of SFAS 123(R) on January
1, 2006 following the "prospective adoption" transition method. This adoption
method requires Corning to begin expensing share-based payments effective
January 1, 2006. Prior periods will not be restated.
Corning grants restricted shares and stock options that are subject to specific
vesting conditions (e.g., three-year cliff vesting). The awards specify that the
employee will continue to vest in the award after retirement without providing
any additional service. Corning accounts for this type of arrangement by
recognizing compensation cost over the nominal vesting period and, if the
employee retires before the end of the vesting period, recognizing any remaining
unrecognized compensation cost at the date of retirement (the "nominal vesting
period approach").
SFAS 123(R) specifies that an award is vested when the employee's retention of
the award is no longer contingent on providing subsequent service (the
"non-substantive vesting period approach"). That would be the case for Corning
awards that vest when employees retire and are granted to retirement eligible
employees. Effective January 1, 2006, related compensation cost must be
recognized immediately for awards granted to retirement eligible employees or
over the period from the grant date to the date retirement eligibility is
achieved, if that is expected to occur during the nominal vesting period.
We will continue to follow the nominal vesting period approach for (1) any new
share-based awards granted prior to adopting SFAS 123(R) and (2) the remaining
portion of unvested outstanding awards after adopting SFAS 123(R). Upon adoption
of SFAS 123(R), we will apply the non-substantive vesting period approach to new
grants that have retirement eligibility provisions. Had we applied the
non-substantive vesting period approach in prior periods, stock-based
compensation cost would have been $11 million and $5 million higher for the nine
months ended September 30, 2005 and 2004, respectively, for stock options and
restricted share awards.
Our current estimate is that our pretax and after-tax stock-based compensation
expense will increase by $60 million to $70 million in 2006 and beyond as a
result of adopting SFAS 123(R). This amount includes approximately $15 million
related to the impact of applying the non-substantive vesting period approach.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4" (SFAS 151). SFAS 151 amends ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify that abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) should be recognized as
current-period charges. Additionally, SFAS 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. Corning is required to adopt SFAS 151 effective
January 1, 2006. Corning does not expect the adoption of SFAS 151 to have a
material impact on its consolidated results of operations and financial
condition.
In December 2004, the FASB issued SFAS No. 153, "Exchanges in Nonmonetary Assets
- an amendment of APB Opinion No. 29" (SFAS 153) which became effective in July
2005. This Statement amends APB No. 29, "Accounting for Nonmonetary
Transactions," by eliminating an exception for nonmonetary exchanges of similar
productive assets and replacing it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Corning adopted SFAS
153 prospectively, on July 1, 2005, as required. The impact of SFAS 153 was not
material to Corning's consolidated results of operations and financial
condition.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations - an interpretation of FASB Statement
No. 143" (FIN 47), which clarifies the term "conditional asset retirement
obligation" used in SFAS No. 143, "Accounting for Asset Retirement Obligations,"
and specifically when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. Corning is required
to adopt FIN 47 no later than December 31, 2005. Corning does not expect the
adoption of FIN 47 to have a material impact on its consolidated results of
operations and financial condition.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" (SFAS 154), which replaces APB Opinion No. 20, "Accounting
Changes," (APB 20) and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements." SFAS 154 changes the requirements for the accounting for
and reporting of a change in accounting principle. Upon the adoption of SFAS 154
beginning January 1, 2006, Corning will apply the standard's guidance to changes
in accounting methods as required. At this time, Corning does not expect the
adoption of SFAS 154 will have a material impact on its consolidated results of
operations and financial condition.
2. Restatement of Previously Issued Financial Statements
The Company's management and its audit committee concluded, on April 21, 2006,
that we would restate previously issued consolidated financial statements for
each of the three years ended December 31, 2005, to correct for errors in the
accounting for the asbestos settlement liability and for our investment in
Pittsburgh Corning Europe N.V. (PCE) from March 31, 2003, through December 31,
2005. We also changed the classification of accretion on a portion of the
liability from interest expense to asbestos settlement expense in our
consolidated statements of operations for the same time period.
On March 28, 2003, we announced that we had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future asbestos claims against Corning and Pittsburgh Corning Corporation (PCC),
which might arise from PCC products or operations. The proposed settlement, if
the plan is approved and becomes effective, will require Corning to relinquish
our equity interest in PCC, contribute our equity interest in PCE, and
contribute 25 million shares of Corning common stock. We also agreed to make
cash payments with a value of $131 million, in March 2003, over six years from
the effective date of the settlement and to assign insurance policy proceeds
from our primary insurance and a portion of our excess insurance at the time of
the settlement.
Between March 31, 2003, and December 31, 2005, the following accounting errors
occurred:
.. Corning's asbestos settlement charges and the related liability for the
asbestos settlement did not reflect the estimated fair value at initial
recognition or subsequent changes in fair value, of certain components of
the proposed settlement offer. As a result, asbestos settlement charges for
the years 2005, 2004, and 2003 were understated by $13 million, $24
million, and $117 million, respectively.
.. Corning incorrectly suspended recording equity earnings of PCE between
March 31, 2003, and December 31, 2005. As a result, equity in earnings of
associated companies for the years 2005, 2004, and 2003 was understated by
$13 million, $11 million, and $7 million, respectively.
.. Accretion on the cash portion of the asbestos settlement offer was
incorrectly recorded as interest expense resulting in both an overstatement
of interest expense and an understatement of asbestos settlement expense
for the years 2005, 2004, and 2003, by $8 million, $8 million, and $5
million, respectively.
In the restated financial statements, the higher asbestos settlement charges
have been tax-effected in 2003 and the first half of 2004. As Corning provided a
valuation allowance on most of its deferred tax assets in the third quarter of
2004, that quarter reflects an increase in the valuation allowance of $55
million for the deferred tax assets related to the higher asbestos settlement
charges.
The cumulative effect of these adjustments to Corning's balance sheet as of
September 30, 2005, resulted in an increase in investments in affiliate
companies of $30 million, an increase to other accrued liabilities of $150
million, an increase to accumulated deficit of $122 million, and an increase to
accumulated other comprehensive income of $2 million.
The cumulative effect of these adjustments to Corning's balance sheet as of
December 31, 2004, resulted in an increase in investments in affiliate companies
of $26 million, an increase to other accrued liabilities of $141 million, an
increase to accumulated deficit of $123 million, and an increase to accumulated
other comprehensive income of $8 million.
The impacts of the restatement adjustments on Corning's financial statements are
provided in the following summaries.
In addition, the consolidated statements of cash flows for the nine months ended
September 30, 2004, reflect changes to Investing Activities and Cash and Cash
Equivalents at End of Period due to the reclassification of auction rate
securities from cash and cash equivalents to short-term investments as of
September 30, 2004. Amounts were reclassified because the securities had stated
maturities beyond three months but priced and traded as short-term investments
due to the liquidity provisions at specified interest rate reset dates,
typically every 7, 28, or 35 days.
Consolidated Statements of Operations
Summary of Restatement Impacts
(Unaudited; in millions, except per share amounts)
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended
September 30, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Operating expenses:
Asbestos settlement $ 68 $ 5 $ 73
Operating income (loss) 150 (5) 145
Interest expense 25 (2) 23
Income (loss) before income taxes 159 (3) 156
Provision for income taxes (28) (28)
--------- --------- ----------
Income (loss) before minority interests and equity earnings 131 (3) 128
Equity in earnings of associated companies, net of impairments 74 3 77
Net income $ 203 $ 203
Basic earnings per common share $ 0.14 $ 0.14
Diluted earnings per common share $ 0.13 $ 0.13
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended
September 30, 2004
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Operating expenses:
Asbestos settlement $ (50) $ 5 $ (45)
Operating loss (1,590) (5) (1,595)
Interest expense 36 (2) 34
Loss before income taxes (1,619) (3) (1,622)
Provision for income taxes (985) (55) (1,040)
--------- ---------- ----------
Loss before minority interests and equity earnings (2,604) (58) (2,662)
Equity in earnings of associated companies, net of impairments 96 3 99
Loss from continuing operations $ (2,511) $ (55) $ (2,566)
Net loss $ (2,491) $ (55) $ (2,546)
Basic loss per common share from continuing operations $ (1.79) $ (0.04) $ (1.83)
Basic loss per common share $ (1.78) $ (0.04) $ (1.82)
Diluted loss per common share from continuing operations $ (1.79) $ (0.04) $ (1.83)
Diluted loss per common share $ (1.78) $ (0.04) $ (1.82)
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
For the nine months ended
September 30, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Operating expenses:
Asbestos settlement $ 189 $ 15 $ 204
Operating income (loss) 338 (15) 323
Interest expense 90 (6) 84
Income before income taxes 304 (9) 295
Provision for income taxes (91) (91)
--------- --------- ----------
Income before minority interests and equity earnings 213 (9) 204
Equity in earnings of associated companies, net of impairments 412 10 422
Net income $ 617 $ 1 $ 618
Basic loss per common share $ 0.43 $ 0.43
Diluted loss per common share $ 0.41 $ 0.41
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
For the nine months ended
September 30, 2004
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Operating expenses:
Asbestos settlement $ 16 $ 13 $ 29
Operating loss (1,524) (13) (1,537)
Interest expense 109 (6) 103
Loss before income taxes (1,647) (7) (1,654)
Provision for income taxes (997) (53) (1,050)
--------- ---------- ----------
Loss before minority interests and equity earnings (2,644) (60) (2,704)
Equity in earnings of associated companies, net of impairments 310 7 317
Loss from continuing operations $ (2,348) $ (53) $ (2,401)
Net loss $ (2,328) $ (53) $ (2,381)
Basic loss per common share from continuing operations $ (1.70) $ (0.04) $ (1.74)
Basic loss per common share $ (1.69) $ (0.04) $ (1.73)
Diluted loss per common share from continuing operations $ (1.70) $ (0.04) $ (1.74)
Diluted loss per common share $ (1.69) $ (0.04) $ (1.73)
------------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
Summary of Restatement Impacts
(Unaudited; in millions)
------------------------------------------------------------------------------------------------------------------------------------
As of September 30, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Investments $ 1,605 $ 30 $ 1,635
Total Assets $ 10,883 $ 30 $ 10,913
Other accrued liabilities $ 1,384 $ 150 $ 1,534
Total current liabilities $ 2,231 $ 150 $ 2,381
Total liabilities $ 5,630 $ 150 $ 5,780
Accumulated deficit $ (6,692) $ (122) $ (6,814)
Accumulated other comprehensive income $ 35 $ 2 $ 37
Total shareholders' equity $ 5,226 $ (120) $ 5,106
Total Liabilities and Shareholders' Equity $ 10,883 $ 30 $ 10,913
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2004
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Investments $ 1,484 $ 26 $ 1,510
Total Assets $ 9,744 $ 26 $ 9,770
Other accrued liabilities $ 1,178 $ 141 $ 1,319
Total current liabilities $ 2,338 $ 141 $ 2,479
Total liabilities $ 5,899 $ 141 $ 6,040
Accumulated deficit $ (7,309) $ (123) $ (7,432)
Accumulated other comprehensive income $ 148 $ 8 $ 156
Total shareholders' equity $ 3,816 $ (115) $ 3,701
Total Liabilities and Shareholders' Equity $ 9,744 $ 26 $ 9,770
------------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Summary of Restatement Impacts
(Unaudited; in millions)
------------------------------------------------------------------------------------------------------------------------------------
For the nine months ended
September 30, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Cash Flows from Operating Activities:
Net income $ 617 $ 1 $ 618
Adjustments to reconcile income from continuing operations to net
cash provided by operating activities:
Asbestos settlement charge 189 15 204
Undistributed earnings of associated companies (196) (10) (206)
Other, net 59 (6) 53
Net cash provided by operating activities $ 1,280 $ 1,280
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
For the nine months ended
September 30, 2004
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Cash Flows from Operating Activities:
Net loss $ (2,328) $ (53) $ (2,381)
Adjustments to reconcile loss from continuing operations to net
cash (used in) provided by operating activities:
Asbestos settlement charge 16 13 29
Undistributed earnings of associated companies (199) (7) (206)
Deferred taxes 939 53 992
Other, net 64 (6) 58
Net cash provided by operating activities $ 643 $ 643
------------------------------------------------------------------------------------------------------------------------------------
3. Restructuring, Impairment and Other Charges
2005 Actions
Third Quarter
-------------
In the third quarter of 2005, we approved a restructuring plan within the
Telecommunications segment to continue to reduce costs in this segment. As a
result, we recorded a charge of $30 million which is comprised of severance
costs. Additional expenses, not included in this charge, related to relocating
manufacturing assets, accelerated depreciation, and shutdown activities are not
expected to be material and will be expensed as incurred in future periods. We
also recorded net credits of $2 million related to adjustments to prior period
restructuring charges.
Second Quarter
--------------
In the second quarter of 2005, we recorded net credits of $1 million included in
restructuring, impairment and other charges and (credits). A summary of these
credits and charges follows:
.. We recorded net credits of $7 million, primarily for adjustments to prior
years' restructuring and impairment reserves.
.. We recorded an additional impairment charge of $6 million for an other than
temporary decline in the fair value of our investment in Avanex Corporation
(Avanex) below its adjusted cost basis. Our investment in Avanex is
accounted for as an available-for-sale security under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." At June
30, 2005, shares of Avanex stock were trading at $0.90 per share compared
to our adjusted cost basis of $1.30 per share (after recording for the
first quarter of 2005 impairment charge discussed below). We continue to
sell our shares of Avanex and, subject to restrictions and the trading
volume in Avanex stock, expect to complete this activity in early 2006. As
we do not expect the market value of the Avanex shares to recover in this
timeframe, the additional impairment in the second quarter was required.
First Quarter
-------------
In the first quarter of 2005, we recorded a $19 million impairment charge for an
other than temporary decline in the fair value of our investment in Avanex.
The following table illustrates the charges, credits and balances of the
restructuring reserves as of and for the nine months ended September 30, 2005
(in millions):
------------------------------------------------------------------------------------------------------------------------------------
Nine months Remaining
ended Sept. Revisions Net Cash reserve at
January 1, 30, 2005 to existing charges/ payments Sept. 30,
2005 charge plans (reversals) in 2005 2005
------------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 18 $ 30 $ (1) $ 29 $ (10) $ 37
Other charges 77 (14) (14) (11) 52
--------------------------------------------------------------------------------
Total restructuring charges $ 95 $ 30 $ (15) $ 15 $ (21) $ 89
--------------------------------------------------------------------------------
Impairment of assets:
Impairment of available-for-sale
securities $ 25 $ 25
Assets to be disposed of by sale or
abandonment $ 6 6
------------------------------------
Total impairment charges $ 25 $ 6 $ 31
------------------------------------
Total restructuring, impairment and
other charges and (credits) $ 55 $ (9) $ 46
------------------------------------------------------------------------------------------------------------------------------------
Charges recorded in the third quarter of 2005 included severance costs for
approximately 330 people. At September 30, 2005, none of these employees had
been severed. Cash payments for employee related costs will be substantially
complete by the end of 2007, while payments for other charges will be
substantially complete by the end of 2008.
2004 Actions
Third Quarter
-------------
In the third quarter of 2004, we recorded restructuring, impairment and other
charges and (credits) of $1,794 million. A summary of the charges and credits
follows:
.. We recorded a charge of $1,420 million to impair a significant portion of
our Telecommunications segment goodwill balance. Pursuant to SFAS No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142), goodwill is required to
be tested for impairment annually at the reporting unit level. In addition,
goodwill should be tested for impairment between annual tests if an event
occurs or circumstances change that would more likely than not reduce the
fair value of the reporting unit below its related carrying value. In the
third quarter of 2004, we identified certain factors that caused us to
lower our estimates and projections for the long-term revenue growth of the
Telecommunications segment, which indicated that the fair value of the
Telecommunications segment reporting unit was less than its carrying value.
As such, we performed an interim impairment test of Telecommunications
segment goodwill in the third quarter of 2004 and, as a result, recorded an
impairment charge of $1,420 million to reduce the carrying value of
goodwill to its implied fair value at September 30, 2004, of $117 million.
.. We recorded a $350 million charge to impair certain fixed assets of our
Telecommunications segment in accordance with SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" (SFAS 144). This charge
primarily relates to our third-quarter decision to permanently abandon
approximately $332 million of construction in progress at our optical fiber
manufacturing facility in Concord, North Carolina that had been stopped in
2002. As a result of our lowered outlook, we have permanently abandoned
this construction in progress as we no longer believe the demand for
optical fiber will warrant the investment necessary to complete this
facility.
.. We recorded an asset held for use impairment charge of $24 million to
impair certain fixed assets and intangible assets other than goodwill in
accordance with SFAS 144. Due to our decision to permanently abandon
certain fixed assets and lower our long-term outlook for the
Telecommunications segment, we determined that an event of impairment, as
defined by SFAS 144, had occurred in our Telecommunications segment which
required us to test the segment's long-lived assets other than goodwill for
impairment. We assess recoverability of the carrying value of long-lived
assets at the lowest level for which indentifiable cash flows are largely
independent of the cash flows of other assets and liabilities. We estimated
the fair value of the long-lived assets using the discounted cash flow
approach as a measure of fair value. As a result of our impairment
evaluation, we recorded an impairment charge to write-down certain assets
to their estimated fair values.
.. We recorded a gain of $8 million related to proceeds in excess of assumed
salvage values for assets of Corning Asahi Video Products Company (CAV)
that were previously impaired but later sold to a Henan Anyang CPT Glass
Bulb Group, Electronic Glass Co., Ltd. (Henan Anyang), located in China.
CAV was our 51% owned affiliate that manufactured glass panels and funnels
for use in conventional televisions that was shut down in 2003. This
represents the substantial completion of the sale of CAV's assets.
.. We recorded a loss of $14 million on the sale of our frequency controls
business for net cash proceeds of $80 million. The frequency controls
business, which was part of our Telecommunications segment, had annual
sales of $76 million.
.. We recorded net credits of $6 million comprised of adjustments to prior
years' restructuring and impairment charges.
Second Quarter
--------------
In the second quarter of 2004, we recorded credits of $34 million included in
restructuring, impairment and other charges and (credits). A summary of these
credits follows:
.. We recorded a $25 million gain related to proceeds in excess of assumed
salvage values for assets of CAV that were previously impaired but later
sold to a third party in China.
.. We recorded a $9 million credit related to adjustments to prior years'
restructuring reserves.
First Quarter
-------------
In the first quarter of 2004, we recorded net charges of $34 million included in
restructuring, impairment and other charges and (credits). A summary of these
charges and credits follow:
.. We recorded $39 million of accelerated depreciation and $1 million of exit
costs relating to the final shutdown of our semiconductor materials
manufacturing facility in Charleston, South Carolina.
.. We recorded credits of $6 million, primarily related to proceeds in excess
of assumed salvage values for assets that were previously impaired.
The following table details the charges, credits and balances of the
restructuring reserves as of and for the nine months ended September 30, 2004
(in millions):
------------------------------------------------------------------------------------------------------------------------------------
Nine months Remaining
ended Sept. Revisions Net Cash reserve at
January 1, 30, 2004 to existing charges/ payments Sept. 30,
2004 charge plans (reversals) in 2004 2004
------------------------------------------------------------------------------------------------------------------------------------
Restructuring charges:
Employee related costs $ 78 $ 4 $ 4 $ (55) $ 27
Other charges 108 $ 2 (4) (2) (20) 86
-------------------------------------------------------------------------------
Total restructuring charges $ 186 $ 2 $ 0 $ 2 $ (75) $ 113
-------------------------------------------------------------------------------
Impairment of long-lived assets:
Goodwill $ 1,420 $ 1,420
Assets to be disposed of by sale
or abandonment 350 $ (55) 295
Assets to be held and used $ 24 $ 24
---------------------------------------
Other:
Accelerated depreciation $ 39 $ 39
Loss on sale of frequency controls business $ 14 $ 14
---------------------------------------
Total restructuring, impairment and other
charges and (credits) $ 1,849 $ (55) $ 1,794
------------------------------------------------------------------------------------------------------------------------------------
4. Commitments and Contingencies
Asbestos Settlement
On March 28, 2003, we announced that we had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future asbestos claims against us and Pittsburgh Corning Corporation (PCC),
which might arise from PCC products or operations. The proposed settlement, if
the plan is approved and becomes effective, will require Corning to relinquish
its equity interest in PCC, contribute its equity interest in Pittsburgh Corning
Europe N.V. (PCE), a Belgian corporation, and contribute 25 million shares of
Corning common stock. Corning also agreed to make cash payments with a value of
$131 million, in March 2003, over six years from the effective date of the
settlement and to assign certain insurance policy proceeds from its primary
insurance and a portion of its excess insurance at the time of the settlement.
The PCC Plan received a favorable vote from creditors in March 2004. Hearings to
consider objections to the PCC Plan were held in the Bankruptcy Court in May
2004. The parties filed post-hearing briefs and made oral arguments to the
Bankruptcy Court in November 2004. The Bankruptcy Court allowed an additional
round of briefing to address current case law developments and heard additional
oral arguments on March 16, 2005. In mid-April 2005, the proponents of the PCC
Plan requested that the court rule on the pending objections. If the Bankruptcy
Court does not approve the PCC Plan in its current form, changes to the Plan are
probable as it is likely that the Court will allow the proponents time to
propose amendments. The outcome of these proceedings is uncertain, and
confirmation of the current Plan or any amended Plan is subject to a number of
contingencies. However, apart from the quarterly mark-to-market adjustment in
the value of the 25 million shares of Corning stock, management believes that
the likelihood of a material adverse impact to Corning's financial statements is
remote.
As discussed in Note 2 (Restatement of Prior Period Financial Statements) we
have restated prior period financial statements to correct the accounting
related to the asbestos settlement.
In the third quarter of 2005, we recorded asbestos settlement expense of $73
million, including $68 million reflecting the increase in the value of Corning's
common stock from June 30, 2005 to September 30, 2005, and $5 million to adjust
the estimated fair value of the other components of the proposed asbestos
settlement.
In the third quarter of 2004, we recorded a credit of $45 million, including $50
million for the decrease in the value of Corning's common stock from June 30,
2004 to September 30, 2004, and a $5 million charge to adjust the estimated fair
value of the other components of the proposed asbestos settlement.
For the nine months ended September 30, 2005, we recorded asbestos settlement
expense of $204 million, including $189 million reflecting the increase in the
value of Corning's common stock from December 31, 2004 to September 30, 2005,
and $15 million to adjust the estimated fair value of the other components of
the proposed asbestos settlement.
For the nine months ended September 30, 2004, we recorded asbestos settlement
expense of $29 million, including $16 million reflecting the increase in the
value of Corning's common stock from December 31, 2003 to September 30, 2004,
and $13 million to adjust the estimated fair value of the other components of
the proposed asbestos settlement.
Since March 28, 2003, we have recorded total net charges of $804 million to
reflect the initial settlement liability and subsequent adjustments for the
change in the fair value of the components of the liability.
The fair value of the liability expected to be settled by contribution of our
investment in PCE, the fair value of 25 million shares of our common stock and
assigned insurance proceeds (in aggregate totaling $654 million at September 30,
2005) is recorded in other accrued liabilities in our consolidated balance
sheets. As the timing of this obligation's settlement will depend on future
judicial rulings (i.e., controlled by a third party and not Corning), this
portion of the PCC liability is considered a "due on demand" obligation.
Accordingly, this portion of the obligation has been classified as a current
liability, even though it is possible that the contribution could be made beyond
one year. The remaining portion of the settlement liability (totaling $150
million at September 30, 2005), representing the net present value of the cash
payments, is recorded in the other liabilities component in our consolidated
balance sheets.
Other Commitments and Contingencies
We provide financial guarantees and incur contingent liabilities in the form of
stand-by letters of credit and performance bonds. These guarantees have various
terms, and none of these guarantees are individually significant. We have also
agreed to provide a credit facility to Dow Corning Corporation (Dow Corning) as
discussed in Note 7 to the consolidated financial statements in our 2004 Form
10-K. The funding of the Dow Corning $150 million credit facility is subject to
events connected to the Dow Corning Bankruptcy Plan. As of September 30, 2005,
we were contingently liable for the items described above totaling $445 million,
compared with $368 million at December 31, 2004. We believe a significant
majority of these guarantees and contingent liabilities will expire without
being funded.
From time to time, we are subject to uncertainties and litigation and are not
always able to predict the outcome of these items with assurance. Various legal
actions (including the PCC matter discussed previously), claims and proceedings
are pending against us, including those arising out of alleged product defects,
product warranties, patents, asbestos and environmental matters. In the opinion
of management, the ultimate disposition of these matters are not expected to
have a material adverse effect on Corning's consolidated financial position,
liquidity or results of operations.
5. Debt
Third Quarter
-------------
In the third quarter of 2005, substantially all holders of our $96 million
outstanding Oak 4 7/8% convertible subordinated notes, due March 1, 2008,
elected to convert their notes into Corning common stock. The conversion ratio
was 64.41381 shares of Corning common stock for each $1,000 principal amount of
notes. Upon the conversion of the notes, we issued 6 million shares of Corning
common stock resulting in an increase to equity of $95 million.
Second Quarter
--------------
In the second quarter of 2005, we completed the following debt transactions:
.. We issued $100 million of 6.05% senior unsecured notes for net proceeds of
approximately $99 million. The notes mature on June 15, 2015. We may call
the debentures at any time on or after June 15, 2010.
.. We redeemed for cash the $100 million principal amount of our 7% debentures
due March 15, 2007, which at the time had a book value of $88 million. We
recognized a loss of $12 million upon the early redemption of these
debentures.
.. We redeemed the remaining $191 million of our outstanding 3.50% convertible
debentures, due November 1, 2008. The bondholders elected to convert
substantially all of their debentures into Corning common stock at a
conversion ratio of 103.3592 shares per $1,000 debenture. We issued 20
million shares upon the conversion of the debentures, resulting in an
increase to equity of $191 million.
First Quarter
-------------
In the first quarter of 2005, we completed the following debt transactions:
.. We obtained a loan of approximately $48 million, bearing interest at 2.1%,
from a Japanese bank. This loan is part of a 10-year loan agreement entered
into in 2004 to fund certain capital expansion activities in Japan.
.. We redeemed $100 million of our outstanding 3.50% convertible debentures,
due November 1, 2008. The bondholders affected by this redemption elected
to convert $98 million of their debentures into Corning common stock at a
conversion ratio of 103.3592 shares per $1,000 debenture, with the
remaining $2 million repaid in cash. Separately, bondholders elected to
convert approximately $6 million of outstanding debentures into Corning
common stock. In total, we issued 11 million shares upon the conversion of
the debentures, resulting in an increase to equity of $105 million.
.. We repaid a total of $192 million of notes in accordance with their stated
repayment schedule. This was primarily comprised of our 5.625% Euro notes.
In addition, in the first quarter of 2005, we completed negotiations with a
group of banks on a new revolving credit facility. Concurrent with the closing
of this credit facility, we terminated our previous $2 billion revolving line of
credit that was set to expire in August 2005. The new facility provides us
access to a $975 million unsecured multi-currency revolving line of credit and
expires in March 2010. The facility includes two financial covenants, including
a leverage test (debt to capital ratio) and an interest coverage ratio
(calculated on the most recent four quarters). As of September 30, 2005, we were
in compliance with these covenants.
The following table summarizes the activities related to our debt retirements
(both current and long-term) for the nine months ended September 30, 2005 and
2004 (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Book Value of Cash Shares
Debentures Retired Paid Issued Loss
------------------------------------------------------------------------------------------------------------------------------------
2005 activity:
Convertible debentures, 3.5%, due 2008 $ 297 $ 2 31
Other (primarily Euro notes, 5.625%, due 2005) 198 198
Oak 4 7/8% Subordinated notes, due 2005 96 6
Debentures, 7%, due 2007 88 100 $ (12)
------------------------------------------------------------------------------------------------------------------------------------
Total 2005 activity $ 679 $ 300 37 $ (12)
------------------------------------------------------------------------------------------------------------------------------------
2004 activity:
Convertible debentures, 3.5%, due 2008 $ 368 $ 37 38 $ (36)
Zero coupon convertible debentures, 2%, due 2015 119 117
Other loans payable 111 111
------------------------------------------------------------------------------------------------------------------------------------
Total 2004 activity $ 598 $ 265 38 $ (36)
------------------------------------------------------------------------------------------------------------------------------------
In the second quarter of 2005, we completed a common stock offering of 20
million shares for net proceeds of approximately $323 million. The net proceeds
from this stock offering are intended to be used primarily to repurchase
Corning's remaining zero coupon convertible debentures due on November 8, 2015.
At September 30, 2005, these debentures had a carrying value of $276 million. On
October 6, 2005, we notified current holders of our election to repurchase any
debentures tendered by holders on November 8, 2005.
Both the $100 million of 6.05% debentures and the 20 million shares of common
stock, issued in the second quarter of 2005, were issued under our existing $5
billion universal shelf registration statement. At September 30, 2005, our
remaining capacity under the shelf registration is approximately $2.1 billion.
6. Income Taxes
Our provision for income taxes and the related tax rates follow (in millions):
--------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
----------------------- -----------------------
2005 2004 2005 2004
(Restated) (Restated) (Restated) (Restated)
--------------------------------------------------------------------------------
Provision for income taxes $ (28) $(1,040) $ (91) $(1,050)
Effective tax rate 17.9% (64.1)% 30.8% (63.5)%
--------------------------------------------------------------------------------
For the three and nine months ended September 30, 2005, the tax provision
reflected the following items:
.. The impact of our inability to record tax benefits on net operating losses
generated in the U.S. and certain foreign jurisdictions;
.. The benefit of tax holidays and investment credits in Taiwan and tax
holidays in China and South Africa; and,
.. The benefit from the reversal of tax contingency liabilities following the
conclusion of Internal Revenue Service (IRS) examinations.
As more fully described in Note 6 (Income Taxes) to the consolidated financial
statements of the 2004 Form 10-K, significant events occurred in the third
quarter of 2004 requiring us to increase our valuation allowance against certain
U.S. and German deferred tax assets. Accordingly, we increased our valuation
allowance by $1.2 billion in the third quarter of 2004 to reduce our net
deferred tax assets to approximately $530 million.
At September 30, 2005, we had net deferred tax assets of $541 million, which are
primarily U.S. net deferred tax assets. We continue to believe it is more likely
than not that these U.S. net deferred tax assets are realizable through a tax
planning strategy involving the sale of a non-strategic appreciated asset.
We expect to maintain a valuation allowance on future tax benefits until an
appropriate level of profitability, primarily in the U.S. and Germany, is
sustained or there are tax planning strategies that would enable us to conclude
that it is more likely than not that a larger portion of the deferred tax assets
would be realizable. Until then, our tax provision will include only the net tax
expense attributable to certain foreign operations.
During the third quarter of 2005, Corning filed its 2004 consolidated U.S.
Federal income tax return, which included a $3.9 billion worthless stock
deduction for the loss on our investment in the photonic technologies business
associated with the Pirelli acquisition. This acquisition was completed in
December 2000 and was substantially impaired in the second quarter of 2001.
Prior to the third quarter of 2005, we did not record a deferred tax asset for
this item as the ultimate realization of such deduction was uncertain, and
consistent with the requirements of SFAS No. 5, "Accounting for Contingencies,"
recognition of an asset prior to the time management determines the realization
of the asset is probable is prohibited. On September 2, 2005, Corning and the
Commissioner of the IRS entered into a closing agreement under section 7121 of
the Internal Revenue Code of 1986 which provides that Corning is entitled to
this worthless stock deduction. We recorded a $1.5 billion deferred tax asset
for this item in the quarter, which was concurrently offset by a valuation
allowance of an equal amount due to our current inability to record tax benefits
for U.S. net operating losses.
Based on our 2004 consolidated U.S. Federal income tax return as filed, Corning
has net operating loss carryforwards of $4.9 billion for U.S. Federal income tax
purposes. These operating losses will expire in 2022 ($0.1 billion), 2023 ($0.6
billion) and 2024 ($4.2 billion).
Certain foreign subsidiaries in China, South Africa and Taiwan are operating
under tax holiday arrangements. The nature and extent of such arrangements vary,
and the benefits of such arrangements phase out in future years (2006 to 2009)
according to the specific terms and schedules of the relevant taxing
jurisdictions. The impact of the tax holidays on our effective rate is a
reduction in the rate of 17% and 14% for the three and nine months ended
September 30, 2005, respectively.
We establish tax contingency liabilities when, despite our belief that our tax
returns are fully supportable, it is probable that certain positions may not be
sustained through the income tax audit process. These liabilities are analyzed
on a quarterly basis and adjusted based upon changes in facts and circumstances,
such as the progress of income tax audits, new case law and emerging
legislation. In the third quarter of 2005, in conjunction with our reassessment
process, we recorded a tax benefit of $14 million following the conclusion of an
IRS examination for the years 2001 and 2002.
7. Earnings (Loss) Per Common Share
The reconciliation of the amounts used in the basic and diluted earnings per
common share from continuing operations follows (in millions, except per share
amounts):
------------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30,
---------------------------------------------------------------------------------
2005 (Restated) 2004 (Restated)
-------------------------------------- --------------------------------------
Weighted- Per Share Weighted- Per Share
Income Average Shares Amount (Loss) Average Shares Amount
------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share $ 203 1,488 $ 0.14 $(2,566) 1,399 $ (1.83)
Effect of dilutive securities:
Stock compensation awards 48
7% mandatory convertible preferred stock (a) 16
------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share $ 203 1,552 $ 0.13 $(2,566) 1,399 $ (1.83)
------------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
---------------------------------------------------------------------------------
2005 (Restated) 2004 (Restated)
-------------------------------------- --------------------------------------
Weighted- Per Share Weighted- Per Share
Income Average Shares Amount (Loss) Average Shares Amount
------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share $ 618 1,444 $ 0.43 $(2,401) 1,380 $ (1.74)
Effect of dilutive securities:
Stock compensation awards 39
7% mandatory convertible preferred stock (a) 27
3.50% convertible debentures 3 13
------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share $ 621 1,523 $ 0.41 $(2,401) 1,380 $ (1.74)
------------------------------------------------------------------------------------------------------------------------------------
(a) On the mandatory conversion date of August 16, 2005, the remaining shares
of our 7.00% Series C Mandatory Convertible Preferred Stock were converted
into Corning common stock at a conversion rate of 50.813 shares of common
stock for each preferred share. Upon conversion of the preferred shares, we
issued 31 million shares of Corning common stock resulting in an increase
to equity of $62 million.
The following potential common shares were excluded from the calculation of
diluted earnings (loss) per common share due to their anti-dilutive effect or,
in the case of stock options, because their exercise price was greater than the
average market price for the periods presented (in millions):
--------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
2005 2004 2005 2004
--------------------------------------------------------------------------------------------------------------------------------
Potential common shares excluded from the calculation
of diluted earnings per common share:
Stock options 32 34
3.5% convertible debentures 39 44
4 7/8% convertible notes (a) 4 6 5 6
Zero coupon convertible debentures 3 3 3 3
7% mandatory convertible preferred stock (b) 35 37
-------------------------------------------------------------
Total 7 115 8 124
=============================================================
Stock options excluded from the calculation of diluted
earnings (loss) per common share 37 61 50 58
--------------------------------------------------------------------------------------------------------------------------------
(a) In the third quarter of 2005, substantially all holders of our $96 million
outstanding Oak 4 7/8% subordinated notes elected to convert their notes
into Corning common stock. The conversion ratio was 64.41381 shares of
Corning common stock for each $1,000 principal amount of notes. Upon the
conversion of these notes, we issued 6 million shares of Corning common
stock resulting in an increase to equity of $95 million.
(b) On the mandatory conversion date of August 16, 2005, the remaining shares
of our 7.00% Series C Mandatory Convertible Preferred Stock were converted
into Corning common stock at a conversion rate of 50.813 shares of common
stock for each preferred share. Upon conversion of the preferred shares, we
issued 31 million shares of Corning common stock resulting in an increase
to equity of $62 million.
8. Discontinued Operation
On December 13, 2002, we completed the sale of our precision lens business to 3M
Company (3M) for cash proceeds up to $850 million, of which $50 million was
deposited in an escrow account. 3M notified Corning that 3M believed it had
certain claims arising out of the representations and warranties made by Corning
in connection with the sale of the precision lens business to 3M. In the third
quarter of 2004, Corning and 3M reached a final settlement agreement for the
funds held in escrow. Accordingly, we recognized a gain of $20 million upon
receipt of $20 million of proceeds. This gain is included in income from
discontinued operation in the consolidated statements of operations.
9. Inventories
Inventories comprise the following (in millions):
--------------------------------------------------------------------------------
September 30, 2005 December 31, 2004
--------------------------------------------------------------------------------
Finished goods $ 148 $ 136
Work in process 171 172
Raw materials and accessories 130 139
Supplies and packing materials 110 88
--------------------------------------------------------------------------------
Total inventories $ 559 $ 535
--------------------------------------------------------------------------------
10. Investments
Investments comprise the following (in millions):
------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
Ownership 2005 2004
Interest (Restated) (Restated)
----------- ------------- ------------
Associated companies at equity
Samsung Corning Precision Glass Co., Ltd. 50% $ 757 $ 572
Dow Corning Corporation 50% 462 324
Samsung Corning Co., Ltd. 50% 233 365
All other 25%-51% (a) 169 188
------- --------
1,621 1,449
Other investments (b) 14 61
------- --------
Total $ 1,635 $ 1,510
------------------------------------------------------------------------------------------------------------------------------------
(a) Amounts reflect Corning's direct ownership interests in the respective
associated companies. Corning does not control any such entities.
(b) Amounts reflect $10 million and $53 million at September 30, 2005 and
December 31, 2004, respectively, of available-for-sale securities stated at
market. During 2005, Corning recorded impairment charges totaling $25
million for other than temporary declines in the fair value of shares of
Avanex below their cost basis. This is in addition to the reversal of
previously unrecognized gains on Avanex shares of $14 million included in
accumulated other comprehensive income at December 31, 2004 on the
consolidated balance sheet. Refer to Note 3 (Restructuring, Impairment and
Other Charges and (Credits)) for additional information.
Summarized results of operations for our three significant investments accounted
for by the equity method follow:
Samsung Corning Precision Glass Co., Ltd. (Samsung Corning Precision)
Samsung Corning Precision is a South Korea-based manufacturer of liquid crystal
display glass for flat panel displays. Samsung Corning Precision's results of
operations follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
----------------------- ---------------------
2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations
Net sales $ 466 $ 275 $ 1,166 $ 774
Gross profit $ 346 $ 211 $ 861 $ 595
Net income $ 242 $ 137 $ 590 $ 408
Corning's equity in earnings of Samsung Corning Precision $ 114 $ 68 $ 279 $ 204
Dividends received from Samsung Corning Precision $ 108 $ 57
Related Party Transactions:
------------------------------------------------------------------------------------------------------------------------------------
Corning sales of inventory to Samsung Corning Precision $ 6
Corning purchases from Samsung Corning Precision $ 18 $ 19 $ 30 $ 56
Corning transfers of machinery and equipment to Samsung
Corning Precision at cost (a) $ 20 $ 67 $ 23
------------------------------------------------------------------------------------------------------------------------------------
(a) Corning purchases machinery and equipment on behalf of Samsung Corning
Precision to support its capital expansion initiatives. The machinery and
equipment are transferred to Samsung Corning Precision at our cost basis,
resulting in no revenue or gain being recognized on the transaction.
Balances due to and from Samsung Corning Precision were immaterial at September
30, 2005 and December 31, 2004.
Dow Corning Corporation (Dow Corning)
Dow Corning is a U.S. based manufacturer of silicone products. Dow Corning's
results of operations follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
----------------------- ----------------------
2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 946 $ 830 $ 2,936 $ 2,496
Gross profit $ 319 $ 262 $ 1,022 $ 770
Net income $ 117 $ 80 $ 407 $ 168
Corning's equity in earnings of Dow Corning (a) $ 58 $ 40 $ 203 $ 81
Dividends received from Dow Corning $ 15
------------------------------------------------------------------------------------------------------------------------------------
(a) Corning's equity in earnings of Dow Corning includes the following:
. During the second quarter of 2005, Dow Corning recorded a gain on the
issuance of subsidiary stock. Our equity earnings included $11 million
related to this gain.
. During the second quarter of 2004, Dow Corning recorded charges
related to restructuring actions and adjustments to interest
liabilities recorded on its emergence from bankruptcy. Our equity
earnings included a $21 million charge related to these actions.
Other - Samsung Corning Co., Ltd. (Samsung Corning)
Samsung Corning is a South Korea-based manufacturer of glass panels and funnels
for cathode ray tube (CRT) television and display monitors.
In the third quarter of 2005, Samsung Corning concluded that there was an event
of impairment triggered by an accelerated decline in its CRT glass business. In
September 2005, Samsung Corning revised its outlook for the CRT glass market and
reduced its projected operating results. Samsung Corning management then
concluded that impairment charges were necessary for certain manufacturing
assets and that certain severance and exit actions will be necessary. As a
result, Samsung Corning incurred impairment and other charges of $212 million
which reduced Corning's equity earnings by $106 million in the third quarter.
None of the charges is expected to result in cash expenditures by Corning.
After the charges described above, Corning's investment in Samsung Corning was
$233 million. Corning has determined that a separate impairment of its
investment in Samsung Corning was not necessary in the third quarter. We will
continue to monitor this investment and it is possible an impairment may be
required in the future.
Samsung Corning's results of operations follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
----------------------- ----------------------
2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 205 $ 250 $ 627 $ 781
Gross profit $ 28 $ 70 $ 104 $ 198
Net income (loss) $ (232) $ (10) $ (222) $ 58
Corning's equity in earnings (losses) of Samsung Corning $ (115) $ 14 $ (108) $ 30
Dividends received from Samsung Corning $ 22 $ 18
------------------------------------------------------------------------------------------------------------------------------------
11. Goodwill and Other Intangibles Assets
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2005 follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Telecom- Display
munications Technologies Other (1) Total
------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2005 (2) $ 123 $ 9 $ 150 $ 282
Foreign currency translation and other (5) (5)
------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2005 $ 118 $ 9 $ 150 $ 277
------------------------------------------------------------------------------------------------------------------------------------
(1) This balance relates to our Specialty Materials operating segment.
(2) In the third quarter of 2004, we recorded an impairment charge of $1,420
million to reduce the carrying value of goodwill in our Telecommunications
segment to its implied fair value. Refer to Note 3 (Restructuring,
Impairment and Other Charges and (Credits)) for additional information.
Other intangible assets follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
September 30, 2005 December 31, 2004
-------------------------------------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Patents and trademarks $ 144 $ 86 $ 58 $ 148 $ 79 $ 69
Non-competition agreements 118 116 2
Other 4 1 3 4 1 3
---------------------------------- -----------------------------------
Total amortized intangible assets 148 87 61 270 196 74
---------------------------------- -----------------------------------
Unamortized intangible assets:
Intangible pension assets 42 42 42 42
---------------------------------- -----------------------------------
Total $ 190 $ 87 $ 103 $ 312 $ 196 $ 116
------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets are primarily related to the Telecommunications
segment.
Estimated amortization expense related to these intangible assets is $13 million
in 2006, $12 million in 2007, $11 million in 2008, and insignificant thereafter.
12. Customer Deposits
In 2005 and 2004, several of Corning's customers entered into long-term purchase
and supply agreements in which Corning's Display Technologies segment will
supply large-size glass substrates to the customers over periods of up to six
years. As part of the agreements, these customers agreed to make advance cash
deposits to Corning for a portion of the contracted glass to be purchased.
During the first nine months of 2005, we received a total of $389 million of
deposits against orders. Subsequent to September 30, 2005, we received an
additional $13 million of deposits.
Upon receipt of the cash deposits made by customers, we record a customer
deposit liability. This liability will be reduced for future product purchases
over the life of the agreements. As product is shipped to a customer, Corning
will recognize revenue at the selling price and issue credit memoranda for an
agreed amount of the customer deposit liability. The credit memoranda will be
applied against customer receivables resulting from the sale of product, thus
reducing operating cash flows in later periods as these credits are applied for
cash deposits received in earlier periods.
Customer deposits have been or will be received in the following periods (in
millions):
-----------------------------------------------------------------------------------------------------------------------------------
Nine
months ended Remainder Estimated 2006
2004 September 30, 2005 of 2005 and Beyond Total
-----------------------------------------------------------------------------------------------------------------------------------
Customer deposits received $204 $389 $93 $295 $981
-----------------------------------------------------------------------------------------------------------------------------------
The majority of customer deposits will be received through 2006. For the three
and nine months ended September 30, 2005, we issued $11 million and $13 million
in credit memoranda, respectively. These credit amounts are not included in the
above amounts, and were applied against customer receivables.
Customer deposit liabilities were $560 million and $215 million at September 30,
2005 and December 31, 2004, respectively, of which $149 million and $18 million
were recorded in the current liabilities - other accrued liabilities component
of our consolidated balance sheets, respectively.
In the event customers do not make all customer deposit installment payments or
elect not to purchase the agreed upon quantities of product, subject to specific
conditions outlined in the agreements, Corning may retain certain amounts of the
customer deposits. If Corning does not deliver agreed upon product quantities,
subject to specific conditions outlined in the agreements, Corning may be
required to return certain amounts of customer deposits.
13. Employee Retirement Plans
The following table summarizes the components of net periodic benefit cost for
Corning's defined benefit pension and postretirement health care and life
insurance plans (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Pension benefits Postretirement benefits
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months Three months Nine months
ended Sept. 30, ended Sept. 30, ended Sept. 30, ended Sept. 30,
-------------------- -------------------- -------------------- --------------------
2005 2004 2005 2004 2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 9 $ 10 $ 39 $ 30 $ 2 $ 2 $ 7 $ 7
Interest cost 26 33 111 99 12 11 33 36
Expected return on plan assets (30) (37) (132) (111)
Amortization of net loss 6 5 24 16 3 1 6 5
Amortization of prior service cost 2 2 6 6 (1) (1) (3) (5)
-------------------------------------------------------------------------------------------
Total expense $ 13 $ 13 $ 48 $ 40 $ 16 $ 13 $ 43 $ 43
------------------------------------------------------------------------------------------------------------------------------------
Corning and certain of its domestic subsidiaries also offer postretirement plans
that provide health care and life insurance benefits for retirees and eligible
dependents. Certain employees may become eligible for such postretirement
benefits upon reaching retirement age. Prior to January 1, 2003, our principal
retiree medical plans required retiree contributions each year equal to the
excess of medical cost increases over general inflation rates. In response to
rising health care costs, in 2002, Corning placed a "cap" on the amount it would
contribute toward the cost of its retiree medical plans for salaried and
non-union hourly employees. Further, as more fully described in Note 12
(Employee Retirement Plans) to the consolidated financial statements included in
our 2004 Form 10-K, Corning will receive a non-taxable subsidy pursuant to
Medicare Part D of the Medicare Prescription Drug, Improvement and Modernization
Act of 2003. The Medicare Part D subsidy gives Corning the opportunity to
restructure the cap so that it takes effect at a later date. The restructured
cap is a way for Corning to share the Medicare Part D subsidy with retirees and
beneficiaries. The existing cap trigger is 150% of Corning's 2001 retiree
medical costs. Effective July 1, 2005, we amended these plans and restructured
the cap to be 120% of Corning's expected 2005 retiree medical costs. This
amendment to the plans will increase 2005 periodic expense by $6 million.
On October 4, 2005, we issued and contributed 5 million shares of Corning common
stock, with a value of approximately $97 million, to our domestic pension plan.
We plan to contribute an additional 5 million shares of Corning common stock to
this plan by December 31, 2005.
14. Comprehensive Income (Loss)
Components of comprehensive income (loss), on an after-tax basis where
applicable, follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------- -------------------------
2005 2004 2005 2004
(Restated) (Restated) (Restated) (Restated)
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 203 $ (2,546) $ 618 $ (2,381)
Other comprehensive income (loss):
Change in unrealized gain (loss) on investments, net (12) (33) (10)
Reclassification adjustment relating to investments
included in net income, net 19
Change in unrealized gain on derivative
instruments, net 16 11 54 14
Reclassification adjustment relating to derivatives, net (7) 2 (22) 7
Foreign currency translation adjustment, net (a) (42) 1 (140) (15)
Change in minimum pension liability 1 (5) 4 (3)
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ 171 $ (2,549) $ 500 $ (2,388)
------------------------------------------------------------------------------------------------------------------------------------
(a) The initial implementation of our Taiwan subsidiary's change in its
functional currency from the new Taiwan dollar to the Japanese yen
effective January 1, 2005 had the effect of increasing the U.S. dollar
value of its net assets and increasing accumulated other comprehensive
income by $23 million. The impact of this change is included in the foreign
currency translation adjustment, net amount.
15. Operating Segments
Our reportable operating segments follow:
.. Display Technologies - manufactures liquid crystal display glass for flat
panel displays;
.. Telecommunications - manufactures optical fiber and cable and hardware and
equipment components for the telecommunications industry;
.. Environmental Technologies - manufactures ceramic substrates and filters
for automobile and diesel applications; and
.. Life Sciences - manufactures glass and plastic consumables for scientific
applications.
All other operating segments that do not meet the quantitative threshold for
separate reporting, certain corporate investments, discontinued operations, and
unallocated expenses (including other corporate items) have been grouped as
"Unallocated and Other." Unallocated expenses include the following: gains or
losses on repurchases and retirement of debt; charges related to the asbestos
litigation; restructuring, impairment and other charges and (credits) related to
the corporate research and development or staff organizations; and charges for
increases in our tax valuation allowance. Unallocated and Other also represents
the reconciliation between the totals for the reportable segments and our
consolidated operating results.
------------------------------------------------------------------------------------------------------------------------------------
Operating Segments Display Telecom- Environmental Life Unallocated Consolidated
(in millions) Technologies munications Technologies Sciences and Other Total
------------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 2005 (Restated)
Net sales $ 489 $ 398 $ 144 $ 70 $ 87 $ 1,188
Research, development and engineering
expenses (1) $ 32 $ 27 $ 29 $ 15 $ 15 $ 118
Restructuring, impairment and other charges
and (credits) $ 28 $ 28
Interest expense (2) $ 12 $ 6 $ 5 $ 1 $ (1) $ 23
(Provision) benefit for income taxes $ (30) $ 2 $ 1 $ (1) $ (28)
Income (loss) before minority interests and
equity earnings (losses) (3) $ 246 $ (37) $ (5) $ (7) $ (69) $ 128
Minority interests (4) 1 (3) (2)
Equity in earnings (losses) of associated
companies, net of impairments (5) 117 6 (46) 77
------- -------- -------- ------- -------- --------
Net income (loss) $ 363 $ (30) $ (5) $ (7) $ (118) $ 203
------------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 2004 (Restated)
Net sales $ 295 $ 412 $ 136 $ 75 $ 88 $ 1,006
Research, development and engineering
expenses (1) $ 22 $ 21 $ 23 $ 9 $ 13 $ 88
Restructuring, impairment and other charges
and (credits) $ 1,802 $ (8) $ 1,794
Interest expense (2) $ 15 $ 9 $ 7 $ 1 $ 2 $ 34
(Provision) benefit for income taxes $ (39) $ (9) $ (1) $ (991) $ (1,040)
Income (loss) before minority interests and
equity earnings (losses) (3) $ 74 $ (1,785) $ 2 $ (953) $ (2,662)
Minority interests (4) (3) (3)
Equity in earnings (losses) of associated
companies, net of impairments (5) 68 (35) 66 99
Income from discontinued operations 20 20
------- -------- -------- ------- -------- --------
Net income (loss) $ 142 $ (1,820) $ 0 $ 2 $ (870) $ (2,546)
------------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2005 (Restated)
Net sales $ 1,224 $ 1,240 $ 438 $ 219 $ 258 $ 3,379
Research, development and engineering
expenses (1) $ 84 $ 71 $ 84 $ 38 $ 43 $ 320
Restructuring, impairment and other charges
and (credits) $ 36 $ 10 $ 46
Interest expense (2) $ 40 $ 25 $ 15 $ 3 $ 1 $ 84
(Provision) benefit for income taxes $ (94) $ 1 $ 2 $ 3 $ (3) $ (91)
Income (loss) before minority interests
and equity earnings (losses) (3) $ 482 $ (41) $ (11) $ (13) $ (213) $ 204
Minority interests (4) 1 (9) (8)
Equity in earnings of associated companies,
net of impairments (5) 285 6 131 422
------- -------- -------- ------- -------- --------
Net income (loss) $ 767 $ (34) $ (11) $ (13) $ (91) $ 618
------------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2004 (Restated)
Net sales $ 802 $ 1,116 $ 418 $ 233 $ 252 $ 2,821
Research, development and engineering
expenses (1) $ 57 $ 69 $ 64 $ 27 $ 40 $ 257
Restructuring, impairment and other charges
and (credits) $ 1,797 $ (3) $ 1,794
Interest expense (2) $ 37 $ 41 $ 17 $ 4 $ 4 $ 103
(Provision) benefit for income taxes $ (97) $ 25 $ (5) $ (6) $ (967) $ (1,050)
Income (loss) before minority interests
and equity earnings (losses) (3) $ 191 $ (1,853) $ 10 $ 12 $ (1,064) $ (2,704)
Minority interests (4) 1 (15) (14)
Equity in earnings (losses) of associated
companies, net of impairments (5) 204 (32) 145 317
Income from discontinued operations 20 20
------- -------- -------- ------- -------- --------
Net income (loss) $ 395 $ (1,884) $ 10 $ 12 $ (914) $ (2,381)
------------------------------------------------------------------------------------------------------------------------------------
(1) Non-direct research, development and engineering expenses are allocated
based upon direct project spending for each segment.
(2) Interest expense is allocated to segments based on a percentage of segment
net operating assets. Consolidated subsidiaries with independent capital
structures do not receive additional allocations of interest expense.
(3) Many of Corning's administrative and staff functions are performed on a
centralized basis. Where practicable, Corning charges these expenses to
segments based upon the extent to which each business uses a centralized
function. Other staff functions, such as corporate finance, human resources
and legal are allocated to segments, primarily as a percentage of sales.
(4) For the three and nine months ended September 30, 2005, minority interests
include gains of $4 million for adjustments to prior years' restructuring
and impairment reserves associated with CAV. For the three and nine months
ended September 30, 2004, minority interests include gains of $4 million
and $17 million, respectively, from the sale of CAV assets in excess of
assumed salvage value.
(5) Equity in earnings (losses) of associated companies, net of impairments,
includes the following:
. For the three and nine months ended September 30, 2005, a charge of
$106 million for Corning's share of Samsung Corning's impairment of
certain manufacturing assets and other charges.
. For the three and nine months ended September 30, 2004, an impairment
charge of $35 million to write down certain Telecommunications equity
method investments to fair value.
A reconciliation of reportable segment net income (loss) to consolidated net
income (loss) follows:
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------- -------------------------
2005 2004 2005 2004
(Restated) (Restated) (Restated) (Restated)
------------------------------------------------------------------------------------------------------------------------------------
Net income of reportable segments $ 321 $ (1,676) $ 709 $ (1,467)
Non-reportable operating segments net income (1) (119) 9 (96) 10
Unallocated amounts:
Non-segment loss and other (2) (2) (1) (1) (4)
Non-segment restructuring, impairment and
other (charges) and credits (3) 1 (25) 5
Asbestos settlement (73) 45 (204) (29)
Interest income 17 6 40 16
Loss on repurchases of debt (4) (12) (36)
Provision for income taxes (4) (3) (989) (7) (984)
Equity in earnings of associated companies (5) 62 43 214 88
Income from discontinued operations 20 20
--------- --------- --------- ---------
Net (loss) income $ 203 $ (2,546) $ 618 $ (2,381)
------------------------------------------------------------------------------------------------------------------------------------
(1) Non-reportable operating segments net income includes the results of
non-reportable operating segments. For the three and nine months ended
September 30, 2005, we recorded a charge of $106 million for our share of
Samsung Corning's impairment of certain manufacturing assets and other
charges for severance and exit costs.
(2) Non-segment loss and other includes the results of non-segment operations
and other corporate activities.
(3) For the three and nine months ended September 30, 2005, non-segment
restructuring, impairment and other (charges) and credits includes
impairment charges for the other than temporary decline in the market value
of Avanex shares. Refer to Note 3 (Restructuring, Impairment and Other
Charges and (Credits)).
(4) Provision for income taxes includes taxes associated with non-segment
restructuring, impairment and other (charges) and credits.
(5) Equity in earnings of associated companies includes amounts derived from
Dow Corning.
Each of our reportable operating segments is concentrated across a relatively
small number of customers. For the nine months ended September 30, 2005, four
customers of the Display Technologies segment, each of which accounted for more
than 10% of segment net sales, accounted for 62% of total segment sales. In the
Telecommunications segment, two customers, each of which accounted for more than
10% of this segment's net sales, accounted for 26% of total segment sales in the
first nine months of 2005. In the Environmental Technologies segment, three
customers, each of which accounted for more than 10% of segment sales,
represented 71% of total segment sales for the nine months ended September 30,
2005. In the Life Sciences segment, one customer accounted for 50% of this
segment's sales for the nine months ended September 30, 2005.
16. Subsequent Events
On October 4, 2005, we issued and contributed 5 million shares of Corning common
stock to our domestic pension plan. This non-cash contribution approximated $97
million. We plan to contribute an additional 5 million shares of Corning common
stock to this plan by December 31, 2005.
On October 6, 2005, we notified all remaining holders of our outstanding zero
coupon convertible debentures of our election to use cash to repurchase any
debentures tendered by holders on the November 8, 2005 optional repurchase date.
At September 30, 2005, these debentures had a carrying value of $276 million.
On October 7, 2005, the assets of O.T.I. S.r.l., a wholly-owned foreign
subsidiary were substantially liquidated. As a result, $84 million of cumulative
translation will be realized in income in the fourth quarter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our key priorities for 2005 remain unchanged from the previous year: protect our
financial health, improve our profitability, and invest in the future. During
the third quarter of 2005, we made the following progress against these
priorities:
Financial Health
Our balance sheet remains strong, and we continued to generate positive cash
flows from operating activities. Significant activities during the third quarter
of 2005 follow:
.. We reduced long-term debt by calling $96 million of convertible debt, which
then converted into Corning common stock.
.. We received $155 million in deposits against orders relating to our
multi-year customer supply agreements in the Display Technologies segment.
.. Our debt to capital ratio declined to 29%.
.. We ended the third quarter of 2005 with $2.4 billion in cash, cash
equivalents and short-term investments. This represents an increase of
approximately $537 million from December 31, 2004, primarily due to the
proceeds from the common stock offering and cash provided by operating
activities more than offsetting the net debt repayments and capital
spending.
We have a financial objective to reduce our outstanding debt below $2 billion by
the end of 2005. Upon the anticipated fourth quarter 2005 repurchase of our zero
coupon convertible debentures, we expect to meet this objective. In April 2005
our public debt ratings were raised to BBB- by both Fitch Ratings and Standard &
Poor's and most recently, in September 2005, to Baa3 by Moody's Investors
Service.
Profitability
For the three months ended September 30, 2005, we generated net income of $203
million or $0.13 per share compared to a net loss of $2,546 million or $1.82 per
share for the same period in 2004. For the nine months ended September 30, 2005,
we generated net income of $618 million or $0.41 per share compared to a net
loss of $2,381 million or $1.73 per share for the nine months ended September
30, 2004.
We recorded non-recurring charges in the three and nine months ended September
30, 2005 and significant net charges for the same periods in 2004 which impact
the comparability of both years. Refer to Note 3 (Restructuring, Impairment and
Other Charges and (Credits)), Note 6 (Income Taxes), and Note 10 (Investments)
to the consolidated financial statements for additional information.
Investing in Our Future
We continue to invest in a wide array of technologies, with our focus being LCD
glass substrates, diesel filters and substrates in response to tightening
emissions control standards, and optical fiber and cable and hardware and
equipment to enable fiber-to-the-premises.
Our research, development and engineering expenses have increased in both the
three and nine month periods ended September 30, 2005, compared to their
respective 2004 periods, but have remained relatively constant as a percentage
of net sales. We believe our current spending levels are adequate to enable us
to execute our growth strategies.
Our capital expenditures are primarily focused on expanding manufacturing
capacity for LCD glass substrates in the Display Technologies segment and diesel
products in the Environmental Technologies segment. Total capital expenditures
for the three and nine month periods ended September 30, 2005 were $378 million
and $1,076 million, respectively. Of these amounts, $304 million and $895
million, respectively, were directed toward our Display Technologies segment,
and $46 million and $120 million, respectively, were directed toward our
Environmental Technologies segment.
Restatement of Prior Period Financial Statements
The Company's management and its audit committee concluded, on April 21, 2006,
that the Company would restate previously issued consolidated financial
statements to properly account for the asbestos settlement charges and liability
and for its investment in and equity earnings of Pittsburgh Corning Europe (PCE)
from March 31, 2003, through December 31, 2005. The Company also changed the
classification of accretion on a portion of the liability to be paid in cash
from interest expense to asbestos settlement charge for the same time period.
The cumulative effect of these adjustments to Corning's balance sheet as of
September 30, 2005, resulted in an increase in investments in affiliate
companies of $30 million, an increase to other liabilities of $150 million, an
increase to accumulated deficit of $122 million, and an increase to accumulated
other comprehensive income of $2 million.
The cumulative effect of these adjustments to Corning's balance sheet as of
December 31, 2004, resulted in an increase in investments in affiliate companies
of $26 million, an increase to other liabilities of $141 million, an increase to
accumulated deficit of $123 million, and an increase to accumulated other
comprehensive income of $8 million.
To correct these errors, the Company has restated its consolidated financial
statements and, on May 9, 2006, filed an amended Annual Report on Form 10-K/A
for the fiscal year ended December 31, 2005. In addition, on May 9, 2006, the
company filed amended reports on Form 10-Q/A for the quarters ended March 31,
2005, June 30, 2005, and September 30, 2005, to restate the financial periods
provided for those quarterly periods.
All information in this document reflects the impact of the restatement
described in Note 2 (Restatement of Prior Period Financial Statements) to the
consolidated financial statements
RESULTS OF OPERATIONS
Selected highlights for the third quarter follow (dollars in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------ ------------------------
2005 2004 % Change 2005 2004 % Change
(Restated) (Restated) 05 vs. 04 (Restated) (Restated) 05 vs. 04
------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,188 $ 1,006 18% $ 3,379 $ 2,821 20%
Gross margin $ 545 $ 404 35% $ 1,457 $ 1,050 39%
(gross margin %) 46% 40% 43% 37%
Selling, general and administrative
expenses $ 178 $ 153 16% $ 553 $ 479 15%
(as a % of net sales) 15% 15% 16% 17%
Research, development and engineering
expenses $ 118 $ 88 34% $ 320 $ 257 25%
(as a % of net sales) 10% 9% 9% 9%
Restructuring, impairment and other
charges $ 28 $ 1,794 (98)% $ 46 $ 1,794 (97)%
(as a % of net sales) 2% 178% 1% 64%
Asbestos settlement $ 73 $ (45) (262)% $ 204 $ 29 603%
(as a % of net sales) 6% (4)% 6% 1%
Income (loss) from continuing operations
before income taxes $ 156 $ (1,622) (110)% $ 295 $ (1,654) (118)%
(as a % of net sales) 13% (161)% 9% (59)%
Provision for income taxes $ (28) $ (1,040) (97)% $ (91) $ (1,050) (91)%
(as a % of net sales) (2)% (103)% (3)% (37)%
Equity in earnings of associated companies,
net of impairments $ 77 $ 99 (22)% $ 422 $ 317 33%
(as a % of net sales) 6% 10% 12% 11%
Income (loss) from continuing operations $ 203 $ (2,566) (108)% $ 618 $ (2,401) (126)%
(as a % of net sales) 17% (255)% 18% (85)%
------------------------------------------------------------------------------------------------------------------------------------
Net Sales
For the three months ended September 30, 2005, the net sales increase compared
to the same period in 2004 was the result of continued strong demand for LCD
glass substrates in our Display Technologies segment. For the nine months ended
September 30, 2005, the net sales increase was the result of strong LCD glass
substrate sales and demand for products in our Telecommunications segment to
support fiber-to-the-premises projects. Net sales for all other segments was
comparable to the respective prior year periods. Movements in foreign exchange
rates, primarily the Japanese yen and Euro, did not significantly impact the
comparison of net sales between 2005 and 2004.
Cost of Sales
The types of expenses included in the cost of sales line item are: raw materials
consumption, including direct and indirect materials; salaries, wages and
benefits; depreciation and amortization; production utilities;
production-related purchasing; warehousing (including receiving and inspection);
repairs and maintenance; inter-location inventory transfer costs; production and
warehousing facility property insurance; rent for production facilities; and
other production overhead.
Gross Margin
As a percentage of net sales, gross margin improved 6 percentage points for the
three and nine months ended September 30, 2005, compared to the respective prior
year periods. The improvement in overall dollars and as a percentage of net
sales was driven by increased volume and manufacturing efficiencies in our
Display Technologies segment.
Selling, General and Administrative Expenses
For the three and nine months ended September 30, 2005, the increase in selling,
general and administrative expenses compared to the respective 2004 periods is
primarily driven by increases in compensation costs. As a percentage of net
sales, selling, general and administrative expenses have remained comparable to
the respective prior year periods.
The types of expenses included in the selling, general and administrative
expenses line item are: salaries, wages and benefits; travel; sales commissions;
professional fees; depreciation and amortization, utilities, and rent for
administrative facilities.
Research, Development and Engineering Expenses
Research, development and engineering expenses have increased in both the three
and nine months ended September 30, 2005 compared to their respective 2004
periods, but have remained somewhat constant as a percentage of net sales. Our
expenditures are focused on our Display Technologies, Environmental Technologies
and Telecommunications segments as we strive to capitalize on the current market
opportunities in those segments.
Restructuring, Impairment and Other Charges and (Credits)
For the three months ended September 30, 2005, we recorded a charge of $30
million related to continued cost reduction actions in the Telecommunications
segment and credits of $2 million related to adjustments to prior period
restructuring charges. Charges recorded for the nine months ended September 30,
2005 included the third quarter charge associated with the Telecommunications
segment and impairment charges for other than temporary declines in the fair
value of our investment in Avanex Corporation (Avanex) below its cost basis. Our
investment in Avanex is accounted for as an available-for-sale security under
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." We continue to sell our shares of Avanex and, subject to
restrictions and the trading volume in Avanex stock, we expect to complete this
activity in early 2006. As we did not expect the market value of the Avanex
shares to recover in this timeframe, the impairments in the first and second
quarters of 2005 were required.
We recorded significant net charges during the third quarter of 2004 which
impact the comparability of the three and nine months ended September 30, 2005
and 2004. A summary of the net charges and credits recorded during the periods
follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
----------------------- -------------------------
2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Impairment of goodwill $ 1,420 $ 1,420
Impairment of assets other than goodwill
Assets to be disposed of by
sale or abandonment 330 $ 6 295
Assets to be held and used 24 24
Impairment of available-for-sale securities 25
Accelerated depreciation 39
Loss on sale of businesses 14 14
Restructuring charges, net $ 28 6 15 2
--------- -------- --------- ---------
Total restructuring, impairment
other charges $ 28 $ 1,794 $ 46 $ 1,794
------------------------------------------------------------------------------------------------------------------------------------
Refer to Note 3 (Restructuring, Impairment and Other Charges and (Credits)) to
the consolidated financial statements for additional information.
Asbestos Settlement
The asbestos settlement activity relates to changes in the estimated fair value
of certain items to be contributed by Corning under the Pittsburgh Corning
Corporation (PCC) asbestos settlement agreement if the PCC Plan of
Reorganization receives judicial approval. For additional information on this
matter, refer to Note 4 (Commitments and Contingencies) to the consolidated
financial statements and Part II - Other Information, Item 1. Legal Proceedings.
Income (Loss) from Continuing Operations Before Income Taxes
In addition to the key drivers outlined above, the following had an impact on
the results of our income (loss) before income taxes:
--------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
2005 2004 2005 2004
--------------------------------------------------------------------------------
(Loss) gain on repurchases
and retirement of debt, net $(4) $12 $(36)
--------------------------------------------------------------------------------
Also, the comparability of income (loss) from continuing operations before
income taxes for the three and nine months ended September 30, 2005 and 2004 was
impacted by movements in foreign exchange rates. In the third quarter of 2005,
we incurred an exchange rate gain of $1 million compared to a loss of $5 million
in the third quarter of 2004. For the nine months ended September 30, 2005, we
incurred a net exchange rate loss of $13 million compared to $6 million for the
prior year period. In the first quarter of 2005, we incurred an exchange rate
loss of $26 million. This exchange rate loss was due to the impact of currency
movements on unhedged balance sheet exposures, most notably at our Taiwan
subsidiary which changed its functional currency from the new Taiwan dollar (its
local currency) to the Japanese yen in the first quarter of 2005. Refer to Note
1 (Basis of Presentation) to the consolidated financial statements for
additional information.
Provision for Income Taxes
Our provision for income taxes and the related tax rates follow (in millions):
--------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
----------------------- -----------------------
2005 2004 2005 2004
(Restated) (Restated) (Restated) (Restated)
--------------------------------------------------------------------------------
Provision for income taxes $ (28) $(1,040) $ (91) $(1,050)
Effective tax rate 17.9% (64.1)% 30.8% (63.5)%
--------------------------------------------------------------------------------
For the three and nine months ended September 30, 2005, the tax provision
reflected the following items:
.. The impact of our inability to record tax benefits on net operating losses
generated in the U.S. and certain foreign jurisdictions;
.. The benefit of tax holidays and investment credits in Taiwan and tax
holidays in China and South Africa; and,
.. The benefit from the reversal of tax contingency liabilities following the
conclusion of IRS examinations.
As more fully described in Note 6 (Income Taxes) to the consolidated financial
statements of the 2004 Form 10-K, significant events occurred in the third
quarter of 2004 requiring us to increase our valuation allowance against certain
U.S. and German deferred tax assets. Accordingly, we increased our valuation
allowance by $1.2 billion in the third quarter of 2004 to reduce our net
deferred tax assets to approximately $530 million.
At September 30, 2005, we had net deferred tax assets of $541 million, which are
primarily U.S. net deferred tax assets. We continue to believe it is more likely
than not that these U.S. net deferred tax assets are realizable through a tax
planning strategy involving the sale of a non-strategic appreciated asset.
We expect to maintain a valuation allowance on future tax benefits until an
appropriate level of profitability, primarily in the U.S. and Germany, is
sustained or there are tax planning strategies that would enable us to conclude
that it is more likely than not that a larger portion of the deferred tax assets
would be realizable. Until then, our tax provision will include only the net tax
expense attributable to certain foreign operations.
During the third quarter of 2005, Corning filed its 2004 consolidated U.S.
Federal income tax return, which included a $3.9 billion worthless stock
deduction for the loss on our investment in the photonic technologies business
associated with the Pirelli acquisition. This acquisition was completed in
December 2000 and was substantially impaired in the second quarter of 2001.
Prior to the third quarter of 2005, we did not record a deferred tax asset for
this item as the ultimate realization of such deduction was uncertain, and
consistent with the requirements of SFAS No. 5, "Accounting for Contingencies,"
recognition of an asset prior to the time management determines the realization
of the asset is probable is prohibited. On September 2, 2005, Corning and the
Commissioner of the Internal Revenue Service entered into a closing agreement
under section 7121 of the Internal Revenue Code of 1986 which provides that
Corning is entitled to this worthless stock deduction. We recorded a $1.5
billion deferred tax asset for this item in the quarter, which was concurrently
offset by a valuation allowance of an equal amount due to our current inability
to record tax benefits for U.S. net operating losses.
Based on our 2004 consolidated U.S. Federal income tax return as filed, Corning
has net operating loss carryforwards of $4.9 billion for U.S. Federal income tax
purposes. These operating losses will expire in 2022 ($0.1 billion), 2023 ($0.6
billion) and 2024 ($4.2 billion).
Certain foreign subsidiaries in China, South Africa and Taiwan are operating
under tax holiday arrangements. The nature and extent of such arrangements vary,
and the benefits of such arrangements phase out in future years (2006 to 2009)
according to the specific terms and schedules of the relevant taxing
jurisdictions. The impact of the tax holidays on our effective rate is a
reduction in the rate of 17% and 14% for the three and nine months ended
September 30, 2005, respectively.
We establish tax contingency liabilities when, despite our belief that our tax
returns are fully supportable, it is probable that certain positions may not be
sustained through the income tax audit process. These liabilities are analyzed
on a quarterly basis and adjusted based upon changes in facts and circumstances,
such as the progress of income tax audits, new case law and emerging
legislation. In the third quarter of 2005, in conjunction with our reassessment
process, we recorded a tax benefit of $14 million following the conclusion of an
IRS examination for the years 2001 and 2002.
Equity in Earnings of Associated Companies, Net of Impairments
The following provides a summary of equity in earnings of associated companies,
net of impairments (in millions):
--------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
---------------------- ------------------------
2005 2004 2005 2004
(Restated) (Restated) (Restated) (Restated)
--------------------------------------------------------------------------------
Samsung Corning Precision $ 114 $ 68 $ 279 $ 204
Dow Corning Corporation 58 40 203 81
Samsung Corning (115) 14 (108) 30
All other 20 (23) 48 2
------- ------- ------ -------
Total equity earnings $ 77 $ 99 $ 422 $ 317
--------------------------------------------------------------------------------
The improvement in equity earnings recognized from Samsung Corning Precision for
both the three and nine months ended September 30, 2005 compared to their
respective 2004 periods is explained in the discussion of the performance of our
Display Technologies segment.
The improvement in equity earnings recognized from Dow Corning for the three and
nine months ended September 30, 2005 compared to their respective 2004 periods
is largely attributable to the following:
.. Strong sales volumes and improved pricing for Dow Corning in 2005.
.. During the second quarter of 2005, Dow Corning recorded a gain on the
issuance of subsidiary stock. Our equity earnings included $11 million
related to this gain.
.. During the second quarter of 2004, Dow Corning recorded charges related to
restructuring actions and adjustments to interest liabilities recorded on
its emergence from bankruptcy. Our equity earnings included a $21 million
charge related to these actions.
In the third quarter of 2005, Samsung Corning incurred impairment and other
charges of $212 million as a result of a decline in the projected operating
results for its CRT glass business. The charge, which included certain
manufacturing assets and severance and exit costs, reduced Corning's equity
earnings by $106 million in the third quarter. None of the charges is expected
to result in cash expenditures by Corning.
As Samsung Corning executes its restructuring plan over the next several
quarters, additional severance and shutdown charges may be required. We expect
our share of these charges to approximate $30 million.
Refer to Note 10 (Investments) to the consolidated financial statements for
additional information relating to Samsung Corning Precision, Dow Corning, and
Samsung Corning's operating results.
Income (loss) from Continuing Operations
As a result of the above, our net income and per share data follow (in millions,
except per share amounts):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------ ------------------------
2005 2004 2005 2004
(Restated) (Restated) (Restated) (Restated)
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 203 $ (2,566) $ 618 $ (2,401)
Basic earnings (loss) per common share $ 0.14 $ (1.83) $ 0.43 $ (1.74)
Diluted earnings (loss) per common share $ 0.13 $ (1.83) $ 0.41 $ (1.74)
Shares used in computing per share amounts
Basic earnings (loss) per common share 1,488 1,399 1,444 1,380
Diluted earnings (loss) per common share 1,552 1,399 1,523 1,380
------------------------------------------------------------------------------------------------------------------------------------
OPERATING SEGMENTS
Our reportable operating segments follow:
.. Display Technologies - manufactures LCD glass for flat panel displays;
.. Telecommunications - manufactures optical fiber and cable, and hardware and
equipment components for the telecommunications industry;
.. Environmental Technologies - manufactures ceramic substrates and filters
for automobile and diesel applications; and
.. Life Sciences - manufactures glass and plastic consumables for scientific
applications.
All other operating segments, which do not meet the quantitative threshold for
separate reporting, certain corporate investments, discontinued operations, and
unallocated expenses (including other corporate items) have been grouped as
"Unallocated and Other." Unallocated expenses include the following: gains or
losses on repurchases and retirement of debt; charges related to the asbestos
litigation; restructuring, impairment and other charges and (credits) related to
the corporate research and development or staff organizations; and charges for
increases in our tax valuation allowance. Unallocated and Other also represents
the reconciliation between the totals for the reportable segments and our
consolidated operating results.
Display Technologies
The following table provides net sales and other data for the Display
Technologies segment (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
----------------------- % Change --------------------- % Change
2005 2004 05 vs. 04 2005 2004 05 vs. 04
------------------------------------------------------------------------------------------------------------------------------------
Sales $ 489 $ 295 66% $ 1,224 $ 802 53%
Income before equity earnings $ 246 $ 74 232% $ 482 $ 191 152%
Equity earnings of associated companies $ 117 $ 68 72% $ 285 $ 204 40%
Net income $ 363 $ 142 156% $ 767 $ 395 94%
------------------------------------------------------------------------------------------------------------------------------------
The net sales increase for the third quarter of 2005 is largely reflective of
the overall LCD market growth. During the third quarter of 2005, glass substrate
volumes (measured in square feet of glass sold) increased approximately 73%
compared with the same period in 2004. Weighted average selling prices decreased
2% compared to 2004. Included in this weighted average were selling price
declines that were offset by increases in the market demand for large-size glass
substrates (generation 5 and above), which carry a higher selling price per
square foot. For the third quarter of 2005, large-size glass substrates
accounted for 70% of total sales volumes, compared to 48% for the third quarter
of 2004. Because the sales of the Display Technologies segment are denominated
in Japanese yen, our sales are susceptible to movements in the U.S. dollar -
Japanese yen exchange rate. Sales growth was negatively impacted by
approximately $6 million from a weakening of the Japanese yen compared to 2004.
For the nine months ended September 30, 2005, the net sales increase is largely
driven by the same factors as those identified for the third quarter of 2005.
For the comparable nine month period, glass substrate volumes increased
approximately 53%, while weighted average selling prices increased modestly.
Sales of large-size glass substrates accounted for 66% of year to date 2005
sales volumes compared to 43% for the same period in 2004. Movements in the U.S.
dollar - Japanese yen exchange rate did not have a significant impact on the
comparable nine month periods.
For the three and nine months ended September 30, 2005, the increase in income
before equity earnings was primarily the result of higher volumes, ongoing
improvements in manufacturing efficiencies, and a lower effective tax rate in
2005.
The increase in our equity earnings from Samsung Corning Precision for the
periods presented was largely driven by the same market factors identified for
our wholly-owned business. During the third quarter of 2005, Samsung Corning
Precision's earnings were negatively impacted by approximately 13% from
movements in exchange rates. As a result, the 68% year over year increase in
equity earnings was less than the sales volume growth of 83% would have
indicated. Equity earnings from Samsung Corning Precision, denominated in Korean
won, are susceptible to movements in the exchange rate between the Korean won
and the U.S. dollar.
The Display Technologies segment has a concentrated customer base comprised of
LCD panel and color filter makers primarily located in Japan and Taiwan. The
most significant customers in these markets are AU Optronics Corp., Chi Mei
Optoelectronics Corp., Hannstar Display Corp., Dai Nippon Printing Co., Ltd.,
Sharp Corporation, and Toppan CFI (Taiwan) Co., Ltd. These customers accounted
for 72% and 73% of the Display Technologies segment sales for the three and nine
months ended September 30, 2005, respectively. In addition, Samsung Corning
Precision's sales are concentrated across a small number of its customers. For
the three and nine months ended September 30, 2005, sales to LCD panel makers
located in Korea (Samsung Electronics Co., Ltd., LG Philips LCD Co., and BOE
Hydis Technology Co., Ltd.) accounted for 89% and 88% of total Samsung Corning
Precision sales, respectively.
In 2005 and 2004, Corning and several customers entered into long-term purchase
and supply agreements in which the Display Technologies segment will supply
large-size glass substrates to the customers over periods of up to six years. As
part of the agreements, these customers agreed to make advance cash deposits to
Corning for a portion of the contracted glass to be purchased. During the first
nine months of 2005, we received a total of $389 million of deposits against
orders. Subsequent to September 30, 2005, we received an additional $13 million
of deposits.
In the event the customers do not make all customer deposit installment payments
or elect not to purchase the agreed upon quantities of product, subject to
specific conditions outlined in the agreements, Corning may retain certain
amounts of the customer deposits. If Corning does not deliver agreed upon
product quantities, subject to specific conditions outlined in the agreements,
Corning may be required to return certain amounts of the customer deposits.
In October 2005, Corning announced a $425 million expansion of our LCD
manufacturing facility in Taichung, Taiwan. This investment will be used to fund
the third phase of the Taichung facility with the majority of the spending
planned for 2006 and 2007. The initial manufacturing from this phase will begin
in late 2006, with production continuing to come online in 2007.
Outlook:
--------
We expect to see a continuation of the overall industry growth and the trend
toward large-size substrates. We have added capacity to meet volume growth in
the LCD market, which is anticipated to be more than 50% in 2005. This market
growth is expected to occur at varying rates in the principal LCD markets of
Japan, Taiwan, China and Korea. Sales of our wholly-owned business are primarily
to panel and color filter manufacturers in Japan, Taiwan, and China while
customers in Korea are serviced by Samsung Corning Precision. The actual growth
rates in these markets will impact our sales and earnings performance.
For the fourth quarter of 2005, we expect volumes for our wholly-owned business
and Samsung Corning Precision may be up 3% to 10% in the aggregate, compared to
the third quarter of 2005. Pricing in the fourth quarter is expected to be down
slightly. In the third quarter of 2005, we began production at our new Taichung,
Taiwan manufacturing facility. The ramp of production and our ability to
efficiently start up operations may impact profitability in the fourth quarter
of 2005. In addition, we are beginning to see increased amounts of larger-sized
glass in the marketplace from competitors. There can be no assurance that the
end-market rates of growth will continue at the high rates experienced in recent
quarters, that we will be able to pace our capacity expansions to actual demand,
or that the rate of cost declines will offset price declines in any given
period. While the industry has grown rapidly, consumer preferences for panels of
differing sizes, or price or other factors, may lead to pauses in market growth,
and it is possible that glass manufacturing capacity may exceed demand from time
to time. In addition, changes in foreign exchange rates, principally the
Japanese yen, will continue to impact the sales and profitability of this
segment. Current exchange rates in October are unfavorable compared to average
exchange rates in the third quarter of 2005.
Telecommunications
The following table provides net sales and other data for the Telecommunications
segment (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
----------------------- % Change ---------------------- % Change
2005 2004 05 vs. 04 2005 2004 05 vs. 04
------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 216 $ 202 7% $ 641 $ 543 18%
Hardware and equipment 182 210 (13)% 599 573 5%
------- --------- ------- ---------
Total net sales $ 398 $ 412 (3)% $ 1,240 $ 1,116 11%
======= ========= ======= =========
Net loss $ (30) $ (1,820) (98)% $ (34) $ (1,884) (98)%
------------------------------------------------------------------------------------------------------------------------------------
For the third quarter of 2005, fiber volumes increased 9% while prices declined
5% compared to the third quarter of 2004. The increase in fiber volumes was
largely driven by sales in North America, Europe, and Japan. The decline in
hardware and equipment sales was driven by lower sales primarily to Verizon
Communications Inc. (Verizon) compared to the third quarter of 2004. Volumes
were negatively impacted as Verizon continued to reduce inventory levels of its
fiber-to-the-premises products. The comparison of sales of the
Telecommunications segment between the third quarter of 2005 and 2004 was
affected by the 2004 sale of our frequency controls business. During the third
quarter of 2004, the frequency controls business recorded sales of $12 million.
Excluding the impact of this divestiture, net sales for the Telecommunications
segment in the third quarter of 2005 were comparable to the same period in 2004.
Movements in foreign exchange rates, primarily the Euro and Japanese yen, did
not have a significant impact on sales for the third quarter of 2005 compared to
the third quarter of 2004.
For the nine months ended September 30, 2005, the net sales increase was largely
driven by sales in North America and Europe. Stronger North American volumes and
sales of the hardware and equipment business were largely the result of sales to
Verizon to support their fiber-to-the premises project. Excluding the cumulative
impact of the divestiture of our frequency controls business, net sales for the
Telecommunications segment increased 17% for the nine months ended September 30,
2005 compared to the prior year period. For the comparable nine month periods,
fiber volumes increased 22% and prices declined 6%. Movements in exchange rates
did not significantly impact sales for the comparable nine month periods.
For the Telecommunications segment, losses in both periods of 2005 and 2004 were
impacted by restructuring, impairment, and other charges and (credits). Refer to
Results of Continuing Operations for a detailed discussion of these charges.
The Telecommunications segment continues to have a concentrated customer base.
For the three and nine months ended September 30, 2005, 10 customers accounted
for 48% and 51% of total segment net sales, respectively. For the same periods,
Verizon accounted for 11% and 15% of total segment net sales, respectively.
Outlook:
--------
For the fourth quarter of 2005, we expect net sales to be down between 4% and 7%
compared to the third quarter of 2005. Fiber and cable sales are expected to be
down 10% to 15% from the third quarter and hardware and equipment sales are
expected to be even with the third quarter. Segment net sales will continue to
benefit from Verizon's fiber-to-the-premises project. Fourth quarter sales
volumes of fiber-to-the-premises products are expected to increase when compared
to the third quarter. Fiber-to-the-premises sales to Verizon in the fourth
quarter are dependent on Verizon's planned targets for homes passed and
connected in 2006. Changes in the expected Verizon deployment plan, or
additional reductions in their inventory levels of fiber-to-the-premises
products, could also affect the sales level.
Environmental Technologies
The following table provides net sales and other data for the Environmental
Technologies segment (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
---------------------- % Change --------------------- % Change
2005 2004 05 vs. 04 2005 2004 05 vs. 04
------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Automotive $ 121 $ 120 1% $ 373 $ 366 2%
Diesel 23 16 44% 65 52 25%
------- -------- ------- --------
Total net sales $ 144 $ 136 6% $ 438 $ 418 5%
======= ======== ======= ========
Net (loss) income $ (5) $ 0 $ (11) $ 10 (210)%
------------------------------------------------------------------------------------------------------------------------------------
The increase in net sales for the three and nine months ended September 30,
2005, versus the same periods in 2004, was the result of continued growth in
diesel products sales. Diesel products sales growth continues to be driven by
demand from retrofit markets, particularly in Asia. In the first half of 2005,
we received letters of intent and other expressions of intent from diesel engine
manufacturers to supply filters for their 2007 model year platforms. We are
continuing to negotiate with several diesel engine manufacturers to develop
supply agreements. Negotiations are likely to continue through the next several
quarters. For automotive products, sales in the third quarter of 2005 were flat
when compared to the same period last year. A portion of this segment's sales is
susceptible to movements in the U.S. dollar - Euro exchange rate. Movements in
exchange rates did not have a significant impact on sales for the third quarter
of 2005 compared to the third quarter of 2004.
For the three and nine months ended September 30, 2005, the decline in net
income compared to the respective 2004 periods is primarily the result of
increased development costs and plant start-up costs to support our emerging
diesel products. These costs offset the gross margin benefits of increased
volumes and the higher mix of premium automotive products. Movements in exchange
rates did not significantly impact net income for the comparable periods.
Outlook:
--------
For the fourth quarter of 2005, we expect net sales to be comparable to those of
the third quarter. We expect a seasonal decline in automotive products to be
offset by a growth in diesel product sales which are expected to grow slightly
as demand from the retrofit market is anticipated to remain stable. The retrofit
market is volatile, and any unanticipated declines in demand could adversely
impact sales.
Life Sciences
The following table provides net sales and net (loss) income for the Life
Sciences segment (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
--------------------- % Change -------------------- % Change
2005 2004 05 vs. 04 2005 2004 05 vs. 04
------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 70 $ 75 (7)% $ 219 $ 233 (7)%
Net (loss) income $ (7) $ 2 (450)% $ (13) $ 12 (208)%
------------------------------------------------------------------------------------------------------------------------------------
The decrease in net sales for the three and nine months ended September 30,
2005, when compared to the same periods in 2004, is primarily due to volume
decreases as a result of the change in our distribution channel previously
disclosed in our 2004 Annual Report on Form 10-K. Movements in foreign exchange
rates, primarily the Euro, did not have a significant impact on the
comparability of sales.
For the three and nine months ended September 30, 2005, the 2005 net loss
compared to income in the respective 2004 periods is largely attributable to the
gross margin impact from the lower sales volumes. Additionally, the Life
Sciences segment incurred higher operating expenses for both the three and nine
month periods ended September 30, 2005 compared to their respective 2004 periods
to implement the change in distribution channels and to support new product
development efforts.
Outlook:
--------
For the fourth quarter of 2005, we expect net sales to be comparable to those of
the third quarter of 2005. We remain encouraged by the results of our efforts to
alter our distribution channel in response to one of our 2004 primary
distributors changing its business strategy. However, it is unlikely that we
will be successful in migrating all of our 2004 sales made through this
distributor to our existing primary distributor and other channels. For the full
year, we expect sales may be negatively impacted between 5% and 10% as a result
of this change in our distribution channel.
LIQUIDITY AND CAPITAL RESOURCES
Customer Deposits
Certain customers of our Display Technologies segment have entered into
long-term supply agreements and agreed to make advance cash deposits to secure
supply of large-size glass substrates. The deposits will be reduced for future
product purchases, thus reducing operating cash flows in later periods as
credits are applied for cash deposits received in earlier periods. During the
first nine months of 2005, we received a total of $389 million of deposits
against orders. Subsequent to September 30, 2005, we received an additional $13
million of deposits.
Customer deposits have been or will be received in the following periods (in
millions):
------------------------------------------------------------------------------------------------------------------------------------
Nine
months ended Remainder Estimated 2006
2004 September 30, 2005 of 2005 and Beyond Total
------------------------------------------------------------------------------------------------------------------------------------
Customer deposits received $204 $389 $93 $295 $981
------------------------------------------------------------------------------------------------------------------------------------
The majority of customer deposits will be received through 2006. For the three
and nine months ended September 30, 2005, we issued $11 million and $13 million
in credit memoranda, respectively. These credit amounts are not included in the
above amounts, and were applied against customer receivables.
Financing Structure
Third Quarter
-------------
In the third quarter of 2005, we completed the following debt and common stock
transactions:
.. Series C Mandatory Convertible Preferred Stock were converted into Corning
common stock at a conversion rate of 50.813 shares of common stock for each
preferred share. Upon conversion of the preferred shares, we issued 31
million shares of Corning common stock resulting in an increase to equity
of $62 million.
.. Prior to the September 6, 2005 redemption date, substantially all holders
of our $96 million outstanding Oak 4 7/8% convertible subordinated notes,
due March 1, 2008, elected to convert their notes into Corning common
stock. The conversion ratio was 64.4138 shares of Corning common stock for
each 1,000 principal amount of notes. Upon the conversion of the notes, we
issued 6 million shares of Corning common stock resulting in an increase to
equity of $95 million.
On October 4, 2005, we issued and contributed 5 million shares of Corning common
stock, with a value of approximately $97 million, to our domestic pension plan.
We plan to contribute an additional 5 million shares of Corning common stock to
our domestic pension plan by December 31, 2005.
In the second quarter of 2005, we completed a common stock offering of 20
million shares for net proceeds of approximately $323 million. The net proceeds
from this stock offering are intended to be used primarily to repurchase
Corning's remaining zero coupon convertible debentures due on November 8, 2015.
At September 30, 2005, these debentures had a carrying value of $276 million. On
October 6, 2005, we notified current holders of our election to repurchase any
debentures tendered by holders on November 8, 2005.
Second Quarter
--------------
In the second quarter of 2005, we completed the following debt and common stock
transactions:
.. We issued $100 million of 6.05% senior unsecured notes for net proceeds of
approximately $99 million. The notes mature on June 15, 2015. We may call
the debentures at any time on or after June 15, 2010.
.. We redeemed for cash the $100 million principal amount of our 7% debentures
due March 15, 2007, which at the time had a book value of $88 million. We
recognized a loss of $12 million upon the early redemption of these
debentures.
.. We redeemed the remaining $191 million of our outstanding 3.50% convertible
debentures due November 1, 2008. The bondholders elected to convert
substantially all of their debentures into Corning common stock at a
conversion ratio of 103.3592 shares per $1,000 debenture. We issued 20
million shares upon the conversion of the debentures, resulting in an
increase to equity of $191 million.
.. We completed a common stock offering of 20 million shares for net proceeds
of approximately $323 million.
Both the $100 million of 6.05% debentures and the 20 million shares of common
stock were issued under our existing $5 billion universal shelf registration
statement. At September 30, 2005, our remaining capacity under the shelf
registration is approximately $2.1 billion.
First Quarter
-------------
In the first quarter of 2005, we completed the following debt transactions:
.. We obtained a loan of approximately $48 million, bearing interest at 2.1%,
from a Japanese bank. This loan is part of a 10-year loan agreement entered
into in 2004 to fund certain capital expansion activities in Japan.
.. We redeemed $100 million of our outstanding 3.50% convertible debentures
due November 1, 2008. The bondholders affected by this redemption elected
to convert $98 million of their debentures into Corning common stock at a
conversion ratio of 103.3592 shares per $1,000 debenture, with the
remaining $2 million repaid in cash. Separately, bondholders elected to
convert approximately $6 million of outstanding debentures into Corning
common stock. In total, we issued 11 million shares upon the conversion of
the debentures, resulting in an increase to equity of $105 million.
.. We repaid a total of $192 million of notes in accordance with their stated
repayment schedule. This was primarily comprised of our 5.625% Euro notes.
In addition, in the first quarter of 2005 we entered a written agreement with a
group of banks on a new revolving credit facility. The new facility provides us
access to a $975 million unsecured multi-currency revolving line of credit and
expires in March 2010. The facility includes two financial covenants, a leverage
test and an interest coverage ratio, both of which we are in compliance.
Concurrent with the closing of this credit facility, we terminated our previous
$2 billion revolving line of credit that was set to expire in August 2005.
Capital Spending
Capital spending totaled $1,076 million and $556 million during the nine months
ended September 30, 2005 and 2004, respectively. Our 2005 forecasted
consolidated capital spending remains at $1.5 billion. Of this amount,
approximately $1.1 billion to $1.2 billion will be directed toward expanding
manufacturing capacity for LCD glass substrates in the Display Technologies
segment and approximately $160 million will be directed toward our Environmental
Technologies segment.
Key Balance Sheet Data
Balance sheet and working capital measures are provided in the following table
(dollars in millions):
--------------------------------------------------------------------------------
As of September 30, As of December 31,
------------------- ------------------
2005 2004
(Restated) (Restated)
--------------------------------------------------------------------------------
Working capital $ 1,518 $ 804
Working capital, excluding cash
and short-term investments $ (900) $ (1,077)
Current ratio 1.6:1 1.3:1
Trade accounts receivable, net
of allowances $ 631 $ 585
Days sales outstanding 48 52
Inventories $ 559 $ 535
Inventory turns 4.7 4.9
Days payable outstanding 77 67
Long-term debt $ 1,804 $ 2,214
Total debt to total capital 29% 42%
--------------------------------------------------------------------------------
Credit Rating
Our credit ratings were updated from those disclosed in our 2004 Annual Report
on Form 10-K as follows:
--------------------------------------------------------------------------------
RATING AGENCY Rating Outlook
Last Update Long-Term Debt Last Update
--------------------------------------------------------------------------------
Fitch BBB- Stable
April 27, 2005 April 27, 2005
Standard & Poor's BBB- Stable
April 27, 2005 April 27, 2005
Moody's Baa3 Stable
September 20, 2005 September 20, 2005
--------------------------------------------------------------------------------
Management Assessment of Liquidity
Our major source of funding for 2005 and beyond will be our existing balance of
cash, cash equivalents and short-term investments. From time to time, we may
also issue debt or equity securities for general corporate purposes. We believe
we have sufficient liquidity for the next several years to fund operations, the
asbestos settlement, research and development, capital expenditures and
scheduled debt repayments.
Contractual Obligations
Other than the early debt repayments described in Note 5 (Debt) to the
consolidated financial statements, and mandatory conversion of our 7.00% Series
C Mandatory Convertible Preferred Stock into Common Stock on August 16, 2005,
described in Note 7, there have been no material changes outside the ordinary
course of business in the contractual obligations disclosed in our 2004 Annual
Report on Form 10-K under the caption "Contractual Obligations."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported therein. The estimates that
required management's most difficult, subjective or complex judgments are
described in our 2004 Annual Report on Form 10-K and remain unchanged through
the third quarter of 2005.
NEW ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS 123(R)), which replaces SFAS 123 and supercedes APB 25. SFAS
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements at fair
value. On April 14, 2005, the SEC issued a new rule that amends the required
adoption dates of SFAS 123(R). Under SFAS 123(R), Corning must determine the
appropriate fair value model to be used for valuing share-based payments, the
attribution method for compensation cost, and the transition method to be used
at date of adoption. We will implement the provisions of SFAS 123(R) on January
1, 2006 following the "prospective adoption" transition method. This adoption
method requires Corning to begin expensing share-based payments effective
January 1, 2006. Prior periods will not be restated.
Corning grants restricted shares and stock options that are subject to specific
vesting conditions (e.g., three-year cliff vesting). The awards specify that the
employee will continue to vest in the award after retirement without providing
any additional service. Corning accounts for this type of arrangement by
recognizing compensation cost over the nominal vesting period (i.e., over the
three-year vesting period) and, if the employee retires before the end of the
vesting period, recognizing any remaining unrecognized compensation cost at the
date of retirement (the "nominal vesting period approach").
SFAS 123(R) specifies that an award is vested when the employee's retention of
the award is no longer contingent on providing subsequent service (the
"non-substantive vesting period approach"). That would be the case for Corning
awards that vest when employees retire and are granted to retirement eligible
employees. Accordingly, related compensation cost must be recognized immediately
for awards granted to retirement eligible employees or over the period from the
grant date to the date retirement eligibility is achieved, if that is expected
to occur during the nominal vesting period.
We will continue to follow the nominal vesting period approach for (1) any new
share-based awards granted prior to adopting SFAS 123(R) and (2) the remaining
portion of unvested outstanding awards after adopting SFAS 123(R). Upon adoption
of SFAS 123(R), we will apply the non-substantive vesting period approach to new
grants that have retirement eligibility provisions. Had we applied the
non-substantive vesting period approach versus the nominal vesting period
approach, stock-based compensation cost would have been $11 million and $5
million higher for the nine months ended September 30, 2005 and 2004,
respectively, for stock options and restricted share awards.
Our current estimate is that our incremental pretax and after-tax share-based
compensation expense will increase by $60 million to $70 million in 2006 and
beyond. This amount includes approximately $15 million related to the impact of
applying the non-substantive vesting period approach.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4" (SFAS 151). SFAS 151 amends ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify that abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) should be recognized as
current-period charges. Additionally, SFAS 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. Corning is required to adopt SFAS 151 effective
January 1, 2006. Corning does not expect the adoption of SFAS 151 to have a
material impact on its consolidated results of operations and financial
condition.
In December 2004, the FASB issued SFAS No. 153, "Exchanges in Nonmonetary Assets
- an amendment of APB Opinion No. 29" (SFAS 153) which became effective in July
2005. This Statement amends APB No. 29, "Accounting for Nonmonetary
Transactions," by eliminating an exception for nonmonetary exchanges of similar
productive assets and replacing it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Corning adopted SFAS
153 prospectively, on July 1, 2005, as required. The impact of SFAS 153 was not
material to Corning's consolidated results of operations and financial
condition.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations - an interpretation of FASB Statement
No. 143" (FIN 47), which clarifies the term "conditional asset retirement
obligation" used in SFAS No. 143, "Accounting for Asset Retirement Obligations,"
and specifically when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. Corning is required
to adopt FIN 47 no later than December 31, 2005. Corning does not expect the
adoption of FIN 47 to have a material impact on its consolidated results of
operations and financial condition.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" (SFAS 154), which replaces APB Opinion No. 20, "Accounting
Changes," (APB 20) and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements." SFAS 154 changes the requirements for the accounting for
and reporting of a change in accounting principle. Upon the adoption of SFAS 154
beginning January 1, 2006, Corning will apply the standard's guidance to changes
in accounting methods as required. At this time, Corning does not expect the
adoption of SFAS 154 will have a material impact on its consolidated results of
operations and financial condition.
ENVIRONMENT
We have been named by the Environmental Protection Agency (the Agency) under the
Superfund Act, or by state governments under similar state laws, as a
potentially responsible party for 11 active hazardous waste sites. Under the
Superfund Act, all parties who may have contributed any waste to a hazardous
waste site, identified by such Agency, are jointly and severally liable for the
cost of cleanup unless the Agency agrees otherwise. It is our policy to accrue
for the estimated liability related to Superfund sites and other environmental
liabilities related to property owned and operated by us based on expert
analysis and continual monitoring by both internal and external consultants. We
have accrued $13 million for the estimated liability for environmental cleanup
and related litigation at September 30, 2005. Based upon the information
developed to date, we believe that the accrued amount is a reasonable estimate
of our liability and that the risk of an additional loss in an amount materially
higher than that accrued is remote.
FORWARD-LOOKING STATEMENTS
Many statements in this Quarterly Report on Form 10-Q/A are forward-looking
statements. These typically contain words such as "believes," "expects,"
"anticipates," "estimates," "forecasts," or similar expressions. These
forward-looking statements involve risks and uncertainties that may cause the
actual outcome to be materially different. Such risks and uncertainties include,
but are not limited to the following:
- global economic and political conditions;
- tariffs, import duties and currency fluctuations;
- product demand and industry capacity;
- competitive products and pricing;
- sufficiency of manufacturing capacity and efficiencies;
- availability and costs of critical components and materials;
- new product development and commercialization;
- order activity and demand from major customers;
- fluctuations in capital spending by customers;
- possible disruption in commercial activities due to terrorist activity,
armed conflict, political instability or major health concerns;
- facility expansions and new plant start-up costs;
- effect of regulatory and legal developments;
- capital resource and cash flow activities;
- ability to pace capital spending to anticipated levels of customer demand,
which may fluctuate;
- interest costs;
- credit rating and ability to obtain financing and capital on commercially
reasonable terms;
- adequacy and availability of insurance;
- financial risk management;
- capital spending;
- acquisition and divestiture activities;
- rate of technology change;
- level of excess or obsolete inventory;
- ability to enforce patents;
- adverse litigation;
- product and components performance issues;
- stock price fluctuations;
- rate of substitution by end-users purchasing LCDs for notebook computers,
desktop monitors and televisions;
- downturn in demand for LCD glass substrates;
- customer ability, most notably in the Display Technologies segment, to
maintain profitable operations and obtain financing to fund their
manufacturing expansions;
- fluctuations in supply chain inventory levels;
- equity company activities, principally at Dow Corning Corporation and
Samsung Corning Co., Ltd.;
- movements in foreign exchange rates, primarily the Japanese yen, Euro and
Korean won; and
- other risks detailed in Corning's Securities and Exchange Commission
filings.
Risk factors
Set forth below and elsewhere in this Quarterly Report on Form 10-Q/A and in
other documents we file with the SEC are some of the principal risks and
uncertainties that could cause our actual business results to differ materially
from any forward-looking statements or other projections contained in this
Report. In addition, future results could be materially affected by general
industry and market conditions, changes in laws or accounting rules, general
U.S. and non-U.S. economic and political conditions, including a global economic
slowdown, fluctuation of interest rates or currency exchange rates, terrorism,
political unrest or international conflicts, political instability or major
health concerns, natural disasters or other disruptions of expected economic and
business conditions. These risk factors should be considered in addition to our
cautionary comments concerning forward-looking statements in this Quarterly
Report on Form 10-Q/A, including statements related to markets for our products
and trends in our business that involve a number of risks and uncertainties. Our
separate statement labeled Forward-Looking Statements should be considered in
addition to the statements below.
Our sales could be negatively impacted if one or more of our key customers
substantially reduce orders for our products
Our customer base is relatively concentrated with 10 or fewer significant
customers accounting for a high percentage (greater than 50%) of net sales in
most of our businesses. Corning's twelve largest customers account for about 50%
of our sales. However, no individual customer accounts for more than 10% of
consolidated sales.
Our Display Technologies, Telecommunications, Environmental Technologies,
and Life Sciences segments have concentrated customer bases. If we lose a
significant customer in any of these businesses, or if one or more significant
customers reduce orders, our sales could be negatively impacted. Corning's
Display Technologies segment manufactures and sells glass substrates to a
concentrated customer base comprised of LCD panel and color filter makers
primarily located in Japan and Taiwan. The most significant customers in these
markets are AU Optronics Corp., Chi Mei Optoelectronics Corp., Hannstar Display
Corp., Dai Nippon Printing Co., Ltd., Sharp Corporation, and Toppan CFI (Taiwan)
Co., Ltd. For the nine months ended September 30, 2005, these LCD customers
accounted for 73% of the Display Technologies segment sales. In addition,
Samsung Corning Precision's sales were also concentrated, with three LCD panel
makers in Korea (Samsung Electronics Co., Ltd., LG Philips LCD Co., and BOE
Hydis Technology Co., Ltd.) accounting for 88% of sales for the nine months
ended September 30, 2005.
Although the sale of LCD glass substrates has increased from quarter to
quarter in 2005, there can be no assurance that this positive trend will
continue. Our customers are LCD panel and color filter makers, and as they
switch to larger size glass, the pace of their orders may be uneven while they
adjust their manufacturing processes and facilities. Additionally, consumer
preferences for panels of differing sizes, or price or other factors, may lead
to pauses in market growth from time to time. There is further risk that our
customers may not be able to maintain profitable operations or access sufficient
capital to fund ongoing expansions, which may limit their pace of orders to us.
Our Telecommunications segment customers' purchases of our products are
affected by their capital expansion plans, general market and economic
uncertainty and regulatory changes, including broadband policy. For the nine
months ended September 30, 2005, one customer accounted for 15% of our
Telecommunications segment sales, and 10 customers accounted for 51% of total
segment sales. Sales in the Telecommunications segment continue to be impacted
by Verizon's fiber-to-the-premises project. Fiber-to-the-premises sales to
Verizon are dependent on Verizon's planned targets for homes passed and
connected. Changes in Verizon's deployment plan, or additional reductions in
their inventory levels of fiber-to-the-premises products, could adversely affect
future sales.
In the Environmental Technologies segment, sales of our ceramic substrate
and filter products for automotive and diesel emissions and pollution control
fluctuate with production and sales of automobiles and other vehicles, as well
as changes in governmental laws and regulations for air quality and emission
controls. Sales in our Environmental Technologies segment are primarily to four
manufacturers of emission control systems who then sell to automotive and diesel
engine manufacturers. A portion of our automotive products are sold to U.S.
engine manufacturers, and as a result, our future sales could be adversely
impacted by slowdowns in automotive production by these manufacturers.
Sales in our Life Sciences segment in 2004 were primarily through two large
distributors to government entities, pharmaceutical and biotechnology companies,
hospitals, universities and other research facilities. One of Life Sciences
primary distributors changed its business strategy, and Corning notified this
distributor that it would not renew its existing distribution agreement, which
expired in April 2005. We are actively working to transition the sales through
this distributor to our remaining primary distributor and other existing and
developing channels. However, this change will likely adversely impact sales
volumes in the short term. For the full year, sales may be adversely impacted by
approximately 10% as a result of this change in our distribution channel. For
the nine months ended September 30, 2005, our remaining primary distributor
accounted for 50% of total segment sales.
If we do not successfully adjust our manufacturing volumes and fixed cost
structure, or achieve manufacturing yields or sufficient product reliability,
our operating results could suffer, and we may not achieve profitability levels
anticipated
We are investing heavily in additional manufacturing capacity of certain
businesses, including forecasted 2005 capital spending of $1.1 billion to $1.2
billion to expand our liquid crystal display glass facilities in response to
anticipated increases in customer demand and approximately $160 million in
anticipation of the emerging market for diesel emission control systems. The
speed of constructing the new facilities presents challenges. We may face
technical and process issues in moving to commercial production. There can be no
assurance that Corning will be able to pace its capacity expansion to the actual
demand. While the LCD industry has grown rapidly, it is possible that glass
manufacturing capacity may exceed customer demand during certain periods.
The manufacturing of our products involves highly complex and precise
processes, requiring production in highly controlled and clean environments.
Changes in our manufacturing processes or those of our suppliers could
significantly reduce our manufacturing yields and product reliability. In some
cases, existing manufacturing may be insufficient to achieve the volume or
requirements of our customers. We will need to develop new manufacturing
processes and techniques to achieve targeted volume, pricing and cost levels
that will permit profitable operations. While we continue to fund projects to
improve our manufacturing techniques and processes, we may not achieve
satisfactory cost levels in our manufacturing activities that will fully satisfy
our yield and margin targets.
Our future operating results depend on our ability to purchase a sufficient
amount of materials, parts and components to meet the demands of our customers
Our ability to meet customer demand depends, in part, on our ability to
obtain timely and adequate delivery of materials, parts and components from our
suppliers and our internal manufacturing capacity. We may experience shortages
that could adversely affect our operations. Although we work closely with our
suppliers to avoid these types of shortages, there can be no assurances that we
will not encounter these problems in the future. Furthermore, certain of our
components are available only from a single source or limited sources. We may
not be able to find alternate sources in a timely manner. A reduction or
interruption in supplies, or a significant increase in the price of supplies
could have a material adverse effect on our businesses.
During the third quarter of 2005, certain suppliers suffered disruptions
from hurricanes in the southern United States. Although we have not encountered
any significant supply shortages, we cannot guarantee we will not in the future.
We have incurred, and may in the future incur, restructuring and other charges,
the amounts of which are difficult to predict accurately
We have recorded several charges for restructuring, impairment of assets,
and the write-off of cost and equity based investments. It is possible we may
record additional charges for restructuring or other asset impairments if
additional actions become necessary to align costs to a reduced level of demand,
or respond to increased competition, regulatory actions, or other factors
impacting our businesses.
If the markets for our products do not develop and expand as we anticipate,
demand for our products may decline, which would negatively impact our results
of operations and financial performance
The markets for our products are characterized by rapidly changing
technologies, evolving industry government standards and frequent new product
introductions. Our success is expected to depend, in substantial part, on the
timely and successful introduction of new products, upgrades of current products
to comply with emerging industry government standards, and our ability to
compete with new technologies and products of other suppliers. In addition, the
following factors related to our products and the markets for them, if not
achieved, could have an adverse impact on our results of operations:
. our ability to introduce leading products such as glass substrates for
liquid crystal displays, optical fiber and cable and hardware and
equipment, and environmental substrate products that can command
competitive prices in the marketplace;
. our ability to maintain or achieve a favorable sales mix of large
generation sizes of liquid crystal display glass;
. our ability to anticipate technological and market trends;
. our ability to develop new products in response to favorable
government regulations and laws, particularly environmental substrate
diesel filter products in the Environmental Technologies segment;
. continued strong demand for notebook computers;
. the rate of substitution by end-users purchasing LCD monitors to
replace cathode ray tube monitors;
. the rate of growth in purchases of LCD televisions to replace other
technologies;
. the rate of growth of the fiber-to-the-premises build-out in North
America.
We face pricing pressures in each of our leading businesses that could adversely
affect our results of operations and financial performance
We periodically face pricing pressures in each of our leading businesses as
a result of intense competition, emerging new technologies, or over-capacity.
While we will work toward reducing our costs to respond to the pricing pressures
that may continue, we may not be able to achieve proportionate reductions in
costs. As a result of overcapacity and the current economic and industry
downturn in the Telecommunications segment, pricing pressures continued in 2005,
particularly in our optical fiber and cable products. We anticipate pricing
pressures will continue into 2006 and beyond. Increased pricing pressure may
develop in our Display Technologies segment as our customers strive to reduce
their costs and our competitors strive to expand production.
We have incurred, and may in the future incur, goodwill and other intangible
asset impairment charges
At September 30, 2005, Corning had goodwill of $277 million and other
intangible assets of $103 million. While we believe the estimates and judgments
about future cash flows used in the goodwill impairment tests are reasonable, we
cannot provide assurance that future impairment charges will not be required if
the expected cash flow estimates as projected by management do not occur or
change based on market conditions.
We may be limited in our ability to obtain additional capital on commercially
reasonable terms
Although we believe existing cash, short-term investments and borrowing
capacity, collectively, provide adequate resources to fund ongoing operating
requirements, we may be required to seek additional financing to compete
effectively in our markets. Our public debt ratings affect our ability to raise
capital and the cost of such capital. Our ratings as of October 28, 2005 were
BBB- from both Fitch, Inc. and Standard & Poor's, a division of the McGraw-Hill
Companies, Inc. and Baa3 from Moody's Investors Service, a subsidiary of Moody's
Corporation. Any downgrades may increase our borrowing costs and affect our
ability to access the debt capital markets.
We are subject under our revolving credit facility to financial covenants
that require us to maintain a ratio of total debt to capital and interest
coverage ratio, as defined under the revolving credit facility. These covenants
may limit our ability to borrow funds. Future losses or significant charges
could materially affect these ratios, which may reduce the amounts we are able
to borrow under our revolving credit facility.
If our products or materials purchased from our suppliers experience performance
issues, our business will suffer
Our business depends on the production of excellent products of
consistently high quality. To this end, our products, including materials
purchased from our suppliers, are tested for quality both by us and our
customers. Nevertheless, our products are highly complex, and our customers'
testing procedures are limited to evaluating our products under likely and
foreseeable failure scenarios. For various reasons (including, among others, the
occurrence of performance problems unforeseeable in testing), our products and
materials purchased from our suppliers may fail to perform as expected. In some
cases, product redesigns or additional capital equipment may be required to
correct a defect. In addition, any significant or systemic product failure could
result in customer relations problems, lost sales, and financial damages.
We face intense competition in most of our businesses
We expect that we will face additional competition from existing
competitors, low cost manufacturers and new entrants. Because some of the
markets in which we compete have been historically characterized by rapid growth
and technology changes, smaller niche and start-up companies, or companies with
lower operating costs may become our principal competitors in the future. We
must invest in research and development, expand our engineering, manufacturing
and marketing capabilities, and continue to improve customer service and support
in order to remain competitive. We cannot provide assurance that we will be able
to maintain or improve our competitive position.
We may experience difficulties in enforcing our intellectual property rights and
we may be subject to claims of infringement of the intellectual property rights
of others
We may encounter difficulties in protecting our intellectual property
rights or obtaining rights to additional intellectual property necessary to
permit us to continue or expand our businesses. We cannot assure you that the
patents that we hold or may obtain will provide meaningful protection against
our competitors or competitive technologies. Litigation may be necessary to
enforce our intellectual property rights, to protect our trade secrets and to
determine the validity and scope of our proprietary rights. Litigation is
inherently uncertain and the outcome is often unpredictable. Other companies
hold patents on technologies used in our industries and are aggressively seeking
to expand, enforce and license their patent portfolios.
The intellectual property rights of others could inhibit our ability to
introduce new products. We are, and may in the future be, subject to claims of
intellectual property infringement or misappropriation that may result in loss
of revenue or require us to incur substantial costs. We cannot assure you as to
the outcome of such claims.
Current or future litigation may harm our financial condition or results of
operations
Pending, threatened or future litigation is subject to inherent
uncertainties. Our financial condition or results of operations may be adversely
affected by unfavorable outcomes, expenses and costs exceeding amounts estimated
or insured. In particular, we have been named as a defendant in numerous
lawsuits against PCC and several other defendants involving claims alleging
personal injury from exposure to asbestos. As described in Legal Proceedings,
our negotiations with the representatives of asbestos claimants have produced a
tentative settlement, but certain cases may still be litigated and the final
approval of the tentative settlement is subject to a number of uncertainties.
Final approval of a global settlement through the PCC bankruptcy process may
impact the results of operations for the period in which such costs, if any, are
recognized. Total charges of $804 million have been incurred through September
30, 2005; however, additional charges are possible due to the potential
fluctuation in the price of our common stock, other adjustments in the proposed
settlement, and other litigation factors.
We face risks related to our international operations and sales
We have customers and significant operations, including manufacturing and
sales, located outside the U.S. We have large manufacturing operations for
liquid crystal display glass substrates in the Asia-Pacific region, including
equity investments in companies operating in South Korea that make liquid
crystal display glass and in China that make telecommunications products, and
several significant customers are located in this region. As a result of these
and other international operations, we face a number of risks, including:
. geographical concentration of our factories and operations;
. major health concerns such as Severe Acute Respiratory Syndrome (SARS)
or avian flu;
. difficulty of effectively managing our diverse global operations;
. change in regulatory requirements;
. tariffs, duties and other trade barriers including anti-dumping
duties;
. undeveloped legal systems; and
. political and economic instability in foreign markets.
Any of these items could cause our sales and/or profitability to be
significantly reduced.
We face risks through our equity method investments in companies that we do not
control
Corning's net income includes significant equity in earnings of associated
companies. For the nine months ended September 30, 2005, we have recognized $422
million of equity earnings, of which $482 million came from our two largest
investments; Dow Corning Corporation (which makes silicone products) and Samsung
Corning Precision Glass Co., Ltd. (which makes liquid crystal display glass).
Samsung Corning Precision is located in the Asia-Pacific region and, as such, is
subject to those geographic risks referred to above. With 50% or lower
ownership, we do not control such equity companies nor their management and
operations. Performance of our equity investments may not continue at the same
levels in the future. In the third quarter of 2005, we recognized charges
associated with Samsung Corning Co., Ltd. (our 50% equity method investment that
makes glass panels and funnels for conventional televisions), which recorded
significant fixed asset impairment charges. As the conventional television
market will be negatively impacted by strong growth in the LCD glass market, it
is reasonably possible that Samsung Corning Co., Ltd. may incur additional
restructuring or impairment charges or net operating losses in the future.
We face risks due to foreign currency fluctuations
Because we have significant customers and operations outside the U.S.,
fluctuations in foreign currencies, especially the Japanese yen and Euro, affect
our sales and profit levels. Foreign exchange rates may make our products less
competitive in countries where local currencies decline in value relative to the
dollar. Sales in our Display Technologies segment are denominated in Japanese
yen. For the nine months ended September 30, 2005, the Display Technologies
segment represented 36% of Corning's sales. Based on the expected sales growth
of the Display Technologies segment, our exposure to currency fluctuations is
increasing. Although we hedge significant transaction risk, we do not currently
hedge translation risk.
If the financial condition of our customers declines, our credit risks could
increase
We have experienced, and in the future may experience, losses as a result
of our inability to collect our accounts receivable, as well as the loss of such
customer's ongoing business. If our customers fail to meet their payment
obligations to us, including deposits due under long-term purchase and supply
agreements in our Display Technologies segment, we could experience reduced cash
flows and losses in excess of amounts reserved. As of September 30, 2005,
reserves for trade receivables totaled approximately $28 million.
We may not have adequate insurance coverage for claims against us
We face the risk of loss resulting from, and adverse publicity associated
with, product liability, securities, fiduciary liability, intellectual property,
antitrust, contractual, warranty, fraud and other lawsuits, whether or not such
claims are valid. In addition, our product liability, fiduciary, directors and
officers, property and comprehensive general liability insurance may not be
adequate to cover such claims or may not be available to the extent we expect.
Our insurance costs have increased and may increase further. We may not be able
to get adequate insurance coverage in the future at acceptable costs. A
successful claim that exceeds or is not covered by our policies could require us
to pay substantial sums. Some of the carriers in our excess insurance programs
are in liquidation and may not be able to respond if we should have claims
reaching into excess layers. The financial health of other insurers may
deteriorate and these insurers may not be able to respond if we should have
claims reaching into excess layers. In addition, we may not be able to insure
against certain risks or obtain some types of insurance, such as political
risks, terrorism or war insurance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
There have been no material changes to our market risk exposures during the
first nine months of 2005. For a discussion of our exposure to market risk,
refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risks,
contained in our 2004 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
(a) Restatement
As discussed in Note 2 to the consolidated financial statements contained
herein, the Company has restated its consolidated financial statements for the
years 2003 through 2005 and its quarterly consolidated financial statements for
each of the quarterly periods in the years ended December 31, 2005 and 2004.
Specifically, between March 31, 2003, and December 31, 2005, the following
accounting errors occurred:
.. Corning's asbestos settlement charges and the related liability for the
asbestos settlement did not reflect the estimated fair value at initial
recognition or subsequent changes in fair value, of certain components of
the proposed settlement offer. As a result, asbestos settlement charges for
the years 2005, 2004, and 2003 were understated by $13 million, $24
million, and $117 million, respectively.
.. Corning incorrectly suspended recording equity earnings of Pittsburgh
Corning Europe, N.V. between March 31, 2003, and December 31, 2005. As a
result, equity in earnings of affiliated companies for the years 2005,
2004, and 2003 was understated by $13 million, $11 million, and $7 million,
respectively.
.. Accretion on the cash portion of the asbestos settlement offer was
incorrectly recorded as interest expense resulting in both an overstatement
of interest expense and an understatement of asbestos settlement expense
for the years 2005, 2004, and 2003, by $8 million, $8 million, and $5
million, respectively.
In the restated consolidated financial statements, the higher asbestos
settlement charges are tax-effected in 2003 and the first half of 2004. As
Corning provided a valuation allowance on most of its deferred tax assets in the
third quarter of 2004, that quarter reflects an increase in the valuation
allowance of $55 million for the deferred tax assets related to the higher
asbestos settlement charges.
(b) Evaluation of disclosure controls and procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Securities Exchange Act of 1934 (the Exchange
Act) is accumulated and communicated to our management, including our principal
executive and principal financial officers, or other persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
In the first quarter of 2006, management identified errors in the accounting of
its Pittsburgh Corning Corporation (PCC) Asbestos Litigation liability and
investments in affiliates and as noted above, has recorded the necessary
adjustments in the unaudited interim consolidated financial statements for the
quarter ended March 31, 2006 to correct these errors and has restated previously
issued financial statements. In its Form 8-K filed on April 25, 2006, management
indicated that the evaluation of internal control over financial reporting
related to the above mentioned errors was still in process.
The evaluation has been completed, and management, under the direction of its
principal executive and principal financial officers, has re-evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2005. Based
upon this re-evaluation and as a result of the material weaknesses discussed
below, the Company's principal executive and principal financial officers, have
concluded that its disclosure controls and procedures were not effective as of
September 30, 2005.
A material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management determined that the following control deficiencies
constitute material weaknesses in internal control over financial reporting at
September 30, 2005:
(i) The Company did not maintain effective controls over the valuation of
its asbestos settlement charges and the valuation and reconciliation
of the related liability pertaining to the 2003 Pittsburgh Corning
Corporation Asbestos Litigation Bankruptcy Settlement. Specifically,
the Company did not maintain effective controls to ensure that certain
components of the liability, which may be settled by contributing the
Company's equity interest of Pittsburgh Corning Europe, N.V. and
assignment of rights to insurance proceeds, were appropriately
recorded at fair value rather than book value as required by generally
accepted accounting principles. This control deficiency resulted in
the restatement of our annual consolidated financial statements for
the years ended December 31, 2005, 2004, and 2003 and the quarterly
consolidated financial statements for each of the three quarterly
periods in the years ended December 31, 2005 and 2004. Additionally,
this control deficiency could result in a misstatement of our asbestos
settlement charges and related liability that would result in a
material misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected.
(ii) The Company did not maintain effective controls over the completeness
and accuracy of its equity investments. Specifically, the Company did
not maintain effective controls to ensure that earnings of its equity
investments were accurately and completely recorded. This control
deficiency resulted in the restatement of the Company's annual
consolidated financial statements for the years ended December 31,
2005, 2004, and 2003 and the quarterly consolidated financial
statements for each of the three quarterly periods in the years ended
December 31, 2005 and 2004. Additionally, this control deficiency
could result in a misstatement of our investments and equity in
earnings of affiliated companies that would result in a material
misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected.
Plan for Remediation of Material Weaknesses - We believe the steps described
below, some of which have already been taken, will remediate the material
weaknesses described above.
.. We have enhanced the procedures and documentation associated with the
reconciliation of our PCC Asbestos Litigation liability in order to ensure
that all components are included in the evaluation process and are
accounted for in accordance with generally accepted accounting principles.
.. We have augmented the resources in our Accounting Services department that
will enable us to have a stronger segregation of duties associated with the
reconciliation of the PCC Asbestos Litigation liability account to ensure
1) the analysis and preparation of the reconciliation and 2) a detailed
review of this work is done by separate individuals who have the requisite
skill set and training.
.. We are in the process of updating our key controls within the Investments
in Affiliates cycle to specifically address 1) our ability to achieve full
inclusion of all less than 100% owned entities in our accounting analysis
of Investments in Affiliates and 2) to ensure proper monitoring and
accounting for these entities.
.. We are in the process of improving our investments in affiliates
reconciliation procedures and documentation in order to ensure 1) the
analysis and preparation of the reconciliation and 2) a detailed review of
the reconciliation is done by separate individuals who have the requisite
skill set and training.
As discussed above, since March 31, 2006, we are in the process of making
improvements to our internal control over financial reporting that have a
material effect, or are reasonably likely to materially affect, our internal
control over financial reporting and anticipate the control deficiencies
described above can be remediated on or before September 30, 2006.
(c) Changes in internal control over financial reporting
No changes in the Company's internal control over financial reporting occurred
during the quarter ending September 30, 2005 that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
Environmental Litigation. Corning has been named by the Environmental Protection
Agency (the Agency) under the Superfund Act, or by state governments under
similar state laws, as a potentially responsible party at 11 active hazardous
waste sites. Under the Superfund Act, all parties who may have contributed any
waste to a hazardous waste site, identified by such Agency, are jointly and
severally liable for the cost of cleanup unless the Agency agrees otherwise. It
is Corning's policy to accrue for its estimated liability related to Superfund
sites and other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued $13 million for its estimated liability for
environmental cleanup and litigation at September 30, 2005. Based upon the
information developed to date, management believes that the accrued reserve is a
reasonable estimate of the Company's liability and that the risk of an
additional loss in an amount materially higher than that accrued is remote.
Schwinger and Stevens Toxins Lawsuits. All Schwinger and Stevens related cases
have been resolved without monetary contribution by Corning. The complaints in
these matters were dismissed with prejudice by a court order dated January 2005.
Dow Corning Bankruptcy. Corning and The Dow Chemical Company (Dow Chemical) each
own 50% of the common stock of Dow Corning Corporation (Dow Corning), which was
in reorganization proceedings under Chapter 11 of the U.S. Bankruptcy Code
between May 1995 and June 2004. Dow Corning filed for bankruptcy protection to
address pending and claimed liabilities arising from many thousand
breast-implant product lawsuits. On June 1, 2004, Dow Corning emerged from
Chapter 11 with a Plan of Reorganization (the Plan) which provided for the
settlement or other resolution of implant claims and includes releases for
Corning and Dow Chemical as shareholders in exchange for contributions to the
Plan.
Under the terms of the Plan, Dow Corning has established and is funding a
Settlement Trust and a Litigation Facility to provide a means for tort claimants
to settle or litigate their claims. Dow Corning has paid approximately $1.6
billion (inclusive of insurance) to the Settlement Trust and subject to a number
of conditions, may pay up to an additional $1.6 billion ($710 million after-tax)
over 16 years. Dow Corning has satisfied the claims of its commercial creditors,
except that certain commercial creditors continue to pursue an appeal to the
U.S. Court of Appeals of the Sixth Circuit seeking from Dow Corning an
additional sum of approximately $80 million for interest at default rates and
enforcement costs. The appeal was argued on July 27, 2005. Corning believes the
risk of loss to Dow Corning (net of amounts reserved) is remote.
In addition, Dow Corning has received a statutory notice of deficiency from the
United States Internal Revenue Service asserting tax deficiencies totaling
approximately $65 million relating to its federal income tax returns for the
1995 and 1996 calendar years. This matter is pending before the U.S. District
Court in Michigan. Dow Corning has also received a proposed adjustment from the
IRS (approximately $117 million) with respect to its federal income tax returns
for the 1997, 1998 and 1999 calendar years. Dow Corning is vigorously contesting
these deficiencies and proposed adjustments which it believes are excessive.
In 1995, Corning fully impaired its investment in Dow Corning upon its entry
into bankruptcy proceedings and did not recognize net equity earnings from the
second quarter of 1995 through the end of 2002. Corning began recognizing equity
earnings in the first quarter of 2003 when management concluded that its
emergence from bankruptcy protection was probable. Corning considers the
difference between the carrying value of its investment in Dow Corning and its
50% share of Dow Corning's equity to be permanent. This difference is $249
million. Subject to future rulings by the bankruptcy court and potential changes
in estimated bankruptcy-related liabilities, it is possible that Dow Corning may
record bankruptcy-related charges in the future. Corning received $15 million in
dividends from Dow Corning in the second quarter of 2005.
Pittsburgh Corning Corporation. Corning and PPG Industries, Inc. (PPG) each own
50% of the capital stock of Pittsburgh Corning Corporation (PCC). Over a period
of more than two decades, PCC and several other defendants have been named in
numerous lawsuits involving claims alleging personal injury from exposure to
asbestos. On April 16, 2000, PCC filed for Chapter 11 reorganization in the U.S.
Bankruptcy Court for the Western District of Pennsylvania. As of the bankruptcy
filing, PCC had in excess of 140,000 open claims and had insufficient remaining
insurance and assets to deal with its alleged current and future liabilities.
More than 100,000 additional claims have been filed with PCC after its
bankruptcy filing. As a result of PCC's bankruptcy filing, Corning recorded an
after-tax charge of $36 million in 2001 to fully impair its investment in PCC
and discontinued recognition of equity earnings. At the time PCC filed for
bankruptcy protection, there were approximately 12,400 claims pending against
Corning in state court lawsuits alleging various theories of liability based on
exposure to PCC's asbestos products and typically requesting monetary damages in
excess of one million dollars per claim. Corning has defended those claims on
the basis of the separate corporate status of PCC and the absence of any facts
supporting claims of direct liability arising from PCC's asbestos products.
Corning is also currently named in approximately 11,500 other cases
(approximately 44,000 claims) alleging injuries from asbestos and similar
amounts of monetary damages per claim. Those cases have been covered by
insurance without material impact to Corning to date. Asbestos litigation is
inherently difficult, and past trends in resolving these claims may not be
indicators of future outcomes.
In the bankruptcy court in April 2000, PCC obtained a preliminary injunction
against the prosecution of asbestos actions arising from PCC's products against
its two shareholders to afford the parties a period of time in which to
negotiate a plan of reorganization for PCC (the PCC Plan).
On May 14, 2002, PPG announced that it had agreed with certain of its insurance
carriers and representatives of current and future asbestos claimants on the
terms of a settlement arrangement applicable to claims arising from PCC's
products.
On March 28, 2003, Corning announced that it had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future asbestos claims against us and Pittsburgh Corning Corporation (PCC),
which might arise from PCC products or operations. The proposed settlement, if
the plan is approved and becomes effective, will require Corning to relinquish
its equity interest in PCC, contribute its equity interest in Pittsburgh Corning
Europe N.V. (PCE), a Belgian corporation, and contribute 25 million shares of
Corning common stock. Corning also agreed to make cash payments with a value of
$131 million, in March 2003, over six years from the effective date of the
settlement. In addition, Corning will assign policy rights or proceeds under
primary insurance from 1962 through 1984, as well as rights to proceeds under
certain excess insurance, most of which falls within the period from 1962
through 1973. In return for these contributions, Corning expects to receive a
release and an injunction channeling asbestos claims against it into a
settlement trust under the PCC Plan.
Corning recorded an initial charge of $392 million in the period ending March
31, 2003 to reflect the settlement terms. However, the asbestos liability
requires adjustment to fair value based upon movements in Corning's common stock
price prior to the contribution of the shares to the trust and changes in the
estimated fair value of the other components of the settlement offer. Beginning
with the first quarter of 2003 and through September 30, 2005, Corning recorded
total net charges of $804 million to reflect the initial settlement, the
movement in Corning's common stock price since March 31, 2003, and changes in
the estimated fair value of the other components of the settlement offer.
Two of Corning's primary insurers and several excess insurers have commenced
litigation for a declaration of the rights and obligations of the parties under
insurance policies, including rights that may be affected by the settlement
arrangement described above. Corning is vigorously contesting these cases.
Management is unable to predict the outcome of this insurance litigation.
The PCC Plan received a favorable vote from creditors in March 2004. Hearings to
consider objections to the Plan were held in the Bankruptcy Court in May 2004.
The parties filed post-hearing briefs and made final oral arguments to the
Bankruptcy Court in November 2004. The Bankruptcy Court allowed an additional
round of briefing to address current case law developments and heard additional
oral arguments on March 16, 2005. In mid-April 2005, the proponents of the PCC
Plan requested that the court rule on the pending objections. If the Bankruptcy
Court does not approve the PCC Plan in its current form, changes to the Plan are
probable as it is likely that the Court will allow the proponents time to
propose amendments. The outcome of these proceedings is uncertain, and
confirmation of the current Plan or any amended Plan is subject to a number of
contingencies. However, apart from the quarterly mark-to-market adjustment in
the value of the 25 million shares of Corning stock, management believes that
the likelihood of a material adverse impact to Corning's financial statements is
remote.
Astrium. In December of 2000, Astrium, SAS and Astrium, Ltd. filed a complaint
for negligence in the U.S. District Court for the Central District of California
against TRW, Inc., Pilkington Optronics Inc., Corning NetOptix, Inc. (NetOptix),
OFC Corporation and Optical Filter Corporation claiming damages in excess of
$150 million. The complaint alleges that certain cover glasses for solar arrays
used to generate electricity from solar energy on satellites sold by Astrium's
corporate successor were negligently coated by NetOptix or its subsidiaries
(prior to Corning's acquisition of NetOptix) in such a way that the amount of
electricity the satellite can produce and their effective life were materially
reduced. NetOptix has denied that the coatings produced by NetOptix or its
subsidiaries caused the damage alleged in the complaint, or that it is legally
liable for any damages that Astrium may have experienced. In April 2002, the
Court granted motions for summary judgment by NetOptix and other defendants to
dismiss the negligence claims, but permitted plaintiffs to add fraud and
negligent misrepresentation claims against all defendants and a breach of
warranty claim against NetOptix and its subsidiaries. In October 2002, the Court
again granted defendants' motions for summary judgment and dismissed the
negligent misrepresentation and breach of warranty claims. The intentional fraud
claims were dismissed against all non-settling defendants on February 25, 2003.
On March 19, 2003, Astrium appealed all of the Court's rulings regarding the
various summary judgment motions to the Ninth Circuit Court of Appeals. Briefing
will be completed in the fourth quarter of 2005. A hearing for oral argument
should set in the first half of 2006. Recognizing that the outcome of litigation
is uncertain, management believes that the likelihood of a materially adverse
impact to Corning's financial statements is remote.
Furukawa Electric Company. On February 3, 2003, The Furukawa Electric Company
(Furukawa) filed suit in the Tokyo District Court in Japan against Corning Cable
Systems International Corporation (CCS International) alleging infringement of
Furukawa's Japanese Patent No. 2,023,966 which relates to separable fiber ribbon
units used in optical cable. Furukawa's complaint requested slightly over 6
billion Japanese yen in damages (approximately $56 million) and an injunction
against further sales in Japan of these fiber ribbon units. CCS International
denied the allegation of infringement and asserted that the patent is invalid.
On October 29, 2004, the Tokyo District Court issued its ruling in favor of CCS
International on both non-infringement and patent invalidity. Furukawa appealed
from this ruling to the Tokyo Court of Appeals. In the third quarter of 2005,
Furukawa and CCS International reached a settlement upon mutually acceptable
terms, including cross licenses of certain patents relating to optical fiber
cable products. This settlement will have no material adverse impact to
Corning's financial results.
PicVue Electronics Ltd., PicVue OptoElectronics International, Inc., and
Eglasstrek Gmbh. In June 2002, Corning brought an action in the U.S. District
Court for the Western District of New York to restrain the use of its trade
secrets relating to certain machinery used for liquid crystal display glass
melting. In July 2003, the District Court granted a preliminary injunction in
favor of Corning, subject to Corning's posting a bond. PicVue, a Taiwanese
company, filed a counterclaim alleging violations of the antitrust laws and
appealed from the granting of the preliminary injunction. The U.S. Court of
Appeals affirmed and remanded the case to the District Court to clarify its
injunction and to determine the amount of the bond. In early July 2005, Corning
reached a settlement with the two PicVue entities resolving Corning's trade
secret claim and dismissing PicVue's counterclaim. Corning and Eglasstrek have
also reached a settlement. As a result, agreed judgments with respect to both
PicVue and Eglasstrek have been entered by the District Court. In October 2005,
PicVue and Corning announced they had amicably resolved and settled the
litigation, and the U.S. Attorney's Office announced arrest of a suspect accused
of misappropriating Corning proprietary information. This settlement will have
no material adverse impact to Corning's financial results.
Tyco Electronics Corporation and Tyco Technology Resources, Inc. On August 13,
2003, CCS Holdings Inc. (CCS), a Corning subsidiary, filed an action in the U.S.
District Court for the Middle District of North Carolina against Tyco
Electronics Corporation and Tyco Technology Resources, Inc. (Tyco), asking the
court to declare a Tyco patent invalid, unenforceable and not infringed by CCS.
The patent generally relates to a type of connector for optical fiber cables.
Tyco filed an answer and counterclaim alleging patent infringement by CCS of the
same patent and seeking unspecified monetary damages and an injunction. In
September 2005, the parties amicably resolved the matter by signing a settlement
agreement, without material impact on Corning's financial statements.
Grand Jury Investigation of Conventional Cathode Ray Television Glass Business.
In August 2003, Corning Asahi Video Products Company (CAV) was served with a
federal grand jury document subpoena related to pricing, bidding and customer
practices involving conventional cathode ray television glass picture tube
components. A number of employees or former employees have received a related
subpoena. CAV is a general partnership, 51% owned by Corning and 49% owned by
Asahi Glass America, Inc. CAV's only manufacturing facility in State College,
Pennsylvania closed in the first half of 2003 due to declining sales. CAV is
cooperating with the government investigation. Management is not able to
estimate the likelihood that any charges will be filed as a result of the
investigation.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
This table provides information about our purchases of our common stock during
the fiscal third quarter of 2005:
Issuer Purchases of Equity Securities
------------------------------------------------------------------------------------------------------------------------------------
Total Average Total Number of Approximate Dollar
Number Price Shares Purchased as Value of Shares that
of Shares Paid per Part of Publicly May Yet Be Purchased
Period Purchased (a) Share (a) Announced Plan (b) Under the Plan (b)
------------------------------------------------------------------------------------------------------------------------------------
July 1-31, 2005 29,872 $17.99 0 $0
August 1-31, 2005 305,210 $19.46 0 $0
September 1-30, 2005 7,132 $20.76 0 $0
------------------------------------------------------------------------------------------------------------------------------------
Total 342,214 $19.36 0 $0
------------------------------------------------------------------------------------------------------------------------------------
(a) This column reflects the following transactions during the fiscal third
quarter of 2005: (i) the deemed surrender to us of 339,758 shares of common
stock to pay the exercise price and to satisfy tax withholding obligations
in connection with the exercise of employee stock options, and (ii) the
surrender to us of 2,456 shares of common stock to satisfy tax withholding
obligations in connection with the vesting of restricted stock issued to
employees.
(b) During the period ended September 30, 2005, we did not have a publicly
announced program for repurchase of shares of our common stock and did not
repurchase our common stock in open-market transactions outside of such a
program.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit Number Exhibit Name
-------------- ------------
12 Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) under the Exchange Act
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) under the Exchange Act
32 Certification Pursuant to 18 U.S.C. Section 1350
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNING INCORPORATED
(Registrant)
May 9, 2006 /s/ JAMES B. FLAWS
--------------- -----------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
May 9, 2006 /s/ KATHERINE A. ASBECK
--------------- -----------------------------------------
Date Katherine A. Asbeck
Senior Vice President - Finance
(Principal Accounting Officer)
EXHIBIT INDEX
-------------
Exhibit Number Exhibit Name
------------- ------------
12 Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) under the Exchange Act
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) under the Exchange Act
32 Certification Pursuant to 18 U.S.C. Section 1350
Exhibit 12
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratios)
Nine months ended
September 30, 2005
(Restated)
------------------
Income before income taxes $ 295
Adjustments:
Distributed income of equity investees 216
Fixed charges net of capitalized interest 104
--------
Income before taxes and fixed charges, as adjusted $ 615
========
Fixed charges:
Interest expense (a) $ 84
Portion of rent expense which represents an
appropriate interest factor (b) 20
Capitalized interest 21
--------
Total fixed charges 125
Capitalized interest (21)
--------
Total fixed charges, net of capitalized interest $ 104
========
Ratio of earnings to fixed charges 4.9x
========
(a) Interest expense includes amortization expense for capitalized interest and
debt costs.
(b) One-third of net rent expense is the portion deemed representative of the
interest factor.
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302(A) OF
THE SARBANES-OXLEY ACT OF 2002
I, Wendell P. Weeks, certify that:
1. I have reviewed this amendment to quarterly report on Form 10-Q/A of
Corning Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 9, 2006
/s/ Wendell P. Weeks
-------------------------------------
Wendell P. Weeks
President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302(A) OF
THE SARBANES-OXLEY ACT OF 2002
I, James B. Flaws, certify that:
1. I have reviewed this amendment to quarterly report on Form 10-Q/A of
Corning Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 9, 2006
/s/ James B. Flaws
-----------------------------------------
James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
We, Wendell P. Weeks, President and Chief Executive Officer, and James B. Flaws,
Vice Chairman and Chief Financial Officer, of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) the amendment to Quarterly Report of Corning Incorporated on Form 10-Q/A
for the three-month period ended September 30, 2005 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) that information contained in such Form 10-Q/A fairly presents in all
material respects the financial condition and results of operations of
Corning Incorporated.
Date: May 9, 2006
/s/ Wendell P. Weeks
-----------------------------------------
Wendell P. Weeks
President and Chief Executive Officer
/s/ James B. Flaws
-----------------------------------------
James B. Flaws
Vice Chairman and Chief Financial Officer