UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2009

 

OR

 

o

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

 

CORNING INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

New York

 

16-0393470

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

One Riverfront Plaza, Corning, New York

 

14831

(Address of principal executive offices)

 

(Zip Code)

 

607-974-9000

(Registrant’s telephone number, including area code)

 

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

o

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes

x

 

No

o

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer

x

 

Accelerated filer

o

 

 

Non-accelerated filer

o

 

Smaller reporting company

o

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes

o

 

No

x

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding as of April 17, 2009

Corning’s Common Stock, $0.50 par value per share

 

1,553,874,440 shares

 


INDEX

 

PART I – FINANCIAL INFORMATION

 

 

 

 

Page

Item 1. Financial Statements

 

 

 

 

 

Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2009 and 2008

 

3

 

 

 

Consolidated Balance Sheets (Unaudited) at March 31, 2009 and December 31, 2008

 

4

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2009 and 2008

 

5

 

 

 

Consolidated Statements of Changes in Equity (Unaudited) for the three months ended March 31, 2009

 

6

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

7

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

44

 

 

 

Item 4. Controls and Procedures

 

44

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

Item 1. Legal Proceedings

 

45

 

 

 

Item 1A. Risk Factors

 

48

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

49

 

 

 

Item 6. Exhibits

 

50

 

 

 

Signatures

 

51

 

 

- 2 -

 

 


CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited; in millions, except per share amounts)

 

 

 

Three months
ended March 31,

 

 

2009

 

2008

 

 

 

 

 

 

Net sales

$

989 

 

$

1,617 

Cost of sales

 

719 

 

 

773 

 

 

 

 

 

 

Gross margin

 

270 

 

 

844 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative expenses

 

207 

 

 

242 

Research, development and engineering expenses

 

151 

 

 

151 

Amortization of purchased intangibles

 

 

 

Restructuring, impairment and other charges and (credits) (Note 2)

 

165 

 

 

(1)

Asbestos litigation charge (credit) (Note 3)

 

 

 

(327)

 

 

 

 

 

 

Operating (loss) income

 

(260)

 

 

777 

 

 

 

 

 

 

Equity in earnings of affiliated companies (Note 9)

 

195 

 

 

312 

Interest income

 

 

 

30 

Interest expense

 

(14)

 

 

(18)

Other income, net (Note 1)

 

20 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

(52)

 

 

1,103 

Benefit (provision) for income taxes (Note 5)

 

66 

 

 

(74)

 

 

 

 

 

 

Net income attributable to Corning Incorporated

$

14 

 

$

1,029 

 

 

 

 

 

 

Earnings per common share attributable to Corning Incorporated:

 

 

 

 

 

Basic (Note 6)

$

0.01 

 

$

0.66 

Diluted (Note 6)

$

0.01 

 

$

0.64 

 

 

 

 

 

 

Dividends declared per common share

$

0.05 

 

$

0.05 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Certain amounts from the prior period were reclassified to conform to the 2009 presentation.

 

- 3 -

 

 


CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited; in millions, except per share amounts)

 

 

 

 

March 31,
2009

 

December 31,
2008

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

1,780 

 

$

1,873 

Short-term investments, at fair value (Note 7)

 

805 

 

 

943 

Total cash, cash equivalents and short-term investments

 

2,585 

 

 

2,816 

Trade accounts receivable, net of doubtful accounts and allowances - $18 and $20

 

593 

 

 

512 

Inventories (Note 8)

 

731 

 

 

798 

Deferred income taxes (Note 5)

 

151 

 

 

158 

Other current assets

 

379 

 

 

335 

Total current assets

 

4,439 

 

 

4,619 

 

 

 

 

 

 

Investments (Note 9)

 

2,435 

 

 

3,056 

Property, net of accumulated depreciation - $5,089 and $5,070

 

7,806 

 

 

8,199 

Goodwill and other intangible assets, net (Note 10)

 

302 

 

 

305 

Deferred income taxes (Note 5)

 

3,059 

 

 

2,932 

Other assets

 

137 

 

 

145 

 

 

 

 

 

 

Total Assets

$

18,178 

 

$

19,256 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

$

68 

 

$

78 

Accounts payable

 

542 

 

 

846 

Other accrued liabilities (Notes 3 and 11)

 

982 

 

 

1,128 

Total current liabilities

 

1,592 

 

 

2,052 

 

 

 

 

 

 

Long-term debt (Note 4)

 

1,596 

 

 

1,527 

Postretirement benefits other than pensions

 

774 

 

 

784 

Other liabilities (Notes 3 and 11)

 

1,521 

 

 

1,402 

Total liabilities

 

5,483 

 

 

5,765 

 

 

 

 

 

 

Commitments and contingencies (Note 3)

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock – Par value $0.50 per share; Shares authorized: 3.8 billion; Shares issued: 1,612 million and 1,609 million

 

806 

 

 

804 

Additional paid-in capital

 

12,576 

 

 

12,502 

Retained earnings

 

1,876 

 

 

1,940 

Treasury stock, at cost; Shares held: 63 million and 61 million

 

(1,202)

 

 

(1,160)

Accumulated other comprehensive loss (Note 16)

 

(1,409)

 

 

(643)

Total Corning Incorporated shareholders’ equity

 

12,647 

 

 

13,443 

Noncontrolling interests

 

48 

 

 

48 

Total equity

 

12,695 

 

 

13,491 

 

 

 

 

 

 

Total Liabilities and Equity

$

18,178 

 

$

19,256 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Certain amounts from the prior period were reclassified to conform to the 2009 presentation.

 

- 4 -

 

 


CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in millions)

 

 

 

Three months ended
March 31,

 

 

2009

 

2008

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

$

14 

 

$

1,029 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

175 

 

 

157 

Amortization of purchased intangibles

 

 

 

Asbestos litigation

 

 

 

(327)

Restructuring, impairment and other charges (credits)

 

165 

 

 

(1)

Stock compensation charges

 

35 

 

 

41 

Undistributed earnings of affiliated companies

 

208 

 

 

(161)

Deferred tax benefit

 

(119)

 

 

(2)

Restructuring payments

 

(12)

 

 

(7)

Customer deposits, net of (credits) issued

 

(103)

 

 

(66)

Employee benefit payments less than (in excess of) expense

 

17 

 

 

(48)

Changes in certain working capital items:

 

 

 

 

 

Trade accounts receivable

 

(111)

 

 

(50)

Inventories

 

39 

 

 

(32)

Other current assets

 

(23)

 

 

(21)

Accounts payable and other current liabilities, net of restructuring payments

 

(89)

 

 

(224)

Other, net

 

61 

 

 

Net cash provided by operating activities

 

264 

 

 

295 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Capital expenditures

 

(276)

 

 

(467)

Net proceeds from sale or disposal of assets

 

12 

 

 

 

Short-term investments – acquisitions

 

(104)

 

 

(724)

Short-term investments – liquidations

 

242 

 

 

816 

Net cash used in investing activities

 

(126)

 

 

(375)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Net repayments of short-term borrowings and current portion of long-term debt

 

(63)

 

 

(9)

Principal payments under capital lease obligations

 

(9)

 

 

 

Proceeds from issuance of common stock, net

 

 

 

Proceeds from the exercise of stock options

 

 

 

18 

Repurchase of common stock

 

 

 

 

(62)

Dividends paid

 

(78)

 

 

(78)

Other, net

 

 

 

(2)

Net cash used in financing activities

 

(143)

 

 

(129)

Effect of exchange rates on cash

 

(88)

 

 

117 

Net decrease in cash and cash equivalents

 

(93)

 

 

(92)

Cash and cash equivalents at beginning of period

 

1,873 

 

 

2,216 

 

 

 

 

 

 

Cash and cash equivalents at end of period

$

1,780 

 

$

2,124 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Certain amounts from the prior period were reclassified to conform with the 2009 presentation.

 

- 5 -

 

 


CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited; in millions)

 

 

 

Common
stock

Additional
paid-in
capital

Retained
earnings

Treasury
stock

Accumulated
other
comprehensive
loss

Total Corning
Incorporated
shareholders’
equity

Non-
controlling
interests

Total

Balance, December 31, 2008

$804 

$12,502 

$1,940 

$(1,160)

$(643)

$13,443 

$48

$13,491 

 

 

 

 

 

 

 

 

 

Net income attributable to Corning Incorporated

 

 

14 

 

 

14 

 

14 

Foreign currency translation adjustment

 

 

 

 

(728)

(728)

 

(728)

Unrealized postretirement benefit plan losses and prior service costs

 

 

 

 

(37)

(37)

 

(37)

Net unrealized loss on investments

 

 

 

 

(14)

(14)

 

(14)

Unrealized derivative gain on cash flow hedges

 

 

 

 

56 

56 

 

56 

Reclassification adjustments on cash flow hedges

 

 

 

 

(43)

(43)

 

(43)

Total comprehensive loss

 

 

 

 

 

(752)

 

(752)

 

 

 

 

 

 

 

 

 

Shares issued to benefit plans and for option exercises

72 

 

(33)

 

40 

 

40 

Dividends on shares

 

 

(78)

 

 

(78)

 

(78)

Other, net

 

(9)

 

(6)

 

(6)

Balance, March 31, 2009

$806 

$12,576 

$1,876 

$(1,202)

$(1,409)

$12,647 

$48

$12,695 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

- 6 -

 

 


CORNING INCORPORATED AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.

Significant Accounting Policies

 

Basis of Presentation

 

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, 2008 (2008 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. Certain amounts for the prior period have been reclassified to conform to the 2009 presentation. 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.

 

Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 160 “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160). A noncontrolling interest, previously called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. Under SFAS 160, noncontrolling interests in subsidiaries are now included as a component of equity in the consolidated statements of financial position. SFAS 160 also provides the required accounting treatment for changes in ownership of noncontrolling interests. As required, the presentation and disclosure provisions of SFAS 160 have been applied retrospectively. For the three months ended March 31, 2009, and 2008, net income attributable to noncontrolling interests was not significant (less than $1 million in each period presented) and therefore, was not presented separately on the consolidated statements of income.

 

Effective January 1, 2009, the Company changed the presentation of equity in earnings of affiliated companies in the Consolidated Statements of Income from below benefit (provision) for income taxes to above (loss) income before income taxes. The change in presentation reflects the strategic and economic importance of the Company’s investments accounted for under the equity method of accounting. There was no effect on the Company’s consolidated results of operation, financial condition, or cash flows as a result of this change.

 

Fair Value Measurements

 

The company applies SFAS No. 157, “Fair Value Measurements” (SFAS 157) and related Financial Accounting Standards Board (FASB) staff positions to all assets and liabilities that are measured and reported on a fair value basis. Major categories of financial assets and liabilities, including short-term investments, other assets and derivatives are measured at fair value on a recurring basis. Certain assets and liabilities including long-lived assets, goodwill, asset retirement obligations, and cost and equity investments are measured at fair value on a nonrecurring basis.

 

SFAS 157 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

 

- 7 -

 

 


Other Income, Net

 

“Other income, net” in Corning’s consolidated statements of income includes the following:

 

Three months
ended March 31,

 

 

2009

 

2008

Royalty income from Samsung Corning Precision

$

42 

 

$

43 

Foreign currency exchange and hedge (losses), net

$

(18)

 

$

(28)

Net income attributable to noncontrolling interests

$

 

$

Other, net

$

(4)

 

$

(14)

Total

$

20 

 

$

 

New Accounting Standards

 

In April 2009, the FASB issued FASB Staff Position (FSP) FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 changes the method for determining whether an other-than-temporary impairment exists for debt securities and for determining the amount of an impairment charge to be recorded in earnings. The FSP is effective for interim and fiscal periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Corning plans to adopt FSP 115-2 and FAS 124-2 effective June 30, 2009. Corning is currently evaluating the impact of FAS 115-2 and FAS 124-2 on its consolidated results of operation and financial condition.

 

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4 provides application guidance addressing the determination of (a) when a market for an asset or a liability is active or inactive and (b) when a particular transaction is distressed. The FSP is required to be applied prospectively and does not allow retrospective application. This FSP is effective for interim and fiscal periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Corning plans to adopt FSP FAS 157-4 effective June 30, 2009. Corning is currently evaluating the impact of FAS 157-4 on its consolidated results of operation and financial condition.

 

2.

Restructuring, Impairment and Other Charges (Credits)

 

2009 Activities

 

In the first quarter of 2009, we recorded a charge of $165 million associated with a corporate-wide restructuring plan to reduce our global workforce in response to anticipated lower sales in 2009. The charge included costs for severance, special termination benefits, outplacement services, and the impact of a $30 million curtailment loss for postretirement benefits. Total cash expenditures associated with this plan are expected to be approximately $105 million with the majority of spending completed by early 2010.

 

- 8 -

 

 


The following table summarizes the restructuring, impairment and other charges (credits) as of and for the three months ended March 31, 2009 (in millions):

 

Reserve at
Jan. 1,
2009

 

Charges

 

Net
Charges

 

Non-Cash
Settlements

 

Cash
Payments

 

Reserve at
March 31,
2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee related costs

$

17

 

$

148

 

$

148

 

$

(46)

 

$

(11)

 

$

108

Other charges (credits)

 

17

 

 

5

 

 

5

 

 

 

 

 

(1)

 

 

21

Total restructuring charges

$

34

 

$

153

 

$

153

 

$

(46)

 

$

(12)

 

$

129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment of long-lived assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets to be disposed of

 

 

 

$

12

 

$

12

 

 

 

 

 

 

 

 

 

Total impairment charges

 

 

 

$

12

 

$

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total restructuring, impairment and other charges and (credits)

 

 

 

$

165

 

$

165

 

 

 

 

 

 

 

 

 

 

The cost of this plan for each of our reportable operating segments was as follows:

Operating segment

Employee-
related
and other
costs

Display Technologies

$

34

Telecommunications

 

15

Environmental Technologies

 

19

Specialty Materials

 

18

Life Sciences

 

7

Corporate and All Other

 

72

Total restructuring, impairment and other charges

$

165

 

Cash payments for employee-related costs will be substantially complete by early 2010, while payments for exit activities will be substantially complete by the end of 2011.

 

2008 Activities

 

In the first quarter of 2008, Corning recorded net credit adjustments of $1 million for revisions to existing restructuring plans. The following table summarizes the restructuring activity as of and for the three months ended March 31, 2008 (in millions):

 

Reserve at
January 1,
2008

 

Revisions
to existing
plans

 

Net
charges/
(reversals)

 

Cash
Payments

 

Reserve at
March 31,
2008

 

 

 

 

 

 

 

 

 

 

Restructuring activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee related costs

$

12

 

$

(1)

 

$

(1)

 

$

(5)

 

$

6

Other charges

 

22

 

 

 

 

 

 

 

 

(2)

 

 

20

Total restructuring activity

$

34

 

$

(1)

 

$

(1)

 

$

(7)

 

$

26

 

 

- 9 -

 

 


3.

Commitments and Contingencies

 

Asbestos Litigation

 

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. 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 involved in approximately 10,300 other cases (approximately 42,800 claims) alleging injuries from asbestos and similar amounts of monetary damages per case. Those cases have been covered by insurance without material impact to Corning to date. As described below, several of Corning’s insurance carriers have filed a legal proceeding concerning the extent of any insurance coverage for these claims. Asbestos litigation is inherently difficult, and past trends in resolving these claims may not be indicators of future outcomes.

 

On March 28, 2003, Corning announced that it had reached agreement with the representatives of asbestos claimants for the resolution of all current and future asbestos claims against it and PCC, which might arise from PCC products or operations (the 2003 Plan). The 2003 Plan would have required Corning to relinquish its equity interest in PCC, contribute its equity interest in Pittsburgh Corning Europe N.V. (PCE), a Belgian corporation, contribute 25 million shares of Corning common stock, and pay a total of $140 million in six annual installments (present value $131 million at March 2003), beginning one year after the plan’s effective date, with 5.5 percent interest from June 2004. In addition, the 2003 Plan provided that Corning would assign certain insurance policy proceeds from its primary insurance and a portion of its excess insurance.

 

On December 21, 2006, the Bankruptcy Court issued an order denying confirmation of the 2003 Plan for reasons it set out in a memorandum opinion. Several parties, including Corning, filed motions for reconsideration. These motions were argued on March 5, 2007, and the Bankruptcy Court reserved decision.

 

On January 10, 2008, some of the parties in the proceeding advised the Bankruptcy Court that they had made substantial progress on an amended plan of reorganization (the Amended PCC Plan) that resolved issues raised by the Court in denying the confirmation of the 2003 Plan and that would therefore make it unnecessary for the Bankruptcy Court to decide the motion for reconsideration. On March 27, 2008 and May 22, 2008, the parties further informed the Bankruptcy Court on the progress toward the Amended PCC Plan. The parties filed a partial tentative plan on August 8, 2008. The parties continued to inform the Bankruptcy Court of the status of their discussions on the Amended PCC Plan. The complete proposed Amended PCC Plan and its ancillary documents were filed with the Bankruptcy Court on January 29, 2009.

 

As a result, Corning believes the Amended PCC Plan now represents the most probable outcome of this matter and expects that such a proposed Amended PCC Plan will be confirmed by the Court. At the same time, Corning believes the 2003 Plan no longer serves as the basis for the Company’s best estimate of liability. Key provisions of the proposed Amended PCC Plan address the concerns expressed by the Bankruptcy Court. Accordingly, in the first quarter of 2008, Corning adjusted its asbestos litigation liability to reflect components of the Amended PCC Plan. The proposed resolution of PCC asbestos claims under the Amended PCC Plan requires Corning to contribute its equity interests in PCC and PCE and to contribute a fixed series of payments, recorded at present value. Corning will have the option to use its shares rather than cash to make these payments, but the liability is fixed by dollar value and not the number of shares. The proposed Amended Plan would require Corning to make one payment of $100 million one year from the date the Amended PCC Plan becomes effective and certain conditions are met and five additional payments of $50 million each on subsequent anniversaries of the first payment, subject to credits applicable under certain circumstances to Corning’s final $50 million payment.

 

- 10 -

 

 


The Amended PCC Plan does not include non-PCC asbestos claims that may be or have been raised against Corning. Corning has recorded an additional $150 million for such claims in its estimated asbestos litigation liability. The liability for non-PCC claims was estimated based upon industry data for asbestos claims since Corning does not have recent claim history due to the injunction issued by the PCC Bankruptcy Court. The estimated liability represents the undiscounted projection of claims and related legal fees over the next 20 years. The amount may need to be adjusted in future periods as more Company-specific data becomes available.

 

The liability for the Amended PCC Plan and the non-PCC asbestos claims was estimated to be $666 million at March 31, 2009, compared with an estimate of liability of $662 million at December 31, 2008. In the first quarter of 2009, Corning recorded asbestos litigation expense of $4 million. The entire obligation is classified as a non-current liability as installment payments for the cash portion of the obligation are not planned to commence until more than 12 months after the Amended PCC Plan is ultimately confirmed and the PCE portion of the obligation will be fulfilled through the direct contribution of Corning’s investment in PCE (currently recorded as a non-current other equity method investment).

 

In the three months ended March 31, 2008, Corning recorded a credit to asbestos litigation expense of $327 million, as a result of the increase in likelihood of a settlement under the Amended PCC Plan and a corresponding decrease in likelihood of a settlement under the 2003 Plan.

 

The Amended PCC Plan is subject to a number of contingencies. Payment of the amounts required to fund the Amended PCC Plan from insurance and other sources are subject to a number of conditions which may not be achieved. The approval of the Amended PCC Plan by the Bankruptcy Court is not certain and may face objections by some parties. Any approval of the Amended PCC Plan by the Bankruptcy Court is subject to appeal. The proposed Amended PCC Plan will also be subject to a vote of PCC’s creditors. For these and other reasons, Corning’s liability for these asbestos matters may be subject to changes in subsequent quarters. The estimate of the cost of resolving the non-PCC asbestos claims may also be subject to change as developments occur. Management continues to believe that the likelihood of the uncertainties surrounding these proceedings causing a material adverse impact to Corning’s financial statements is remote.

 

Several of Corning’s 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 potential resolutions described above. Corning is vigorously contesting these cases. Management is unable to predict the outcome of this insurance litigation and therefore cannot estimate the range of any possible loss.

 

Other Commitments and Contingencies

 

In the normal course of our business, we do not routinely provide significant third-party guarantees. When provided, these guarantees have various terms, and none of these guarantees are individually significant. Generally, third party guarantees provided by Corning are limited to certain financial guarantees including stand-by letters of credit and performance bonds, and the incurrence of contingent liabilities in the form of purchase price adjustments related to attainment of milestones.

 

We have also agreed to provide a credit facility to Dow Corning Corporation (Dow Corning). The funding of the Dow Corning $150 million credit facility is subject to events connected to the Dow Corning Bankruptcy Plan. Refer to Note 13 (Commitments, Contingencies, and Guarantees) to the consolidated financial statements in our 2008 Form 10-K for a discussion of contingent liabilities associated with Dow Corning.

 

As of March 31, 2009, contingent guarantees totaled a notional value of $291 million, compared with $292 million at December 31, 2008. We believe a significant majority of these contingent guarantees will expire without being funded. We also were contingently liable for purchase obligations of $119 million and $126 million, at March 31, 2009 and December 31, 2008, respectively.

 

Product warranty liability accruals at March 31, 2009 and December 31, 2008 were $22 million and $18 million, respectively.

 

- 11 -

 

 


Corning is a defendant in various lawsuits, including environmental, product-related suits, the Dow Corning and PCC matters, discussed in Note 7 (Investments) to the consolidated financial statements in our 2008 Form 10-K and in Part II – Item 1, Legal Proceedings, and is subject to various claims which arise in the normal course of business. In the opinion of management, the likelihood that the ultimate disposition of these matters will have a material adverse effect on Corning’s consolidated financial position, liquidity, or results of operations, is remote.

 

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 for 19 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. At March 31, 2009, and December 31, 2008, Corning had accrued approximately $24 million and $21 million, respectively, for the estimated liability for environmental cleanup and related litigation. 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.

 

4.

Debt

 

In the first quarter of 2009, we recorded the impact of a capital lease obligation associated with a manufacturing facility in our Display Technologies segment. The balance of this obligation at March 31, 2009 was $141 million and is included in our long-term debt balance. Corning repaid $72 million of debt which included the redemption of $54 million principal amount of our 6.3% notes due March 1, 2009. There were no other significant debt transactions in the first quarter of 2009.

 

5.

Income Taxes

 

Our provision for income taxes and the related effective income tax rates were as follows (in millions):

 

Three months

ended March 31,

 

 

2009

 

2008

 

 

 

 

 

 

Benefit (provision) for income taxes

$

66    

 

$

(74)  

Effective (benefit) tax rate

 

(126.9)%

 

 

6.7%

 

For the three months ended March 31, 2009, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:

Rate differences on income/(losses) of consolidated foreign companies;

The impact of equity in earnings of affiliated companies;

The benefit of tax holidays and investment credits in foreign jurisdictions; and

The impact of discrete items, including a restructuring charge of $165 million and our share of Dow Corning’s restructuring charge of $29 million. Refer to Note 2 (Restructuring, Impairment and Other Charges (Credits)) for additional information about the restructuring charge. Discrete items increased our effective tax rate by 128.3 percentage points.

 

For the three months ended March 31, 2008, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:

The impact of not recording net tax expense on income generated in the U.S.;

The benefit of tax holidays and investment credits in foreign jurisdictions; and

The impact of discrete items for which no tax benefit was recorded, including an asbestos litigation credit of $327 million. Refer to Note 3 (Commitments and Contingencies) for additional information about the asbestos litigation. Discrete items decreased our effective tax rate by 2.8 percentage points.

 

- 12 -

 

 


As more fully described in Note 6 (Income Taxes) to the consolidated financial statements in our 2008 Form 10-K, all of our U.S. deferred tax assets had full valuation allowances until the second quarter of 2008. At that time, we concluded that it was more likely than not that we would realize substantially all of our U.S. deferred tax assets because we expect to generate sufficient levels of income in the U.S. As a result, we released $2.5 billion of valuation allowances in 2008 on our U.S. deferred tax assets and, effective January 1, 2009, are providing U.S. income tax expense or (benefit) on U.S. earnings (losses).

 

For the three months ended March 31, 2008, we recorded tax expense on income generated in the U.S. of $172 million which was fully offset by releases of valuation allowance. This amount includes the impact of discrete items described above.

 

Certain foreign subsidiaries in China and Taiwan are operating under tax holiday arrangements. The nature and extent of such arrangements vary, and the benefits of such arrangements phase out through 2013 according to the specific terms and schedules of the relevant taxing jurisdictions. The impact of the tax holidays on our effective tax rate is a reduction in the rate of 21.9 and 3.8 percentage points for the three months ended March 31, 2009 and 2008, respectively.

 

Corning is currently reviewing its eligibility for a U.S. tax credit for research and experimentation expenses incurred from 2005 to 2008. As a result, it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase within the next 12 months. The amount or range of increase cannot be estimated at March 31, 2009.

 

6.

Earnings per Common Share

 

The reconciliation of the amounts used in the basic and diluted earnings per common share computations follows (in millions, except per share amounts):

 

Three months ended March 31,

 

2009

 

2008

 

Net
Income

 

Weighted-
Average
Shares

 

Per
Share
Amount

 

Net
Income

 

Weighted-
Average
Shares

 

Per
Share
Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

14

 

1,548

 

$

0.01

 

$

1,029

 

1,566

 

$

0.66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and other dilutive securities

 

 

 

11

 

 

 

 

 

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

$

14

 

1,559

 

$

0.01

 

$

1,029

 

1,598

 

$

0.64

 

The following potential common shares were excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive. In addition, the following performance-based restricted stock awards have been excluded from the calculation of diluted earnings per common share because the number of shares ultimately issued is contingent on our performance against certain targets established for the performance period (in millions):

 

Three months ended
March 31,

 

 

2009

 

2008

Potential common shares excluded from the calculation of diluted earnings per share:

 

 

 

Employee stock options and awards

79

 

37

Performance-based restricted stock awards

4

 

2

Total

83

 

39

 

 

- 13 -

 

 


7.

Short-term Investments

 

The following is a summary of the fair value of short-term investments, which are comprised of available-for-sale securities (in millions):

 

March 31,
2009

 

December 31,
2008

 

Bonds, notes and other securities:

 

 

 

 

 

U.S. government and agencies

$

627

 

$

737

Asset-backed securities

 

4

 

 

5

Other debt securities

 

174

 

 

201

Total short-term investments

$

805

 

$

943

 

Gross realized gains and losses for the three months ended March 31, 2009 and 2008 were not significant.

 

Gross unrealized gains and losses at March 31, 2009 were $2 million and $60 million, respectively, and were included in accumulated other comprehensive income. Unrealized losses included temporary impairments of asset-backed securities with a fair value of $33 million at March 31, 2009. Because we believe the $85 million cost-basis of these asset-backed securities, which are collateralized by mortgages, is recoverable in the long-term we have classified these securities as long-term assets. It is possible that a significant degradation in the delinquency or foreclosure rates in the underlying mortgages could cause further temporary or other-than-temporary impairments in the future. Gross unrealized gains and losses at March 31, 2008 were $6 million and $39 million, respectively.

 

8.

Inventories

 

Inventories comprise the following (in millions):

 

March 31,
2009

 

December 31,
2008

Finished goods

$

260

 

$

293

Work in process

 

166

 

 

197

Raw materials and accessories

 

123

 

 

120

Supplies and packing materials

 

182

 

 

188

Total inventories

$

731

 

$

798

 

9.

Investments

 

Investments comprise the following (in millions):

 

Ownership
Interest (1)

 

March 31,
2009

 

December 31,
2008

Affiliated companies accounted for by the equity method

 

 

 

 

 

 

 

Samsung Corning Precision Glass Co., Ltd.

50%

 

$

1,613

 

$

1,965

Dow Corning Corporation

50%

 

 

601

 

 

866

All other

20%-50%

 

 

217

 

 

221

 

 

 

 

2,431

 

 

3,052

Other investments

 

 

 

4

 

 

4

Total

 

 

$

2,435

 

$

3,056

 

(1)

Amounts reflect Corning’s direct ownership interests in the respective affiliated companies. Corning does not control any of these entities.

 

- 14 -

 

 


Related party information for these investments in affiliates follows (in millions):

 

Three months
ended March 31,

 

2009

 

2008

Related Party Transactions:

 

 

 

 

 

Corning sales to affiliates

$

4

 

$

15

Corning purchases from affiliates

$

4

 

$

13

Dividends received from affiliates

$

403

 

$

151

Royalty income from affiliates

$

43

 

$

43

Corning transfers of assets, at cost, to affiliates

 

 

 

$

48

 

As of March 31, 2009, balances due to and due from affiliates were $2 million and $22 million, respectively. As of December 31, 2008, balances due to and due from affiliates were $2 million and $20 million, respectively.

 

We have contractual agreements with several of our equity affiliates which include sales, purchasing, licensing and technology agreements.

 

Summarized results of operations for our two 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 primarily of liquid crystal display glass for flat panel displays.

 

Samsung Corning Precision’s results of operations follow (in millions):

 

Three months
ended March 31,

 

 

2009

 

2008

 

 

 

 

 

 

Statement of Operations:

 

 

 

 

 

Net sales

$

755

 

$

855

Gross profit

$

510

 

$

569

Net income

$

371

 

$

449

Corning’s equity in earnings of Samsung Corning Precision

$

187

 

$

216

 

 

 

 

 

 

Related Party Transactions:

 

 

 

 

 

Corning purchases from Samsung Corning Precision

 

 

 

$

7

Corning sales to Samsung Corning Precision

 

 

 

$

8

Dividends received from Samsung Corning Precision

$

181

 

$

151

Royalty income from Samsung Corning Precision

$

42

 

$

43

Corning transfers of machinery and equipment to Samsung Corning Precision at cost (1)

 

 

 

$

48

 

(1)

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, with no gain or loss recognized on the transaction.

 

Corning owns 50% of Samsung Corning Precision, Samsung Electronics Co., Ltd. owns 43% and three other shareholders own the remaining 7%.

 

As of March 31, 2009, balances due from Samsung Corning Precision were $20 million. As of December 31, 2008, balances due from Samsung Corning Precision were $17 million.

 

On December 31, 2007, Samsung Corning Precision acquired all of the outstanding shares of Samsung Corning Co., Ltd. (Samsung Corning). After the transaction, Corning retained its 50% interest in Samsung Corning Precision. Samsung Corning Precision accounted for the transaction at fair value while Corning accounted for the transaction at historical cost.

 

- 15 -

 

 


Prior to their merger, Samsung Corning Precision Glass Co., Ltd. (Samsung Corning Precision) and Samsung Corning Co. Ltd. (Samsung Corning) were two of approximately thirty co-defendants in a lawsuit filed by Seoul Guarantee Insurance Co. and thirteen other creditors (SGI and Creditors) for alleged breach of an agreement that approximately twenty-eight affiliates of the Samsung group (“Samsung Affiliates”) entered into with SGI and Creditors on August 24, 1999 (“the Agreement”). The lawsuit is pending in the courts of South Korea. Under the Agreement it is alleged that the Samsung Affiliates agreed to sell certain shares of Samsung Life Insurance Co., Ltd. (SLI), which had been transferred to SGI and Creditors in connection with the petition for court receivership of Samsung Motor Inc. In the lawsuit, SGI and Creditors allege a breach of the Agreement by the Samsung Affiliates and are seeking the loss of principal (approximately $1.95 billion) for loans extended to Samsung Motors Inc., default interest and a separate amount for breach. On January 31, 2008, the Seoul District Court ordered the Samsung Affiliates to pay approximately $1.30 billion by disposing of 2,334,045 shares of SLI less 1,165,955 shares of SLI previously sold by SGI and Creditors and paying the proceeds to SGI and Creditors and to satisfy any shortfall by participating in the purchase of equity or subordinate debentures issued by them and pay default interest of 6% per annum. The ruling has been appealed. Due to the uncertainties around the financial impact to each of the respective Samsung affiliates, Samsung Corning Precision is unable to reasonably estimate the amount of potential loss, if any, associated with this case and therefore no provision for such loss is reflected in its financial statements. Other than as described above, no claim in these matters has been asserted against Corning or any of its affiliates.

 

In connection with an investigation by the Commission of the European Communities, Competition DG, of alleged anticompetitive behavior relating to the worldwide production of LCD glass, Corning and Samsung Corning Precision received a request on March 30, 2009, for certain information from the Competition DG. Corning and Samsung Corning Precision are in the process of responding to the request for information.

 

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 ended
March 31,

 

2009

 

2008

 

 

 

 

 

 

Statement of Operations:

 

 

 

 

 

Net sales

$

1,025

 

$

1,275

Gross profit

$

282

 

$

409

Net income

$

10

 

$

160

Corning’s equity in earnings of Dow Corning

$

5

 

$

80

 

 

 

 

 

 

Related Party Transactions:

 

 

 

 

 

Corning purchases from Dow Corning

$

4

 

$

4

Dividends received from Dow Corning

$

222

 

 

 

 

The balance due to Dow Corning was $1 million as of March 31, 2009.

 

In response to current economic challenges, Dow Corning incurred restructuring charges associated with a global workforce reduction in the first quarter of 2009. Our share of these charges was $29 million.

 

At March 31, 2009, Dow Corning’s marketable securities included approximately $1.1 billion of auction rate securities, net of a temporary impairment of $147 million. As a result of the temporary impairment, unrealized losses of $113 million, net of $34 million for a minority interests’ share, were included in accumulated other comprehensive income in Dow Corning’s consolidated balance sheet. Corning’s share of this unrealized loss was $57 million and is included in Corning’s accumulated other comprehensive income.

 

- 16 -

 

 


Dow Corning has borrowed the full amount under its $500 million revolving credit facility and believes it has adequate liquidity to fund operations, its capital expenditure plan, breast implant settlement liabilities, and shareholder dividends.

 

Corning and The Dow Chemical Company (Dow Chemical) each own 50% of the common stock of Dow Corning. In May 1995, Dow Corning filed for bankruptcy protection to address pending and claimed liabilities arising from many thousands of 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. The Plan also 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. Inclusive of insurance, Dow Corning has paid approximately $1.6 billion to the Settlement Trust. As of December 31, 2008, Dow Corning had recorded a reserve for breast implant litigation of $1.6 billion and anticipates insurance receivables of $41 million. As a separate matter arising from the bankruptcy proceedings, Dow Corning is defending claims asserted by a number of commercial creditors who claim additional interest at default rates and enforcement costs, during the period from May 1995 through June 2004. As of December 31, 2008, Dow Corning has estimated the liability to commercial creditors to be within the range of $80 million to $234 million. As Dow Corning management believes no single amount within the range appears to be a better estimate than any other amount within the range, Dow Corning has recorded the minimum liability within the range less approximately $6 million paid in 2008 in settlement of certain trade creditors’ claims for default interest. Should Dow Corning not prevail in this matter, Corning’s equity earnings would be reduced by its 50% share of the amount in excess of $74 million, net of applicable tax benefits. In addition, the London Market Insurers (the “LMI Claimants”) have claimed a reimbursement right with respect to a portion of insurance proceeds previously paid by the LMI Claimants to Dow Corning. This claim is based on a theory that the LMI Claimants overestimated Dow Corning’s liability for the resolution of implant claims pursuant to the Plan. The LMI Claimants offered two calculations of their claim amount: $54 million and $93 million, plus minimum interest of $67 million and $116 million, respectively. These estimates were explicitly characterized as preliminary and subject to change. Litigation regarding this claim is in the discovery stage. Dow Corning disputes the claim and is unable to reasonably estimate any potential liability. There are a number of other claims in the bankruptcy proceedings against Dow Corning awaiting resolution by the U.S. District Court, and it is reasonably possible that Dow Corning may record bankruptcy-related charges in the future. There are no remaining tort claims against Corning, other than those that will be channeled by the Plan into facilities established by the Plan or otherwise defended by the Litigation Facility.

 

In 1995, Corning fully impaired its investment in Dow Corning after it filed for bankruptcy protection. Corning 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 Dow Corning’s emergence from bankruptcy was probable. Corning considers the $249 million difference between the carrying value of its investment in Dow Corning and its 50% share of Dow Corning’s equity to be permanent.

 

Variable Interest Entities

Corning leases certain transportation equipment from three Trusts that qualify as variable interest entities under FASB Interpretation 46R, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (FIN 46R). The sole purpose of these entities is to lease transportation equipment to Corning.

 

For variable interest entities, we assess the terms of our interest in each entity to determine if we are the primary beneficiary as prescribed by FIN 46R. Corning has performed the required FIN 46R assessments and has identified three entities as being variable interest entities. None of these entities are considered significant to Corning’s consolidated statements of position.

 

Corning does not have retained interests in assets transferred to an unconsolidated entity that serve as credit, liquidity or market risk support to that entity.

 

- 17 -

 

 


10.

Goodwill and Other Intangible Assets

 

There were no changes in the carrying amount of goodwill for the three months ended March 31, 2009. Balances by segment are as follows (in millions):

 

Telecom-
munications

 

Display
Technologies

 

Specialty
Materials

 

Total

 

 

 

 

 

 

 

 

Balance at March 31, 2009

$ 118

 

$ 9

 

$ 150

 

$ 277

 

Other intangible assets follow (in millions):

 

March 31, 2009

 

December 31, 2008

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents and trademarks

$

128

 

$

114

 

$

14

 

$

129

 

$

112

 

$

17

Non-competition agreements

 

97

 

 

89

 

 

8

 

 

98

 

 

90

 

 

8

Other

 

5

 

 

2

 

 

3

 

 

5

 

 

2

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

230

 

$

205

 

$

25

 

$

232

 

$

204

 

$

28

 

Amortized intangible assets are primarily related to the Telecommunications segment.

 

Estimated amortization expense related to these intangible assets is $10 million for 2009 and insignificant thereafter.

 

11.

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 would supply large-size glass substrates to these customers over periods of up to six years. As part of the agreements, these customers agreed to advance cash deposits to Corning for a portion of the contracted glass to be purchased. Between 2004 and 2007, we received a total of $937 million for customer deposit agreements. We received our last deposit of $105 million in 2007 and do not expect to receive additional deposits related to these agreements.

 

Upon receipt of the cash deposits made by customers, we recorded a customer deposit liability. This liability is reduced at the time of future product sales over the life of the agreements. As product is shipped to a customer, Corning recognizes revenue at the selling price and issues credit memoranda for an agreed amount of the customer deposit liability. The credit memoranda are 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.

 

During the three months ended March 31, 2009 and 2008, we issued $103 million and $66 million, respectively, in credit memoranda. Customer deposit liabilities were $237 million and $369 million at March 31, 2009 and December 31, 2008, respectively, of which $198 million and $320 million, respectively, were recorded in the current portion of other accrued liabilities in our consolidated balance sheets. Because these liabilities are denominated in Japanese yen, changes in the balances include the impact of movements in the Japanese yen–U.S. dollar exchange rate.

 

In the event customers do not 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.

 

- 18 -

 

 


12.

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
ended March 31,

 

Three months
ended March 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

13 

 

$

13 

 

$

 

$

Interest cost

 

38 

 

 

37 

 

 

12 

 

 

12 

Expected return on plan assets

 

(45)

 

 

(49)

 

 

 

 

 

 

Amortization of net loss

 

 

 

 

 

 

 

Amortization of prior service cost

 

 

 

 

 

(1)

 

 

(1)

Total pension and postretirement benefit expense

$

15 

 

$

 

$

18 

 

$

16 

 

 

 

 

 

 

 

 

 

 

 

 

Curtailment charge

 

22 

 

 

 

 

 

 

 

 

Total expense

$

37 

 

$

 

$

26 

 

$

16 

 

Corning and certain of its domestic subsidiaries 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 and service requirements. In response to rising health care costs, we changed our cost-sharing approach for retiree medical coverage. For current retirees (including surviving spouses) and active employees eligible for the salaried retiree medical program, we placed a “cap” on the amount we will contribute toward retiree medical coverage in the future. The cap equals 120% of our 2005 contributions toward retiree medical benefits. Once our contributions toward salaried retiree medical costs reach this cap, impacted retirees will have to pay the excess amount in addition to their regular contributions for coverage. This cap was attained for post-65 retirees in 2008 and has impacted their contribution rate in 2009. The pre-65 retirees are expected to trigger the cap in 2009. Further, employees hired or rehired on or after January 1, 2007 will be eligible for Corning retiree medical upon retirement; however, these employees will pay 100% of the cost.

 

In the three months ended March 31, 2009, Corning recorded restructuring charges of $44 million for pension and postretirement benefit plans. This included a curtailment charge of $30 million for the domestic qualified defined benefit plan (U.S. pension plan) and the domestic postretirement benefit plan. Accordingly, we remeasured the U.S. pension and postretirement benefit plans as of March 31, 2009. The remeasurement resulted in an increase of $115 million to the Company’s U.S. pension liability and a decrease of $12 million to the domestic postretirement benefit plan liability. As part of the remeasurement, we updated the assumed discount rate for both plans to 6.25%, which reflects a 25 basis point increase from December 31, 2008.

 

13.

Hedging Activities

 

Effective January 1, 2009, Corning adopted SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (SFAS 161) which provides guidance for enhanced disclosures about derivatives. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk related contingent features in derivative agreements. The adoption of SFAS 161 did not have a material impact on the Company’s consolidated results of operation or financial condition.

 

- 19 -

 

 


Corning operates and conducts business in many foreign countries and as a result is 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 translation 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 the Japanese yen, Korean won, New Taiwan dollar, and the Euro. We selectively enter into foreign exchange forward and option contracts with durations of 18 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 (in millions):

As of March 31, 2009

 

 

Asset derivatives

 

Liability derivatives

 

Notional
amount

 

Balance
sheet
location

 

Fair
value

 

Balance
sheet
location

 

Fair
value

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments under Statement 133

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

$

278

 

Other current assets

 

$

13

 

Other accrued liabilities

 

$

(15)

Total

$

278

 

 

 

$

13

 

 

 

$

(15)

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments under Statement 133

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

$

1,316

 

Other current assets

 

$

33

 

Other accrued liabilities

 

$

(18)

Total

$

1,316

 

 

 

$

33

 

 

 

$

(18)

Total derivatives

 

 

 

 

 

$

46

 

 

 

$

(33)

 

Corning uses derivative instruments (forwards and options) to limit exposures to fluctuations related to certain monetary assets, monetary liabilities, and net earnings in foreign currencies. These derivative instruments are not designated as hedging instruments for accounting purposes and, as such, are referred to as undesignated derivatives. Changes in the fair value of undesignated derivatives are recorded in current period earnings in the other income, net component, along with the foreign currency gains and losses arising from the underlying monetary assets or liabilities in the consolidated statement of operations. The notional amount of the undesignated derivatives at March 31, 2009 and December 31, 2008 was $1.3 billion and $1.5 billion, respectively.

 

- 20 -

 

 


The following table summarizes the notional amounts and respective fair values of Corning’s derivative financial instruments, which mature at varying dates (in millions):

 

 

 

Effect of derivative instruments on the statement of financial performance

 

 

 

 

For the three months ended March 31, 2009

 

 

Derivatives in
Statement 133
hedging
relationships

 

Gain/(loss)
recognized
in other
comprehensive
income (OCI)

 

Location of
gain/(loss)
reclassified
from
accumulated
OCI
into income
(effective)

 

Gain/(loss)
reclassified
from
accumulated
OCI
into income
(effective)

 

Location of
gain/(loss)
related to
ineffectiveness
& excluded
from
effectiveness
testing

 

Gain/(loss)
related to
ineffectiveness
& excluded
from
effectiveness
testing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

Cost of sales

 

$

 

Other income/ (expense)

 

 

 

Foreign exchange contracts

 

$

(15)

 

Royalties (1)

 

 

(11)

 

Other income/ (expense)

 

$

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash flow hedges

 

$

(15)

 

 

 

$

(10)

 

 

 

$

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign denominated debt

 

$

139 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net investment hedges

 

$

139 

 

 

 

 

 

 

 

 

 

 

 


Undesignated
derivatives

 

Location of
gain/(loss)
recognized in
income

 

Gain/(loss) 
recognized
in income

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other income/
(expense)

 

$

28

 

 

 

 

 

 

 

 

Total undesignated

 

 

 

$

28

 

 

(1)

Included in this amount is $9 million of loss relating to derivatives that were de-designated by the company in the fourth quarter of 2008 for which the amounts recorded in accumulated OCI were determined to still be probable or reasonably possible of occurring as originally forecasted.

 

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. Neither we nor our counterparties are required to post collateral for these financial instruments.

 

Corning excludes the impact of credit risk from the assessment of hedge effectiveness. The amount of ineffectiveness, related to derivatives, at March 31, 2009 was a gain of $2 million. The amount of ineffectiveness at December 31, 2008 was a loss of $19 million.

 

Cash Flow Hedges

Corning typically has cash flow hedges that are comprised of foreign exchange forward and option contracts. Corning utilizes a regression analysis for the effectiveness analysis of its cash flow hedges, both prospectively and retrospectively. This analysis excludes the impact of credit risk from the assessment of hedge effectiveness.

 

Corning defers net gains and losses from cash flow hedges into accumulated other comprehensive income on the consolidated balance sheet until such time as the hedged item impacts earnings. At that time, Corning reclassifies net gains and losses from cash flow hedges into the same line item of the consolidated statements of income where the effects of the hedged item are recorded, typically sales, cost of sales, or royalty income. At March 31, 2009, the amount of net losses expected to be reclassified into earnings within the next 12 months is $15 million.

 

- 21 -

 

 


Net Investment in Foreign Operations

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 accumulated comprehensive income (loss) as part of the foreign currency translation adjustment. Net losses related to this investment included in the cumulative translation adjustment at March 31, 2009 and December 31, 2008, were $139 million and $141 million, respectively.

 

14.

Fair Value Measurements

 

The following tables provide fair value measurement information for the Company’s major categories of financial assets and liabilities measured on a recurring basis:

 

March 31,
2009

 

Fair Value Measurements at Reporting Date Using

 

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

806

 

 

 

$

499

 

 

 

$

307

(2)

 

 

 

 

Other assets

 

$

33

 

 

 

 

 

 

 

 

$

33

 

 

 

 

 

Derivatives (1)

 

$

33

 

 

 

 

 

 

 

 

$

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives (1)

 

$

5

 

 

 

 

 

 

 

 

$

5

 

 

 

 

 

 

 

December 31,
2008

 

Fair Value Measurements at Reporting Date Using

 

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

943

 

 

 

$

531

 

 

 

$

412

(2)

 

 

 

 

Other assets

 

$

40

 

 

 

 

 

 

 

 

$

40

 

 

 

 

 

Derivatives (1)

 

$

22

 

 

 

 

 

 

 

 

$

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives (1)

 

$

81

 

 

 

 

 

 

 

 

$

81

 

 

 

 

 

 

(1)

Derivative assets and liabilities include interest rate swaps and foreign exchange contracts which are measured using observable quoted prices for similar assets and liabilities.

(2)

Short-term investments are measured using observable quoted prices for similar assets.

 

The FASB deferred implementation of SFAS 157 for certain assets and liabilities that are measured at fair value on a non-recurring basis until 2009. Corning adopted SFAS 157 effective January 1, 2009. Corning’s assets and liabilities that are measured at fair value on a non-recurring basis include long-lived assets, goodwill, asset retirement obligations, cost and equity investments. These items are recognized at fair value when they are considered to be other than temporarily impaired. In the first quarter of 2009, there were no required fair value measurements for assets and liabilities measured at fair value on a non-recurring basis and no required additional disclosures upon adoption.

 

- 22 -

 

 


15.  Share-based Compensation

 

Stock Compensation Plans

 

The Company accounts for share-based compensation in accordance with SFAS 123(R) “Share-Based Payment” (SFAS 123(R)), which requires the measurement and recognition of compensation cost for all share-based payment awards made to employees and directors, including grants of employee stock options and employee stock purchases related to the Worldwide Employee Share Purchase Plan (WESPP), based on estimated fair values. The Company elected to use the modified prospective transition method upon adoption of SFAS 123(R).

 

Share-based compensation cost recognized under SFAS 123(R) was approximately $35 million and $41 million for the three months ended March 31, 2009 and 2008, respectively, and included (1) employee stock options, (2) time-based restricted stock, (3) performance-based restricted stock, and (4) WESPP shares.

 

Stock Options

 

Our stock option plans provide non-qualified and incentive stock options to purchase authorized but unissued or treasury shares at the market price on the grant date and generally become exercisable in installments from one to five years from the grant date. The maximum term of non-qualified and incentive stock options is 10 years from the grant date.

 

The following table summarizes information concerning options outstanding including the related transactions under the option plans for the three months ended March 31, 2009:

 

Number
of Shares
(in thousands)

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contractual
Term in
Years

 

Aggregate
Intrinsic
Value
(in thousands)

Options Outstanding as of December 31, 2008

89,630 

 

$

26.92

 

 

 

 

 

Granted

9,235 

 

$

10.16

 

 

 

 

 

Exercised

(212)

 

$

5.81

 

 

 

 

 

Forfeited and Expired

(80)

 

$

26.07

 

 

 

 

 

Options Outstanding as of March 31, 2009

98,573 

 

$

25.40

 

5.07

 

$

205,826

Options Exercisable as of March 31, 2009

74,812 

 

$

28.37

 

3.76

 

$

156,311

 

The aggregate intrinsic value (market value of stock less option exercise price) in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price on March 31, 2009, which would have been received by the option holders had all option holders exercised their options as of that date.

 

As of March 31, 2009, there was approximately $79 million of unrecognized compensation cost related to stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.04 years. Compensation cost related to stock options was approximately $18 million and $20 million for the three months ended March 31, 2009 and 2008, respectively.

 

Proceeds received from the exercise of stock options were $1 million and $18 million for the three months ended March 31, 2009 and 2008, respectively. Proceeds received from the exercise of stock options were included in financing activities on the Company’s Consolidated Statements of Cash Flows. The total intrinsic value of options exercised for the three months ended March 31, 2009 and 2008 was approximately $1 million and $32 million, respectively, which is currently deductible for tax purposes. However, these tax benefits were not realized due to net operating loss carryforwards available to the Company. Refer to Note 5 (Income Taxes) to the consolidated financial statements.

 

A lattice-based valuation model is used to estimate the fair values of option and restricted stock grants and incorporates the assumptions (including ranges of assumptions) noted in the table below. Expected volatility is based on the blended short-term volatility (the arithmetic average of the implied volatility and the short-term historical volatility), and the long-term historical volatility of Corning’s stock.

 

- 23 -

 

 


Corning also uses historical data to estimate future option exercise and employee termination within the valuation model. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected time to exercise of options granted is derived using a regression model and represents the period of time that options granted are expected to be outstanding. The range given below results from certain groups of employees exhibiting different behavior. The risk-free rates used in the lattice model are derived from the U.S. Treasury yield curve in effect from the grant date to the option’s expiration date. Since period-by-period calculations are employed in the lattice model, Corning uses risk-free rates that apply from one period to the next, generally quarter to quarter. Such rates are typically referred to as “forward” rates. Being essentially marginal rates, forward rates both vary during the contractual term of the option and exhibit greater variation than the yield curve from which they are derived.

 

The following inputs for the lattice-based valuation model were used for option grants under our Stock Option Plans:

 

Three months
ended March 31,

 

 

2009

 

2008

Expected volatility

45-60%

 

34-54%

Weighted-average volatility

55%

 

51%

Expected dividends

1.50%

 

0.85%

Risk-free rate

0.1-4.7%

 

2.0-6.0%

Average risk-free rate

2.7%

 

3.9%

Expected time to exercise (in years)

2.2-5.4

 

2.2-5.4

Pre-vesting departure rate

1.4-2.7%

 

1.5-2.6%

Post vesting departure rate

1.9-3.8%

 

3.5-6.3%

 

Incentive Stock Plans

 

The Corning Incentive Stock Plan permits stock grants, either determined by specific performance goals or issued directly, in most instances, subject to the possibility of forfeiture and without cash consideration. Shares under the Incentive Stock Plan are generally granted “at the money”, contingently vest over a period of 1 to 10 years, and have contractual lives of 1 to 10 years.

 

The fair value of each restricted stock grant under the Incentive Stock Plans was estimated on the date of grant for performance based grants assuming that performance goals will be achieved. The expected term for grants under the Incentive Stock Plans is 1 to 10 years.

 

Time-Based Restricted Stock:

 

Time-based restricted stock is issued by the Company on a discretionary basis, and is payable in shares of the Company’s common stock upon vesting. The fair value is based on the market price of the Company’s stock on the grant date. Compensation cost is recognized over the requisite vesting period and adjusted for actual forfeitures before vesting.

 

The following table represents a summary of the status of the Company’s nonvested time-based restricted stock as of December 31, 2008, and changes during the three months ended March 31, 2009:

 

Shares
(000’s)

 

Weighted-
Average
Grant-Date
Fair Value

 

Nonvested shares at December 31, 2008

2,065 

 

$

21.01

Granted

92 

 

 

10.75

Vested

(57)

 

 

26.33

Forfeited

(3)

 

 

61.91

Nonvested shares at March 31, 2009

2,097 

 

$

20.42

 

 

- 24 -

 

 


As of March 31, 2009, there was approximately $23 million of unrecognized compensation cost related to non-vested time-based restricted stock compensation arrangements granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3.4 years. Compensation cost related to time-based restricted stock was approximately $4 million and $2 million for the three months ended March 31, 2009 and 2008, respectively.

 

Performance-Based Restricted Stock and Restricted Stock Units:

 

Performance-based restricted stock and restricted stock units are earned upon the achievement of certain targets, and are payable in shares of the Company’s common stock upon vesting typically over a three-year period. The fair value is based on the market price of the Company’s stock on the grant date and assumes that the target payout level will be achieved. Compensation cost is recognized over the requisite vesting period and adjusted for actual forfeitures before vesting. During the performance period, compensation cost may be adjusted based on changes in the expected outcome of the performance-related target.

 

The following table represents a summary of the status of the Company’s nonvested performance-based restricted stock and restricted stock units as of December 31, 2008, and changes during the three months ended March 31, 2009:

 

Shares
(000’s)

 

Weighted-
Average
Grant-Date
Fair Value

Nonvested restricted stock and restricted stock units at December 31, 2008

8,942 

 

$

15.51

Granted

 

 

 

 

Vested

(2,210)

 

 

21.11

Forfeited

(64)

 

 

21.23

Nonvested restricted stock and restricted stock units at March 31, 2009

6,668 

 

$

13.60

 

As of March 31, 2009, there was approximately $44 million of unrecognized compensation cost related to non-vested performance-based restricted stock and restricted stock units compensation arrangements granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.4 years. Compensation cost related to performance-based restricted stock and restricted stock units was approximately $12 million and $17 million for the three months ended March 31, 2009 and 2008, respectively.

 

Worldwide Employee Stock Purchase Plan

 

In addition to the Stock Option Plan and Incentive Stock Plans, we have a Worldwide Employee Share Purchase Plan (WESPP). Under the WESPP, substantially all employees can elect to have up to 10% of their annual wages withheld to purchase our common stock. The purchase price of the stock is 85% of the end-of-quarter closing market price. Compensation cost related to the WESPP for all periods presented is immaterial.

 

- 25 -

 

 


16.

Comprehensive Income

 

Components of comprehensive income, on an after-tax basis where applicable, follow (in millions):

 

Three months

ended March 31,

 

 

2009 (1)

 

2008 (1)

 

 

 

 

 

 

Net income

$

14 

 

$

1,028 

Other comprehensive income:

 

 

 

 

 

Change in unrealized loss on investments, net

 

(1)

 

 

(22)

Change in unrealized gain (loss) on derivative hedging instruments, net

 

56 

 

 

(99)

Reclassification adjustment relating to derivatives, net

 

(43)

 

 

32 

Foreign currency translation adjustment, net

 

(728)

 

 

396 

Amortization of postretirement benefit plan losses, net

 

(37)

 

 

13 

Other, net (2)

 

(13)

 

 

 

Comprehensive income

$

(752)

 

$

1,348 

Comprehensive income attributable to noncontrolling interests

 

 

 

 

Comprehensive income attributable to Corning

$

(752)

 

$

1,349 

 

(1)

Other comprehensive income items for the three months ended March 31, 2009 include net tax effects of $16 million and were not significant in the first quarter of 2008. Refer to Note 5 (Income Taxes) for an explanation of Corning’s tax paying position.

(2)

Other, net includes an unrealized loss of $13 million for the three months ended March 31, 2009, related to the temporary impairment of auction rate securities held by Dow Corning Corporation. Refer to Note 9 (Investments).

 

17.

Significant Customers

 

For the three months ended March 31, 2009, Corning’s sales to AU Optronics Corporation (AUO), a customer of our Display Technologies segment, represented 10% of the Company’s consolidated net sales. For the three months ended March 31, 2008, Corning’s sales to AUO and Chi Mei, both customers of our Display Technologies segment, represented 13% and 12%, respectively, of the Company’s consolidated net sales.

 

18.

Operating Segments

 

Our reportable operating segments are as follows:

 

Display Technologies – manufactures liquid crystal display (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 automotive and diesel applications. This reportable operating segment is an aggregation of our Automotive and Diesel operating segments as these two segments share similar economic characteristics, products, customer types, production processes and distribution methods.

Specialty Materials – manufactures products that provide more than 150 material formulations for glass, glass ceramics and fluoride crystals to meet demand for unique customer needs.

Life Sciences – manufactures glass and plastic consumables for scientific applications.

 

All other operating segments that do not meet the quantitative threshold for separate reporting are grouped as “All Other.” This group is primarily comprised of development projects and results for new product lines.

 

We prepared the financial results for our reportable segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We included the earnings of equity affiliates that are closely associated with our operating segments in the respective segment’s net income. We have allocated certain common expenses among segments differently than we would for stand-alone financial information prepared in accordance with GAAP. Segment net income may not be consistent with measures used by other companies. The accounting policies of our reportable segments are the same as those applied in the consolidated financial statements.

 

- 26 -

 

 


Effective January 1, 2009, we began providing U.S. income tax expense (or benefit) on U.S. earnings (losses) due to the change in our conclusion about the realizability of our U.S. deferred tax assets in 2008. As a result of the change in our tax position, we adjusted the allocation of taxes to our operating segments in 2009 to reflect this difference. The impact of this change was not significant.

 

Operating Segments (in millions)

 

 

Display
Technologies

 

Telecom-
munications

 

Environmental
Technologies

 

Specialty
Materials

 

Life
Sciences

 

All
Other

 

Total

Three months ended March 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

357 

 

$

385 

 

$

110 

 

$

60 

 

$

76 

 

$

 

$

989 

Depreciation (1)

$

104 

 

$

31 

 

$

24 

 

$

10 

 

$

 

$

 

$

176 

Amortization of purchased intangibles

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

$

Research, development and engineering expenses (2)

$

22 

 

$

23 

 

$

30 

 

$

11 

 

$

 

$

36 

 

$

125 

Restructuring, impairment and other charges

$

34 

 

$

15 

 

$

19 

 

$

18 

 

$

 

$

 

$

97 

Equity in earnings (loss) of affiliated companies

$

180 

 

$

(4)

 

$

 

 

 

 

 

 

 

$

12 

 

$

190 

Income tax (provision) benefit

$

(7)

 

$

 

$

14 

 

$

10 

 

 

 

 

$

 

$

25 

Net income (loss) (3)

$

218 

 

$

(1)

 

$

(44)

 

$

(27)

 

$

 

$

(29)

 

$

125 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

829 

 

$

421 

 

$

197 

 

$

83 

 

$

81 

 

$

 

$

1,617 

Depreciation (1)

$

90 

 

$

27 

 

$

24 

 

$

 

$

 

$

 

$

156 

Amortization of purchased intangibles

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

$

Research, development and engineering expenses (2)

$

24 

 

$

24 

 

$

33 

 

$

 

$

 

$

36 

 

$

128 

Restructuring, impairment and other credits

 

 

 

$

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(1)

Equity in earnings of affiliated companies

$

207 

 

 

 

 

$

 

 

 

 

 

 

 

$

22 

 

$

230 

Income tax provision

$

(61)

 

$

(5)

 

$

(5)

 

 

 

 

$

(5)

 

$

(2)

 

$

(78)

Net income (loss) (3)

$

679 

 

$

11 

 

$

13 

 

$

(4)

 

$

10 

 

$

(27)

 

$

682 

 

(1)

Depreciation expense for Corning’s reportable segments includes an allocation of depreciation of corporate property not specifically identifiable to a segment.

(2)

Research, development, and engineering expense includes direct project spending which is identifiable to a segment.

(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.

 

- 27 -

 

 


A reconciliation of reportable segment net income to consolidated net income follows (in millions):

 

Three months ended
March 31,

 

 

2009

 

2008

Net income of reportable segments

$

154 

 

$

709 

Non-reportable segments

 

(29)

 

 

(27)

Unallocated amounts:

 

 

 

 

 

Net financing costs (1)

 

(20)

 

 

Stock-based compensation expense

 

(35)

 

 

(41)

Exploratory research

 

(20)

 

 

(18)

Corporate contributions

 

(9)

 

 

(11)

Equity in earnings of affiliated companies (2)

 

 

 

82 

Asbestos litigation (3)

 

(4)

 

 

327 

Other corporate items (4)

 

(28)

 

 

(1)

Net income attributable to Corning Incorporated

$

14 

 

$

1,029 

 

(1)

Net financing costs include interest income, interest expense, and interest costs and investment gains associated with benefit plans.

(2)

Represents the equity earnings of Dow Corning Corporation. In the first quarter of 2009, equity earnings of affiliated companies, net of impairments includes a charge of $29 million representing restructuring charges at Dow Corning Corporation.

(3)

In the first quarter of 2008, Corning reduced its liability for asbestos litigation as a result of the increase in the likelihood of a settlement under recently proposed terms and a corresponding decrease in the likelihood of a settlement under terms established in 2003.

(4)

In the first quarter of 2009, other corporate items included $68 million ($44 million after-tax) of restructuring charges.

 

The sales of each of our reportable operating segments are concentrated across a relatively small number of customers. In the first quarter of 2009, the following number of customers, which individually accounted for 10% or more of each segment’s sales, represented the following concentration of segment sales:

 

In the Display Technologies segment, three customers accounted for 70% of segment sales.

In the Telecommunications segment, two customers accounted for 24% of segment sales.

In the Environmental Technologies segment, three customers accounted for 84% of segment sales.

In the Specialty Materials segment, one customer accounted for 11% of segment sales.

In the Life Sciences segment, one customer accounted for 41% of segment sales.

 

A significant amount of specialized manufacturing capacity for our Display Technologies segment is concentrated in Taiwan, Japan, and Korea. It is possible that the use of a facility located outside of an entity’s home country could be disrupted. Due to the scale and specialized nature of the assets, it would not be possible to find replacement capacity quickly. Accordingly, disruption at these facilities would produce a near-term severe impact to our display business and the Company as a whole.

 

- 28 -

 

 


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

ORGANIZATION OF INFORMATION

Management’s Discussion and Analysis provides a historical and prospective narrative on the Company’s financial condition and results of operations. The discussion includes the following sections:

 

Overview

Results of Operations

Operating Segments

Liquidity and Capital Resources

Critical Accounting Estimates

New Accounting Standards

Environment

Forward Looking Statements

 

OVERVIEW

 

We believe the global economic recession continued to affect demand for our products in the first quarter of 2009 and that the decline may continue in the second quarter. The Company has responded to the economic conditions that affected demand for our products by scaling back manufacturing operations, curbing the rate of growth in research, development, and engineering expenses, reducing capital spending, and reducing operating costs. In the first quarter of 2009, we recorded restructuring charges of $165 million for costs associated with workforce reductions in all of our operating segments. Dow Corning also incurred restructuring costs associated with workforce reductions in the first quarter of 2009. Our share of these charges was $29 million.

 

Our key priorities for 2009 remain similar to those from the previous four years: protect our financial health and invest in the future. During the first quarter of 2009, we made the following progress against our priorities:

 

Protecting Financial Health

Our balance sheet remains strong, and we generated positive cash flow from operating activities.

 

Our debt to capital ratio of 12% at March 31, 2009 remains low when compared to 11% at December 31, 2008. The slight increase from December 31, 2008 reflected the impact of a capital lease associated with our Display Technologies segment.

Operating cash flow in the three months ended March 31, 2009 was $264 million.

We ended the first quarter of 2009 with $2.6 billion of cash, cash equivalents and short-term investments.

 

For the three months ended March 31, 2009, we generated net income of $14 million or $0.01 per share compared to net income of $1.0 billion or $0.64 per share for the same period in 2008. When compared to the same period last year, the decrease in net income was due largely to the following items:

 

Lower net income in the Display Technologies segment driven by lower volumes, price declines, and a decline in equity earnings from Samsung Corning Precision, our equity affiliate located in Korea.

Asbestos litigation expense of $4 million, compared to a credit of $327 million in the first quarter of 2008. In the first quarter of 2008, Corning reduced its liability for asbestos litigation as a result of the increase in the likelihood of a settlement under recently proposed terms and a corresponding decrease in the likelihood of a settlement under terms proposed in 2003. For additional information on the asbestos litigation, refer to Note 3 (Commitments and Contingencies) to the consolidated financial statements and Part II – Other Information, Item 1. Legal Proceedings.

Charges of $165 million in the first quarter of 2009 for corporate-wide restructuring actions which included a selective voluntary early retirement program, global workforce reductions, and consolidation of manufacturing facilities. For additional information, refer to Note 2 (Restructuring, Impairment, and Other Charges (Credits)) to the consolidated financial statements.

A decline in equity earnings from Dow Corning due to reduced volume and the negative impact of $29 million of restructuring charges at Dow Corning.

 

- 29 -

 

 


The decrease in net income was offset somewhat by $71 million from the positive impact of movements in foreign exchange rates and a reduction in operating expenses.

 

Investing In Our Future

We continue to focus on the future and on what we do best – creating and making keystone components that enable high-technology systems. We remain committed to investing in research, development, and engineering to drive innovation and continue to work on technologies for glass substrates for active matrix LCD glass substrates, diesel filters and substrates in response to tightening emissions control standards, and the optical fiber and cable and hardware and equipment that enable fiber-to-the-premises. We continue to make investments in promising technologies such as the Epic™ system, synthetic green lasers, silicon-on-glass, advanced flow reactors, thin-film photovoltaics, and mercury abatement.

 

Our research, development and engineering expenses for the three months ended March 31, 2009, were even with the same period last year. We believe our spending levels are adequate to support our technology and innovation strategies and reflect our commitment to the future, despite current economic conditions. As a percentage of net sales, these expenses grew 6 percentage points when compared to the first quarter of 2008 due to the significant decline in net sales when compared to a year ago.

 

Capital spending totaled $276 million and $467 million for the three months ended March 31, 2009 and 2008, respectively. Spending in the first quarter of 2009 was driven primarily by projects in our Display Technologies segment that were completed in 2008. We expect our 2009 capital spending to be about $1.1 billion. Approximately $700 million will be directed toward our Display Technologies segment, of which about $525 million relates to construction completed in 2008.

 

Corporate Outlook

We believe sales and profitability in 2009 will continue to be negatively impacted by global economic conditions. If we do not experience sufficient recovery in certain of our businesses, we may incur further charges to reduce our workforce and consolidate capacity. We will continue to focus on preserving cash, controlling our costs, and accelerating new products while maintaining our emphasis on research and development investments for longer term growth. We remain confident that our strategy to grow through global innovation while preserving our financial stability will enable our continued long-term success.

 

- 30 -

 

 


RESULTS OF OPERATIONS

 

Selected highlights for the first quarter follow (dollars in millions):

 

Three months ended

March 31,

 

%

Change

 

 

 

2009

 

2008

 

09 vs. 08

 

 

 

 

 

 

 

 

Net sales

$

989

 

$

1,617

 

(39)%

 

 

 

 

 

 

 

 

Gross margin

$

270

 

$

844

 

(68)%

(gross margin %)

 

27%

 

 

52%

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

$

207

 

$

242

 

(14)%

(as a % of net sales)

 

21%

 

 

15%

 

 

 

 

 

 

 

 

 

 

Research, development and engineering expenses

$

151

 

$

151

 

0%

(as a % of net sales)

 

15%

 

 

9%