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, 2010
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
(Registrants 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 (§232.405 of this chapter) 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 issuers classes of common stock, as of the latest practicable date.
Class |
|
Outstanding as of April 16, 2010 |
Cornings Common Stock, $0.50 par value per share |
|
1,560,761,299 shares |
INDEX
PART I FINANCIAL INFORMATION |
|
|
|
|
Page |
Item 1. Financial Statements |
|
|
|
|
|
Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2010 and 2009 |
|
3 |
|
|
|
Consolidated Balance Sheets (Unaudited) at March 31, 2010 and December 31, 2009 |
|
4 |
|
|
|
Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2010 and 2009 |
|
5 |
|
|
|
Notes to Consolidated Financial Statements (Unaudited) |
|
6 |
|
|
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
|
33 |
|
|
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
|
50 |
|
|
|
Item 4. Controls and Procedures |
|
50 |
|
|
|
PART II OTHER INFORMATION |
|
|
|
|
|
Item 1. Legal Proceedings |
|
51 |
|
|
|
Item 1A. Risk Factors |
|
54 |
|
|
|
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
|
55 |
|
|
|
Item 6. Exhibits |
|
56 |
|
|
|
Signatures |
|
57 |
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in millions, except per share amounts)
|
Three months | ||||
| |||||
|
2010 |
|
2009 | ||
|
|
|
|
|
|
Net sales |
$ |
1,553 |
|
$ |
989 |
Cost of sales |
|
822 |
|
|
719 |
|
|
|
|
|
|
Gross margin |
|
731 |
|
|
270 |
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
Selling, general and administrative expenses |
|
235 |
|
|
207 |
Research, development and engineering expenses |
|
145 |
|
|
151 |
Amortization of purchased intangibles |
|
2 |
|
|
3 |
Restructuring, impairment and other (credits) and charges (Note 2) |
|
(2) |
|
|
165 |
Asbestos litigation (credit) charge (Note 3) |
|
(52) |
|
|
4 |
|
|
|
|
|
|
Operating income (loss) |
|
403 |
|
|
(260) |
|
|
|
|
|
|
Equity in earnings of affiliated companies (Note 9) |
|
469 |
|
|
195 |
Interest income |
|
3 |
|
|
7 |
Interest expense |
|
(26) |
|
|
(14) |
|
|
|
|
|
|
Other-than-temporary impairment (OTTI) losses: |
|
|
|
|
|
Total OTTI losses |
|
(5) |
|
|
|
Portion of OTTI losses recognized in other comprehensive income (before taxes) |
|
5 |
|
|
|
Net OTTI losses recognized in earnings |
|
0 |
|
|
|
|
|
|
|
|
|
Other income, net (Note 1) |
|
64 |
|
|
20 |
|
|
|
|
|
|
Income (loss) before income taxes |
|
913 |
|
|
(52) |
(Provision) benefit for income taxes (Note 5) |
|
(97) |
|
|
66 |
|
|
|
|
|
|
Net income attributable to Corning Incorporated |
$ |
816 |
|
$ |
14 |
|
|
|
|
|
|
Earnings per common share attributable to Corning Incorporated: |
|
|
|
|
|
Basic (Note 6) |
$ |
0.52 |
|
$ |
0.01 |
Diluted (Note 6) |
$ |
0.52 |
|
$ |
0.01 |
|
|
|
|
|
|
Dividends declared per common share |
$ |
0.05 |
|
$ |
0.05 |
The accompanying notes are an integral part of these consolidated financial statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except per share amounts)
|
March 31, |
|
December 31, | ||
Assets |
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
Cash and cash equivalents |
$ |
3,075 |
|
$ |
2,541 |
Short-term investments, at fair value (Note 7) |
|
798 |
|
|
1,042 |
Total cash, cash equivalents and short-term investments |
|
3,873 |
|
|
3,583 |
Trade accounts receivable, net of doubtful accounts and allowances - $22 and $20 |
|
860 |
|
|
753 |
Inventories (Note 8) |
|
604 |
|
|
579 |
Deferred income taxes (Note 5) |
|
392 |
|
|
235 |
Other current assets |
|
323 |
|
|
371 |
Total current assets |
|
6,052 |
|
|
5,521 |
|
|
|
|
|
|
Investments (Note 9) |
|
4,296 |
|
|
3,992 |
Property, net of accumulated depreciation - $5,640 and $5,503 (Note 11) |
|
7,847 |
|
|
7,995 |
Goodwill and other intangible assets, net (Note 12) |
|
674 |
|
|
676 |
Deferred income taxes (Note 5) |
|
2,733 |
|
|
2,982 |
Other assets |
|
125 |
|
|
129 |
|
|
|
|
|
|
Total Assets |
$ |
21,727 |
|
$ |
21,295 |
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Current portion of long-term debt |
$ |
23 |
|
$ |
74 |
Accounts payable |
|
459 |
|
|
550 |
Other accrued liabilities (Notes 3 and 13) |
|
796 |
|
|
915 |
Total current liabilities |
|
1,278 |
|
|
1,539 |
|
|
|
|
|
|
Long-term debt (Note 4) |
|
1,919 |
|
|
1,930 |
Postretirement benefits other than pensions |
|
866 |
|
|
858 |
Other liabilities (Notes 3 and 13) |
|
1,311 |
|
|
1,373 |
Total liabilities |
|
5,374 |
|
|
5,700 |
|
|
|
|
|
|
Commitments and contingencies (Note 3) |
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
Common stock Par value $0.50 per share; Shares authorized: 3.8 billion; |
|
811 |
|
|
808 |
Additional paid-in capital |
|
12,759 |
|
|
12,707 |
Retained earnings |
|
4,374 |
|
|
3,636 |
Treasury stock, at cost; Shares held: 65 million and 64 million |
|
(1,223) |
|
|
(1,207) |
Accumulated other comprehensive loss (Note 18) |
|
(419) |
|
|
(401) |
Total Corning Incorporated shareholders equity |
|
16,302 |
|
|
15,543 |
Noncontrolling interests |
|
51 |
|
|
52 |
Total equity |
|
16,353 |
|
|
15,595 |
|
|
|
|
|
|
Total Liabilities and Equity |
$ |
21,727 |
|
$ |
21,295 |
The accompanying notes are an integral part of these consolidated financial statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
|
Three months ended | ||||
| |||||
|
2010 |
|
2009 | ||
Cash Flows from Operating Activities: |
|
|
|
|
|
Net income |
$ |
816 |
|
$ |
14 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
Depreciation |
|
206 |
|
|
175 |
Amortization of purchased intangibles |
|
2 |
|
|
3 |
Asbestos litigation (credits) charges |
|
(52) |
|
|
4 |
Restructuring, impairment and other (credits) charges |
|
(2) |
|
|
165 |
Stock compensation charges |
|
29 |
|
|
35 |
Earnings of affiliated companies (in excess of) less than dividends received |
|
(241) |
|
|
208 |
Deferred tax provision (benefit) |
|
50 |
|
|
(119) |
Restructuring payments |
|
(31) |
|
|
(12) |
Credits issued against customer deposits |
|
(30) |
|
|
(103) |
Employee benefit expense, net of payments |
|
26 |
|
|
17 |
Changes in certain working capital items: |
|
|
|
|
|
Trade accounts receivable |
|
(120) |
|
|
(111) |
Inventories |
|
(31) |
|
|
39 |
Other current assets |
|
32 |
|
|
(23) |
Accounts payable and other current liabilities, net of restructuring payments |
|
(74) |
|
|
(89) |
Other, net |
|
63 |
|
|
61 |
Net cash provided by operating activities |
|
643 |
|
|
264 |
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
Capital expenditures |
|
(173) |
|
|
(276) |
Net proceeds from sale or disposal of assets |
|
|
|
|
12 |
Short-term investments acquisitions |
|
(224) |
|
|
(104) |
Short-term investments liquidations |
|
472 |
|
|
242 |
Other, net |
|
2 |
|
|
|
Net cash provided by (used in) investing activities |
|
77 |
|
|
(126) |
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
Net repayments of short-term borrowings and current portion of long-term debt |
|
(58) |
|
|
(63) |
Principal payments under capital lease obligations |
|
|
|
|
(9) |
Proceeds from issuance of common stock, net |
|
4 |
|
|
5 |
Proceeds from the exercise of stock options |
|
21 |
|
|
1 |
Dividends paid |
|
(78) |
|
|
(78) |
Other, net |
|
|
|
|
1 |
Net cash used in financing activities |
|
(111) |
|
|
(143) |
Effect of exchange rates on cash |
|
(75) |
|
|
(88) |
Net increase (decrease) in cash and cash equivalents |
|
534 |
|
|
(93) |
Cash and cash equivalents at beginning of period |
|
2,541 |
|
|
1,873 |
|
|
|
|
|
|
Cash and cash equivalents at end of period |
$ |
3,075 |
|
$ |
1,780 |
The accompanying notes are an integral part of these consolidated financial statements.
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.
Effective September 30, 2009, the Financial Accounting Standards Board (FASB) established The FASB Accounting Standards Codification (ASC) as the source of authoritative accounting to be applied by nongovernmental entities in the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). Except for newly issued standards which have not been codified, references to codified literature have been updated to reflect this change.
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 U.S. GAAP for interim financial information. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted or condensed. These interim consolidated financial statements should be read in conjunction with Cornings consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K).
The unaudited consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. The results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.
Effective April 1, 2009, the Company adopted the following which resulted from the issuance of new fair value accounting standards under U.S. GAAP:
|
We changed 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; |
|
We adopted new guidance for 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; and |
|
If applicable, we will provide required disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. |
The impact of adopting these fair value standards was not significant to Cornings consolidated results of operations or financial condition.
Effective January 1, 2010, the Company adopted required changes to consolidation guidance for variable interest entities which require an enterprise to perform an analysis to determine whether the enterprises variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has (1) the power to direct the activities of a variable interest entity that most significantly impact the entitys economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. In addition, the required changes provide guidance on shared power and joint venture relationships, remove the scope exemption for qualified special purpose entities, revise the definition of a variable interest entity, and require additional disclosures. The adoption of this standard was not material to Cornings consolidated results of operations or financial condition.
Since January 2006, Corning has utilized a lattice-based binomial model to estimate the fair value of its employee stock options. Beginning in 2010, the Company moved to a multiple point Black Scholes model to value stock option awards since Corning generally grants only simple options and recently reduced the emphasis of stock options as part of its compensation program. The multiple point Black Scholes model incorporates all assumptions required under U.S. GAAP, and provides an appropriate fair value estimate while improving transparency and efficiency. The impact of the change in valuation models was not significant to Cornings consolidated results of operations or financial condition.
Property, Net of Accumulated Depreciation
Land, buildings, and equipment, including precious metals, are recorded at cost. Depreciation is based on estimated useful lives of properties using the straight-line method. Except as described in Note 11 (Property, Net of Accumulated Depreciation), related to the depletion of precious metals, the estimated useful lives range from 10 to 40 years for buildings and 2 to 20 years for equipment.
Included in the subcategory of equipment are the following types of assets:
Asset type |
Range of useful life |
|
|
Computer hardware and software |
3 to 7 years |
Manufacturing equipment (excluding precious metals) |
2 to 15 years |
Furniture and fixtures |
5 to 10 years |
Transportation equipment |
5 to 20 years |
Manufacturing equipment includes certain components of production equipment that are constructed of precious metals. These assets are not depreciated because they have very low physical losses and are repeatedly reclaimed and reused in our manufacturing process over a very long useful life. We treat the physical loss of precious metals in the manufacturing and reclamation process as depletion and account for these losses as a period expense based on actual units lost. Precious metals are integral to many of our glass production processes. They are only acquired to support our operations and are not held for trading or other purposes.
Fair Value Measurements
As prescribed by U.S. GAAP, 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.
Fair value is 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.
Other Income, Net
Other income, net in Cornings consolidated statements of income includes the following (in millions):
|
Three months ended | ||||
| |||||
|
2010 |
|
2009 | ||
Royalty income from Samsung Corning Precision |
$ |
65 |
|
$ |
42 |
Foreign currency exchange and hedge gains/(losses), net |
|
9 |
|
|
(18) |
Net income attributable to noncontrolling interests |
|
1 |
|
|
0 |
Other, net |
|
(11) |
|
|
(4) |
Total |
$ |
64 |
|
$ |
20 |
New Accounting Standards
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangementsa consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 addresses the accounting for sales arrangements that include multiple products or services by revising the criteria for when deliverables may be accounted for separately rather than as a combined unit. Specifically, this guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is necessary to separately account for each product or service. This hierarchy provides more options for establishing selling price than did the previous guidance. ASU 2009-13 is required to be applied prospectively to new or materially modified revenue arrangements in fiscal years beginning on or after June 15, 2010. Corning does not expect adoption of this standard to have a material impact on its consolidated results of operations and financial condition.
In January 2010, the FASB issued Accounting Standards Update No. 2009-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (ASU 2009-06). Corning adopted ASU 2009-06 effective January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements which are deferred until fiscal years beginning after December 15, 2010. Corning believes that the disclosures will not have a material impact on its consolidated results of operations and financial condition when updated.
2. |
Restructuring, Impairment and Other Charges (Credits) |
2010 Activities
The following table summarizes the restructuring reserve activity for the three months ended March 31, 2010 (in millions):
|
Reserve at |
|
Non-cash |
|
Net |
|
Cash |
|
Reserve at | |||||
Restructuring: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee related costs |
$ |
80 |
|
$ |
(2) |
|
$ |
(2) |
|
$ |
(28) |
|
$ |
48 |
Other charges (credits) |
|
20 |
|
|
|
|
|
|
|
|
(3) |
|
|
17 |
Total restructuring charges |
$ |
100 |
|
$ |
(2) |
|
$ |
(2) |
|
$ |
(31) |
|
$ |
65 |
Cash payments for employee-related costs will be substantially complete by the end of 2010, while payments for exit activities will be substantially complete by the end of 2011.
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.
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 |
|
Charges |
|
Non-Cash |
|
Cash |
|
Reserve at | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee related costs |
$ |
17 |
|
$ |
148 |
|
$ |
(46) |
|
$ |
(11) |
|
$ |
108 |
Other charges (credits) |
|
17 |
|
|
5 |
|
|
|
|
|
(1) |
|
|
21 |
Total restructuring charges |
$ |
34 |
|
$ |
153 |
|
$ |
(46) |
|
$ |
(12) |
|
$ |
129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets to be disposed of |
|
|
|
$ |
12 |
|
|
|
|
|
|
|
|
|
Total impairment charges |
|
|
|
$ |
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring, impairment and other charges and (credits) |
|
|
|
$ |
165 |
|
|
|
|
|
|
|
|
|
The cost of this plan for each of our reportable operating segments was as follows:
Operating segment |
Employee- | |
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 |
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 11,800 claims pending against Corning in state court lawsuits alleging various theories of liability based on exposure to PCCs 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 PCCs asbestos products. Corning is also currently involved in approximately 10,300 other cases (approximately 38,800 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 Cornings 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 plans 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 a proposed 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 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, modified as indicated below, now represents the most probable outcome of this matter and expects that the 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 Companys best estimate of liability. Key provisions of the 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 Amended PCC Plan would require Corning to make (1) one payment of $100 million one year from the date the Amended PCC Plan becomes effective and certain conditions are met and (2) five additional payments of $50 million, on each of the five subsequent anniversaries of the first payment, the final payment of which is subject to reduction based on the application of credits under certain circumstances. Several of the parties in the bankruptcy proceeding have filed documents with the Bankruptcy Court further modifying the Amended PCC Plan by reducing Cornings initial payment by $30 million and reducing its second and fourth payments by $15 million each. In return, Corning will relinquish its claim for reimbursement of its payments and contributions under the Amended PCC Plan from the insurance carriers involved in the bankruptcy proceeding with possible minor exceptions. These modifications are expected to resolve objections to the Amended PCC Plan filed by some of the insurance carriers.
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 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 $630 million at March 31, 2010, compared with an estimate of the liability of $682 million at December 31, 2009. In the three months ended March 31, 2010, Corning recorded a credit of $52 million to reflect the change in the terms of the proposed settlement compared to asbestos litigation expense of $4 million in the three months ended March 31, 2009. 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 becomes effective and the PCE portion of the obligation will be fulfilled through the direct contribution of Cornings investment in PCE (currently recorded as a non-current other equity method investment).
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 faces objections by some parties. Any approval of the Amended PCC Plan by the Bankruptcy Court is subject to appeal. For these and other reasons, Cornings 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 Cornings financial statements is remote.
Several of Cornings insurers have commenced litigation in state courts 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 agreed to provide a credit facility to Dow Corning Corporation (Dow Corning). The funding of the Dow Corning credit facility will be required only if Dow Corning is not otherwise able to meet its scheduled funding obligations in its confirmed Bankruptcy Plan. Refer to Note 14 (Commitments, Contingencies, and Guarantees) to the consolidated financial statements in our 2009 Form 10-K for a discussion of contingent liabilities associated with Dow Corning.
As of March 31, 2010, contingent guarantees totaled a notional value of $256 million, compared with $252 million at December 31, 2009. We believe a significant majority of these contingent guarantees will expire without being funded. We also were contingently liable for purchase obligations of $67 million and $63 million, at March 31, 2010 and December 31, 2009, respectively.
Product warranty liability accruals were $24 million at both March 31, 2010 and December 31, 2009.
Corning is a defendant in various lawsuits, including environmental litigation, product-related suits, the Dow Corning and PCC matters, discussed in Note 7 (Investments) to the consolidated financial statements in our 2009 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 Cornings 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 21 active hazardous waste sites. Under the Superfund Act, all parties who may have contributed any waste to a hazardous waste site, identified by the Agency, are jointly and severally liable for the cost of cleanup unless the Agency agrees otherwise. It is Cornings 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, 2010, and December 31, 2009, Corning had accrued approximately $25 million (undiscounted) and $26 million (undiscounted), 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 Companys 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 2010, Corning repaid $58 million of debt which included the redemption of $48 million principal amount of our 6.25% notes due February 18, 2010.
Based on borrowing rates currently available to us for loans with similar terms and maturities, the fair value of long-term debt was $2.0 billion at March 31, 2010 and December 31, 2009.
In the first quarter of 2009, Corning also repaid $72 million of debt which included the redemption of $54 million principal amount of our 6.3% notes due March 1, 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, | ||||
| |||||
|
2010 |
|
2009 | ||
|
|
|
|
|
|
(Provision) benefit for income taxes |
$ |
(97) |
|
$ |
66 |
Effective tax rate |
|
10.6% |
|
|
126.9% |
For the three months ended March 31, 2010, 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; |
|
The benefit of excess foreign tax credits from repatriation of current year earnings of certain foreign subsidiaries; and |
|
The impact of discrete items including a $56 million charge from the reversal of the deferred tax asset associated with a subsidy for certain retiree medical benefits. Discrete items increased our effective tax rate by 8.3 percentage points. |
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 Cornings restructuring charge of $29 million. Refer to Note 2 (Restructuring, Impairment and Other Charges (Credits)) for additional information about the restructuring charge. Discrete items had a favorable impact on our effective tax rate of 128.3 percentage points. |
U.S. profits of approximately $8.3 billion will be required to fully realize the deferred tax assets as of December 31, 2009. Of that amount, $3.6 billion of U.S. profits will be required over the next 16 years to fully realize the deferred tax assets associated with federal net operating loss carry forwards.
During 2010, Corning plans to repatriate to the U.S. up to $1 billion of current year earnings from certain foreign subsidiaries. As a result of this plan, a tax benefit from excess foreign tax credits is included in the full year effective tax rate. The impact of this item in the first quarter of 2010 was a $74 million reduction to our tax provision. We continue to maintain our permanent reinvestment assertion with regards to the remaining unremitted earnings of our foreign subsidiaries. At December 31, 2009, taxes had not been provided on approximately $7.3 billion of accumulated foreign unremitted earnings that are expected to remain invested indefinitely. It is not practical to calculate the unrecognized deferred tax liability on those earnings.
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 2015 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 4.7 and 21.9 percentage points for the three months ended March 31, 2010 and 2009, respectively.
While we expect the amount of unrecognized tax benefits to change in the next 12 months, we do not expect the change to have a significant impact on the results of operations or our financial position.
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, | ||||||||||||||
|
2010 |
|
2009 | ||||||||||||
|
Net |
|
Weighted- |
|
Per |
|
Net |
|
Weighted- |
|
Per | ||||
|
|
|
|
|
| ||||||||||
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
$ |
816 |
|
1,555 |
|
$ |
0.52 |
|
$ |
14 |
|
1,548 |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and other dilutive securities |
|
|
|
24 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
$ |
816 |
|
1,579 |
|
$ |
0.52 |
|
$ |
14 |
|
1,559 |
|
$ |
0.01 |
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 | ||
| |||
|
2010 |
|
2009 |
Potential common shares excluded from the calculation of diluted earnings per share: |
|
|
|
Employee stock options and awards |
51 |
|
79 |
Performance-based restricted stock awards |
|
|
4 |
Total |
51 |
|
83 |
7. |
Available-for-Sale Investments |
The following is a summary of the fair value of available-for-sale investments (in millions):
|
Amortized cost |
|
Fair value | ||||||||
|
March 31, |
|
December 31, |
|
March 31, |
|
December 31, | ||||
Bonds, notes and other securities: |
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
$ |
772 |
|
$ |
973 |
|
$ |
774 |
|
$ |
975 |
Other debt securities |
|
19 |
|
|
66 |
|
|
24 |
|
|
67 |
Total short-term investments |
$ |
791 |
|
$ |
1,039 |
|
$ |
798 |
|
$ |
1,042 |
Asset-backed securities |
$ |
73 |
|
$ |
75 |
|
$ |
45 |
|
$ |
42 |
Total long-term investments |
$ |
73 |
|
$ |
75 |
|
$ |
45 |
|
$ |
42 |
We do not intend to sell, nor do we believe it is more likely than not that we would be required to sell, the long-term investment asset-backed securities (which are collateralized by mortgages) before recovery of their amortized cost basis. It is possible that a significant degradation in the delinquency or foreclosure rates in the underlying assets could cause further temporary or other-than-temporary impairments in the future.
The following tables provide the fair value and gross unrealized losses of the Companys investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2010 and December 31, 2009 (in millions):
|
March 31, 2010 | ||||||||||||||||
|
Less than 12 months |
|
12 months or greater |
|
Total | ||||||||||||
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized | ||||||
U.S. government and agencies |
$ |
375 |
|
$ |
0 |
|
|
|
|
|
|
|
$ |
375 |
|
$ |
0 |
Total short-term investments |
$ |
375 |
|
$ |
0 |
|
|
|
|
|
|
|
$ |
375 |
|
$ |
0 |
Asset-backed securities |
|
|
|
|
|
|
$ |
45 |
|
$ |
(28) |
|
$ |
45 |
|
$ |
(28) |
Total long-term investments |
|
|
|
|
|
|
$ |
45 |
|
$ |
(28) |
|
$ |
45 |
|
$ |
(28) |
|
December 31, 2009 | ||||||||||||||||
|
Less than 12 months |
|
12 months or greater |
|
Total | ||||||||||||
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized | ||||||
U.S. government and agencies |
$ |
320 |
|
$ |
0 |
|
|
|
|
|
|
|
$ |
320 |
|
$ |
0 |
Total short-term investments |
$ |
320 |
|
$ |
0 |
|
|
|
|
|
|
|
$ |
320 |
|
$ |
0 |
Asset-backed securities |
|
|
|
|
|
|
$ |
42 |
|
$ |
(33) |
|
$ |
42 |
|
$ |
(33) |
Total long-term investments |
|
|
|
|
|
|
$ |
42 |
|
$ |
(33) |
|
$ |
42 |
|
$ |
(33) |
Gross realized gains and losses for the three months ended March 31, 2010 and 2009 were not significant.
A reconciliation of the changes in credit losses recognized in earnings for the three months ended March 31, 2010 (in millions):
Beginning balance of credit losses, January 1, 2010 |
$ 2 |
Additions for credit losses not previously recognized in earnings |
0 |
Ending balance of credit losses, for the three months ended March 31, 2010 |
$ 2 |
The $2 million loss represents managements estimate of credit losses inherent in the securities considering projected cash flows using assumptions of delinquency rates, loss severities, and other estimates of future collateral performance. These credit losses are limited to asset-backed securities in our investment portfolio.
The following table summarizes the contractual maturities of available-for-sale securities at March 31, 2010 (in millions):
Less than one year |
$788 |
Due in 1-5 years |
0 |
Due in 5-10 years |
0 |
Due after 10 years (1) |
55 |
Total |
$843 |
(1) |
Includes $45 million of asset-based securities that mature over time and are being reported at their final maturity dates. |
8. |
Inventories |
Inventories comprise the following (in millions):
|
March 31, |
|
December 31, | ||
Finished goods |
$ |
177 |
|
$ |
175 |
Work in process |
|
124 |
|
|
113 |
Raw materials and accessories |
|
123 |
|
|
114 |
Supplies and packing materials |
|
180 |
|
|
177 |
Total inventories |
$ |
604 |
|
$ |
579 |
9. |
Investments |
Investments comprise the following (in millions):
|
Ownership |
|
March 31, |
|
December 31, | ||
Affiliated companies accounted for by the equity method |
|
|
|
|
|
|
|
Samsung Corning Precision Glass Co., Ltd. |
50% |
|
$ |
3,042 |
|
$ |
2,772 |
Dow Corning Corporation |
50% |
|
|
1,031 |
|
|
992 |
All other |
20-50% |
|
|
220 |
|
|
224 |
|
|
|
|
4,293 |
|
|
3,988 |
Other investments |
|
|
|
3 |
|
|
4 |
Total |
|
|
$ |
4,296 |
|
$ |
3,992 |
(1) |
Amounts reflect Cornings direct ownership interests in the respective affiliated companies. Corning does not control any of these entities. |
Related party information for these investments in affiliates follows (in millions):
|
Three months ended | ||||
|
2010 |
|
2009 | ||
Related Party Transactions: |
|
|
|
|
|
Corning sales to affiliated companies |
$ |
5 |
|
$ |
4 |
Corning purchases from affiliated companies |
$ |
25 |
|
$ |
4 |
Corning transfers of assets, at cost, to affiliated companies |
$ |
27 |
|
$ |
13 |
Dividends received from affiliated companies |
$ |
228 |
|
$ |
403 |
Royalty income from affiliated companies |
$ |
65 |
|
$ |
43 |
Corning services to affiliates |
$ |
7 |
|
|
|
As of March 31, 2010, balances due to and due from affiliates were $3 million and $103 million, respectively. As of December 31, 2009, balances due to and due from affiliates were $2 million and $122 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 (LCD) glass for flat panel displays.
Samsung Corning Precisions results of operations follow (in millions):
|
Three months ended | ||||
| |||||
|
2010 |
|
2009 | ||
|
|
|
|
|
|
Statement of Operations: |
|
|
|
|
|
Net sales |
$ |
1,198 |
|
$ |
755 |
Gross profit |
$ |
925 |
|
$ |
510 |
Net income attributable to Samsung Corning Precision |
$ |
701 |
|
$ |
371 |
Cornings equity in earnings of Samsung Corning Precision |
$ |
350 |
|
$ |
187 |
|
|
|
|
|
|
Related Party Transactions: |
|
|
|
|
|
Corning purchases from Samsung Corning Precision |
$ |
18 |
|
|
|
Corning sales to Samsung Corning Precision |
$ |
0 |
|
|
|
Dividends received from Samsung Corning Precision |
$ |
173 |
|
$ |
181 |
Royalty income from Samsung Corning Precision |
$ |
65 |
|
$ |
42 |
Corning transfers of machinery and equipment to Samsung Corning Precision at cost (1) |
$ |
27 |
|
$ |
13 |
(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. |
Corning owns 50% of Samsung Corning Precision. Samsung Electronics Co., Ltd. owns 43% and other shareholders own the remaining 7%.
As of March 31, 2010, balances due from Samsung Corning Precision were $29 million and balances due to Samsung Corning Precision were not significant. As of December 31, 2009, balances due from Samsung Corning Precision were $36 million and balances due to Samsung Corning Precision were $14 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.
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; 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. On November 10, 2009, the Appellate Court directed the parties to attempt to resolve this matter through mediation. As a result, the parties are discussing the possibility of a settlement of this matter. 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 have responded to those requests for information. On October 9, 2009, in connection with its investigation, the Competition DG made a further request for information from both Corning and Samsung Corning Precision to which each party has responded. Samsung Corning Precision has also responded to the Competition DG and authorities in other jurisdictions, including the United States in connection with similar investigations of alleged anticompetitive behavior relating to worldwide production of cathode ray tube glass.
In September 2009, Corning and Samsung Corning Precision formed Corsam Technologies LLC (Corsam), a new equity affiliate established to provide glass technology research for future product applications. Samsung Corning Precision invested $124 million in cash and Corning contributed intellectual property with a corresponding value. Corning and Samsung Corning Precision each own 50% of the common stock of Corsam and Corning has agreed to provide research and development services at arms length to Corsam. Corning does not control Corsam because Samsung Corning Precisions other investors maintain significant participating voting rights. In addition, Corsam has sufficient equity to finance its activities, the voting rights of investors in Corsam are considered substantive, and the risks and rewards of Corsams research are shared only by those investors noted. As a result, Corsam is accounted for under the equity method of accounting for investments.
Dow Corning Corporation (Dow Corning)
Dow Corning is a U.S.-based manufacturer of silicone products. Dow Cornings results of operations follow (in millions):
|
Three months ended | ||||
|
2010 |
|
2009 | ||
|
|
|
|
|
|
Statement of Operations: |
|
|
|
|
|
Net sales |
$ |
1,354 |
|
$ |
1,025 |
Gross profit |
$ |
506 |
|
$ |
282 |
Net income attributable to Dow Corning |
$ |
218 |
|
$ |
10 |
Cornings equity in earnings of Dow Corning |
$ |
112 |
|
$ |
5 |
|
|
|
|
|
|
Related Party Transactions: |
|
|
|
|
|
Corning purchases from Dow Corning |
$ |
5 |
|
$ |
4 |
Dividends received from Dow Corning |
$ |
56 |
|
$ |
222 |
Amounts owed to Dow Corning totaled $2 million as of March 31, 2010. At December 31, 2009, amounts owed to Dow Corning were not significant.
In response to recent 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, 2010, Dow Cornings marketable securities included approximately $1.1 billion of auction rate securities, net of a temporary impairment of $13 million. As a result of the temporary impairment, unrealized losses of $11 million, net of $2 million for a minority interests share, were included in accumulated other comprehensive income in Dow Cornings consolidated balance sheet. Cornings share of this unrealized loss was $5 million and is included in Cornings accumulated other comprehensive income.
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.
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 Cornings 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 Cornings equity to be permanent.
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 March 31, 2010, Dow Corning had recorded a reserve for breast implant litigation of $1.6 billion and anticipates insurance receivables of $16 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 March 31, 2010, Dow Corning has estimated the liability to commercial creditors to be within the range of $79 million to $257 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. Should Dow Corning not prevail in this matter, Cornings equity earnings would be reduced by its 50% share of the amount in excess of $79 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 Cornings 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. The remaining tort claims against Corning relating to the breast implant product lawsuits under the jurisdiction of the Bankruptcy Court will be channeled by the Plan into facilities established by the Plan or otherwise defended by the Litigation Facility.
Pittsburgh Corning Corporation (PCC)
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. Corning also has an equity interest in Pittsburgh Corning Europe N.V. (PCE), a Belgian Corporation which is a component of the Companys proposed settlement for asbestos litigation. At March 31, 2010 and December 31, 2009, the fair value of PCE significantly exceeded its carrying value of $116 million and $125 million, respectively. There have been no impairment indicators for our investment in PCE and we continue to recognize equity earnings of this affiliate. PCC filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Western District of Pennsylvania on April 16, 2000. At that time, Corning determined that it lacked the ability to recover the carrying amount of its investment in PCC and its investment was other-than-temporarily impaired. As a result, we reduced our investment in PCC to zero. Refer to Note 3 (Commitments and Contingencies) for additional information about PCC and PCE.
Variable Interest Entities
For variable interest entities, we routinely assess the terms of our interest in each entity to determine if we are the primary beneficiary as prescribed by U.S. GAAP. Corning leases certain transportation equipment from three Trusts that qualify as variable interest entities. The sole purpose of these entities is to lease transportation equipment to Corning. None of these entities are considered significant to Cornings consolidated financial statements.
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.
10. Acquisition
On September 15, 2009, Corning acquired all of the shares of Axygen Bioscience, Inc. and its subsidiaries from American Capital Ltd. for $410 million, net of $7 million cash received. Axygen is a leading manufacturer and distributor of high-quality life sciences plastic consumable labware, liquid handling products, and bench-top laboratory equipment.
The purchase price of the acquisition was allocated to the net tangible and other intangible assets acquired with the remainder recorded as goodwill on the basis of fair value. While our valuation is substantially complete, the following amounts are subject to revision until finalized (in millions):
Total current assets |
$ |
63 |
Other tangible assets |
|
49 |
Other intangible assets |
|
153 |
Current and non-current liabilities |
|
(80) |
Net tangible and intangible assets |
$ |
185 |
Purchase price, including cash received |
|
417 |
Goodwill (1) |
$ |
232 |
(1) |
None of the goodwill recognized is deductible for U.S. income tax purposes. The goodwill was allocated to the Life Sciences segment. |
Goodwill is primarily related to the value of Axygens product portfolio and distribution network and its combination with Cornings existing life science platform, as well as synergies and other intangibles that do not qualify for separate recognition. Supplemental pro forma information was not provided because Axygen is not material to Cornings consolidated financial statements.
11. |
Property, Net of Accumulated Depreciation |
Property, net follows (in millions):
|
March 31, |
|
December 31, | ||
|
| ||||
Land |
$ |
104 |
|
$ |
96 |
Buildings |
|
3,438 |
|
|
3,443 |
Equipment |
|
9,382 |
|
|
9,237 |
Construction in progress |
|
563 |
|
|
722 |
|
|
13,487 |
|
|
13,498 |
Accumulated depreciation |
|
(5,640) |
|
|
(5,503) |
Total |
$ |
7,847 |
|
$ |
7,995 |
In the three months ended March 31, 2010 and 2009, interest costs capitalized as part of property, net, were $4 million and $10 million, respectively.
Manufacturing equipment includes certain components of production equipment that are constructed of precious metals. At March 31, 2010 and December 31, 2009, the recorded value of precious metals totaled $1.8 billion. Depletion expense for precious metals in the three months ended March 31, 2010 and 2009 totaled $3 million and $1 million, respectively.
12. |
Goodwill and Other Intangible Assets |
There were no significant changes in the carrying amount of goodwill for the three months ended March 31, 2010. Balances by segment are as follows (in millions):
|
Telecom- |
|
Display |
|
Specialty |
|
Life |
|
Total |
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010 |
$ 118 |
|
$ 9 |
|
$ 150 |
|
$ 232 |
|
$ 509 |
Other intangible assets are as follows (in millions):
|
March 31, 2010 |
|
December 31, 2009 | ||||||||||||||
|
Gross |
|
Accumulated |
|
Net |
|
Gross |
|
Accumulated |
|
Net | ||||||
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents, trademarks, and trade names (1) |
$ |
205 |
|
$ |
123 |
|
$ |
82 |
|
$ |
206 |
|
$ |
122 |
|
$ |
84 |
Non-competition agreements |
|
97 |
|
|
91 |
|
|
6 |
|
|
98 |
|
|
93 |
|
|
5 |
Other (1) |
|
81 |
|
|
4 |
|
|
77 |
|
|
80 |
|
|
2 |
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
383 |
|
$ |
218 |
|
$ |
165 |
|
$ |
384 |
|
$ |
217 |
|
$ |
167 |
(1) |
The Company recorded other identifiable intangible assets associated with the purchase of Axygen Bioscience, Inc. in the third quarter of 2009. Refer to Note 10 (Acquisition) for additional information. |
Amortized intangible assets are primarily related to the Telecommunications and Life Sciences segments.
Amortization expense related to these intangible assets is estimated to be approximately $6 million for 2010 and $6 million annually, thereafter.
13. |
Customer Deposits |
In 2005 and 2004, several of Cornings customers entered into long-term purchase and supply agreements in which Cornings 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 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, 2010 and 2009, we issued $30 million and $103 million, respectively, in credit memoranda. Customer deposit liabilities were $74 million and $104 million at March 31, 2010 and December 31, 2009, respectively, of which $56 million and $80 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 yenU.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.
14. |
Employee Retirement Plans |
The following table summarizes the components of net periodic benefit cost for Cornings defined benefit pension and postretirement health care and life insurance plans (in millions):
|
Pension benefits |
|
Postretirement benefits | ||||||||
|
Three months ended |
|
Three months ended | ||||||||
|
| ||||||||||
|
2010 |
|
2009 |
|
2010 |
|
2009 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
$ |
12 |
|
$ |
13 |
|
$ |
3 |
|
$ |
4 |
Interest cost |
|
39 |
|
|
38 |
|
|
13 |
|
|
12 |
Expected return on plan assets |
|
(42) |
|
|
(45) |
|
|
|
|
|
|
Amortization of net loss |
|
13 |
|
|
7 |
|
|
4 |
|
|
3 |
Amortization of prior service cost |
|
2 |
|
|
2 |
|
|
(1) |
|
|
(1) |
Total pension and postretirement benefit expense |
$ |
24 |
|
$ |
15 |
|
$ |
19 |
|
$ |
18 |
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment charge |
|
|
|
|
22 |
|
|
|
|
|
8 |
Total expense |
$ |
24 |
|
$ |
37 |
|
$ |
19 |
|
$ |
26 |
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 and going forward. The pre-65 retirees are expected to trigger the cap in 2010 which will impact their contribution rate in 2011. 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 Companys 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.
15. |
Hedging Activities |
Corning operates in many foreign countries and as a result is exposed to movements in foreign currency exchange rates. The areas in which exchange rate fluctuations affect us include:
|
Financial instruments and transactions denominated in foreign currencies, which impact earnings; and |
|
The translation of net assets in foreign subsidiaries for which the functional currency is not the U.S. dollar, which impacts our net equity. |
Our most significant foreign currency exposures relate to the Japanese yen, Korean won, New Taiwan dollar and the Euro. We manage our foreign currency exposure primarily by entering into foreign exchange forward contracts with durations of generally 18 months or less to hedge foreign currency risk. 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.
The forward 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.
The amount of hedge ineffectiveness at March 31, 2010 and at December 31, 2009 was insignificant.
Cash Flow Hedges
Our cash flow hedging activities utilize foreign exchange forward contracts to reduce the risk that movements 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. Corning uses a regression analysis to monitor the effectiveness of its cash flow hedges both prospectively and retrospectively. 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 March 31, 2010, the amount of net gains expected to be reclassified into earnings within the next 12 months is $17 million.
Undesignated Hedges
Corning uses other foreign exchange forward contracts that are not designated as hedging instruments for accounting purposes. The undesignated hedges limit exposures to foreign currency fluctuations related to certain monetary assets, monetary liabilities and net earnings in foreign currencies.
Net Investment in Foreign Operations
In February 2000, we issued $500 million of Euro-denominated notes that were designated as a hedge of a net investment in foreign operations. The effective portion of the changes in fair value of the outstanding debt balance have been included as a component of the foreign currency translation adjustment (CTA) within accumulated other comprehensive income (loss). In February 2010, we repaid the remaining $48 million balance of this debt. At that time, the cumulative amount of CTA related to this debt was a net loss of $140 million, which will remain in accumulated other comprehensive income until ultimate disposition of the underlying Euro investment.
The following tables summarize the notional amounts and respective fair values of Cornings derivative financial instruments (in millions):
|
|
|
Asset derivatives |
|
Liability derivatives | |||||||
As of March 31, 2010 |
Notional |
|
Balance |
|
Fair |
|
Balance |
|
Fair | |||
|
|
|
|
|
|
|
|
|
|
| ||
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
$ |
306 |
|
Other current assets |
|
$ |
17 |
|
Other accrued liabilities |
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
$ |
1,247 |
|
Other current assets |
|
$ |
20 |
|
Other accrued liabilities |
|
$ |
(20) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
$ |
1,553 |
|
|
|
$ |
37 |
|
|
|
$ |
(20) |
|
|
|
Asset derivatives |
|
Liability derivatives | |||||||
As of March 31, 2009 |
Notional |
|
Balance |
|
Fair |
|
Balance |
|
Fair | |||
|
|
|
|
|
|
|
|
|
|
| ||
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
$ |
278 |
|
Other current assets |
|
$ |
13 |
|
Other accrued liabilities |
|
$ |
(15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
$ |
1,316 |
|
Other current assets |
|
$ |
33 |
|
Other accrued liabilities |
|
$ |
(18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
$ |
1,594 |
|
|
|
$ |
46 |
|
|
|
$ |
(33) |
The following tables summarize the effect of derivative financial instruments on Cornings consolidated financial statements (in millions):
|
|
Effect of derivative instruments on the consolidated financial statements |
|
| |||||||||
|
|
For the three months ended March 31, 2010 |
|
| |||||||||
Derivatives in |
|
Gain/(loss) |
|
Location of |
|
Gain/(loss) |
|
Location of |
|
Gain/(loss) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
|
|
Cost of sales |
|
$ |
2 |
|
Other income/ (expense) |
|
|
|
Foreign exchange contracts |
|
$ |
5 |
|
Royalties |
|
$ |
2 |
|
Other income/ (expense) |
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash flow hedges |
|
$ |
5 |
|
|
|
$ |
4 |
|
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign denominated debt |
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment hedges |
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
Location of |
|
Gain/(loss) |
| |
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Other income/ |
|
$ |
(1) |
|
|
|
|
|
|
|
|
Total undesignated |
|
|
|
$ |
(1) |
|
|
|
Effect of derivative instruments on the consolidated financial statements |
|
| |||||||||
|
|
For the three months ended March 31, 2009 |
|
| |||||||||
Derivatives in |
|
Gain/(loss) |
|
Location of |
|
Gain/(loss) |
|
Location of |
|
Gain/(loss) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
|
|
Cost of sales |
|
$ |
1 |
|
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 |
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment hedges |
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
Location of |
|
Gain/(loss) |
| |
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Other income/ |
|
$ |
28 |
|
|
|
|
|
|
|
|
Total undesignated |
|
|
|
$ |
28 |
|
(1) |
Included in this amount is a loss of $9 million relating to derivatives that were de-designated by the Company in the fourth quarter of 2008. At that time, the amounts recorded in accumulated OCI were determined to still be reasonably possible of occurring as originally forecasted. |
16. |
Fair Value Measurements |
Fair value standards under U.S. GAAP define fair value, establish a framework for measuring fair value in applying generally accepted accounting principles, and require disclosures about fair value measurements. The standards also identify two kinds of inputs that are used to determine the fair value of assets and liabilities: observable and unobservable. Observable inputs are based on market data or independent sources while unobservable inputs are based on the Companys own market assumptions. Once inputs have been characterized, the inputs are prioritized into one of three broad levels (provided in the table below) used to measure fair value.
Fair value standards apply whenever an entity is measuring fair value under other accounting pronouncements that require or permit fair value measurement and require the use of observable market data when available. As of March 31, 2010 and December 31, 2009, the Company did not have any financial assets or liabilities that were measured using unobservable (or Level 3) inputs.
The following tables provide fair value measurement information for the Companys major categories of financial assets and liabilities measured on a recurring basis (in millions):
|
March 31, |
|
Fair value measurements at reporting date using | |||||||||||||||||
|
|
Quoted prices in |
|
Significant other |
|
Significant | ||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Short-term investments |
|
$ |
798 |
|
|
|
$ |
774 |
|
|
|
$ |
24 |
(2) |
|
|
|
| ||
Other assets |
|
$ |
45 |
|
|
|
|
|
|
|
|
$ |
45 |
|
|
|
|
| ||
Derivatives (1) |
|
$ |
37 |
|
|
|
|
|
|
|
|
$ |
37 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Derivatives (1) |
|
$ |
20 |
|
|
|
|
|
|
|
|
$ |
20 |
|
|
|
|
| ||
(1) |
Derivative assets and liabilities include 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. |
|
December 31, |
|
Fair value measurements at reporting date using | |||||||||||||||||
|
|
Quoted prices in |
|
Significant other |
|
Significant | ||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Short-term investments |
|
$ |
1,042 |
|
|
|
$ |
969 |
|
|
|
$ |
73 |
(2) |
|
|
|
| ||
Other assets |
|
$ |
42 |
|
|
|
|
|
|
|
|
$ |
42 |
|
|
|
|
| ||
Derivatives (1) |
|
$ |
53 |
|
|
|
|
|
|
|
|
$ |
53 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Derivatives (1) |
|
$ |
14 |
|
|
|
|
|
|
|
|
$ |
14 |
|
|
|
|
| ||
(1) |
Derivative assets and liabilities include 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. |
17. |
Share-based Compensation |
Stock Compensation Plans
The Company measures and recognizes 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. Fair values for stock options granted prior to January 1, 2010 were estimated using a lattice-based binomial valuation model. In 2010, Corning began estimating fair values for stock options granted using a multiple point Black Scholes model. Both models incorporate the required assumptions and meet the fair value measurement objective under U.S. GAAP.
Share-based compensation cost was approximately $29 million and $35 million for the three months ended March 31, 2010 and 2009, respectively, and included (1) employee stock options, (2) time-based restricted stock and restricted stock units, (3) performance-based restricted stock and restricted stock units, and (4) WESPP shares.
Stock Options
Our Stock Option Plans provide non-qualified and incentive stock options to purchase authorized but unissued shares 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 Stock Option Plans for the three months ended March 31, 2010:
|
Number |
|
Weighted- |
|
Weighted- |
|
Aggregate | |
Options Outstanding as of December 31, 2009 |
92,504 |
|
$ |
25.83 |
|
4.48 |
|
$ 425,427 |
Granted |
5,570 |
|
$ |
18.52 |
|
|
|
|
Exercised |
(2,396) |
|
$ |
9.35 |
|
|
|
|
Forfeited and Expired |
(673) |
|
$ |
38.76 |
|
|
|
|
Options Outstanding as of March 31, 2010 |
95,005 |
|
$ |
25.73 |
|
4.57 |
|
$ 464,744 |
Options Exercisable as of March 31, 2010 |
75,455 |
|
$ |
28.21 |
|
3.49 |
|
$ 368,795 |
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 Companys closing stock price on March 31, 2010, which would have been received by the option holders had all option holders exercised their options as of that date.
As of March 31, 2010, there was approximately $61 million of unrecognized compensation cost related to stock options granted under the Plans. The cost is expected to be recognized over a weighted-average period of 2 years. Compensation cost related to stock options was approximately $15 million and $18 million for the three months ended March 31, 2010 and 2009, respectively.
Proceeds received from the exercise of stock options were $21 million and $1 million for the three months ended March 31, 2010 and 2009, respectively. Proceeds received from the exercise of stock options were included in financing activities on the Companys Consolidated Statements of Cash Flows. The total intrinsic value of options exercised for the three months ended March 31, 2010 and 2009 was approximately $20 million and $1 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.
Corning used a binomial lattice model to estimate the fair values of stock option grants through December 31, 2009. Effective January 1, 2010, Corning began using a multiple point Black Scholes model to estimate the fair value of stock option grants. The financial impact of the change in valuation models is insignificant.
The following inputs were used for the valuation of option grants under our Stock Option Plans:
|
Three months ended | ||
| |||
|
2010 |
|
2009 |
Expected volatility |
48-49% |
|
45-60% |
Weighted-average volatility |
49% |
|
55% |
Expected dividends |
1.40% |
|
1.50% |
Risk-free rate |
2.7-3.2% |
|
0.1-4.7% |
Average risk-free rate |
3.2% |
|
2.7% |
Expected term (in years) |
5.1-6.5 |
|
|
Expected time to exercise (in years) |
|
|
2.2-5.4 |
Pre-vesting departure rate |
1.4-3.6% |
|
1.4-2.7% |
For stock options granted during the three months ended March 31, 2010, Corning utilized a blended approach defined as the weighted average of the short-term implied volatility, the most recent volatility for the period equal to the expected term and the most recent 15-year historical volatility. The expected term assumption is the period of time the options are expected to be outstanding, and is calculated using a combination of historical exercise experience adjusted to reflect the current vesting period of options being valued, and partial life cycles of outstanding options. The risk-free rates used in the multiple point Black Scholes model are the implied rates for a zero-coupon U.S. Treasury bond with a term equal to the options expected term. The ranges given above result from separate groups of employees exhibiting different exercise behavior.
For stock options granted during the three months ended March 31, 2009, expected volatility was based on the blended short-term volatility (the arithmetic average of the implied volatility and the short-term historical volatility), and the most recent 15-year historical volatility of Cornings stock. The expected time to exercise of options granted in the first quarter of 2009 was derived using a regression model and represents the period of time that options granted are expected to be outstanding. The risk-free rates used in the lattice-based binomial model were derived from the U.S. Treasury yield curve in effect from the grant date to the options expiration date.
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 and Restricted Stock Units:
Time-based restricted stock and restricted stock units are issued by the Company on a discretionary basis, and are payable in shares of the Companys common stock upon vesting. The fair value is based on the market price of the Companys 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 Companys nonvested time-based restricted stock and restricted stock units as of December 31, 2009, and changes during the three months ended March 31, 2010:
|
Shares |
|
Weighted- |
|
Nonvested shares at December 31, 2009 |
3,880 |
|
$18.59 | |
Granted |
151 |
|
18.93 | |
Vested |
(53) |
|
22.14 | |
Forfeited |
(1) |
|
23.61 | |
Nonvested shares at March 31, 2010 |
3,977 |
|
$18.57 |
As of March 31, 2010, there was approximately $37 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 2.9 years. Compensation cost related to time-based restricted stock and restricted stock units was approximately $6 million and $4 million for the three months ended March 31, 2010 and 2009, 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 Companys common stock upon vesting, typically over a three-year period. The fair value is based on the market price of the Companys 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 Companys nonvested performance-based restricted stock and restricted stock units as of December 31, 2009, and changes during the three months ended March 31, 2010:
|
Shares |
|
Weighted- |
Nonvested restricted stock and restricted stock units at December 31, 2009 |
6,377 |
|
$13.47 |
Granted |
1,844 |
|
8.67 |
Vested |
(2,026) |
|
22.03 |
Forfeited |
(87) |
|
8.67 |
Nonvested restricted stock and restricted stock units at March 31, 2010 |
6,108 |
|
$ 9.25 |
As of March 31, 2010, there was approximately $19 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 1.8 years. Compensation cost related to performance-based restricted stock and restricted stock units was approximately $6 million and $12 million for the three months ended March 31, 2010 and 2009, respectively.
Worldwide Employee Stock Purchase Plan
In addition to the Stock Option Plan and Incentive Stock Plans, Corning offered a Worldwide Employee Share Purchase Plan (WESPP). Under the WESPP, substantially all employees could elect to have up to 10% of their annual wages withheld to purchase our common stock. The purchase price of the stock was 85% of the end-of-quarter closing market price. Compensation cost related to the WESPP for all periods presented is immaterial.
On February 3, 2010, Cornings Board of Directors approved the recommendation to terminate on-going WESPP contributions effective March 31, 2010.
18. |
Comprehensive Income |
Components of comprehensive income on an after-tax basis, where applicable, follow (in millions):
|
Three months ended March 31, | ||||
| |||||
|
2010 |
|
2009 | ||
|
|
|
|
|
|
Net income |
$ |
815 |
|
$ |
14 |
Other comprehensive income, net of taxes (1): |
|
|
|
|
|
Net change in unrealized gain (loss) on investments securities |
|
11 |
|
|
(14) |
Net change in unrealized gain (loss) on derivative hedging instruments |
|
2 |
|
|
13 |
Foreign currency translation adjustment |
|
(22) |
|
|
(728) |
Amortization of postretirement benefit plan losses and prior service costs |
|
(9) |
|
|
(37) |
Comprehensive income |
$ |
797 |
|
$ |
(752) |
Comprehensive income attributable to noncontrolling interests |
|
1 |
|
|
0 |
Comprehensive income attributable to Corning |
$ |
798 |
|
$ |
(752) |
(1) |
Other comprehensive income items for the three months ended March 31, 2010 and 2009 include net tax effects of $5 million and $16 million, respectively. Refer to Note 5 (Income Taxes) for additional information. |
19. |
Significant Customers |
For the three months ended March 31, 2010, Cornings sales to each of the following three customers of the Display Technologies segment were equal to or greater than ten percent of the Companys consolidated net sales: AU Optronics Corporation (AUO), Chimei Innolux Corporation, and Sharp Electronics Corporation. For the three months ended March 31, 2009, Cornings sales to AUO were equal to or greater than ten percent of the Companys consolidated net sales.
20. |
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 segments net income. We have allocated certain common expenses among segments differently than we would for stand-alone financial information prepared in accordance with U.S. 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.
Operating Segments (in millions)
|
Display |
|
Telecom- |
|
Environmental |
|
Specialty |
|
Life |
|
All |
|
Total | |||||||
Three months ended March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
$ |
782 |
|
$ |
364 |
|
$ |
192 |
|
$ |
96 |
|
$ |
118 |
|
$ |
1 |
|
$ |
1,553 |
Depreciation (1) |
$ |
128 |
|
$ |
30 |
|
$ |
26 |
|
$ |
11 |
|
$ |
8 |
|
$ |
3 |
|
$ |
206 |
Amortization of purchased intangibles |
|
|
|
$ |
1 |
|
|
|
|