FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________to____________
Commission file number 1-3247
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CORNING INCORPORATED
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(Registrant)
New York 16-0393470
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(State of incorporation) (I.R.S. Employer Identification No.)
One Riverfront Plaza, Corning, New York 14831
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-974-9000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No ____
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No ____
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
1,557,553,059 shares of Corning's Common Stock, $0.50 Par Value, were
outstanding as of May 3, 2006.
Explanatory Note
On April 25, 2006, Corning Incorporated (Corning) filed a Current Report on Form
8-K with the Securities and Exchange Commission in which it announced that it
was restating its previously issued consolidated financial statements to correct
errors in its accounting for Corning's asbestos settlement liability and the
accounting for its investment in Pittsburgh Corning Europe from March 31, 2003,
through December 31, 2005. Corning also changed the classification of accretion
on a portion of the asbestos settlement liability from interest expense to
asbestos settlement expense in its statement of operations for the same time
period. Corning is filing this Amendment No. 1 on Form 10-Q/A to amend its
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (the Original
Filing), which was originally filed on April 26, 2005.
As more fully described in Note 2 (Restatement of Previously Issued Financial
Statements) to the consolidated financial statements in this Form 10-Q/A, the
cumulative effect of these adjustments to Corning's March 31, 2005 balance sheet
was to increase its investments in affiliate companies by $26 million, increase
other accrued liabilities by $143 million, increase accumulated deficit by $122
million, and increase accumulated other comprehensive income by $5 million. The
cumulative effect of these adjustments to Corning's December 31, 2004 balance
sheet was to increase investments in affiliate companies by $26 million,
increase other accrued liabilities by $141 million, increase accumulated deficit
by $123 million, and increase accumulated other comprehensive income by $8
million.
The restatement adjustments had the following impact on Corning's reported net
income and earnings per share as follows (in millions, except per share
amounts):
Three months ended March 31,
----------------------------
2005 2004
---- ----
As reported:
Net income $ 249 $ 55
Basic earnings per share $ 0.18 $ 0.04
Diluted earnings per share $ 0.17 $ 0.04
As restated:
Net income $ 250 $ 56
Basic earnings per share $ 0.18 $ 0.04
Diluted earnings per share $ 0.17 $ 0.04
Increase in net income $ 1 $ 1
As a result of the restatement, the Company's previously issued consolidated
financial statements for the period from March 31, 2003, through December 31,
2005, including those contained in the following filings, should no longer be
relied upon: Annual Report on Form 10-K for the fiscal year ended December 31,
2005; Quarterly Reports on Form 10-Q for the quarters ended September 30, 2005,
June 30, 2005 and March 31, 2005.
Refer to Note 2 (Restatement of Previously Issued Financial Statements) to the
consolidated financial statements in this Form 10-Q/A for additional
information.
In connection with the restatement, Corning concluded that certain material
weaknesses existed in its internal control over financial reporting. See Part I
- Item 4 "Controls and Procedures."
This Form 10-Q/A amends and restates only certain information in Items 1, 2, and
4 of Part I and Items 1 and 6 of Part II of the Original Filing. In addition,
Item 6 of Part II of the Original Filing has been amended to include updated
certifications executed as of the date of this Form 10-Q/A from our Chief
Executive Officer and Chief Financial Officer as required by Sections 302 and
906 of the Sarbanes-Oxley Act of 2002 and an updated Computation of Ratio of
Earnings to Fixed Charges. The certifications of the Chief Executive Officer and
Chief Financial Officer and our Computation of Ratio of Earnings to Fixed
Charges are attached to this Form 10-Q/A as exhibits 12, 31.1, 31.2, and 32.
Except for the amended and restated information, this Form 10-Q/A includes all
of the information contained in the Original Filing, and no attempt has been
made in this Form 10-Q/A to modify or update the disclosures presented in the
Original Filing, except as required to reflect the effects of the restatement.
This Form 10-Q/A continues to describe conditions as of the date of the Original
Filing, and the disclosures contained herein have not been updated to reflect
events, results, or developments that occurred after the Original Filing, or to
modify or update those disclosures affected by subsequent events. Forward
looking statements made in the Original Filing have not been revised to reflect
events, results or developments that have become known to us after the date of
the Original Filing (other than the restatement), and such forward looking
statements should be read in their historical context.
INDEX
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Page
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Consolidated Statements of Operations (Unaudited) for the three
months ended March 31, 2005 and 2004 5
Consolidated Balance Sheets (Unaudited) at March 31, 2005 and
December 31, 2004 6
Consolidated Statements of Cash Flows (Unaudited) for the three
months ended March 31, 2005 and 2004 7
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 38
Item 4. Controls and Procedures 38
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings 40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45
Item 4. Submission of Matters to a Vote of Security Holders 45
Item 6. Exhibits 46
Signatures 47
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share amounts)
For the three months ended
March 31,
-----------------------------
2005 2004
(Restated) (Restated)
---------- ----------
Net sales $ 1,050 $ 844
Cost of sales 621 544
--------- ---------
Gross margin 429 300
Operating expenses:
Selling, general and administrative expenses 184 160
Research, development and engineering expenses 98 84
Amortization of purchased intangibles 5 10
Restructuring, impairment and other charges and (credits) (Note 3) 19 34
Asbestos settlement (Note 4) (12) 22
--------- ---------
Operating income (loss) 135 (10)
Interest income 10 6
Interest expense (35) (34)
Loss on repurchases and retirement of debt, net (23)
Other expense, net (Note 1) (9) (4)
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Income (loss) before income taxes 101 (65)
(Provision) benefit for income taxes (Note 5) (19) 13
--------- ---------
Income (loss) before minority interests and equity earnings 82 (52)
Minority interests (1)
Equity in earnings of associated companies 169 108
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Net income $ 250 $ 56
========= =========
Basic earnings per common share (Note 6) $ 0.18 $ 0.04
========= =========
Diluted earnings per common share (Note 6) $ 0.17 $ 0.04
========= =========
Shares used in computing per share amounts for (Note 6):
Basic earnings per common share 1,411 1,358
========= =========
Diluted earnings per common share 1,503 1,437
========= =========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except share and per share amounts)
March 31, December 31,
2005 2004
(Restated) (Restated)
---------- ------------
Assets
Current assets:
Cash and cash equivalents $ 847 $ 1,009
Short-term investments, at fair value 700 872
--------- ---------
Total cash, cash equivalents and short-term investments 1,547 1,881
Trade accounts receivable, net of doubtful accounts and allowances - $28 and $30 621 585
Inventories (Note 7) 562 535
Deferred income taxes (Note 5) 90 94
Other current assets 208 188
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Total current assets 3,028 3,283
Investments (Note 8) 1,511 1,510
Property, net of accumulated depreciation - $3,559 and $3,532 4,096 3,941
Goodwill and other intangible assets, net (Note 9) 387 398
Deferred income taxes (Note 5) 478 472
Other assets 159 166
--------- ---------
Total Assets $ 9,659 $ 9,770
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings, including current portion of long-term debt (Note 10) $ 288 $ 478
Accounts payable 667 682
Other accrued liabilities 1,144 1,319
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Total current liabilities 2,099 2,479
Long-term debt (Note 10) 2,125 2,214
Postretirement benefits other than pensions 595 600
Other liabilities 740 747
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Total liabilities 5,559 6,040
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Commitments and contingencies (Note 4)
Minority interests 29 29
Shareholders' equity:
Preferred stock - Par value $100.00 per share; Shares authorized: 10 million
Series C mandatory convertible preferred stock - Shares issued: 5.75 million;
Shares outstanding: 633 thousand and 637 thousand 63 64
Common stock - Par value $0.50 per share; Shares authorized: 3.8 billion;
Shares issued: 1,437 million and 1,424 million 719 712
Additional paid-in capital 10,484 10,363
Accumulated deficit (7,182) (7,432)
Treasury stock, at cost; Shares held: 15 million and 16 million (155) (162)
Accumulated other comprehensive income 142 156
--------- ---------
Total shareholders' equity 4,071 3,701
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Total Liabilities and Shareholders' Equity $ 9,659 $ 9,770
========= =========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
For the three months ended
March 31,
------------------------------
2005 2004
(Restated) (Restated)
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Cash Flows from Operating Activities:
Income from continuing operations $ 250 $ 56
Adjustments to reconcile income from continuing operations to net
cash provided by operating activities:
Depreciation 120 120
Amortization of purchased intangibles 5 10
Asbestos settlement (12) 22
Restructuring, impairment and other charges and (credits) 19 34
Loss on repurchases and retirement of debt 23
Undistributed earnings of associated companies (26) (30)
Deferred taxes 3 (41)
Restructuring payments (9) (34)
Customer deposits 20
Changes in certain working capital items:
Trade accounts receivable (54) (17)
Inventories (39) (32)
Other current assets (16) 3
Accounts payable and other current liabilities, net of restructuring payments (151) (66)
Other, net 32 (3)
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Net cash provided by operating activities 142 45
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Cash Flows from Investing Activities:
Capital expenditures (323) (134)
Short-term investments - acquisitions (314) (544)
Short-term investments - liquidations 486 421
Other, net 2 11
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Net cash used in investing activities (149) (246)
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Cash Flows from Financing Activities:
Repayments of short-term borrowings and current portion of long-term debt (192) (2)
Proceeds from issuance of long-term debt, net 48 396
Retirements of long-term debt (2) (141)
Proceeds from issuance of common stock, net 12 11
Proceeds from the exercise of stock options 9 12
Other, net (5) (2)
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Net cash (used in) provided by financing activities (130) 274
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Effect of exchange rates on cash (25) (1)
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Net (decrease) increase in cash and cash equivalents (162) 72
Cash and cash equivalents at beginning of period 1,009 688
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Cash and cash equivalents at end of period $ 847 $ 760
========= =========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
General
In these notes, the terms "Corning," "Company," "we," "us," or "our" mean
Corning Incorporated and subsidiary companies.
The accompanying unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC) and in accordance with accounting principles generally accepted in the
United States of America (GAAP) for interim financial information. Certain
information and note disclosures normally included in financial statements
prepared in accordance with GAAP have been omitted or condensed. These interim
consolidated financial statements should be read in conjunction with Corning's
consolidated financial statements and notes thereto included in its Annual
Report on Form 10-K for the year ended December 31, 2004 (2004 Form 10-K).
Except as disclosed herein, there has been no material change in the information
disclosed in the notes to the consolidated financial statements included in the
2004 Form 10-K.
The unaudited consolidated financial statements reflect all adjustments which,
in the opinion of management, are necessary for a fair statement of the results
of operations, financial position and cash flows for the interim periods
presented. All such adjustments are of a normal recurring nature. The results
for interim periods are not necessarily indicative of results which may be
expected for any other interim period or for the full year.
Certain amounts for 2004 were reclassified to conform with 2005 classifications.
Additionally, we have reclassified the 2004 interim results to conform to the
2004 year-end classification of auction rate securities as short-term
investments instead of cash equivalents. These reclassifications had no impact
on results of operations or shareholders' equity.
Foreign Currency Translation and Transactions
Effective January 1, 2005, our Taiwan subsidiary changed its functional currency
from the new Taiwan dollar (its local currency) to the Japanese yen due to the
increased significance of Japanese yen based transactions of that subsidiary. As
a result of this change in functional currency, exchange rate gains and losses
are recognized on transactions in currencies other than the Japanese yen and
included in income for the period in which the exchange rates changed.
Stock-Based Compensation
We apply Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25), for our stock-based compensation plans. The
following table illustrates the effect on income and earnings per share if we
had applied the fair value recognition provisions of Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation" (SFAS 123), to stock-based
employee compensation.
(In millions, except per share amounts):
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For the three months ended March 31,
------------------------------------
2005 2004
(Restated) (Restated)
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Net income - as reported $ 250 $ 56
Add: Stock-based employee compensation expense
determined under APB 25, included in reported net income, net of tax 7 2
Less: Stock-based employee compensation expense determined
under fair value based method, net of tax (23) (29)
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Net income - pro forma $ 234 $ 29
Earnings per common share:
Basic - as reported $ 0.18 $ 0.04
Basic - pro forma $ 0.17 $ 0.02
Diluted - as reported $ 0.17 $ 0.04
Diluted - pro forma $ 0.16 $ 0.02
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For purposes of SFAS 123 fair value disclosures, each option grant's fair value
is estimated on the grant date using the Black-Scholes option-pricing model. The
following are weighted-average assumptions used for grants under our stock
option plans:
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For the three months ended March 31,
------------------------------------
2005 2004
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Expected life in years 4 4
Risk free interest rate 3.7% 3.2%
Expected volatility 50.0% 50.0%
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Changes in the status of outstanding options follow:
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Number of Shares Weighted-Average
(in thousands) Exercise Price
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Options outstanding December 31, 2004 139,023 $ 20.43
Options granted under plans 3,476 $ 11.40
Options exercised (1,450) $ 6.38
Options terminated (975) $ 33.72
---------
Options outstanding March 31, 2005 140,074 $ 20.26
=========
Options exercisable March 31, 2005 112,443 $ 23.01
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New Accounting Standards
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS 123R), which replaces SFAS 123 and supercedes APB 25. SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements at fair value. On
April 14, 2005, the SEC issued a new rule that amends the required effective
dates for SFAS 123R. As a result of the SEC amendment, Corning intends to adopt
SFAS 123R in the first quarter of 2006. The SEC amendment does not change the
accounting required under SFAS 123R.
Under SFAS 123R, Corning must determine the appropriate fair value model to be
used for valuing share-based payments, the amortization method for compensation
cost, and the transition method to be used at date of adoption. As we will
implement the provisions of SFAS 123R on January 1, 2006, we must select one of
the following transition method adoption alternatives permitted by the standard:
.. "Prospective adoption" would require Corning to begin expensing share-based
payments no later than January 1, 2006. Prior periods would not be
restated.
.. "Modified retrospective adoption" would require Corning to begin expensing
share-based payments no later than January 1, 2006. Prior periods would be
restated.
We are currently evaluating the impact that SFAS 123R will have on our
consolidated results of operations and financial condition, which in part will
be dependent on the amortization methods used to adopt the new rules in 2006.
Our current estimate is that our incremental share-based compensation pretax
expense would be approximately $60 million in 2006 and beyond.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations - an interpretation of FASB Statement
No. 143," (FIN 47) which clarifies the term "conditional asset retirement
obligation" used in SFAS No. 143, "Accounting for Asset Retirement Obligations,"
and specifically when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. Corning is required
to adopt FIN 47 no later than December 31, 2005. Corning does not expect the
adoption of FIN 47 to have a material impact on its consolidated results of
operations and financial condition.
2. Restatement of Previously Issued Financial Statements
The Company's management and its audit committee concluded, on April 21, 2006,
that we would restate previously issued consolidated financial statements for
each of the three years ended December 31, 2005, to correct for errors in the
accounting for the asbestos settlement liability and for our investment in
Pittsburgh Corning Europe N.V. (PCE) from March 31, 2003, through December 31,
2005. We also changed the classification of accretion on a portion of the
liability from interest expense to asbestos settlement expense in our
consolidated statements of operations for the same time period.
On March 28, 2003, we announced that we had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future asbestos claims against Corning and Pittsburgh Corning Corporation (PCC),
which might arise from PCC products or operations. The proposed settlement, if
the plan is approved and becomes effective, will require Corning to relinquish
our equity interest in PCC, contribute our equity interest in PCE, and
contribute 25 million shares of Corning common stock. We also agreed to make
cash payments with a value of $131 million, in March 2003, over six years from
the effective date of the settlement and to assign insurance policy proceeds
from our primary insurance and a portion of our excess insurance at the time of
the settlement.
Between March 31, 2003, and December 31, 2005, the following accounting errors
occurred:
.. Corning's asbestos settlement charges and the related liability for the
asbestos settlement did not reflect the estimated fair value at initial
recognition or subsequent changes in fair value, of certain components of
the proposed settlement offer. As a result, asbestos settlement charges for
the years 2005, 2004, and 2003 were understated by $13 million, $24
million, and $117 million, respectively.
.. Corning incorrectly suspended recording equity earnings of PCE between
March 31, 2003, and December 31, 2005. As a result, equity in earnings of
associated companies for the years 2005, 2004, and 2003 was understated by
$13 million, $11 million, and $7 million, respectively.
.. Accretion on the cash portion of the asbestos settlement offer was
incorrectly recorded as interest expense resulting in both an overstatement
of interest expense and an understatement of asbestos settlement expense
for the years 2005, 2004, and 2003, by $8 million, $8 million, and $5
million, respectively.
In the restated financial statements, the higher asbestos settlement charges
have been tax-effected in 2003 and the first half of 2004. As Corning provided a
valuation allowance on most of its deferred tax assets in the third quarter of
2004, that quarter reflects an increase in the valuation allowance of $55
million for the deferred tax assets related to the higher asbestos settlement
charges.
The cumulative effect of these adjustments to Corning's balance sheet as of
March 31, 2005, resulted in an increase in investments in affiliate companies of
$26 million, an increase to other accrued liabilities of $143 million, an
increase to accumulated deficit of $122 million, and an increase to accumulated
other comprehensive income of $5 million.
The cumulative effect of these adjustments to Corning's balance sheet as of
December 31, 2004, resulted in an increase in investments in affiliate companies
of $26 million, an increase to other accrued liabilities of $141 million, an
increase to accumulated deficit of $123 million, and an increase to accumulated
other comprehensive income of $8 million.
The impacts of the restatement adjustments on Corning's financial statements are
as follows:
Consolidated Statements of Operations
Summary of Restatement Impacts
(Unaudited; in millions, except per share amounts)
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For the three months ended
March 31, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Operating expenses:
Asbestos settlement $ (16) $ 4 $ (12)
Operating income (loss) 139 (4) 135
Interest expense 37 (2) 35
Income (loss) from before income taxes 103 (2) 101
Provision for income taxes (19) (19)
-------- --------- ---------
Income (loss) before minority interests and equity earnings 84 (2) 82
Equity in earnings of associated companies, net of impairments 166 3 169
Net income $ 249 $ 1 $ 250
Basic earnings per common share $ 0.18 $ 0.18
Diluted earnings per common share $ 0.17 $ 0.17
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For the three months ended
March 31, 2004
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Operating expenses:
Asbestos settlement $ 19 $ 3 $ 22
Operating loss (7) (3) (10)
Interest expense 36 (2) 34
Loss before income taxes (64) (1) (65)
Benefit for income taxes 12 1 13
-------- --------- ---------
Loss before minority interests and equity earnings (52) (52)
Equity in earnings of associated companies, net of impairments 107 1 108
Net income $ 55 $ 1 $ 56
Basic earnings per common share $ 0.04 $ 0.04
Diluted earnings per common share $ 0.04 $ 0.04
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Consolidated Balance Sheets
Summary of Restatement Impacts
(Unaudited; in millions)
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As of March 31, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Investments $ 1,485 $ 26 $ 1,511
Total Assets $ 9,633 $ 26 $ 9,659
Other accrued liabilities $ 1,001 $ 143 $ 1,144
Total current liabilities $ 1,956 $ 143 $ 2,099
Total liabilities $ 5,416 $ 143 $ 5,559
Accumulated deficit $ (7,060) $ (122) $ (7,182)
Accumulated other comprehensive income $ 137 $ 5 $ 142
Total shareholders' equity $ 4,188 $ (117) $ 4,071
Total Liabilities and Shareholders' Equity $ 9,633 $ 26 $ 9,659
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As of December 31, 2004
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Investments $ 1,484 $ 26 $ 1,510
Total Assets $ 9,744 $ 26 $ 9,770
Other accrued liabilities $ 1,178 $ 141 $ 1,319
Total current liabilities $ 2,338 $ 141 $ 2,479
Total liabilities $ 5,899 $ 141 $ 6,040
Accumulated deficit $ (7,309) $ (123) $ (7,432)
Accumulated other comprehensive income $ 148 $ 8 $ 156
Total shareholders' equity $ 3,816 $ (115) $ 3,701
Total Liabilities and Shareholders' Equity $ 9,744 $ 26 $ 9,770
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Consolidated Statements of Cash Flows
Summary of Restatement Impacts
(Unaudited; in millions)
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For the three months ended
March 31, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Cash Flows from Operating Activities:
Net income $ 249 $ 1 $ 250
Adjustments to reconcile loss from continuing operations to net
cash (used in) provided by operating activities:
Asbestos settlement charge (16) 4 (12)
Undistributed earnings of associated companies (23) (3) (26)
Other, net 34 (2) 32
Net cash provided by operating activities $ 142 $ 142
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For the three months ended
March 31, 2004
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Cash Flows from Operating Activities:
Net income $ 55 $ 1 $ 56
Adjustments to reconcile loss from continuing operations to net
cash (used in) provided by operating activities:
Asbestos settlement charge 19 3 22
Undistributed earnings of associated companies (29) (1) (30)
Deferred taxes (40) (1) (41)
Other, net (1) (2) (3)
Net cash provided by operating activities $ 45 $ 45
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3. Restructuring, Impairment and Other Charges and (Credits)
2005 Actions
In the first quarter of 2005, we recorded a $19 million impairment charge for an
other than temporary decline in the fair value of our investment in Avanex
Corporation (Avanex) below its cost basis. Our investment in Avanex is accounted
for as an available-for-sale security under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." At March 31, 2005, shares of
Avanex stock were trading at $1.30 per share compared to our average cost basis
of $2.40 per share. We intend to sell our shares of Avanex and, subject to
restrictions and the trading volume in Avanex stock, we expect to complete this
activity in early 2006. As we do not expect the market value of the Avanex
shares to recover in this timeframe, the impairment in the first quarter was
required.
The following table illustrates the charges, credits and balances of the
restructuring reserves as of and for the three months ended March 31, 2005 (in
millions):
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Quarter Remaining
ended March Cash reserve at
January 1, 31, 2005 payments March 31,
2005 charge in 2005 2005
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Restructuring charges:
Employee related costs $ 18 $ 5 $ 13
Other charges 77 4 73
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Total restructuring charges $ 95 $ 9 $ 86
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Other:
Impairment of available-for-sale securities $ 19
-------
Total restructuring, impairment and other charges and (credits) $ 19
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Cash payments for employee related costs will be substantially complete by the
end of 2005, while payments for exit activities will be substantially completed
by the end of 2008.
2004 Actions
In the first quarter of 2004, we recorded net charges of $34 million included in
restructuring, impairment and other charges and (credits). A summary of these
charges and credits follow:
.. We recorded $39 million of accelerated depreciation and $1 million of exit
costs relating to the final shutdown of our semiconductor materials
manufacturing facility in Charleston, South Carolina, which we announced in
the fourth quarter of 2003.
.. We recorded credits of $6 million, primarily related to proceeds in excess
of assumed salvage values for assets that were previously impaired.
The following table illustrates the charges, credits and balances of the
restructuring reserves as of and for the three months ended March 31, 2004 (in
millions):
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Quarter Remaining
ended March Revisions Net Cash reserve at
January 1, 31, 2004 to existing charges/ payments March 31,
2004 charge plans (reversals) in 2004 2004
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Restructuring charges:
Employee related costs $ 78 $ (28) $ 50
Other charges 108 $ 1 $ 1 (6) 103
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Total restructuring charges $ 186 $ 1 $ 1 $ (34) $ 153
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Impairment of long-lived assets:
Assets to be disposed of by sale
or abandonment $ (6) $ (6)
Other:
Accelerated depreciation $ 39 $ 39
------------------------------------------
Total restructuring, impairment and
other charges and (credits) $ 40 $ (6) $ 34
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4. Commitments and Contingencies
Asbestos Settlement
On March 28, 2003, we announced that we had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future asbestos claims against us and Pittsburgh Corning Corporation (PCC),
which might arise from PCC products or operations. The proposed settlement, if
the plan is approved and becomes effective, will require Corning to relinquish
its equity interest in PCC, contribute its equity interest in Pittsburgh Corning
Europe N.V. (PCE), a Belgian corporation, and contribute 25 million shares of
Corning common stock. Corning also agreed to make cash payments with a value of
$131 million, in March 2003, over six years from the effective date of the
settlement and to assign certain insurance policy proceeds from its primary
insurance and a portion of its excess insurance at the time of the settlement.
The PCC Plan received a favorable vote from creditors in March 2004. Hearings to
consider objections to the PCC Plan were held in the Bankruptcy Court in May
2004. The parties filed post-hearing briefs and made oral arguments to the
Bankruptcy Court in November 2004. The Bankruptcy Court allowed an additional
round of briefing to address current case law developments and heard additional
oral arguments on March 16, 2005. In mid-April 2005, the proponents of the PCC
Plan requested that the court rule on the pending objections. If the Bankruptcy
Court does not approve the PCC Plan in its current form, changes to the Plan are
probable as it is likely that the Court will allow the proponents time to
propose amendments. The outcome of these proceedings is uncertain, and
confirmation of the current Plan or any amended Plan is subject to a number of
contingencies. However, apart from the quarterly mark-to-market adjustment in
the value of the 25 million shares of Corning stock, management believes that
the likelihood of a material adverse impact to Corning's financial statements is
remote.
As discussed in Note 2 (Restatement of Prior Period Financial Statements) we
have restated prior period financial statements to correct the accounting
related to the asbestos settlement.
In the first quarter of 2005, we recorded a credit to the asbestos settlement of
$12 million, including $16 million reflecting the decrease in the value of
Corning's common stock from December 31, 2004 to March 31, 2005, and $4 million
to adjust the estimated fair value of the other components of the proposed
asbestos settlement.
In the first quarter of 2004, we recorded asbestos settlement expense of $22
million, including $19 million for the increase in the value of Corning's common
stock from December 31, 2003 to March 31, 2004, and a $3 million charge to
adjust the estimated fair value of the other components of the proposed asbestos
settlement.
Since March 28, 2003, we have recorded total net charges of $588 million to
reflect the initial settlement liability and subsequent adjustments for the
change in the fair value of the components of the liability.
The fair value of the liability expected to be settled by contribution of our
investment in PCE, the fair value of 25 million shares of our common stock and
assigned insurance proceeds (in aggregate totaling $442 million at March 31,
2005) is recorded in other accrued liabilities in our consolidated balance
sheets. As the timing of this obligation's settlement will depend on future
judicial rulings (i.e., controlled by a third party and not Corning), this
portion of the PCC liability is considered a "due on demand" obligation.
Accordingly, this portion of the obligation has been classified as a current
liability, even though it is possible that the contribution could be made beyond
one year. The remaining portion of the settlement liability (totaling $146
million at March 31, 2005), representing the net present value of the cash
payments, is recorded in the other liabilities component in our consolidated
balance sheets.
Other Commitments and Contingencies
We provide financial guarantees and incur contingent liabilities in the form of
purchase price adjustments related to attainment of milestones, stand-by letters
of credit and performance bonds. These guarantees have various terms, and none
of these guarantees are individually significant. We have also agreed to provide
a credit facility to Dow Corning Corporation (Dow Corning) as discussed in Note
8 to the consolidated financial statements in our 2004 Form 10-K. The funding of
the Dow Corning $150 million credit facility is subject to events connected to
the Bankruptcy Plan. As of March 31, 2005, we were contingently liable for the
items described above totaling $364 million, compared with $368 million at
December 31, 2004. We believe a significant majority of these guarantees and
contingent liabilities will expire without being funded.
From time to time, we are subject to uncertainties and litigation and are not
always able to predict the outcome of these items with assurance. Various legal
actions (including the PCC matter discussed previously), claims and proceedings
are pending against us, including those arising out of alleged product defects,
product warranties, patents, asbestos and environmental matters. In the opinion
of management, the ultimate disposition of these matters will not have a
material adverse effect on Corning's consolidated financial position, liquidity
or results of operations.
5. Income Taxes
Our (provision) benefit for income taxes and the related tax rates follow (in
millions):
--------------------------------------------------------------------------------
For the three months ended March 31,
--------------------------------------
2005 2004
(Restated) (Restated)
--------------------------------------------------------------------------------
(Provision) benefit for income taxes $ (19) $ 13
Effective (income tax) benefit rate (18.8)% (20.0)%
--------------------------------------------------------------------------------
For the three months ended March 31, 2005, the tax provision reflected the
impact of maintaining a valuation allowance on the majority of net deferred tax
assets. As a result, U.S. (federal, state and local) and certain foreign income
taxes attributable to pre-tax income or losses were not provided. The $19
million income tax provision included income taxes for certain foreign
operations that were favorably impacted by tax holiday benefits and investment
tax credits. For the U.S. and certain foreign operations, the income tax
provision or benefit attributable to pre-tax income or losses was recorded as an
adjustment to the valuation allowance.
At March 31, 2005, we had net deferred tax assets of $535 million, which are
primarily U.S. net deferred tax assets. We continue to believe it is more likely
than not that we could realize these U.S. net deferred tax assets through a
tax-planning strategy involving the sale of a non-strategic appreciated asset.
We expect to maintain a valuation allowance on future tax benefits until an
appropriate level of profitability, primarily in the U.S. and Germany, is
sustained or we are able to develop tax planning strategies that enable us to
conclude that it is more likely than not that a larger portion of our deferred
tax assets would be realizable, or if the PCC settlement is finalized earlier
than we anticipate. Until then, our tax provision will include only the net tax
expense attributable to certain foreign operations and the expense or benefit
from U.S. and certain foreign operations will be recorded as an adjustment to
the valuation allowance.
The effective benefit rate for the three months ended March 31, 2004 is lower
than the U.S. statutory income tax rate of 35%. Our effective benefit rate was
impacted by restructuring, impairment and other charges and (credits), asbestos
settlement charges and loss on repurchases and retirement of debt.
6. Earnings Per Common Share
The reconciliation of the amounts used in the basic and diluted earnings per
common share computations follow (in millions, except per share amounts):
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended March 31,
-----------------------------------------------------------------------------------
2005 (Restated) 2004 (Restated)
---------------------------------------- ----------------------------------------
Net Weighted- Per Share Net Weighted- Per Share
Income Average Shares Amount Income Average Shares Amount
------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 250 1,411 $ 0.18 $ 56 1,358 $ 0.04
------------------------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Stock options 31 37
7% mandatory convertible preferred stock 32 42
3.50% convertible debentures 2 29
------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 252 1,503 $ 0.17 $ 56 1,437 $ 0.04
------------------------------------------------------------------------------------------------------------------------------------
The following potential common shares were excluded from the calculation of
diluted earnings per common share due to their anti-dilutive effect or, in the
case of stock options, because their exercise price was greater than the average
market price for periods presented (in millions):
--------------------------------------------------------------------------------
For the three months ended March 31,
------------------------------------
2005 2004
--------------------------------------------------------------------------------
Potential common shares excluded from
the calculation of diluted earnings
per common share:
3.50% convertible debentures 57
4.875% convertible notes 6 6
Zero coupon convertible debentures 3 4
-------- --------
Total 9 67
======== ========
Stock options excluded from the calculation
of diluted earnings (loss) per share
because the exercise price was greater
than the average market price of the
common shares 63 55
--------------------------------------------------------------------------------
7. Inventories
Inventories comprise the following (in millions):
--------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
--------------------------------------------------------------------------------
Finished goods $ 157 $ 136
Work in process 170 172
Raw materials and accessories 137 139
Supplies and packing materials 98 88
--------------------------------------------------------------------------------
Total inventories $ 562 $ 535
--------------------------------------------------------------------------------
8. Investments
Investments comprise the following (in millions):
------------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
Ownership 2005 2004
Interest (Restated) (Restated)
----------- ---------- ------------
Associated companies at equity
Samsung Corning Precision Glass Co., Ltd. 50% $ 562 $ 572
Dow Corning 50% 373 324
All other 25%-51% (a) 547 553
------- -------
1,482 1,449
Other investments (b) 29 61
------- -------
Total $ 1,511 $ 1,510
------------------------------------------------------------------------------------------------------------------------------------
(a) Amounts reflect Corning's direct ownership interests in the respective
associated companies. Corning does not control any such entities.
(b) Amounts reflect $22 million and $53 million at March 31, 2005 and December
31, 2004, respectively, of available-for-sale securities stated at market.
During the first quarter of 2005, Corning recorded an impairment charge of
$19 million for an other than temporary decline in the fair value of shares
of Avanex below their cost basis. This included the reversal of previously
unrecognized gains on Avanex shares of $14 million included in accumulated
other comprehensive income at December 31, 2004 on the consolidated balance
sheet. Refer to Note 3 (Restructuring, Impairment and Other Charges and
(Credits)) for additional information.
Summarized results of operations for our 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 of liquid crystal
display glass for flat panel displays. Samsung Corning Precision's results of
operations follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended March 31,
------------------------------------
2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 317 $ 235
Gross profit $ 237 $ 179
Net income $ 165 $ 126
Corning's equity in earnings of Samsung Corning Precision $ 80 $ 65
Related Party Transactions:
Corning sales of inventory to Samsung Corning Precision $ 6
Corning purchases from Samsung Corning Precision $ 9 $ 22
Corning sales of machinery and equipment to Samsung Corning Precision $ 20 $ 23
------------------------------------------------------------------------------------------------------------------------------------
Balances due to and from Samsung Corning Precision were immaterial at March 31,
2005 and December 31, 2004.
Dow Corning
-----------
Dow Corning is a U.S. based manufacturer of silicone products. Dow Corning's
results of operations follow (in millions):
--------------------------------------------------------------------------------
For the three months ended March 31,
------------------------------------
2005 2004
--------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 983 $ 814
Gross profit $ 346 $ 230
Net income $ 136 $ 52
Corning's equity in earnings
of Dow Corning $ 68 $ 24
--------------------------------------------------------------------------------
9. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the three months ended March
31, 2005 follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Telecom- Display
munications Technologies Other (1) Total
------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2005 $ 123 $ 9 $ 150 $ 282
Foreign currency translation & other (5) (5)
------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2005 $ 118 $ 9 $ 150 $ 277
------------------------------------------------------------------------------------------------------------------------------------
(1) This balance relates to our Specialty Materials operating segment.
Other intangible assets follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
-------------------------------------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Patents and trademarks $ 146 $ 81 $ 65 $ 148 $ 79 $ 69
Non-competition agreements 115 115 118 116 2
Other 4 1 3 4 1 3
----------------------------------- -----------------------------------
Total amortized intangible assets 265 197 68 270 196 74
----------------------------------- -----------------------------------
Unamortized intangible assets:
Intangible pension assets 42 42 42 42
----------------------------------- -----------------------------------
Total $ 307 $ 197 $ 110 $ 312 $ 196 $ 116
------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets are primarily related to the Telecommunications
segment.
Estimated amortization expense related to these intangible assets is $13 million
in 2006, $12 million in 2007, $11 million in 2008, and insignificant thereafter.
10. Debt
In the first quarter of 2005, we completed the following debt transactions:
.. We obtained a loan of approximately $48 million, bearing interest at 2.1%,
from a Japanese bank. This loan is part of a 10-year loan agreement entered
into in 2004 to fund certain capital expansion activities in Japan.
.. We redeemed $100 million of our outstanding 3.50% convertible debentures.
The bondholders affected by this redemption elected to convert $98 million
of their debentures into Corning common stock at a conversion ratio of
103.3592 shares per $1,000 debenture, with the remaining $2 million repaid
in cash. Separately, bondholders elected to convert approximately $6
million of outstanding debentures into Corning common stock. In total, we
issued 11 million shares upon the conversion of the debentures, resulting
in an increase to equity of $105 million. At March 31, 2005, $191 million
of our 3.50% convertible debentures remained outstanding. We expect to
redeem these debentures, subject to market conditions, before December 31,
2005.
.. We repaid a total of $192 million of notes in accordance with their stated
repayment schedule. This was primarily comprised of our 5.625% Euro notes.
In addition, in the first quarter of 2005, we completed negotiations with a
group of banks on a new revolving credit facility. The new facility provides us
access to a $975 million unsecured multi-currency revolving line of credit and
expires in March 2010. The facility includes two financial covenants, including
a leverage test (debt to capital ratio) and an interest coverage ratio
(calculated on the most recent four quarters). As of March 31, 2005, we were in
compliance with these covenants. Concurrent with the closing of this credit
facility, we terminated our previous $2 billion revolving line of credit that
was set to expire in August 2005.
11. Customer Deposits
In 2005 and 2004, Corning and several customers entered into long-term purchase
and supply agreements in which the Display Technologies segment will supply
large-size glass substrates to the customers over periods of up to six years. As
part of the agreements, these customers have agreed to make advance cash
deposits to Corning for a portion of the contracted glass to be purchased.
During the current year, we received a total of $108 million of deposits against
orders, of which $20 million was received in the first quarter. Upon receipt of
the cash deposits made by customers, we record a customer deposit liability,
which will be applied in the form of credits against future product purchases
over the life of the agreements. As product is shipped to a customer, Corning
will recognize revenue at the selling price and issue a credit memorandum for an
agreed amount of the customer deposit liability. The credit memorandum will be
applied against customer receivables resulting from the sale of product, thus
reducing operating cash flows in later periods as credits are applied for cash
deposits received in earlier periods.
Customer deposits will be received in the following periods (in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the three
months ended Remainder Estimated 2006
2004 March 31, 2005 of 2005 and Beyond Total
------------------------------------------------------------------------------------------------------------------------------------
Customer deposits received (a) $ 204 $ 20 $ 463 $ 295 $ 982
------------------------------------------------------------------------------------------------------------------------------------
(a) The majority of customer deposits will be received through 2006.
We had total customer deposit liabilities of $228 million and $215 million at
March 31, 2005 and December 31, 2004, respectively, of which $40 million and $18
million were recorded in the current liabilities - other accrued liabilities
component of our consolidated balance sheets.
In the event the customers do not make all customer deposit installment payments
or elect not to purchase the agreed upon quantities of product, subject to
specific conditions outlined in the agreements, we may retain certain amounts of
the customer deposits. If we do not deliver agreed upon product quantities,
subject to specific conditions outlined in the agreements, we may be required to
return certain amounts of the customer deposits.
12. Employee Retirement Plans
The following table summarizes the components of net periodic benefit cost for
our defined benefit pension and postretirement health care and life insurance
plans (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Pension benefits Postretirement benefits
For the three months For the three months
ended March 31, ended March 31,
------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 16 $ 11 $ 2 $ 2
Interest cost 45 38 12 13
Expected return on plan assets (52) (43)
Amortization of net loss 1 6 1 3
Amortization of prior service cost 10 3 (2) (2)
------------------------------------------------------------------------------------------------------------------------------------
Total expense $ 20 $ 15 $ 13 $ 16
------------------------------------------------------------------------------------------------------------------------------------
For 2005, we expect to contribute at least $100 million in cash or stock to our
domestic and international pension plans.
13. Comprehensive Income
Components of comprehensive income, on an after-tax basis where applicable,
follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended March 31,
------------------------------------
2005 2004
(Restated) (Restated)
------------------------------------------------------------------------------------------------------------------------------------
Net income $ 250 $ 56
Other comprehensive income:
Change in unrealized gain (loss) on investments, net (33) 2
Reclassification adjustment relating to investments included in
net income, net 19
Change in unrealized gain (loss) on derivative instruments, net 26 (6)
Reclassification adjustment relating to derivatives, net (13) 7
Foreign currency translation adjustment, net (a) (15) 1
Change in minimum pension liability 2 (3)
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 236 $ 57
------------------------------------------------------------------------------------------------------------------------------------
(a) The initial implementation of our Taiwan subsidiary's change in its
functional currency from the new Taiwan dollar to the Japanese yen
effective January 1, 2005 had the effect of increasing the U.S. dollar
value of its net assets and increasing accumulated other comprehensive
income by $23 million. The impact of this change is included in the foreign
currency translation adjustment, net amount.
14. Operating Segments
Our reportable operating segments follow:
.. Display Technologies - manufactures liquid crystal display glass for flat
panel displays;
.. Telecommunications - manufactures optical fiber and cable, and hardware and
equipment components for the telecommunications industry;
.. Environmental Technologies - manufactures ceramic substrates and filters
for automobile and diesel applications; and
.. Life Sciences - manufactures glass and plastic consumables for scientific
applications.
All other operating segments that do not meet the quantitative threshold for
separate reporting (e.g., Specialty Materials, Ophthalmic and Conventional Video
Components), certain corporate investments (e.g., Dow Corning and Steuben
Glass), discontinued operations, and unallocated expenses (including other
corporate items) have been grouped as "Unallocated and Other." Unallocated
expenses include the following: gains or losses on repurchases and retirement of
debt; charges related to the asbestos litigation; restructuring, impairment and
other charges and (credits) related to the corporate research and development or
staff organizations; and charges for increases in our tax valuation allowance.
Unallocated and Other also represents the reconciliation between the totals for
the reportable segments and our consolidated operating results.
------------------------------------------------------------------------------------------------------------------------------------
Operating Segments Display Telecom- Environmental Life Unallocated Consolidated
(in millions) Technologies munications Technologies Sciences and Other Total
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended March 31, 2005 (Restated)
Net sales $ 320 $ 427 $ 148 $ 74 $ 81 $ 1,050
Research, development and engineering
expenses (1) $ 25 $ 22 $ 26 $ 11 $ 14 $ 98
Restructuring, impairment and other charges
and (credits) $ 19 $ 19
Interest expense (2) $ 16 $ 11 $ 6 $ 1 $ 1 $ 35
(Provision) benefit for income taxes $ (17) $ (2) $ (19)
Income (loss) before minority interests and
equity earnings (3) $ 80 $ 9 $ (2) $ (2) $ (3) $ 82
Minority interests (1) (1)
Equity in earnings of associated
companies 81 88 169
------- -------- -------- ------- -------- --------
Net income (loss) $ 161 $ 9 $ (2) $ (2) $ 84 $ 250
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended March 31, 2004 (Restated)
Net sales $ 230 $ 312 $ 141 $ 79 $ 82 $ 844
Research, development and engineering
expenses (1) $ 16 $ 25 $ 20 $ 9 $ 14 $ 84
Restructuring, impairment and other charges
and (credits) $ (4) $ 38 $ 34
Interest expense (2) $ 11 $ 16 $ 5 $ 1 $ 1 $ 34
(Provision) benefit for income taxes $ (26) $ 23 $ (3) $ (3) $ 22 $ 13
Income (loss) before minority interests and
equity earnings (3) $ 53 $ (47) $ 6 $ 5 $ (69) $ (52)
Minority interests 1 (1)
Equity in earnings of associated
companies 65 3 40 108
------- -------- -------- ------- -------- --------
Net income (loss) $ 118 $ (43) $ 6 $ 5 $ (30) $ 56
------------------------------------------------------------------------------------------------------------------------------------
(1) Non-direct research, development and engineering expenses are allocated
based upon direct project spending for each segment.
(2) Interest expense is allocated to segments based on a percentage of segment
net operating assets. Consolidated subsidiaries with independent capital
structures do not receive additional allocations of interest expense.
(3) Many of Corning's administrative and staff functions are performed on a
centralized basis. Where practicable, Corning charges these expenses to
segments based upon the extent to which each business uses a centralized
function. Other staff functions, such as corporate finance, human resources
and legal are allocated to segments, primarily as a percentage of sales.
A reconciliation of reportable segment net income to consolidated net income
follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended March 31,
------------------------------------
2005 2004
(Restated) (Restated)
------------------------------------------------------------------------------------------------------------------------------------
Net income of reportable segments $ 166 $ 86
Non-reportable operating segments net income (loss) (1) 10 (18)
Unallocated amounts:
Non-segment loss and other (2) (1)
Non-segment restructuring, impairment and
other (charges) and credits (3) (19)
Asbestos settlement 12 (22)
Interest income 10 6
Loss on repurchases of debt (23)
Benefit for income taxes (4) 3
Equity in earnings of associated companies (5) 71 25
--------- ---------
Net income $ 250 $ 56
------------------------------------------------------------------------------------------------------------------------------------
(1) Non-reportable operating segments net income (loss) includes the results of
non-reportable operating segments.
(2) Non-segment loss and other includes the results of non-segment operations
and other corporate activities.
(3) For the first quarter of 2005, non-segment restructuring, impairment and
other (charges) and credits includes an impairment charge for the other
than temporary decline in the market value of Avanex shares.
(4) Benefit for income taxes includes taxes associated with non-segment
restructuring, impairment and other (charges) and credits.
(5) Equity in earnings of associated companies includes amounts derived from
corporate investments, primarily Dow Corning.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our key priorities for 2005 remain unchanged from the previous year: protect our
financial health, improve our profitability, and invest in the future. During
the first quarter of 2005, we made the following progress against these
priorities:
Financial Health
Our balance sheet remains strong and we continue to generate positive cash flows
from operating activities. Significant activities during the quarter included
the following:
.. We reduced outstanding debt by $279 million. This included the scheduled
repayment of $192 million of debt and the early retirement of $106 million
of long-term debt, the majority of which was converted into Corning common
stock. As a result of these transactions, our debt to capital ratio
declined to 36%.
.. We entered into additional multi-year customer supply agreements in the
Display Technologies segment, and received $108 million in deposits against
orders, of which $20 million was received in the first quarter.
.. We completed negotiations with a group of banks on a new revolving credit
facility. The new facility provides us access to a $975 million revolving
line of credit and expires in March 2010. This facility replaces our
previous $2 billion revolving line of credit facility that was set to
expire in August 2005.
We ended the first quarter of 2005 with $1.5 billion in cash, cash equivalents
and short-term investments. This represents a decrease of approximately $300
million from December 31, 2004, primarily due to capital spending in excess of
cash provided by operating activities and the net debt repayments.
Profitability
For the three months ended March 31, 2005, we generated net income of $250
million or $0.17 per share. This represents an improvement of $194 million over
the same period in 2004. This improvement in net income was primarily driven by
the following:
.. Growth in our Display Technologies segment, which continued to experience
strong market demand for LCD glass substrates. For 2005, net income for the
Display Technologies segment, including equity earnings from Samsung
Corning Precision Glass Co., Ltd. (Samsung Corning Precision), a South
Korea-based manufacturer of LCD glass substrates, increased $43 million, or
36%.
.. Improved performance in the Telecommunications segment. This segment
generated a modest profit of $9 million, which represented an improvement
of $52 million compared to the first quarter of 2004 net loss.
.. Strong equity earnings from Dow Corning Corporation (Dow Corning), a U.S.
based manufacturer of silicone products, of $68 million, which represented
a 183% increase over the amount recognized in the first quarter of 2004.
Investing in our Future
We continue to invest in a wide array of technologies, with our focus being LCD
glass substrates, diesel filters and substrates in response to tightening
emissions control standards, and optical fiber and cable and hardware and
equipment to enable fiber-to-the-premises.
Our research, development and engineering expenses have increased $14 million
compared to the first quarter of 2004, but are relatively constant as a
percentage of net sales. We believe our current spending levels are adequate to
enable us to execute our growth strategies.
Our capital expenditures are primarily focused on expanding manufacturing
capacity for LCD glass substrates in the Display Technologies segment and diesel
products in the Environmental Technologies segment. Total capital expenditures
for the first quarter of 2005 were $323 million, of which $283 million and $34
million was directed toward our Display Technologies and Environmental
Technologies segments, respectively.
Restatement of Prior Period Financial Statements
The Company's management and its audit committee concluded, on April 21, 2006,
that the Company would restate previously issued consolidated financial
statements to properly account for the asbestos settlement charges and liability
and for its investment in and equity earnings of Pittsburgh Corning Europe (PCE)
from March 31, 2003, through December 31, 2005. The Company also changed the
classification of accretion on a portion of the liability to be paid in cash
from interest expense to asbestos settlement charge for the same time period.
The cumulative effect of these adjustments to Corning's balance sheet as of
March 31, 2005, resulted in an increase in investments in affiliate companies of
$26 million, an increase to other accrued liabilities of $143 million, an
increase to accumulated deficit of $122 million, and an increase to accumulated
other comprehensive income of $5 million.
The cumulative effect of these adjustments to Corning's balance sheet as of
December 31, 2004, resulted in an increase in investments in affiliate companies
of $26 million, an increase to other accrued liabilities of $141 million, an
increase to accumulated deficit of $123 million, and an increase to accumulated
other comprehensive income of $8 million.
To correct these errors, the Company has restated its consolidated financial
statements and, on May 9, 2006, filed an amended Annual Report on Form 10-K/A
for the fiscal year ended December 31, 2005. In addition, on May 9, 2006, the
company filed amended reports on Form 10-Q/A for the quarters ended March 31,
2005, June 30, 2005, and September 31, 2005, to restate the financial periods
provided for those quarterly periods.
All information in this document reflects the impact of the restatement
described in Note 2 (Restatement of Prior Period Financial Statements) to the
consolidated financial statements
RESULTS OF OPERATIONS
Selected highlights for the first quarter were as follows (dollars in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended March 31,
------------------------------------ % Change
2005 2004 --------
(Restated) (Restated) 05 vs. 04
------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,050 $ 844 24%
Gross margin $ 429 $ 300 43%
(gross margin %) 41% 36%
Selling, general and administrative expenses $ 184 $ 160 15%
(as a % of net sales) 18% 19%
Research, development and engineering expenses $ 98 $ 84 17%
(as a % of net sales) 9% 10%
Restructuring, impairment and other charges and (credits) $ 19 $ 34 (44)%
(as a % of net sales) 2% 4%
Asbestos settlement $ (12) $ 22 (155)%
(as a % of net sales) (1)% 3%
Income (loss) before income taxes $ 101 $ (65) 255%
(as a % of net sales) 10% (8)%
(Provision) benefit for income taxes $ (19) $ 13 (246)%
(as a % of net sales) (2)% 2%
Equity in earnings of associated companies $ 169 $ 108 56%
(as a % of net sales) 16% 13%
Net income $ 250 $ 56 346%
(as a % of net sales) 24% 7%
------------------------------------------------------------------------------------------------------------------------------------
Net Sales
The net sales increase for the first quarter of 2005 was the result of demand
for products in our Telecommunications segment to support fiber-to-the-premises
projects and continued strong demand for LCD glass substrates in our Display
Technologies segment. The performance in all other segments of the company was
comparable to the year ago period. Movements in foreign exchange rates,
primarily the Japanese yen and Euro. Movements in foreign exchange rates,
primarily the Japanese yen and Euro, did not significantly impact the comparison
of net sales between 2005 and 2004.
Gross Margin
As a percentage of net sales, gross margin improved 5 points in the first
quarter of 2005. The improvement in overall dollars and as a percentage of net
sales was primarily driven by increased volume in our Telecommunications and
Display Technologies segments.
Selling, General and Administrative Expenses
The increase in selling, general and administrative expenses is primarily driven
by increases in compensation costs. As a percentage of net sales, selling,
general and administrative expenses have remained comparable to the year ago
period.
Research, Development and Engineering Expenses
Research, development and engineering expenses have increased $14 million over
2004, but have remained comparable as a percentage of net sales. Our
expenditures are focused on our Environmental Technologies, Display Technologies
and Telecommunications segments as we strive to capitalize on the current market
opportunities in those segments.
Restructuring, Impairment and Other Charges and (Credits)
In the first quarter of 2005, we recorded a $19 million impairment charge for an
other than temporary decline in the fair value of our investment in Avanex
Corporation (Avanex) below its cost basis. Our investment in Avanex is accounted
for as an available-for-sale security under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." At March 31, 2005, shares of
Avanex stock were trading at $1.30 per share compared to our average cost basis
of $2.40 per share. We intend to sell our shares of Avanex and, subject to
restrictions and the trading volume in Avanex stock, we expect to complete this
activity in early 2006. As we do not expect the market value of the Avanex
shares to recover in this timeframe, the impairment in the first quarter was
required. The charge in the first quarter of 2004 was primarily due to the final
shutdown of our semiconductor manufacturing facility in Charleston, South
Carolina.
Asbestos Settlement
The asbestos settlement activity relates to changes in the estimated fair value
of certain items to be contributed by Corning under the Pittsburgh Corning
Corporation (PCC) asbestos settlement agreement if the PCC Plan of
Reorganization receives judicial approval. For additional information on this
matter, refer to Note 4 (Commitments and Contingencies) to the consolidated
financial statements and Part II - Other Information, Item 1. Legal Proceedings.
Income (Loss) Before Income Taxes
In addition to the key drivers outlined above, the comparability of income
(loss) before income taxes between 2005 and 2004 was impacted by movements in
foreign exchange rates. In the first quarter of 2005, we incurred an exchange
rate loss of $26 million. This exchange rate loss was due to the impact of
currency movements on unhedged balance sheet exposures, most notably at our
Taiwan subsidiary which changed its functional currency from the new Taiwan
dollar (its local currency) to the Japanese yen in the first quarter of 2005.
Refer to Note 1 to the consolidated financial statements for additional
information. Movements in exchange rates did not significantly impact results
for the first quarter of 2004.
(Provision) Benefit for Income Taxes
Our (provision) benefit for income taxes and the related tax rates follow (in
millions):
--------------------------------------------------------------------------------
For the three months ended March 31,
------------------------------------
2005 2004
(Restated) (Restated)
--------------------------------------------------------------------------------
(Provision) benefit for income taxes $ (19) $ 13
Effective (income tax) benefit rate (18.8)% (20.0)%
--------------------------------------------------------------------------------
For the three months ended March 31, 2005, the tax provision reflected the
impact of maintaining a valuation allowance on the majority of net deferred tax
assets. As a result, U.S. (federal, state and local) and certain foreign income
taxes attributable to pre-tax income were not provided. The $19 million income
tax provision included income taxes for certain foreign operations that were
favorably impacted by tax holiday benefits and investment tax credits. For the
U.S. and certain foreign operations, the income tax provision or benefit
attributable to pre-tax income or losses was recorded as an adjustment of the
valuation allowance.
At March 31, 2005, we had net deferred tax assets of $535 million, which are
primarily U.S. net deferred tax assets. We continue to believe it is more likely
than not that we could realize these U.S. net deferred tax assets through a
tax-planning strategy involving the sale of a non-strategic appreciated asset.
We expect to maintain a valuation allowance on future tax benefits until an
appropriate level of profitability, primarily in the U.S. and Germany, is
sustained or we are able to develop tax planning strategies that enable us to
conclude that it is more likely than not that a larger portion of our deferred
tax assets would be realizable, or if the Pittsburgh Corning Corporation
settlement is finalized earlier than we anticipate. Until then, our tax
provision will include only the net tax expense attributable to certain foreign
operations and the expense or benefit from U.S. and certain foreign operations
will be recorded as an adjustment to the valuation allowance.
The effective benefit rate for the three months ended March 31, 2004 is lower
than the U.S. statutory income tax rate of 35%. Our effective benefit rate was
impacted by restructuring, impairment and other charges and (credits), asbestos
settlement charges and loss on repurchases and retirement of debt.
Equity in Earnings of Associated Companies
The following provides a summary of equity in earnings of associated companies,
net of impairments (in millions):
--------------------------------------------------------------------------------
For the three months ended March 31,
------------------------------------
2005 2004
(Restated) (Restated)
--------------------------------------------------------------------------------
Samsung Corning Precision $ 80 $ 65
Dow Corning 68 24
All other 21 19
------ -------
Total equity earnings $ 169 $ 108
--------------------------------------------------------------------------------
The improvement in equity earnings recognized from Samsung Corning Precision is
explained in the discussion of the performance of our Display Technologies
segment. The increase in 2005 equity earnings recognized from Dow Corning
compared to 2004 is largely attributed to record sales volumes and improved
pricing for Dow Corning in 2005.
Refer to Note 8 to the consolidated financial statements for additional
information relating to Samsung Corning Precision and Dow Corning's operating
results.
Net Income
As a result of the above, our net income and per share data follow (in millions,
except per share amounts):
--------------------------------------------------------------------------------
For the three months ended March 31,
------------------------------------
2005 2004
(Restated) (Restated)
--------------------------------------------------------------------------------
Net income $ 250 $ 56
Basic earnings per common share $ 0.18 $ 0.04
Diluted earnings per common share $ 0.17 $ 0.04
Shares used in computing per share amounts:
Basic 1,411 1,358
Diluted 1,503 1,437
--------------------------------------------------------------------------------
OPERATING SEGMENTS
Our reportable operating segments follow:
.. 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 automobile and diesel applications; and
.. Life Sciences - manufactures glass and plastic consumables for scientific
applications.
All other operating segments that do not meet the quantitative threshold for
separate reporting (e.g., Specialty Materials, Ophthalmic and Conventional Video
Components), certain corporate investments (e.g., Dow Corning and Steuben
Glass), discontinued operations, and unallocated expenses (including other
corporate items) have been grouped as "Unallocated and Other." Unallocated
expenses include the following: gains or losses on repurchases and retirement of
debt; charges related to the asbestos litigation; restructuring, impairment and
other charges and (credits) related to the corporate research and development or
staff organizations; and charges for increases in our tax valuation allowance.
Unallocated and Other also represents the reconciliation between the totals for
the reportable segments and our consolidated operating results.
Display Technologies
The following table provides net sales and other data for the Display
Technologies segment (in millions):
----------------------------------------------------------------------------------------------------------
For the three months ended March 31, % Change
------------------------------------ --------
2005 2004 05 vs. 04
----------------------------------------------------------------------------------------------------------
Net sales $ 320 $ 230 39%
Income before equity earnings $ 80 $ 53 51%
Equity earnings of associated companies $ 81 $ 65 25%
Net income $ 161 $ 118 36%
----------------------------------------------------------------------------------------------------------
The 2005 net sales increase is largely reflective of the overall LCD market
growth. During the first quarter of 2005, glass substrate volumes (measured in
square feet of glass sold) increased approximately 35%. Weighted average selling
prices increased modestly compared to 2004. Included in this weighted average
were selling price declines that were more than offset by increases in the
market demand for large-size glass substrates (generation 5 and above), which
carry a higher selling price per square foot. For the first quarter of 2005,
large-size glass substrates accounted for 58% of total sales volumes, compared
to 34% for the first quarter of 2004. The sales of the Display Technologies
segment are denominated in Japanese yen and, as such, our revenues are
susceptible to movements in the US dollar - Japanese yen exchange rates. Sales
growth benefited by approximately 3% from a weakening of the U.S. dollar
compared to 2004.
For 2005, the increase in income before equity earnings was the result of higher
volumes and ongoing improvements in manufacturing efficiencies. Net income
before equity earnings for the first quarter of 2005, includes approximately $20
million of exchange losses related to foreign currency denominated transactions.
The impact of this loss on the comparability of results was largely offset by a
lower effective tax rate in 2005 than in 2004. The increase in our equity
earnings from Samsung Corning Precision were largely driven by the same factors
identified for our wholly-owned business, excluding the foreign exchange loss.
The Display Technologies segment continues to have a concentrated customer base
comprised of LCD panel makers primarily located in Japan and Taiwan. The most
significant customers in these markets are AU Optronics Corp., Chi Mei
Optoelectronics Corp., Hannstar Display Corp., Quanta Display Inc., Sharp
Corporation, and Toppan CFI (Taiwan) Co., Ltd. For the three months ended March
31, 2005, these customers accounted for 79% of the Display Technologies segment
sales.
We expect the LCD market to continue to grow rapidly. We anticipate higher
demand for LCD televisions, for which our customers require large-size glass
substrates. During 2005 and 2004, Corning held discussions with several of its
customers to discuss how to meet this demand. As part of its discussions,
Corning has sought improved payment terms, including deposits against orders, to
provide a greater degree of assurance that we are effectively building capacity
to meet the needs of a rapidly growing industry.
In 2005 and 2004, Corning and several customers entered into long-term purchase
and supply agreements in which the Display Technologies segment will supply
large-size glass substrates to the customers over periods of up to six years. As
part of the agreements, these customers have agreed to make advance cash
deposits to Corning for a portion of the contracted glass to be purchased. We
now have customer deposit agreements with five customers of the Display
Technologies segment.
In the event the customers do not make all customer deposit installment payments
or elect not to purchase the agreed upon quantities of product, subject to
specific conditions outlined in the agreements, Corning may retain certain
amounts of the customer deposits. If Corning does not deliver agreed upon
product quantities, subject to specific conditions outlined in the agreements,
Corning may be required to return certain amounts of the customer deposits.
Outlook:
--------
We expect to see a continuation of the overall industry growth and the trend
toward large size substrates. Full year 2005 volume growth for the LCD glass
market is anticipated to be greater than 50%, and we anticipate adding
sufficient capacity to meet market growth. This market growth is expected to
occur at varying rates in the principal LCD markets of Japan, Taiwan, China and
Korea. Sales of our wholly-owned business are primarily to panel manufacturers
in Japan, Taiwan, and China with customers in Korea being serviced by Samsung
Corning Precision. The actual growth rates in these markets will impact our
sales and earnings performance. For the second quarter of 2005, we expect
volumes for our wholly-owned business and Samsung Corning Precision may grow
between 10% and 20%, both individually and in the aggregate. We expect second
quarter pricing pressures to be slightly less than what occurred in the first
quarter, which experienced a sequential price decline of less than 4%. There can
be no assurance that the end-market rates of growth will continue at the high
rates experienced in recent quarters, that we will be able to pace our capacity
expansions to actual demand, or that the rate of cost declines will offset price
declines in any given period. While the industry has grown rapidly, consumer
preferences for panels of differing sizes, or price or other factors, may lead
to pauses in market growth, and it is possible that glass manufacturing capacity
may exceed demand from time to time. In addition, changes in foreign exchange
rates, principally the Japanese yen, will continue to impact the profitability
of this segment.
Telecommunications
The following table provides net sales and other data for the Telecommunications
segment (in millions):
--------------------------------------------------------------------------------
For the three months ended March 31, % Change
------------------------------------ ---------
2005 2004 05 vs. 04
--------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 212 $ 149 42%
Hardware and equipment 215 163 32%
--------- --------
Total net sales $ 427 $ 312 37%
========= ========
Net income (loss) $ 9 $ (43) 121%
--------------------------------------------------------------------------------
For the first quarter of 2005, fiber volumes increased 52% while prices declined
7% compared to the first quarter of 2004. The 2005 increase in fiber volumes was
largely driven by sales in North America and Europe, offset by lower volumes in
China. The stronger North America volumes were primarily due to increased sales
to Verizon Communications (Verizon) to support their fiber-to-the-premises
project. Sales to Verizon also accounted for the majority of the increase in
hardware and equipment product sales. In the first quarter of 2004, the
Telecommunications segment did not have any significant sales to Verizon for
their fiber-to-the-premises project. The lower volume in China was due to the
overall weakness in the market, which continues to suffer over capacity and
pricing pressure. Based on these market conditions, we have been unable to
regain the share we lost prior to the successful resolution of the 2004
anti-dumping preliminary determination. The comparison of sales of the
Telecommunications segment between 2005 and 2004 was negatively affected by the
2004 sale of our frequency controls business. During the first quarter of 2004,
the frequency controls business recorded sales of $22 million. Excluding the
impact of this divestiture, net sales for the Telecommunications segment
increased 47% for the first quarter of 2005 compared to the year ago period.
Movements in foreign exchange rates, primarily the Euro and Japanese yen, did
not have a significant impact on sales for 2005 compared to 2004.
Although showing a modest profit, the first quarter 2005 net income represented
a significant improvement over the loss incurred in the first quarter of 2004.
This improvement in performance is primarily driven by operational efficiencies
from the increase in sales volumes. Movements in exchange rates did not
significantly impact net income.
Outlook:
--------
For the second quarter of 2005, we expect net sales to increase approximately 5%
compared to those of the first quarter. This sales performance primarily
reflects typical seasonal increases in North America and Europe, as well as
ongoing demand from fiber-to-the-premises projects. For China, we do not
anticipate any significant recovery during the second quarter. We expect fiber
volumes to be flat to up 10% and moderate pricing declines. Segment net sales
continue to be impacted by Verizon's fiber-to-the-premises project. We expect
the second quarter level of sales to Verizon to decline due to expected price
declines as this program enters its second year. Second quarter sales volumes
should be approximately flat with the first quarter. However,
fiber-to-the-premises sales to Verizon could decline more significantly in the
third and fourth quarters unless Verizon raises its announced targets for homes
passed and connected. Potential changes in Verizon's inventory of
fiber-to-the-premises products could also affect the sales level.
Environmental Technologies
The following table provides net sales and other data for the Environmental
Technologies segment (in millions):
--------------------------------------------------------------------------------
For the three months ended March 31, % Change
------------------------------------ ---------
2005 2004 05 vs. 04
--------------------------------------------------------------------------------
Net sales:
Automotive $ 127 $ 125 2%
Diesel 21 16 31%
--------- --------
Total net sales $ 148 $ 141 5%
========= ========
Net (loss) income $ (2) $ 6 (133)%
--------------------------------------------------------------------------------
The 2005 increase in net sales is primarily the result of demand for our ceramic
filters and substrates for diesel emission control applications. We have
received several letters of intent from diesel engine manufacturers to supply
filters for their 2007 model year platforms, but they have not yet developed
into supply agreements. Negotiations with these diesel engine manufacturers will
continue through the next several quarters. For automotive products, volumes
were up slightly from 2004, and sales continue to benefit from a higher mix of
our thin-wall and ultra thin-wall substrates, which allow engine manufacturers
to meet increasingly tighter emissions control requirements in a more cost
effective manner. Strong sales to Asian auto manufacturers were largely offset
by weaker demand from U.S. auto manufacturers due to slowdowns in their
production. A portion of this segment's sales are susceptible to movements in
the U.S. dollar-Euro exchange rate. Movements in exchange rates did not have a
significant impact on sales for 2005 compared to 2004.
The 2005 decline in net income is primarily the result of increased development
costs and plant start-up costs to support our emerging diesel products. These
costs offset the gross margin benefits of increased volumes and the higher mix
of premium automotive products. Movements in exchange rates did not
significantly impact net income.
Outlook:
--------
For the second quarter of 2005, we expect net sales to be comparable to those of
the first quarter. For automotive products, we expect to see stable demand based
on anticipated worldwide auto production and a continuation of the shift to
premium products, although at slightly slower rates than 2004. A portion of our
automotive products are sold to U.S. auto manufacturers, and as a result,
further slowdowns in automotive production by these manufacturers could
adversely impact sales. Diesel product sales are expected to grow in the quarter
as the retrofit market is anticipated to remain strong. The retrofit market is
volatile, and any unanticipated declines in demand could adversely impact sales.
Life Sciences
The following table provides net sales and other data for the Life Sciences
segment (in millions):
--------------------------------------------------------------------------------
For the three months ended March 31, % Change
------------------------------------ --------
2005 2004 05 vs. 04
--------------------------------------------------------------------------------
Net sales $ 74 $ 79 (6)%
Net (loss) income $ (2) $ 5 (140)%
--------------------------------------------------------------------------------
The 2005 decrease in net sales is primarily due to volume decreases as a result
of the change in our distribution channel previously disclosed in our 2004
Annual Report on Form 10-K. Movements in foreign exchange rates, primarily the
Euro, did not have a significant impact on the comparability of sales.
The 2005 decrease in net income is largely attributable to the gross margin
impact from the lower sales volumes. Additionally, the Life Science segment
incurred higher operating expenses to implement the change in distribution
channels and to support new product development efforts.
Outlook:
--------
For the second quarter of 2005, we expect to see a modest decline in sales due
to the ongoing change in our distribution channel. The second quarter of 2005
will be the first full quarter of our channel migration as the distribution
agreement with one of our primary distributors expired in April. While we are
encouraged by the early results of our efforts to migrate sales previously made
through this distributor to our other primary distributor and other channels,
the adverse impact to sales is likely to increase in the second quarter of 2005.
There can be no assurance that we will be successful in migrating the majority
of our 2004 sales made through this distributor, as end user preferences for
distribution models, price or other factors may adversely impact sales in the
second half of 2005. For the full year, sales may be negatively impacted by as
much as 10% to 20% as a result of this change in our distribution channel.
LIQUIDITY AND CAPITAL RESOURCES
Customer Deposits
Certain customers of our Display Technologies segment have entered into
long-term supply agreements and agreed to make advance cash deposits to secure
supply of large-size glass substrates. The deposits will be applied in the form
of credits against future product purchases in later periods as credits are
applied for cash deposits received in earlier periods. For the current year, we
received a total of $108 million of deposits against orders, of which $20
million was received in the first quarter.
Customer deposits will be received in the following periods (in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the three
months ended Remainder Estimated 2006
2004 March 31, 2005 of 2005 and Beyond Total
------------------------------------------------------------------------------------------------------------------------------------
Customer deposits received (a) $ 204 $ 20 $ 463 $ 295 $ 982
------------------------------------------------------------------------------------------------------------------------------------
(a) The majority of customer deposits will be received through 2006.
Financing Structure
In the first quarter of 2005, we completed the following debt transactions:
.. We obtained a loan of approximately $48 million, bearing interest at 2.1%,
from a Japanese bank. This loan is part of a 10-year loan agreement entered
into in 2004 to fund certain capital expansion activities in Japan.
.. We redeemed $100 million of our outstanding 3.50% convertible debentures.
The bondholders affected by this redemption elected to convert $98 million
of their debentures into Corning common stock at a conversion ratio of
103.3592 shares per $1,000 debenture, with the remaining $2 million repaid
in cash. Separately, bondholders elected to convert approximately $6
million of outstanding debentures into Corning common stock. In total, we
issued 11 million shares upon the conversion of the debentures, resulting
in an increase to equity of $105 million. At March 31, 2005, $191 million
of our 3.50% convertible debentures remained outstanding. We expect to
redeem these debentures, subject to market conditions, before December 31,
2005.
.. We repaid a total of $192 million of notes in accordance with their stated
repayment schedule. This was primarily comprised of our 5.625% Euro notes.
In addition, in the first quarter of 2005 we completed negotiations with a group
of banks on a new revolving credit facility. The new facility provides us access
to a $975 million unsecured multi-currency revolving line of credit and expires
in March 2010. The facility includes two financial covenants, a leverage test
(debt to capital ratio not greater than 50%) and an interest coverage ratio of
no less than 3.5 times (calculated on the most recent four quarters). As of
March 31, 2005, our interest coverage ratio was 8.4 times, and our debt to
capital ratio was 36%. Concurrent with the closing of this credit facility, we
terminated our previous $2 billion revolving line of credit that was set to
expire in August 2005.
Capital Spending
Capital spending totaled $323 million during the three months ended March 31,
2005. Our 2005 forecasted consolidated capital spending remains at $1.2 billion
to $1.4 billion. Of this amount, $900 million to $1 billion will be directed
toward expanding manufacturing capacity for LCD glass substrates in the Display
Technologies segment and approximately $150 million will be directed toward our
Environmental Technologies segment.
Restructuring
During the three months ended March 31, 2005, we made payments of $5 million
related to employee severance and termination costs and $4 million in other exit
costs resulting from prior years' restructuring actions. We expect additional
payments to approximate $9 million in the second quarter of 2005 for actions
taken from 2001 through 2004.
Key Balance Sheet Data
Balance sheet and working capital measures are provided in the following table
(dollars in millions):
----------------------------------------------------------------------------------------------------------
As of March 31, As of December 31,
--------------- ------------------
2005 2004
(Restated) (Restated)
----------------------------------------------------------------------------------------------------------
Working capital $ 929 $ 804
Working capital, excluding cash and short-term investments $ (618) $ (1,077)
Current ratio 1.4:1 1.3:1
Trade accounts receivable, net of allowances $ 621 $ 585
Days sales outstanding 53 52
Inventories $ 562 $ 535
Inventory turns 4.8 4.9
Days payable outstanding 95 67
Long-term debt $ 2,125 $ 2,214
Total debt to total capital 37% 42%
----------------------------------------------------------------------------------------------------------
Credit Rating
There has been no change in our credit ratings from those disclosed in our 2004
Form 10-K:
--------------------------------------------------------------------------------
RATING AGENCY Rating Outlook
Last Update Long-Term Debt Last Update
--------------------------------------------------------------------------------
Fitch BB+ Positive
August 12, 2004 August 12, 2004
Standard & Poor's (a) BB+ Stable
July 29, 2002 January 16, 2004
Moody's Ba2 Positive
July 29, 2002 January 14, 2005
--------------------------------------------------------------------------------
(a) Standard & Poor's placed Corning's credit rating on Credit Watch with
positive implications on February 8, 2005.
Management Assessment of Liquidity
Our major source of funding for 2005 and beyond will be our existing balance of
cash, cash equivalents and short-term investments. From time to time, we may
also issue debt or equity securities for general corporate purposes. We believe
we have sufficient liquidity for the next several years to fund operations,
restructuring, the asbestos settlement, research and development, capital
expenditures and scheduled debt repayments.
Contractual Obligations
There have been no material changes outside the ordinary course of business in
the contractual obligations disclosed in our 2004 Annual Report on Form 10-K
under the caption "Contractual Obligations."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported therein. The estimates that
required management's most difficult, subjective or complex judgments are
described in our 2004 Annual Report on Form 10-K and remain unchanged through
the first quarter of 2005.
ENVIRONMENT
We have been named by the Environmental Protection Agency under the Superfund
Act, or by state governments under similar state laws, as a potentially
responsible party for 11 active hazardous waste sites. Under the Superfund Act,
all parties who may have contributed any waste to a hazardous waste site,
identified by such Agency, are jointly and severally liable for the cost of
cleanup unless the Agency agrees otherwise. It is our policy to accrue for the
estimated liability related to Superfund sites and other environmental
liabilities related to property owned and operated by us based on expert
analysis and continual monitoring by both internal and external consultants. We
have accrued $14 million for the estimated liability for environmental cleanup
and related litigation at March 31, 2005. Based upon the information developed
to date, we believe that the accrued amount is a reasonable estimate of our
liability and that the risk of an additional loss in an amount materially higher
than that accrued is remote.
FORWARD-LOOKING STATEMENTS
Many statements in this Quarterly Report on Form 10-Q are forward-looking
statements. These typically contain words such as "believes," "expects,"
"anticipates," "estimates," "forecasts," or similar expressions. These
forward-looking statements involve risks and uncertainties that may cause the
actual outcome to be materially different. Such risks and uncertainties include,
but are not limited to the following:
- global economic and political conditions;
- tariffs, import duties and currency fluctuations;
- product demand and industry capacity;
- competitive products and pricing;
- sufficiency of manufacturing capacity and efficiencies;
- availability and costs of critical components and materials;
- new product development and commercialization;
- order activity and demand from major customers;
- fluctuations in capital spending by customers;
- possible disruption in commercial activities due to terrorist activity,
armed conflict, political instability or major health concerns;
- facility expansions and new plant start-up costs;
- effect of regulatory and legal developments;
- capital resource and cash flow activities;
- ability to pace capital spending to anticipated levels of customer demand,
which may fluctuate;
- interest costs;
- credit rating and ability to obtain financing and capital on commercially
reasonable terms;
- adequacy and availability of insurance;
- financial risk management;
- capital spending;
- acquisition and divestiture activities;
- rate of technology change;
- level of excess or obsolete inventory;
- ability to enforce patents;
- adverse litigation;
- product and components performance issues;
- stock price fluctuations;
- rate of substitution by end-users purchasing LCDs for notebook computers,
desktop monitors and televisions;
- downturn in demand for LCD glass substrates;
- customer ability, most notably in the Display Technologies segment, to
maintain profitable operations and obtain financing to fund their
manufacturing expansions;
- fluctuations in supply chain inventory levels;
- equity company activities, principally at Dow Corning Corporation and
Samsung Corning Co., Ltd.; and
- other risks detailed in Corning's Securities and Exchange Commission
filings.
Risk factors
Current or future litigation may harm our financial condition or results of
operations
Pending, threatened or future litigation is subject to inherent
uncertainties. Our financial condition or results of operations may be adversely
affected by unfavorable outcomes, expenses and costs exceeding amounts estimated
or insured. In particular, we have been named as a defendant in numerous
lawsuits against PCC and several other defendants involving claims alleging
personal injury from exposure to asbestos. As described in Legal Proceedings,
our negotiations with the representatives of asbestos claimants have produced a
tentative settlement, but certain cases may still be litigated. Final approval
of a global settlement through the PCC bankruptcy process may impact the results
of operations for the period in which such costs, if any, are recognized. Total
charges of $588 million have been incurred through March 31, 2005; however,
additional charges are possible due to the potential fluctuation in the price of
our common stock, other adjustments in the proposed settlement, and other
litigation factors.
There have been no material changes to the other risk factors, noted in our
Annual Report on Form 10-K for the year ended December 31, 2004, during the
first three months of 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
There have been no material changes to our market risk exposures during the
first three months of 2005. For a discussion of our exposure to market risk,
refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risks,
contained in our 2004 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
(a) Restatement
As discussed in Note 2 to the consolidated financial statements contained
herein, the Company has restated its consolidated financial statements for the
years 2003 through 2005 and its quarterly consolidated financial statements for
each of the quarterly periods in the years ended December 31, 2005 and 2004.
Specifically, between March 31, 2003, and December 31, 2005, the following
accounting errors occurred:
.. Corning's asbestos settlement charges and the related liability for the
asbestos settlement did not reflect the estimated fair value at initial
recognition or subsequent changes in fair value, of certain components of
the proposed settlement offer. As a result, asbestos settlement charges for
the years 2005, 2004, and 2003 were understated by $13 million, $24
million, and $117 million, respectively.
.. Corning incorrectly suspended recording equity earnings of Pittsburgh
Corning Europe, N.V. between March 31, 2003, and December 31, 2005. As a
result, equity in earnings of affiliated companies for the years 2005,
2004, and 2003 was understated by $13 million, $11 million, and $7 million,
respectively.
.. Accretion on the cash portion of the asbestos settlement offer was
incorrectly recorded as interest expense resulting in both an overstatement
of interest expense and an understatement of asbestos settlement expense
for the years 2005, 2004, and 2003, by $8 million, $8 million, and $5
million, respectively.
In the restated consolidated financial statements, the higher asbestos
settlement charges are tax-effected in 2003 and the first half of 2004. As
Corning provided a valuation allowance on most of its deferred tax assets in the
third quarter of 2004, that quarter reflects an increase in the valuation
allowance of $55 million for the deferred tax assets related to the higher
asbestos settlement charges.
(b) Evaluation of disclosure controls and procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Securities Exchange Act of 1934 (the Exchange
Act) is accumulated and communicated to our management, including our principal
executive and principal financial officers, or other persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
In the first quarter of 2006, management identified errors in the accounting of
its Pittsburgh Corning Corporation (PCC) Asbestos Litigation liability and
investments in affiliates and as noted above, has recorded the necessary
adjustments in the unaudited interim consolidated financial statements for the
quarter ended March 31, 2006 to correct these errors and has restated previously
issued financial statements. In its Form 8-K filed on April 25, 2006, management
indicated that the evaluation of internal control over financial reporting
related to the above mentioned errors was still in process.
The evaluation has been completed, and management, under the direction of its
principal executive and principal financial officers, has re-evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2005. Based upon
this re-evaluation and as a result of the material weaknesses discussed below,
the Company's principal executive and principal financial officers, have
concluded that its disclosure controls and procedures were not effective as of
March 31, 2005.
A material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management determined that the following control deficiencies
constitute material weaknesses in internal control over financial reporting at
March 31, 2005:
(i) The Company did not maintain effective controls over the valuation of
its asbestos settlement charges and the valuation and reconciliation
of the related liability pertaining to the 2003 Pittsburgh Corning
Corporation Asbestos Litigation Bankruptcy Settlement. Specifically,
the Company did not maintain effective controls to ensure that certain
components of the liability, which may be settled by contributing the
Company's equity interest of Pittsburgh Corning Europe, N.V. and
assignment of rights to insurance proceeds, were appropriately
recorded at fair value rather than book value as required by generally
accepted accounting principles. This control deficiency resulted in
the restatement of our annual consolidated financial statements for
the years ended December 31, 2005, 2004, and 2003 and the quarterly
consolidated financial statements for each of the three quarterly
periods in the years ended December 31, 2005 and 2004. Additionally,
this control deficiency could result in a misstatement of our asbestos
settlement charges and related liability that would result in a
material misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected.
(ii) The Company did not maintain effective controls over the completeness
and accuracy of its equity investments. Specifically, the Company did
not maintain effective controls to ensure that earnings of its equity
investments were accurately and completely recorded. This control
deficiency resulted in the restatement of our annual consolidated
financial statements for the years ended December 31, 2005, 2004, and
2003 and the quarterly consolidated financial statements for each of
the three quarterly periods in the years ended December 31, 2005 and
2004. Additionally, this control deficiency could result in a
misstatement of our investments and equity in earnings of affiliated
companies that would result in a material misstatement to the annual
or interim consolidated financial statements that would not be
prevented or detected.
Plan for Remediation of Material Weaknesses - We believe the steps described
below, some of which have already been taken, will remediate the material
weaknesses described above.
.. We have enhanced the procedures and documentation associated with the
reconciliation of our PCC Asbestos Litigation liability in order to ensure
that all components are included in the evaluation process and are
accounted for in accordance with generally accepted accounting principles.
.. We have augmented the resources in our Accounting Services department that
will enable us to have a stronger segregation of duties associated with the
reconciliation of the PCC Asbestos Litigation liability account to ensure
1) the analysis and preparation of the reconciliation and 2) a detailed
review of this work is done by separate individuals who have the requisite
skill set and training.
.. We are in the process of updating our key controls within the Investments
in Affiliates cycle to specifically address 1) our ability to achieve full
inclusion of all less than 100% owned entities in our accounting analysis
of Investments in Affiliates and 2) to ensure proper monitoring and
accounting for these entities.
.. We are in the process of improving our investments in affiliates
reconciliation procedures and documentation in order to ensure 1) the
analysis and preparation of the reconciliation and 2) a detailed review of
the reconciliation is done by separate individuals who have the requisite
skill set and training.
As discussed above, since March 31, 2006, we are in the process of making
improvements to our internal control over financial reporting that have a
material effect, or are reasonably likely to materially affect, our internal
control over financial reporting and anticipate the control deficiencies
described above can be remediated on or before September 30, 2006.
(c) Changes in internal control over financial reporting
No changes in the Company's internal control over financial reporting occurred
during the quarter ending March 31, 2005 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
Environmental Litigation. Corning has been named by the Environmental Protection
Agency under the Superfund Act, or by state governments under similar state
laws, as a potentially responsible party at 11 active hazardous waste sites.
Under the Superfund Act, all parties who may have contributed any waste to a
hazardous waste site, identified by such Agency, are jointly and severally
liable for the cost of cleanup unless the Agency agrees otherwise. It is
Corning's policy to accrue for its estimated liability related to Superfund
sites and other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued $14 million for its estimated liability for
environmental cleanup and litigation at March 31, 2005. Based upon the
information developed to date, management believes that the accrued reserve is a
reasonable estimate of the Company's liability and that the risk of an
additional loss in an amount materially higher than that accrued is remote.
Schwinger and Stevens Toxins Lawsuits. In April 2002, Corning was named as a
defendant in two actions, Schwinger and Stevens, filed in the U.S. District
Court for the Eastern District of New York, which asserted various personal
injury and property damage claims against a number of corporate defendants.
These claims allegedly arise from the release of toxic substances from a
Sylvania nuclear materials processing facility near Hicksville, New York.
Amended complaints naming 205 plaintiffs and seeking damages in excess of $3
billion were served in September 2002. The sole basis of liability against
Corning was plaintiffs' claim that Corning was the successor to Sylvania-Corning
Nuclear Corporation (Sylvania-Corning), a Delaware corporation formed in 1957
and dissolved in 1960. Management intends to vigorously contest all claims
against Corning for the reason that Corning is not the successor to
Sylvania-Corning. Management will also defend on the grounds that almost all of
the wrongful death claims and personal injury claims are time-barred. At a
status conference in December 2002, the Court decided to "administratively
close" the Schwinger and Stevens cases and ordered plaintiffs' counsel to bring
new amended complaints with "bellwether" plaintiffs. In these actions, known as
Schwinger II and Astuto, the plaintiffs have not named Corning as a defendant.
Although it appears that plaintiffs may proceed only against the other corporate
defendants, the original Schwinger and Stevens cases remain pending, and no
order has been entered dismissing Corning. Based upon the information developed
to date, and recognizing that the outcome of litigation is uncertain, management
believes that the likelihood of a materially adverse impact to Corning's
financial statements is remote.
Dow Corning Bankruptcy. Corning and The Dow Chemical Company (Dow Chemical) each
own 50% of the common stock of Dow Corning, which was in reorganization
proceedings under Chapter 11 of the U.S. Bankruptcy Code between May 1995 and
June 2004. Dow Corning filed for bankruptcy protection to address pending and
claimed liabilities arising from many thousand breast-implant product lawsuits.
On June 1, 2004, Dow Corning emerged from Chapter 11 with a Plan of
Reorganization (the Plan) which provided for the settlement or other resolution
of implant claims and includes releases for Corning and Dow Chemical as
shareholders in exchange for contributions to the Plan.
Under the terms of the Plan, Dow Corning has established and is funding a
Settlement Trust and a Litigation Facility to provide a means for tort claimants
to settle or litigate their claims. Of the approximately $3.2 billion of
required funding, Dow Corning has paid approximately $1.6 billion (inclusive of
insurance) and expects to pay up to an additional $1.6 billion ($710 million
after-tax) over 16 years. Dow Corning has satisfied the claims of its commercial
creditors, except that certain commercial creditors continue to pursue an appeal
to the U.S. Court of Appeals of the Sixth Circuit seeking from Dow Corning an
additional sum of approximately $80 million for interest at default rates and
enforcement costs. Corning believes the risk of loss to Dow Corning (net of
amounts reserved) is remote.
In addition, Dow Corning has received a statutory notice of deficiency from the
United States Internal Revenue Service asserting tax deficiencies totaling
approximately $65 million relating to its federal income tax returns for the
1995 and 1996 calendar years. This matter is pending before the U.S. District
Court in Michigan. Dow Corning has also received a proposed adjustment from the
IRS (approximately $117 million) with respect to its federal income tax returns
for the 1997, 1998 and 1999 calendar years. Dow Corning is vigorously contesting
these deficiencies and proposed adjustments which it believes are excessive.
In 1995, Corning fully impaired its investment in Dow Corning upon its entry
into bankruptcy proceedings and did not recognize net equity earnings from the
second quarter of 1995 through the end of 2002. Corning began recognizing equity
earnings in the first quarter of 2003 when management concluded that its
emergence from bankruptcy protection was probable. Corning considers the
difference between the carrying value of its investment in Dow Corning and its
50% share of Dow Corning's equity to be permanent. This difference is $249
million. Subject to future rulings by the bankruptcy court and potential changes
in estimated bankruptcy-related liabilities, it is possible that Dow Corning may
record bankruptcy-related charges in the future.
Corning received no dividends from Dow Corning in the first quarter of 2005, but
anticipates that Dow Corning will begin to pay dividends later in 2005.
Federal Securities Cases. From December 2001 through April 2002, Corning and
three of its officers and directors were named defendants in lawsuits alleging
(a) violations of the U.S. securities laws in connection with Corning's November
2000 offering of 30 million shares of common stock and $2.7 billion zero coupon
convertible debentures, due November 2015 and (b) misleading disclosures and
non-disclosures that allegedly inflated the price of Corning's common stock in
the period from October 2000 through July 9, 2001. On April 12, 2004, the U.S.
District Court of the Western District of New York entered a decision and order
dismissing plaintiffs' complaint. That dismissal was affirmed by the U.S. Court
of Appeals of the Second Circuit by an order entered on March 30, 2005. Although
it is possible that plaintiffs may seek further judicial review, management
believes that the likelihood of a material adverse impact to Corning's financial
statements is remote.
Pittsburgh Corning Corporation. Corning and PPG Industries, Inc. ("PPG") each
own 50% of the capital stock of PCC. Over a period of more than two decades, PCC
and several other defendants have been named in numerous lawsuits involving
claims alleging personal injury from exposure to asbestos. On April 16, 2000,
PCC filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the
Western District of Pennsylvania. As of the bankruptcy filing, PCC had in excess
of 140,000 open claims and had insufficient remaining insurance and assets to
deal with its alleged current and future liabilities. More than 100,000
additional claims have been filed with PCC after its bankruptcy filing. As a
result of PCC's bankruptcy filing, Corning recorded an after-tax charge of $36
million in 2001 to fully impair its investment in PCC and discontinued
recognition of equity earnings. At the time PCC filed for bankruptcy protection,
there were approximately 12,400 claims pending against Corning in state court
lawsuits alleging various theories of liability based on exposure to PCC's
asbestos products and typically requesting monetary damages in excess of one
million dollars per claim. Corning has defended those claims on the basis of the
separate corporate status of PCC and the absence of any facts supporting claims
of direct liability arising from PCC's asbestos products. Corning is also
currently named in approximately 11,400 other cases (approximately 43,400
claims) alleging injuries from asbestos and similar amounts of monetary damages
per claim. Those cases have been covered by insurance without material impact to
Corning to date. Asbestos litigation is inherently difficult, and past trends in
resolving these claims may not be indicators of future outcomes.
In the bankruptcy court, PCC in April 2000 obtained a preliminary injunction
against the prosecution of asbestos actions arising from PCC's products against
its two shareholders to afford the parties a period of time in which to
negotiate a plan of reorganization for PCC ("PCC Plan").
On May 14, 2002, PPG announced that it had agreed with certain of its insurance
carriers and representatives of current and future asbestos claimants on the
terms of a settlement arrangement applicable to claims arising from PCC's
products.
On March 28, 2003, we announced that we had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future asbestos claims against us and Pittsburgh Corning Corporation (PCC),
which might arise from PCC products or operations. The proposed settlement, if
the plan is approved and becomes effective, will require Corning to relinquish
its equity interest in PCC, contribute its equity interest in Pittsburgh Corning
Europe N.V. (PCE), a Belgian corporation, and contribute 25 million shares of
Corning common stock. Corning also agreed to make cash payments with a value of
$131 million, in March 2003, over six years from the effective date of the
settlement. In addition, Corning will assign policy rights or proceeds under
primary insurance from 1962 through 1984, as well as rights to proceeds under
certain excess insurance, most of which falls within the period from 1962
through 1973. In return for these contributions, Corning expects to receive a
release and an injunction channeling asbestos claims against it into a
settlement trust under the PCC Plan.
Corning recorded an initial charge of $392 million in the period ending March
31, 2003 to reflect the settlement terms. However, the asbestos liability
requires adjustment to fair value based upon movements in Corning's common stock
price prior to the contribution of the shares to the trust and changes in the
estimated fair value of the other components of the settlement offer.. Beginning
with the first quarter of 2003 and through March 31, 2005, Corning recorded
total net charges of $588 million to reflect the initial settlement, the
movement in Corning's common stock price since March 31, 2003, and changes in
the estimated fair value of the other components of the settlement offer.
Two of Corning's primary insurers and several excess insurers have commenced
litigation for a declaration of the rights and obligations of the parties under
insurance policies, including rights that may be affected by the settlement
arrangement described above. Corning is vigorously contesting these cases.
Management is unable to predict the outcome of this insurance litigation.
The PCC Plan received a favorable vote from creditors in March 2004. Hearings to
consider objections to the Plan were held in the Bankruptcy Court in May 2004.
The parties filed post-hearing briefs and made final oral arguments to the
Bankruptcy Court in November 2004. The Bankruptcy Court allowed an additional
round of briefing to address current case law developments and heard additional
oral arguments on March 16, 2005. At this hearing, the court allowed the
proponents of the PCC Plan 60 days to consider amendments to the Plan or to
request rulings on the pending objections. The timing and outcome are uncertain.
If the Bankruptcy Court does not confirm the PCC Plan in its current form,
changes to the settlement agreement are reasonably possible. Further judicial
review is also reasonably possible. Although the confirmation of the PCC Plan is
subject to a number of contingencies, apart from the quarterly adjustment in the
value of 25 million shares of Corning common stock, management believes that the
likelihood of a material adverse impact to Corning's financial statements is
remote.
Astrium. In December of 2000, Astrium, SAS and Astrium, Ltd. filed a complaint
for negligence in the U.S. District Court for the Central District of California
against TRW, Inc., Pilkington Optronics Inc., Corning NetOptix, Inc. (NetOptix),
OFC Corporation and Optical Filter Corporation claiming damages in excess of
$150 million. The complaint alleges that certain cover glasses for solar arrays
used to generate electricity from solar energy on satellites sold by Astrium's
corporate successor were negligently coated by NetOptix or its subsidiaries
(prior to Corning's acquisition of NetOptix) in such a way that the amount of
electricity the satellite can produce and their effective life were materially
reduced. NetOptix has denied that the coatings produced by NetOptix or its
subsidiaries caused the damage alleged in the complaint, or that it is legally
liable for any damages that Astrium may have experienced. In April 2002, the
Court granted motions for summary judgment by NetOptix and other defendants to
dismiss the negligence claims, but permitted plaintiffs to add fraud and
negligent misrepresentation claims against all defendants and a breach of
warranty claim against NetOptix and its subsidiaries. In October 2002, the Court
again granted defendants' motions for summary judgment and dismissed the
negligent misrepresentation and breach of warranty claims. The intentional fraud
claims were dismissed against all non-settling defendants on February 25, 2003.
On March 19, 2003, Astrium appealed all of the Court's rulings regarding the
various summary judgment motions to the Ninth Circuit Court of Appeals. The
period of briefing the appeal was extended, and oral argument has not been
scheduled. Recognizing that the outcome of litigation is uncertain, management
believes that the likelihood of a materially adverse impact to Corning's
financial statements is remote.
Furukawa Electric Company. On February 3, 2003, The Furukawa Electric Company
(Furukawa) filed suit in the Tokyo District Court in Japan against Corning Cable
Systems International Corporation (CCS International) alleging infringement of
Furukawa's Japanese Patent No. 2,023,966 which relates to separable fiber ribbon
units used in optical cable. Furukawa's complaint requests slightly over 6
billion Japanese yen in damages (approximately $56 million) and an injunction
against further sales in Japan of these fiber ribbon units. CCS International
has denied the allegation of infringement, asserted that the patent is invalid,
and is defending vigorously against this lawsuit. On October 29, 2004, the Tokyo
District Court issued its ruling in favor of CCS on both non-infringement and
patent invalidity. Furukawa has filed an appeal from this ruling to the Tokyo
Court of Appeals. Management believes that the likelihood of a materially
adverse impact to Corning's financial statements is remote.
PicVue Electronics Ltd., PicVue OptoElectronics International, Inc. and
Eglasstrek Gmbh. In June 2002, Corning brought an action seeking to restrain the
use of its trade secrets and for copyright infringement relating to certain
aspects of the fusion draw machine used for liquid crystal display glass
melting. This action is pending in the U.S. District Court for the Western
District of New York against these three named defendants. The District Court in
July 2003 denied the PicVue motion to dismiss and granted a preliminary
injunction in favor of Corning, subject to posting a bond in an amount to be
determined. PicVue, a Taiwanese company, filed a counterclaim alleging
violations of the antitrust laws and claiming damages of more than $120 million
as well as requesting trebled damages. On PicVue's appeal from the District
Court's grant of the preliminary injunction, the Court of Appeals affirmed but
remanded the case for the District Court to clarify the scope of the injunction
and to consider what, if any, bond should be posted. The parties have submitted
papers to the District Court addressing the issues remanded. Recognizing that
the outcome of litigation is uncertain, management believes that the PicVue
counterclaim is without merit and that the likelihood of a materially adverse
impact to Corning's financial statements is remote.
Tyco Electronics Corporation and Tyco Technology Resources, Inc. On August 13,
2003, CCS Holdings Inc. (CCS), a Corning subsidiary, filed an action in the U.S.
District Court for the Middle District of North Carolina against Tyco
Electronics Corporation and Tyco Technology Resources, Inc. (Tyco), asking the
court to declare a Tyco patent invalid and not infringed by CCS. The patent
generally relates to a type of connector for optical fiber cables. Tyco has
responded with a motion to dismiss the action for lack of jurisdiction, but that
motion has been withdrawn. Tyco has filed an answer and counterclaims to CCS's
complaint. Tyco's counterclaims allege patent infringement by CCS and seeks
unspecified monetary damages and an injunction. Recognizing that the outcome of
litigation is uncertain, management believes that the risk of a material impact
on Corning's financial statements is remote.
Grand Jury Investigation of Conventional Cathode Ray Television Glass Business.
In August 2003, Corning Asahi Video Products Company (CAV) was served with a
federal grand jury document subpoena related to pricing, bidding and customer
practices involving conventional cathode ray television glass picture tube
components. A number of employees or former employees have received a related
subpoena. CAV is a general partnership, 51% owned by Corning and 49% owned by
Asahi Glass America, Inc. CAV's only manufacturing facility in State College,
Pennsylvania closed in the first half of 2003 due to declining sales. CAV is
cooperating with the government investigation. Management is not able to
estimate the likelihood that any charges will be filed as a result of the
investigation.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
This table provides information about our purchases of our common stock during
the fiscal first quarter of 2005:
Issuer Purchases of Equity Securities (a)
------------------------------------------------------------------------------------------------------------------------------------
Total Average Total Number of Approximate Dollar
Number Price Shares Purchased as Value of Shares that
of Shares Paid per Part of Publicly May Yet Be Purchased
Period Purchased (b) Share (b) Announced Plan (a) Under the Plan (a)
------------------------------------------------------------------------------------------------------------------------------------
January 1-31, 2005 0 $0 0 $0
February 1-28, 2005 118,161 $11.43 0 $0
March 1-31, 2005 10,801 $11.81 0 $0
------------------------------------------------------------------------------------------------------------------------------------
Total 128,962 $11.46 0 $0
------------------------------------------------------------------------------------------------------------------------------------
(a) During the quarter ended March 31, 2005, we did not have a publicly
announced program for repurchase of shares of our common stock and did not
repurchase our common stock in open-market transactions outside of such a
program.
(b) These columns reflect the following transactions during the first quarter
of 2005: (i) the deemed surrender to us of 58,921 shares of common stock to
pay the exercise price and to satisfy tax withholding obligations in
connection with the exercise of employee stock options, and (ii) the
surrender to us of 70,041 shares of common stock to satisfy tax withholding
obligations in connection with the vesting of restricted stock issued to
employees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We will include voting results of our annual meeting of shareholders to be held
on April 28, 2005 as part of our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2005, which we expect to file with the Securities and Exchange
Commission on or about July 26, 2005.
ITEM 6. EXHIBITS
Exhibits
Exhibit Number Exhibit Name
-------------- ------------
10 Five-Year Revolving Credit Agreement with Citibank, N.A.;
J.P. Morgan Chase Bank, N.A.; Bank of America, N.A.; Bank of
Tokyo - Mitsubishi, Ltd.; Wachovia Bank, National
Association; Barclays Bank PLC; and Deutsche Bank A.G. New
York branch Dated March 17, 2005 (Incorporated by reference
to Exhibit 10 of Corning's Form 10-Q filed April 26, 2005)
12 Computation of Ratio of Earnings to Fixed Charges
31.1 Certification Pursuant to Rule 13a-15(e) and 15d-15(e), As
adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification Pursuant to Rule 13a-15(e) and 15d-15(e), As
adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certification Pursuant to 18 U.S.C. Section 1350, As adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNING INCORPORATED
(Registrant)
May 9, 2006 /s/ JAMES B. FLAWS
----------------- ---------------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
May 9, 2006 /s/ KATHERINE A. ASBECK
----------------- ---------------------------------------------
Date Katherine A. Asbeck
Senior Vice President and Controller
(Principal Accounting Officer)
EXHIBIT INDEX
-------------
Exhibit Number Exhibit Name
-------------- ------------
10 Five-Year Revolving Credit Agreement with Citibank, N.A.;
J.P. Morgan Chase Bank, N.A.; Bank of America, N.A.; Bank of
Tokyo - Mitsubishi, Ltd.; Wachovia Bank, National
Association; Barclays Bank PLC; and Deutsche Bank A.G. New
York branch Dated March 17, 2005 (Incorporated by reference
to Exhibit 10 of Corning's Form 10-Q filed April 26, 2005)
12 Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-15(e) and 15d-15(e), As adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-15(e) and 15d-15(e), As adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 Certification Pursuant to 18 U.S.C. Section 1350, As adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 12
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratios)
For the three months ended
March 31, 2005
(Restated)
--------------------------
Income before income taxes $ 101
Adjustments:
Distributed income of equity investees 143
Fixed charges net of capitalized interest 41
---------
Income before taxes and fixed charges, as adjusted $ 285
=========
Fixed charges:
Interest expense (a) $ 35
Portion of rent expense which represents an
appropriate interest factor (b) 6
Capitalized interest 4
---------
Total fixed charges 45
Capitalized interest (4)
---------
Total fixed charges, net of capitalized interest $ 41
=========
Ratio of earnings to fixed charges 6.3x
=========
(a) Interest expense includes amortization expense for capitalized interest and
debt costs.
(b) One-third of net rent expense is the portion deemed representative of the
interest factor.
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302(A) OF
THE SARBANES-OXLEY ACT OF 2002
I, Wendell P. Weeks, certify that:
1. I have reviewed this amendment to quarterly report on Form 10-Q/A of
Corning Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 9, 2006
/s/ Wendell P. Weeks
--------------------------------------
Wendell P. Weeks
President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302(A) OF
THE SARBANES-OXLEY ACT OF 2002
I, James B. Flaws, certify that:
1. I have reviewed this amendment to quarterly report on Form 10-Q/A of
Corning Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 9, 2006
/s/ James B. Flaws
-----------------------------------------
James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
We, Wendell P. Weeks, President and Chief Executive Officer, and James B. Flaws,
Vice Chairman and Chief Financial Officer, of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) the amendment to Quarterly Report on Form 10-Q/A for the three-month period
ended March 31, 2005 fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) that information contained in such Form 10-Q/A fairly presents in all
material respects the financial condition and results of operations of
Corning Incorporated.
Date: May 9, 2006
/s/ Wendell P. Weeks
-----------------------------------------
Wendell P. Weeks
President and Chief Executive Officer
/s/ James B. Flaws
-----------------------------------------
James B. Flaws
Vice Chairman and Chief Financial Officer