SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: (Date of earliest event reported) August 6, 2004
CORNING INCORPORATED
(Exact name of registrant as specified in its charter)
New York 1-3247 16-0393470
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
One Riverfront Plaza, Corning, New York 14831
(Address of principal executive offices) (Zip Code)
(607) 974-9000
(Registrant's telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
Item 5. Other Events
The information included in this Current Report on Form 8-K affects only
disclosures related to segment results, and updated risk factors, and does not
in any way restate or revise the financial position, results of operations or
cash flows for the years ended December 31, 2003, 2002 and 2001 in any reported
Statement of Financial Position, Statement of Earnings, Statement of Changes in
Shareholders' Equity or Statement of Cash Flows of Corning Incorporated and its
consolidated subsidiaries (hereinafter sometimes referred to as the "the
Company," "the Registrant," "Corning," or "we") as reported in the 2003 Annual
Report on Form 10-K. Refer to Corning's 2004 Quarterly Report on Form 10-Q for
the period ended March 31, 2004 and June 30, 2004 for additional information.
As described in our Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2004, we revised our reporting segments to reflect how Corning's
Chief Operating Decision Making group ("CODM") allocates resources and assesses
the performance of its businesses. Specifically, the CODM is significantly
increasing its level of review of the Display Technologies business due to the
recent increase in growth and capital spending in that business. Additionally,
the CODM is increasing its review of the Environmental Technologies and Life
Sciences businesses. As a result of this revision, we have increased our number
of reporting segments from 2 to 4. Our 4 reporting segments as of March 31, 2004
were as follows:
. Telecommunications - manufactures optical fiber and cable, and
hardware and equipment components for the worldwide telecommunications
industry;
. Display Technologies - manufactures liquid crystal display glass for
flat panel displays;
. Environmental Technologies - manufactures ceramic substrates and
filters for automobile and diesel applications; and
. Life Sciences - manufactures glass and plastic consumables for
scientific applications.
More detailed business descriptions are presented in the exhibits referred to
below.
As required by Statement of Financial Accounting Standards (SFAS) No. 131,
consolidated financial statements issued by Corning in the future will reflect
modifications to our reportable segment information resulting from this
revision, including reclassifications of all comparative prior period segment
information. In this Current Report on Form 8-K, we are providing the
reclassification of our segment information for the years ended December 31,
2003, 2002 and 2001.
We submit various reports to the Securities and Exchange Commission with
updated information from time to time. Copies of Corning's Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available free of charge through Corning's
website (www.corning.com) as soon as reasonably practicable after we
electronically file or furnish the material with the Securities and Exchange
Commission.
Item 7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
Not applicable.
(b) Pro forma financial information.
Not applicable.
(c) Exhibits.
23 Consent of Independent Registered Public Accounting Firm.
99.1 Description of our business, including risk factors, revised to
reflect the revisions to our reportable segments described herein.
99.2 Management's Discussion and Analysis of Financial Condition and
Results of Operations of the 2003 Annual Report on Form 10-K,
revised to reflect the revisions in our reportable segments
described herein.
99.3 Audited consolidated financial statements of Corning for the years
ended December 31, 2003, 2002 and 2001, revised to reflect the
revisions to our reportable segments described herein. Also
included is the report of independent registered public accounting
firm dated January 22, 2004, except for Note 22, as to which the
date is March 1, 2004, and except for Note 21, as to which the
date is August 5, 2004.
These financial statements, conformed to reflect the 2004
revision in segments, are our historical financial statements.
SIGNATURES
Pursuant to the requirements of the Securities 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
Date: August 6, 2004 By /s/ KATHERINE A. ASBECK
---------------- ------------------------------------
Katherine A. Asbeck
Senior Vice President and Controller
Exhibit 23
Consent of Independent Registered public Accounting Firm
PricewaterhouseCoopers LLP
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-55345, 33-58193, 333-24337, 333-26049,
333-26151, 333-41246, 333-61975, 333-61983, 333-91879, 333-95693, 333-60480,
333-82926, 333-87128, 333-106265, and 333-109405) and Form S-3 (Nos. 333-41244,
333-57082, and 333-100302) of Corning Incorporated of our report dated January
22, 2004, except for Note 22, as to which the date is March 1, 2004, and except
for Note 21, as to which the date is August 5, 2004, relating to the financial
statements and financial statement schedule, which appears in this Current
Report on Form 8-K.
/s/ PricewaterhouseCoopers LLP
New York, New York
August 5, 2004
Exhibit 99.1
------------
Description of our business, including risk factors, revised to reflect the
revisions to our reportable segments described herein.
Corning Incorporated and its consolidated subsidiaries are hereinafter sometimes
referred to as "the Company," "the Registrant," "Corning," or "we."
This report contains forward-looking statements that involve a number of risks
and uncertainties. These statements relate to our future plans, objectives,
expectations and estimates and may contain words such as "believes," "expects,"
"anticipates," "estimates," "forecasts," or similar expressions. Our actual
results could differ materially from what is expressed or forecasted in our
forward-looking statements. Some of the factors that could contribute to these
differences include those discussed under "Forward-Looking Statements," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere in this report.
General
Corning traces its origins to a glass business established in 1851. The present
corporation was incorporated in the State of New York in December 1936, and its
name was changed from Corning Glass Works to Corning Incorporated on April 28,
1989.
Corning is a global, technology-based corporation that operates in four
reportable business segments: Telecommunications, Display Technologies,
Environmental Technologies and Life Sciences.
Telecommunications Segment
The Telecommunications segment produces optical fiber and cable, and hardware
and equipment products for the worldwide telecommunications industry. Corning
invented the world's first low-loss optical fiber more than 30 years ago and
offers a range of optical fiber technology products and enhancements for a
variety of applications, including premises, fiber-to-the-premises access,
metropolitan, long-haul and submarine networks. Corning makes and sells
InfiniCor(R) fibers for local area networks, data centers and central offices;
NexCor(TM) fiber for converged services networks, SMF-28e(R) single mode optical
fiber that provides additional transmission wavelengths in metropolitan and
access networks; MetroCor(R) fiber products for metropolitan networks; LEAF(R)
optical fiber products for long-haul, regional and metropolitan networks; and
Vascade(R) submarine optical fibers for use in undersea networks. Corning has
two large optical fiber manufacturing facilities in North Carolina, as well as a
controlling interest in Shanghai Fiber Optics Co., Ltd. in China. As a result of
lowered demand for optical fiber products, in 2002 Corning mothballed its
optical fiber manufacturing facility in Concord, North Carolina and transferred
certain capabilities to its Wilmington, North Carolina facility. Corning
believes that the Concord facility can be returned to productive capacity within
six to nine months of a decision to reopen.
A significant portion of Corning's optical fiber is sold to subsidiaries such as
CCS Holdings, Inc. (Corning Cable Systems), Corning Cable Systems Verwaltungs
GmbH, and Norddeutsche Seekabelwerke GmbH & Co., KG (NSW) or equity ventures
such as Aberdare Fiber Optic Cables (Pty.) Ltd. in South Africa, Advanced Cable
Systems Corporation in Japan, and Chengdu CCS Optical Fiber Cable Co. in China.
The optical fiber is cabled prior to being sold in cable form. The remaining
fiber production is sold directly to end users or third party cablers around the
world. Corning's cabling operations include large facilities in North Carolina
and Germany and smaller regional locations or equity affiliates, including those
listed above.
Corning's hardware and equipment products include cable assemblies, fiber optic
hardware, fiber optic connectors, optical components and couplers, closures and
pedestals, splice and test equipment and other accessories for optical
connectivity. For copper connectivity, Corning's products include subscriber
demarcation, connection and protection devices, xDSL passive solutions and
outside plant enclosures. Each of the product lines may be combined in Corning's
fiber-to-the-premises solutions. Corning has manufacturing operations for
hardware and equipment products in North Carolina and Texas, as well as Europe,
Mexico, China, and the Caribbean. Corning Gilbert Inc. offers products for the
cable television industry, including coaxial connectors and associated tools.
Corning Gilbert has manufacturing operations for coaxial connectors and
associated assembly tools in Arizona, Mexico and Denmark. Corning's controls and
connectors products include high performance oscillators and crystals for use in
various telecommunication applications. Corning manufactures these products in
Pennsylvania, Canada, China and Germany.
On July 31, 2003, Corning completed the sale of a significant portion of
photonic technologies assets and $22 million in cash to Avanex Corporation
(Avanex) in exchange for 21 million shares of Avanex common stock. Corning's
photonic technologies products had included erbium doped fiber amplifiers
("EDFAs"), Raman amplifier modules and pumps, semiconductor optical amplifiers
for long-haul, metropolitan and access markets, and dispersion compensation
devices for long-haul and metropolitan networks. These photonic technologies
products maintain and control light signals in optical fiber telecommunications
systems. These products were made primarily by Corning in New York and
Massachusetts. As of December 31, 2003, we had discontinued production of these
products.
The Telecommunications segment represented approximately 46% of Corning's sales
for 2003.
Display Technologies Segment
Corning's Display Technologies segment manufactures glass substrates for active
matrix liquid crystal displays, which are used primarily in notebook computers,
flat panel desktop monitors, and liquid crystal display (LCD) televisions.
Corning's facilities in Kentucky, Japan and Taiwan and its 50% interest in
Samsung Corning Precision Glass Co., Ltd. (Samsung Corning Precision) in South
Korea develop, manufacture and supply high quality glass products using a
proprietary fusion manufacturing process and know-how. Affiliates of Samsung
Electronics Co., Ltd. own the remaining 50% interest in Samsung Corning
Precision, which sells glass primarily to LCD panel manufacturers in Korea.
Panel manufacturers in the other leading LCD-producing areas of the world, Japan
and Taiwan, are supplied by Corning. The Display Technologies segment
represented approximately 19% of Corning's sales for 2003.
Corning has consistently been a leader to market with new large-generation sized
substrates used by our customers in the production of larger LCDs for monitors
and television. The company continues to be one of the first with product
innovations that help our customers produce larger, lighter, thinner and
higher-resolution displays more affordably. Glass substrates are currently
available in sizes up to Generation 6, with Generation 7 planned for
introduction in the second half of 2004. Large generation substrates allow LCD
manufacturers to produce larger and a greater number of panels from each
substrate. This leads to dramatic economies of scale for LCD manufacturers and
is expected to help lower display prices for consumers in the future. At the end
of 2003, approximately 33% of Corning and Samsung Corning Precision's volume of
LCD glass was Generation 5 and higher.
Corning's proprietary manufacturing process, known as fusion, was invented by
the company. It is the cornerstone of Corning's technology leadership in the LCD
industry. The highly automated process yields superior quality glass substrates
with pristine surfaces, as well as excellent dimensional stability and
uniformity - essential attributes for the production of increasingly larger,
high performance active matrix LCDs. Corning's fusion process is scalable and
has proven to be the most effective process in producing larger size substrates.
LCD glass manufacturing is a highly capital intensive business. Corning
continued to make significant investments to expand its liquid crystal display
glass facilities in response to increased customer demand. The environment is
very competitive and there are high barriers to entry, such as access to
capital, technology know-how, intellectual property, patents and customer
access.
Environmental Technologies Segment
Corning's environmental products include ceramic technologies and solutions for
emissions and pollution control in mobile and stationary applications around the
world, including gasoline and diesel substrate and filter products. As
regulations and laws on emission controls standards have tightened over time and
additional countries have instituted requirements related to clean air, Corning
has continued to develop more efficient emission-control catalytic converter
substrates products with higher density and greater surface area for improved
emissions controls. Corning manufactures these products in New York, Virginia,
China, Germany and South Africa. Cormetech Inc., 50% owned by Corning and 50%
owned by Mitsubishi Heavy Industries Ltd. of Japan, manufactures ceramic
environmental substrate products at its North Carolina and Tennessee facilities
for use in power plants. Corning is investing in new ceramic substrate and
filter technologies for diesel emission control device products, with a new
production facility in New York to produce such products for diesel vehicles
worldwide. The Environmental Technologies segment represented approximately 15%
of Corning's sales for 2003.
Life Sciences Segment
Life sciences laboratory products include microplate products, coated slides,
filter plates for genomics sample preparation, plastic cell culture dishes,
flasks, cryogenic vials, roller bottles, mass cell culture products, liquid
handling instruments, Pyrex(R) glass beakers, pipettors, serological pipettes,
centrifuge tubes and laboratory filtration products. Corning sells products
under 3 brands: Corning, Costar and Pyrex. Corning manufactures these products
in Maine, New York, England and Mexico and markets them worldwide primarily
through large distributors to government entities, pharmaceutical and
biotechnology companies, hospitals, universities and other laboratories. The
Life Sciences segment represented approximately 9% of Corning's sales for 2003.
Other Products
Other products made by Corning include semiconductor optics, ophthalmic glass
and plastic products, technical products, such as polarizing glass, glass for
high temperature applications and machinable glass ceramic products.
Semiconductor optics manufactured by Corning include: high-performance optical
material products; optical-based metrology instruments; and optical assemblies
for applications in the global semiconductor industry. Corning's high purity
fused silica (HPFS(R)) materials applications include projection and illuminator
lens blanks products used in microlithography, spacecraft windows and optics
products used in high-energy laser fusion systems. Corning's ultra low expansion
glass (ULE(R)) is used in manufacturing mirror blanks for use in space and
ground-based systems. Corning also makes fluoride crystals products and
fabricates optical components, including calcium fluoride products, for
customers who make lasers and projection and illuminator lens systems used in
scanner and stepper systems. Corning Tropel Corporation (a wholly owned
operation) designs and manufactures precision optical components, modules and
systems for semiconductor wafer and mask inspection, high energy laser beam
delivery and shaping, and components for precision inspection and optical
management systems. Corning's semiconductor optics products are manufactured in
New York. Other specialty glass products include glass lens and window
components and assemblies. Other specialty glass products are made in New York,
Virginia, England and France. Corning's Eurokera and Keraglass equity ventures
with Saint Gobain Vitrage S.A. of France manufacture smooth cooktop
glass/ceramic products in France and in South Carolina.
Corning's conventional glass television business includes a 51% owned affiliate,
Corning Asahi Video Products Company (CAV), a producer of glass panels and
funnels for cathode ray television tubes in Pennsylvania. CAV ceased production
in the second quarter of 2003. Corning also owns a 50% interest in Samsung
Corning Company, Ltd. (Samsung Corning), a producer of glass panels and funnels
for cathode ray tubes for televisions and computer monitors, with manufacturing
facilities in Korea, Germany and Malaysia. Samsung Electronics Company, Ltd.
owns the remaining 50% interest in Samsung Corning.
We manufacture and process products at more than 60 plants and 22 countries.
Additional explanation regarding Corning and our four segments is presented in
Management's Discussion and Analysis of Financial Condition under Operating
Review and Results of Operations and Note 21 (Operating Segments) to the
Consolidated Financial Statements.
Corporate Investments
Corning and The Dow Chemical Company (Dow Chemical) each own half of Dow Corning
Corporation (Dow Corning), an equity company in Michigan that manufactures
silicone products worldwide. Dow Corning is expected to emerge from its Chapter
11 bankruptcy proceedings during 2004. Additional discussion about this company
appears in the Legal Proceedings section.
Corning and PPG Industries, Inc. each own half of Pittsburgh Corning Corporation
(PCC), an equity company in Pennsylvania that manufactures glass products for
architectural and industrial uses. PCC filed for Chapter 11 bankruptcy
reorganization in April 2000. Additional discussion about PCC appears in the
Legal Proceedings section. Corning also owns half of Pittsburgh Corning Europe
N.V., a Belgian corporation that manufactures glass products for industrial uses
primarily in Europe.
Competition
Corning competes across all of its product lines with many large and varied
manufacturers, both domestic and foreign. Some of these competitors are larger
than Corning, and some have broader product lines. Corning strives to maintain
its position through technology and product innovation. For the future, Corning
believes its competitive advantage lies in its commitment to research and
development, its financial resources and its commitment to quality. There is no
assurance that Corning will be able to maintain its market position or
competitive advantage.
Telecommunications Segment
Competition within the telecommunications equipment industry is intense among
several significant companies. Corning is a leading competitor in the segment's
principal product lines. Price and new product innovations are significant
competitive factors. The continued downturn in the telecommunications industry,
particularly in Europe and North America, has changed the competitive landscape
by increasing competition based upon pricing. These competitive conditions are
likely to persist.
Corning is the largest producer of optical fiber and cable products, but faces
significant competition due to continued excess capacity in the market place,
price pressure and new product innovations. Corning obtained the first
significant optical fiber patents and believes its large scale manufacturing
experience, fiber process, technology leadership and intellectual property
assets yield cost advantages relative to several of its competitors. The primary
competing producers of optical fiber products are Furukawa OFS, Fujikura,
Sumitomo, Pirelli and Draka Comteq. Furukawa OFS is Corning's largest
competitor. For optical fiber cable products, Corning's primary competitors are
Furukawa OFS, Pirelli, Draka Comteq, Alcoa Fujikura and Sumitomo.
For hardware and equipment products, significant competitors are 3M Company
(3M), Tyco Electronics, OFS, CommScope, ADC Communications and Marconi.
Display Technologies Segment
Corning is the largest worldwide producer of active matrix liquid crystal
display glass substrates and that market position remained relatively stable
over the past year. Corning believes it has competitive advantages in LCD glass
substrate products by investing in new technologies, offering a consistent
source of reliable supply, using its proprietary fusion manufacturing process at
facilities in Kentucky, Japan and Taiwan, as well as Korea through Samsung
Corning Precision. This competitive advantage allows us to deliver glass that is
larger, thinner and lighter weight with exceptional surface quality and process
attributes. Asahi Glass, Nippon Electric Glass and NH Techno are Corning's
principal competitors in display glass substrates. In addition, new entrants are
seeking to expand their presence in this business.
Environmental Technologies Segment
For worldwide automotive ceramic substrate products, Corning has a leading
market position that has remained relatively stable over the past year. Corning
believes its competitive advantage in automotive ceramic substrate products for
catalytic converters is based upon global presence, customer service,
engineering design services and product innovation. Corning has a leading market
position in ceramic substrates for heavy duty diesel applications. The light
duty diesel vehicle market opportunity is still emerging. Corning's
environmental technologies products face principal competition from NGK, Denso,
Ibiden and Emitec.
Life Sciences Segment
Corning is a leading supplier of glass and plastic science laboratory products,
with a growing plastics products market presence in North America and Europe,
and a relatively stable laboratory glass products market presence during 2003.
Corning seeks to maintain competitive advantages relative to its competitors by
emphasizing product quality, product availability, supply chain efficiency, a
wide product line and superior product attributes. For laboratory products,
Schott Glaswerke, Kimble, Greiner and Becton Dickinson are the principal
worldwide competitors.
Other Products
Corning is a leading supplier of materials and products for lithography optics
in the semiconductor industry and that market position remained relatively
stable during the past year. Corning seeks to compete by providing superior
optical quality, leading optical designs and a local Corning presence supporting
its customers. For Corning's semiconductor optical material products, general
specialty glass/glass ceramic products and ophthalmic products, Schott
Glaswerke, Shin-Etsu Quartz Products, Hoya and Hereaus are the main competitors.
CAV was a producer of conventional television glass products in North America.
In 2003, its market position declined due to competition from Asian television
glass suppliers and as the market shifted from conventional cathode ray tubes to
flat panel cathode ray tubes and other technologies. CAV ceased production in
June 2003. Samsung Corning is the third largest worldwide producer of cathode
ray tube glass products for conventional televisions. Its relative competitive
position has remained stable over the past year, although there has been a
decline in sales. Samsung Corning seeks to maintain its competitive advantage
through customer support, logistics expertise and a lower cost manufacturing
structure. Nippon Electric Glass, Asahi, and various other Asian manufacturers
compete with Samsung Corning.
Raw Materials
Corning's production of specialty glasses and related materials requires
significant quantities of energy and batch materials.
Although energy shortages have not been a problem recently, Corning has achieved
flexibility through important engineering changes to take advantage of the
lowest-cost energy source in most significant processes. Specifically, many of
Corning's principal manufacturing processes can now be operated with natural
gas, propane, oil or electricity, or a combination of these energy sources.
As to resources (ores, minerals, and processed chemicals) required in
manufacturing operations, availability appears to be adequate. Corning's
suppliers from time to time may experience capacity limitations in their own
operations, or may eliminate certain product lines; nevertheless, Corning
believes it has adequate programs to ensure a reliable supply of batch chemicals
and raw materials. For many products, Corning has alternative glass compositions
that would allow operations to continue without interruption in the event of
specific materials shortages.
Certain key optical components used in the manufacturing of products within
Corning's Telecommunications segment are currently sole sourced or available
only from a limited number of sources. Any future difficulty in obtaining
sufficient and timely delivery of components could result in delays or
reductions in product shipments, or reduce Corning's gross margins.
Patents and Trademarks
Inventions by members of Corning's research and engineering staff have been, and
continue to be, important to the Company's growth. Patents have been granted on
many of these inventions in the United States ("U.S.") and other countries. Some
of these patents have been licensed to other manufacturers, including companies
in which Corning has equity investments. Many of the earlier patents have now
expired, but Corning continues to seek and obtain patents protecting its newer
innovations. In 2003, Corning was granted over 300 patents in the U.S. and over
400 patents in countries outside the U.S.
Each business segment possesses its own patent portfolio that provides a
competitive advantage in protecting Corning's innovations. Corning has
historically enforced, and will continue to enforce, its intellectual property
rights. At the end of 2003, Corning and its subsidiaries owned over 6,000
unexpired patents in various countries of which over 3,000 were U.S. patents.
Between 2004 and 2006, approximately 4% of these patents will expire, while at
the same time Corning intends to seek patents protecting its newer innovations.
Worldwide, Corning has over 3,000 patent applications in process, with over 850
in process in the U.S. As a result, Corning believes that its patent portfolio
will continue to provide a competitive advantage in protecting Corning's
innovation, although Corning's competitors in each of its businesses are
actively seeking patent protection as well.
The Telecommunications segment has over 3,600 patents in various countries of
which over 2,000 were U.S. patents. Although no one patent is considered
material to this business segment, and new patents are frequently granted to
Corning, some of the important issued U.S. patents in this segment include: (i)
patents relating to optical fiber products including dispersion compensating
fiber, low loss optical fiber and high data rate optical fiber and processes and
equipment for manufacturing optical fiber including methods for making optical
fiber preforms and methods for drawing, cooling and winding optical fiber; (ii)
patents relating to packaging of lasers and designs for optical switch products;
(iii) patents relating to optical fiber ribbons and methods for making such
ribbon, fiber optic cable designs and methods for installing optical fiber
cable; and (iv) patents relating to optical fiber and electrical connectors and
associated methods of manufacture. While a particular U.S. patent related to one
type of low loss optical fiber will expire in 2004, there is no group of
important Telecommunications segment patents set to expire between 2004 and
2006.
The Display Technologies segment has over 200 patents in various countries of
which over 75 were U.S. patents. Although no one patent is considered material
to this business segment, and new patents are frequently granted to Corning,
some of the important issued U.S. patents in this segment include patents
relating to glass compositions and methods for the use and manufacture of flat
panel glass for display applications.
The Environmental Technologies segment has over 500 patents in various countries
of which over 225 were U.S. patents. Although no one patent is considered
material to this business segment, and new patents are frequently granted to
Corning, some of the important issued U.S. patents in this segment include
patents relating to cellular ceramic honeycomb products, together with ceramic
batch and binder system compositions, honeycomb extrusion and firing processes,
and honeycomb extrusion dies and equipment for the high-volume, low-cost
manufacture of such products. While a particular U.S. patent related to the
process of mixing and extruding certain ceramic materials will expire in 2004,
there is no group of important Environmental segment patents set to expire
between 2004 and 2006.
The Life Sciences segment has over 150 patents in various countries of which
over 50 were U.S. patents. Although no one patent is considered material to this
business segment, and new patents are frequently granted to Corning, some of the
important issued U.S. patents in this segment include patents relating to
methods and apparatus for the manufacture and use of scientific laboratory
equipment including nucleic acid arrays, multiwell plates, and cell culture
products. There is no group of important Life Sciences segment patents set to
expire between 2004 and 2006. Many of these patents are used in Corning's
operations or are licensed for use by others, and Corning is licensed to use
patents owned by others. Corning has entered into cross licensing arrangements
with some major competitors, but the scope of such licenses has been limited to
specific product areas or technologies.
Corning's principal trademarks include the following: Corning, Celcor,
Discovering Beyond Imagination, Eagle 2000, Eagle APT, Flame of Discovery
Design, HPFS, LEAF, Pyrex, SMF-28e, Steuben, Lanscape and Vycor.
Protection of the Environment
Corning has a program to ensure that its facilities are in compliance with
state, federal and foreign pollution-control regulations. This program resulted
in capital and operating expenditures during the past several years. In order to
maintain compliance with such regulations, capital expenditures for pollution
control in continuing operations were approximately $7 million in 2003 and are
estimated to be $14 million in 2004.
Corning's 2003 operating results from continuing operations were charged with
approximately $28 million for depreciation, maintenance, waste disposal and
other operating expenses associated with pollution control. Corning believes
that its compliance program will not place it at a competitive disadvantage.
Risk factors
Set forth below and elsewhere in this Current Report on Form 8-K and in other
documents we file with the Securities and Exchange Commission (SEC) are some of
the principal risks and uncertainties that could cause our actual business
results to differ materially from any forward-looking statements or other
projections contained in this Current Report on Form 8-K. In addition, future
results could be materially affected by general industry and market conditions,
changes in laws or accounting rules, general U.S. and non-U.S. economic and
political conditions, including a global economic slowdown, fluctuation of
interest rates or currency exchange rates, terrorism, political unrest or
international conflicts, political instability or major health concerns, natural
disasters or other disruptions of expected economic and business conditions.
These risk factors should be considered in addition to our cautionary comments
concerning forward-looking statements in this Current Report on Form 8-K,
including statements related to markets for our products and trends in our
business that involve a number of risks and uncertainties. Our separate
statement labeled Forward-Looking Statements should be considered in addition to
the statements below.
Our sales could be negatively impacted if one or more of our key customers
substantially reduce orders for our products
Our customer base is relatively concentrated with less than 10 significant
customers accounting for a high percentage (greater than 50%) of net sales in
most of our businesses, including those purchasing liquid crystal display glass.
However, no individual customer accounts for more than 10% of consolidated
sales.
Our Display Technologies and Environmental Technologies segments have
concentrated customer bases. If we lose a significant customer in any of these
businesses, our sales could be negatively impacted. The Display Technologies
segment manufactures and sells glass substrates to a concentrated customer base
comprised of LCD panel makers primarily located in Japan and Taiwan. LCD panels
are used in computer products, such as notebook computers and desktop monitors,
consumer electronics products, such as digital cameras and camcorders and car
navigation systems, and LCD televisions. For the six months ended June 30, 2004,
six LCD customers accounted for 76% of the Display Technologies segment sales.
Although the sale of LCD glass substrates has increased from quarter to
quarter in 2003 and in 2004, there can be no assurance that this upward trend
will continue. Our customers are LCD panel makers, and as they switch to larger
size glass, the pace of their orders may be uneven while they adjust their
manufacturing processes and facilities. Additionally, consumer preferences for
panels of differing sizes, or price or other factors, may lead to pauses in
market growth from time to time. There is further risk that our customers may
not be able to maintain profitable operations or access sufficient capital to
fund ongoing expansions.
Over recent years, most of our major customers in the Telecommunications
segment have reduced their purchases of our products and have expressed
uncertainty as to their future requirements. As a result, our sales have
declined to their current low levels, and it is difficult to predict future
sales accurately. The conditions contributing to this difficulty include:
. the prolonged downturn in the telecommunications industry;
. uncertainty regarding the capital spending plans of the major
telecommunications carriers;
. potential changes in governmental regulations;
. the telecommunications carriers' current limited access to the capital
required for expansion;
. June 2004 Chinese Ministry of Commerce preliminary determination of
dumping of certain U.S. optical fiber exports to China; and
. general market and economic uncertainty.
While we have responded to the depressed telecommunications market by
reducing excess capacity and cutting costs, we cannot assure you that our plans
will be successful in mitigating the adverse effects of a prolonged downturn.
The continuing downturn in the telecommunications industry may be more severe
and prolonged than expected. If our net sales continue to decline or our net
sales do not increase as planned, our ability to meet financial expectations for
future periods may be impaired, and we may need to impair tangible assets,
intangible assets or goodwill or record additional reserves against deferred tax
assets.
If we do not successfully adjust our manufacturing volumes and fixed cost
structure, or achieve manufacturing yields or sufficient product reliability,
our operating results could suffer, and we may not achieve profitability as
anticipated
In the economic and industry downturn for our Telecommunications segment,
we have responded to the softer market by cutting costs, including the reduction
of our manufacturing volumes. We continued to execute our restructuring plans in
2003. We have closed two fiber facilities and mothballed another and closed
several factories that made photonics, cabling or hardware and equipment. In
2003, we reduced our workforce by 1,975 positions, and we have reduced more than
21,000 positions since 2001. We cannot assure you that our plans will be
successful in mitigating the adverse effects of a softer market, nor can we
assure you that additional adjustments and charges will not be necessary to
respond to further market changes.
The LCD market continues to grow rapidly. This growth is being driven, in
part, by higher demand for LCD televisions, for which our LCD customers require
larger size glass substrates. Based on events as of June 30, 2004, we plan to
spend $750 million to $800 million in 2004 to expand our liquid crystal display
glass facilities in response to increased customer demand. During 2004, Corning
has 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. There can be no assurance that Corning will be able to pace its
capacity expansion to the actual demand and, while the industry has grown
rapidly, it is possible that glass manufacturing capacity may exceed demand
during certain periods.
In addition, our restructuring programs and current business plans are
designed to restore profitability and improve cash flow, but we cannot be
certain that this will occur or that we will return to positive cash flow at the
levels and in the time period we are targeting.
The manufacturing of our products involves highly complex and precise
processes, requiring production in highly controlled and clean environments. Any
changes in our manufacturing processes or those of our suppliers could
significantly reduce our manufacturing yields and product reliability. In some
cases, existing manufacturing may be insufficient to achieve the volume or cost
targets of our customers. We will need to develop new manufacturing processes
and techniques to achieve targeted volume and cost levels. While we continue to
fund projects to improve our manufacturing techniques and processes, we may not
achieve cost levels in our manufacturing activities that will fully satisfy our
customers.
We have incurred, and may in the future incur, restructuring and other charges,
the amounts of which are difficult to predict accurately
The telecommunications industry was severely hampered from 2001 to 2003 by
continued excess manufacturing capacity, increased intensity of competition, and
growing pressure on price and profits. These negative trends are expected to
continue in 2004. In 2001 through 2003, we recorded charges for restructuring,
impairment of assets, and the write-off of cost and equity based investments.
Our ability to forecast our customers' needs for our products in the
current economic and industry environment is limited. Our results in 2003 and
2002 included significant charges for impairment of long-lived assets, primarily
in the Telecommunications segment and the conventional television glass and
specialty materials businesses.
We may record additional charges for restructuring or other asset
impairments if additional actions become necessary to respond to align costs to
a reduced level of demand.
In the event we incur continued operating losses, we may be unable to recognize
future deferred tax assets and may be required to reassess our ability to
realize the deferred tax assets already recorded.
At December 31, 2003, we had recorded gross deferred tax assets of
approximately $2.1 billion with a valuation allowance of $469 million, and
offset by deferred tax liabilities of $201 million. Net domestic deferred tax
assets were approximately $1.3 billion. Although management expects the domestic
deferred tax assets to be realized from future earnings, currently we are
generating domestic losses. Our forecast of domestic income is based on
assumptions about and current trends in our operating segments, and we can not
assure you that such results will be achieved. As a result, we may record
additional material deferred tax valuation reserves that would reduce our net
income and shareholders equity. If we record such a valuation allowance, we will
also cease to recognize additional tax benefits on any losses in the U.S.
If the markets for our products do not develop and expand as we anticipate,
demand for our products may decline further, which would negatively impact our
results of operations and financial performance
The markets for our products are characterized by rapidly changing
technologies, evolving industry government standards and frequent new product
introductions. Our success is expected to depend, in substantial part, on the
timely and successful introduction of new products, upgrades of current products
to comply with emerging industry government standards, our ability to acquire
technologies needed to remain competitive and our ability to address competing
technologies and products. In addition, the following factors related to our
products and the markets for them, if not achieved, could have an adverse impact
on our results of operations and financial performance:
. our ability to introduce leading products such as glass substrates for
liquid crystal displays, optical fiber and environmental substrate
products that can command competitive prices in the marketplace;
. our ability to maintain or achieve a favorable mix of sales between
premium and non-premium fiber and new large generation sizes of
display glass;
. our ability to continue to develop new product lines to address our
customers' diverse needs within the several market segments that we
participate in, which requires a high level of innovation, as well as
the accurate anticipation of technological and market trends;
. our ability to develop new products in response to favorable
government regulations and laws driving customer demand, particularly
environmental substrate diesel filter products in the Environmental
Technologies segment and Telecommunications segment products
associated with fiber to the premises;
. our ability to create the infrastructure required to support
anticipated growth in certain businesses:
. a downturn in demand for notebook computers;
. the rate of substitution by end-users purchasing LCD monitors to
replace cathode ray tube monitors;
. the rate of growth in purchases of LCD televisions to replace other
technologies; or
. fluctuations in inventory levels in the supply chain of LCD-based
consumer electronics.
We face pricing pressures in each of our leading businesses that could adversely
affect our results of operations and financial performance
We periodically face pricing pressures in each of our leading businesses as
a result of intense competition, emerging new technologies, or over-capacity.
While we will work toward reducing our costs to respond to the pricing pressures
that may continue, we may not be able to achieve proportionate reductions in
costs. As a result of overcapacity and the current economic and industry
downturn in the Telecommunications segment, pricing pressures continued in 2003
and 2004, particularly in our optical fiber and cable products. Pricing pressure
has also continued in our Display Technologies segment as the manufacturers of
desktop displays strive to reduce their costs.
We have incurred, and may in the future incur, goodwill and other intangible
asset impairment charges
Acquisitions recorded as purchases for accounting purposes have resulted in
the recognition of significant amounts of goodwill and other purchased
intangibles. At December 31, 2003, the Telecommunications operating segment
goodwill balance was $1.6 billion, and goodwill associated with the other
segments was $159 million. The potential impairment of these assets could reduce
our net income and shareholders' equity.
Effective January 1, 2002, we adopted Financial Accounting Standards Board
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," pursuant to which goodwill is no longer amortized but
is subject to impairment tests at least annually. The goodwill impairment
accounting rules are intricate and require that we make certain difficult,
subjective and complex judgments involving a number of matters, including
assumptions and estimates used to determine the fair value of our reporting
units. Under SFAS No. 142, goodwill is tested for impairment at a reporting unit
level. The criteria for establishing a reporting unit is dependent upon how a
company determines its operating segments under SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Specifically, SFAS No. 142
permits a company to define a reporting unit as either an operating segment, a
component of an operating segment or an aggregation of two or more components of
an operating segment. The reporting units include Telecommunications, Display
Technologies, Environmental Technologies, specialty materials, conventional
video components and ophthalmic.
During 2002, we completed our annual goodwill impairment test, determined
the Telecommunications goodwill balance was impaired, and recorded a related
impairment charge of $400 million. Our 2002 testing results also determined that
the goodwill related to the remaining reporting units was not impaired. In the
fourth quarter of 2003, we completed our annual goodwill impairment tests and
determined that the goodwill balances were not impaired. While we believe the
estimates and judgments about future cash flows used in the goodwill impairment
tests are reasonable, we cannot provide assurance that future impairment charges
will not be required if the expected cash flow estimates as projected by
management do not occur or change based on market conditions.
In June 2004, the Chinese Ministry of Commerce (the Ministry) issued its
preliminary determination asserting that various optical fiber producers,
including Corning, had dumped optical fiber in China. That ruling requires
Chinese importers to make cash deposits of 16% of the single mode optical fiber
price to Chinese customs officials. Should the preliminary determination become
final, it will negatively impact our long-term outlook for the
Telecommunications segment, and may require us to test goodwill for
recoverability.
We may be limited in our ability to obtain additional capital on commercially
reasonable terms
Although we believe existing cash, short-term investments and borrowing
capacity, collectively, provide adequate resources to fund ongoing operating
requirements, we may be required to seek additional financing to compete
effectively in our markets. Our public debt ratings affect our ability to raise
capital and the cost of such capital. In July 2002, Fitch downgraded our senior
unsecured long-term debt rating from BBB- to BB; Standard & Poor's downgraded
our senior unsecured long-term debt rating from BBB- to BB+ and short-term debt
credit rating from A-3 to B; and Moody's reduced our senior unsecured long-term
debt rating from Baa3 to Ba2 and short-term debt credit rating from Prime-3 to
Not Prime. These and any further downgrades may increase our borrowing costs and
affect our ability to access the debt capital markets.
As a result of our lower debt ratings, we may face difficulties in our
business. For example, we may face increasing requirements to post cash
collateral for performance bonds and some customers may seek alternative
suppliers.
We are subject under our revolving credit facility to a covenant that
requires us to maintain a ratio of total debt to capital, as defined under the
credit facility, of not greater than 60%. Our total debt to capital ratio was
31% at June 30, 2004. This covenant may limit our ability to borrow funds.
Further declines or failure to recover in our Telecommunications segment could
cause impairments of goodwill, deferred tax assets, tangible or intangible
assets or restructuring charges related to our overall business. Additional
impairments or charges could materially increase our total debt to capital ratio
which may reduce the amounts we are able to borrow under the revolving credit
facility.
If our products or components purchased from our suppliers experience
performance issues, our business will suffer
Our business depends on the production of excellent products of
consistently high quality. To this end, our products, including components
purchased from our suppliers, are tested for quality both by us and our
customers. Nevertheless, our products are highly complex, and our customers'
testing procedures are limited to evaluating our products under likely and
foreseeable failure scenarios. For various reasons (including, among others, the
occurrence of performance problems unforeseeable in testing), our products and
components purchased from our suppliers may fail to perform as expected.
Performance issues could result from faulty design or problems in manufacturing
or testing. We have experienced such performance issues in the past and remain
exposed to such performance issues. In some cases, product redesigns or
additional capital equipment may be required to correct a defect. In addition,
any significant or systemic product failure could result in customer relations
problems and harm the future sales of our products.
Interruptions of supplies from our key suppliers may affect our results of
operations and financial performance
Interruptions of supplies from our key suppliers could disrupt production
or impact our ability to increase production and sales. We do not have long-term
or volume purchase agreements with every supplier, and may have limited options
for alternative supply if these suppliers fail, for any reason, including their
business failure or financial difficulties, to continue the supply of
components.
We face intense competition in most of our businesses
We expect that we will face additional competition from existing
competitors and from a number of companies that may enter our markets. Because
some of the markets in which we compete have been historically characterized by
rapid growth and are characterized by rapid technology changes, smaller niche
and start-up companies may become our principal competitors in the future. We
must invest in research and development, expand our engineering, manufacturing
and marketing capabilities, and continue to improve customer service and support
in order to remain competitive. While we expect to undertake the investment and
effort in each of these areas, we cannot assure you that we will be able to
maintain or improve our competitive position.
We may experience difficulties in enforcing our intellectual property rights and
we may be subject to claims of infringement of the intellectual property rights
of others
We may encounter difficulties in protecting our intellectual property
rights or obtaining rights to additional intellectual property necessary to
permit us to continue or expand our businesses. We cannot assure you that the
patents that we hold or may obtain will provide meaningful protection against
our competitors or competitive technologies. Litigation may be necessary to
enforce our intellectual property rights, to protect our trade secrets and to
determine the validity and scope of our proprietary rights. Litigation is
inherently uncertain and the outcome is often unpredictable. Other companies
hold patents on technologies used in our industries and are aggressively seeking
to expand, enforce and license their patent portfolios.
The intellectual property rights of others could inhibit our ability to
introduce new products. We are, and may in the future be, subject to claims of
intellectual property infringement or misappropriation and we cannot assure you
as to the outcome of such claims. Litigation or claims against us could force us
to cease selling or using any of our products that incorporate the intellectual
property that is the subject of such claims, obtain a license from a third
party, or redesign or rename our products. These actions, if possible, could
result in substantial costs or loss of revenue.
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 $413 million ($263 million after-tax) have been incurred through
December 31, 2003; however, the final settlement value will be dependent on the
price of our common stock at the time it is contributed to the settlement trust.
Management cannot provide assurances that the ultimate outcome of a settlement
will not be materially different from the amount recorded to date.
We face risks related to our international operations and sales
We have customers and significant operations, including manufacturing and
sales, located outside the U.S. We have large manufacturing operations for
liquid crystal display glass substrates in the Asia-Pacific region, including
equity investments in companies operating in South Korea that make liquid
crystal display glass and in China that make telecommunications products, and
several significant customers are located in this region. As a result of these
and other international operations, we face a number of risks, including:
. major health concerns such as SARS;
. difficulty of effectively managing our diverse global operations;
. change in regulatory requirements;
. tariffs, duties and other trade barriers;
. undeveloped legal systems; and
. political and economic instability in foreign markets.
We face risks from claims of dumping products in foreign markets
We export large quantities of Telecommunications segment products to
customers outside the U.S. Customs duties, tariffs and other trade barriers in
countries outside the U.S. affect our sales and profit levels, as well as our
export product volume. Our optical fiber exports to China may be reduced by a
June 2004 preliminary ruling by the Chinese Ministry of Commerce that various
optical fiber producers dumped products into China. That ruling requires Chinese
importers to make cash deposits of 16% of the single mode optical fiber price to
Chinese customs officials.
Our equity investments in companies that we do not control generated substantial
equity earnings
Dow Corning (which makes silicone products) and Samsung Corning Precision
(which makes liquid crystal display glass) are two companies in which we have a
50% ownership interest. During 2003, we recognized $226 million in equity
earnings from these two companies. Dow Corning emerged from Chapter 11
bankruptcy proceedings in June 2004. Samsung Corning Precision is located in the
Asia-Pacific region and, as such, is subject to those geographic risks referred
to above. We have equity investments in other companies within and outside the
U.S., and many of these have been successful operations over the years. With 50%
or lower ownership, we do not control such equity companies nor their management
and operations. Performance of our equity investments may not continue at the
same levels in the future. During 2003 and 2004, we have recognized charges
associated with restructuring actions and bankruptcy related settlement
activities. It is possible that future earnings could be negatively impacted by
additional charges, principally at Dow Corning and Samsung Corning Company, Ltd.
We face risks due to foreign currency fluctuations
Because we have significant customers and operations outside the U.S.,
fluctuations in foreign currencies affect our sales and profit levels. Foreign
exchange rates may make our products less competitive in countries where local
currencies decline in value relative to the dollar.
If the financial condition of our customers declines, our credit risks could
increase
In 2002 and 2003, certain of our customers experienced financial
difficulties, and some filed with the courts seeking protection under bankruptcy
or reorganization laws. We have experienced, and in the future may experience,
losses as a result of our inability to collect our accounts receivable, as well
as the loss of such customer's ongoing business. If our customers fail to meet
their payment obligations to us, we could experience reduced cash flows and
losses in excess of amounts reserved. As of December 31, 2003, reserves for
trade receivables totaled approximately $38 million.
We may not have adequate insurance coverage for claims against us
We face the risk of loss resulting from, and adverse publicity associated
with, product liability, securities, fiduciary liability, intellectual property,
antitrust, contractual, warranty, fraud and other lawsuits, whether or not such
claims are valid. In addition, our product liability, fiduciary, directors and
officers, property and comprehensive general liability insurance may not be
adequate to cover such claims or may not be available to the extent we expect.
Our insurance costs have increased substantially and may increase further. We
may not be able to get adequate insurance coverage in the future at acceptable
costs. A successful claim that exceeds or is not covered by our policy limits
could require us to pay substantial sums. Some of the carriers in our historic
excess insurance program are not rated, or may have lower ratings, and may not
be able to respond if we should have claims reaching into excess layers. In
addition, we may not be able to insure against certain risks or obtain some
types of insurance, such as terrorism insurance.
Other
Additional information in response to Item 1 is found in Note 21 (Operating
Segments) to the Consolidated Financial Statements and Selected Financial Data.
Exhibit 99.2
------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the 2003 Annual Report on Form 10-K, revised to reflect the
revisions in our reportable segments described herein.
Overview
Corning had three significant priorities in 2003: to protect our financial
health, to restore profitability, and to invest in our future. We have made
significant progress towards all three in 2003.
Financial Health
We have improved our balance sheet in 2003 by substantially decreasing our debt
from $4.2 billion at the beginning of the year to $2.8 billion. We reduced debt
by using cash on hand and by completing equity offerings of 45 million shares of
our common stock for proceeds of $363 million in the third quarter and 50
million shares of our common stock for proceeds of $267 million in the second
quarter. These actions improved our debt to capital ratio from 47% at the end of
2002 to 34% at the end of 2003.
We have $1.3 billion in cash and cash equivalents and short-term investments,
access to a $2 billion revolving credit facility and access to the capital
markets. Our major source of funding for 2004 and beyond will be our existing
balance of cash and short-term investments. From time to time, we may also issue
debt or equity securities to raise additional cash to fund a portion of our
capital expenditures related to our growth businesses. We believe we have
sufficient liquidity for the next several years to fund operations,
restructuring liabilities, the asbestos settlement, research and development
expenditures, capital expenditures and scheduled debt repayments.
Profitability
On an overall basis, we believe that our 2003 results reflect positive
developments including significant growth in our Display Technologies segment,
stabilization in our Telecommunications segment, and exiting our photonics and
conventional video components product lines. We incurred a net loss of $223
million, or $0.18 per share in 2003 compared to a net loss of $1.3 billion, or
$1.39 per share, in 2002, and a net loss of $5.5 billion, or $5.89 per share, in
2001. The improvements were driven primarily by a reduction in restructuring,
impairment and other charges and credits to $111 million ($26 million after-tax
and minority interest) in 2003 compared to $2.1 billion ($1.5 billion after-tax)
in 2002 and $5.7 billion ($5.3 billion after-tax) in 2001.
Our $223 million net loss in 2003 included the following:
.. a charge of $413 million ($263 million after-tax) related to the pending
asbestos settlement of current and future tort claims in connection with a
proposed reorganization plan for our Pittsburgh Corning Corporation (PCC)
equity affiliate,
.. a net gain on repurchases of debt of $19 million ($12 million after-tax),
and
.. an after-tax charge in equity earnings of $66 million related to an asset
impairment charge recorded by Samsung Corning Company Ltd. (Samsung
Corning), a 50% owned equity venture which manufactures glass funnels and
panels for conventional television.
Sales in the Telecommunications segment have stabilized, remaining relatively
flat from the third quarter of 2002 to the fourth quarter 2003. We have been
able to reduce the loss in the Telecommunications segment in 2003 by closing
plants and reducing costs. Demand for many of our products, particularly in
photonics, remained soft. In July 2003, we completed the sale of certain
photonics assets to Avanex, and in December 2003, our final shipment of pump
lasers for sale to Avanex was completed.
Sales and earnings in our Display Technologies segment improved primarily due to
the volume growth experienced in this segment. Segment sales grew from $93
million in the first quarter of 2002 to $199 million in the fourth quarter of
2003. Offsetting this improvement, the market for conventional televisions
declined. As a result, in 2003 we agreed with our partner to shutdown Corning
Asahi Video Products Company (CAV), a 51% consolidated venture that manufactured
conventional video components products. In addition, demand for high purity
fused silica and calcium fluoride products was lower than we had anticipated.
Therefore, we decided to consolidate the operations of our semiconductor
materials products in the fourth quarter of 2003 to make our infrastructure more
flexible for the cyclical nature of this market.
Investing in our future
We remain committed to investing in innovation, and we are investing in a wide
variety of technologies including liquid crystal displays, diesel filters and
substrates, and the optical fiber, cable, and hardware and equipment that will
enable fiber-to-the-premises. Although our spending in research, development and
engineering has declined, as a percentage of sales it remains above historic
levels.
We have also continued to invest in capital spending in the Display Technologies
and Environmental Technologies segments. Capital spending in 2003 and 2002
approximated $370 million and $360 million, respectively, the majority of which
was to expand capacity for liquid crystal display glass and for new capacity for
diesel substrates and filters. As a result of market expansion, and based on
events as of June 30, 2004, we expect our consolidated capital spending to
approximate $950 million to $1 billion in 2004, of which $750 million to $800
million will be to expand capacity for liquid crystal display glass production.
RESULTS OF CONTINUING OPERATIONS
Selected highlights from our continuing operations follow (in millions):
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2003 2002 2001
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Net sales $ 3,090 $ 3,164 $ 6,047
Gross margin $ 849 $ 602 $ 1,820
(gross margin %) 27% 19% 30%
Selling, general and administrative expenses $ 599 $ 716 $ 1,090
(as a % of revenues) 19% 23% 18%
Research, development and engineering expenses $ 344 $ 483 $ 622
(as a % of revenues) 11% 15% 10%
Restructuring, impairment and other charges and credits $ 111 $ 2,080 $ 5,717
(as a % of revenues) 4% 66% 95%
Asbestos settlement $ 413
(as a % of revenues) 13%
Operating loss $ (655) $ (2,720) $ (6,048)
(as a % of revenues) (21)% (86)% (100)%
Gain on repurchases and retirement of debt, net $ 19 $ 176
(as a % of revenues) 1% 6%
Benefit for income taxes $ (254) $ (726) $ (468)
(as a % of revenues) (8)% (23)% (8)%
Equity in earnings of associated companies, net of impairments $ 209 $ 116 $ 148
(as a % of revenues) 7% 4% 2%
Loss from continuing operations $ (223) $ (1,780) $ (5,532)
(as a % of revenues) (7)% (56)% (91)%
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Net sales
Consolidated net sales for 2003 were $3.1 billion, a decrease of 2%, or $74
million, compared to 2002. Approximately $158 million of the sales decline
occurred in the photonic technologies and the conventional television glass
products that we exited during 2003. Based on the exchange rates at the
beginning of 2003, our sales were favorably impacted by the weakening U.S.
dollar against the Yen and the Euro by approximately $85 million. Consolidated
net sales for 2002 were $3.2 billion, a decrease of 48%, or $2.9 billion, from
2001 sales of $6.0 billion. The sales decline was most pronounced in the
Telecommunications segment where significantly lower demand and price declines
for our optical fiber and cable and photonic technologies products caused sales
to decrease in this segment by 63%, or $2.8 billion year to year.
Gross margin
As a percentage of net sales, gross margin improved eight points in 2003
compared to 2002. The improvement was driven by lower depreciation and other
fixed costs resulting from the 2002 restructuring actions, primarily in the
Telecommunications segment. Gross margin improved in all other reportable
segments; however, the gains achieved were partially offset by a $13 million
write-down of inventory related to the exit of CAV. As a percentage of net
sales, gross margin decreased from 30% to 19% in 2002 compared to 2001. Gross
margin was impacted by lower sales volumes in the Telecommunications segment
which were insufficient to cover fixed manufacturing costs. Downward pricing
pressure also negatively impacted gross margins, primarily in the optical fiber
and cable products. These negative trends were offset by significant fixed cost
reductions as manufacturing capacity was shutdown. Gross margin in the other
operating segments decreased approximately two points from 2001.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased 16%, or $117 million, in
2003 compared to 2002 and as a percentage of sales improved four points in the
same period. The improvement reflects cost savings primarily from the 2002 and
2003 restructuring actions. SG&A expenses decreased 34% to $716 million in 2002
while SG&A increased five points as a percentage of net sales to 23% over 2001.
The decrease in selling, general and administrative expenses for 2002 reflects
cost savings from the restructuring actions which began in 2001, while the
increase as a percentage of net sales was caused by the more significant decline
in revenues.
Research, development and engineering expenses
Research, development and engineering expenses decreased 29%, or $139 million in
2003 compared to 2002 and as a percentage of sales improved four points in the
same period. The improvement reflects the cost savings which resulted from the
2002 restructuring actions. Research, development and engineering expenses
declined 22%, or $139 million in 2002 compared to 2001. As a percentage of net
sales, RD&E increased five points from 2001. The decrease in expense for 2002
reflects the impact of the restructuring actions, while the increase as a
percentage of net sales was caused by the more significant decline in revenues.
Restructuring, impairment and other charges and credits
Corning recorded significant net charges in 2003, 2002 and 2001. These charges are summarized in the following table (in millions):
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For the years ended December 31,
----------------------------------------------
2003 2002 2001
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Impairment of goodwill $ 400 $ 4,648
Restructuring actions $ 49 1,271 953
Impairment of long-lived assets other than
goodwill:
Photonic technologies 269 116
Conventional video components 62 140
----------------------------------------------
Total restructuring, impairment and other charges $ 111 $ 2,080 $ 5,717
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Impairment of Goodwill
2003 Annual Assessment
Due to market conditions in the telecommunications and semiconductor
industries, we performed goodwill impairment tests for our
Telecommunications and specialty materials reporting units in the fourth
quarter of 2003. The results of our impairment tests indicated that the
fair value of each reporting unit exceeded its book value. Although an
impairment charge was not required in 2003, it is possible that future
impairment charges may be required if our expected future cash flow
estimates are not realized. Management must exercise judgment in assessing
the recoverability of goodwill. See Critical Accounting Estimates for
related discussion.
We believe the telecommunication industry is currently depressed but will
ultimately recover. We do not expect growth in this segment in the
short-term, but believe that growth will return to this segment by 2005.
Our view that the industry will recover is based on the fact that bandwidth
demand continues to grow, and the belief that a combination of public
policy changes, consolidation and recovery of industry players, and the
advancement of profitable broadband business models will drive recovery in
the future.
We believe the specialty materials reporting unit decrease in sales in 2003
was primarily due to the cyclical nature of the semiconductor market. We
expect increased volume growth beginning in 2004.
2002 Charge
In the fourth quarter of 2002, we conducted our annual impairment tests and
concluded that an impairment charge of $400 million ($294 million
after-tax) was necessary to reduce the carrying value of goodwill in the
Telecommunications reporting unit to its estimated fair value of $1.6
billion. The decrease in fair value at the end of 2002 from that measured
in the initial benchmark assessment on January 1, 2002 primarily reflected
the following:
. a delay in the timing of the expected recovery from late 2002, or
early 2003 to 2005,
. a reduction in the short-term cash flow expectations of the fiber and
cable business and a lower base from which the expected recovery will
occur, and
. a reduction in the short and long-term cash flow expectations of the
photonic technologies product line.
We retained valuation specialists to assist in the valuation of our
tangible and identifiable intangible assets for the purpose of determining
the implied fair value of goodwill at December 31, 2002.
2001 Charge
During the first half of 2001, we experienced a significant decrease in the
rate of growth of our Telecommunications segment, primarily in the
photonics technologies product line due to a dramatic decline in
infrastructure spending in the telecommunications industry, and determined
that there were events of impairment within photonics. We determined that
our goodwill related to photonics was not recoverable under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of," which was the governing accounting principles
generally accepted in the U.S. (GAAP) guidance at that time. As a result,
we recorded a charge of $4.6 billion to impair a significant portion of
goodwill, of which $3.0 billion related to the Pirelli transaction and $1.6
billion related to goodwill resulting from the acquisition of NetOptix
Corporation.
Restructuring Actions
2003 Restructuring Actions
Corning recorded net charges of $49 million ($14 million credit after tax
and minority interest) in 2003. Major actions approved and initiated in
2003 included the following:
. the shutdown of CAV, which was a manufacturer of glass panel and
funnels for use in conventional tube televisions,
. the sale and exit of our photonics products within the
Telecommunications segment, and
. the shutdown of two of our specialty materials manufacturing
facilities.
Restructuring Charges
---------------------
The 2003 restructuring charges of $41 million included $90 million of
employee separation costs (including special termination and curtailment
losses related to pension and postretirement health care plans) and $37
million in other exit costs (principally lease termination and contract
cancellation payments), offset by an $86 million credit related to previous
restructuring actions. These credits were primarily the result of revised
cost estimates of existing restructuring plans and a decision to not exit
two small cabling sites. The charge entailed the elimination of
approximately 1,975 hourly and salaried positions including involuntary
separation, early retirement and social programs. In addition, we recorded
a $20 million foreign deferred tax benefit adjustment related to
restructuring charges recorded in 2002. This credit is reflected in the
consolidated statement of operations under, "Benefit for income taxes."
Impairment of Plant and Equipment to be Shutdown or Disposed
------------------------------------------------------------
Corning recorded a net credit of $21 million in 2003. This included $40
million of charges to impair plant and equipment related to facilities to
be shutdown or disposed, which comprised $11 million for the North
Brookfield semiconductor materials plant closure, $14 million related to a
cabling plant, $10 million related to the final exit of photonics, and $5
million of other various costs. The impairment charges were determined
based on the amount by which the carrying value exceeded the fair market
value of the asset. The charge was more than offset by $61 million in
credits related to previous restructuring actions. These credits were
primarily the result of our decision not to exit two of the previous
cabling sites marked for shutdown in 2002 as well as proceeds on asset
disposals exceeding assumed salvage values.
Impairment of Cost Investments
------------------------------
In the first quarter, we recorded a $5 million charge for other than
temporary declines in certain cost investments in the Telecommunications
segment. In the third quarter, we sold these investments for $4 million in
cash, which was $1 million more than previously expected. We reported this
gain as a credit to restructuring actions.
Loss on Sale of Photonics
-------------------------
We recorded a loss of $13 million in the third quarter when we completed
the sale of certain photonic technologies assets to Avanex. In exchange for
our photonics assets and $22 million in cash, we received 21 million
restricted shares of Avanex common stock, which we valued at approximately
$53 million. These shares are restricted from sale for approximately one
year at which point the restrictions are lifted at intervals beginning July
2004 and ending October 2005. As the shares become unrestricted, we will
mark-to-market the shares through other comprehensive income as
available-for-sale securities. The Avanex restricted shares are reflected
as a cost investment and recorded under "Investments" in our consolidated
balance sheet. Approximately 400 employees of the photonic technologies
products became employees of Avanex in the third quarter. The loss on sale
included a $21 million reduction of our goodwill. See Notes 5
(Restructuring Actions) and 10 (Investments) of the Consolidated Financial
Statements for further detail.
In addition to these restructuring action costs, we also incurred the
following charges in our consolidated statement of operations related to
the exit of photonics:
. an increase to the deferred tax valuation allowance by $21 million as
we do not expect to realize certain deferred tax assets in Italy,
which is reflected in the consolidated statement of operations under,
"Benefit for income taxes," and
. a $7 million impairment charge for equity investments that were
abandoned as part of the exit from photonics, which is reflected in
the consolidated statement of operations under, "Equity in earnings of
associated companies, net of impairments."
Accelerated Depreciation
------------------------
We recorded $12 million of accelerated depreciation as a result of our
decision to shutdown our semiconductor materials manufacturing facility in
Charleston, South Carolina by March 31, 2004. We will record an additional
$36 million in the first quarter of 2004 while the plant continues
operating.
The following table summarizes the charges, credits and balances of the restructuring reserves as of and for the year
ended December 31, 2003 (in millions):
-------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003
--------------------------------- Remaining
Reversals Net Non-cash Cash reserve at
January 1, to existing charges/ uses payments Dec. 31,
2003 Charges plans (reversals) in 2003 in 2003 2003
------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 273 $ 90 $ (63) $ 27 $ (27) $ (195) $ 78
Exit costs 132 37 (23) 14 (38) 108
-----------------------------------------------------------------------------
Total restructuring charges $ 405 $ 127 $ (86) $ 41 $ (27) $ (233) $ 186
-----------------------------------------------------------------------------
Impairment:
Assets to be disposed of by sale
or abandonment $ 40 $ (61) $ (21)
Cost investments 5 (1) 4
--------------------------------
Total impairment charges $ 45 $ (62) $ (17)
--------------------------------
Other:
Loss on Avanex transaction $ 13 $ 13
Accelerated depreciation 12 12
--------------------------------
Total other charges $ 25 $ 25
--------------------------------
Total restructuring, impairment and
other charges and credits $ 197 $ (148) $ 49
Tax (benefit) expense and minority
interest (83) 20 (63)
--------------------------------
Restructuring, impairment and other
charges and credits, net $ 114 $ (128) $ (14)
-------------------------------------------------------------------------------------------------------------------------------
Cash payments for employee-related costs will be substantially completed by
the end of 2004, while payments for exit activities will be substantially
completed by the end of 2005. We expect approximately one-half of the 2003
restructuring charges to be paid in cash.
The following table summarizes the net charge (reversals) for 2003 restructuring actions by operating segment (in millions):
-------------------------------------------------------------------------------------------------------------------------------
Telecom- Unallocated
munications and Other Total
-------------------------------------------------------------------------------------------------------------------------------
Net charges (reversals) for restructuring actions $ (36) $ 85 $ 49
-------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the headcount reduction related to the 2003 plans:
-------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
-------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 975 750 250 1,975
-------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2003, approximately 1,600 of the 1,975 employees had
been separated under the 2003 plans. We expect the remaining to be
separated by December 31, 2004, with the majority to be separated by the
end of the first quarter of 2004.
2002 Restructuring Actions
The continued decline in demand in the Telecommunications segment during
2002 required additional restructuring beyond that taken in 2001 to bring
manufacturing capacity in line with revenue projections. We recorded total
charges of $1.3 billion ($929 million after-tax and minority interest) over
the second, third and fourth quarters. Actions approved and initiated in
2002 included the following:
. permanent closing of our optical fiber manufacturing facilities in
Noble Park, Victoria, Australia, and Neustadt bei Coburg, Germany. We
also mothballed our optical fiber manufacturing facility in Concord,
North Carolina and transferred certain capabilities to our Wilmington,
North Carolina facility,
. reductions in capacity and employment in our cabling and hardware and
equipment locations worldwide to reduce costs,
. permanent closure of our photonic technologies thin film filter
manufacturing facility in Marlborough, Massachusetts,
. permanent abandonment of certain construction projects that had been
stopped in 2001 in the fiber and cable business within the
Telecommunications segment,
. closure of minor manufacturing facilities, primarily in the
Telecommunications segment,
. closure and consolidation of research facilities,
. elimination of positions worldwide through voluntary and involuntary
programs, and
. divestiture of a portion of the controls and connectors product line
in the Telecommunications segment.
In addition, we impaired cost based investments in a number of private
telecommunications companies based upon a decision in the fourth quarter of
2002 to divest the portfolio.
The following table summarizes the charges, credits and balances of the restructuring reserves as of December 31, 2002
(in millions):
-------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
--------------------------------- Remaining
Reversals Net Non-cash Cash reserve at
January 1, to existing charges/ uses payments Dec. 31,
2002 Charges plans (reversals) in 2002 in 2002 2002
-------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 198 $ 376 $ (5) $ 371 $ (40) $ (256) $ 273
Exit costs 78 85 (9) 76 (22) 132
------------------------------------------------------------------------------
Total restructuring charges $ 276 $ 461 $ (14) $ 447 $ (40) $ (278) $ 405
------------------------------------------------------------------------------
Impairment:
Assets to be disposed of by sale
or abandonment $ 712 $ (11) $ 701
Cost investments 107 107
---------------------------------
Total impairment charges $ 819 $ (11) $ 808
---------------------------------
Other:
Loss on divestiture $ 16 $ 16
Total restructuring, impairment and
other charges and credits $ 1,296 $ (25) $ 1,271
Tax (benefit) expense and minority
interest (352) 10 (342)
---------------------------------
Restructuring, impairment and other
charges and credits, net $ 944 $ (15) $ 929
-------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the net charges (reversals) for 2002 restructuring actions by operating segment (in millions):
-------------------------------------------------------------------------------------------------------------------------------
Telecom- Environmental Life Unallocated
munications Technologies Sciences and Other Total
-------------------------------------------------------------------------------------------------------------------------------
Net charges for restructuring actions $ 1,053 $ 2 $ 1 $ 215 $ 1,271
-------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the headcount reduction related to the 2002 plans:
-------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
-------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 1,650 2,950 2,500 7,100
-------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2003, all of the 7,100 employees from the 2002 plan had
been separated.
2001 Restructuring Actions
In July and October of 2001, we announced a series of restructuring actions
in response to significant deteriorating business conditions which began
initially in our Telecommunications segment, but eventually spread to our
other businesses as the year progressed. The following actions were
approved and undertaken in 2001:
. closure of seven major manufacturing facilities and the consolidation
of several smaller facilities in the Telecommunications segment, as
well as the lighting and conventional television businesses,
. discontinuation of our initiative in Corning Microarray Technology
products, part of our Life Sciences segment, and
. elimination of approximately 12,000 positions affecting all operating
segments, but especially impacting the photonic technologies, hardware
and equipment and the optical fiber and cable products. This action
included a selective voluntary early retirement program for certain
employees along with involuntary separations.
These actions resulted in a pre-tax charge totaling $953 million ($585
million after-tax) for the year ended December 31, 2001. Approximately one
third of the total charge was expected to be paid in cash.
The following table summarizes the charges, credits and balances of the restructuring reserves as of December 31, 2001
(in millions):
-------------------------------------------------------------------------------------------------------------------------------
Non-cash Cash Remaining
Total uses payments reserve at
charges in 2001 in 2001 Dec. 31, 2001
-------------------------------------------------------------------------------------------------------------------------------
Restructuring charges:
Employee related costs $ 324 $ (66) $ (60) $ 198
Exit costs 95 (17) 78
-------------------------------------------------------------
Total restructuring charges $ 419 $ (66) $ (77) $ 276
-------------------------------------------------------------
Impairment:
Assets held for use $ 46
Assets to be disposed of by sale or abandonment 496
---------
Total impairment charges $ 542
---------
Total restructuring and impairment charges $ 961
Discontinued operations (8)
---------
Restructuring and impairment charges
from continuing operations 953
Tax benefit and minority interest 368
---------
Restructuring and impairment charges, net $ 585
-------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the charge for 2001 restructuring actions by operating segment (in millions):
-------------------------------------------------------------------------------------------------------------------------------
Telecom- Environmental Life Unallocated
munications Technologies Sciences and Other Total
-------------------------------------------------------------------------------------------------------------------------------
Charges for restructuring actions $ 640 $ 1 $ 11 $ 301 $ 953
-------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the headcount reduction related to the 2001 plans:
-------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
-------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 6,000 3,100 2,900 12,000
-------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2002, all of the 12,000 employees had been separated
under the plans.
Impairment Of Long-Lived Assets Other Than Goodwill
Given our restructuring actions and the market conditions facing our
businesses, at various times throughout 2001 to 2003, we performed
evaluations of the recoverability of our long-lived assets. In each case
that an impairment evaluation was required, we developed operating cash
flow projections for each strategic alternative and made assessments as to
the probability of each outcome. If our projections indicated that our long
lived assets were not recoverable through future cash flows, we were then
required to estimate the fair value of the long-lived assets, which were
limited to property, plant and equipment, using the expected cash flow
approach as a measure of fair value.
2003 Impairment Charge
In April 2003, we announced that we had agreed with our partner to shutdown
CAV and wrote down its assets to their estimated salvage values. This
resulted in an impairment charge of $62 million ($19 million after-tax and
minority interest).
Subsequent to our decision to exit, CAV signed a definitive agreement to
sell tangible assets to Henan Anyang CPT Glass Bulb Group, Electronic Glass
Co., Ltd. (Henan Anyang), located in China, for amounts exceeding estimated
salvage values. Upon the receipt of $10 million in cash, we recognized a $5
million credit in restructuring. We expect the sale to be completed in the
first half of 2004 at which time we anticipate recognizing an additional
gain of approximately $40 million ($13 million after-tax and minority
interest).
2002 Impairment Charges
Photonic technologies
---------------------
In 2002, the telecommunications market underwent a dramatic decline in
demand for its products as major buyers of network equipment in this
industry reduced their capital spending. This negative trend was expected
to continue into the foreseeable future. As a result of our impairment
evaluation, the photonics assets were written down to estimated salvage
value, as this amount was our best estimate of fair value. This resulted in
a $269 million ($195 million after-tax) write down of the long-lived assets
including $90 million related to patents.
Conventional video components
-----------------------------
In 2002, the market was impacted by a decline in demand for conventional
television glass and a dramatic increase in the importation of television
glass, tubes and sets from Asia. These trends were expected to continue
into the foreseeable future. As a result of our impairment evaluation,
CAV's assets were written down to their estimated fair values. This
resulted in a $140 million ($44 million after-tax and minority interest)
write-down of the assets.
2001 Impairment Charges
Photonic technologies
---------------------
In 2001, the telecommunications market's dramatic decline began. We
performed an asset impairment evaluation of our photonics product line and
incurred a charge of $116 million to write down intangible assets to their
estimated fair values.
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 non-premises asbestos claims against us and PCC, which might arise from
PCC products or operations.
The agreement is expected to be incorporated into a settlement fund as part of a
reorganization plan for PCC. The plan will be submitted to the federal
bankruptcy court in Pittsburgh for approval, and is subject to a number of
contingencies, including a favorable vote by 75% of the asbestos claimants
voting on the PCC reorganization plan. We will make our contributions to the
settlement trust under the agreement after the plan is approved, becomes
effective and is no longer subject to appeal. We expect the approval process to
be complete in 2004.
When the plan becomes effective, our settlement will require the contribution of
our equity interest in PCC, our one-half equity interest in PCE, and 25 million
shares of our common stock. The common stock will be marked-to-market each
quarter until it is contributed to the settlement trust, thus resulting in
adjustments to income and the settlement liability as appropriate. We will also
make cash payments with a current value of $136 million over six years beginning
in June 2005 which we will accelerate, as needed, to maximize the related tax
benefits. In addition, we will assign insurance policy proceeds from our primary
insurance and a portion of our excess insurance as part of the settlement. We
recorded an initial charge of $298 million in the first quarter of 2003 to
reflect the terms of the settlement and additional charges of $115 million to
reflect the mark to market of our common stock through December 31, 2003. Total
charges of $413 million ($263 million after-tax) were incurred for the twelve
months ended December 31, 2003. This charge was previously reported as a
nonoperating charge in our 2003 Quarterly Reports on Form 10-Q. Effective with
the Annual Report on Form 10-K as of December 31, 2003, we have reclassified
this charge to operating expenses in the consolidated statements of operations.
The carrying value of our investment in PCE and the fair value of 25 million
shares of our common stock, totaling $282 million, have been reflected in
current liabilities. The remaining $136 million, representing the net present
value of the cash payments, discounted at 5.5%, is recorded in noncurrent
liabilities. See Legal Proceedings in our most recent quarterly report on Form
10-Q for a history of this matter.
Operating loss
We incurred an operating loss of $655 million in 2003 which was significantly
lower than the 2002 loss of $2.7 billion and the 2001 operating loss of $6.0
billion. Our loss in 2003 included the asbestos settlement charges. Losses in
all three years included restructuring, impairment and other charges and credits
as described above. Our results for 2001 were also impacted by an operating
charge of $333 million to write-down excess and obsolete inventory, a $90
million charge related to the release of restrictions on shares of Corning
common stock and a $28 million charge to write-down an investment in
intellectual property.
Gain on repurchases and retirement of debt, net
During the years ended December 31, 2003 and 2002, we repurchased and retired a
significant portion of our zero coupon convertible debentures due November 8,
2015. In 2003, we repurchased and retired 1,531,000 debentures with an accreted
value of $1.2 billion for cash of approximately $1.1 billion through open market
purchases and a public tender offer and recorded a net gain of $55 million. We
also issued 6.5 million shares of common stock from treasury in exchange for
55,000 debentures with an accreted value of $43 million, and recognized a charge
of $35 million reflecting the fair value of the incremental shares issued beyond
those required by the terms of the debentures. The increase in equity due to the
issuance of shares from treasury stock was $77 million.
The following table summarizes the activity related to our zero coupon
convertible debentures (dollars in millions):
--------------------------------------------------------------------------------
For the years ended
December 31,
------------------------------
2003 2002
--------------------------------------------------------------------------------
Bonds repurchased or exchanged for equity 1,586,000 638,987
Book value $ 1,239 $ 493
Fair value $ 1,154 $ 308
Pre-tax gain (1) $ 20 $ 176
After-tax gain (1) $ 13 $ 108
--------------------------------------------------------------------------------
(1) Net of the write-off of unamortized issuance and deal costs.
In addition to our zero coupon debentures, we repurchased and retired 60,000
euro notes due 2005 with a book value of 60 million euros for cash of 63 million
euros (including accrued interest) or $70 million. We recorded a loss of $1
million on the transaction.
Benefit for income taxes
Our provision (benefit) for income taxes and the related effective benefit rates
for continuing operations were as follows (in millions):
--------------------------------------------------------------------------------
For the years ended December 31,
---------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------
Provision (benefit) for income taxes $ (254) $ (726) $ (468)
Effective benefit rate (33.4)% (26.7)% (7.6)%
--------------------------------------------------------------------------------
Our effective tax rate was impacted by our restructuring, impairment and other
charges and credits and our gains on repurchases and retirements of debt.
Excluding these items, our rate was (33)% in 2003, (30)% in 2002 and (13)% in
2001.
SFAS No.109, "Accounting for Income Taxes ("SFAS No. 109")," requires that a
valuation allowance be established when it is more likely than not that all or a
portion of a deferred tax asset will not be realized. A review of all available
positive and negative evidence needs to be considered, including a company's
current, past and future predicted performance, the market environment of the
industries in which the company operates, the utilization of past tax credits,
length of carryback and carryforward periods, and existing contracts or sales
backlog that will result in future profits.
At December 31, 2003, we have recorded gross deferred tax assets of
approximately $2.1 billion with a valuation allowance of $469 million, and
offset by deferred tax liabilities of $201 million. The valuation allowance is
primarily attributable to the uncertainty regarding the realization of specific
foreign and state tax benefits, net operating losses and tax credits. The net
deferred tax assets of approximately $1.5 billion consist of a combination of
domestic (U.S. federal, state and local) and foreign tax benefits for: (a) items
which have been recognized for financial reporting purposes, but which will be
reported on tax returns to be filed in the future, and (b) loss and tax credit
carryforwards. As explained further below, we have performed the required
assessment of positive and negative evidence regarding the realization of the
net deferred tax assets in accordance with SFAS No. 109. This assessment
included the evaluation of scheduled reversals of deferred tax liabilities,
estimates of projected future taxable income and tax-planning strategies.
Although realization is not assured, based on our assessment, we have concluded
that it is more likely than not that such assets, net of the existing valuation
allowance, will be realized.
Net domestic deferred tax assets are approximately $1.3 billion at December 31,
2003. Approximately $460 million of these net deferred tax assets relate to loss
and tax credit carryforwards that expire through 2023. The remaining net
deferred tax assets comprise the following deductible temporary differences:
1. other postretirement benefits of $244 million, which will reverse over the
next 40 to 50 years;
2. restructuring and other liabilities of $155 million, which will reverse
over the next 10 years;
3. research and development expenditures of $252 million, which will reverse
over the next 10 years; and
4. other miscellaneous items of $178 million, which will reverse, on average,
over the next 10 years.
Approximately 10% of our net domestic deferred tax assets will be realized
through net operating loss carryback claims to be filed over the next three to
five years, which will generate cash refunds during such period. We expect the
remaining net domestic deferred tax assets to be realized from future earnings.
However, in the event future earnings are insufficient, approximately 40% of our
net domestic deferred tax assets could be realized through a tax-planning
strategy involving the sale of a non-strategic appreciated asset. Realization of
the remaining 50% of our net domestic deferred tax assets is solely dependent on
our ability to generate sufficient future taxable income during carryforward
periods of approximately 20 years.
The minimum amount of domestic future income that would have to be generated to
realize this portion of our deferred tax assets is $1.7 billion over at least 20
years. Currently, we are generating domestic losses. However, our forecast of
domestic income indicates it is more likely than not that the future results of
operations in the U.S. will generate sufficient taxable income to realize this
portion of our deferred tax assets. Specifically, we expect to incur
significantly lower domestic losses in 2004 and to return to profitability in
the U.S. in 2005. Key assumptions embedded in these near-term forecasts follow:
1. Our 2004 U.S. losses will decrease as a result of the 2003 exit of the
photonics technologies business and CAV.
2. We expect to see improved earnings trends in our Telecommunications segment
which is primarily in the U.S. This includes a lower loss in 2004 and a
return to profitability in 2005. This trend is partially being driven by
the realization of lower operating costs as a result of prior years'
restructuring actions. In addition, we are forecasting revenue to be flat
or down slightly in 2004 but significantly higher in 2005 due to an
expected recovery in the telecommunications industry in 2005.
3. Our specialty materials semiconductor business will generate higher
earnings in 2004 as a result of a recovery in the semiconductor equipment
industry and lower operating costs as a result of the fourth quarter 2003
restructuring actions, which will be completed by the end of the first
quarter of 2004.
4. Our Display Technologies segment will continue its rapid growth. Although
this business is largely based in Asia, domestic earnings of this business
have increased in 2003 and are expected to continue to increase over the
next several years, in part due to an increase in U.S. royalty income.
5. We will continue to sustain modest growth in our remaining domestic
businesses and, except for the restructuring actions announced prior to
December 31, 2003, we do not expect to incur any significant additional
restructuring or impairment charges.
Our forecast of domestic income is based on assumptions about and current trends
in our operating segments, and there can be no assurance that such results will
be achieved. We review such forecasts in comparison with actual results and
expected trends quarterly for purpose of our recoverability assessment. As a
result of this review, if we determine that we will not return to profitability
in the U.S. in 2005 or if sufficient future taxable income may not be generated
to fully realize the net deferred tax assets, we will increase the valuation
allowance by a charge to income tax expense in an amount equal to the portion of
the deferred tax assets that are realizable solely through projected future
taxable income. If we record such a valuation allowance, we will also cease to
recognize additional tax benefits on any losses in the U.S.
Equity in earnings of associated companies, net of impairments
Equity earnings nearly doubled to $209 million in 2003. The increase was due to
the following:
.. The resumption of the recognition of equity earnings from Dow Corning in
2003 added $82 million to equity earnings in 2003. In 1995, we fully
impaired our investment in Dow Corning upon its entry into bankruptcy
proceedings and did not recognize equity earnings from the second quarter
of 1995 through the end of 2002. We began recognizing equity earnings in
the first quarter of 2003 when we concluded that Dow Corning's emergence
from bankruptcy protection was probable based on the Bankruptcy Court's
findings on December 11, 2002. See Legal Proceedings for a history of this
matter.
.. Our 50% owned Samsung Corning Precision, a South Korean manufacturer of
liquid crystal display glass, increased its net income by 82% compared to
2002, resulting in equity earnings $64 million higher than 2002. Earnings
in 2003 were $144 million.
.. These positive results were negatively impacted by Samsung Corning, which
recorded a significant asset impairment charge in the fourth quarter of
2003. Our portion of that charge was $66 million (after-tax), which
resulted in a net equity loss of $39 million.
Equity earnings in 2002 were $116 million, a decline of 22% from 2001, primarily
due to the impairment of an equity investment in the second quarter of 2002 for
$14 million and a $20 million reduction in equity earnings in the fourth
quarter, caused by restructuring and impairment charges recorded by Samsung
Corning Micro Optics, a 50% owned manufacturer of photonics components.
Excluding these items, equity earnings approximated those in 2001.
Loss from continuing operations
As a result of the above, the loss from continuing operations and per share data was as follows (in millions, except per share
amounts):
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations $ (223) $ (1,780) $ (5,532)
Basic and diluted loss per common share from continuing operations $ (0.18) $ (1.85) $ (5.93)
Shares used in computing basic and diluted per share amounts 1,274 1,030 933
------------------------------------------------------------------------------------------------------------------------------------
RESULTS OF DISCONTINUED OPERATIONS
On December 13, 2002, we completed the sale of our precision lens business to 3M
Company (3M) for cash proceeds up to $850 million, of which $50 million was
deposited in an escrow account. During 2002, we received approximately $800
million in cash and recorded a gain on the sale of $415 million, net of tax, in
income from discontinued operations in the consolidated statements of
operations. 3M has notified Corning that 3M believes it has certain claims
arising out of the representations and warranties made by Corning in connection
with the sale of the precision lens business to 3M. The parties are attempting
to resolve such claims. In 2003, $1 million of the escrow balance was used to
pay state income taxes. At December 31, 2003, approximately $49 million remains
in the escrow account, and no other gain on the sale of the precision lens
business will be recognized until such claims are resolved.
The precision lens business operating results and cash flows have been removed
from our results of continuing operations for all periods presented, and have
been excluded from the operating segments data. There were no results from
discontinued operations in 2003.
Summarized selected financial information for the discontinued operations
related to the precision lens business follows (in millions):
--------------------------------------------------------------------------------
For the years ended December 31,
----------------------------------
2002 2001
--------------------------------------------------------------------------------
Net sales $ 268 $ 225
============================
Income before taxes $ 100 $ 50
Gain on sale before taxes 652
Provision for income taxes (274) (16)
----------------------------
Net income $ 478 $ 34
--------------------------------------------------------------------------------
OPERATING SEGMENTS
Effective with the first quarter of 2004, we have revised our reportable
operating segments from Telecommunications and Technologies to
Telecommunications, Display Technologies, Environmental Technologies, and Life
Sciences. The following provides a brief description of the products and markets
served by each reportable segment:
.. Telecommunications - manufactures optical fiber and cable, and hardware and
equipment components for the worldwide telecommunications industry;
.. Display Technologies - manufactures liquid crystal display glass for flat
panel displays;
.. Environmental Technologies - manufactures ceramic substrates and filters
for automobile and diesel applications; and
.. Life Sciences - manufactures glass and plastic consumables for scientific
applications.
The change in our segment presentation reflects how Corning's Chief Operating
Decision Making group ("CODM") allocates resources and assesses the performance
of its businesses. Specifically, the CODM is increasing its level of review of
the Display Technologies segment significantly due to the recent increase in
growth and capital spending in that segment. In addition, the CODM is increasing
its review of the Environmental Technologies and Life Sciences segments to
strengthen the overall balance and stability of Corning's portfolio of
businesses.
We prepared the financial results for our operating segments on a basis that is
consistent with the manner in which we internally disaggregate financial
information to assist in making internal operating decisions. We include the
earnings of equity affiliates that are closely associated with our operating
segments in the respective segment's net income. We have allocated certain
common expenses among segments differently than we would for stand-alone
financial information prepared in accordance with GAAP. These expenses include
interest, taxes and corporate functions. Segment net income may not be
consistent with measures used by other companies. The accounting policies of our
operating segments are the same as those applied in the consolidated financial
statements.
------------------------------------------------------------------------------------------------------------------------------------
Telecom- Display Environmental Life Unallocated Consolidated
munications Technologies Technologies Sciences and Other Total
------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2003
Net sales $ 1,426 $ 595 $ 476 $ 281 $ 312 $ 3,090
Research, development and engineering expenses (1) $ 120 $ 55 $ 87 $ 28 $ 54 $ 344
Restructuring, impairment and other charges and
credits (2) $ (36) $ 147 $ 111
Interest expense (3) $ 75 $ 39 $ 19 $ 5 $ 16 $ 154
(Benefit) provision for income taxes $ (78) $ 45 $ 5 $ 7 $ (233) $ (254)
(Loss) earnings before minority interests and equity
(losses) earnings (4)(5) $ (158) $ 91 $ 9 $ 14 $ (461) $ (505)
Minority interests (6) 73 73
Equity in (losses) earnings of associated companies,
net of impairments (11) 144 76 209
------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (169) $ 235 $ 9 $ 14 $ (312) $ (223)
------------------------------------------------------------------------------------------------------------------------------------
Segment (loss) income before minority interest and
equity (losses) earnings as a percentage of
segment sales (11.1)% 15.3% 1.9% 5.0% (16.3)%
Segment net (loss) income as a percentage of
segment sales (11.8)% 39.5% 1.9% 5.0% (7.2)%
------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2002
Net sales $ 1,631 $ 405 $ 394 $ 280 $ 454 $ 3,164
Research, development and engineering expenses (1) $ 308 $ 41 $ 63 $ 17 $ 54 $ 483
Restructuring, impairment and other charges
and credits (2) $ 1,722 $ 2 $ 1 $ 355 $ 2,080
Interest expense (3) $ 99 $ 29 $ 16 $ 5 $ 30 $ 179
(Benefit) provision for income taxes $ (722) $ 20 $ 8 $ 13 $ (45) $ (726)
(Loss) earnings before minority interests and equity
(losses) earnings (4)(5) $(1,838) $ 39 $ 16 $ 25 $ (236) $ (1,994)
Minority interests (6) 1 97 98
Equity in (losses) earnings of associated companies,
net of impairments (60) 80 16 80 116
Income from discontinued operations 478 478
------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $(1,897) $ 119 $ 32 $ 25 $ 419 $ (1,302)
------------------------------------------------------------------------------------------------------------------------------------
Segment (loss) income before minority interest and
equity (losses) earnings as a percentage of
segment sales (112.7)% 9.6% 4.1% 8.9% (63.0)%
Segment net (loss) income as a percentage of
segment sales (116.3)% 29.4% 8.1% 8.9% (41.2)%
------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2001
Net sales $ 4,458 $ 323 $ 379 $ 267 $ 620 $ 6,047
Research, development and engineering expenses (1) $ 474 $ 27 $ 50 $ 31 $ 40 $ 622
Restructuring, impairment and other charges
and credits (2) $ 5,404 $ 1 $ 11 $ 301 $ 5,717
Interest expense (3) $ 104 $ 16 $ 10 $ 4 $ 19 $ 153
Benefit for income taxes $ (336) $ 14 $ 12 $ (9) $ (149) $ (468)
Loss before minority interests and equity earnings(4)(5) $(5,215) $ 28 $ 24 $ (17) $ (513) $ (5,693)
Minority interests (6) 13 13
Equity in earnings of associated companies 12 60 6 70 148
Income from discontinued operations 34 34
------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $(5,203) $ 88 $ 30 $ (17) $ (396) $ (5,498)
------------------------------------------------------------------------------------------------------------------------------------
Segment (loss) income before minority interest and
equity (losses) earnings as a percentage of
segment sales (117.0)% 8.7% 6.3% (6.4)% (94.1)%
Segment net (loss) income as a percentage of
segment sales (116.7)% 27.2% 7.9% (6.4)% (90.9)%
------------------------------------------------------------------------------------------------------------------------------------
(1) Non-direct research, development and engineering expenses are allocated to
segments based upon direct project spending for each segment.
(2) Related tax benefit:
Year ended December 31, 2003: $17, $0, $0, $0, $32 and $49.
Year ended December 31, 2002: $452, $0, $1, $0, $95 and $548.
Year ended December 31, 2001: $282, $0, $0, $4, $113 and $399.
(3) 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.
(4) 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.
(5) Includes an allocation of depreciation of corporate property not
specifically identifiable to a segment. Related depreciable assets are not
allocated to segment assets.
(6) Includes $30 million and $68 million in 2003 and 2002, respectively,
related to impairment of long-lived assets of the conventional video
components business.
A reconciliation of reportable segment net income (loss) to consolidated net loss follows (in millions):
-----------------------------------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------
2003 2002 2001
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) of reportable segments $ 89 $ (1,721) $ (5,102)
Non-reportable operating segments net (loss) income (1) (139) (29) 1
Unallocated amounts:
Non-segment loss and other (2) (51) (24) (43)
Amortization of goodwill (363)
Non-segment restructuring, impairment and
other (charges) and credits (13) (208) (191)
Asbestos settlement (413)
Interest income 32 41 68
Gain on repurchases of debt 19 176
Benefit (provision) for income taxes (3) 170 (24) 94
Minority interests 1
Equity in earnings of associated companies (4) 83 8 4
Income from discontinued operations 478 34
-------- --------- --------
Net loss $ (223) $ (1,302) $ (5,498)
-----------------------------------------------------------------------------------------------------------------------
(1) Includes the results of non-reportable operating segments.
(2) Includes the results of non-segment operations and other corporate
activities.
(3) Includes tax associated with non-segment restructuring, impairment and
other charges.
(4) Includes amounts derived from corporate investments, primarily Dow Corning
Corporation in 2003.
Telecommunications
The Telecommunications segment produces optical fiber and cable, and optical
hardware and equipment for the worldwide telecommunications industry. In July
2003, we exited the photonic technologies product line.
The following table provides net sales and other data for the Telecommunications
segment (in millions):
--------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 760 $ 859 $ 2,889
Hardware and equipment 612 661 1,022
Photonic technologies 54 111 547
-------- --------- --------
Total net sales $ 1,426 $ 1,631 $ 4,458
======== ========= ========
Net loss $ (169) $ (1,897) $ (5,203)
--------------------------------------------------------------------------------
2003 vs. 2002
Sales in the segment declined 13%, or $205 million, compared to 2002. All
products in the segment incurred a decline in sales. A portion of the decline
was in photonic technologies which we exited in July 2003. The remaining decline
in sales was due to price decreases for optical fiber and cable which were
partially offset by volume increases. The segment incurred a loss of $169
million in 2003, compared to a net loss of $1.9 billion in the prior year.
Restructuring and impairment charges included a $13 million loss on the sale of
photonics technologies assets to Avanex and $88 million for restructuring
charges offset by credits of $137 million, resulting in net credits of $36
million. All of the Telecommunications products reported a loss in 2003;
however, the losses were significantly lower than those incurred in the prior
year. The decrease in the loss over the prior year was primarily due to much
lower restructuring and impairment charges and cost savings resulting from these
actions.
The following discussion of products in the Telecommunications segment excludes
the restructuring and impairment charges and credits to provide clarity on the
underlying business trends.
Optical fiber and cable
-----------------------
Sales declined 12%, or $99 million compared to 2002. The decrease was primarily
due to pricing pressure, particularly in fiber, but was partially offset by
strong demand in Japan and China, primarily in the first quarter. Sales volume
increased almost 20% in 2003 compared to 2002 due primarily to having the full
year results of the Chinese fiber and cable entities acquired from Lucent in the
fourth quarter of 2002. Volumes for our other fiber and cable facilities were up
slightly in 2003 compared to 2002. The loss for 2003 was significantly less than
2002 due to significant cost reduction.
Hardware and equipment
----------------------
Sales decreased 7%, or $49 million in 2003, compared to the prior year. The
sales decrease was primarily due to the overall lack of capital spending by our
customers impacting the entire telecommunications industry, as well as the sale
of the appliance controls group in May 2002. The loss for 2003 significantly
decreased from the prior year due to cost reductions achieved from the 2002
restructuring actions and other cost reduction initiatives.
Photonic technologies
---------------------
On July 31, 2003, we completed the sale of a significant portion of the photonic
technologies assets to Avanex. See Restructuring, Impairment and Other Charges
and Credits and Note 5 (Restructuring Actions) to the Consolidated Financial
Statements. Sales declined 51%, or $57 million, compared to 2002 due to lower
sales volume in the early part of the year as well as our exit of photonics
technologies in 2003. The loss in 2003 was more than 85% less than the prior
year loss due to cost savings resulting from restructuring actions taken in 2002
as well as the exit of this business in 2003.
2002 vs. 2001
This segment incurred significant restructuring and impairment charges in 2002
and 2001. The 2002 and 2001 charges are described in detail in Restructuring,
Impairment and Other Charges and Credits. The restructuring activities were
undertaken to reduce the operating cost structure due to continued market
declines. More than half of the 2002 charge related to the impairment of fixed
assets, primarily in the fiber and cable business. A significant portion of the
asset impairments in this business represented the closure of two fiber plants
and permanent abandonment of certain construction projects. The balance of the
charge represented impairments of cost based investments, primarily in the
photonic technologies business, and severance and benefits for retirees and
separated personnel in all businesses. In addition, the segment incurred a $400
million charge for the impairment of goodwill and a $269 million charge for
long-lived asset impairments in photonic technologies. The impairment charge
incurred in the second quarter of 2001 relates to goodwill and certain acquired
intangible assets from acquisitions in the photonic technologies business. These
charges are described in Notes 4 (Impairment of Goodwill) and 6 (Impairment of
Other Long-Lived Assets) to the Consolidated Financial Statements.
Sales in the segment declined 63%, or $2,827 million, compared to 2001 as each
product in the segment experienced a significant decline in volume with the
largest declines in optical fiber and cable and photonic technologies. The
segment incurred losses of $1.9 billion in 2002, compared to a net loss of $5.2
billion in 2001. The 2002 loss was primarily due to the significant decrease in
sales volume and restructuring and impairment charges. Each product line
reported a loss in 2002. The trend between years reflected lower restructuring
and impairment charges. Excluding these restructuring and impairment charges,
the segment net loss was $592 million compared to a loss of $81 million in 2001.
The increase in the loss in 2002 reflected reduced sales volumes and lower
prices in each product line offset by cost reductions resulting from
restructuring actions.
The following discussion of products in the Telecommunications segment excludes
the restructuring and impairment charges and credits to provide clarity on the
underlying business trends.
Optical fiber and cable
-----------------------
Sales declined 70%, or $2,030 million compared to 2001. The decrease was
primarily due to a sales volume decline of more than 50% for the year as well as
double digit price declines. Excluding restructuring and impairment charges, the
optical fiber and cable product line incurred a significant loss in 2002,
compared to profits in the prior year, primarily due to significantly lower
sales volume, declining prices and unfavorable product mix.
As discussed in Restructuring Actions, the optical fiber and cable product line
undertook significant restructuring actions in the fourth quarter of 2002. These
actions included permanent closure of two international fiber manufacturing
plants and the mothballing of the Concord, North Carolina facility. We believe
that the Concord facility can be returned to productive capacity within six to
nine months of a decision to do so and construction in progress at the Concord
facility can be completed efficiently. We believe the Concord and Wilmington
plants will provide sufficient capacity for the foreseeable future.
Hardware and equipment
----------------------
Sales decreased 35%, or $361 million, compared to 2001. The sales decreases were
primarily due to the overall lack of spending impacting the entire
telecommunications industry, as well as the sale of the appliance controls group
in May 2002. Excluding restructuring charges, the product line incurred a loss
driven by lower volumes and pricing pressure in 2002, compared to a near
breakeven performance in 2001.
Photonic technologies
---------------------
Sales declined 80%, or $436 million, compared to 2001, primarily due to lower
sales volume as network build-outs in the telecommunications industry declined
resulting in much lower demand for photonic products. The business incurred a
significant loss for 2002 primarily due to dramatically lower sales volumes.
However, the 2002 losses decreased more than 50%, compared to the losses
incurred in 2001, which included inventory write-downs of $333 million. The
results in 2002 reflected cost reductions resulting from restructuring actions
taken in 2001 and 2002.
During the second quarter of 2002, we favorably resolved an open issue from the
second quarter of 2001 with a major customer, resulting in the recognition of
revenue of $14 million and pre-tax income of $3 million. This revenue was
recognized in part on shipment of inventory previously reserved. In addition, we
settled an open matter with a significant vendor in 2002 resulting in the
reversal of a vendor reserve of $20 million that was recorded as part of the
charge in the second quarter of 2001.
Outlook:
The global telecommunications market downturn that began in 2001 continued into
2003; however, we believe that conditions have begun to stabilize. We ultimately
expect a recovery in 2005, and we believe 2004 will be comparable to 2003. We
expect 2004 sales to be flat to down slightly compared to 2003. Although we
expect to see volumes in our hardware and equipment and fiber and cable
businesses to increase, we will continue to experience pricing pressure, but at
a lower level than in 2003. We expect a loss in 2004; however, we believe it
will be significantly less than 2003, primarily due to the exit of the photonic
technologies product line and lower operating expenses reflecting cost savings
from restructuring actions taken in 2003 and 2002.
Display Technologies
The following table provides net sales and other data for the Display
Technologies segment (in millions):
--------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------
Net Sales $ 595 $ 405 $ 323
Income before equity earnings $ 91 $ 39 $ 28
Equity earnings of associated companies $ 144 $ 80 $ 60
Net income $ 235 $ 119 $ 88
--------------------------------------------------------------------------------
2003 vs. 2002
Sales increased 47%, or $190 million, compared to 2002. The increase was
primarily due to volume gains of approximately 43%, as penetration of liquid
crystal display panels in the desktop market increased, and favorable exchange
rates. Earnings approximately doubled in 2003 compared to the prior year due to
the increase in volume and significant gains in equity earnings from Samsung
Corning Precision over the prior year.
In July 2003, we announced a $180 million expansion of our liquid crystal
display glass manufacturing facility in Taiwan. The three-phased project is
expected to be completed by the end of 2004 with production to begin in the
second quarter of 2004. In February 2004, we announced a $600 million expansion
of our liquid crystal display glass manufacturing facilities in Japan and
Taiwan. This expansion will occur over 2004 and 2005.
2002 vs. 2001
Sales increased 25%, or $82 million, compared to 2001. The increase was
primarily due to higher sales volume as penetration in the desktop market
increased. The prior year's sales were negatively impacted by an inventory
correction in the industry in the first quarter of 2001. Volume gains of over
46% for 2002 were partially offset by price declines of 10% on a constant
currency basis. Earnings increased 35% in 2002, compared to 2001, primarily due
to volume gains and a more than 30% improvement in equity earnings from Samsung
Corning Precision.
Outlook:
We expect sales volume to increase in 2004, and weighted average pricing to be
stable. We also expect profitability in the segment to improve significantly in
2004 due to the strong volume growth and increased equity earnings from Samsung
Corning Precision.
Environmental Technologies
The following table provides net sales and other data for the Environmental
Technologies segment (in millions):
--------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------
Net sales $ 476 $ 394 $ 379
Net income $ 9 $ 32 $ 30
--------------------------------------------------------------------------------
2003 vs. 2002
Sales increased 21%, or $82 million, compared to 2002. The increased sales were
primarily due to increased U.S. auto production driven by financing incentives,
favorable mix of premium products, favorable exchange rates and higher sales for
diesel products. Earnings decreased 72% compared to the prior year due to a
decrease in equity earnings from Cormetech, a U.S. designer and manufacturer of
industrial catalysts, and higher development spending for the diesel product
line.
2002 vs. 2001
Sales increased 4%, or $15 million, compared to 2001, primarily due to increased
U.S. auto production driven by financing incentives and strong growth in Europe
and Japan. Earnings improved 7%, compared to 2001, as a significant increase in
equity earnings from Cormetech, a U.S. designer and manufacturer of industrial
catalysts, was partially offset by price declines and increased manufacturing
and development costs related to new products.
Outlook:
We expect sales to increase in 2004, primarily due to strong demand for our
thin-wall automotive substrates and diesel products.
Life Sciences
The following table provides net sales and other data for the Life Sciences
segment (in millions):
--------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------
Net sales $ 281 $ 280 $ 267
Net income (loss) $ 14 $ 25 $ (17)
--------------------------------------------------------------------------------
2003 vs. 2002
Sales were flat in 2003, compared to 2002, primarily due to weak sales in Europe
and a general softness in the market. Earnings were down 44% compared to the
prior year. Improved manufacturing efficiencies, and a gain on the disposition
of a minor product line, were more than offset by higher development spending.
2002 vs. 2001
Sales increased 5%, or $13 million, compared to 2001, primarily due to strong
growth in most product lines. The segment returned to profitability in 2002,
primarily due to cost savings from the discontinuation of our investment in
microarray technology products in the third quarter of 2001, as well as improved
manufacturing efficiencies and higher sales.
Outlook:
We expect sales to increase in 2004, primarily due to stabilization of the
market.
Unallocated and Other
The following table provides net sales and other data (in millions):
--------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------
Conventional video components $ 65 $ 166 $ 252
Other businesses 247 288 368
Total net sales $ 312 $ 454 $ 620
======== ========= ========
Net (loss) income $ (312) $ 419 $ (396)
--------------------------------------------------------------------------------
Unallocated and Other includes all other operating segments that do not meet the
quantitative threshold for separate reporting (e.g. conventional video
components, specialty materials, and ophthalmic products), certain corporate
investments (e.g. Dow Corning, Samsung Corning and Steuben), discontinued
operations, and unallocated expenses. Unallocated expenses include: research and
other expenses related to new business development; gains or losses on
repurchases and retirement of debt; charges related to the asbestos litigation;
and restructuring and impairment charges related to the corporate research and
development or staff organizations. Unallocated and Other also represents the
reconciliation between the totals for the reportable segments and our
consolidated total.
See Restructuring, impairment, and other charges and credits, Asbestos
settlement, and Discontinued Operations for a description of the key drivers of
sales and net (loss) income for 2003 vs. 2002 and 2002 vs. 2001.
LIQUIDITY AND CAPITAL RESOURCES
Financing Structure
In 2003, we completed two equity offerings of our common stock as follows:
.. 45 million shares in July for net proceeds of $363 million, and
.. 50 million shares in May for net proceeds of $267 million.
We used the net proceeds of the May offering and $356 million of existing cash
to reduce debt through a public tender offer conducted in June. We used the net
proceeds of the July offering to reduce debt through open market repurchases.
See Note 17 (Shareholders' Equity) to the Consolidated Financial Statements.
We repurchased and retired approximately 1.6 million zero coupon convertible
debentures in 2003 for approximately $1.1 billion in cash and 6.5 million shares
of treasury common stock. See Note 14 (Long-Term Debt and Loans Payable) to the
Consolidated Financial Statements for further detail.
As a result of our debt repurchase program, we reduced the balance of zero
coupon convertible debentures as follows:
--------------------------------------------------------------------------------
December 31, 2003 December 31, 2002 December 31, 2001
--------------------------------------------------------------------------------
Zero coupon convertibles $ 385 $ 1,606 $ 2,059
--------------------------------------------------------------------------------
The remaining zero coupon convertible debentures will likely be put back to us
on November 8, 2005, at $819.54 per debenture and on November 8, 2010, at
$905.29 per debenture. We have the option of settling this obligation in cash,
common stock, or a combination of both. From time to time, we may retire
additional debt securities for cash or equity.
Due to our debt ratings, we continue to be precluded from accessing the
short-term commercial paper market. The terms that we could receive on any new
long-term debt issues would likely be consistent with those generally available
to high-yield issuers.
As an additional source of funds, we currently have full unrestricted access to
a $2 billion revolving credit facility with 17 banks, expiring on August 17,
2005. As of December 31, 2003, there were no borrowings under the credit
facility. The facility includes one financial covenant limiting the ratio of
total debt to total capital, as defined, to not greater than 60%. At December
31, 2003 and December 31, 2002, this ratio was 34% and 47%, respectively.
In March 2001, we filed a universal shelf registration statement with the SEC
that became effective in the first quarter of 2001. The shelf permits the
issuance of up to $5 billion of various debt and equity securities. As of March
1, 2004, our remaining capacity under the shelf registration statement was
approximately $2.9 billion.
Subsequent Event
Through March 1, 2004, we repurchased and retired 25 thousand zero coupon
convertible debentures for approximately $19 million in cash resulting in a net
decrease of $20 million to the zero coupon convertible debenture book value. In
addition, we issued 22 million shares of Corning common stock and $24 million in
cash in exchange for 3.5% convertible debentures with a book value of $213
million at an effective conversion price of $9.675 per share. As a result of
these transactions, we will record a $23 million pre-tax loss on repurchases and
retirement of debt during the first quarter of 2004.
Capital Spending
Capital spending totaled $366 million, $357 million and $1.7 billion in 2003,
2002 and 2001, respectively. Based on events as of June 30, 2004, our 2004
capital spending program is expected to be in the range of $950 million to $1
billion, of which $750 million to $800 million will be to expand the capacity
for liquid crystal display glass. Capital spending activity in 2002 and 2003
primarily included expansion of liquid crystal display capacity and new capacity
for diesel substrates. Capital spending in 2001 related primarily to the
Telecommunications segment.
Restructuring
During 2003, 2002 and 2001, we made payments of $233 million, $278 million and
$77 million, respectively, related to employee severance and other exit costs
resulting from restructuring actions. Cash payments for employee-related costs
and other exit costs will be substantially completed by the end of 2004, while
payments for exit activities will be substantially completed by the end of 2005.
Key Balance Sheet Data
At December 31, 2003, cash, cash equivalents and short-term investments totaled
$1.3 billion, compared with $2.1 billion at December 31, 2002. The decrease from
December 31, 2002, was primarily due to long-term debt repayments, restructuring
payments, capital expenditures and the use for working capital. These items were
partially offset by the proceeds from the May and July equity offerings and the
receipt of a U.S. federal tax refund of $191 million.
Balance sheet and working capital measures are provided in the following table
(dollars in millions):
--------------------------------------------------------------------------------
As of December 31,
-------------------
2003 2002
--------------------------------------------------------------------------------
Working capital $ 1,141 $ 2,145
Working capital, excluding cash and short-term investments $ (125) $ 55
Current ratio 1.7:1 2.3:1
Trade accounts receivable, net of allowances $ 525 $ 470
Days sales outstanding 58 56
Inventories $ 467 $ 559
Inventory turns 4.8 4.4
Days payable outstanding 52 46
Long-term debt $ 2,668 $ 3,963
Total debt to total capital 34% 47%
--------------------------------------------------------------------------------
Credit Ratings
As of March 1, 2004, our credit ratings were as follows:
--------------------------------------------------------------------------------
RATING AGENCY Rating Rating Outlook
Last Update Long-Term Debt Commercial Paper Last Update
--------------------------------------------------------------------------------
Standard & Poor's BB+ B Stable
July 29, 2002 January 16, 2004
Moody's Ba2 Not Prime Stable
July 29, 2002 November 19, 2003
Fitch BB B Stable
July 24, 2002 July 24, 2003
--------------------------------------------------------------------------------
Our 2003 earnings were not adequate to cover our fixed charges (principally
interest and related charges on debt), primarily as a result of the asbestos
settlement charge, losses incurred in the Telecommunications segment and
restructuring and impairment charges. We expect our full year 2004 earnings will
be sufficient to cover our fixed charges.
Management Assessment of Liquidity
Our major source of funding for 2004 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 to raise additional cash to fund a portion of
our capital expenditures related to our growth businesses. 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. We may accelerate some or all of the
funding of the cash payments to the asbestos settlement trust, as needed, to
maximize the tax benefits we can realize in connection with the related
settlement charges.
Off Balance Sheet Arrangements
We have two variable interest entities ("VIEs") that are not consolidated as we
are not the primarily beneficiary. The assets and debt of these entities total
$12 million. Our maximum loss exposure as a result of our involvement with these
VIEs is approximately $18 million. This amount represents payments that would be
due to the lessor in the event of a total loss of the assets. We carry insurance
coverage for this risk.
Contractual Obligations
--------------------------------------------------------------------------------------------------------------------------------
Amount of commitment and contingency expiration per period
----------------------------------------------------------
Less than 1 to 2 2 to 3 3 to 4 5 years and
(In millions) Total 1 year years years years thereafter
--------------------------------------------------------------------------------------------------------------------------------
Performance bonds and guarantees $ 170 $ 31 $ 2 $ 1 $ 136
Contingent purchase price for acquisitions 36 36
Dow Corning credit facility 150 150
Stand-by letters of credit 16 6 10
Loan guarantees 25 4 21
Purchase obligations (1) 48 15 14 11 $ 8
Capital expenditure obligations (2) 59 59
Total debt (3) 2,827 146 590 46 113 1,932
Minimum rental commitments 300 44 33 29 39 155
--------------------------------------------------------------------------------------------------------------------------------
Total other commercial commitments
and contingencies $ 3,631 $ 337 $ 643 $ 87 $ 160 $ 2,404
--------------------------------------------------------------------------------------------------------------------------------
(1) Balance primarily represents obligations associated with a take or pay
contract related to our hardware and equipment operations.
(2) Capital expenditure obligations primarily related to our Display
Technologies segment expansions, which are included on our balance sheet.
(3) At December 31, 2003, $2,814 million of the $2,827 million was included on
our balance sheet. Amounts above are stated at their maturity value.
We have provided other financial guarantees and have contingent liabilities in
the form of purchase price adjustments for acquisitions, stand-by letters of
credit and performance bonds, some of which do not have fixed or scheduled
expiration dates. We have agreed to provide a credit facility related to Dow
Corning as discussed in Note 10 (Investments) to the Consolidated Financial
Statements. The funding of the Dow Corning credit facility is subject to events
connected to the Bankruptcy Plan. We believe the significant majority of these
guarantees and contingent liabilities will expire without being funded.
In January 2003, the SEC released FR-67, "Disclosure in Management's Discussion
and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations". In response to this guidance, we have assessed our off-balance
sheet and contractual obligations and have determined that in addition to
previously disclosed items, purchase obligations would be added. Given the
nature of purchase obligations, we limited our assessment to individual items
outstanding at December 31, 2003 greater than $1 million.
Pensions
We have a number of defined benefit pension plans covering certain domestic and
international employees. Our largest single pension plan is Corning's U.S.
qualified plan. At December 31, 2003, this plan accounted for 82% of our
consolidated defined benefit pension plans' projected benefit obligation and 89%
of the related plans' assets. In 2002, global capital market developments
resulted in negative returns on plan assets and a decline in the discount rate
used to estimate the related pension liability. In 2003, although global
equities had positive returns, interest rates continued to decline. As a result,
at December 31, 2003 and 2002, the accumulated benefit obligation (ABO) for our
domestic qualified and non-qualified plans and several international plans
exceeded the fair value of related plan assets, which required Corning to record
an additional minimum pension liability in accordance with SFAS No. 87,
"Employers' Accounting for Pensions."
Balances of these non-cash adjustments follow (in millions):
--------------------------------------------------------------------------------
December 31,
-----------------------
2003 2002
--------------------------------------------------------------------------------
Minimum pension liability $ 311 $ 348
Intangible assets 52 68
Other accumulated comprehensive loss, pre-tax 259 280
Other accumulated comprehensive loss, after-tax 159 173
--------------------------------------------------------------------------------
We have traditionally contributed to the U.S. qualified pension plan on an
annual basis in excess of the IRS minimum requirements, and as a result,
mandatory contributions are not expected to be required for this plan at least
until 2006. We contributed $160 million in 2003 to our U.S. pension plan. For
2004, we anticipate making voluntary contributions of at least $40 million to
this plan.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires us to make estimates and
assumptions that affect amounts reported therein. The estimates that required us
to make difficult, subjective or complex judgments follow.
Impairment of goodwill
SFAS No. 142, "Goodwill and Other Intangible Assets," requires us to make
certain difficult, subjective and complex judgments on a number of matters,
including assumptions and estimates used to determine the fair value of our
reporting units and the definition of our reporting units.
We measure fair value on the basis of discounted expected future cash flows. Our
estimates are based upon our historical experience, our current knowledge from
our commercial relationships, and available external information about future
trends.
The criteria for establishing a reporting unit is dependent upon how a company
determines its operating segments under SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Specifically, SFAS No. 142
permits a company to define a reporting unit as either an operating segment, a
component of an operating segment or an aggregation of two or more components of
an operating segment. Our reporting units include Telecommunications, Display
Technologies, Environmental Technologies, Life Sciences, specialty materials,
conventional video components, and ophthalmic. At December 31, 2003, the
Telecommunications, specialty materials and Display Technologies goodwill
balances were $1.6 billion, $150 million, and $9 million, respectively.
During 2002, we completed our annual goodwill impairment test, determined the
Telecommunications goodwill balance was impaired, and recorded a related
impairment charge of $400 million. Our 2002 testing results also determined that
the goodwill was not impaired for any other reporting unit. In the fourth
quarter of 2003, we completed our annual goodwill impairment tests and
determined that the goodwill balances were not impaired. As discussed in more
detail below, while we believe the estimates and judgments about future cash
flows used in the goodwill impairment tests are reasonable, we cannot provide
assurance that future impairment charges will not be required if the expected
cash flow estimates as projected by management do not occur.
Telecommunications
Our expectation is that there will be minimal volume growth in the short term;
volume growth is assumed to accelerate beginning in 2005 commensurate with
overall market recovery. Terminal value of the business assumes a growth in
perpetuity of 3%. These cash flows are also used to value intangible and
tangible assets which determine the implied value of reporting unit goodwill.
The discount rate applied to these cash flows represents a telecommunications
weighted average cost of capital based upon current debt and equity activity of
eleven public companies representing a cross section of worldwide competitors of
the reporting unit. For our 2002 annual test, we used a discount rate of 12% in
our calculation of fair value of the expected future cash flows. An impairment
charge of $400 million was recorded in 2002. Had we used a discount rate of
11.5%, the fair value of the reporting unit would have exceeded its carrying
value, and there would not have been impairment. Had we used a discount rate of
12.5%, the pre-tax impairment charge would have been approximately $225 million
higher. In 2003, we also used a 12% discount rate for our annual impairment
test. The results of our test indicated that goodwill was not impaired. The
results would not have changed had we used a discount rate of 11.5% or 12.5%.
Specialty materials
Due to market conditions, we determined that a detailed impairment test of the
specialty materials reporting unit was required in the fourth quarter of 2003.
While there was a significant decrease in sales in 2003 in this reporting unit
due to the cyclicality of the semiconductor industry, we expect increased volume
growth beginning in 2004. Our discounted cash flow test for this reporting unit
assumes a perpetuity growth rate of 3%. The discount rate applied to the
forecasted cash flows represents weighted average cost of capital based upon
current debt and equity activity of eight public companies representing a cross
section of worldwide competitors of the reporting unit. We used a discount rate
of 12% in our calculation of fair value of the expected future cash flows. The
results of our test indicated that goodwill was not impaired. The results would
not have changed had we used a discount rate of 11.5% or 12.5%.
Impairment of assets held for use
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
requires us to assess the recoverability of the carrying value of long-lived
assets when an event of impairment has occurred. We must exercise judgment in
assessing whether an event of impairment has occurred. For purposes of
recognition and measurement of an impairment loss, a long-lived asset or assets
is grouped with other assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other
assets and liabilities. We must exercise judgment in assessing the lowest level
for which identifiable cash flows are largely independent of the cash flows of
other assets and liabilities. We concluded events of impairment had occurred in
our semiconductor materials product line, which is part of the specialty
materials business, in the fourth quarter of 2003, and performed an impairment
test. The results of our test indicated that our long-lived assets held for use
were not impaired.
In 2002, we recorded pre-tax charges totaling $409 million primarily related to
the photonics and conventional television product lines. In each circumstance,
behavior of external parties, including customers and competitors, were
considered in the determination of whether an impairment was required. We also
exercised judgment in the determination of expected future cash flows against
which to compare the carrying value of the asset group being evaluated. For the
impairment in 2002, we exercised judgment in determining the fair value of the
assets from which the impairment charge was measured. For our photonic
technologies products, we based the fair value of our long-lived assets on the
actual results of recent asset auctions of similar equipment. For the assets
related to our conventional television product line, we exercised judgment about
alternative volume and sales price scenarios, computed discounted cash flows,
and assigned our best estimate of probability to each alternative. We reduced
the useful lives of the fixed assets of CAV as a result of this assessment.
Restructuring charges and impairments resulting from restructuring actions
During 2003 and 2002, we recorded write-downs of property, plant and equipment
as a result of decisions to exit facilities, primarily in the Telecommunications
segment. Assets impaired were primarily equipment, construction in progress and
buildings, which were sold or abandoned. We used information available from
recent auctions of telecommunications equipment to estimate salvage value when
measuring impairment. The estimated salvage values were very low, primarily due
to the depressed market for telecommunications related equipment. The salvage
values of property impaired were also estimated to be minimal as certain
facilities will be abandoned and not sold. We have had significant reversals in
2003, and it is possible that actual results will differ from assumptions and
require adjustments to reserves.
Valuation allowances for deferred income taxes
SFAS No. 109, "Accounting for Income Taxes," requires us to exercise judgment
about our future results in assessing the realizability of our deferred tax
assets. At December 31, 2003, Corning had gross deferred tax assets of $2.1
billion. We determined that the likelihood of realization of certain deferred
tax assets is less than 50% and recorded valuation allowances of $469 million.
If future taxable income differs from our estimate, adjustments to these
allowances will be required and will impact future net income. See Income Taxes
and Note 9 (Income Taxes) to the Consolidated Financial Statements for further
detail.
Probability of litigation outcomes
SFAS No. 5, "Accounting for Contingencies," requires us to make judgments about
future events that are inherently uncertain. In making determinations of likely
outcomes of litigation matters, we consider the evaluation of outside counsel
knowledgeable about each matter, as well as known outcomes in case law. See
Legal Proceedings for a detailed discussion of the key litigation matters we
face. The most significant matter involving judgment is the PCC asbestos
liability. There are a number of factors bearing upon our potential liability,
including the inherent complexity of a Chapter 11 filing, our history of success
in defending ourselves against asbestos claims, our assessment of the strength
of our corporate veil defenses, our continuing dialogue with our insurance
carriers and the claimants' representatives, and other factors. We have reached
a tentative settlement on PCC as disclosed in Legal Proceedings and Note 10
(Investments) to the Consolidated Financial Statements. The settlement is
subject to a number of contingencies, including a favorable vote by 75% of the
asbestos claimants voting on the PCC Plan, and approval by the bankruptcy court.
Pension assumptions
In 2002, we made a change in assumption that impacted pension expense in future
periods. Specifically, we lowered our expected long-term rate of return on
pension assets from 9% to 8.5%. We did not alter the nature of the pension trust
investments. Asset performance in 2002 had been below the 9% assumption. As
such, we lowered our long-term rate of return assumption. In 2003, this
increased our pension expense as measured in accordance with SFAS No. 87,
"Employers' Accounting for Pension," compared to amounts recorded in 2002. The
increase was approximately $8 million in 2003. In 2003, our actual return on
plan assets approximated 20%; however, we will continue to hold our expected
long-term rate of return at 8.5%.
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 twelve 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 its
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 approximately $21 million for our estimated liability for
environmental cleanup and related litigation at December 31, 2003. 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.
NEW ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board ("FASB") issued a
revised SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." The revised standard requires incremental pension and
other postretirement benefit plan disclosures to financial statements and is
designed to improve disclosure transparency. The adoption of this accounting
standard did not have any effect on our results of operations or financial
position.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51," ("FIN 46") which requires all VIEs to be consolidated by the primary
beneficiary. The primary beneficiary is the entity that holds the majority of
the beneficial interests in the VIE. In addition, the interpretation expands
disclosure requirements for both VIEs that are consolidated as well as VIEs from
which the entity is the holder of a significant, but not the majority amount of
the beneficial interests. We have leased equipment from three VIEs for which the
sole purpose is the leasing of equipment to us. We assessed the impact of this
interpretation and determined that we are the primary beneficiary of one of
these existing VIEs, and therefore, began to consolidate this entity beginning
on July 1, 2003. At December 31, 2003, the assets and debt of this entity were
$31 million and $34 million, respectively. We also evaluated the impact of this
interpretation on the two other entities and determined that we are not the
primary beneficiary for either entity. The assets and debt of these entities
total $12 million. The adoption of this interpretation did not have a material
effect on our results of operations or financial position.
In addition, we adopted the following new standards in 2003, which did not have
a material impact on our consolidated financial position or results of
operations:
.. SFAS No. 143, "Accounting for Asset Retirement Obligations,"
.. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities,"
.. FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45"),
.. SFAS No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and
Hedging Activities," and
.. SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity."
FORWARD-LOOKING STATEMENTS
The statements in this Annual Report on Form 10-K, in reports subsequently filed
by Corning with the SEC on Forms 10-Q and 8-K, and related comments by
management which are not historical facts or information and contain words such
as "believes," "expects," "anticipates," "estimates," "forecasts," and similar
expressions are forward-looking statements. 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:
- 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;
- cost reductions;
- 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 in the Display Technologies
and other operating segments;
- changes in the mix of sales between premium and non-premium products;
- 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;
- equity company activities;
- interest costs;
- credit rating and ability to obtain financing and capital on commercially
reasonable terms;
- adequacy and availability of insurance;
- financial risk management;
- 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; and
- stock price fluctuations.
Exhibit 99.3
------------
Audited consolidated financial statements of Corning for the years ended
December 31, 2003, 2002 and 2001, revised to reflect the revisions to our
reportable segments described herein. Also included is the report of independent
registered public accounting firm dated January 22, 2004, except for Note 22, as
to which the date is March 1, 2004, and except for Note 21, as to which the date
is August 5, 2004.
Index to Financial Statements and Financial Statement Schedules
Page
Report of Independent Registered Public Accounting Firm.................................................................42
Consolidated Statements of Operations...................................................................................43
Consolidated Balance Sheets.............................................................................................44
Consolidated Statements of Cash Flows...................................................................................45
Consolidated Statements of Changes in Shareholders' Equity..............................................................46
Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Policies............................................................47
2. Discontinued Operations...............................................................................51
3. Inventory Write-down..................................................................................52
4. Impairment of Goodwill................................................................................52
5. Restructuring Actions.................................................................................53
6. Impairment of Long-Lived Assets Other Than Goodwill...................................................57
7. Short-Term Investments................................................................................58
8. Inventories...........................................................................................59
9. Income Taxes..........................................................................................59
10. Investments...........................................................................................62
11. Property, Net.........................................................................................68
12. Goodwill and Other Intangible Assets..................................................................68
13. Other Accrued Liabilities.............................................................................69
14. Long-Term Debt and Loans Payable......................................................................69
15. Employee Retirement Plans.............................................................................71
16. Commitments, Contingencies, Guarantees and Hedging Activities.........................................75
17. Shareholders' Equity..................................................................................77
18. Loss Per Common Share.................................................................................79
19. Stock Compensation Plans..............................................................................79
20. Business Combinations and Divestitures................................................................81
21. Operating Segments....................................................................................82
22. Subsequent Event......................................................................................86
Financial Statement Schedule:
II. Valuation Accounts and Reserves.......................................................................87
Report of independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
To the Board of Directors and Shareholders of Corning Incorporated
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Corning Incorporated and its subsidiaries at December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Notes 1, 2 and 4 of the consolidated financial statements, as of
January 1, 2002, the Company ceased amortization of goodwill and changed its
method of accounting for discontinued operations to conform with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", respectively.
/s/ PricewaterhouseCoopers LLP
New York, New York
January 22, 2004, except for Note 22, as to which the date is March 1, 2004, and
except for Note 21, as to which the date is August 5, 2004
Consolidated Statements of Operations Corning Incorporated and Subsidiary Companies
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts) 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 3,090 $ 3,164 $ 6,047
Cost of sales (Note 3) 2,241 2,562 4,227
---------------------------------------------
Gross margin 849 602 1,820
Operating expenses:
Selling, general and administrative expenses 599 716 1,090
Research, development and engineering expenses 344 483 622
Amortization of purchased intangibles (Note 12) 37 43 76
Amortization of goodwill (Note 1) 363
Restructuring, impairment and other charges and credits (Notes 4, 5 and 6) 111 2,080 5,717
Asbestos settlement (Note 10) 413
---------------------------------------------
Operating loss (655) (2,720) (6,048)
Interest income 32 41 68
Interest expense (Note 14) (154) (179) (153)
Gain on repurchases and retirement of debt, net (Note 14) 19 176
Other expense, net (1) (38) (28)
---------------------------------------------
Loss from continuing operations before income taxes (759) (2,720) (6,161)
Benefit for income taxes (Note 9) (254) (726) (468)
---------------------------------------------
Loss from continuing operations before minority interests
and equity earnings (505) (1,994) (5,693)
Minority interests 73 98 13
Equity in earnings of associated companies, net of impairments (Note 10) 209 116 148
---------------------------------------------
Loss from continuing operations (223) (1,780) (5,532)
Income from discontinued operations, net of income taxes (Note 2) 478 34
---------------------------------------------
Net loss (223) (1,302) (5,498)
Dividend requirements of preferred stock (Note 17) (128) (1)
---------------------------------------------
Loss attributable to common shareholders $ (223) $ (1,430) $ (5,499)
=============================================
Basic and diluted (loss) earnings per common share from (Note 18):
Continuing operations $ (0.18) $ (1.85) $ (5.93)
Discontinued operations (Note 2) 0.46 0.04
---------------------------------------------
Basic and diluted loss per common share $ (0.18) $ (1.39) $ (5.89)
=============================================
The accompanying notes are an integral part of these statements.
Consolidated Balance Sheets Corning Incorporated and Subsidiary Companies
------------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------------------------------------------------------------------------------------------------------
(In millions, except share and per share amounts) 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (Note 1) $ 833 $ 1,426
Short-term investments, at fair value (Note 7) 433 664
----------------------------------
Total cash, cash equivalents and short-term investments 1,266 2,090
Trade accounts receivable, net of doubtful accounts and allowances - $38 and $59 525 470
Inventories (Note 8) 467 559
Deferred income taxes (Note 9) 242 296
Other accounts receivable 117 358
Prepaid expenses and other current assets 77 52
----------------------------------
Total current assets 2,694 3,825
----------------------------------
Restricted cash and investments (Note 1) 66 82
Investments (Note 10) 1,045 769
Property, net (Note 11) 3,620 3,705
Goodwill (Note 12) 1,735 1,715
Other intangible assets, net (Note 12) 166 213
Deferred income taxes (Note 9) 1,225 887
Other assets 201 210
----------------------------------
Total Assets $ 10,752 $ 11,406
==================================
Liabilities and Shareholders' Equity
Current liabilities:
Loans payable (Note 14) $ 146 $ 204
Accounts payable 333 339
Other accrued liabilities (Note 13) 1,074 1,137
----------------------------------
Total current liabilities 1,553 1,680
----------------------------------
Long-term debt (Note 14) 2,668 3,963
Postretirement benefits other than pensions (Note 15) 619 617
Other liabilities (Notes 10, 13, 15) 412 396
Commitments and contingencies (Note 16)
Minority interests 36 59
Shareholders' equity (Note 17):
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: 854 thousand and 1.55 million 85 155
Common stock - Par value $0.50 per share; Shares authorized:
3.8 billion; Shares issued: 1,401 million and 1,267 million 701 634
Additional paid-in capital 10,298 9,695
Accumulated deficit (5,144) (4,921)
Treasury stock, at cost; Shares held: 58 million and 70 million (574) (702)
Accumulated other comprehensive income (loss) 98 (170)
----------------------------------
Total shareholders' equity 5,464 4,691
----------------------------------
Total Liabilities and Shareholders' Equity $ 10,752 $ 11,406
==================================
The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows Corning Incorporated and Subsidiary Companies
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
(In millions) 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Loss from continuing operations $ (223) $ (1,780) $ (5,532)
Adjustments to reconcile loss from continuing operations
to net cash provided by (used in) operating activities:
Amortization of purchased intangibles 37 43 76
Amortization of goodwill 363
Depreciation 480 618 621
Asbestos settlement 413
Restructuring, impairment and other charges and credits 111 2,080 5,717
Gain on repurchases of debt, net of inducements (19) (176)
Inventory write-down 333
Stock compensation charges 1 3 130
Undistributed earnings of associated companies (97) (33) (75)
Minority interests, net of dividends paid (77) (98) (22)
Deferred income tax benefit (263) (432) (528)
Interest expense on convertible debentures 18 38 41
Tax benefit on stock options 2 27
Restructuring payments (233) (278) (77)
Increases in restricted cash (3) (53)
Income tax refund 191
Employee benefits payments in excess of expense (142) (55) (23)
Changes in certain working capital items (Note 1) (62) (233) 240
Other, net (1) 32 91
------------------------------------
Net cash provided by (used in) operating activities 133 (324) 1,382
------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (366) (357) (1,741)
Acquisitions of businesses, net of cash acquired (6) (56) (66)
Proceeds from sale of precision lens business 9 787
Net proceeds from sale or disposal of assets 46 92 67
Increase in long-term investments and other long-term assets (10) (31) (113)
Short-term investments - acquisitions (1,584) (2,222) (1,320)
Short-term investments - liquidations 1,814 2,742 853
Restricted investments - acquisitions (117)
Restricted investments - liquidations 19 88
Other, net (2) 4
------------------------------------
Net cash (used in) provided by investing activities (78) 924 (2,316)
------------------------------------
Cash Flows from Financing Activities:
Net (repayments of) proceeds from loans payable (162) (490) 181
Proceeds from issuance of long-term debt 11 735
Repayments of long-term debt (1,193) (325) (104)
Proceeds from issuance of Series C preferred stock, net 557
Proceeds from issuance of common stock, net 667 52 247
Repurchases of common stock for treasury (23)
Cash dividends paid to preferred and common shareholders (19) (88) (113)
Other, net (1) (8) (42)
------------------------------------
Net cash (used in) provided by financing activities (708) (314) 904
------------------------------------
Effect of exchange rates on cash 60 43 (7)
Cash (used in) provided by continuing operations (593) 329 (37)
Cash provided by (used in) discontinued operations (Note 2) 60 (5)
------------------------------------
Net (decrease) increase in cash and cash equivalents (593) 389 (42)
Cash and cash equivalents at beginning of year 1,426 1,037 1,079
------------------------------------
Cash and cash equivalents at end of year $ 833 $ 1,426 $ 1,037
====================================
The accompanying notes are an integral part of these statements.
Consolidated Statements of Changes in Shareholders' Equity Corning Incorporated and Subsidiary Companies
------------------------------------------------------------------------------------------------------------------------------------
(In millions)
Retained Accumulated
Series C Capital in earnings other Total
Preferred Common excess of Unearned (accumulated Treasury comprehensive shareholders'
stock stock par value compensation deficit) stock income (loss) equity
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 501 $ 9,315 $ (304) $ 2,001 $ (753) $ (127) $ 10,633
Net loss (5,498) (5,498)
Foreign currency translation
adjustment (31) (31)
Net unrealized loss on
investments, net of tax (45) (45)
Other comprehensive income 10 10
-----------
Total comprehensive loss (5,564)
-----------
Shares issued in acquisitions 2 163 165
Shares issued in equity offerings 7 218 225
Shares issued to benefit plans (166) 239 (33) 40
Dividends on stock ($0.12
per share) (113) (113)
Other, net 2 7 60 (41) 28
-------------------------------------------------------------------------------------------------
Balance, December 31, 2001 512 9,537 (5) (3,610) (827) (193) 5,414
Net loss (1,302) (1,302)
Foreign currency translation
adjustment 208 208
Minimum pension liability
adjustment (173) (173)
Net unrealized gain on
investments, net of tax 6 6
Other comprehensive loss (18) (18)
-----------
Total comprehensive loss (1,279)
-----------
Issuance of Series C preferred
stock, net $ 575 (18) 557
Series C preferred stock
conversions (420) 107 313
Shares issued in acquisitions 15 34 49
Shares issued to benefit plans (97) 148 51
Purchase of common stock
for treasury (23) (23)
Dividends on preferred stock (118) (118)
Other, net 46 3 (9) 40
-------------------------------------------------------------------------------------------------
Balance, December 31, 2002 155 634 9,697 (2) (4,921) (702) (170) 4,691
Net loss (223) (223)
Foreign currency translation
adjustment 239 239
Minimum pension liability
adjustment 26 26
Net unrealized gain on
investments, net of tax 1 1
Other comprehensive income 2 2
-----------
Total comprehensive income 45
-----------
Series C preferred stock
conversions (70) 18 52
Shares issued in equity offerings 47 583 630
Shares issued to benefit plans (37) 65 28
Other, net 2 22 (17) 63 70
-------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 85 $ 701 $ 10,317 $ (19) $(5,144) $ (574) $ 98 $ 5,464
=================================================================================================
The accompanying notes are an integral part of these statements.
Notes to Consolidated Financial Statements Corning Incorporated and Subsidiary Companies
------------------------------------------------------------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of all entities
controlled by Corning and our majority-owned domestic and foreign subsidiaries,
after elimination of all material intercompany accounts, transactions and
profits.
The equity method of accounting is used for investments in associated companies
which are not controlled by Corning and in which our interest is generally
between 20% and 50%. Our share of earnings or losses of associated companies, in
which at least 20% of the voting securities is owned, is included in the
consolidated operating results.
We consolidate one variable interest entity in which we are the primary
beneficiary.
On December 13, 2002, we completed the sale of the precision lens business to 3M
Company (3M). Our consolidated statements of operations and cash flows and
related notes present the precision lens business as a discontinued operation.
Certain amounts for 2002 and 2001 have been reclassified to conform to the 2003
classifications.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires management to
make estimates and assumptions that affect amounts reported therein. Significant
estimates and assumptions in these Consolidated Financial Statements include
restructuring and other charges and credits, allowances for doubtful accounts
receivable, estimates of future cash flows and other assumptions associated with
goodwill and long-lived asset impairment tests, estimates of the fair value of
assets held for disposal, environmental and legal liabilities, income taxes and
deferred tax valuation allowances, and the determination of discount and other
rate assumptions for pension and postretirement employee benefit expenses. Due
to the inherent uncertainty involved in making estimates, actual results
reported in future periods may be different from these estimates.
Revenue Recognition
We recognize revenue when it is realized or realizable and has been earned.
Product revenue is recognized when persuasive evidence of an arrangement exists,
the product has been delivered and legal title and all risks of ownership have
been transferred, customer acceptance has occurred, and payment is reasonably
assured. We reduce revenue for estimated product returns, allowances and price
discounts based on past experience.
Foreign Currencies
Balance sheet accounts of foreign subsidiaries are translated at current
exchange rates and statements of operations accounts are translated at average
exchange rates for the year. Translation gains and losses are reported as a
separate component of accumulated other comprehensive income (loss). Foreign
currency transaction gains and losses are included in current earnings.
Stock-Based Compensation
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation (SFAS No. 123)," we apply the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25 (APB No. 25), "Accounting for Stock Issued to Employees," to our stock
options and other stock-based compensation plans. These plans are more fully
described in Note 19 (Stock Compensation Plans).
In accordance with APB No. 25, compensation expense for stock options is
recognized in income based on the excess, if any, of the quoted market price of
the stock at the grant date of the award or other measurement date over the
amount an employee must pay to acquire the stock. Generally, the exercise price
for stock options granted to employees equals or exceeds the fair market value
of our common stock at the date of grant.
1. Summary of Significant Accounting Policies (continued)
The following table illustrates the effect on loss from continuing operations
and loss per share if we had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation. The estimated fair value of
each Corning option is calculated using the Black-Scholes option-pricing model.
(In millions, except per share amounts):
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations - as reported $ (223) $ (1,780) $ (5,532)
Less: Dividend requirements of preferred stock (128) (1)
------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations attributable to common
shareholders - as reported (223) (1,908) (5,533)
Add: Stock-based employee compensation expense
determined under APB No. 25, included in reported
loss from continuing operations, net of tax 1 1 79
Less: Stock-based employee compensation expense
determined under fair value based method, net of tax (162) (278) (446)
------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations attributable to common
shareholders - pro forma $ (384) $ (2,185) $ (5,900)
------------------------------------------------------------------------------------------------------------------------------------
Loss per common share from continuing operations:
Basic - as reported $ (0.18) $ (1.85) $ (5.93)
Basic - pro forma $ (0.30) $ (2.12) $ (6.32)
Diluted - as reported $ (0.18) $ (1.85) $ (5.93)
Diluted - pro forma $ (0.30) $ (2.12) $ (6.32)
------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents
All short-term, highly liquid investments with original maturities of 90 days or
less, are considered cash equivalents.
Supplemental disclosure of cash flow information follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Changes in certain working capital items:
Trade accounts receivable $ 153 $ 666
Inventories $ 108 135 (47)
Other current assets 49 (363) 92
Accounts payable and other current liabilities, net of
restructuring payments (219) (158) (471)
------------------------------------------------------------------------------------------------------------------------------------
Total $ (62) $ (233) $ 240
------------------------------------------------------------------------------------------------------------------------------------
Cash paid (received) for interest and income taxes:
Interest expense $ 124 $ 112 $ 111
Income taxes, net of refunds received $ (145) $ 60 $ 99
------------------------------------------------------------------------------------------------------------------------------------
Short-Term Investments
Our short-term investments consist of debt securities classified as
available-for-sale, which are stated at estimated fair value. These debt
securities include U.S. treasury notes, state and municipal bonds, asset-backed
securities, corporate bonds, commercial paper and certificates of deposit. These
investments are on deposit with a major financial institution. Unrealized gains
and losses, net of tax, are computed on the first-in first-out basis and are
reported as a separate component of accumulated other comprehensive income
(loss) in shareholders' equity until realized.
1. Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
Restricted Cash and Investments
Restricted cash and investments represent cash and investments that we are
temporarily unable to access or funds set aside for other legally restricted
purposes. Restricted cash consists primarily of cash provided as collateral for
performance bonds and self-insured workers' compensation liabilities. Restricted
investments also include U.S. treasury securities pledged as collateral to
secure the payments on a promissory note. The note was issued in connection with
a one-time dividend that was declared upon the issuance of the Series C
convertible preferred stock.
Other Investments
Other investments include equity securities for which Corning does not have the
ability to exercise significant influence. These investments are accounted for
under the cost method of accounting. Equity securities that we are restricted
from selling beyond one year are carried at cost. Unrestricted shares are
adjusted to market value at the end of each accounting period. Unrealized gains
and losses are reported in a separate component of shareholders' equity under
the caption accumulated other comprehensive income (loss). A decline in the
value of other investments below cost that is deemed to be other than temporary
is charged to earnings, resulting in a new cost basis for that investment.
Property and Depreciation
Land, buildings and equipment are recorded at cost. Depreciation is based on
estimated useful lives of properties using the straight-line method. Except as
described in Note 5 (Restructuring Actions) related to accelerated depreciation
arising from restructuring programs, the estimated useful lives range from 20 to
40 years for buildings and 3 to 20 years for the majority of our equipment.
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," and SFAS No. 142 ("SFAS No. 142"), "Goodwill and
Other Intangible Assets." Among other provisions, goodwill is no longer
amortized but is subject to impairment tests at least annually. We selected the
fourth quarter to perform the annual impairment test for goodwill. We adopted
SFAS No. 142 on January 1, 2002. We completed our initial impairment review
during the first quarter of 2002 and concluded a transitional impairment charge
from the adoption of the standard was not required. As described in Note 4
(Impairment of Goodwill), during the fourth quarter of 2002, we recorded a
goodwill impairment charge in accordance with SFAS No. 142.
The following table presents a reconciliation of reported net loss and loss per
share to adjusted net loss and loss per share, as if SFAS No. 142 had been in
effect as of January 1, 2001 (in millions, except per share amounts):
-------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------------------------------------------------
Reported net loss $ (223) $ (1,302) $ (5,498)
Goodwill amortization, net of income taxes 345
-----------------------------------------
Adjusted net loss $ (223) $ (1,302) $ (5,153)
=========================================
Reported net loss per share - basic $ (0.18) $ (1.39) $ (5.89)
Goodwill amortization, net of income taxes 0.37
-----------------------------------------
Adjusted net loss per share - basic $ (0.18) $ (1.39) $ (5.52)
=========================================
Reported net loss per share - diluted $ (0.18) $ (1.39) $ (5.89)
Goodwill amortization, net of income taxes 0.37
-----------------------------------------
Adjusted net loss per share - diluted $ (0.18) $ (1.39) $ (5.52)
-------------------------------------------------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
Goodwill is allocated to our reporting units. The reporting units with goodwill
allocated to them are Telecommunications, Display Technologies, and specialty
materials. SFAS No. 142 defines a reporting unit as an operating segment or one
level below an operating segment. SFAS No. 142 requires us to compare the fair
value of the reporting unit to its carrying amount on an annual basis to
determine if there is potential impairment. We perform interim impairment tests
when events or changes in circumstances occur that would more likely than not
reduce the fair value of a reporting unit below its carrying value. If the fair
value of the reporting unit is less than its carrying value, an impairment loss
is recorded to the extent that the fair value of the goodwill within the
reporting unit is less than its carrying value. The fair value of the reporting
unit is determined based on discounted cash flows, market multiples or appraised
values as appropriate.
Other intangible assets are recorded at cost and amortized over periods
generally ranging from 5 to 20 years.
Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets, such as plant and
equipment, intangible assets and investments, when events or changes in
circumstances occur that indicate that the carrying value of the asset or asset
group may not be recoverable. The assessment of possible impairment is based on
our ability to recover the carrying value of the asset or asset group from the
expected future pre-tax cash flows (undiscounted and without interest charges)
of the related operations. We assess the recoverability of the carrying value of
long-lived assets at the lowest level for which identifiable cash flows are
largely independent of the cash flows of other assets and liabilities. If these
cash flows are less than the carrying value of such asset or asset group, an
impairment loss is measured based on the difference between estimated fair value
and carrying value. Assets to be disposed are written-down to the greater of
their fair value or salvage value. Fair values are based on assumptions
concerning the amount and timing of estimated future cash flows and assumed
discount rates, reflecting varying degrees of perceived risk.
Treasury Stock
Shares of common stock repurchased by us are recorded at cost as treasury stock
and result in a reduction of shareholders' equity in the consolidated balance
sheets. From time to time, treasury shares may be reissued as contributions to
our employee benefit plans. When shares are reissued, we use an average cost
method for determining cost. The difference between the cost of the shares and
the reissuance price is added or deducted from additional paid-in capital.
Income Taxes
We use the asset and liability approach to account for income taxes. Under this
method, deferred tax assets and liabilities are recognized for the expected
future tax consequences of differences between the carrying amounts of assets
and liabilities and their respective tax base using enacted tax rates in effect
for the year in which the differences are expected to reverse. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period when the change is enacted. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
Derivative Instruments
We participate in a variety of foreign exchange forward contracts, foreign
exchange option contracts and interest rate swaps entered into in connection
with the management of our exposure to fluctuations in foreign exchange and
interest rates. These financial exposures are managed in accordance with
corporate policies and procedures.
All derivatives are recorded at fair value on the balance sheet. Changes in the
fair value of derivatives designated as cash flow hedges and hedges of net
investments in foreign operations are recorded in accumulated other
comprehensive income (loss). Amounts are reclassified from accumulated other
comprehensive income (loss) when the underlying hedged item impacts earnings.
Changes in the fair value of derivatives designated as fair value hedges are
recorded currently in earnings offset to the extent the derivative was
effective, by the changes in the fair value of the hedged item. Changes in the
fair value of derivatives not designated as hedging instruments are recorded
currently in earnings.
Effective January 1, 2001, Corning adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and
SFAS No. 138. The adoption of SFAS No. 133 as of January 1, 2001, resulted in a
cumulative after-tax credit to comprehensive income of $3 million. For the years
ended December 31, 2003 and 2001, respectively, an after-tax loss of $3 million
and $4 million was recorded in "other expense, net" for the ineffective portion
of cash flow hedges.
1. Summary of Significant Accounting Policies (concluded)
We have issued foreign currency denominated debt that has been designated as a
hedge of the net investment in a foreign operation. The effective portion of the
changes in fair value of the debt is reflected as a component of other
comprehensive income (loss) as part of the foreign currency translation
adjustment. During 2001, the after-tax amount included in other comprehensive
income (loss) as a result of a net investment hedge was $6 million.
Product Warranties
Provisions for estimated expenses related to product warranties are made at the
time the products are sold using historical experience as a prediction of
expected settlements. Reserves are adjusted when experience indicates an
expected settlement will differ from initial estimates. Reserves for warranty
items are included in other current liabilities.
New Standards Adopted
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The revised standard requires
incremental pension and other postretirement benefit plan disclosures to
financial statements and is designed to improve disclosure transparency. The
adoption of this accounting standard did not have any effect on our results of
operations or financial position.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51," ("FIN 46") which requires all variable interest entities ("VIEs") to be
consolidated by the primary beneficiary. The primary beneficiary is the entity
that holds the majority of the beneficial interests in the VIE. In addition, the
interpretation expands disclosure requirements for both VIEs that are
consolidated as well as VIEs from which the entity is the holder of a
significant, but not the majority amount of the beneficial interests. We have
leased equipment from three VIEs for which the sole purpose is the leasing of
equipment to us. We assessed the impact of this interpretation and determined
that we are the primary beneficiary of one of these existing VIEs, and
therefore, began to consolidate this entity beginning on July 1, 2003. At
December 31, 2003, the assets and debt of this entity were $31 million and $34
million, respectively. We also evaluated the impact of this interpretation on
the two other entities and determined that we are not the primary beneficiary
for either entity. The assets and debt of these entities total $12 million. The
adoption of this interpretation did not have a material effect on our results of
operations or financial position.
In addition, we adopted the following new standards in 2003, which did not have
a material impact on our consolidated financial position or results of
operations:
.. SFAS No. 143, "Accounting for Asset Retirement Obligations,"
.. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities,"
.. FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45"),
.. SFAS No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and
Hedging Activities," and
.. SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity."
2. Discontinued Operations
On December 13, 2002, we completed the sale of our precision lens business to 3M
for cash proceeds up to $850 million, of which $50 million was deposited in an
escrow account. During 2002, we received approximately $800 million in cash and
recorded a gain on the sale of $415 million, net of tax, in income from
discontinued operations in the consolidated statements of operations. 3M has
notified Corning that 3M believes it has certain claims arising out of the
representations and warranties made by Corning in connection with the sale of
the precision lens business to 3M. The parties are attempting to resolve such
claims. In 2003, $1 million of the escrow balance was used to pay state income
taxes. At December 31, 2003, approximately $49 million remains in the escrow
account, and no other gain on the sale of the precision lens business will be
recognized until such claims are resolved.
The precision lens business operating results and cash flows have been removed
from our results of continuing operations for all periods presented and have
been excluded from the operating segments data. There were no results from
discontinued operations in 2003.
2. Discontinued Operations (concluded)
Summarized selected financial information for the discontinued operations
related to the precision lens business follows (in millions):
--------------------------------------------------------------------------------
For the years ended December 31,
----------------------------------
2002 2001
--------------------------------------------------------------------------------
Net sales $ 268 $ 225
==========================
Income before taxes $ 100 $ 50
Gain on sale before taxes 652
Provision for income taxes (274) (16)
--------------------------
Net income $ 478 $ 34
--------------------------------------------------------------------------------
3. Inventory Write-down
During the second quarter of 2001, major customers in the photonic technologies
product line reduced their order forecasts and canceled orders already placed.
As a result, we determined that certain products were not likely to be sold
during their product life cycle. We recorded a charge to write-down excess and
obsolete inventory, including estimated purchase commitments, of $273 million
($184 million after-tax), which is included in cost of sales in the consolidated
statement of operations. In the fourth quarter of 2001, we recorded an
additional charge of $60 million ($37 million after-tax) for excess and obsolete
inventory primarily in the photonic technologies product line in response to
continued weak demand. This charge was also included in cost of sales.
During the second quarter of 2002, we favorably resolved an open issue from the
second quarter of 2001 with a major photonic technologies' customer, which
resulted in the recognition of revenue of $14 million and pre-tax income of $3
million. This revenue was recognized in part on shipment of inventory previously
reserved. In addition, the business settled an open matter with a significant
vendor, which resulted in the reversal of a vendor reserve of $20 million that
was included in the second quarter 2001 charge. In total, the impact of these
settlements in the second quarter of 2002 was pre-tax income of $23 million.
4. Impairment of Goodwill
2003 Annual Assessment
Due to market conditions in the telecommunications and semiconductor industries,
we performed goodwill impairment tests for our Telecommunications and specialty
materials reporting units in the fourth quarter of 2003. The results of our
impairment tests indicated that the fair value of each reporting unit exceeded
its book value.
2002 Charge
In the fourth quarter of 2002, we conducted our annual impairment tests and
concluded that an impairment charge of $400 million ($294 million after-tax) was
necessary to reduce the carrying value of goodwill in the Telecommunications
reporting unit to its estimated fair value of $1.6 billion. The decrease in fair
value at the end of 2002 from that measured in the initial benchmark assessment
on January 1, 2002 primarily reflected the following:
.. a delay in the timing of the expected recovery from late 2002, or early
2003 to 2005,
.. a reduction in the short-term cash flow expectations of the fiber and cable
business and a lower base from which the expected recovery will occur, and
.. a reduction in the short and long-term cash flow expectations of the
photonic technologies product line.
We retained valuation specialists to assist in the valuation of our tangible and
identifiable intangible assets for the purpose of determining the implied fair
value of goodwill at December 31, 2002.
4. Impairment of Goodwill (concluded)
2001 Charge
During the first half of 2001, we experienced a significant decrease in the rate
of growth of our Telecommunications segment, primarily in the photonic
technologies product line due to a dramatic decline in infrastructure spending
in the telecommunications industry, and determined that there were events of
impairment within photonics. We determined that our goodwill related to
photonics was not recoverable under SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," which was the
governing GAAP guidance at that time. As a result, we recorded a charge of $4.6
billion to impair a significant portion of goodwill, of which $3.0 billion
related to the Pirelli transaction and $1.6 billion related to goodwill
resulting from the acquisition of NetOptix Corporation.
5. Restructuring Actions
Corning recorded net charges of $49 million ($14 million credit after tax and
minority interest) in 2003. Major actions approved and initiated in 2003
included the following:
.. the shutdown of our 51% owned venture Corning Asahi Video Products Company
(CAV), which was a manufacturer of glass panel and funnels for use in
conventional tube televisions,
.. the sale and exit of our photonics products within the Telecommunications
segment, and
.. the shutdown of two of our specialty materials manufacturing facilities.
Restructuring Charges
---------------------
The 2003 restructuring charges of $41 million included $90 million of employee
separation costs (including special termination and curtailment losses related
to pension and postretirement health care plans) and $37 million in other exit
costs (principally lease termination and contract cancellation payments), offset
by an $86 million credit related to previous restructuring actions. These
credits were primarily the result of revised cost estimates of existing
restructuring plans and a decision to not exit two small cabling sites. The
charge entailed the elimination of approximately 1,975 hourly and salaried
positions including involuntary separation, early retirement and social
programs. In addition, we recorded a $20 million foreign deferred tax benefit
adjustment related to restructuring charges recorded in 2002. This credit is
reflected in the consolidated statement of operations under, "Benefit for income
taxes."
Impairment of Plant and Equipment to be Shutdown or Disposed
------------------------------------------------------------
Corning recorded a net credit of $21 million in 2003. This included $40 million
of charges to impair plant and equipment related to facilities to be shutdown or
disposed, which comprised $11 million for the North Brookfield semiconductor
materials plant closure, $14 million related to a cabling plant, $10 million
related to the final exit of photonics, and $5 million of other various costs.
The impairment charges were determined based on the amount by which the carrying
value exceeded the fair market value of the asset. The charge was more than
offset by $61 million in credits related to previous restructuring actions.
These credits were primarily the result of our decision not to exit two of the
previous cabling sites marked for shutdown in 2002 as well as proceeds on asset
disposals exceeding assumed salvage values.
Impairment of Cost Investments
------------------------------
In the first quarter, we recorded a $5 million charge for other than temporary
declines in certain cost investments in the Telecommunications segment. In the
third quarter, we sold these investments for $4 million in cash, which was $1
million more than previously expected. We reported this gain as a credit to
restructuring actions.
Loss on Sale of Photonics
-------------------------
We recorded a loss of $13 million in the third quarter when we completed the
sale of certain photonic technologies assets to Avanex Corporation ("Avanex").
In exchange for our photonics assets and $22 million in cash, we received 21
million restricted shares of Avanex common stock, which we valued at
approximately $53 million. These shares are restricted from sale for
approximately one year at which point the restrictions are lifted at intervals
beginning July 2004 and ending October 2005. As the shares become unrestricted,
we will mark-to-market the shares through other comprehensive income as
available-for-sale securities. The Avanex restricted shares are reflected as a
cost investment and recorded under "Investments" in our consolidated balance
sheet. Approximately 400 employees of the photonic technologies products became
employees of Avanex in the third quarter. The loss on sale included a $21
million reduction of our goodwill. See Note 10 (Investments) for further detail.
5. Restructuring Actions (continued)
In addition to these restructuring action costs, we also incurred the following
charges in our consolidated statement of operations related to the exit of
photonics:
.. an increase to the deferred tax valuation allowance by $21 million as we do
not expect to realize certain deferred tax assets in Italy, which is
reflected in the consolidated statement of operations under, "Benefit for
income taxes," and
.. a $7 million impairment charge for equity investments that were abandoned
as part of the exit from photonics, which is reflected in the consolidated
statement of operations under, "Equity in earnings of associated companies,
net of impairments."
Accelerated Depreciation
------------------------
We recorded $12 million of accelerated depreciation as a result of our decision
to shutdown our semiconductor materials manufacturing facility in Charleston,
South Carolina by March 31, 2004. We will record an additional $36 million in
the first quarter of 2004 while the plant continues operating.
The following table summarizes the charges, credits and balances of the
restructuring reserves as of and for the year ended December 31, 2003 (in
millions):
------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003
-------------------------------------- Remaining
Reversals Net Non-cash Cash reserve at
January 1, to existing charges/ uses payments Dec. 31,
2003 Charges plans (reversals) in 2003 in 2003 2003
------------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 273 $ 90 $ (63) $ 27 $ (27) $ (195) $ 78
Exit costs 132 37 (23) 14 (38) 108
----------------------------------------------------------------------------------------
Total restructuring charges $ 405 $ 127 $ (86) $ 41 $ (27) $ (233) $ 186
----------------------------------------------------------------------------------------
Impairment:
Assets to be disposed of by sale
or abandonment $ 40 $ (61) $ (21)
Cost investments 5 (1) 4
------------------------------------
Total impairment charges $ 45 $ (62) $ (17)
------------------------------------
Other:
Loss on Avanex transaction $ 13 $ 13
Accelerated depreciation 12 12
------------------------------------
Total other charges $ 25 $ 25
------------------------------------
Total restructuring, impairment and
other charges and credits $ 197 $ (148) $ 49
Tax (benefit) expense and minority
interest (83) 20 (63)
------------------------------------
Restructuring, impairment and other
charges and credits, net $ 114 $ (128) $ (14)
------------------------------------------------------------------------------------------------------------------------------------
Cash payments for employee-related costs will be substantially completed by the
end of 2004, while payments for exit activities will be substantially completed
by the end of 2005. We expect approximately one-half of the 2003 restructuring
charges to be paid in cash.
5. Restructuring Actions (continued)
The following table summarizes the net charge (reversals) for 2003 restructuring actions by operating segment (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Telecom- Unallocated
munications and Other Total
------------------------------------------------------------------------------------------------------------------------------------
Net charges (reversals) for restructuring actions $ (36) $ 85 $ 49
------------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the headcount reduction related to the 2003 plans:
------------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
------------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 975 750 250 1,975
------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2003, approximately 1,600 of the 1,975 employees had been
separated under the 2003 plans. We expect the remaining to be separated by
December 31, 2004, with the majority to be separated by the end of the first
quarter of 2004.
2002 Restructuring Actions
The continued decline in demand in the Telecommunications segment during 2002
required additional restructuring beyond that taken in 2001 to bring
manufacturing capacity in line with revenue projections. We recorded total
charges of $1.3 billion ($929 million after-tax and minority interest) over the
second, third and fourth quarters. Actions approved and initiated in 2002
included the following:
.. permanent closing of our optical fiber manufacturing facilities in Noble
Park, Victoria, Australia, and Neustadt bei Coburg, Germany. We also
mothballed our optical fiber manufacturing facility in Concord, North
Carolina and transferred certain capabilities to our Wilmington, North
Carolina facility,
.. reductions in capacity and employment in our cabling and hardware and
equipment locations worldwide to reduce costs,
.. permanent closure of our photonic technologies thin film filter
manufacturing facility in Marlborough, Massachusetts,
.. permanent abandonment of certain construction projects that had been
stopped in 2001 in the fiber and cable business within the
Telecommunications segment,
.. closure of minor manufacturing facilities, primarily in the
Telecommunications segment,
.. closure and consolidation of research facilities,
.. elimination of positions worldwide through voluntary and involuntary
programs, and
.. divestiture of a portion of the controls and connectors product line in the
Telecommunications segment.
In addition, we impaired cost based investments in a number of private
telecommunications companies based upon a decision in the fourth quarter of 2002
to divest the portfolio.
5. Restructuring Actions (continued)
The following table summarizes the charges, credits and balances of the restructuring reserves as of December 31, 2002
(in millions):
------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
------------------------------------- Remaining
Reversals Net Non-cash Cash reserve at
January 1, to existing charges/ uses payments Dec. 31,
2002 Charges plans (reversals) in 2002 in 2002 2002
------------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 198 $ 376 $ (5) $ 371 $ (40) $ (256) $ 273
Exit costs 78 85 (9) 76 (22) 132
----------------------------------------------------------------------------------------
Total restructuring charges $ 276 $ 461 $ (14) $ 447 $ (40) $ (278) $ 405
----------------------------------------------------------------------------------------
Impairment:
Assets to be disposed of by sale
or abandonment $ 712 $ (11) $ 701
Cost investments 107 107
-------------------------------------
Total impairment charges $ 819 $ (11) $ 808
-------------------------------------
Other:
Loss on divestiture $ 16 $ 16
Total restructuring, impairment and
other charges and credits $ 1,296 $ (25) $ 1,271
Tax (benefit) expense and minority
interest (352) 10 (342)
-------------------------------------
Restructuring, impairment and other
charges and credits, net $ 944 $ (15) $ 929
------------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the net charges (reversals) for 2002 restructuring actions by operating segment (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Telecom- Environmental Life Unallocated
munications Technologies Sciences and Other Total
------------------------------------------------------------------------------------------------------------------------------------
Net charges for restructuring actions $ 1,053 $ 2 $ 1 $ 215 $ 1,271
------------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the headcount reduction related to the 2002 plans:
------------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
------------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 1,650 2,950 2,500 7,100
------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2003, all of the 7,100 employees from the 2002 plan had been
separated.
2001 Restructuring Actions
In July and October of 2001, we announced a series of restructuring actions in
response to significant deteriorating business conditions which began initially
in our Telecommunications segment, but eventually spread to our other businesses
as the year progressed. The following actions were approved and undertaken in
2001:
.. closure of seven major manufacturing facilities and the consolidation of
several smaller facilities in the Telecommunications segment, as well as
the lighting and conventional television businesses,
.. discontinuation of our initiative in Corning Microarray Technology
products, part of our Life Sciences segment, and
.. elimination of approximately 12,000 positions affecting all operating
segments, but especially impacting the photonic technologies, hardware and
equipment and the optical fiber and cable products. This action included a
selective voluntary early retirement program for certain employees along
with involuntary separations.
These actions resulted in a pre-tax charge totaling $953 million ($585 million
after-tax) for the year ended December 31, 2001. Approximately one third of the
total charge was expected to be paid in cash.
5. Restructuring Actions (concluded)
The following table summarizes the charges and balances of the restructuring reserves as of December 31, 2001 (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Non-cash Cash Remaining
Total uses payments reserve at
charges in 2001 in 2001 Dec. 31, 2001
------------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 324 $ (66) $ (60) $ 198
Exit costs 95 (17) 78
------------------------------------------------------------
Total restructuring charges $ 419 $ (66) $ (77) $ 276
------------------------------------------------------------
Impairment:
Assets held for use $ 46
Assets to be disposed of by sale or abandonment 496
---------
Total impairment charges $ 542
---------
Total restructuring and impairment charges $ 961
Discontinued operations (8)
---------
Restructuring and impairment charges
from continuing operations 953
Tax benefit and minority interest 368
---------
Restructuring and impairment charges, net $ 585
------------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the charge for 2001 restructuring actions by operating segment (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Telecom- Environmental Life Unallocated
munications Technologies Sciences and Other Total
------------------------------------------------------------------------------------------------------------------------------------
Charges for restructuring actions $ 640 $ 1 $ 11 $ 301 $ 953
------------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the headcount reduction related to the 2001 plans:
------------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
------------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 6,000 3,100 2,900 12,000
------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2002, all of the 12,000 employees had been separated under
the plans.
6. Impairment of Long-Lived Assets Other Than Goodwill
Given our restructuring actions and the market conditions facing our businesses,
at various times throughout 2001 to 2003, we performed evaluations of the
recoverability of our long-lived assets. In each case that an impairment
evaluation was required, we developed operating cash flow projections for each
strategic alternative and made assessments as to the probability of each
outcome. If our projections indicated that our long lived assets were not
recoverable through future cash flows, we were then required to estimate the
fair value of the long-lived assets, which were limited to property, plant and
equipment, using the expected cash flow approach as a measure of fair value.
2003 Impairment Charges
In April 2003, we announced that we had agreed with our partner to shutdown CAV
and wrote down its assets to their estimated salvage values. This resulted in an
impairment charge of $62 million ($19 million after-tax and minority interest).
6. Impairment of Long-Lived Assets Other Than Goodwill (concluded)
Subsequent to our decision to exit, CAV signed a definitive agreement to sell
tangible assets to Henan Anyang CPT Glass Bulb Group, Electronic Glass Co., Ltd.
(Henan Anyang), located in China, for amounts exceeding estimated salvage
values. Upon the receipt of $10 million in cash, we recognized a $5 million
credit in restructuring. We expect the sale to be completed in the first half of
2004 at which time we anticipate recognizing an additional gain of approximately
$40 million ($13 million after-tax and minority interest).
2002 Impairment Charges
Photonic technologies
---------------------
In 2002, the telecommunications market underwent a dramatic decline in demand
for its products as major buyers of network equipment in this industry reduced
their capital spending. This negative trend was expected to continue into the
foreseeable future. As a result of our impairment evaluation, the photonics
assets were written down to estimated salvage value, as this amount was our best
estimate of fair value. This resulted in a $269 million ($195 million after-tax)
write-down of the long-lived assets including $90 million related to patents.
Conventional video components
-----------------------------
In 2002, the market was impacted by a decline in demand for conventional
television glass and a dramatic increase in the importation of television glass,
tubes and sets from Asia. These trends were expected to continue into the
foreseeable future. As a result of our impairment evaluation, the CAV's assets
were written down to their estimated fair values. This resulted in a $140
million ($44 million after-tax and minority interest) write down of the assets.
2001 Impairment Charges
Photonic technologies
---------------------
In 2001, the telecommunications market's dramatic decline began. We performed an
asset impairment evaluation of our photonics product line and incurred a charge
of $116 million to write-down intangible assets to their estimated fair values.
7. Short-Term Investments
We invest in publicly traded, highly liquid debt securities with credit ratings
of A or better (A-2 and P-2 or better for short-term ratings).
The following is a summary of the fair value of available-for-sale securities
(in millions):
--------------------------------------------------------------------------------
December 31,
---------------------------
2003 2002
--------------------------------------------------------------------------------
Bonds, notes and other securities
United States government and agencies $ 88 $ 315
States and municipalities 93 168
Asset-backed securities 93 58
Commercial paper 25 10
Other debt securities 134 113
--------------------------------------------------------------------------------
Total short-term investments $ 433 $ 664
--------------------------------------------------------------------------------
Gross unrealized gains and losses were insignificant at December 31, 2003 and
2002.
The following table summarizes the contractual maturities of debt securities at
December 31, 2003 (in millions):
--------------------------------------------------------------------------------
Less than one year $ 137
Due in 1-2 years 123
Due in 2-5 years 89
Due after 5 years 84
--------------------------------------------------------------------------------
Total $ 433
--------------------------------------------------------------------------------
Proceeds from sales of short-term investments totaled $1.4 billion and $2.2
billion in 2003 and 2002, respectively. The gross realized gains related to
sales of short-term investments were $2 million in 2003 and $10 million in 2002.
The gross realized losses related to sales of short-term investments were
insignificant in 2003 and $8 million in 2002.
8. Inventories
Inventories consist of the following (in millions):
--------------------------------------------------------------------------------
December 31,
-----------------------------
2003 2002
--------------------------------------------------------------------------------
Finished goods $ 141 $ 212
Work in process 113 115
Raw materials and accessories 138 135
Supplies and packing materials 75 97
--------------------------------------------------------------------------------
Total inventories $ 467 $ 559
--------------------------------------------------------------------------------
9. Income Taxes
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
----------------------------------------
(In millions) 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations before income taxes:
U.S. companies $ (927) $ (2,045) $ (2,995)
Non-U.S. companies 168 (675) (3,166)
------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations before income taxes $ (759) $ (2,720) $ (6,161)
------------------------------------------------------------------------------------------------------------------------------------
Current and deferred (benefit) provision for income taxes:
Current:
Federal $ (11) $ (330) $ (22)
State and municipal (3) (7) 9
Foreign 23 43 73
Deferred:
Federal (258) (263) (420)
State and municipal (24) (70) (72)
Foreign 19 (99) (36)
------------------------------------------------------------------------------------------------------------------------------------
Benefit for income taxes $ (254) $ (726) $ (468)
------------------------------------------------------------------------------------------------------------------------------------
Effective tax rate reconciliation:
Statutory U.S. benefit rate (35.0)% (35.0)% (35.0)%
State income benefit, net of federal benefit (5.3) (2.7) (0.8)
Nondeductible goodwill and other expenses 0.6 1.1 28.4
Foreign and other tax credits (0.1) (0.3)
Lower (higher) taxes on subsidiary earnings 0.8 (0.1) (0.3)
Valuation allowances 4.9 10.2 0.5
Other items, net 0.7 (0.2) (0.1)
------------------------------------------------------------------------------------------------------------------------------------
Effective income tax (benefit) rate (33.4)% (26.7)% (7.6)%
------------------------------------------------------------------------------------------------------------------------------------
9. Income Taxes (continued)
The tax effects of temporary differences and carryforwards that gave rise to
significant portions of the deferred tax assets and liabilities follow (in
millions):
--------------------------------------------------------------------------------
December 31,
---------------------------
2003 2002
--------------------------------------------------------------------------------
Loss and tax credit carryforwards $ 1,045 $ 435
Capitalized research and development 252 182
Restructuring reserves 146 532
Postretirement medical and life benefits 244 240
Inventory 55 93
Intangible and other assets 125 111
Other accrued liabilities 177 121
Other employee benefits 14 45
Other 79 68
--------------------------------------------------------------------------------
Gross deferred tax assets 2,137 1,827
Valuation allowance (469) (417)
--------------------------------------------------------------------------------
Deferred tax assets 1,668 1,410
--------------------------------------------------------------------------------
Fixed assets (201) (224)
Other (3)
--------------------------------------------------------------------------------
Deferred tax liabilities (201) (227)
--------------------------------------------------------------------------------
Net deferred tax assets $ 1,467 $ 1,183
--------------------------------------------------------------------------------
At December 31, 2003, we have recorded gross deferred tax assets of
approximately $2.1 billion with a valuation allowance of $469 million, and
offset by deferred tax liabilities of $201 million. The valuation allowance is
primarily attributable to the uncertainty regarding the realization of specific
foreign and state tax benefits, net operating losses and tax credits. The net
deferred tax assets of approximately $1.5 billion consist of a combination of
domestic (U.S. federal, state and local) and foreign tax benefits for: (a) items
which have been recognized for financial reporting purposes, but which will be
reported on tax returns to be filed in the future, and (b) loss and tax credit
carryforwards. As explained further below, we have performed the required
assessment of positive and negative evidence regarding the realization of the
net deferred tax assets in accordance with SFAS No. 109, "Accounting for Income
Taxes." This assessment included the evaluation of scheduled reversals of
deferred tax liabilities, estimates of projected future taxable income and
tax-planning strategies. Although realization is not assured, based on our
assessment, we have concluded that it is more likely than not that such assets,
net of the existing valuation allowance, will be realized.
Net domestic deferred tax assets are approximately $1.3 billion at December 31,
2003. Approximately $460 million of these net deferred tax assets relate to loss
and tax credit carryforwards that expire through 2023. The remaining net
deferred tax assets comprise the following deductible temporary differences:
1. other postretirement benefits of $244 million, which will reverse over the
next 40 to 50 years;
2. restructuring and other liabilities of $155 million, which will reverse
over the next 10 years;
3. research and development expenditures of $252 million, which will reverse
over the next 10 years; and
4. other miscellaneous items of $178 million, which will reverse, on average,
over the next 10 years.
Approximately 10% of our net domestic deferred tax assets will be realized
through net operating loss carrybacks claims to be filed over the next three to
five years, which will generate cash refunds during such period. We expect the
remaining net domestic deferred tax assets to be realized from future earnings.
However, in the event future earnings are insufficient, approximately 40% of our
net domestic deferred tax assets could be realized through a tax-planning
strategy involving the sale of a non-strategic appreciated asset. Realization of
the remaining 50% of our net domestic deferred tax assets is solely dependent on
our ability to generate sufficient future taxable income during carryforward
periods of approximately 20 years.
The minimum amount of domestic future taxable income that would have to be
generated to realize this portion of our deferred tax assets is $1.7 billion
over at least 20 years. Currently, we are generating domestic losses. However,
our forecast of domestic taxable income indicates it is more likely than not
that the future results of operations in the U.S. will generate sufficient
taxable income to realize this portion of our deferred tax assets. Specifically,
we expect to incur significantly lower domestic losses in 2004 and to return to
profitability in the U.S. in 2005. Key assumptions embedded in these near-term
forecasts follow:
9. Income Taxes (concluded)
1. Our 2004 U.S. losses will decrease as a result of the 2003 exit of the
photonics technologies business and CAV.
2. We expect to see improved earnings trends in our Telecommunications segment
which is primarily in the U.S. This includes a significantly lower loss in
2004 and a return to profitability in 2005. This trend is partially being
driven by the realization of lower operating costs as a result of prior
years' restructuring actions. In addition, we are forecasting revenue to be
flat or down slightly in 2004 but significantly higher in 2005 due to an
expected recovery in the telecommunications industry in 2005.
3. Our specialty materials semiconductor business will generate higher
earnings in 2004 as a result of a recovery in the semiconductor equipment
industry and lower operating costs as a result of the fourth quarter 2003
restructuring actions, which will be completed by the end of the first
quarter of 2004.
4. Our Display Technologies segment will continue its rapid growth. Although
this business is largely based in Asia, domestic earnings relating to this
business have increased in 2003 and are expected to continue to increase
over the next several years, in part due to an increase in U.S. royalty
income.
5. We will continue to sustain modest growth in our remaining domestic
businesses and, except for the restructuring actions announced prior to
December 31, 2003, we do not expect to incur any significant additional
restructuring or impairment charges.
Our forecast of domestic income is based on assumptions about and current trends
in Corning's operating segments, and there can be no assurance that such results
will be achieved. We review such forecasts in comparison with actual results and
expected trends quarterly for purpose of our recoverability assessment. As a
result of this review, if we determine that we will not return to profitability
in the U.S. in 2005 or if sufficient future taxable income may not be generated
to fully realize the net deferred tax assets, we will increase the valuation
allowance by a charge to income tax expense by an amount equal to the portion of
the deferred tax assets to be realized through projected future taxable income.
If we record such a valuation allowance, we will also cease to recognize
additional tax benefits on losses in the U.S.
The change in the total valuation allowance for the year ended December 31, 2003
was an increase of $52 million. The increase in the 2003 valuation allowance was
primarily due to the uncertainty regarding the realization of certain foreign
tax benefits, foreign net operating losses and foreign tax credits.
We currently provide income taxes on the earnings of foreign subsidiaries and
associated companies to the extent these earnings are currently taxable or
expected to be remitted. Taxes have not been provided on approximately $1.2
billion of accumulated foreign unremitted earnings which are expected to remain
invested indefinitely.
We do not provide income taxes on the post-1992 earnings of domestic
subsidiaries that we expect to recover tax-free without significant cost. Income
taxes have been provided for post-1992 unremitted earnings of domestic corporate
joint ventures that we do not expect to recover tax-free. Unremitted earnings of
domestic subsidiaries and corporate joint ventures that arose in fiscal years
beginning on or before December 31, 1992 have been indefinitely reinvested.
In 2001, tax legislation was enacted in the U.S. that temporarily extended the
net operating loss carryback period from two to five years. Due to this
legislative change, we were able to carryback the 2002 U.S. federal net
operating loss and claim a refund that would not have otherwise been available.
Corning received a $191 million refund in the first quarter of 2003.
10. Investments
Associated Companies at Equity
At December 31, 2003 and 2002, our total investments accounted for by the equity
method were $978 million and $746 million, respectively.
The financial position and results of operations of these investments follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
-------------------------------------------------
2003 (1) 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 4,971 $ 1,846 $ 1,892
Gross profit $ 1,649 $ 648 $ 631
Net income $ 505 $ 317 $ 340
Corning's equity in earnings of affiliated companies (2)(3) $ 209 $ 116 $ 148
------------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------
2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 3,531 $ 854
Long-lived assets $ 5,028 $ 1,557
Current portion of long-term debt $ 120 $ 108
Other current liabilities $ 1,716 $ 322
Long-term debt $ 219 $ 181
Long-term liabilities $ 315 $ 184
Liabilities subject to compromise (1) $ 3,615
Minority interest $ 147 $ 59
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Dividends received from affiliated companies $ 112 $ 83 $ 73
------------------------------------------------------------------------------------------------------------------------------------
(1) Corning resumed recognition of equity earnings in Dow Corning in 2003. See
Dow Corning discussion below.
(2) Equity in earnings shown above and in the consolidated statements of
operations is net of amounts recorded for income tax.
(3) Includes $7 million and $34 million of charges to impair investments in
equity affiliates in 2003 and 2002, respectively, and $66 million related
to Samsung Corning's 2003 asset impairment charge.
At December 31, 2003, approximately $789 million of equity in undistributed
earnings of equity companies was included in our accumulated deficit.
We have contractual agreements with several of our equity investees which
include sales, purchasing, licensing and technology agreements. Except for
Samsung Corning Precision Glass Co., Ltd., as noted below, transactions with and
balances due to and from these related companies were not material to the
consolidated financial statements taken as a whole.
A discussion and summarized results of Corning's significant investees at
December 31, 2003 are as follows:
10. Investments (continued)
Samsung Corning Precision Glass Co., Ltd. (Samsung Corning Precision)
---------------------------------------------------------------------
Samsung Corning Precision, a 50%-owned South Korea-based manufacturer of liquid
crystal display glass, represented $299 million and $187 million of our
investments accounted for by the equity method at December 31, 2003 and 2002,
respectively.
The financial position and results of operations of Samsung Corning Precision follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
-------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 590 $ 335 $ 237
Gross profit $ 424 $ 217 $ 160
Net income $ 295 $ 162 $ 119
Corning's equity in earnings of affiliated companies $ 144 $ 80 $ 60
------------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 162 $ 137
Long-lived assets $ 720 $ 393
Current portion of long-term debt $ 24 $ 6
Other current liabilities $ 218 $ 100
Long-term debt $ 24 $ 43
Long-term liabilities $ 17 $ 8
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Dividends received from affiliated companies $ 33 $ 23 $ 17
------------------------------------------------------------------------------------------------------------------------------------
Sales to Samsung Corning Precision totaled $68 million, $39 million and $18
million for the years ended December 31, 2003, 2002 and 2001, respectively.
Purchases from Samsung Corning Precision totaled $26 million, $10 million and
$12 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Balances due to and from Samsung Corning Precision were immaterial at December
31, 2003 and 2002.
10. Investments (continued)
Samsung Corning Company Ltd. (Samsung Corning)
----------------------------------------------
Samsung Corning, a 50%-owned South Korea-based manufacturer of glass panels and
funnels for television and display monitors, represented $320 million and $381
million of our investments accounted for by the equity method at December 31,
2003 and 2002, respectively. In 2003, Samsung Corning recorded a significant
asset impairment charge, our portion of which was $66 million after tax.
The financial position and results of operations of Samsung Corning follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 895 $ 854 $ 886
Gross profit $ 199 $ 225 $ 227
Net (loss) income $ (74) $ 99 $ 107
Corning's equity in (losses) earnings of affiliated
companies $ (39) $ 44 $ 51
------------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 467 $ 347
Long-lived assets $ 572 $ 859
Current portion of long-term debt $ 72 $ 63
Other current liabilities $ 116 $ 115
Long-term debt $ 87 $ 90
Long-term liabilities $ 68 $ 119
Minority interest $ 55 $ 59
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Dividends received from affiliated companies $ 29 $ 17 $ 22
------------------------------------------------------------------------------------------------------------------------------------
10. Investments (continued)
Dow Corning Corporation (Dow Corning)
-------------------------------------
Dow Corning, a 50%-owned U.S. based manufacturer of silicone products
represented $185 million of our investments accounted for by the equity method
at December 31, 2003. In 1995, Corning fully impaired its investment of Dow
Corning upon its entry into bankruptcy proceedings and did not recognize 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. See
discussion below for additional information for a history of this matter. With
the exception of the remote possibility of a future bankruptcy related charge,
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 $270 million.
The financial position and results of operations of Dow Corning follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
-------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 2,873 $ 2,610 $ 2,439
Gross profit $ 820 $ 728 $ 542
Net income (loss) $ 177 $ 59 $ (28)
Corning's equity in earnings of affiliated companies $ 82
------------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 2,558 $ 2,162
Long-lived assets $ 3,450 $ 3,465
Current portion of long-term debt $ 9 $ 13
Other current liabilities $ 1,185 $ 1,159
Long-term debt $ 52 $ 50
Long-term liabilities $ 212 $ 108
Liabilities subject to compromise (1) $ 3,615 $ 3,667
Minority interest $ 92 $ 90
------------------------------------------------------------------------------------------------------------------------------------
(1) Dow Corning's financial statements for 2003, 2002 and 2001 have been
prepared in conformity with the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" (SOP 90-7). SOP 90-7 requires a
segregation of liabilities subject to compromise by the Bankruptcy Court as
of the filing date (May 15, 1995) and identification of all transactions
and events that are directly associated with the reorganization.
10. Investments (continued)
Dow Corning filed for bankruptcy protection to address pending and claimed
liabilities arising from many thousand breast-implant product lawsuits each of
which typically sought damages in excess of one million dollars. On November 8,
1998, Dow Corning and the Tort Claimants Committee jointly filed a revised Plan
of Reorganization ("Joint Plan") which provided for the settlement or other
resolution of implant claims. The Joint Plan included releases for third parties
(including Corning and The Dow Chemical Company ("Dow Chemical") as
shareholders) in exchange for contributions to the Joint Plan. By an order dated
November 30, 1999, the Bankruptcy Court confirmed the Joint Plan, but with
certain limitations concerning the third party releases as reflected in an
opinion issued on December 21, 1999. On November 13, 2000, the U.S. District
Court for the Eastern District of Michigan reversed the Bankruptcy Court's
order, restored the third-party releases, and confirmed the Joint Plan. Certain
foreign claimants, the U.S. government, and certain other tort claimants
appealed from the District Court's order. On January 29, 2002, the U.S. Court of
Appeals for the Sixth Circuit affirmed the determinations made in the District
Court with respect to the foreign claimants, but remanded to the District Court
for further proceedings with respect to certain lien claims of the U.S.
government and with respect to the findings supporting the non-debtor releases
in favor of Dow Corning's shareholders, foreign subsidiaries and insurers. The
Plan proponents have settled the lien claims of the U.S. government for $9.8
million to be paid from the Settlement Fund under the Plan. On December 11,
2002, the District Court entered further findings and conclusions supporting the
non-debtor releases. Certain tort claimants filed appeals to the U.S. Court of
Appeals for the Sixth Circuit from the District Court's order. One group of
foreign claimants has settled and dismissed their appeal, leaving a grouping of
approximately 50 plaintiffs from Nevada as the remaining appellants. The
appellate process may take another 6 months. If the Joint Plan with shareholder
releases is upheld after all appeals, any remaining personal injury claims
against Corning in these matters will be channeled to the resolution procedures
under the Joint Plan. If the Joint Plan with shareholder releases is not upheld
after all appeals, Corning would expect to defend any remaining claims against
it (and any new claims) on the same grounds that led to a series of orders and
judgments dismissing all claims against us in the federal courts and in many
state courts as described under the heading Implant Tort Lawsuits immediately
hereafter. Management believes that the claims against Corning lack merit and
that the risk of material impact on Corning's financial statements is remote.
Under the terms of the Joint Plan, Dow Corning will establish a Settlement Trust
and a Litigation Facility to provide a means for tort claimants to settle or
litigate their claims. Dow Corning would have the obligation to fund the Trust
and the Facility, over a period of up to 16 years, in an amount up to
approximately $3.3 billion, subject to the limitations, terms and conditions
stated in the Joint Plan. Corning and Dow Chemical have each agreed to provide a
credit facility to Dow Corning of up to $150 million ($300 million in the
aggregate), subject to the terms and conditions stated in the Joint Plan. The
Joint Plan also provides for Dow Corning to make full payment, through cash and
issuance of senior notes, to its commercial creditors. These creditors claim
approximately $810 million in principal plus an additional sum for pendency
interest, costs and fees from the petition date (May 15, 1995) through the
effective date under the Plan when payment is made. The commercial creditors
have contested the Bankruptcy Court's disallowance of their claims for
post-petition interest at default rates of interest, and have appealed to the
District Court. The District Court heard oral arguments on this appeal on May 2,
2002, and has not ruled. The amount of additional interest, costs and fees at
issue in these claims against Dow Corning is approximately $100 million pre-tax.
Pittsburgh Corning Corporation ("PCC")
--------------------------------------
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 United States 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. 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 11,200 other cases
(approximately 40,700 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 ("the Injunction
Period") in which to negotiate a plan of reorganization for PCC ("PCC Plan").
The Injunction Period was extended on several occasions through September 30,
2002, and later for a period from December 23, 2002, through January 23, 2003,
and was reinstated as of April 22, 2003, and will now continue, pending
developments with respect to the PCC Plan as described below.
10. Investments (concluded)
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. The announced arrangement would permit PPG and certain of its insurers
to make contributions of cash over a period of years, PPG's shares in PCC and
Pittsburgh Corning Europe N.V. (PCE), a Belgian corporation, and an agreed
number of shares of PPG's common stock in return for a release and injunction
channeling claims against PPG into a settlement trust under the PCC Plan.
On March 28, 2003, Corning announced that it had reached agreement with
representatives of current and future asbestos claimants on a settlement
arrangement that will be incorporated into the PCC Plan. This settlement is
subject to a number of contingencies, including a favorable vote by 75% of the
asbestos claimants voting on the PCC Plan, and approval by the bankruptcy court.
Corning's settlement will require the contribution, when the Plan becomes
effective, of its equity interest in PCC, its one-half equity interest in PCE,
and 25 million shares of Corning common stock. Corning also will be making cash
payments of $136 million (net present value as of December 31, 2003) in six
installments beginning in June 2005 assuming the Plan is effective. Corning will
accelerate the cash funding, if necessary, to maximize the realization of tax
benefits. In addition, Corning will assign policy rights or proceeds under
primary insurance from 1962 through 1984, as well as rights or 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 $298 million ($192 million after-tax) in
the period ending March 31, 2003 to reflect the settlement terms. However, the
amount of the charge for this settlement requires adjustment each quarter based
upon movement in Corning's common stock price prior to contribution of the
shares to the trust. Corning recorded total charges of $413 million ($263
million after-tax) to reflect the settlement and to mark-to-market the value of
Corning common stock for the year ended December 31, 2003. This charge was
previously reported as a nonoperating charge in our 2003 Quarterly Reports on
Form 10-Q. Effective with this Annual Report on Form 10-K, we have reclassified
this charge to operating expenses in the consolidated statements of operations.
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, a disclosure statement and various supplement Plan documents were
filed with the Court in the second quarter of 2003. Additional supplemental plan
documents were filed in mid-August 2003. In October 2003, the Court held a
hearing to review the disclosure documents. The Court has announced a schedule
projecting that the Plan and disclosure documents will be mailed to creditors
for voting expected to be completed in March 2004, to be followed by
confirmation hearings in May 2004. Although the confirmation of the PCC Plan is
subject to a number of contingencies, management believes that the asbestos
claims against Corning will be resolved without additional material impact on
the company's financial statements and (apart from the quarterly adjustment in
the value of 25 million shares of Corning common stock) believes the risk of
additional loss is remote.
Other Investments
At December 31, 2003, other investments primarily represent our current holdings
of 19 million shares of Avanex common stock. These shares were received as
proceeds from the sale of certain photonic assets to Avanex. Approximately 17
million shares or 88% of these shares are contractually restricted from sale for
more than one year. As such, these restricted shares have been accounted for at
cost. Shares of Avanex stock that are saleable within one year have been
adjusted to market value at December 31, 2003 and are accounted for as
available-for-sale securities.
At December 31, 2003, the fair value and cost of our equity securities was $67
million and $62 million, respectively. The difference between fair value and
cost is due to gross unrealized gains of $5 million primarily on Avanex stock.
At December 31, 2002, the fair value and cost of our equity securities was $23
million.
Proceeds from sales of other investments were $4 million and $1 million in 2003
and 2002, respectively, and related net realized losses included in income were
$8 million and $1 million, respectively.
In 2002, we decided to divest our portfolio of cost based investments related to
start-up companies with emerging technologies in the telecommunications
industry. As a result, we impaired the portfolio to estimated fair market value.
See Note 5 (Restructuring Actions) for further detail.
11. Property, Net
Property, net follows (in millions):
--------------------------------------------------------------------------------
December 31,
------------------------------------
2003 2002
--------------------------------------------------------------------------------
Land $ 80 $ 93
Buildings 1,946 1,828
Equipment 4,264 4,620
Construction in progress 745 539
--------------------------------------------------------------------------------
7,035 7,080
Accumulated depreciation (3,415) (3,375)
--------------------------------------------------------------------------------
Property, net $ 3,620 $ 3,705
--------------------------------------------------------------------------------
Approximately $9 million, $13 million and $49 million of interest costs were
capitalized as part of property, net in 2003, 2002 and 2001, respectively.
12. Goodwill and Other Intangible Assets
The change in the carrying amount of goodwill for the year ended December 31 by segment follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
2003 2002
------------------------------------------ ------------------------------------------
Telecom- Display Unallocated Telecom- Display Unallocated
munications Technologies and Other Total munications Technologies and Other Total
------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1 $ 1,556 $ 9 $ 150 $ 1,715 $ 1,772 $ 15 $ 150 $ 1,937
Foreign currency translation 36 36 90 90
Impairment (400) (400)
Divestitures (21) (21) (16) (6) (22)
Acquisitions 5 5 110 110
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 1,576 $ 9 $ 150 $ 1,735 $ 1,556 $ 9 $ 150 $ 1,715
------------------------------------------------------------------------------------------------------------------------------------
Other intangible assets follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Patents and trademarks $ 145 $ 57 $ 88 $ 138 $ 40 $ 98
Non-competition agreements 113 89 24 106 62 44
Other 4 1 3 5 2 3
-------------------------------------------------------------------------------
Total amortized intangible assets 262 147 115 249 104 145
-------------------------------------------------------------------------------
Unamortized intangible assets:
Intangible pension assets 51 51 68 68
-------------------------------------------------------------------------------
Total $ 313 $ 147 $ 166 $ 317 $ 104 $ 213
------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets are primarily related to the Telecommunications
segment.
Amortization expense related to these intangible assets is expected to be
approximately $36 million in 2004, $16 million in 2005, $11 million in 2006, $11
million in 2007, and insignificant thereafter.
13. Other Accrued Liabilities
Other accrued liabilities follow (in millions):
--------------------------------------------------------------------------------
December 31,
-----------------------------------
2003 2002
--------------------------------------------------------------------------------
Restructuring reserves $ 186 $ 405
Wages and employee benefits 238 224
Income taxes 88 153
Asbestos settlement (1) 282
Other 280 355
--------------------------------------------------------------------------------
Other accrued liabilities $ 1,074 $ 1,137
--------------------------------------------------------------------------------
(1) The $282 Asbestos settlement represents the fair value of Corning's 25
million shares at December 31, 2003 and Corning's investment balance of PCE
to be contributed to the trust as part of the settlement. The remainder of
Corning's reserve for this settlement is reflected in other long-term
liabilities. See Note 10 (Investments) for further information related to
the Asbestos settlement.
Our product warranty liability (included in "Other" in the table above) relates
primarily to the Telecommunications segment.
A reconciliation of the changes in the product warranty liability for the year
ended December 31 follows (in millions):
--------------------------------------------------------------------------------
2003 2002
--------------------------------------------------------------------------------
Balance at January 1 $ 64 $ 60
Provision based on current year sales 7 15
Adjustments to liability existing on January 1 (1) (22) (4)
Foreign currency translation 3 4
Settlements made during the current year (11) (11)
--------------------------------------------------------------------------------
Balance at December 31 $ 41 $ 64
--------------------------------------------------------------------------------
(1) The 2003 adjustment primarily relates to the photonics technologies product
line.
14. Long-Term Debt and Loans Payable
Long-term debt and loans payable follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------
2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Loans Payable
Current portion of long-term debt $ 120 $ 191
Other short-term borrowings 26 13
------------------------------------------------------------------------------------------------------------------------------------
Total loans payable $ 146 $ 204
------------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt
Debentures, 6%, due 2003 $ 100
Euro notes, 5.625%, due 2005 $ 173 206
Debentures, 7%, due 2007, net of unamortized discount of
$20 million in 2003 and $25 million in 2002 80 75
Convertible notes, 4.875%, due 2008 96 96
Convertible debentures, 3.5%, due 2008 665 665
Notes, 6.3%, due 2009 150 150
Euro notes, 6.25%, due 2010 374 310
Debentures, 6.75%, due 2013 100 100
Zero coupon convertible debentures, 2%, due 2015, redeemable
and callable in 2005 385 1,606
Debentures, 8.875%, due 2016 82 86
Debentures, 8.875%, due 2021 83 88
Debentures, 7.625%, putable in 2004, due 2024 100 100
Medium-term notes, average rate 8.1%, due through 2025 178 242
Debentures, 6.85%, due 2029 150 150
Other, average rate 2.9%, due through 2015 172 180
------------------------------------------------------------------------------------------------------------------------------------
Total long-term debt 2,788 4,154
Less current portion of long-term debt 120 191
------------------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 2,668 $ 3,963
------------------------------------------------------------------------------------------------------------------------------------
14. Long-Term Debt and Loans Payable (continued)
At December 31, 2003 and 2002, the weighted-average interest rate on short-term
borrowings was 5.7% and 5.5%, respectively.
Based on borrowing rates currently available to us for loans with similar terms
and maturities, the fair value of long-term debt was $3.0 billion at December
31, 2003.
The following table shows the maturities by year of total long-term debt and
loans payable obligations at December 31, 2003 (in millions):
--------------------------------------------------------------------------------
2004 2005 2006 2007 2008-2030
--------------------------------------------------------------------------------
$146 $590 $46 $113 $1,932
--------------------------------------------------------------------------------
The 7.625% debentures and the zero coupon convertible debentures are presented
in the above table as due in 2004 and 2005, respectively, which is the earliest
possible redemption date.
We have convertible debt of $665 million due November 1, 2008 that is
convertible into approximately 69 million shares of common stock at an effective
conversion price of $9.675 per share. The debentures are available for
conversion into 103.3592 shares of Corning common stock if certain conditions
are met. Each $1,000 debenture was issued at par and pays interest of 3.5%
semi-annually on May 1 and November 1 of each year. We may repurchase securities
at certain redemption prices beginning on November 8, 2004.
We have $385 million of zero coupon convertible debentures outstanding. The
initial price of the debentures was $741.92 with a 2% annual yield. Interest is
compounded semi-annually with a 25% conversion factor. The remaining debentures
mature on November 8, 2015, and are convertible into approximately 17 million
shares of Corning common stock at the rate of 8.3304 per $1,000 debenture. We
may call the debentures at any time on or after November 8, 2005. The debentures
may be put to us for $819.54 on November 8, 2005 and $905.29 on November 8,
2010. The holder can convert the debenture into Corning common stock at any time
prior to maturity or redemption. We have the option of settling this obligation
in cash, common stock, or a combination of both.
During the years ended December 31, 2003 and 2002, we repurchased and retired a
significant portion of our zero coupon convertible debentures due November 8,
2015. In 2003, we repurchased and retired 1,531,000 debentures with an accreted
value of $1.2 billion for cash of approximately $1.1 billion through open market
purchases and a public tender offer and recorded a net gain of $55 million. We
also issued 6.5 million shares of common stock from treasury in exchange for
55,000 debentures with an accreted value of $43 million, and we recognized a
charge of $35 million reflecting the fair value of the incremental shares issued
beyond those required by the terms of the debentures. The increase in equity due
to the issuance of shares from treasury stock was $77 million. We recorded the
net gain of $20 million on these repurchases as a component of income from
continuing operations.
The following table summarizes the activity related to our zero coupon
convertible debentures (dollars in millions):
--------------------------------------------------------------------------------
For the years
ended December 31,
-----------------------------
2003 2002
--------------------------------------------------------------------------------
Bonds repurchased or exchanged for equity 1,586,000 638,987
Book value $ 1,239 $ 493
Fair value $ 1,154 $ 308
Pre-tax gain (1) $ 20 $ 176
After-tax gain (1) $ 13 $ 108
--------------------------------------------------------------------------------
(1) Net of the write-off of unamortized issuance and deal costs.
In addition to our zero coupon debentures, we repurchased and retired 60,000
euro notes due 2005 with a book value of 60 million euros for cash of 63 million
euros (including accrued interest) or $70 million. We recorded a loss of $1
million on the transaction.
We also have $100 million of convertible subordinated notes bearing interest at
4.875%, due in 2008. The notes are convertible into 6 million shares of Corning
common stock at a conversion price of approximately $16 per share.
14. Long-Term Debt and Loans Payable (concluded)
We have full access to a $2.0 billion revolving line of credit with a syndicate
of banks. The line of credit expires in August 2005. There were no borrowings
under the agreement at December 31, 2003. The revolving credit agreement
provides for borrowing of U.S. dollars and Eurocurrency at various rates and
supports our commercial paper program when available. The facility includes a
covenant requiring us to maintain a total debt to total capital ratio, as
defined, not greater than 60%. At December 31, 2003, this ratio was 34%.
15. Employee Retirement Plans
Defined Benefit Plans
We have defined benefit pension plans covering certain domestic and
international employees. Our funding policy has been to contribute, as
necessary, an amount in excess of the minimum requirements determined jointly by
us and our consulting actuaries to achieve the company's long-term funding
targets. In 2003, we made a voluntary incremental contribution of $160 million
to the pension trust.
In 2000, we amended our U.S. pension plan to include a cash balance pension
feature. All salaried and non-union hourly employees hired before July 1, 2000
were given the choice of staying in the existing plan or participating in the
cash balance plan beginning January 1, 2001. Salaried employees hired after July
1, 2000 automatically became participants in the new cash balance plan. Under
the cash balance plan, employee accounts are credited monthly with a percentage
of eligible pay based on age and years of service. Benefits are 100% vested
after five years of service.
Corning and certain of its domestic subsidiaries also offer postretirement plans
that provide health care and life insurance benefits for retirees and eligible
dependents. Certain employees may become eligible for such postretirement
benefits upon reaching retirement age. Prior to January 1, 2003, our principal
retiree medical plans required retiree contributions each year equal to the
excess of medical cost increases over general inflation rates. In response to
rising health care costs, effective January 1, 2003, we changed our cost-sharing
approach for retiree medical coverage. For current retirees (including surviving
spouses) and active employees eligible for the salaried retiree medical program,
we are placing a "cap" on the amount we will contribute toward retiree medical
coverage in the future. The cap will equal 150% of our 2001 contributions toward
retiree medical benefits. Once our contributions toward retiree medical costs
reach this cap, impacted retirees will have to pay the excess amount, in
addition to their regular contributions for coverage.
We use a December 31 measurement date for the majority of our plans.
15. Employee Retirement Plans (continued)
Obligations and Funded Status
-----------------------------
The change in benefit obligation and funded status of our employee retirement plans follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
------------------------ -------------------------
December 31, 2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 1,890 $ 1,742 $ 718 $ 631
Service cost 33 37 9 11
Interest cost 126 125 48 52
Plan participants' contributions 2 3 4 4
Amendments (1) 22 (17) (80)
Curtailment gain (9) (15) (12) (9)
Special termination benefits 15 21 10 11
Actuarial losses 168 82 124 151
Benefits paid (158) (147) (55) (53)
Foreign currency translation 29 20
------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 2,095 1,890 829 718
------------------------------------------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at beginning of year 1,517 1,628
Actual gain (loss) on plan assets 292 (76)
Employer contributions 170 96
Plan participants' contributions 2 3
Benefits paid (158) (147)
Foreign currency translation 16 13
------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 1,839 1,517
------------------------------------------------------------------------------------------------------------------------------------
Unfunded status (256) (373) (829) (718)
Unrecognized transition asset (1) (1)
Unrecognized prior service cost (credit) 53 70 (78) (71)
Unrecognized actuarial loss 409 402 235 127
------------------------------------------------------------------------------------------------------------------------------------
Recognized asset (liability) $ 205 $ 98 $ (672) $ (662)
------------------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid benefit cost $ 338 $ 205
Accrued benefit liability (133) (107) $ (672) $ (662)
Additional minimum liability (311) (348)
Intangible asset 52 68
Accumulated other comprehensive loss 259 280
------------------------------------------------------------------------------------------------------------------------------------
Recognized asset (liability) $ 205 $ 98 $ (672) $ (662)
------------------------------------------------------------------------------------------------------------------------------------
The accumulated benefit obligation for all defined benefit pension plans was
$2.0 billion and $1.8 billion at December 31, 2003 and 2002, respectively.
Information for pension plans with an accumulated benefit obligation in excess
of plan assets follows (in millions):
--------------------------------------------------------------------------------
December 31,
----------------------
2003 2002
--------------------------------------------------------------------------------
Projected benefit obligation $ 1,902 $ 1,724
Accumulated benefit obligation 1,808 1,644
Fair value of plan assets 1,641 1,351
--------------------------------------------------------------------------------
15. Employee Retirement Plans (continued)
Information for pension plans with a projected benefit obligation in excess of
plan assets follows (in millions):
--------------------------------------------------------------------------------
December 31,
----------------------
2003 2002
--------------------------------------------------------------------------------
Projected benefit obligation $ 2,060 $ 1,786
Accumulated benefit obligation 1,958 1,691
Fair value of plan assets 1,794 1,408
--------------------------------------------------------------------------------
The components of net periodic benefit expense for our employee retirement plans follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
-------------------------------- ---------------------------------
Years ended December 31, 2003 2002 2001 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 33 $ 37 $ 38 $ 9 $ 11 $ 14
Interest cost 126 125 118 48 52 43
Expected return on plan assets (146) (159) (161)
Amortization of transition asset (1)
Amortization of net loss (gain) 9 2 (6) 5 2
Amortization of prior service cost (credit) 9 11 14 (6) (1) (1)
------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit expense 31 16 2 56 64 56
------------------------------------------------------------------------------------------------------------------------------------
Discontinued operations 9 2 (7) 1
Curtailment loss (gain) 9 10 44 (5) (2) (13)
Special termination benefits 15 21 18 10 11 17
------------------------------------------------------------------------------------------------------------------------------------
Total expense $ 55 $ 56 $ 66 $ 61 $ 66 $ 61
------------------------------------------------------------------------------------------------------------------------------------
Additional information on our pension plan follows (in millions):
--------------------------------------------------------------------------------
Pension Benefits
-------------------
2003 2002
--------- ----
(Decrease) increase in minimum liability
included in other comprehensive income
(loss), after tax $(26) (1) $173
--------------------------------------------------------------------------------
(1) Includes $12 million after-tax decrease in minimum liability included in
other comprehensive income related to an investment accounted for under the
equity method.
Measurement of postretirement benefit expense is based on assumptions used to
value the postretirement benefit obligation at the beginning of the year.
The weighted-average assumptions for our domestic employee retirement plans follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions Pension Benefits Postretirement Benefits
used to determine benefit -------------------------------- ---------------------------------
obligations at December 31 2003 2002 2001 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Discount rate 6.25% 6.75% 7.25% 6.25% 6.75% 7.25%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
------------------------------------------------------------------------------------------------------------------------------------
15. Employee Retirement Plans (continued)
------------------------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions Pension Benefits Other Benefits
used to determine net cost for -------------------------------- ---------------------------------
years ended December 31 2003 2002 2001 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Discount rate 6.75% 7.25% 7.75% 6.75% 7.25% 7.75%
Expected return on plan assets 8.50% 9.00% 9.00%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
------------------------------------------------------------------------------------------------------------------------------------
The expected rate of return on assets was based on the current interest rate
environment and historical market premiums of equity and other asset classes
relative to fixed income rates.
--------------------------------------------------------------------------------
Assumed Health Care Trend Rates at December 31 2003 2002
--------------------------------------------------------------------------------
Health care cost trend rate assumed for next year 10% 9%
Rate that the cost trend rate gradually declines to 5% 5%
Year that the rate reaches the ultimate trend rate 2009 2007
--------------------------------------------------------------------------------
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans.
A one-percentage-point change in assumed health care cost trend rates would have the following effects (in millions):
------------------------------------------------------------------------------------------------------------------------------------
One-Percentage-Point One-Percentage-Point
Increase Decrease
------------------------------------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost $ 4.1 $ (3.4)
Effect on postretirement benefit obligation $ 52.9 $ (44.7)
------------------------------------------------------------------------------------------------------------------------------------
Medicare Prescription Drug, Improvement and Modernization Act of 2003
---------------------------------------------------------------------
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) was passed which expands Medicare to include an outpatient
prescription drug benefit beginning in 2006. In January 2004, the FASB issued
Staff Position No. FAS 106-1, "Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("FSP
No. 106-1")," which provides preliminary accounting guidance on how to account
for the effects of the Act on postretirement benefit plans. As permitted by FSP
No. 106-1, we have elected to defer accounting for the impact of the Act until
the FASB issues final accounting guidance later in 2004. Such guidance from the
FASB is pending and that guidance, when issued, could require us to change
previously reported information. We are currently evaluating the impact of the
Act on our postretirement benefit plans.
Plan Assets (domestic plans only)
---------------------------------
Corning's pension plan weighted average asset allocation for domestic pension
plans at December 31, 2003 and December 31, 2002, by asset category is as
follows:
--------------------------------------------------------------------------------
Plan Assets
At December 31,
-------------------------
2003 2002
--------------------------------------------------------------------------------
Equity Securities 50% 44%
Fixed Income Securities 34% 37%
Real Estate 8% 11%
Other 8% 8%
------ -------
Total 100% 100%
--------------------------------------------------------------------------------
The total fair value of domestic plan assets at December 31, 2003 is $1,672
million and the expected long-term rate of return on these assets is 8.5%.
15. Employee Retirement Plans (concluded)
We have an investment policy for domestic pension plans with a primary objective
to adequately provide for both the growth and liquidity needed to support all
current and future benefit payment obligations. The investment strategy is to
invest in a diversified portfolio of assets which are expected to satisfy the
above objective and produce both absolute and risk adjusted returns competitive
with a benchmark that is 60% Russell 3000 Index and 40% Lehman Long
Government/Credit Index. The strategy includes the following target asset
allocation:
Equity Securities 50%
Fixed Income Securities 32%
Real Estate 8%
Other 10%
-----
Total 100%
A tactical allocation mandate, which is part of the overall investment strategy,
allows the actual allocation in equity securities to be reduced by maximum of
10% relative to the total based on market valuations.
Equity securities include Corning common stock in the amount of $5.7 million
(0.3% of total plan assets) and $1.8 million (0.1% of total plan assets) at
December 31, 2003 and 2002, respectively.
Cash Flows Data (domestic plans only)
-------------------------------------
We expect to contribute $40 million to its domestic pension plans in 2004.
The following benefit payments, which reflect expected future service, are
expected to be paid for the domestic plans (in millions):
--------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
--------------------------------------------------------------------------------
2004 $ 138 $ 68
2005 137 72
2006 136 75
2007 135 77
2008 134 79
Years 2009-2013 663 408
--------------------------------------------------------------------------------
Other Benefit Plans
We offer defined contribution plans covering employees meeting certain
eligibility requirements. On January 1, 2003, we reduced our matching
contributions to the domestic Corning Incorporated Investment Plan by 2.5% of
pay for all salaried employees. This reduction was temporary, and we increased
our contributions to prior levels on January 1, 2004. Total consolidated defined
contribution plan expense was $24 million, $44 million and $56 million for the
years ended December 31, 2003, 2002 and 2001, respectively.
16. Commitments, Contingencies, Guarantees and Hedging Activities
Commitments, Contingencies and Guarantees
In 2003, we adopted the initial recognition and measurement provisions of FIN
45. We do not routinely provide significant third-party guarantees and, as a
result, this interpretation has not had a material effect on our consolidated
financial statements. The initial recognition and measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002.
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.
16. Commitments, Contingencies, Guarantees and Hedging Activities (continued)
Minimum rental commitments under leases outstanding at December 31, 2003 follow
(in millions):
--------------------------------------------------------------------------------
2004 2005 2006 2007 2008 2009 and thereafter
--------------------------------------------------------------------------------
$44 $33 $29 $39 $42 $113
--------------------------------------------------------------------------------
Total rental expense was $66 million for 2003, $85 million for 2002 and $89
million for 2001.
Corning and PPG each own 50% of the capital stock of PCC. PCC and several other
defendants have been named in numerous lawsuits involving claims alleging
personal injury from exposure to asbestos. See Note 10 (Investments) for a more
complete discussion.
The ability of certain subsidiaries and associated companies to transfer funds
is limited by provisions of certain loan agreements and foreign government
regulations. At December 31, 2003, the amount of equity subject to such
restrictions for consolidated subsidiaries totaled $43 million. While this
amount is legally restricted, it does not result in operational difficulties
since we have generally permitted subsidiaries to retain a majority of equity to
support their growth programs. In addition, we have provided other financial
guarantees and contingent liabilities in the form of purchase price adjustments
related to attainment of milestones, stand-by letters of credit and performance
bonds. We have agreed to provide a credit facility related to Dow Corning as
discussed in Note 10 (Investments). The funding of the Dow Corning credit
facility is subject to events connected to the Bankruptcy Plan. The purchase
obligations primarily represent take or pay contracts associated with our
hardware and equipment operations. We believe a significant majority of these
guarantees and contingent liabilities will expire without being funded.
The amounts of our obligations follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Amount of commitment and contingency expiration per period
----------------------------------------------------------
Less than 1 to 2 2 to 3 3 to 4 5 years and
Total 1 year years years years thereafter
------------------------------------------------------------------------------------------------------------------------------------
Performance bonds and guarantees $ 170 $ 31 $ 2 $ 1 $ 136
Contingent purchase price for acquisitions 36 36
Dow Corning credit facility 150 150
Purchase obligations 48 15 14 11 $ 8
Stand-by letters of credit 16 6 10
Loan guarantees 25 4 21
------------------------------------------------------------------------------------------------------------------------------------
Total other commercial commitments
and contingencies $ 445 $ 88 $ 20 $ 12 $ 8 $ 317
------------------------------------------------------------------------------------------------------------------------------------
We have two VIEs that are not consolidated as we are not the primary
beneficiary. The assets and debt of these entities total $12 million. Our
maximum loss exposure as a result of our involvement with these unconsolidated
VIEs is approximately $18 million. This amount represents payments that would be
due to the VIE in the event of a total loss of the equipment. We carry insurance
coverage for this risk.
Hedging Activities
We operate and conduct business in many foreign countries. As a result, there is
exposure to potentially adverse movement in foreign currency exchange rates. We
enter into foreign exchange forward and option contracts with durations
generally 15 months or less to reduce our exposure to exchange rate risk on
foreign source income and purchases. The objective of these contracts is to
neutralize the impact of foreign currency exchange rate movements on our
operating results.
We engage in foreign currency hedging activities to reduce the risk that changes
in exchange rates will adversely affect the eventual net cash flows resulting
from the sale of products to foreign customers and purchases from foreign
suppliers. The hedge contracts reduce the exposure to fluctuations in exchange
rate movements because the gains and losses associated with foreign currency
balances and transactions are generally offset with gains and losses of the
hedge contracts. Because the impact of movements in foreign exchange rates on
hedge contracts offsets the related impact on the underlying items being hedged,
these financial instruments help alleviate the risk that might otherwise result
from currency exchange rate fluctuations.
16. Commitments, Contingencies, Guarantees and Hedging Activities (concluded)
The following table (in millions) summarizes the notional amounts and respective
fair values of the derivative financial instruments at December 31, 2003. These
contracts are held by Corning and its subsidiaries and mature at varying dates:
--------------------------------------------------------------------------------
Notional Amount Fair Value
--------------------------------------------------------------------------------
Foreign exchange forward contracts $ 182 $ 3
Foreign exchange option contracts $ 379 $ (10)
--------------------------------------------------------------------------------
The forward and option contracts we use in managing our foreign currency
exposures contain an element of risk in that the counterparties may be unable to
meet the terms of the agreements. However, we minimize this risk by limiting the
counterparties to a diverse group of highly-rated major domestic and
international financial institutions with which we have other financial
relationships. We are exposed to potential losses in the event of
non-performance by these counterparties; however, we do not expect to record any
losses as a result of counterparty default. We do not require and are not
required to place collateral for these financial instruments.
17. Shareholders' Equity
Preferred Stock
We have 10 million authorized shares of Preferred Stock, par value $100 per
share.
Series A Junior Participating Preferred Stock
---------------------------------------------
Of the authorized shares, we have designated 2.4 million shares as Series A
Junior Participating Preferred Stock for which no shares have been issued.
In June 1996, the Board of Directors approved the renewal of the Preferred Share
Purchase Right Plan, which entitles shareholders to purchase 0.01 of a share of
Series A Junior Participating Preferred Stock upon the occurrence of certain
events. In addition, the rights entitle shareholders to purchase shares of
common stock at a 50% discount in the event a person or group acquires 20% or
more of our outstanding common stock. The preferred share purchase rights became
effective July 15, 1996 and expire July 15, 2006.
Series C Mandatory Convertible Preferred Stock
----------------------------------------------
In July and August 2002, we issued 5.75 million shares of 7% Series C mandatory
convertible preferred stock having a liquidation preference of $100 per share,
plus accrued and unpaid dividends, and resulting in gross proceeds of $557
million. The mandatory convertible stock has an annual dividend rate of 7%,
payable quarterly in cash. The first dividend payment date was November 16,
2002. The dividends are also payable immediately upon conversion to Corning
common stock. At the time we issued the Series C convertible stock, a one-time
dividend was declared for all dividends that will be payable from issuance
through the mandatory conversion date of August 16, 2005. We secured the payment
of the dividends through the issuance of a promissory note and used a portion of
the proceeds from the sale of the Series C preferred stock to purchase $117
million of U.S. treasury securities that were pledged as collateral to secure
the payments on the promissory note. As a result, net proceeds of the offering
were $440 million.
The Series C preferred stock will automatically convert on the mandatory
conversion date of August 16, 2005, into between 50.813 and 62.5 shares of
Corning common stock, depending on the then current market price. At any time
prior to the mandatory conversion date, holders may elect to convert in whole or
part of their shares of Series C preferred stock into 50.813 shares of common
stock plus an amount of cash equal to the market value at that time of the pro
rata share of the collateral portfolio that secures the promissory note. At
December 31, 2003, approximately 4.9 million shares of the Series C preferred
stock had been converted into 248.8 million common shares.
As the closing price of Corning common stock was $1.60 on July 31, 2002, the
holder could immediately convert the Series C preferred stock and obtain a value
of $101.72 (50.813 shares valued at $1.60 plus $20.42 in future dividends)
indicating that the preferred stock contains a beneficial conversion feature of
$1.72 per preferred share. The beneficial conversion totaled approximately $10
million and was charged to additional paid in capital. The beneficial conversion
was also deducted from earnings attributable to common shareholders in the 2002
earnings per share calculations.
Common Stock
In July 2003, we completed an equity offering of 45 million shares of common
stock generating net proceeds of approximately $363 million. This offering's net
proceeds were used to reduce debt through open market repurchases, public tender
offers or other methods, and for general corporate purposes. We invest the net
proceeds in short-term, interest bearing, investment grade obligations until
they are applied as described.
17. Shareholders' Equity (concluded)
In May 2003, we completed an equity offering of 50 million shares of common
stock generating net proceeds of approximately $267 million. We used the net
proceeds of this offering and approximately $356 million of existing cash to
reduce debt through a public tender offer in the second quarter of 2003 as
discussed in Note 14 (Long-Term Debt and Loans Payable).
On July 9, 2001, we announced the discontinuation of the payment of dividends on
our common stock. Dividends paid to common shareholders in 2001 totaled $112
million.
Treasury Stock
We did not repurchase any of our common stock in 2003. On July 22, 2002, we
repurchased 5.5 million shares of our common stock for $23 million in a
privately negotiated transaction.
Accumulated Other Comprehensive Income (Loss)
Components of other comprehensive income (loss), accumulated in shareholders' equity, are reported net of income taxes, follow
(in millions):
------------------------------------------------------------------------------------------------------------------------------------
Net
Net unrealized
Foreign Minimum unrealized gains Accumulated
currency pension gains (losses) on other
translation liability (losses) on cash flow comprehensive
adjustment adjustment investments hedges (loss) income
--------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 $ (168) $ 41 $ (127)
Foreign currency translation adjustment (31) (31)
Unrealized loss on investments (net of tax of $17 million) (27) (27)
Realized gains on securities (net of tax of $12 million) (18) (18)
Cumulative effect of adoption of SFAS No. 133 $ 3 3
Unrealized derivative gain on cash flow hedges
(net of tax of $7 million) 11 11
Reclassification adjustments on cash flow hedges
(net of tax of $2 million) (4) (4)
------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 (199) (4) 10 (193)
------------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment 208 208
Minimum pension liability adjustment $ (173) (173)
Unrealized gain on investments (net of tax of $1 million) 1 1
Realized loss on securities (net of tax of $3 million) 5 5
Unrealized derivative loss on cash flow hedges
(net of tax of $17 million) (27) (27)
Reclassification adjustments on cash flow hedges
(net of tax of $6 million) 9 9
------------------------------------------------------------------------------------------------------------------------------------
December 31, 2002 9 (173) 2 (8) (170)
------------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment 239 239
Minimum pension liability adjustment (1) 26 26
Unrealized gain on investments (net of tax of $2 million) 4 4
Realized gain on securities (net of tax of $2 million) (3) (3)
Unrealized derivative loss on cash flow hedges
(net of tax of $4 million) (30) (30)
Reclassification adjustments on cash flow hedges
(net of tax of $4 million) 32 32
------------------------------------------------------------------------------------------------------------------------------------
December 31, 2003 $ 248 $ (147) $ 3 $ (6) $ 98
------------------------------------------------------------------------------------------------------------------------------------
(1) Includes adjustments from Dow Corning.
18. Loss Per Common Share
Basic loss per common share is computed by dividing loss attributable to common
shareholders by the weighted-average number of common shares outstanding for the
period. The net loss attributable to common shareholders for 2002 is further
increased by the Series C mandatory convertible preferred stock dividend
requirement.
Diluted loss per common share is computed by dividing net loss attributable to
common shareholders, adjusted for the preferred dividend requirements in 2002,
by the weighted average shares outstanding. Since we reported a loss from
continuing operations in 2003, 2002 and 2001, the diluted loss per share is the
same as basic, as any potentially dilutive securities would reduce the loss per
share from continuing operations.
A reconciliation of the basic and diluted loss per common share from continuing operations computations for 2003, 2002 and 2001
follows (in millions, except per share amounts):
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------ ------------------------------ ----------------------------
Weighted- Per Weighted- Per Weighted- Per
Average Share Average Share Average Share
Loss Shares Amount Loss Shares Amount Loss Shares Amount
----------------------------- ------------------------------ ----------------------------
Loss from
continuing operations $ (223) $ (1,780) $ (5,532)
Less: Preferred stock
dividend requirements 128 1
------------------------------------------------------------------------------------------------------------------------------------
Loss income from continuing
operations attributable to
common shareholders (223) (1,908) (5,533)
------------------------------------------------------------------------------------------------------------------------------------
Basic and Diluted Loss
Per Common Share $ (223) 1,274 $ (0.18) $ (1,908) 1,030 $(1.85) $ (5,533) 933 $(5.93)
------------------------------------------------------------------------------------------------------------------------------------
The potential common shares excluded from the calculation of diluted loss per share because their effect would be anti-dilutive and
the amount of stock options excluded from the calculation of diluted loss per share because their exercise price was greater than
the average market price of the common shares of the periods presented follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Potential common shares excluded from the calculation
of diluted loss per share:
Stock options 19 1 6
7% mandatory convertible preferred stock 65 31
Convertible preferred stock 1
4.875% convertible notes 6 6 6
3.5% convertible debentures 69 69 9
Zero coupon convertible debentures 10 21 23
--------------------------------------------
Total 169 128 45
============================================
Stock options excluded from the calculation of diluted
loss per share because the exercise price was greater
than the average market price of the common shares 76 84 48
------------------------------------------------------------------------------------------------------------------------------------
19. Stock Compensation Plans
At December 31, 2003, our stock compensation programs are in accordance with the
2000 Employee Equity Participation Program and 2000 Equity Plan for Non-Employee
Directors Program. For calendar years beginning January 1, 2001, 3.5% of our
common stock outstanding at the beginning of the year and any ungranted shares
from prior years will be available for grant in the current year. At December
31, 2003, 76.9 million shares will be available under these programs for 2004.
Any remaining shares available for grant, but not yet granted will be carried
over and used in the following year.
19. Stock Compensation Plans (continued)
Stock Option Plans
Our stock option plans provide non-qualified and incentive stock options to
purchase unissued or treasury shares at the market price on the grant date and
generally become exercisable in installments from one to five years from the
grant date. The maximum term of non-qualified and incentive stock options is 10
years from the grant date.
Changes in the status of outstanding options were as follows:
--------------------------------------------------------------------------------
Number Weighted-
of Shares Average
(in thousands) Exercise Price
--------------------------------------------------------------------------------
Options outstanding January 1, 2001 45,003 $ 42.27
--------------------------------------------------------------------------------
Options granted under plans 29,784 $ 21.02
Options exercised (1,258) $ 9.40
Options terminated (1,138) $ 37.53
--------------------------------------------------------------------------------
Options outstanding December 31, 2001 72,391 $ 34.21
--------------------------------------------------------------------------------
Options granted under plans 26,852 $ 4.55
Options exercised (56) $ 1.86
Options terminated (1,860) $ 23.20
--------------------------------------------------------------------------------
Options outstanding December 31, 2002 97,327 $ 26.47
--------------------------------------------------------------------------------
Options granted under plans 40,953 $ 5.85
Options exercised (1,547) $ 6.75
Options terminated (1,381) $ 16.26
--------------------------------------------------------------------------------
Options outstanding December 31, 2003 135,352 $ 20.58
Options exercisable at December 31, 2003 72,867 $ 27.47
--------------------------------------------------------------------------------
Options exercisable at December 31, 2002 42,428 $ 28.96
Options exercisable at December 31, 2001 20,882 $ 26.33
--------------------------------------------------------------------------------
The weighted-average fair value of options granted was $3.82 in 2003, $3.64 in
2002 and $13.83 in 2001.
The following table summarizes information about our stock option plans at December 31, 2003:
------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------------------------------------------
Number Weighted-Average Number
Outstanding at Remaining Weighted- Exercisable at Weighted-
Range of December 31, 2003 Contractual Life Average December 31, 2003 Average
Exercise Prices (in thousands) in Years Exercise Price (in thousands) Exercise Price
------------------------------------------------------------------------------------------------------------------------------------
$ 0.47 to 3.80 15,551 8.9 $ 3.15 1,444 $ 1.60
$ 4.06 to 6.93 23,606 8.9 $ 4.76 2,987 $ 4.79
$ 7.08 to 9.95 39,014 7.6 $ 8.41 22,128 $ 8.64
$ 10.04 to 15.95 13,271 7.2 $ 14.07 10,133 $ 14.77
$ 16.08 to 29.58 13,198 7.1 $ 19.82 12,410 $ 19.62
$ 30.01 to 59.50 13,348 6.7 $ 47.28 11,273 $ 46.98
$ 60.24 to 70.75 9,791 6.7 $ 67.02 9,033 $ 67.45
$71.04 to 111.00 7,573 6.5 $ 73.95 3,459 $ 75.74
------------------------------------------------------------------------------------------------------------------------------------
135,352 7.7 $ 20.58 72,867 $ 27.47
------------------------------------------------------------------------------------------------------------------------------------
19. Stock Compensation Plans (concluded)
Incentive Stock Plans
The Corning Incentive Stock Plan permits stock grants, either determined by
specific performance goals or issued directly, in most instances, subject to the
possibility of forfeiture and without cash consideration.
In 2003, 2002 and 2001, grants of 1,842,000 shares, 88,500 shares and 1,028,000
shares, respectively, were made under this plan. The weighted-average price of
the grants was $10.61 in 2003, $7.15 in 2002 and $36.89 in 2001, respectively. A
total of 2.2 million shares issued remain subject to forfeiture at December 31,
2003.
We apply APB No. 25 accounting for our stock-based compensation plans.
Compensation expense is recorded for awards of shares or share rights over the
period earned. Compensation expense of $1 million, $1 million and $79 million
after-tax was recorded in 2003, 2002 and 2001, respectively.
SFAS No. 123 requires that reload options be treated as separate grants from the
related original option grants. Under our reload program, upon exercise of an
option, employees may tender unrestricted shares owned at the time of exercise
to pay the exercise price and related tax withholding, and receive a reload
option covering the same number of shares tendered for such purposes at the
market price on the date of exercise. The reload options vest in one year and
are only granted in certain circumstances according to the original terms of the
option being exercised. The existence of the reload feature results in a greater
number of options being measured.
For purposes of SFAS No. 123 disclosure, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model.
The following are weighted-average assumptions used for grants under our stock
plans in 2003, 2002 and 2001, respectively:
-------------------------------------------------------------------------------
For Options Granted During 2003 2002 2001
-------------------------------------------------------------------------------
Expected life in years 5 5 6
Risk free interest rate 2.9% 4.0% 4.8%
Dividend yield 0.46%
Expected volatility 79% 80% 75%
-------------------------------------------------------------------------------
We discontinued payment of dividends on our common stock in July 2001. The
dividend yield assumption applies to grants prior to July 2001.
Worldwide Employee Share Purchase Plan
In addition to the Stock Option Plan and Incentive Stock Plans, we have a
Worldwide Employee Share Purchase Plan ("WESPP"). Under the WESPP, substantially
all employees can elect to have up to 10% of their annual wages withheld to
purchase our common stock. The purchase price of the stock is 85% of the lower
of the beginning-of-quarter or end-of-quarter market price.
20. Business Combinations and Divestitures
Purchases
The transactions listed on the following table were all accounted for under the
purchase method of accounting. We are responsible for estimating the fair value
of the assets and liabilities acquired. We have made estimates and assumptions
that affect the reported amounts of assets, liabilities and expenses resulting
from such acquisitions. From time to time we use our common stock as
consideration for business combinations. The value of the common stock is based
upon the average closing price of Corning common stock for a range of days
surrounding the agreement or announcement and adjusted for a discount
commensurate with restrictions on the shares, if applicable.
20. Business Combinations and Divestitures (concluded)
We had no acquisitions in 2003. The following table presents information related to our acquisitions for the years ended December
31, 2002 and 2001 (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Initial Goodwill &
Acquisition Date Price Form Intangibles
------------------------------------------------------------------------------------------------------------------------------------
Lucent Technologies Joint Ventures (1) 9/02 $ 198 Cash/Stock $ 110
------------------------------------------------------------------------------------------------------------------------------------
Tropel Corporation (2) 3/01 $ 160 Cash/Stock $ 155
------------------------------------------------------------------------------------------------------------------------------------
(1) Acquisition of 56% interest in Lucent Technologies Shanghai Fiber Optic
Co., Ltd. and a 68% interest in Lucent Technologies Beijing Fiber Optic
Cable Co., Ltd. from Lucent Technologies. The Shanghai-based company
manufactures optical fiber and the Beijing-based company manufactures fiber
cable. Purchase price included 30 million shares of Corning common stock
valued at $48 million. These entities are included in the
Telecommunications segment.
(2) Manufacturer of precision optics and metrology instruments for the
semiconductor and other industries. Purchase price included 1.95 million
shares of Corning common stock valued at $94 million.
Divestitures
Photonic Technologies
---------------------
In July 2003, we completed the sale of certain optical component products to
Avanex. See Note 5 (Restructuring Actions) for a description of the transaction.
Appliance Controls Group
------------------------
In May 2002, we completed the sale of our appliance controls group, which was
included in the controls and connectors products within the Telecommunications
segment. During 2002, we received proceeds of $30 million and realized a loss on
the sale of approximately $16 million ($10 million after-tax). This loss is
included in restructuring, impairment and other charges in the consolidated
statements of operations.
21. Operating Segments
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," sets standards for reporting information regarding operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. Our
Chief Operating Decision Making group ("CODM") is comprised of the Chairman and
Chief Executive Officer, Vice Chairman and Chief Financial Officer, President
and Chief Operating Officer, President-Corning Technologies, Executive Vice
President-Chief Administrative Officer and Executive Vice President-Chief
Technology Officer.
We are a world-leading provider of optical fiber and cable and hardware and
equipment products for the telecommunications industry; high-performance glass
for computer monitors, and other information display applications; advanced
optical materials for the semiconductor industry and the scientific community;
scientific laboratory products for the scientific community; ceramic substrates
for the automotive industry; specialized polymer products for biotechnology
applications; and other technologies.
Effective with the first quarter of 2004, we have revised our reportable
operating segments from Telecommunications and Technologies to
Telecommunications, Display Technologies, Environmental Technologies, and Life
Sciences. The following provides a brief description of the products and markets
served by each reportable segment:
.. Telecommunications - manufactures optical fiber and cable, and hardware and
equipment components for the worldwide telecommunications industry;
.. Display Technologies - manufactures liquid crystal display glass for flat
panel displays;
.. Environmental Technologies - manufactures ceramic substrates and filters
for automobile and diesel applications; and
.. Life Sciences - manufactures glass and plastic consumables for scientific
applications.
The change in our segment presentation reflects how Corning's CODM allocates
resources and assesses the performance of its businesses. Specifically, the CODM
is increasing its level of review of the Display Technologies segment
significantly due to the recent increase in growth and capital spending in that
segment. In addition, the CODM is increasing its review of the Environmental
Technologies and Life Sciences segments to strengthen the overall balance and
stability of Corning's portfolio of businesses.
21. Operating Segments (continued)
All other operating segments that do not meet the quantitative threshold for
separate reporting (e.g. conventional video components, semiconductor materials,
and ophthalmic products), certain corporate investments (e.g. Dow Corning and
Steuben), discontinued operations, and unallocated expenses (e.g. and other
corporate items) have been grouped as "Unallocated and Other". Unallocated
expenses include: research and other expenses related to new business
development; amortization of goodwill; gains or losses on repurchases and
retirement of debt; charges related to the asbestos litigation; and
restructuring and impairment charges related to the corporate research and
development or staff organizations. Unallocated and Other also represents the
reconciliation between the totals for the reportable segments and our
consolidated total.
We prepared the financial results for our operating segments on a basis that is
consistent with the manner in which we internally disaggregate financial
information to assist in making internal operating decisions. We include the
earnings of equity affiliates that are closely associated with our operating
segments in the respective segment's net income. We have allocated certain
common expenses among segments differently than we would for stand-alone
financial information prepared in accordance with GAAP. These expenses include
interest, taxes and corporate functions. Segment net income may not be
consistent with measures used by other companies. The accounting policies of our
operating segments are the same as those applied in the consolidated financial
statements. Revenue attributed to geographic areas is based on the location of
the customer.
21. Operating Segments (continued)
------------------------------------------------------------------------------------------------------------------------------------
Telecom- Display Environmental Life Unallocated Consolidated
munications Technologies Technologies Sciences and Other Total
------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2003
Net sales $ 1,426 $ 595 $ 476 $ 281 $ 312 $ 3,090
Depreciation (1) $ 246 $ 110 $ 80 $ 38 $ 6 $ 480
Amortization of purchased intangibles $ 37 $ 37
Research, development and engineering expenses (2) $ 120 $ 55 $ 87 $ 28 $ 54 $ 344
Restructuring, impairment and other charges
and credits (3) $ (36) $ 147 $ 111
Interest expense (4) $ 75 $ 39 $ 19 $ 5 $ 16 $ 154
(Benefit) provision for income taxes $ (78) $ 45 $ 5 $ 7 $ (233) $ (254)
(Loss) earnings before minority interests and equity
(losses) earnings (5) $ (158) $ 91 $ 9 $ 14 $ (461) $ (505)
Minority interests (6) 73 73
Equity in (losses) earnings of associated companies,
net of impairments (11) 144 76 209
------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (169) $ 235 $ 9 $ 14 $ (312) $ (223)
------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 59 $ 299 $ 30 $ 590 $ 978
Segment assets (7) $ 1,901 $ 1,297 $ 485 $ 111 $ 6,958 $ 10,752
Capital expenditures $ 15 $ 251 $ 69 $ 7 $ 49 $ 391
------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2002
Net sales $ 1,631 $ 405 $ 394 $ 280 $ 454 $ 3,164
Depreciation (1) $ 379 $ 79 $ 50 $ 22 $ 88 $ 618
Amortization of purchased intangibles $ 41 $ 2 $ 43
Research, development and engineering expenses (2) $ 308 $ 41 $ 63 $ 17 $ 54 $ 483
Restructuring, impairment and other charges
and credits (3) $ 1,722 $ 2 $ 1 $ 355 $ 2,080
Interest expense (4) $ 99 $ 29 $ 16 $ 5 $ 30 $ 179
(Benefit) provision for income taxes $ (722) $ 20 $ 8 $ 13 $ (45) $ (726)
(Loss) earnings before minority interests and equity
(losses) earnings (5) $(1,838) $ 39 $ 16 $ 25 $ (236) $ (1,994)
Minority interests (6) 1 97 98
Equity in (losses) earnings of associated companies,
net of impairments (60) 80 16 80 116
Income from discontinued operations 478 478
------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $(1,897) $ 119 $ 32 $ 25 $ 419 $ (1,302)
------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 72 $ 187 $ 30 $ 457 $ 746
Segment assets (7) $ 2,243 $ 913 $ 428 $ 126 $ 7,696 $ 11,406
Capital expenditures $ 49 $ 77 $ 74 $ 8 $ 108 $ 316
------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2001
Net sales $ 4,458 $ 323 $ 379 $ 267 $ 620 $ 6,047
Depreciation (1) $ 401 $ 52 $ 45 $ 24 $ 99 $ 621
Amortization of purchased intangibles $ 76 $ 76
Research, development and engineering expenses (2) $ 474 $ 27 $ 50 $ 31 $ 40 $ 622
Restructuring, impairment and other charges
and credits (3) $ 5,404 $ 1 $ 11 $ 301 $ 5,717
Interest expense (4) $ 104 $ 16 $ 10 $ 4 $ 19 $ 153
Benefit for income taxes $ (336) $ 14 $ 12 $ (9) $ (149) $ (468)
Loss before minority interests and equity earnings (5) $(5,215) $ 28 $ 24 $ (17) $ (513) $ (5,693)
Minority interests (6) 13 13
Equity in earnings of associated companies 12 60 6 70 148
Income from discontinued operations 34 34
------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $(5,203) $ 88 $ 30 $ (17) $ (396) $ (5,498)
------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 101 $ 118 $ 15 $ 402 $ 636
Segment assets (7) $ 3,972 $ 783 $ 352 $ 138 $ 7,548 $ 12,793
Capital expenditures $ 941 $ 232 $ 62 $ 14 $ 368 $ 1,617
------------------------------------------------------------------------------------------------------------------------------------
21. Operating Segments (continued)
(1) Depreciation expense for Corning's reportable segments includes an
allocation of depreciation of corporate property not specifically
identifiable to a segment. Related depreciable assets are not allocated to
segment assets.
(2) Non-direct research, development and engineering expenses are allocated to
segments based upon direct project spending for each segment.
(3) Related tax benefit:
Year ended December 31, 2003: $17, $0, $0, $0, $32 and $49.
Year ended December 31, 2002: $452, $0, $1, $0, $95 and $548.
Year ended December 31, 2001: $282, $0, $0, $4, $113 and $399.
(4) 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.
(5) 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.
(6) Includes $30 million and $68 million in 2003 and 2002, respectively,
related to impairment of long-lived assets of the conventional video
components business.
(7) Includes inventory, accounts receivable, property and investments in
associated equity companies.
A reconciliation of reportable segment net income (loss) to consolidated net loss follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) of reportable segments $ 89 $ (1,721) $ (5,102)
Non-reportable operating segments net (loss) income (1) (139) (29) 1
Unallocated amounts:
Non-segment loss and other (2) (51) (24) (43)
Amortization of goodwill (363)
Non-segment restructuring, impairment and
other (charges) and credits (13) (208) (191)
Asbestos settlement (413)
Interest income 32 41 68
Gain on repurchases of debt 19 176
Benefit (provision) for income taxes (3) 170 (24) 94
Minority interests 1
Equity in earnings of associated companies (4) 83 8 4
Income from discontinued operations 478 34
-------- --------- --------
Net loss $ (223) $ (1,302) $ (5,498)
------------------------------------------------------------------------------------------------------------------------------------
(1) Includes the results of non-reportable operating segments.
(2) Includes the results of non-segment operations and other corporate
activities.
(3) Includes tax associated with non-segment restructuring, impairment and
other charges.
(4) Includes amounts derived from corporate investments, primarily Dow Corning
Corporation in 2003.
The following table provides net sales for the Telecommunications segment (in
millions):
--------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 760 $ 859 $ 2,889
Hardware and equipment 612 661 1,022
Photonic technologies 54 111 547
--------- --------- --------
Total net sales $ 1,426 $ 1,631 $ 4,458
--------------------------------------------------------------------------------
21. Operating Segments (concluded)
A reconciliation of reportable segment assets to consolidated assets follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Total assets of reportable segments $ 3,794 $ 3,710 $ 5,245
Non-reportable operating segments assets 683 915 1,298
Unallocated amounts:
Current assets (1) 1,698 2,746 2,723
Investments (2) 211 25 80
Property, net (3) 973 903 636
Other non-current assets (4) 3,393 3,107 2,811
-------- --------- --------
Total assets $ 10,752 $ 11,406 $ 12,793
------------------------------------------------------------------------------------------------------------------------------------
(1) Includes current corporate assets, primarily cash, short-term investments
and deferred taxes.
(2) Represents corporate investments in associated companies, at both cost and
equity.
(3) Represents corporate property not specifically identifiable to an operating
segment.
(4) Includes non-current corporate assets, pension assets and deferred taxes.
Information concerning principal geographic areas was as follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Net Long-lived Net Long-lived Net Long-lived
Sales Assets (1) Sales Assets (1) Sales Assets (1)
------------------------------------------------------------------------------------------------------------------------------------
North America
United States $ 1,222 $ 4,435 $ 1,446 $ 4,588 $ 2,665 $ 6,249
Canada 88 70 122 66 238 54
Mexico 65 72 56 73 85 3
------------------------------------------------------------------------------------------------------------------------------------
Total North America 1,375 4,577 1,624 4,727 2,988 6,306
------------------------------------------------------------------------------------------------------------------------------------
Asia Pacific
Japan 382 349 372 292 518 264
China 134 191 102 189 511 170
Korea 55 620 57 574 50 454
Other, including Taiwan 472 253 331 129 373 79
------------------------------------------------------------------------------------------------------------------------------------
Total Asia Pacific 1,043 1,413 862 1,184 1,452 967
------------------------------------------------------------------------------------------------------------------------------------
Europe
Germany 198 295 210 236 443 484
France 42 133 46 121 141 123
United Kingdom 74 67 82 83 223 97
Italy 36 268 47 265 114 319
Other 194 77 183 39 479 37
------------------------------------------------------------------------------------------------------------------------------------
Total Europe 544 840 568 744 1,400 1,060
------------------------------------------------------------------------------------------------------------------------------------
Latin America
Brazil 17 2 15 2 59 7
Other 11 1 6 1 39 3
------------------------------------------------------------------------------------------------------------------------------------
Total Latin America 28 3 21 3 98 10
------------------------------------------------------------------------------------------------------------------------------------
All Other 100 89 36 109 30
------------------------------------------------------------------------------------------------------------------------------------
Total $ 3,090 $ 6,833 $ 3,164 $ 6,694 $ 6,047 $ 8,373
------------------------------------------------------------------------------------------------------------------------------------
(1) Long-lived assets primarily include investments, plant and equipment,
goodwill and other intangible assets.
22. Subsequent Event
Through March 1, 2004, we repurchased and retired 25 thousand zero coupon
convertible debentures for approximately $19 million in cash resulting in a net
decrease of $20 million to the zero coupon convertible debenture book value. In
addition, we issued 22 million shares of Corning common stock and $24 million in
cash in exchange for 3.5% convertible debentures with a book value of $213
million at an effective conversion price of $9.675 per share. As a result of
these transactions, we will record a $23 million pre-tax loss on repurchases and
retirement of debt during the first quarter of 2004.
Corning Incorporated and Subsidiary Companies
Schedule II - Valuation Accounts and Reserves
(In millions)
------------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year ended December 31, 2003 Beginning of Period Additions and Other End of Period
------------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 59 $ 5 $ 26 $ 38
Deferred tax assets valuation allowance $ 417 $ 52 $ 469
Accumulated amortization of
purchased intangible assets $ 104 $ 43 $ 147
Reserves for accrued costs of
business restructuring $ 405 $ 127 $ 346 $ 186
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year ended December 31, 2002 Beginning of Period Additions and Other End of Period
------------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 60 $ 15 $ 16 $ 59
Deferred tax assets valuation allowance $ 189 $ 228 $ 417
Accumulated amortization of
purchased intangible assets $ 90 $ 43 $ 29 $ 104
Reserves for accrued costs of
business restructuring $ 276 $ 461 $ 332 $ 405
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year ended December 31, 2001 Beginning of Period Additions and Other End of Period
------------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 47 $ 32 $ 19 $ 60
Deferred tax assets valuation allowance $ 72 $ 117 $ 189
Accumulated amortization of goodwill $ 303 $ 363 $ 5 $ 661
Accumulated amortization of purchased
intangible assets $ 52 $ 76 $ 38 $ 90
Reserves for accrued costs of
business restructuring $ 419 $ 143 $ 276
------------------------------------------------------------------------------------------------------------------------------------