FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to____________
Commission file number 1-3247
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CORNING INCORPORATED
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(Registrant)
New York 16-0393470
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(State of incorporation) (I.R.S. Employer Identification No.)
One Riverfront Plaza, Corning, New York 14831
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-974-9000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
at least the past 90 days.
Yes X No ____
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No ____
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
1,205,775,286 shares of Corning's Common Stock, $0.50 Par Value, were
outstanding as of March 31, 2003.
INDEX
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Page
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Consolidated Statements of Operations (Unaudited) for the
three months ended March 31, 2003 and 2002 3
Consolidated Balance Sheets at March 31, 2003 (Unaudited) and
December 31, 2002 4
Consolidated Statements of Cash Flows (Unaudited) for the
three months ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 28
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 36
Certifications 37
Exhibit Index 39
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share amounts)
For the three months ended
March 31,
----------------------------
2003 2002
---------- ----------
Net sales $ 746 $ 839
Cost of sales 546 655
--------- ---------
Gross margin 200 184
Operating expenses:
Selling, general and administrative expenses 152 188
Research, development and engineering expenses 93 126
Amortization of purchased intangibles 9 11
Restructuring, impairment and other charges and
credits (Note 2) 51
--------- ---------
Operating loss (105) (141)
Interest income 8 14
Interest expense (40) (48)
Asbestos settlement (Note 3) (298)
Gain on repurchases of debt, net of inducements (Note 4) 4
Other expense, net (14) (9)
--------- ---------
Loss from continuing operations before income taxes (445) (184)
Benefit for income taxes (144) (50)
--------- ---------
Loss from continuing operations before minority interests
and equity earnings (301) (134)
Minority interests 37 6
Equity in earnings of associated companies 59 30
--------- ---------
Loss from continuing operations (205) (98)
Income from discontinued operations, net of income taxes (Note 5) 8
--------- ---------
Net loss $ (205) $ (90)
========= =========
Basic and diluted loss per common share from (Note 11):
Continuing operations $ (0.17) $ (0.10)
Discontinued operations (Note 5)
--------- ---------
Loss per common share $ (0.17) $ (0.10)
========= =========
Shares used in computing per share amounts for basic
and diluted loss per common share 1,200 945
========= =========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
Unaudited
March 31, December 31,
2003 2002
----------- -------------
Assets
Current assets:
Cash and cash equivalents $ 1,127 $ 1,426
Short-term investments, at fair value 722 664
--------- ---------
Total cash and short-term investments 1,849 2,090
Trade accounts receivable, net of doubtful accounts and allowances - $54; $59 494 470
Inventories (Note 6) 556 559
Deferred income taxes 323 296
Other accounts receivable 140 358
Prepaid expenses and other current assets 58 52
--------- ---------
Total current assets 3,420 3,825
Restricted cash and investments 82 82
Investments 773 769
Property, net of accumulated depreciation - $3,496; $3,375 3,576 3,705
Goodwill (Note 7) 1,721 1,715
Other intangible assets, net (Note 7) 205 213
Deferred income taxes 1,018 887
Other assets 202 210
--------- ---------
Total Assets $ 10,997 $ 11,406
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Loans payable $ 145 $ 204
Accounts payable 299 339
Other accrued liabilities (Note 8) 1,115 1,137
--------- ---------
Total current liabilities 1,559 1,680
Long-term debt 3,710 3,963
Postretirement benefits other than pensions 609 617
Other liabilities 512 396
Commitments and contingencies (Note 9)
Minority interests 19 59
Shareholders' equity:
Preferred stock - Par value $100.00 per share; Shares authorized: 10 million
Series C mandatory convertible preferred stock - Shares issued: 5.75 million;
Shares outstanding: 1.55 million 155 155
Common stock - Par value $0.50 per share; Shares authorized: 3.8 billion;
Shares issued: 1,267 million 634 634
Additional paid-in capital 9,671 9,695
Accumulated deficit (5,126) (4,921)
Treasury stock, at cost: 61 million; 70 million (613) (702)
Accumulated other comprehensive loss (133) (170)
--------- ---------
Total shareholders' equity 4,588 4,691
--------- ---------
Total Liabilities and Shareholders' Equity $ 10,997 $ 11,406
========= =========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
For the three months ended
March 31,
--------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Loss from continuing operations $ (205) $ (98)
Adjustments to reconcile loss from continuing operations
to net cash provided by (used in) operating activities:
Amortization of purchased intangibles 9 11
Depreciation 118 157
Asbestos settlement 298
Restructuring, impairment and other charges and credits 51
Gain on repurchases of debt, net of inducements (4)
Undistributed earnings of associated companies 1 23
Minority interests, net of dividends paid (37) (6)
Deferred tax benefit (178) (87)
Interest expense on convertible debentures 7 10
Restructuring payments (94) (58)
Increases in restricted cash (3)
Income tax refund 191
Changes in certain working capital items:
Trade accounts receivable (13) (26)
Inventories 7 1
Other current assets 10 34
Accounts payable and other current liabilities, net of restructuring payments (118) (154)
Other, net (17) (9)
-------- -------
Net cash provided by (used in) operating activities 23 (202)
-------- -------
Cash flows from investing activities:
Capital expenditures (55) (101)
Net proceeds from sale of precision lens business 9
Net proceeds from sale or disposal of assets 13 5
Short-term investments - acquisitions (428) (603)
Short-term investments - liquidations 369 919
Restricted investments - liquidations 3
Other, net 1
-------- -------
Net cash (used in) provided by investing activities (88) 220
-------- -------
Cash flows from financing activities:
Net repayments of loans payable (62) (143)
Proceeds from issuance of long-term debt 11
Repayments of long-term debt (189) (4)
Proceeds from issuance of common stock, net 3 15
Cash dividends paid to preferred shareholders (3)
-------- -------
Net cash used in financing activities (251) (121)
-------- -------
Effect of exchange rates on cash 17 (6)
-------- -------
Cash used in continuing operations (299) (109)
Cash provided by discontinued operations (Note 5) 30
-------- -------
Net decrease in cash and cash equivalents (299) (79)
Cash and cash equivalents at beginning of period 1,426 1,037
-------- -------
Cash and cash equivalents at end of period $ 1,127 $ 958
======== =======
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
General
Corning Incorporated and its consolidated subsidiaries is hereinafter sometimes
referred to as the "the Company," "the Registrant," "Corning," "we," "our," or
"us."
Corning Incorporated is a world-leading provider of optical fiber, cable, and
hardware and equipment products for the telecommunications industry;
high-performance glass for computer monitors and television screens, advanced
optical materials for the semiconductor industry and the scientific community;
ceramic substrates for the automotive industry; specialized polymer products for
biotechnology applications; and other technologies.
The unaudited consolidated financial statements reflect all adjustments which,
in the opinion of management, are necessary for a fair statement of the results
of operations, financial position and cash flows for the interim periods
presented. All such adjustments are of a normal recurring nature. The
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and in accordance with
accounting principles generally accepted in the United States of America (GAAP)
for interim financial information.
GAAP requires management to make certain estimates and judgments that are
reflected in the reported amounts of assets, liabilities, revenues and expenses
and also in the disclosure of contingent liabilities. The actual results may
differ from the estimates. Management exercises judgment and makes estimates for
allowance for bad debts, inventory obsolescence, product warranty, in-process
research and development, restructuring charges, asset and goodwill impairments,
depreciation, pension and post-retirement benefits, income taxes, litigation and
other contingencies. Management reviews these estimates on a systematic basis
and, if necessary, any material adjustments are reflected in the consolidated
financial statements in the period that they are deemed necessary.
The results for interim periods are not necessarily indicative of results which
may be expected for any other interim period, or for the full year. These
interim consolidated financial statements should be read in conjunction with
Corning's Annual Report on Form 10-K for the year ended December 31, 2002.
Corning began recognizing equity earnings from Dow Corning Corporation ("Dow
Corning") in the first quarter of 2003 since it concluded that the emergence of
Dow Corning from bankruptcy protection is probable based on the Bankruptcy
Court's findings on December 11, 2002. See Legal Proceedings, Part II, Item 1
for a history of this matter.
Certain amounts for 2002 were reclassified to conform with 2003 classifications.
Stock-Based Compensation
Corning applies Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees," for its stock-based compensation
plans. Compensation expense is recorded for awards of shares or share rights
over the period earned. Compensation expense of $1 million was recorded for the
three months ended March 31, 2003, compared with $1 million in the same period
of 2002.
The following table illustrates the effect on loss from continuing operations
and loss per share if Corning had applied the fair value recognition provisions
of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," 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):
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For the three months ended March 31,
------------------------------------
2003 2002
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Loss from continuing operations - as reported $ (205) $ (98)
Add: Stock-based employee compensation expense
determined under APB No. 25, included in reported
loss from continuing operations, net of tax 1 1
Less: Stock-based employee compensation expense
determined under fair value based method, net of tax (35) (70)
- --------------------------------------------------------------------------------------------------------
Loss from continuing operations - pro forma $ (239) $ (167)
Loss per common share from continuing operations:
Basic and diluted - as reported $ (0.17) $ (0.10)
Basic and diluted - pro forma $ (0.20) $ (0.18)
- --------------------------------------------------------------------------------------------------------
For purposes of SFAS No. 123 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 Corning stock plans in
2003 and 2002, respectively:
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For Options For the three months ended March 31,
------------------------------------
Granted During 2003 2002
- --------------------------------------------------------------------------------
Expected life in years 5 6
Risk free interest rate 2.9% 4.4%
Expected volatility 78.3% 77.2%
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Changes in the status of outstanding options were as follows:
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Number of Shares Weighted-Average
(in thousands) Exercise Price
---------------- ----------------
Options outstanding December 31, 2002 97,327 $ 26.47
Options granted under plans 25,192 $ 4.30
Options exercised 39 $ 3.02
Options terminated 154 $ 17.21
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Options outstanding March 31, 2003 122,326 $ 21.92
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Options exercisable March 31, 2003 53,645 $ 25.85
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New Accounting Standards
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51," 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 variable interest entities that are consolidated as well as VIEs from which
the entity is the holder of a significant amount of the beneficial interests,
but not the majority. The disclosure requirements of this interpretation are
effective for all financial statements issued after January 31, 2003. The
consolidation requirements of this interpretation are effective for all periods
beginning after June 15, 2003. Management is still assessing the impacts of this
interpretation, however, it is probable that Corning will be considered the
primary beneficiary of one existing special purpose entity and therefore would
need to consolidate this entity beginning on July 1, 2003. The assets and debt
of this entity at March 31, 2003, approximates $34 million. Corning is still
evaluating the impacts of this interpretation on two other entities with assets
and liabilities of $12 million.
2. Restructuring, Impairment and Other Charges and Credits
In the first quarter of 2003, Corning recorded charges for the shut-down of the
conventional video components business and the optical switching product line
which were announced on April 15, 2003 and February 13, 2003, respectively.
Corning also recorded credits related to the restructuring reserve discussed
below.
Conventional video components business
Corning Asahi Video Products Company (conventional video components business, or
CAV), a 51% owned consolidated subsidiary, is a manufacturer of glass panels and
funnels for use in conventional tube televisions and is reported in the
Technologies segment. In the fourth quarter of 2002, Corning impaired certain
assets of this business and indicated that it could be required to record
additional impairment charges, or that it could choose to exit the business if
performance differed from expectations. During the first quarter, operating
results and cash flows were less than expected and certain customers
significantly reduced forecasted orders for the year.
On April 15, 2003, Corning announced that it had agreed with its partner to
cease production. Corning impaired the long-lived assets of this business to
estimated salvage value and recorded a charge of $62 million ($19 million
after-tax and minority interest). Restructuring costs, comprised primarily of
pension termination benefits, severance and exit costs offset in part by a gain
on the curtailment of post employment benefits, are expected to be recorded in
the second quarter and total $80 million to $110 million. In connection with the
cessation of operations, the partners have reached agreement on the shared
funding of CAV's obligations. Corning expects the restructuring costs to require
$40 million to $65 million in cash spending.
Optical Switching
Corning recorded a charge of $17 million ($11 million after-tax) associated with
the discontinuance of the optical switching product line in the photonic
technologies business due to the downturn in the telecommunications industry.
The charge included $13 million for employee separation costs and $4 million for
asset impairments related to equipment. In addition to the first quarter
charges, we expect to record charges of $10 million in the second quarter for
exit costs.
Impairment of Cost Investments
In the first quarter, Corning recorded a $5 million ($3 million after-tax)
charge for other than temporary declines in certain cost investments in the
Telecommunications segment.
Credits
The current restructuring reserve continues to be evaluated as plans are being
executed. In addition, since the restructuring program is an aggregation of many
individual plans currently being executed, actual costs have differed from
estimated amounts. As a result, there may be additional charges or reversals.
During the first quarter, Corning reversed $33 million ($21 million after-tax)
related to revised cost estimates of existing restructuring plans of which $24
million related to employee separation and exit costs which were less than
estimated, while $9 million related to proceeds in excess of assumed salvage
values for assets that were previously impaired.
The following table illustrates the charges, credits and balances of the
restructuring reserves as of March 31, 2003 (in millions):
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Quarter Quarter ended Remaining
ended March Revisions Net March 31, 2003 Cash reserve at
January 1, 31, 2003 to existing charges/ Non-cash payments March 31,
2003 charge plans (reversals) charges in 2003 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring charges:
Employee related costs $ 273 $ 13 $ (11) $ 2 $ 1 $ 79 $ 195
Other charges 132 (13) (13) 15 104
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Total restructuring charges $ 405 $ 13 $ (24) $ (11) $ 1 $ 94 $ 299
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Impairment of long-lived assets:
Assets to be held and used $ 62 $ 62
Assets to be disposed of by sale
or abandonment 4 (9) (5)
Cost investments 5 5
-------------------------------------
Total impairment charges $ 71 $ (9) $ 62
-------------------------------------
Total restructuring and impairment
charges and credits $ 84 $ (33) $ 51
Tax benefit and minority interest (51) 12 (39)
-------------------------------------
Restructuring and impairment
charges and credits, net $ 33 $ (21) $ 12
-------------------------------------
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The following table illustrates the headcount reduction amongst U.S. Hourly,
U.S. Salaried and Non-U.S. positions:
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Headcount reduction
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U.S. Hourly U.S. Salaried Total
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Headcount reduction 25 175 200
=============================================
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As of March 31, 2002, approximately 6,200 of the 7,100 employees had been
separated under the 2002 plans.
3. Asbestos Settlement
On March 28, 2003, Corning announced that it had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future asbestos claims against Corning and Pittsburgh Corning Corporation (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 favorable vote
by 75 percent of the asbestos claimants voting on the PCC reorganization plan.
Corning will make its contributions to the settlement trust under the agreement
after the plan is approved and no longer subject to appeal. The approval process
could take one year or longer.
Corning's settlement will require the contribution, when the plan becomes
effective, of Corning's equity interest in PCC, its one-half equity interest in
Pittsburgh Corning Europe N.V. (PCE), a Belgian corporation, and 25 million
shares of Corning 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. Corning will
also make cash payments with a current value of $130 million over six years
beginning in June 2005. In addition, Corning will assign insurance policy
proceeds from its primary insurance and a portion of its excess insurance as
part of the settlement. Corning recorded a charge of $298 million ($192 million
after-tax) in the first quarter. The carrying value of Corning's stock in PCE
and the fair value as of March 31, 2003, of 25 million shares of Corning common
stock have been reflected in current liabilities. The remaining $130 million,
representing the net present value of the cash payments, discounted at 5.5%, is
recorded in noncurrent liabilities. See Legal Proceedings, Part II, Item 1 for a
history of this matter.
4. Gain on Repurchases of Debt, Net of Inducements
During the first quarter of 2003, Corning repurchased and retired 298,500 zero
coupon convertible debentures with an accreted value of $231 million in exchange
for cash of $189 million in a series of open-market repurchases. Corning
recorded a gain of $38 million on these transactions, net of the write-off of
the unamortized issuance costs. Also in the first quarter, Corning issued 6.5
million shares of common stock from treasury in exchange for 55,000 zero coupon
convertible debentures with an accreted value of $43 million. In accordance with
SFAS No. 84, "Induced Conversions of Convertible Debt," Corning recognized a
charge of $34 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.
In total, Corning recorded a net gain of $4 million ($3 million after-tax)
associated with retirements of its zero coupon convertible debentures in the
first quarter. As of March 31, 2003, 1,720,044 debentures with an accreted value
of $1.3 billion remain outstanding.
5. Discontinued Operations
Summarized selected financial information for the discontinued operations
related to the precision lens business was as follows (in millions):
- --------------------------------------------------------------------------------
For the three months ended March 31, 2002
- --------------------------------------------------------------------------------
Net sales $ 59
========
Income before taxes $ 16
Provision for income taxes 8
--------
Net income $ 8
========
- --------------------------------------------------------------------------------
6. Inventories
Inventories shown on the accompanying balance sheets were comprised of the
following (in millions):
- --------------------------------------------------------------------------------
March 31, December 31,
2003 2002
- --------------------------------------------------------------------------------
Finished goods $ 194 $ 212
Work in process 128 115
Raw materials and accessories 140 135
Supplies and packing materials 94 97
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Total inventories $ 556 $ 559
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7. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the three months ended March
31, 2003, were as follows (in millions):
- --------------------------------------------------------------------------------
Telecom-
munications Technologies Total
- --------------------------------------------------------------------------------
Balance at January 1, 2003 $ 1,556 $ 159 $ 1,715
Foreign currency translation 9 9
Other (3) (3)
- --------------------------------------------------------------------------------
Balance at March 31, 2003 $ 1,562 $ 159 $ 1,721
- --------------------------------------------------------------------------------
Other intangible assets consisted of the following (in millions):
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March 31, 2003 December 31, 2002
-------------------------------------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Patents and trademarks $ 139 $ 44 $ 95 $ 138 $ 40 $ 98
Non-competition agreements 107 68 39 106 62 44
Other 5 2 3 5 2 3
----------------------------------- -----------------------------------
Total amortized intangible assets 251 114 137 249 104 145
----------------------------------- -----------------------------------
Other intangible assets:
Intangible pension assets 68 68 68 68
----------------------------------- -----------------------------------
Total $ 319 $ 114 $ 205 $ 317 $ 104 $ 213
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets are primarily related to the Telecommunications
segment.
Amortization expense related to these intangible assets is expected to be in the
range of approximately $20 million to $35 million annually from 2003 to 2007.
8. Product Warranty Liability
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. Corning's reserve
relates primarily to its Telecommunications segment. Reserves for warranty items
are included in other current liabilities. A reconciliation of the changes in
the product warranty liability during the three months ended March 31, 2003, was
as follows (in millions):
- --------------------------------------------------------------------------------
Balance at December 31, 2002 $ 64
Adjustments to liability existing on January 1, 2003 (6)
Settlements made during 2003 (4)
------
Balance at March 31, 2003 $ 54
- --------------------------------------------------------------------------------
9. Commitments and Contingencies
From time to time, Corning is subject to uncertainties and litigation and is not
always able to predict the outcome of these items with assurance. Various legal
actions, claims and proceedings are pending against Corning, including those
arising out of alleged product defects, shareholder matters, product warranties,
patents, asbestos and environmental matters. These issues are discussed in Part
II, Item 1, Legal Proceedings of this Form 10-Q.
Corning's cash obligations, commercial commitments and contingencies were
relatively unchanged from those disclosed in Corning's 2002 Form 10-K filed
February 20, 2003.
10. Comprehensive Loss
Comprehensive loss, net of tax, was as follows (in millions):
- --------------------------------------------------------------------------------
For the three months ended March 31,
------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Net loss $ (205) $ (90)
Other comprehensive income (loss) 37 (25)
- --------------------------------------------------------------------------------
Total comprehensive loss $ (168) $ (115)
- --------------------------------------------------------------------------------
11. Loss Per Common Share
Basic and diluted loss per common share was calculated by dividing net loss
attributable to common shareholders by the weighted average number of common
shares outstanding during the period.
The potential common shares excluded from the calculation of diluted loss per
common share because their effect would be anti-dilutive and the amount of stock
options excluded from the calculation of diluted loss per common share because
their exercise price was greater than the average market price of the common
shares of the periods presented was as follows (in millions):
- --------------------------------------------------------------------------------
For the three months ended March 31,
------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Potential common shares excluded from
the calculation of diluted loss per
common share:
Stock options 8 1
7% mandatory convertible preferred stock 79
Convertible preferred stock 1
4.875% convertible notes 6 6
3.5% convertible debentures 69 69
Zero coupon convertible debentures 16 23
------------------------
Total 178 100
========================
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 88 71
========================
- --------------------------------------------------------------------------------
12. Operating Segments
Corning's reportable operating segments consist of: Telecommunications and
Technologies. Corning includes the earnings of equity affiliates that are
closely associated with Corning's operating segments in segment results.
Corning prepared the financial results for its operating segments on a basis
that is consistent with the manner in which Corning management internally
disaggregates financial information to assist in making internal operating
decisions. Corning has allocated certain common expenses among segments
differently than it would for stand-alone financial information prepared in
accordance with GAAP. These expenses include interest, taxes and corporate
functions. This method of preparation may not be consistent with methods used by
other companies. The accounting policies of Corning's operating segments are the
same as those applied in the consolidated financial statements.
Telecom- Non-segment/ Consolidated
munications Technologies Other items Total
----------- ------------ ------------ ------------
For the three months ended March 31, 2003
Net sales $ 352 $ 388 $ 6 $ 746
Research, development and engineering expenses (1) $ 38 $ 55 $ 93
Restructuring, impairment and other charges and (credits) (2) $ (9) $ 60 $ 51
Interest expense (3) $ 21 $ 19 $ 40
Benefit for income taxes $ (25) $ (7) $ (112) $ (144)
Loss before minority interests and equity (losses)
earnings (4)(5) $ (60) $ (55) $ (186) $ (301)
Minority interests (6) 37 37
Equity in (losses) earnings of associated companies (3) 44 18 59
-------- -------- ------- --------
Net (loss) income $ (63) $ 26 $ (168) (7) $ (205)
======== ======== ======= ========
For the three months ended March 31, 2002
Net sales $ 465 $ 369 $ 5 $ 839
Research, development and engineering expenses (1) $ 86 $ 40 $ 126
Interest expense (3) $ 32 $ 16 $ 48
(Benefit) provision for income taxes $ (64) $ (1) $ 15 $ (50)
(Loss) income before minority interests and equity
(losses) earnings (4)(5) $ (138) $ (4) $ 8 $ (134)
Minority interests 6 6
Equity in (losses) earnings of associated companies (4) 33 1 30
Income from discontinued operations 8 8
-------- -------- ------- --------
Net (loss) income $ (142) $ 35 $ 17 (7) $ (90)
======== ======== ======= ========
(1) Non-direct research, development and engineering expenses are allocated
based upon direct project spending for each segment.
(2) Related tax expense (benefit) of $4, $(12) and $(8) million, respectively.
(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, plant and
equipment not specifically identifiable to a segment. Related depreciable
assets are not allocated to segment assets.
(6) $31 million related to impairments of CAV.
(7) Non-segment/Other items net income (loss) reported as "Other" is reconciled
below:
Non-segment/other items net (loss) income is detailed below:
Three months ended
March 31,
--------------------------
2003 2002
-------- ---------
Non-segment (loss) income and other (1) $ (12) $ 9
Interest income (2) 8 14
Asbestos settlement (298)
Gain on repurchases of debt (2) 4
Benefit (provision) for income taxes (3) 112 (15)
Equity in earnings of associated companies (4) 18 1
Income from discontinued operations 8
-------- --------
Net (loss) income $ (168) $ 17
======== ========
(1) Includes non-segment operations and other corporate activities.
(2) Corporate interest income and gain on repurchases of debt is not allocated
to reportable segments.
(3) Includes tax associated with unallocated items.
(4) Include amounts derived from corporate investments and activities,
primarily Dow Corning Corporation - $17 million.
13. Subsequent Event
On April 28, 2003, Corning announced an equity offering of 50 million shares of
common stock generating net proceeds to Corning of approximately $267 million.
Corning expects to use the net proceeds of this offering and $100 million to
$500 million of existing cash to reduce debt by engaging in, including without
limitation, open market repurchases and tender offers in the second quarter of
2003.
ITEM 2.
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Overview
In the first quarter of 2003, our Telecommunications segment did not display any
signs of meaningful recovery as major carriers continue to withhold capital
spending. At the same time our Technologies segment exhibited modest growth as
the general economy continues to struggle. During the quarter, we reached major
milestones regarding two of our joint ventures that have been in litigation. We
reached a settlement in the asbestos litigation related to Pittsburgh Corning
Corporation (PCC) and we also began to include the equity earnings of Dow
Corning Corporation ("Dow Corning") in our results.
We recorded a net loss from continuing operations of $205 million in the first
quarter of 2003, or $0.17 per share, compared to $98 million, or $0.10 per share
in the prior year quarter. The loss for the quarter was primarily due to a
charge of $298 million ($192 million after-tax) related to an agreement to
settle asbestos litigation as part of a reorganization of PCC, which is
currently in bankruptcy.
Our Telecommunications segment continued to incur operating losses in the first
quarter, although the loss in 2003 was less than 2002, reflecting lower
depreciation and operating expenses as a result of restructuring actions
completed in 2002. Revenues increased in our Technologies segment led by growth
in the display technologies business. The operating results of this segment were
reduced by a charge of $62 million ($19 million after-tax and minority interest)
associated with the announced cessation of the Corning Asahi Video (CAV)
operations.
In a continuing effort to strengthen our balance sheet we retired zero coupon
convertible debentures with an accreted value of $274 million for cash of $189
million and 6.5 million shares of common stock and recorded a net gain of $4
million ($3 million after-tax).
RESULTS OF CONTINUING OPERATIONS
Selected highlights from our results of continuing operations for the first
quarter were as follows (in millions, except per share amounts and percentages):
- --------------------------------------------------------------------------------
Three months ended March 31,
2003 2002
- --------------------------------------------------------------------------------
Net sales $ 746 $ 839
Gross margin $ 200 $ 184
(gross margin %) 27% 22%
Selling, general and administrative expenses $ 152 $ 188
(as a % of net sales) 20% 22%
Research, development and engineering expenses $ 93 $ 126
(as a % of net sales) 12% 15%
Operating loss $ (105) $ (141)
(as a % of net sales) (14)% (17)%
Loss from continuing operations $ (205) $ (98)
(as a % of net sales) (27)% (12)%
- --------------------------------------------------------------------------------
Net sales
Consolidated net sales for the first three months of 2003 decreased 11%, or $93
million, from sales reported in the prior year quarter. The sales decline was
most pronounced in the Telecommunications segment where significantly lower
demand in most businesses and price declines for our optical fiber and cable
products drove a sales decline in that segment of 24%, or $113 million, compared
to the prior year quarter. Sales in the Technologies segment for the first
quarter of 2003 increased 5%, or $19 million, compared to the first quarter of
2002, primarily due to strong demand for liquid crystal display glass and our
ceramic substrate products.
Gross margin
As a percentage of net sales, gross margin improved 5 points in the first
quarter of 2003 to 27%, compared to the prior year quarter. The improvement is
primarily due to lower depreciation and other fixed costs due to the
restructuring actions taken in the Telecommunications segment in 2002. Gross
margin in the Telecommunications segment improved 3 points over the prior year
quarter despite downward pricing pressure that continued to negatively impact
gross margins, primarily in the optical fiber and cable business. Gross margin
in the Technologies segment increased approximately 5 points from the first
quarter of 2002 led by the display technologies and the environmental
technologies businesses.
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses decreased 19%, or $36
million, in the first quarter of 2003, compared to the prior year quarter, while
SG&A as a percentage of net sales improved 2 points compared with the first
quarter of 2002. The decrease in SG&A for the year reflected the cost savings
which resulted from the restructuring actions which began in 2001.
Research, development and engineering
Research, development and engineering (RD&E) expenses decreased 26%, or $33
million for the first quarter of 2003, compared to the first quarter of 2002. As
a percentage of net sales, RD&E decreased 3 points for the same period. The
decrease in expense and expense as a percentage of net sales reflected the
impact of the restructuring actions which began in 2001.
Restructuring, impairment and other charges and credits
In the first quarter of 2003, we recorded charges for the shut-down of our
conventional video components business and our optical switching product line
which were announced on April 15, 2003 and February 13, 2003, respectively. We
also recorded credits related to the restructuring reserve discussed below. See
Note 2 to the consolidated financial statements.
Conventional video components business
Corning Asahi Video Products Company (conventional video components business, or
CAV), a 51% owned consolidated subsidiary, is a manufacturer of glass panels and
funnels for use in conventional tube televisions and is reported in the
Technologies segment. In the fourth quarter of 2002, we impaired certain assets
of this business and indicated that we could be required to record additional
impairment charges, or that we could choose to exit the business if performance
differed from expectations. During the first quarter, operating results and cash
flows were less than expected and certain customers significantly reduced
forecasted orders for the year.
On April 15, 2003, we announced that we have agreed with our partner to cease
production. We impaired the long-lived assets of this business to estimated
salvage value and recorded a charge of $62 million, ($19 million after-tax and
minority interest). Restructuring costs, comprised primarily of pension
termination benefits, severance and exit costs offset in part by a gain on the
curtailment of post employment benefits are expected to be recorded in the
second quarter and total $80 million to $110 million. In connection with the
cessation of operations, the partners have reached agreement on the shared
funding of CAV's obligations. We expect the restructuring costs to require $40
million to $65 million in cash spending. We expect charges in the second quarter
after tax and minority interest to approximate $20 million to $35 million. We
are currently assessing whether the disposal of this business qualifies for
discontinued operations treatment under SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."
Optical Switching
We recorded a charge of $17 million ($11 million after-tax) associated with the
discontinuance of the optical switching product line in the photonic
technologies business due to the downturn in the telecommunications industry.
The charge included $13 million for employee separation costs and $4 million for
asset impairments related to equipment. In addition to the first quarter
charges, we expect to record charges of $10 million in the second quarter for
exit costs.
Impairment of Cost Investments
In the first quarter, Corning recorded a $5 million ($3 million after-tax)
charge for other than temporary declines in certain cost investments in the
Telecommunications segment.
Credits
The current restructuring reserve continues to be evaluated as plans are being
executed. In addition, since the restructuring program is an aggregation of many
individual plans currently being executed, actual costs have differed from
estimated amounts. As a result, there may be additional charges or reversals.
During the first quarter, we reversed $33 million ($21 million after-tax)
related to revised cost estimates of existing restructuring plans of which $24
million related to employee separation and exit costs which were less than
estimated, while $9 million related to proceeds in excess of assumed salvage
values for assets that were previously impaired.
The following table illustrates the headcount reduction amongst U.S. Hourly,
U.S. Salaried and Non-U.S. positions:
- --------------------------------------------------------------------------------
Headcount reduction
- --------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Total
- --------------------------------------------------------------------------------
Headcount reduction 25 175 200
==============================================
- --------------------------------------------------------------------------------
As of March 31, 2003, approximately 6,200 of the 7,100 employees had been
separated under the 2002 plans.
Operating loss
We incurred an operating loss of $105 million in the first quarter of 2003,
compared to an operating loss of $141 million in 2002. The decrease in the
operating loss was primarily due to the improvements in gross margin, SG&A and
RD&E expenses partially offset by restructuring charges and asset impairments
totaling $51 million. As a percentage of net sales, the operating loss improved
3 points over the prior year quarter.
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
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 favorable vote
by 75 percent of the asbestos claimants voting on the PCC reorganization plan.
We will make contributions to the settlement trust under the agreement after the
plan is approved and no longer subject to appeal. The approval process could
take one year or longer.
Our settlement will require the contribution, when the plan becomes effective,
of our equity interest in PCC, our one-half equity interest in Pittsburgh
Corning Europe N.V. (PCE), a Belgian corporation, and 25 million shares of
Corning 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 $130 million over six years beginning in June
2005. In addition, we will assign insurance policy proceeds from our primary
insurance and a portion of the excess insurance as part of the settlement. We
recorded a charge of $298 million ($192 million after-tax) in the first quarter.
The carrying value of our stock in PCE and the fair value as of March 31, 2003,
of 25 million shares of Corning common stock have been reflected in current
liabilities. The remaining $130 million, representing the net present value of
the cash payments, discounted at 5.5%, is recorded in noncurrent liabilities.
See Legal Proceedings, Part II, Item 1 for a history of this matter.
Gain on Repurchases of Debt, Net of Inducements
During the first quarter of 2003, we repurchased and retired 298,500 zero coupon
convertible debentures with an accreted value of $231 million in exchange for
cash of $189 million in a series of open-market repurchases. We recorded a gain
of $38 million on these transactions, net of the write-off of the unamortized
issuance costs. Also in the first quarter, we issued 6.5 shares of common stock
from treasury in exchange for 55,000 zero coupon convertible debentures with an
accreted value of $43 million. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 84, "Induced Conversions of Convertible Debt,"
we recognized a charge of $34 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.
In total, we recorded a net gain of $4 million ($3 million after-tax) associated
with retirements of our zero coupon convertible debentures in the first quarter.
As of March 31, 2003, 1,720,044 debentures with an accreted value of $1.3
billion remain outstanding.
Income taxes
Our benefit for income taxes and the related effective tax benefit rates for
continuing operations were as follows (in millions):
- --------------------------------------------------------------------------------
For the three months ended March 31,
---------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Benefit for income taxes $ (144) $ (50)
Effective tax benefit rate (32.4)% (27.2)%
- --------------------------------------------------------------------------------
The effective tax benefit rate for the quarter is lower than the U.S. statutory
income tax rate of 35% due to the impact of restructuring, impairment and other
charges, asbestos settlement and debt transactions. The effective benefit rate
without consideration of these items was 30% for the quarter.
The effective tax benefit rate for the first quarter of 2002 was lower than the
U.S. statutory income tax rate, primarily due to the impact of unusable tax
credits and nondeductible expenses and losses.
Equity earnings
Equity earnings almost doubled to $59 million in the first quarter of 2003,
compared to the prior year quarter, primarily due to the recognition of $17
million of equity earnings from Dow Corning in 2003 and a strong performance at
Samsung Corning Precision Glass Company Ltd. ("Samsung Corning Precision"), a
Korean manufacturer of liquid crystal display glass, which resulted in an $8
million increase in equity earnings over the prior year quarter. We began
recognizing equity earnings from Dow Corning in the first quarter of 2003 since
we concluded that the emergence of Dow Corning from bankruptcy protection is
probable based on the Bankruptcy Court's findings on December 11, 2002. See
Legal Proceedings, Part II, Item 1 for a history of this matter.
Loss from continuing operations
As a result of the above, the loss from continuing operations and per share data
were as follows (in millions, except per share amounts):
- --------------------------------------------------------------------------------
For the three months ended March 31,
------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Loss from continuing operations $ (205) $ (98)
Basic and diluted loss per common share from
continuing operations $ (0.17) $ (0.10)
Shares used in computing basic and diluted
per share amounts 1,200 945
- --------------------------------------------------------------------------------
OPERATING SEGMENTS
Our reportable operating segments consist of: Telecommunications and
Technologies. We include the earnings of equity affiliates that are closely
associated with our operating segments in segment results.
We prepared the financial results for the 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 have allocated
certain common expenses among segments differently than we would for stand-alone
financial information prepared in accordance with accounting principles
generally accepted in the U.S. These expenses include interest, taxes and
corporate functions. This method of preparation may not be consistent with
methods used by other companies. The accounting policies of our operating
segments are the same as those applied in the consolidated financial statements.
Telecom- Non-segment/ Consolidated
munications Technologies Other items Total
----------- ------------ ------------ ------------
For the three months ended March 31, 2003
Net sales $ 352 $ 388 $ 6 $ 746
Research, development and engineering expenses (1) $ 38 $ 55 $ 93
Restructuring, impairment and other charges and (credits) (2) $ (9) $ 60 $ 51
Interest expense (3) $ 21 $ 19 $ 40
Benefit for income taxes $ (25) $ (7) $ (112) $ (144)
Loss before minority interests and equity (losses)
earnings (4)(5) $ (60) $ (55) $ (186) $ (301)
Minority interests (6) 37 37
Equity in (losses) earnings of associated companies (3) 44 18 59
-------- -------- ------- --------
Net (loss) income $ (63) $ 26 $ (168) (7) $ (205)
======== ======== ======= ========
For the three months ended March 31, 2002
Net sales $ 465 $ 369 $ 5 $ 839
Research, development and engineering expenses (1) $ 86 $ 40 $ 126
Interest expense (3) $ 32 $ 16 $ 48
(Benefit) provision for income taxes $ (64) $ (1) $ 15 $ (50)
(Loss) income before minority interests and equity
(losses) earnings (4)(5) $ (138) $ (4) $ 8 $ (134)
Minority interests 6 6
Equity in (losses) earnings of associated companies (4) 33 1 30
Income from discontinued operations 8 8
-------- -------- ------- --------
Net (loss) income $ (142) $ 35 $ 17 (7) $ (90)
======== ======== ======= ========
(1) Non-direct research, development and engineering expenses are allocated
based upon direct project spending for each segment.
(2) Related tax expense (benefit) of $4, $(12) and $(8), respectively.
(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, plant and
equipment not specifically identifiable to a segment. Related depreciable
assets are not allocated to segment assets.
(6) $31 million related to impairments of CAV.
(7) Non-segment/Other items net income (loss) reported as "Other" is reconciled
below:
Non-segment/other items net (loss) income is detailed below:
Three months ended
March 31,
--------------------------
2003 2002
-------- ---------
Non-segment (loss) income and other (1) $ (12) $ 9
Interest income (2) 8 14
Asbestos settlement (298)
Gain on repurchases of debt (2) 4
Benefit (provision) for income taxes (3) 112 (15)
Equity in earnings of associated companies (4) 18 1
Income from discontinued operations 8
-------- ---------
Net (loss) income $ (168) $ 17
======== =========
(1) Includes non-segment operations and other corporate activities.
(2) Corporate interest income and gain on repurchases of debt is not allocated
to reportable segments.
(3) Includes tax associated with unallocated items.
(4) Include amounts derived from corporate investments and activities,
primarily Dow Corning Corporation - $17 million.
Telecommunications
The Telecommunications segment produces optical fiber and cable, optical
hardware and equipment, photonic modules and components for the worldwide
telecommunications industry. The following table provides net sales and other
data for the Telecommunications segment:
- --------------------------------------------------------------------------------
Telecommunications Three months ended March 31,
(In millions) 2003 2002
- --------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 193 $ 255
Hardware and equipment 122 135
Photonic technologies 18 36
Controls and connectors 19 39
-------- ---------
Total net sales $ 352 $ 465
======== =========
Segment loss before minority interests and
equity earnings as a percentage of segment sales (17.0)% (29.7)%
Segment net loss as a percentage of segment sales (17.9)% (30.5)%
- --------------------------------------------------------------------------------
Sales in the segment declined 24%, or $113 million, from the first quarter of
2002 as each business in the segment experienced a decline in sales, with the
largest decline in the optical fiber and cable business. The segment incurred
losses of $63 million in the first quarter of 2003, compared to a net loss of
$142 million in the prior year quarter. The first quarter 2003 loss was
primarily due to the significant price declines in optical fiber and cable and
the decrease in sales volume in most businesses. Each business also reported a
loss in the first quarter of 2003, however the losses were less significant than
those incurred in the prior year quarter. The decrease in the loss over the
prior year quarter was primarily due to cost reductions resulting from
restructuring actions.
The $9 million net credit to restructuring reserves primarily reflects favorable
settlements in both proceeds and timing of asset dispositions. These reserve
adjustments more than offset the $22 million of charges associated with the exit
of the optical switching product line and the impairment of certain cost
investments.
Sales in the optical fiber and cable business declined 24%, or $62 million, for
the first quarter of 2003, compared to the prior year quarter. The decrease was
primarily due to price declines for cable and fiber products ranging from 10% to
40% for the quarter, partially offset by a double digit volume increase. Sales
benefited from unusually strong demand in Japan and China, offset by the
continued weak European and North American markets. The optical fiber and cable
business incurred a loss in the quarter, however the loss improved over 30%,
compared to the first quarter of 2002, as price declines were more than offset
by the cost reductions from 2002 restructuring actions.
Sales in the hardware and equipment business decreased 10%, or $13 million, for
the first quarter of 2003, compared to the prior year quarter. The sales
decreases were primarily due to the overall lack of capital spending impacting
the entire telecommunications industry. The business incurred a loss for the
quarter driven by lower volumes and pricing pressure, however the loss improved
14% over the loss incurred in the prior year quarter due to the 2002
restructuring actions.
Sales in the photonic technologies business declined 50%, or $18 million, for
the first quarter of 2003, compared to the prior year quarter, primarily due to
lower sales volume as network buildouts in the telecommunications industry
declined resulting in much lower demand for photonic products. The business
incurred a loss for the first quarter of 2003, primarily due to dramatically
lower sales volumes. However, the 2003 quarterly loss decreased more than 70%,
compared to the loss incurred in the prior year quarter. The results in the
first quarter of 2003 reflect cost reductions resulting from restructuring
actions taken in 2002.
The lack of demand for optical component products started in early 2001 and
resulted in restructuring and impairment charges in 2001, 2002 and in the first
quarter of 2003. This negative trend is expected to continue into the
foreseeable future.
As we disclosed in our 2002 Form 10-K, we will continue to evaluate strategic
alternatives for this business. While certain product lines are promising in the
event of industry recovery, the pace and extent of that recovery is uncertain.
Alternatives under consideration for this business include staying in the
business with scaled down operations or contract manufacturing, partnering, sale
or abandonment. In February 2003, we announced we would stop the
commercialization of our optical switching product in 2003 and incur pre-tax
charges of up to $30 million related to the exit representing severance and cash
exit costs. We estimate that severance, exit costs and inventory write-downs
related to a complete abandonment of remaining product lines could approximate
$70 million to $80 million in total pre-tax charges.
Sales in the controls and connectors business decreased 51%, or $20 million, for
the first quarter of 2003, compared to the prior year quarter, primarily due to
the sale of the appliance controls group in May 2002 and the lack of capital
spending in the telecommunications industry. The business was breakeven for the
quarter, compared to a small loss in the prior year quarter, primarily due to
the restructuring actions taken in 2002.
Technologies
The Technologies segment manufactures specialized products with unique
properties for customer applications utilizing glass, glass ceramic and polymer
technologies. Its primary products include liquid crystal display glass for flat
panel displays, ceramic substrates for automobile and diesel applications,
scientific laboratory products, glass panels and funnels for televisions and
cathode ray tubes.
The following table provides net sales and other data for the Technologies
segment:
- --------------------------------------------------------------------------------
Technologies Three months ended March 31,
(In millions) 2003 2002
- --------------------------------------------------------------------------------
Net sales:
Display technologies $ 117 $ 93
Environmental technologies 115 94
Life sciences 73 70
Conventional video components 25 43
Other technologies businesses 58 69
-------- ---------
Total net sales $ 388 $ 369
======== =========
Segment loss before minority interests and equity
earnings as a percentage of segment sales (14.2)% (1.1)%
Segment net income as a percentage of segment sales 6.7% 9.5%
- --------------------------------------------------------------------------------
Sales in the Technologies segment increased 5%, or $19 million, compared to the
first quarter of 2002, as increased sales in display technologies, environmental
technologies and life sciences were partially offset by much lower sales in the
mature conventional video components business, decreased demand for
semiconductor materials and the impact of our exit of the lighting products line
in late 2002. Segment earnings decreased 26%, or $9 million, compared to 2002,
as improved operating performance in environmental technologies, display
technologies and the life sciences business and stronger equity earnings were
more than offset by the restructuring and impairment charge of $62 million ($19
million after-tax and minority interest) for the conventional video components
business and decreased earnings in the semiconductor materials business. See
Restructuring, Impairment and Other Charges and Credits.
Sales in the display technologies business increased 26%, or $24 million, for
the first quarter of 2003, compared to the prior year quarter. The increase was
primarily due to higher sales volume as penetration in the desktop market
increased. Volume gains of 20% and favorable yen exchange rates for the current
period were partially offset by price declines of 6%. Earnings in the business
increased over 35% for the quarter, compared to the prior year quarter,
primarily due to volume gains and a more than 40% improvement in equity earnings
from Samsung Corning Precision. Both Corning and Samsung Corning Precision have
recently approved expansions of manufacturing capacity in Taiwan and Korea,
respectively. These capital projects are expected to begin production in 2004.
Sales in the environmental technologies business increased 22%, or $21 million,
for the first quarter of 2003, compared to the prior year quarter, primarily due
to increased U.S. auto production, particularly early in the quarter, driven by
financing incentives and strong growth in Europe and Japan. Earnings in this
business improved 28% for the quarter, compared to the prior year quarter,
primarily due to the increased sales volume, favorable mix, strong gross margin
improvement and manufacturing gains.
Sales in the life sciences business increased 4%, or $3 million, for the first
quarter of 2003, compared to the prior year quarter, primarily due to strong
growth in most product lines. Earnings in the business increased 50% for the
quarter, compared to the prior year quarter, primarily due to improved
manufacturing efficiencies and a gain on the disposition of a minor product
line.
Sales in the conventional video components business decreased 42%, or $18
million, for the first quarter of 2003, compared to the prior year quarter.
Pricing pressure is strong in this market due to increased competition. As
discussed earlier, we have decided to cease operations in this business in the
second quarter of 2003. Excluding the asset impairment charges, the business
earned a small profit for the quarter and was flat compared to 2002, primarily
due to improved equity earnings partially offset by decreased sales volume and
continued competitive pricing pressures. Samsung Corning Company Ltd., a 50%
owned manufacturer of glass panels and funnels based in South Korea, reported a
more than 20% increase in equity earnings for the first quarter of 2003,
compared to the prior year quarter.
Sales in our other technologies businesses decreased 16%, or $11 million, for
the first quarter of 2003, compared to the prior year quarter. The decrease was
led by the exit of the lighting business in September 2002 and lower sales
volume of high purity fused silica products in the semiconductor materials
business as capital spending in the semiconductor equipment industry remained at
relatively low levels as the industry continues to struggle. The losses in these
businesses more than doubled compared to the prior year quarter. The losses were
primarily due to significantly lower sales volume and increased spending in
development and engineering for calcium fluoride products.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash Flow and Key First Quarter Activities
On April 28, 2003, we announced an equity offering of 50 million shares of
common stock generating net proceeds to us of approximately $267 million. We
expect to use the net proceeds of this offering and $100 million to $500 million
of our existing cash to reduce debt by engaging in, including without
limitation, open market repurchases and tender offers in the second quarter of
2003.
Due to our sub-investment grade rating, we continue to be precluded from
accessing the short-term commercial paper market and our access to the debt
markets has been and will likely continue to be constrained. The terms that we
could receive on 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 16 banks, expiring on August 17,
2005. As of March 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 March 31, 2003 and
December 31, 2002, this ratio was 46% and 47%, respectively.
In March 2001, we filed a universal shelf registration statement with the SEC
that became effective in the first quarter. The shelf permits the issuance of up
to $5.0 billion of various debt and equity securities. As of April 30, 2003, our
remaining capacity under the shelf registration was approximately $3.3 billion.
Uses of Cash and Key First Quarter Activities
In the first quarter of 2003, we used cash for debt repurchases, capital
spending and restructuring actions.
During the first quarter of 2003, we repurchased and retired 298,500 zero coupon
convertible debentures with an accreted value of $231 million in exchange for
cash of $189 million in a series of open-market repurchases. We recorded a gain
of $38 million on these transactions, net of the write-off of the unamortized
issuance costs. Also in the first quarter we issued 6.5 shares of treasury
common stock in exchange for 55,000 zero coupon convertible debentures with an
accreted value of $43 million. In accordance with SFAS No. 84, "Induced
Conversions of Convertible Debt," we recognized a charge of $34 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.
In total, we recorded a net gain of $4 million ($3 million after-tax) associated
with retirements of our zero coupon convertible debentures in the first quarter.
As of March 31, 2003, 1,720,044 debentures remain outstanding. The remaining
debentures may be put back to Corning 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 repurchase for cash or equity certain additional debt
securities in open-market, privately negotiated or publicly tendered
transactions.
Capital spending totaled $55 million and $101 million in the first quarter ended
March 31, 2003 and 2002, respectively. Our 2003 capital spending program is
expected to be limited to $350 million to $400 million. Capital spending
activity in 2003 is primarily expected to be the planned expansion in the liquid
crystal display and environmental businesses.
During the first quarter of 2003, we made payments of $79 million related to
employee severance and termination costs and $15 million in other exit costs
resulting from restructuring actions. We expect additional payments for actions
taken in 2001, 2002 and 2003 to approximate $200 million in 2003.
Key Balance Sheet Data
At March 31, 2003, cash and short-term investments totaled $1.85 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 and
the use of working capital. These items were partially offset by significantly
lower capital spending and the receipt of our 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 March 31, As of December 31,
2003 2002
- --------------------------------------------------------------------------------
Working capital $1,861 $2,145
Working capital, excluding cash and
short-term investments $12 $55
Current ratio 2.2:1 2.3:1
Trade accounts receivable, net of allowances $494 $470
Days sales outstanding 60 56
Inventories $556 $559
Inventory turns 3.9 4.4
Days payable outstanding 49 46
Long-term debt $3,710 $3,963
Total debt to total capital 46% 47%
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Credit Ratings
Our credit ratings remain unchanged from those disclosed in the 2002 Form 10-K
as follows:
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RATING AGENCY Rating Rating
Last Update Long-Term Debt Commercial Paper
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Standard & Poor's BB+ B
July 29, 2002
Moody's Ba2 Not Prime
July 29, 2002
Fitch BB B
July 24, 2002
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All three rating agencies maintain a Negative Outlook.
Our sub-investment grade credit rating has, in some instances, resulted in
requirements to deposit cash with counterparties under performance surety bond
and letter of credit arrangements. At March 31, 2003, $82 million of restricted
cash was included in other long-term assets. We expect our restricted cash
balance to increase $40 million to $50 million in the second quarter of 2003.
Our first quarter 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 impairment and restructuring charges. It is likely our full year 2003
earnings will not be sufficient to cover our fixed charges.
Management Assessment of Liquidity
Our major source of funding in 2003 will be our existing balance of cash,
short-term investments and the proceeds of the equity offering completed in
April 2003. We expect to use up to $400 million to $800 million of those funds
to retire debt through open market repurchases or tender offers. We believe we
have sufficient liquidity for the intermediate term to fund operations,
restructuring, research and development and capital expenditures and to make
scheduled debt repayments. We may need to raise additional capital to supplement
our cash and short-term investments to further reduce our outstanding debt
obligations, including the zero coupon debt that may be put to us in November
2005.
Deferred Taxes
At March 31, 2003, we have recorded gross deferred tax assets of approximately
$1.8 billion with a valuation allowance in excess of $400 million. The valuation
allowance is primarily attributable to the uncertainty regarding the realization
of certain foreign tax benefits, net operating losses and tax credits. The net
deferred tax assets of approximately $1.4 billion consist of a combination of
domestic (U.S. Federal and State & 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. Realization of the domestic portion of the net deferred tax asset
is dependent upon profitable operations in the United States during carryforward
periods of approximately 20 years. Although realization is not assured, we have
carefully performed the required assessment of positive and negative evidence
regarding the realization of the net deferred tax assets, in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes," and concluded that it
is more likely than not that such assets will be realized. Should we experience
a significant negative deviation from our current performance expectations,
including significant future unannounced restructuring or impairment charges, it
is possible we could be required to record a valuation allowance on a portion or
all of the deferred tax assets.
Off Balance Sheet Arrangements
We have leased equipment from three unconsolidated special purpose entities
(SPE) for which the sole purpose is the leasing of equipment to Corning. These
SPEs are not consolidated in the 2002 financial statements since the equity
investor of the SPE has made a substantial investment that is at risk for the
life of the SPE. However, the Financial Accounting Standards Board issued
Interpretation 46, Consolidation of Variable Interest Entities in January 2003.
Interpretation 46 will require the consolidation of variable interest entities
(VIE) by the primary beneficiary. We are still assessing the impacts of this
interpretation, however, it is probable that Corning will be considered the
primary beneficiary of one existing SPE, and therefore would need to consolidate
this entity beginning on July 1, 2003. The assets and debt of this entity at
March 31, 2003, approximates $34 million. We are still evaluating the impacts of
this interpretation on two other entities with assets and liabilities of $12
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.
OUTLOOK
We disclosed in our 2002 Form 10-K that we expect 2003 net sales to approximate
those reported in 2002, reflecting a year-over-year decline in the
Telecommunications segment and an improvement in the Technologies segment. We
now expect sales to decline year-over-year, primarily due to the exit of CAV. We
also expect, at a minimum, to significantly reduce operating losses in 2003
versus 2002 as a result of restructuring actions in the second half of 2002 in
Telecommunications and an expected strong performance in Technologies. Our goal
is to return to profitability in 2003 before consideration of litigation,
restructuring and impairment charges or other non-operating items such as gains
from debt retirements. Our goal to return to profitability is dependent upon
stabilization of revenues and continued strength in North America and world
economies.
For the second quarter of 2003, we expect sales in the range of $715 million to
$745 million. We also expect results for the second quarter to be in a range of
a net loss of $0.02 per share to income of $0.01 per share, excluding the impact
of previously announced restructuring charges and any adjustments to the
asbestos settlement reserve required by movement in our stock price.
We believe we have sufficient liquidity to meet our funding needs. We finished
the quarter with $1.85 billion in cash and short-term investments, raised $267
million in an April equity offering and continue to have full access to an
unused revolving credit facility of $2 billion. Capital spending is expected to
approximate $350 million to $400 million in 2003. The anticipated spending will
focus primarily on the planned expansion in the liquid crystal display and
environmental businesses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported therein. The estimates that
required management's most difficult, subjective or complex judgments are
described in our 2002 Form 10-K and remain unchanged through the first quarter
of 2003.
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 12 active hazardous waste sites. Under the Superfund Act,
all parties who may have contributed any waste to a hazardous waste site,
identified by such Agency, are jointly and severally liable for the cost of
cleanup unless the Agency agrees otherwise. It is our policy to accrue for the
estimated liability related to Superfund sites and other environmental
liabilities related to property owned and operated by us based on expert
analysis and continual monitoring by both internal and external consultants. We
have accrued approximately $22 million for the estimated liability for
environmental cleanup and related litigation at March 31, 2003. Based upon the
information developed to date, we believe that the accrued amount is a
reasonable estimate of our estimated liability and that the risk of an
additional loss in an amount materially higher than that accrued is remote.
FORWARD-LOOKING STATEMENTS
The statements in this Quarterly Report on Form 10-Q, in reports subsequently
filed by Corning with the SEC on Forms 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,
- - currency fluctuations,
- - product demand and industry capacity,
- - competitive products and pricing,
- - sufficiency of manufacturing capacity and efficiencies,
- - cost reductions,
- - availability and costs of critical materials,
- - new product development and commercialization,
- - attracting and retaining key personnel,
- - order activity and demand from major customers,
- - fluctuations in capital spending by customers in the telecommunications
industry and other business segments,
- - financial condition of customers,
- - changes in the mix of sales between premium and non-premium products,
- - facility expansions and new plant start-up costs,
- - adverse litigation or regulatory developments, including future or pending
tax legislation,
- - adequacy and availability of insurance,
- - capital resource and cash flow activities,
- - capital spending,
- - equity company activities,
- - interest costs,
- - acquisition and divestiture activity,
- - the rate of technology change,
- - the ability to enforce patents,
- - product performance issues,
- - stock price fluctuations, and
- - other risks detailed in Corning's SEC filings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
There have been no material changes to our market risk exposure during the first
three months of 2003. For a discussion of our exposure to market risk, refer to
Item 7A, Quantitative and Qualitative Disclosures About Market Risks, contained
in our 2002 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the date of the report, Corning carried out an
evaluation, under the supervision and with the participation of management,
including its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of Corning's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon the evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that Corning's
disclosure controls and procedures are effective to timely alert them to
material information related to Corning (including its consolidated
subsidiaries) required to be included in Corning's Exchange Act filings.
Subsequent to the date of our management's evaluation, there were no significant
changes in our internal controls or in other factors that could significantly
affect these controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
Environmental Litigation. Corning has been named by the Environmental Protection
Agency under the Superfund Act, or by state governments under similar state
laws, as a potentially responsible party at 12 active hazardous waste sites.
Under the Superfund Act, all parties who may have contributed any waste to a
hazardous waste site, identified by such Agency, are jointly and severally
liable for the cost of cleanup unless the Agency agrees otherwise. It is
Corning's policy to accrue for its estimated liability related to Superfund
sites and other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued approximately $22 million for its estimated
liability for environmental cleanup and litigation at March 31, 2003. Based upon
the information developed to date, management believes that the accrued reserve
is a reasonable estimate of the Company's estimated liability and that the risk
of an additional loss in an amount materially higher than that accrued is
remote.
Schwinger and Stevens Toxins Lawsuits. In April 2002, Corning was named as a
defendant in two actions, Schwinger and Stevens, filed in the United States
District Court for the Eastern District of New York, which asserted various
personal injury and property damage claims against a number of corporate
defendants. These claims allegedly arise from the release of toxic substances
from a Sylvania nuclear materials processing facility near Hicksville, New York.
Amended complaints naming 205 plaintiffs and seeking damages in excess of $3
billion were served in September 2002. The sole basis of liability against
Corning was plaintiffs' claim that Corning was the successor to Sylvania-Corning
Nuclear Corporation, a Delaware corporation formed in 1957 and dissolved in
1960. Management intends to vigorously contest all claims against Corning for
the reason that Corning is not the successor to Sylvania-Corning. Management
will also defend on the grounds that almost all of the wrongful death claims and
personal injury claims are time-barred. At a status conference in December 2002,
the Court decided to "administratively close" the Schwinger and Stevens cases
and ordered plaintiffs' counsel to bring new amended complaints with
"bellwether" plaintiffs. In these actions, known as Schwinger II and Astuto, the
plaintiffs have not named Corning as a defendant. Although it appears that
plaintiffs may proceed only against the other corporate defendants, the original
Schwinger and Stevens cases remain pending and no order has been entered
dismissing Corning. Based upon the information developed to date, and
recognizing that the outcome of litigation is uncertain, management believes
that the risk of a materially adverse verdict is remote.
Dow Corning Bankruptcy. Corning and The Dow Chemical Company each own 50% of the
common stock of Dow Corning Corporation, which has been in reorganization
proceedings under Chapter 11 of the United States Bankruptcy Code since May,
1995. Dow Corning filed for bankruptcy protection to address pending and claimed
liabilities arising from breast-implant product lawsuits. 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 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 with respect to these
limitations on 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 agreed to settle the lien claims of the U.S. government for $9.8
million to be paid from the Settlement Fund under the Plan. This settlement was
approved by the District Court in the third quarter of 2002. On December 11,
2002, the District Court entered further findings and conclusions supporting the
non-debtor releases. Certain tort claimants have filed a notice of appeal to the
U.S. Court of Appeals for the Sixth Circuit from the District Court's order.
Management expects the appellate process may take another 12 to 16 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 Corning 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 breast implant
litigation against Corning will be resolved without material impact on Corning's
financial statements.
Under the terms of the Joint Plan, Dow Corning would be required to 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
claimed by the commercial creditors is approximately $100 million pre-tax more
than Dow Corning believes it should pay.
In 1995, Corning fully reserved its investment in Dow Corning upon its filing
for bankruptcy and has not recognized equity earnings since the second quarter
of 1995. Corning has determined that this decline in the value of its investment
in Dow Corning is other than temporary. Management has assessed the December 11,
2002, findings by Judge Hood and concluded that emergence of Dow Corning
Corporation from bankruptcy protection is probable. Management has also
concluded that it has adequately provided for the other than temporary decline
associated with the bankruptcy. 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 percent share of Dow
Corning's equity to be permanent. This difference was $270 million at March 31,
2003.
Corning resumed recognition of equity earnings from Dow Corning in the first
quarter of 2003. Corning does not expect to receive dividends from Dow Corning
in 2003.
Implant Tort Lawsuits. Corning and Dow Chemical, the shareholders of Dow Corning
Corporation, were named in a number of state and federal tort lawsuits alleging
injuries arising from Dow Corning's implant products. The claims against the
shareholders alleged a variety of direct or indirect theories of liability. In
1992, the federal breast implants cases were coordinated for pretrial purposes
in the United States District Court, Northern District of Alabama (Judge Sam C.
Pointer, Jr.). In April 1995, the District Court granted Corning a summary
judgment dismissing it from over 4,000 federal court cases. On March 12, 1996,
the U.S. Court of Appeals for the Eleventh Circuit dismissed the plaintiffs'
appeal from that judgment. In state court litigation, Corning was awarded
summary judgment in California, Connecticut, Illinois, Indiana, Michigan,
Mississippi, New Jersey, New York, Pennsylvania, Tennessee, and Dallas, Harris
and Travis Counties in Texas, thereby dismissing approximately 7,000 state
cases. In Louisiana, Corning's summary judgment was vacated by an intermediate
appeals court in Louisiana as premature. The Louisiana cases were transferred to
the United States District Court for the Eastern District of Michigan, Southern
Division (Michigan Federal Court) to which substantially all breast implant
cases were transferred in 1997. In the Michigan Federal Court, Corning is named
as a defendant in approximately 70 pending cases (including some cases with
multiple claimants), in addition to the transferred Louisiana cases. The
Michigan Federal Court heard Corning's motion for summary judgment on February
27, 1998, but has not ruled. Based upon the information developed to date and
recognizing that the outcome of complex litigation is uncertain, management
believes that the risk of a materially adverse result in the implant litigation
against Corning is remote and believes the implant litigation against Corning
will be resolved without material impact on Corning's financial statements.
Federal Securities Cases. A federal securities class action lawsuit was filed in
1992 against Corning and certain individual defendants by a class of purchasers
of Corning stock who allege misrepresentations and omissions of material facts
relative to the silicone gel breast implant business conducted by Dow Corning.
This action is pending in the United States District Court for the Southern
District of New York. The class consists of those purchasers of Corning stock in
the period from June 14, 1989, to January 13, 1992, who allegedly purchased at
inflated prices due to the non-disclosure or concealment of material
information. No amount of damages is specified in the complaint. In 1997, the
Court dismissed the individual defendants from the case. In December 1998,
Corning filed a motion for summary judgment requesting that all claims against
it be dismissed. Plaintiffs requested the opportunity to take depositions before
responding to the motion for summary judgment. Corning has advised the Court
that it will renew its motion for summary judgment upon papers incorporating
additional discovery materials. Corning intends to continue to defend this
action vigorously. Based upon the information developed to date and recognizing
that the outcome of litigation is uncertain, management believes that the
likelihood of a materially adverse verdict is remote.
From December 2001 through April 2002, Corning and three of its officers and
directors were named defendants in lawsuits alleging violations of the U.S.
securities laws in connection with Corning's November 2000 offering of 30
million shares of common stock and $2.7 billion zero coupon convertible
debentures, due November 2015. In addition, the Company and the same three
officers and directors were named in lawsuits alleging selective disclosures and
non-disclosures that allegedly inflated the price of Corning's common stock in
the period from September 2000 through July 9, 2001. The plaintiffs in these
actions seek to represent classes of purchasers of Corning's stock in all or
part of the period indicated. These lawsuits are pending in the United States
District Court for the Western District of New York. On August 2, 2002, the
District Court entered an order consolidating these actions for all purposes,
designating lead plaintiffs and lead counsel, and directing that a consolidated
complaint be served within sixty days. The consolidated amended complaint was
served at the end of October 2002. In February 2003, defendants filed a motion
to dismiss the complaint for failure to allege the requisite elements of the
claims with particularity. Plaintiff's responded with opposing papers on April
7, 2003. Defendants have until May 12, 2003, to serve reply papers, and argument
is set for May 29, 2003. The Court's scheduling order further provides that a
motion to certify the action as a class action shall be filed after all motions
to dismiss are resolved. The order further provides that a motion to certify the
action as a class action shall be filed after all motions to dismiss are
resolved. Another lawsuit has been filed, also in the Western District of New
York, on behalf of participants in the Company's Investment Plan for Salaried
Employees, purportedly as a class action on behalf of participants in the Plan
who purchased or held Corning stock in a Plan account. The defendants in that
action responded with a motion to dismiss the lawsuit on a variety of grounds.
On December 12, 2002, the Court entered judgment dismissing the claims as to
each of the defendants. On December 19, 2002, plaintiffs filed a motion to open
the judgment and for leave to file an amended complaint. This motion was argued
on April 10, 2003. The Court reserved decision on the motion for leave to amend.
Management is prepared to defend these lawsuits vigorously and, recognizing that
the outcome of litigation is uncertain, believes that these will be resolved,
net of applicable insurance, without material impact on Corning's financial
statements.
Pittsburgh Corning Corporation. Corning and PPG Industries, Inc. (PPG) each own
50% of the capital stock of Pittsburgh Corning Corporation (PCC). Over a period
of more than two decades, PCC and several other defendants have been named in
numerous lawsuits involving claims alleging personal injury from exposure to
asbestos. On April 16, 2000, PCC filed for Chapter 11 reorganization in the
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. 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 10,500 other cases (approximately 36,500
claims) alleging injuries from asbestos. 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 as to Corning 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.
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 also 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 Corning's 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 $130 million (net present value as of March 31, 2003) in six
installments beginning in June 2005 assuming the Plan is effective. In addition,
Corning will assign policy rights or proceeds under its 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 has recorded a charge in the amount of $298 million ($192 million
after-tax) in its results for the period ending March 31, 2003. The amount of
the charge for this settlement will require adjustment each quarter based upon
movement in Corning's common stock price prior to contribution of the shares to
the trust.
Two of Corning's primary insurers and several of its excess insurers have
commenced litigation against the Company 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.
Management expects that the PCC Plan will be filed with the Court in the second
quarter of 2003. No schedule has been set for voting on the PCC Plan by
claimants or for the confirmation hearings required for the court to consider
approval of the PCC Plan. The process of confirmation is expected to take from
six to twelve months after the PCC Plan is filed. Although the confirmation of
the PCC Plan is subject to a number of contingencies, management believes that
the asbestos claims against the Company will be resolved without additional
material impact on the Company's financial statements.
Astrium. In December of 2000, Astrium, SAS and Astrium, Ltd. filed a complaint
for negligence in the United States District Court for the Central District of
California against TRW, Inc., Pilkington Optronics Inc., Corning NetOptix, Inc.,
OFC Corporation and Optical Filter Corporation claiming damages in excess of
$150 million. The complaint alleges that certain cover glasses for solar arrays
used to generate electricity from solar energy on satellites sold by Astrium's
corporate successor were negligently coated by NetOptix or its subsidiaries
(prior to Corning's acquisition of NetOptix) in such a way that the amount of
electricity the satellite can produce and their effective life were materially
reduced. NetOptix has denied that the coatings produced by NetOptix or its
subsidiaries caused the damage alleged in the complaint, or that it is legally
liable for any damages which Astrium may have experienced. Formal discovery
through document production and depositions was completed for fact witnesses and
will continue through January 2003 for experts. In April 2002, the Court granted
motions for summary judgment by NetOptix and other defendants to dismiss the
negligence claims, but permitted plaintiffs to add fraud and negligent
misrepresentation claims against all defendants and a breach of warranty claim
against NetOptix and its subsidiaries. In October 2002, the Court again granted
defendants' motions for summary judgment and dismissed the negligent
misrepresentation and breach of warranty claims. The only claims remaining are
claims by the plaintiff for intentional fraud against all defendants. The
intentional fraud claims were dismissed against all non-settling defendants on
February 25, 2003. On March 19, 2003, Astrium appealed all of the Court's
Rulings regarding the various summary judgment motions to the Ninth Circuit
Court of Appeals. We anticipate that the Ninth Circuit will establish a briefing
schedule in the very near future. Based upon the information developed to date
and recognizing that the outcome of litigation is uncertain, management believes
that there are strong defenses to these claims and believes they will be
resolved without material impact on Corning's financial statements.
In November 2002, American Motorists Insurance Company and Lumbermens Mutual
Casualty Company (collectively "AIMCO") filed a declaratory judgment action
against Corning, as well as Corning NetOptix, Inc., OFC Corporation and Optical
Filter Corporation. In the complaint, AIMCO seeks a ruling that its duty to
defend the insureds in the underlying Astrium action ceased with the dismissal
of the negligence claims. AIMCO also seeks reimbursement of approximately $4
million dollars spent for defense costs through November 2002. Corning believes
that AIMCO remains responsible for the continued representation of all insureds
and for any amount spent on the defense of the insureds to date. Answers were
filed in January 2003 on behalf of the defendants other than Corning. Corning
has moved to dismiss all claims filed against it as it was not a party to the
underlying Astrium action. Based upon the information developed to date and
recognizing that the outcome of litigation is uncertain, management believes
that there are strong defenses to the reimbursement claim for $4 million.
Optel Arbitration. On June 28, 2002, Madeco S.A. and Madeco Brasil Ltda. filed a
notice of arbitration and statement of claim against Corning International
Corporation ("CIC") with the American Arbitration Association in New York, New
York, alleging "breaches of its contractual duties and partnership obligations
to Madeco." Madeco asserts that it has the right, under a "Put Option," to sell
shares of another company to CIC for approximately $18 million. Among other
things, Madeco requested "no less than $20 million to compensate Madeco for the
breach of its rights under the Put Option, plus additional damages caused by
Corning's failure to perform under the Investment Agreement and related
contracts." The arbitration panel has been convened and the arbitration hearings
are scheduled for late May 2003. Based upon the information developed to date
and recognizing that the outcome of arbitration is uncertain, management
believes that the risk of a materially adverse verdict is remote.
Astarte/Tellium. In July of 2002, Corning filed a demand for binding arbitration
between Corning and Astarte Fiber Networks Inc.; Tellium, Inc.; AFN, LLC; and
their related parties. The arbitration concerns a contract relating to certain
patents and patent applications previously owned by Astarte and now held by AFN
and Tellium, Astarte's successor. Corning's demand includes a claim for
approximately $38 million from those parties due to material misrepresentations
and fraud, as well as a claim to have the contract canceled for breach. AFN has
counterclaimed in the arbitration, asking the arbitrators to decide that Corning
remains obligated under the contract for future contingent payments to AFN of up
to $50 million. While the outcome of arbitration proceedings concerning complex
contracts involving intellectual property matters cannot be predicted with
certainty, based upon the information discovered to date, management believes
that Corning's claims are well founded. Management expects that the disputes in
arbitration will be resolved without material negative impact on Corning's
financial statements.
Furukawa Electric Company. On February 3, 2003, The Furukawa Electric Company
filed suit in the Tokyo District Court in Japan against CCS International
Corporation alleging infringement of Furukawa's Japanese Patent No. 2,023,966
which relates to separable fiber ribbon units used in optical cable. Furukawa's
complaint requests slightly over (Y)6 billion in damages and an injunction
against further sales in Japan of these fiber ribbon units. CCS has denied the
allegation of infringement, asserted that the patent is invalid, and is
defending vigorously against this lawsuit. While recognizing that litigation is
inherently uncertain, based upon the information developed to date, management
believes that the claims against CCS will not have a material impact on the
Company's financial statements.
Fitel USA Corp. and OFS Fitel LLC. On February 3, 2003, Corning filed an action
in federal district court for the District of Delaware against Fitel USA Corp.
("Fitel") and OFS Fitel LLC ("OFS") asking the court to declare a Fitel patent
invalid, unenforceable, and not infringed by Corning. The patent generally
relates to low water content fiber used in coarse wavelength division
multiplexing. Fitel and OFS have counterclaimed that Corning has induced
infringement of the patent. Corning has denied the allegations of infringement.
Based upon the information developed to date, management believes this
counterclaim against Corning will not have a material impact on the Company's
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
a) The annual meeting of shareholders of the Registrant was held on April 24,
2003. At that meeting, the following matters were submitted to a vote of
the shareholders of Corning Incorporated: 2003 Corning Incorporated Annual
Meeting Final Voting Results.
Proposal Voting Results
Items (a) and (b)
Nomination and Election of Directors
The Judges subscribed and delivered a certificate reporting that the following
nominees for directors had received the number of votes set opposite their
respective names
Name Votes For Votes Withheld
James B. Flaws 1,054,906,565 16,330,255
James R. Houghton 1,051,693,202 19,543,618
James J. O'Connor 1,005,972,355 65,264,465
Deborah D. Reiman 1,053,953,194 17,283,626
Peter F. Volanakis 1,055,177,845 16,058,974
Jeremy R. Knowles 1,053,404,739 17,832,080
Item (c)
Votes For Votes Against Votes Withheld
To approve the adoption 1,004,998,122 55,042,597 11,195,701
of the 2003 Variable
Compensation Plan
Item (d)
Votes For Votes Against Votes Withheld
To approve the adoption 940,679,042 118,960,107 11,597,271
of the 2003 Equity Plan
for Non-Employee Directors
Item (e)
Votes For Votes Against Votes Withheld
To approve the amendment 930,682,898 129,304,963 11,248,559
of the 2000 Employee Equity
Participation Program
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
Exhibit Number Exhibit Name
-------------- ------------
12 Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred
Dividends
99.1 Certification Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
99.2 Certification Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K
A report on Form 8-K dated January 23, 2003, was filed in connection
with the registrant's 2002 results.
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNING INCORPORATED
(Registrant)
May 1, 2003 /s/ JAMES B. FLAWS
- ----------------------- -------------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
May 1, 2003 /s/ KATHERINE A. ASBECK
- ----------------------- -------------------------------------------
Date Katherine A. Asbeck
Senior Vice President and Controller
(Principal Accounting Officer)
CERTIFICATIONS
--------------
I, James R. Houghton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Corning Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 1, 2003 /s/ JAMES R. HOUGHTON
- --------------------- --------------------------------------
Date James R. Houghton
Chairman and Chief Executive Officer
CERTIFICATIONS
--------------
I, James B. Flaws, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Corning Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 1, 2003 /s/ JAMES B. FLAWS
- --------------------- -----------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
EXHIBIT INDEX
-------------
Exhibit Number Exhibit Name
- -------------- ------------
12 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 12
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
DIVIDENDS
(In millions, except ratios)
For the three months ended
March 31, 2003
--------------------------
Loss from continuing operations before taxes on income $ (445)
Adjustments:
Distributed income of equity investees 66
Amortization of capitalized interest 2
Fixed charges net of capitalized interest 46
-----------
Loss before taxes and fixed charges as adjusted (331)
===========
Fixed charges:
Interest incurred 40
Portion of rent expense which represents an
appropriate interest factor 7
Amortization of debt costs 1
-----------
Total fixed charges 48
Capitalized interest (2)
-----------
Total fixed charges net of capitalized interest 46
===========
Preferred dividends:
Preferred dividend requirement
Ratio of pre-tax income to income before
minority interest and equity earnings 1.0
-----------
Pre-tax preferred dividend requirement
Total fixed charges 48
-----------
Fixed charges and pre-tax preferred dividend requirement 48
===========
Ratio of earnings to fixed charges *
===========
Ratio of earnings to combined fixed charges and
preferred dividends *
===========
* Loss before taxes and fixed charges as adjusted were inadequate to cover
total fixed charges and inadequate to cover fixed charges and pre-tax
dividend requirement by approximately $379 million at March 31, 2003.
Exhibit 99.1
CORNING INCORPORATED
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Corning Incorporated (the "Company")
on Form 10-Q for the period ended March 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, James R. Houghton,
Chairman and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
May 1, 2003 /s/ JAMES R. HOUGHTON
- ----------------------- ---------------------------------------------
Date James R. Houghton
Chairman and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to Corning Incorporated and will be retained by Corning Incorporated
and furnished to the Securities and Exchange Commission or its staff upon
request.
Exhibit 99.2
CORNING INCORPORATED
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Corning Incorporated (the "Company")
on Form 10-Q for the period ended March 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, James B. Flaws,
Vice Chairman and Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
May 1, 2003 /s/ JAMES B. FLAWS
- ---------------------- ---------------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to Corning Incorporated and will be retained by Corning Incorporated
and furnished to the Securities and Exchange Commission or its staff upon
request.