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 June 30, 2005
--------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to____________
Commission file number 1-3247
------
CORNING INCORPORATED
--------------------
(Registrant)
New York 16-0393470
- ---------------------------------------- ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
One Riverfront Plaza, Corning, New York 14831
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-974-9000
------------
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
the past 90 days.
Yes X No ____
-----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No ____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
1,472,062,428 shares of Corning's Common Stock, $0.50 Par Value, were
outstanding as of July 15, 2005.
INDEX
-----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Page
----
Consolidated Statements of Operations (Unaudited) for the three
and six months ended June 30, 2005 and 2004 3
Consolidated Balance Sheets (Unaudited) at June 30, 2005 and
December 31, 2004 4
Consolidated Statements of Cash Flows (Unaudited) for the six
months ended June 30, 2005 and 2004 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 42
Item 4. Controls and Procedures 42
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 47
Item 4. Submission of Matters to a Vote of Security Holders 48
Item 6. Exhibits 49
Signatures 50
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share amounts)
Three months Six months
ended June 30, ended June 30,
------------------------ ------------------------
2005 2004 2005 2004
--------- -------- --------- ---------
Net sales $ 1,141 $ 971 $ 2,191 $ 1,815
Cost of sales 658 625 1,279 1,169
--------- -------- --------- ---------
Gross margin 483 346 912 646
Operating expenses:
Selling, general and administrative expenses 191 166 375 326
Research, development and engineering expenses 104 85 202 169
Amortization of purchased intangibles 3 9 8 19
Restructuring, impairment and other charges and
(credits) (Note 2) (1) (34) 18
Asbestos settlement (Note 3) 137 47 121 66
--------- -------- --------- ---------
Operating income 49 73 188 66
Interest income 13 4 23 10
Interest expense (28) (37) (65) (73)
Loss on repurchases and retirement of debt, net (Note 4) (12) (9) (12) (32)
Other income, net 20 5 11 1
--------- -------- --------- ---------
Income (loss) before income taxes 42 36 145 (28)
Provision for income taxes (Note 5) (44) (24) (63) (12)
--------- -------- --------- ---------
(Loss) income before minority interests and
equity earnings (2) 12 82 (40)
Minority interests (5) (11) (6) (11)
Equity in earnings of associated companies 172 107 338 214
--------- -------- --------- ---------
Net income $ 165 $ 108 $ 414 $ 163
========= ======== ========= =========
Basic earnings per common share (Note 6) $ 0.11 $ 0.08 $ 0.29 $ 0.12
========= ======== ========= =========
Diluted earnings per common share (Note 6) $ 0.11 $ 0.07 $ 0.28 $ 0.11
========= ======== ========= =========
Shares used in computing per share amounts for (Note 6):
Basic earnings per common share 1,438 1,383 1,422 1,371
========= ======== ========= =========
Diluted earnings per common share 1,517 1,495 1,508 1,446
========= ======== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except share and per share amounts)
June 30, December 31,
2005 2004
--------- ------------
Assets
Current assets:
Cash and cash equivalents $ 1,301 $ 1,009
Short-term investments, at fair value 814 872
--------- ---------
Total cash, cash equivalents and short-term investments 2,115 1,881
Trade accounts receivable, net of doubtful accounts and allowances - $27 and $30 645 585
Inventories (Note 7) 552 535
Deferred income taxes (Note 5) 93 94
Other current assets 223 188
--------- ---------
Total current assets 3,628 3,283
Investments (Note 8) 1,546 1,484
Property, net of accumulated depreciation - $3,515 and $3,532 4,220 3,941
Goodwill and other intangible assets, net (Note 9) 383 398
Deferred income taxes (Note 5) 464 472
Other assets 156 166
--------- ---------
Total Assets $ 10,397 $ 9,744
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings, including current portion of long-term debt (Note 4) $ 288 $ 478
Accounts payable 609 682
Other accrued liabilities (Notes 3 and 10) 1,214 1,178
--------- ---------
Total current liabilities 2,111 2,338
Long-term debt (Note 4) 1,915 2,214
Postretirement benefits other than pensions 593 600
Other liabilities (Notes 3 and 10) 887 747
--------- ---------
Total liabilities 5,506 5,899
--------- ---------
Commitments and contingencies (Note 3)
Minority interests 28 29
Shareholders' equity:
Preferred stock - Par value $100.00 per share; Shares authorized: 10 million
Series C mandatory convertible preferred stock - Shares issued: 5.75 million;
Shares outstanding: 616 thousand and 637 thousand 62 64
Common stock - Par value $0.50 per share; Shares authorized: 3.8 billion;
Shares issued: 1,487 million and 1,424 million 743 712
Additional paid-in capital 11,043 10,363
Accumulated deficit (6,895) (7,309)
Treasury stock, at cost; Shares held: 16 million (158) (162)
Accumulated other comprehensive income (Note 12) 68 148
--------- ---------
Total shareholders' equity 4,863 3,816
--------- ---------
Total Liabilities and Shareholders' Equity $ 10,397 $ 9,744
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
Six months ended
June 30,
-------------------------
2005 2004
--------- ---------
Cash Flows from Operating Activities:
Net income $ 414 $ 163
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 246 240
Amortization of purchased intangibles 8 19
Restructuring, impairment and other charges and (credits) 18
Asbestos settlement 121 66
Loss on repurchases and retirement of debt, net 12 32
Undistributed earnings of associated companies (126) (92)
Minority interests, net of dividends paid 6 11
Deferred taxes 7 (35)
Restructuring payments (16) (56)
Customer deposits, net 232
Changes in certain working capital items:
Trade accounts receivable (89) (43)
Inventories (39) (33)
Other current assets (40) 7
Accounts payable and other current liabilities, net of restructuring payments (129) (6)
Other, net 60 34
-------- -------
Net cash provided by operating activities 685 307
-------- -------
Cash Flows from Investing Activities:
Capital expenditures (698) (302)
Net proceeds from sale or disposal of assets 17 35
Short-term investments - acquisitions (703) (1,102)
Short-term investments - liquidations 762 745
Other, net 10 5
-------- -------
Net cash used in investing activities (612) (619)
-------- -------
Cash Flows from Financing Activities:
Repayments of short-term borrowings and current portion of long-term debt (195) (9)
Proceeds from issuance of long-term debt, net 147 396
Repayments of long-term debt (102) (150)
Proceeds from issuance of common stock, net 344 24
Proceeds from exercise of stock options 59 27
Other, net (6) (5)
-------- -------
Net cash provided by financing activities 247 283
-------- -------
Effect of exchange rates on cash (28) (5)
-------- -------
Net increase (decrease) in cash and cash equivalents 292 (34)
Cash and cash equivalents at beginning of period 1,009 688
-------- -------
Cash and cash equivalents at end of period $ 1,301 $ 654
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
General
In these notes, the terms "Corning," "Company," "we," "us," or "our" mean
Corning Incorporated and subsidiary companies.
The accompanying unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC) and in accordance with accounting principles generally accepted in the
United States of America (GAAP) for interim financial information. Certain
information and note disclosures normally included in financial statements
prepared in accordance with GAAP have been omitted or condensed. These interim
consolidated financial statements should be read in conjunction with Corning's
consolidated financial statements and notes thereto included in its Annual
Report on Form 10-K for the year ended December 31, 2004 (2004 Form 10-K).
Except as disclosed herein, there has been no material change in the information
disclosed in the notes to the consolidated financial statements included in the
2004 Form 10-K.
The unaudited consolidated financial statements reflect all adjustments which,
in the opinion of management, are necessary for a fair statement of the results
of operations, financial position and cash flows for the interim periods
presented. All such adjustments are of a normal recurring nature. The results
for interim periods are not necessarily indicative of results which may be
expected for any other interim period or for the full year.
Certain amounts for 2004 were reclassified to conform with 2005 classifications.
Additionally, we have reclassified the 2004 interim results to conform to the
2004 year-end classification of auction rate securities as short-term
investments instead of cash equivalents. These reclassifications had no impact
on results of operations or shareholders' equity.
Foreign Currency Translation and Transactions
Effective January 1, 2005, our Taiwan subsidiary changed its functional currency
from the new Taiwan dollar (its local currency) to the Japanese yen due to the
increased significance of Japanese yen based transactions of that subsidiary. As
a result of this change in functional currency, exchange rate gains and losses
are recognized on transactions in currencies other than the Japanese yen and
included in income for the period in which the exchange rates changed.
Derivative Instruments
In the second quarter of 2005, Corning began using derivative instruments
(forwards) to limit the exposure to foreign currency fluctuations associated
with certain monetary assets and liabilities. These derivative instruments are
not designated as hedging instruments for accounting purposes and, as such, are
referred to as undesignated hedges. Changes in the fair values of undesignated
hedges are recorded in current period earnings in the other income, net
component, along with the foreign currency gains and losses arising from the
underlying monetary assets or liabilities, in the consolidated statement of
operations. At June 30, 2005, the notional amount of the undesignated
derivatives was $283 million.
Stock-Based Compensation
We apply Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees" (APB 25), for our stock-based compensation plans. The
following table illustrates the effect on income and earnings per share if we
had applied the fair value recognition provisions of Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation" (SFAS 123), to stock-based
employee compensation.
(In millions, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
------------------------- -------------------------
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Net income - as reported $ 165 $ 108 $ 414 $ 163
Add: Stock-based employee compensation expense
determined under APB 25, included in reported
net income, net of tax 9 1 16 3
Less: Stock-based employee compensation expense
determined under fair value based method, net of tax (22) (28) (42) (57)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income - pro forma $ 152 $ 81 $ 388 $ 109
Earnings per common share:
Basic - as reported $ 0.11 $ 0.08 $ 0.29 $ 0.12
Basic - pro forma $ 0.11 $ 0.06 $ 0.27 $ 0.08
Diluted - as reported $ 0.11 $ 0.07 $ 0.28 $ 0.11
Diluted - pro forma $ 0.10 $ 0.05 $ 0.26 $ 0.08
- ------------------------------------------------------------------------------------------------------------------------------------
For purposes of SFAS 123 fair value disclosures, each option grant's fair value
is estimated on the grant date using the Black-Scholes option-pricing model. The
following are weighted-average assumptions used for grants under our stock
plans:
- --------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
---------------------- ------------------------
2005 2004 2005 2004
- --------------------------------------------------------------------------------
Expected life in years 4 4 4 4
Risk free interest rate 3.8% 3.7% 3.7% 3.3%
Expected volatility 40% 50% 45% 50%
- --------------------------------------------------------------------------------
Changes in the status of outstanding options follow:
- --------------------------------------------------------------------------------
Number of Shares Weighted-Average
(in thousands) Exercise Price
- --------------------------------------------------------------------------------
Options outstanding December 31, 2004 139,023 $ 20.43
Options granted under plans 7,476 $ 12.62
Options exercised (9,460) $ 6.69
Options terminated (2,106) $ 35.81
---------
Options outstanding June 30, 2005 134,933 $ 20.72
=========
Options exercisable June 30, 2005 106,148 $ 24.09
- --------------------------------------------------------------------------------
New Accounting Standards
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS 123(R)), which replaces SFAS 123 and supercedes APB 25. SFAS
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements at fair
value. On April 14, 2005, the SEC issued a new rule that amends the required
adoption dates of SFAS 123(R). Under SFAS 123(R), Corning must determine the
appropriate fair value model to be used for valuing share-based payments, the
amortization method for compensation cost, and the transition method to be used
at date of adoption. We will implement the provisions of SFAS 123(R) on January
1, 2006 following the "prospective adoption" transition method. This adoption
method requires Corning to begin expensing share-based payments effective
January 1, 2006. Prior periods will not be restated.
Corning grants restricted shares and stock options that are subject to specific
vesting conditions (e.g., three-year cliff vesting). The awards specify that the
employee will continue to vest in the award after retirement without providing
any additional service. Corning accounts for this type of arrangement by
recognizing compensation cost over the nominal vesting period (i.e., over the
three-year vesting period) and, if the employee retires before the end of the
vesting period, recognizing any remaining unrecognized compensation cost at the
date of retirement (the "nominal vesting period approach").
SFAS 123(R) specifies that an award is vested when the employee's retention of
the award is no longer contingent on providing subsequent service (the
"non-substantive vesting period approach"). That would be the case for Corning
awards that vest when employees retire and are granted to retirement eligible
employees. Accordingly, related compensation cost must be recognized immediately
for awards granted to retirement eligible employees or over the period from the
grant date to the date retirement eligibility is achieved, if that is expected
to occur during the nominal vesting period.
We will continue to follow the nominal vesting period approach for (1) any new
share-based awards granted prior to adopting SFAS 123(R) and (2) the remaining
portion of unvested outstanding awards after adopting SFAS 123(R). Upon adoption
of SFAS 123(R), we will apply the non-substantive vesting period approach to new
grants that have retirement eligibility provisions. Had we applied the
non-substantive vesting period approach versus the nominal vesting period
approach, stock-based compensation cost would have been $7 million and $3
million higher for the six months ended June 30, 2005 and 2004, respectively, to
stock options and restricted share awards.
In summary, we are currently evaluating the impact that SFAS 123(R) will have on
our consolidated results of operations and financial condition. Our current
estimate is that our incremental pretax and after-tax share-based compensation
expense will be up to $90 million in 2006 and beyond. This amount includes
approximately $20 million related to the impact of applying the non-substantive
vesting period approach.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations - an interpretation of FASB Statement
No. 143" (FIN 47), which clarifies the term "conditional asset retirement
obligation" used in SFAS No. 143, "Accounting for Asset Retirement Obligations,"
and specifically when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. Corning is required
to adopt FIN 47 no later than December 31, 2005. Corning does not expect the
adoption of FIN 47 to have a material impact on its consolidated results of
operations and financial condition.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" (SFAS 154), which replaces APB Opinion No. 20, "Accounting
Changes," (APB 20) and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements." SFAS 154 changes the requirements for the accounting for
and reporting of a change in accounting principle. Upon the adoption of SFAS 154
beginning January 1, 2006, Corning will apply the standard's guidance to changes
in accounting methods as required. At this time, Corning does not expect the
adoption of SFAS 154 will have a material impact on its consolidated results of
operations and financial condition.
2. Restructuring, Impairment and Other Charges and (Credits)
2005 Actions
Second Quarter
- --------------
In the second quarter of 2005, we recorded net credits of $1 million included in
restructuring, impairment and other charges and (credits). A summary of these
credits and charges follows:
.. We recorded net credits of $7 million, primarily for adjustments to prior
years' restructuring and impairment reserves.
.. We recorded an additional impairment charge of $6 million for an other than
temporary decline in the fair value of our investment in Avanex Corporation
(Avanex) below its adjusted cost basis. Our investment in Avanex is
accounted for as an available-for-sale security under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." At June
30, 2005, shares of Avanex stock were trading at $0.90 per share compared
to our adjusted cost basis of $1.30 per share (after recording for the
first quarter of 2005 impairment charge discussed below). We intend to sell
our shares of Avanex and, subject to restrictions and the trading volume in
Avanex stock, we expect to complete this activity in early 2006. As we do
not expect the market value of the Avanex shares to recover in this
timeframe, the additional impairment in the second quarter was required.
First Quarter
- -------------
In the first quarter of 2005, we recorded a $19 million impairment charge for an
other than temporary decline in the fair value of our investment in Avanex.
The following table illustrates the charges, credits and balances of the
restructuring reserves as of and for the six months ended June 30, 2005 (in
millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Remaining
ended June Revisions Net Cash reserve at
January 1, 30, 2005 to existing charges/ payments June 30,
2005 charge plans (reversals) in 2005 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 18 $ (8) $ 10
Other charges 77 $ (13) $ (13) (8) 56
-----------------------------------------------------------------------------------
Total restructuring charges $ 95 (13) (13) $ (16) $ 66
-----------------------------------------------------------------------------------
Impairment of assets:
Impairment of available-for-sale
securities $ 25 25
------------------------------------
Assets to be disposed of by sale or
abandonment 6 6
------------------------------------
Total impairment charges 25 6 31
------------------------------------
Total restructuring, impairment and
other charges and (credits) $ 25 $ (7) $ 18
- ------------------------------------------------------------------------------------------------------------------------------------
Cash payments for employee related costs will be substantially complete by the
end of 2005, while payments for other charges will be substantially complete by
the end of 2008.
2004 Actions
Second Quarter
- --------------
In the second quarter of 2004, we recorded credits of $34 million included in
restructuring, impairment and other charges and (credits). A summary of these
credits follows:
.. We recorded a $25 million gain related to proceeds in excess of assumed
salvage values for assets of Corning Asahi Video Products Company (CAV)
that were previously impaired but later sold to a third party in China. CAV
was our 51% owned affiliate that manufactured glass panels and funnels for
use in conventional televisions and which was shut down in 2003.
.. We recorded a $9 million credit related to adjustments to prior years'
restructuring reserves.
First Quarter
- -------------
In the first quarter of 2004, we recorded net charges of $34 million included in
restructuring, impairment and other charges and (credits). A summary of these
charges and credits follow:
.. We recorded $39 million of accelerated depreciation and $1 million of exit
costs relating to the final shutdown of our semiconductor materials
manufacturing facility in Charleston, South Carolina.
.. We recorded credits of $6 million, primarily related to proceeds in excess
of assumed salvage values for assets that were previously impaired.
The following table illustrates the charges, credits and balances of the
restructuring reserves as of and for the six months ended June 30, 2004 (in
millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Six months Remaining
ended June Revisions Net Cash reserve at
January 1, 30, 2004 to existing charges/ payments June 30,
2004 charge plans (reversals) in 2004 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 78 $ (2) $ (2) $ (41) $ 35
Other charges 108 $ 1 (5) (4) (15) 89
-------------------------------------------------------------------------------------
Total restructuring charges $ 186 1 (7) (6) $ (56) $ 124
-------------------------------------------------------------------------------------
Impairment of assets:
Assets to be disposed of by sale
or abandonment (33) (33)
Other: Accelerated depreciation 39 39
------------------------------------------
Total restructuring, impairment and
other charges and (credits) $ 40 $ (40)
- ------------------------------------------------------------------------------------------------------------------------------------
3. Commitments and Contingencies
Asbestos Settlement
On March 28, 2003, we announced that we had reached agreement with the
representatives of current and future asbestos claimants on a settlement
arrangement that was thereafter incorporated into the Pittsburgh Corning
Corporation (PCC) plan of reorganization (the PCC Plan). This settlement remains
subject to a number of contingencies, including approval by the Bankruptcy
Court. If the PCC Plan is approved and becomes effective, our settlement will
require the contribution of our equity interest in PCC, our one-half equity
interest in Pittsburgh Corning Europe N.V. (PCE), and 25 million shares of our
common stock. The common stock will be marked-to-market each quarter until the
PCC Plan is approved, thus resulting in adjustments to income and the settlement
liability as appropriate. Corning will also be making cash payments of $148
million (net present value as of June 30, 2005) in six installments beginning
one year after the plan is effective. In addition, we will assign insurance
policy proceeds from our primary insurance and a portion of our excess insurance
as part of the settlement. Two of Corning's primary insurers and several excess
insurers have commenced litigation for a declaration of the rights and
obligations of the parties under insurance policies, including rights that may
be affected by the settlement arrangement described above. Corning is vigorously
contesting these cases. Management is unable to predict the outcome of this
insurance litigation.
The PCC Plan received a favorable vote from creditors in March 2004. Hearings to
consider objections to the PCC Plan were held in the Bankruptcy Court in May
2004. The parties filed post-hearing briefs and made oral arguments to the
Bankruptcy Court in November 2004. The Bankruptcy Court allowed an additional
round of briefing to address current case law developments and heard additional
oral arguments on March 16, 2005. In mid-April 2005, the proponents of the PCC
Plan requested that the court rule on the pending objections. If the Bankruptcy
Court does not approve the PCC Plan in its current form, changes to the Plan are
probable as it is likely that the Court will allow the proponents time to
propose amendments. The outcome of these proceedings is uncertain, and
confirmation of the current Plan or any amended Plan is subject to a number of
contingencies. However, apart from the quarterly mark-to-market adjustment in
the value of the 25 million shares of Corning stock, management believes that
the likelihood of a material adverse impact to Corning's financial statements is
remote.
The following summarizes the charges we have recorded to mark-to-market the
value of our common stock (in millions):
- --------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
---------------- ----------------
2005 2004 2005 2004
- --------------------------------------------------------------------------------
Asbestos settlement charge $ 137 $ 47 $ 121 $ 66
- --------------------------------------------------------------------------------
Since March 28, 2003, we have recorded total net charges of $567 million to
reflect the initial settlement and subsequent mark-to-market adjustment for the
change in the value of our common stock.
The carrying value of our investment in PCE and the fair value of 25 million
shares of our common stock (totaling $437 million at June 30, 2005) is recorded
in the other accrued liabilities component in our consolidated balance sheets.
As the timing of this obligation's settlement will depend on future judicial
rulings (i.e., controlled by a third party and not Corning), this portion of the
PCC liability is considered a "due on demand" obligation. Accordingly, this
portion of the obligation has been classified as a current liability, even
though it is possible that the contribution could be made beyond one year. The
remaining portion of the settlement liability, representing the net present
value of the cash payments, is recorded in the other liabilities component in
our consolidated balance sheets.
Other Commitments and Contingencies
We provide financial guarantees and incur contingent liabilities in the form of
stand-by letters of credit and performance bonds. These guarantees have various
terms, and none of these guarantees are individually significant. We have also
agreed to provide a credit facility to Dow Corning Corporation (Dow Corning) as
discussed in Note 8 to the consolidated financial statements in our 2004 Form
10-K. The funding of the Dow Corning $150 million credit facility is subject to
events connected to the Bankruptcy Plan. As of June 30, 2005, we were
contingently liable for the items described above totaling $361 million,
compared with $368 million at December 31, 2004. We believe a significant
majority of these guarantees and contingent liabilities will expire without
being funded.
From time to time, we are subject to uncertainties and litigation and are not
always able to predict the outcome of these items with assurance. Various legal
actions (including the PCC matter discussed previously), claims and proceedings
are pending against us, including those arising out of alleged product defects,
product warranties, patents, asbestos and environmental matters. In the opinion
of management, the ultimate disposition of these matters will not have a
material adverse effect on Corning's consolidated financial position, liquidity
or results of operations.
4. Debt
Second Quarter
- --------------
In the second quarter of 2005, we completed the following debt transactions:
.. We issued $100 million of 6.05% senior unsecured notes for net proceeds of
approximately $99 million. The notes mature on June 15, 2015. We may call
the debentures at any time on or after June 15, 2010.
.. We redeemed for cash the $100 million principal amount of our 7% debentures
due March 15, 2007, which at the time had a book value of $88 million. We
recognized a loss of $12 million upon the early redemption of these
debentures.
.. We redeemed the remaining $191 million of our outstanding 3.50% convertible
debentures. The bondholders elected to convert substantially all of their
debentures into Corning common stock at a conversion ratio of 103.3592
shares per $1,000 debenture. We issued 20 million shares upon the
conversion of the debentures, resulting in an increase to equity of $191
million.
In addition, in the second quarter of 2005, we completed a common stock offering
of 20 million shares for net proceeds of approximately $323 million. The net
proceeds from this stock offering are intended to be used primarily to reduce
debt by repurchasing for cash the remaining zero coupon convertible debentures
due on November 8, 2015. We may call the debentures at any time on or after
November 8, 2005. At June 30, 2005, the debentures had a carrying value of $275
million.
Both the $100 million of 6.05% debentures and the 20 million shares of common
stock were issued under our existing $5 billion universal shelf registration
statement. At June 30, 2005, our remaining capacity under the shelf registration
is approximately $2.1 billion.
First Quarter
- -------------
In the first quarter of 2005, we completed the following debt transactions:
.. We obtained a loan of approximately $48 million, bearing interest at 2.1%,
from a Japanese bank. This loan is part of a 10-year loan agreement entered
into in 2004 to fund certain capital expansion activities in Japan.
.. We redeemed $100 million of our outstanding 3.50% convertible debentures.
The bondholders affected by this redemption elected to convert $98 million
of their debentures into Corning common stock at a conversion ratio of
103.3592 shares per $1,000 debenture, with the remaining $2 million repaid
in cash. Separately, bondholders elected to convert approximately $6
million of outstanding debentures into Corning common stock. In total, we
issued 11 million shares upon the conversion of the debentures, resulting
in an increase to equity of $105 million.
.. We repaid a total of $192 million of notes in accordance with their stated
repayment schedule. This was primarily comprised of our 5.625% Euro notes.
In addition, in the first quarter of 2005, we completed negotiations with a
group of banks on a new revolving credit facility. The new facility provides us
access to a $975 million unsecured multi-currency revolving line of credit and
expires in March 2010. The facility includes two financial covenants, including
a leverage test (debt to capital ratio) and an interest coverage ratio
(calculated on the most recent four quarters). Concurrent with the closing of
this credit facility, we terminated our previous $2 billion revolving line of
credit that was set to expire in August 2005. As of June 30, 2005, we were in
compliance with these covenants.
The following table summarizes the activities related to our debt retirements
(both current and long-term) for the six months ended June 30, 2005 and 2004 (in
millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Book Value of Cash Shares
Debentures Retired Paid Issued Loss
- ------------------------------------------------------------------------------------------------------------------------------------
2005 activity:
Convertible debentures, 3.5%, due 2008 $ 297 $ 2 31
Other (primarily Euro notes, 5.625%, due 2005) 195 195
Debentures, 7%, due 2007 88 100 $ (12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2005 activity $ 580 $ 297 31 $ (12)
- ------------------------------------------------------------------------------------------------------------------------------------
2004 activity:
Convertible debentures, 3.5%, due 2008 $ 311 $ 33 32 $ (32)
Zero coupon convertible debentures, 2%, due 2015 119 117
Other loans payable 9 9
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2004 activity $ 439 $ 159 32 $ (32)
- ------------------------------------------------------------------------------------------------------------------------------------
5. Income Taxes
Our provision for income taxes and the related tax rates follow (in millions):
- --------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
------------------- -----------------
2005 2004 2005 2004
- --------------------------------------------------------------------------------
Provision for income taxes $ (44) $ (24) $ (63) $ (12)
Effective tax rate (104.8)% (66.7)% (43.4)% (42.9)%
- --------------------------------------------------------------------------------
For the three and six months ended June 30, 2005, the tax provision reflected
the impact of maintaining a valuation allowance on the majority of our net
deferred tax assets. As a result, U.S. (federal, state and local) and certain
foreign income taxes attributable to pretax income or losses were not provided.
The most significant item for which a U.S. tax benefit was not provided was the
asbestos settlement charge. For the U.S. and certain foreign operations, the
income tax provision or benefit attributable to pretax income or losses was
recorded as an adjustment to the valuation allowance. The income tax provision
for the three and six months ended June 30, 2005 included income taxes for
certain foreign operations that were favorably impacted by tax holiday benefits
and investment tax credits.
At June 30, 2005, we had net deferred tax assets of $529 million, which are
primarily U.S. net deferred tax assets. We continue to believe it is more likely
than not that we could realize these U.S. net deferred tax assets through a
tax-planning strategy involving the sale of a non-strategic appreciated asset.
We expect to maintain a valuation allowance on future tax benefits until an
appropriate level of profitability, primarily in the U.S. and Germany, is
sustained or we are able to develop tax planning strategies that enable us to
conclude that it is more likely than not that a larger portion of our deferred
tax assets would be realizable. Until then, our tax provision will include only
the net tax expense attributable to certain foreign operations and the expense
or benefit from current U.S. and certain foreign operations will be recorded as
an adjustment to the valuation allowance.
The effective tax rate for the three and six months ended June 30, 2004 is
higher than the U.S. statutory income tax rate of 35%. Our effective tax rate
was impacted by restructuring, impairment and other charges and (credits),
asbestos settlement charges and losses on repurchases and retirement of debt.
6. Earnings Per Common Share
The reconciliation of the amounts used in the basic and diluted earnings per
common share computations follow (in millions, except per share amounts):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30,
-------------------------------------------------------------------------------
2005 2004
------------------------------------- -------------------------------------
Net Weighted- Per Share Net Weighted- Per Share
Income Average Shares Amount Income Average Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 165 1,438 $ 0.11 $ 108 1,383 $ 0.08
Effect of dilutive securities:
Stock compensation awards 38 34
7% mandatory convertible preferred stock 32 35
3.50% convertible debentures 1 9 2 43
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 166 1,517 $ 0.11 $ 110 1,495 $ 0.07
- ------------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
-------------------------------------------------------------------------------
2005 2004
------------------------------------- -------------------------------------
Net Weighted- Per Share Net Weighted- Per Share
Income Average Shares Amount Income Average Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 414 1,422 $ 0.29 $ 163 1,371 $ 0.12
Effect of dilutive securities:
Stock compensation awards 35 36
7% mandatory convertible preferred stock 32 39
3.50% convertible debentures 3 19
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 417 1,508 $ 0.28 $ 163 1,446 $ 0.11
- ------------------------------------------------------------------------------------------------------------------------------------
The following potential common shares were excluded from the calculation of
diluted earnings per common share due to their anti-dilutive effect or, in the
case of stock options, because their exercise price was greater than the average
market price for the periods presented (in millions):
- --------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
-------------- --------------
2005 2004 2005 2004
- --------------------------------------------------------------------------------
Potential common shares excluded from the
calculation of diluted earnings per
common share:
3.5% convertible debentures 50
4.875% convertible notes 6 6 6 6
Zero coupon convertible debentures 3 3 3 3
-------------------------------
Total 9 9 9 59
===============================
Stock options excluded from the calculation
of diluted earnings per common share 50 58 57 57
- --------------------------------------------------------------------------------
7. Inventories
Inventories comprise the following (in millions):
- --------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
- --------------------------------------------------------------------------------
Finished goods $ 161 $ 136
Work in process 157 172
Raw materials and accessories 130 139
Supplies and packing materials 104 88
- --------------------------------------------------------------------------------
Total inventories $ 552 $ 535
- --------------------------------------------------------------------------------
8. Investments
Investments comprise the following (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Ownership June 30, December 31,
Interest 2005 2004
----------- -------- ------------
Associated companies at equity
Samsung Corning Precision Glass Co., Ltd. 50% $ 647 $ 572
Dow Corning 50% 406 324
All other 25%-51% (a) 478 527
------- -------
1,531 1,423
Other investments (b) 15 61
------- -------
Total $ 1,546 $ 1,484
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Amounts reflect Corning's direct ownership interests in the respective
associated companies. Corning does not control any such entities.
(b) Amounts reflect $12 million and $53 million at June 30, 2005 and December
31, 2004, respectively, of available-for-sale securities stated at market.
During 2005, Corning recorded impairment charges totaling $25 million for
other than temporary declines in the fair value of shares of Avanex below
their cost basis. This is in addition to the reversal of previously
unrecognized gains on Avanex shares of $14 million included in accumulated
other comprehensive income at December 31, 2004 on the consolidated balance
sheet. Refer to Note 2 (Restructuring, Impairment and Other Charges and
(Credits)) for additional information.
Summarized results of operations for our two significant investments accounted
for by the equity method follow:
Samsung Corning Precision Glass Co., Ltd. (Samsung Corning Precision)
- ---------------------------------------------------------------------
Samsung Corning Precision is a South Korea-based manufacturer of liquid crystal
display glass for flat panel displays. Samsung Corning Precision's results of
operations follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
------------------------ -------------------------
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 383 $ 264 $ 700 $ 499
Gross profit $ 278 $ 205 $ 515 $ 384
Net income $ 183 $ 145 $ 348 $ 271
Corning's equity in earnings of Samsung Corning Precision $ 85 $ 71 $ 165 $ 136
Dividends received from Samsung Corning Precision $ 108 $ 57
Related Party Transactions:
Corning sales of inventory to Samsung Corning Precision $ 6
Corning purchases from Samsung Corning Precision $ 3 $ 15 $ 12 $ 37
Corning transfers of machinery & equipment to Samsung
Corning Precision at cost (a) $ 26 $ 9 $ 46 $ 32
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Corning purchases machinery and equipment on behalf of Samsung Corning
Precision to support its capital expansion initiatives. The machinery and
equipment is transferred to Samsung Corning Precision at our cost basis,
resulting in no revenue or gain being recognized on the transaction.
Balances due to and from Samsung Corning Precision were immaterial at June 30,
2005 and December 31, 2004.
Dow Corning
- -----------
Dow Corning is a U.S. based manufacturer of silicone products. Dow Corning's
results of operations follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
------------------------ -------------------------
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 1,007 $ 852 $ 1,990 $ 1,666
Gross profit $ 357 $ 278 $ 703 $ 508
Net income $ 154 $ 36 $ 290 $ 88
Corning's equity in earnings of Dow Corning (a) $ 77 $ 17 $ 145 $ 41
Dividends received from Dow Corning $ 15 $ 15
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Corning's equity in earnings of Dow Corning includes the following:
. During the second quarter of 2005, Dow Corning recorded a gain on the
issuance of subsidiary stock. Our equity earnings included $11 million
related to this gain.
. During the second quarter of 2004, Dow Corning recorded charges
related to restructuring actions and adjustments to interest
liabilities recorded on its emergence from bankruptcy. Our equity
earnings included $21 million related to these charges.
9. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30,
2005 follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Telecom- Display
munications Technologies Other (1) Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2005 $ 123 $ 9 $ 150 $ 282
Foreign currency translation & other (5) (5)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2005 $ 118 $ 9 $ 150 $ 277
- ------------------------------------------------------------------------------------------------------------------------------------
(1) This balance relates to our Specialty Materials operating segment.
Other intangible assets follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
-------------------------------------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Patents and trademarks $ 144 $ 83 $ 61 $ 148 $ 79 $ 69
Non-competition agreements 118 116 2
Other 4 1 3 4 1 3
----------------------------------- -----------------------------------
Total amortized intangible assets 148 84 64 270 196 74
----------------------------------- -----------------------------------
Unamortized intangible assets:
Intangible pension assets 42 42 42 42
----------------------------------- -----------------------------------
Total $ 190 $ 84 $ 106 $ 312 $ 196 $ 116
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets are primarily related to the Telecommunications
segment.
Estimated amortization expense related to these intangible assets is $13 million
in 2006, $12 million in 2007, $11 million in 2008, and insignificant thereafter.
10. Customer Deposits
In 2005 and 2004, Corning and several customers entered into long-term purchase
and supply agreements in which the Display Technologies segment will supply
large-size glass substrates to the customers over periods of up to six years. As
part of the agreements, these customers have agreed to make advance cash
deposits to Corning for a portion of the contracted glass to be purchased.
During the current year, we received a total of $323 million of deposits against
orders, of which $234 million was received in the first half of 2005. Upon
receipt of the cash deposits made by customers, we record a customer deposit
liability, which will be applied in the form of credits against future product
purchases over the life of the agreements. As product is shipped to a customer,
Corning will recognize revenue at the selling price and issue credit memoranda
for an agreed amount of the customer deposit liability. The credit memoranda
will be applied against customer receivables resulting from the sale of product,
thus reducing operating cash flows in later periods as credits are applied for
cash deposits received in earlier periods.
Customer deposits will be received in the following periods (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Six
months ended Remainder Estimated 2006
2004 June 30, 2005 of 2005 and Beyond Total
- ------------------------------------------------------------------------------------------------------------------------------------
Customer deposits received $ 204 $ 234 $ 248 $ 295 $ 981
- ------------------------------------------------------------------------------------------------------------------------------------
The majority of customer deposits will be received through 2006. For the three
and six months ended June 30, 2005, we issued $2 million in credit memoranda,
not reflected in the above amounts, which were applied against customer
receivables.
We had total customer deposit liabilities of $431 million and $215 million at
June 30, 2005 and December 31, 2004, respectively, of which $114 million and $18
million were recorded in the current liabilities - other accrued liabilities
component of our consolidated balance sheets.
In the event customers do not make all customer deposit installment payments or
elect not to purchase the agreed upon quantities of product, subject to specific
conditions outlined in the agreements, we may retain certain amounts of the
customer deposits. If we do not deliver agreed upon product quantities, subject
to specific conditions outlined in the agreements, we may be required to return
certain amounts of customer deposits.
11. Employee Retirement Plans
Defined Benefit Plans
The following table summarizes the components of net periodic benefit cost for
our defined benefit pension and postretirement health care and life insurance
plans (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Pension benefits Postretirement benefits
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months Three months Six months
ended June 30, ended June 30, ended June 30, ended June 30,
-------------------- -------------------- -------------------- --------------------
2005 2004 2005 2004 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 14 $ 9 $ 30 $ 20 $ 3 $ 2 $ 5 $ 4
Interest cost 40 28 85 66 9 11 21 24
Expected return on plan assets (50) (32) (102) (75)
Amortization of net loss 7 5 18 11 2 2 3 5
Amortization of prior service cost 4 2 4 4 (1) (2) (3)
-------------------------------------------------------------------------------------------
Total expense $ 15 $ 12 $ 35 $ 26 $ 14 $ 14 $ 27 $ 30
- ------------------------------------------------------------------------------------------------------------------------------------
In the second half of 2005, we will contribute up to 10 million shares of
Corning common stock to our domestic pension plan. We do not anticipate any
significant contributions to our international pension plans.
Corning and certain of its domestic subsidiaries also offer postretirement plans
that provide health care and life insurance benefits for retirees and eligible
dependents. Certain employees may become eligible for such postretirement
benefits upon reaching retirement age. Prior to January 1, 2003, our principal
retiree medical plans required retiree contributions each year equal to the
excess of medical cost increases over general inflation rates. In response to
rising health care costs, in 2002, Corning placed a "cap" on the amount it would
contribute toward the cost of its retiree medical plans for salaried and
union-free hourly employees. The Medicare Part D subsidy gives Corning the
opportunity to restructure the cap so that it takes effect at a later date. The
restructured cap is a way for Corning to share the Medicare Part D subsidy with
retirees and beneficiaries. The existing cap trigger is 150% of Corning's 2001
retiree medical costs. Effective July 1, 2005, we amended these plans and
restructured the cap to be 120% of Corning's expected 2005 retiree medical
costs. This amendment to the plans will increase 2005 periodic expense by $6
million.
12. Comprehensive Income
Components of comprehensive income, on an after-tax basis where applicable,
follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
----------------------- ------------------------
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 165 $ 108 $ 414 $ 163
Other comprehensive income:
Change in unrealized gain (loss) on investments, net (33) 2
Reclassification adjustment relating to investments
included in net income, net 19
Change in unrealized gain on derivative
instruments, net 12 9 38 3
Reclassification adjustment relating to derivatives, net (2) (2) (15) 5
Foreign currency translation adjustment, net (a) (80) (17) (92) (15)
Change in minimum pension liability 1 5 3 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 96 $ 103 $ 334 $ 160
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The initial implementation of our Taiwan subsidiary's change in its
functional currency from the new Taiwan dollar to the Japanese yen
effective January 1, 2005 had the effect of increasing the U.S. dollar
value of its net assets and increasing accumulated other comprehensive
income by $23 million. The impact of this change is included in the foreign
currency translation adjustment, net amount.
13. Operating Segments
Our reportable operating segments follow:
.. Display Technologies - manufactures liquid crystal display glass for flat
panel displays;
.. Telecommunications - manufactures optical fiber and cable, and hardware and
equipment components for the telecommunications industry;
.. Environmental Technologies - manufactures ceramic substrates and filters
for automobile and diesel applications; and
.. Life Sciences - manufactures glass and plastic consumables for scientific
applications.
All other operating segments that do not meet the quantitative threshold for
separate reporting (e.g., Specialty Materials, Ophthalmic and Conventional Video
Components), certain corporate investments (e.g., Dow Corning and Steuben
Glass), discontinued operations, and unallocated expenses (including other
corporate items) have been grouped as "Unallocated and Other." Unallocated
expenses include the following: gains or losses on repurchases and retirement of
debt; charges related to the asbestos litigation; restructuring, impairment and
other charges and (credits) related to the corporate research and development or
staff organizations; and charges for increases in our tax valuation allowance.
Unallocated and Other also represents the reconciliation between the totals for
the reportable segments and our consolidated operating results.
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Segments Display Telecom- Environmental Life Unallocated Consolidated
(in millions) Technologies munications Technologies Sciences and Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2005
Net sales $ 415 $ 415 $ 146 $ 75 $ 90 $ 1,141
Research, development and engineering
expenses (1) $ 27 $ 22 $ 29 $ 12 $ 14 $ 104
Restructuring, impairment and other charges
and (credits) $ 8 $ (9) $ (1)
Interest expense (2) $ 12 $ 8 $ 4 $ 1 $ 3 $ 28
(Provision) benefit for income taxes $ (47) $ 1 $ 2 $ 2 $ (2) $ (44)
Income (loss) before minority interests and
equity earnings (3) $ 156 $ (13) $ (4) $ (4) $ (137) $ (2)
Minority interests (4) (5) (5)
Equity in earnings of associated companies 87 85 172
------- -------- -------- ------- -------- --------
Net income (loss) $ 243 $ (13) $ (4) $ (4) $ (57) $ 165
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2004
Net sales $ 277 $ 392 $ 141 $ 79 $ 82 $ 971
Research, development and engineering
expenses (1) $ 19 $ 23 $ 21 $ 9 $ 13 $ 85
Restructuring, impairment and other charges
and (credits) $ (1) $ (33) $ (34)
Interest expense (2) $ 11 $ 16 $ 5 $ 2 $ 3 $ 37
(Provision) benefit for income taxes $ (32) $ 11 $ (2) $ (2) $ 1 $ (24)
Income (loss) before minority interests and
equity earnings (3) $ 64 $ (21) $ 4 $ 5 $ (40) $ 12
Minority interests (4) (11) (11)
Equity in earnings of associated companies 71 36 107
------- -------- -------- ------- -------- --------
Net income (loss) $ 135 $ (21) $ 4 $ 5 $ (15) $ 108
- ------------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2005
Net sales $ 735 $ 842 $ 294 $ 149 $ 171 $ 2,191
Research, development and engineering
expenses (1) $ 52 $ 44 $ 55 $ 23 $ 28 $ 202
Restructuring, impairment and other charges
and (credits) $ 8 $ 10 $ 18
Interest expense (2) $ 28 $ 19 $ 10 $ 2 $ 6 $ 65
(Provision) benefit for income taxes $ (64) $ (1) $ 2 $ 2 $ (2) $ (63)
Income (loss) before minority interests and
equity earnings (3) $ 236 $ (4) $ (6) $ (6) $ (138) $ 82
Minority interests (4) (6) (6)
Equity in earnings of associated companies 168 170 338
------- -------- -------- ------- -------- --------
Net income (loss) $ 404 $ (4) $ (6) $ (6) $ 26 $ 414
- ------------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2004
Net sales $ 507 $ 704 $ 282 $ 158 $ 164 $ 1,815
Research, development and engineering
expenses (1) $ 35 $ 48 $ 41 $ 18 $ 27 $ 169
Restructuring, impairment and other charges
and (credits) $ (5) $ 5
Interest expense (2) $ 22 $ 32 $ 10 $ 3 $ 6 $ 73
(Provision) benefit for income taxes $ (58) $ 34 $ (5) $ (5) $ 22 $ (12)
Income (loss) before minority interests and
equity earnings (3) $ 117 $ (68) $ 10 $ 10 $ (109) $ (40)
Minority interests (4) 1 (12) (11)
Equity in earnings of associated companies 136 3 75 214
------- -------- -------- ------- -------- --------
Net income (loss) $ 253 $ (64) $ 10 $ 10 $ (46) $ 163
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Non-direct research, development and engineering expenses are allocated
based upon direct project spending for each segment.
(2) Interest expense is allocated to segments based on a percentage of segment
net operating assets. Consolidated subsidiaries with independent capital
structures do not receive additional allocations of interest expense.
(3) Many of Corning's administrative and staff functions are performed on a
centralized basis. Where practicable, Corning charges these expenses to
segments based upon the extent to which each business uses a centralized
function. Other staff functions, such as corporate finance, human resources
and legal are allocated to segments, primarily as a percentage of sales.
(4) For the three and six months ended June 30, 2005, minority interests
include gains of $4 million for adjustments to prior years' restructuring
and impairment reserves associated with CAV. For the three and six months
ended June 30, 2004, minority interests include gains of $13 and $14,
respectively, from the sale of CAV assets in excess of assumed salvage
value.
A reconciliation of reportable segment net income to consolidated net income
follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
------------------------ ------------------------
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Net income of reportable segments $ 222 $ 123 $ 388 $ 209
Non-reportable operating segments net income (1) 13 19 23 1
Unallocated amounts:
Non-segment loss and other (2) (1) (4) (3) (7)
Non-segment restructuring, impairment and
other (charges) and credits (3) (6) 4 (25) 4
Asbestos settlement (137) (47) (121) (66)
Interest income 13 4 23 10
Loss on repurchases of debt (12) (9) (12) (32)
Benefit for income taxes (4) (4) 1 (4) 3
Equity in earnings of associated companies (5) 77 17 145 41
--------- --------- --------- ---------
Net income $ 165 $ 108 $ 414 $ 163
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Non-reportable operating segments net income includes the results of
non-reportable operating segments.
(2) Non-segment loss and other includes the results of non-segment operations
and other corporate activities.
(3) For the three and six months ended June 30, 2005, non-segment
restructuring, impairment and other (charges) and credits includes
impairment charges for the other than temporary decline in the market value
of Avanex shares. Refer to Note 2 (Restructuring, Impairment and Other
Charges and (Credits))
(4) Benefit for income taxes includes taxes associated with non-segment
restructuring, impairment and other (charges) and credits.
(5) Equity in earnings of associated companies includes amounts derived from
Dow Corning.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our key priorities for 2005 remain unchanged from the previous year: protect our
financial health, improve our profitability, and invest in the future. During
the second quarter of 2005, we made the following progress against these
priorities:
Financial Health
Our balance sheet remains strong, and we continue to generate positive cash
flows from operating activities. Significant activities during the second
quarter of 2005 follow:
.. We entered into an additional multi-year customer supply agreement in the
Display Technologies segment. During the second quarter of 2005, we
received $214 million in deposits against orders under all such contracts.
.. We reduced long-term debt by calling $191 million of convertible debt,
which then converted into Corning common stock. Additionally, we refinanced
$100 million of debt to reduce interest expense and extend the duration of
our debt portfolio.
.. We completed a common stock offering of 20 million shares for net proceeds
of approximately $323 million. The net proceeds from this stock offering
are intended to be used primarily to reduce debt by redeeming for cash the
remaining zero coupon convertible debentures due on November 8, 2015.
.. The debt and common stock transactions listed above resulted in an
improvement to our debt to capital ratio, which declined to 31%.
.. We ended the second quarter of 2005 with $2.1 billion in cash, cash
equivalents and short-term investments. This represents an increase of
approximately $200 million from December 31, 2004, primarily due to the
proceeds from the common stock offering and cash provided by operating
activities more than offsetting the net debt repayments and capital
spending.
We have a financial objective to reduce our outstanding debt below $2 billion by
the end of 2005. Upon the anticipated fourth quarter 2005 repurchase of our zero
coupon convertible debentures, we expect to meet this objective. Additionally,
in April 2005 our public debt ratings were raised to BBB- by both Fitch Ratings
and Standard & Poor's.
Profitability
For the three months ended June 30, 2005, we generated net income of $165
million or $0.11 per share. This represents an improvement of $57 million over
the same period in 2004. This improvement in net income was primarily driven by
the following:
.. Growth in our Display Technologies segment, which continued to experience
strong market demand for liquid crystal display (LCD) glass substrates. For
the second quarter of 2005, net income for the Display Technologies
segment, including equity earnings from Samsung Corning Precision Glass
Co., Ltd. (Samsung Corning Precision), a South Korea-based manufacturer of
LCD glass substrates, increased $108 million, or 80%.
.. Strong equity earnings from Dow Corning Corporation (Dow Corning), a U.S.
based manufacturer of silicone products, which increased $60 million over
the amount recognized in the second quarter of 2004. The second quarter of
2005 equity earnings from Dow Corning included a one-time gain of $11
million compared to a one-time loss of $21 million in the second quarter of
2004.
.. The above items were partially offset by the second quarter pretax and
after-tax charge of $137 million to mark-to-market the shares of common
stock that will be contributed to the Pittsburgh Corning Corporation (PCC)
asbestos settlement agreement if the PCC Plan of Reorganization receives
judicial approval.
For the six months ended June 30, 2005, we generated net income of $414 million
or $0.28 per share. This represents an improvement of $251 million over the same
period in 2004. This improvement in net income was largely the result of the
same factors identified for the three month period.
Investing in our Future
We continue to invest in a wide array of technologies, with our focus being LCD
glass substrates, diesel filters and substrates in response to tightening
emissions control standards, and optical fiber and cable and hardware and
equipment to enable fiber-to-the-premises.
Our research, development and engineering expenses have increased in both the
three and six month periods ended June 30, 2005 compared to their respective
2004 periods, but have remained relatively constant as a percentage of net
sales. We believe our current spending levels are adequate to enable us to
execute our growth strategies.
Our capital expenditures are primarily focused on expanding manufacturing
capacity for LCD glass substrates in the Display Technologies segment and diesel
products in the Environmental Technologies segment. Total capital expenditures
for the three and six month periods ended June 30, 2005 were $375 million and
$698 million, respectively. Of these amounts, $308 million and $591 million,
respectively, were directed toward our Display Technologies segment, and $40
million and $74 million, respectively, were directed toward our Environmental
Technologies segment.
RESULTS OF OPERATIONS
Selected highlights for the second quarter follow (dollars in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
------------------------ % Change -------------------- % Change
2005 2004 05 vs. 04 2005 2004 05 vs. 04
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,141 $ 971 18% $ 2,191 $ 1,815 21%
Gross margin $ 483 $ 346 40% $ 912 $ 646 41%
(gross margin %) 42% 36% 42% 36%
Selling, general and administrative
expenses $ 191 $ 166 15% $ 375 $ 326 15%
(as a % of net sales) 17% 17% 17% 18%
Research, development and engineering
expenses $ 104 $ 85 22% $ 202 $ 169 20%
(as a % of net sales) 9% 9% 9% 9%
Restructuring, impairment and other
charges and (credits) $ (1) $ (34) (97)% $ 18
(as a % of net sales) (4)% 1%
Asbestos Settlement $ 137 $ 47 191% $ 121 $ 66 83%
(as a % of net sales) 12% 5% 6% 4%
Income (loss) before income taxes $ 42 $ 36 17% $ 145 $ (28) 618%
(as a % of net sales) 4% 4% 7% (2)%
Provision for income taxes $ (44) $ (24) 83% $ (63) $ (12) 425%
(as a % of net sales) (4)% (2)% (3)% (1)%
Equity in earnings of associated companies $ 172 $ 107 61% $ 338 $ 214 58%
(as a % of net sales) 15% 11% 15% 12%
Net income $ 165 $ 108 53% $ 414 $ 163 154%
(as a % of net sales) 14% 11% 19% 9%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales
For the three and six months ended June 30, 2005, the net sales increase
compared to the respective 2004 periods was the result of continued strong
demand for LCD glass substrates in our Display Technologies segment and demand
for products in our Telecommunications segment to support fiber-to-the-premises
projects. The performance in all other segments of the company was comparable to
the respective prior year periods. Movements in foreign exchange rates,
primarily the Japanese yen and Euro, did not significantly impact the comparison
of net sales between 2005 and 2004.
Gross Margin
As a percentage of net sales, gross margin improved 6 percentage points for the
three and six months ended June 30, 2005, compared to the respective prior year
periods. The improvement in overall dollars and as a percentage of net sales was
primarily driven by increased volume in our Display Technologies and
Telecommunications segments.
Selling, General and Administrative Expenses
For the three and six months ended June 30, 2005, the increase in selling,
general and administrative expenses compared to the respective 2004 periods is
primarily driven by increases in compensation costs. As a percentage of net
sales, selling, general and administrative expenses have remained comparable to
the respective prior year periods.
Research, Development and Engineering Expenses
Research, development and engineering expenses have increased in both the three
and six month periods ended June 30, 2005 compared to their respective 2004
periods, but have remained constant as a percentage of net sales. Our
expenditures are focused on our Environmental Technologies, Display Technologies
and Telecommunications segments as we strive to capitalize on the current market
opportunities in those segments.
Restructuring, Impairment and Other Charges and (Credits)
For the three and six months ended June 30, 2005, the charges recorded were
primarily for impairment charges for an other than temporary decline in the fair
value of our investment in Avanex Corporation (Avanex) below its cost basis. Our
investment in Avanex is accounted for as an available-for-sale security under
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." We intend to sell our shares of Avanex and, subject to restrictions
and the trading volume in Avanex stock, we expect to complete this activity in
early 2006. As we do not expect the market value of the Avanex shares to recover
in this timeframe, the impairments in the first and second quarters of 2005 were
required.
The credit for the three months ended June 30, 2004 was primarily due to a gain
related to proceeds in excess of assumed salvage values for assets of Corning
Asahi Video Products Company (CAV) that were previously impaired but later sold
to a third party in China. The net charge for the three months ended June 30,
2004 included the second quarter credit associated with the sale of CAV assets
offset by the first quarter of 2004 charge associated with the final shutdown of
our semiconductor manufacturing facility in Charleston, South Carolina.
Refer to Note 2 (Restructuring, Impairment and Other Charges and (Credits)) to
the consolidated financial statements for additional information.
Asbestos Settlement
For the three and six months ended June 30, 2005 and 2004 the asbestos
settlement activity relates to the quarterly mark-to-market of our common stock
that will be contributed to the PCC asbestos settlement agreement if the PCC
Plan of Reorganization receives judicial approval. For additional information on
this matter, refer to Note 3 (Commitments and Contingencies) to the consolidated
financial statements and Part II - Other Information, Item 1. Legal Proceedings.
Income (Loss) Before Income Taxes
In addition to the key drivers outlined above, the following had a material
effect on the results of our income (loss) before income taxes:
- --------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
-------------- --------------
2005 2004 2005 2004
- --------------------------------------------------------------------------------
Loss on repurchases and retirement of debt, net $ (12) $ (9) $ (12) $ (32)
- --------------------------------------------------------------------------------
Also, the comparability of income (loss) before income taxes for the three and
six months ended June 30, 2005 and 2004 was impacted by movements in foreign
exchange rates. In the second quarter of 2005, we incurred an exchange rate gain
of $12 million compared to a loss of $1 million in the second quarter of 2004.
For the six months ended June 30, 2005, we incurred a net exchange rate loss of
$14 million compared to less than $1 million for the prior year period. In the
first quarter of 2005, we incurred an exchange rate loss of $26 million. This
exchange rate loss was due to the impact of currency movements on unhedged
balance sheet exposures, most notably at our Taiwan subsidiary which changed its
functional currency from the new Taiwan dollar (its local currency) to the
Japanese yen in the first quarter of 2005. Refer to Note 1 (Basis of
Presentation) to the consolidated financial statements for additional
information.
Provision for Income Taxes
Our provision for income taxes and the related effective tax rates follow (in
millions):
- --------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
-------------------- ---------------------
2005 2004 2005 2004
- --------------------------------------------------------------------------------
Provision for income taxes $ (44) $ (24) $ (63) $ (12)
Effective tax rate (104.8)% (66.7)% (43.4)% (42.9)%
- --------------------------------------------------------------------------------
For the three and six months ended June 30, 2005, the tax provision reflected
the impact of maintaining a valuation allowance on the majority of our net
deferred tax assets. As a result, U.S. (federal, state and local) and certain
foreign income taxes attributable to pretax income or losses were not provided.
The most significant item for which a U.S. tax benefit was not provided was the
asbestos settlement charge. Such items increased our effective tax rate from 23%
to 105% and from 21% to 43% for the three and six months ended June 30, 2005,
respectively. For the U.S. and certain foreign operations, the income tax
provision or benefit attributable to pretax income or losses was recorded as an
adjustment to the valuation allowance. The income tax provision for the three
and six months ended June 30, 2005 included income taxes for certain foreign
operations that were favorably impacted by tax holiday benefits and investment
tax credits.
At June 30, 2005, we had net deferred tax assets of $529 million, which are
primarily U.S. net deferred tax assets. We continue to believe it is more likely
than not that we could realize these U.S. net deferred tax assets through a
tax-planning strategy involving the sale of a non-strategic appreciated asset.
We expect to maintain a valuation allowance on future tax benefits until an
appropriate level of profitability, primarily in the U.S. and Germany, is
sustained or we are able to develop tax planning strategies that enable us to
conclude that it is more likely than not that a larger portion of our deferred
tax assets would be realizable. Until then, our tax provision will include only
the net tax expense attributable to certain foreign operations and the expense
or benefit from current U.S. and certain foreign operations will be recorded as
an adjustment to the valuation allowance.
The effective tax rate for the three and six months ended June 30, 2004 is
higher than the U.S. statutory income tax rate of 35%. Our effective tax rate
was impacted by restructuring, impairment and other charges and (credits),
asbestos settlement charges and loss on repurchases and retirement of debt.
Equity in Earnings of Associated Companies
The following provides a summary of equity in earnings of associated companies
(in millions):
- --------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
----------------- -----------------
2005 2004 2005 2004
- --------------------------------------------------------------------------------
Samsung Corning Precision $ 85 $ 71 $ 165 $ 136
Dow Corning 77 17 145 41
All other 10 19 28 37
----- ----- ----- -----
Total equity earnings $ 172 $ 107 $ 338 $ 214
- --------------------------------------------------------------------------------
The improvement in equity earnings recognized from Samsung Corning Precision for
both the three and six months ended June 30, 2005 compared to their respective
2004 periods is explained in the discussion of the performance of our Display
Technologies segment.
The improvement in equity earnings recognized from Dow Corning for the three and
six months ended June 30, 2005 compared to their respective 2004 periods is
largely attributable to the following:
.. Strong sales volumes and improved pricing for Dow Corning in 2005.
.. During the second quarter of 2005, Dow Corning recorded a gain on the
issuance of subsidiary stock. Our equity earnings included $11 million
related to this gain.
.. During the second quarter of 2004, Dow Corning recorded charges related to
restructuring actions and adjustments to interest liabilities recorded on
its emergence from bankruptcy. Our equity earnings included $21 million
related to these charges.
Refer to Note 8 (Investments) to the consolidated financial statements for
additional information relating to Samsung Corning Precision and Dow Corning's
operating results.
As the conventional television market will be negatively impacted by strong
growth in the LCD glass market, it is reasonably possible that Samsung Corning
Co., Ltd. (our 50% equity method investment that makes glass panels and funnels
for conventional televisions) may incur additional restructuring or impairment
charges or net operating losses in the future.
Net Income
As a result of the above, our net income and per share data follow (in millions,
except per share amounts):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
------------------------ -------------------------
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 165 $ 108 $ 414 $ 163
Basic earnings per common share $ 0.11 $ 0.08 $ 0.29 $ 0.12
Diluted earnings per common share $ 0.11 $ 0.07 $ 0.28 $ 0.11
Shares used in computing per share amounts for:
Basic earnings per common share 1,438 1,383 1,422 1,371
Diluted earnings per common share 1,517 1,495 1,508 1,446
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING SEGMENTS
Our reportable operating segments follow:
.. Display Technologies - manufactures LCD glass for flat panel displays;
.. Telecommunications - manufactures optical fiber and cable, and hardware and
equipment components for the telecommunications industry;
.. Environmental Technologies - manufactures ceramic substrates and filters
for automobile and diesel applications; and
.. Life Sciences - manufactures glass and plastic consumables for scientific
applications.
All other operating segments that do not meet the quantitative threshold for
separate reporting (e.g., Specialty Materials, Ophthalmic and Conventional Video
Components), certain corporate investments (e.g., Dow Corning and Steuben
Glass), discontinued operations, and unallocated expenses (including other
corporate items) have been grouped as "Unallocated and Other." Unallocated
expenses include the following: gains or losses on repurchases and retirement of
debt; charges related to the asbestos litigation; restructuring, impairment and
other charges and (credits) related to the corporate research and development or
staff organizations; and charges for increases in our tax valuation allowance.
Unallocated and Other also represents the reconciliation between the totals for
the reportable segments and our consolidated operating results.
Display Technologies
The following table provides net sales and other data for the Display
Technologies segment (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
----------------------- % Change ------------------- % Change
2005 2004 05 vs. 04 2005 2004 05 vs. 04
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 415 $ 277 50% $ 735 $ 507 45%
Income before equity earnings $ 156 $ 64 144% $ 236 $ 117 102%
Equity earnings of associated companies $ 87 $ 71 23% $ 168 $ 136 24%
Net income $ 243 $ 135 80% $ 404 $ 253 60%
- ------------------------------------------------------------------------------------------------------------------------------------
The net sales increase for the second quarter of 2005 is largely reflective of
the overall LCD market growth. During the second quarter of 2005, glass
substrate volumes (measured in square feet of glass sold) increased
approximately 47%. Weighted average selling prices increased modestly compared
to 2004. Included in this weighted average were selling price declines that were
more than offset by increases in the market demand for large-size glass
substrates (generation 5 and above), which carry a higher selling price per
square foot. For the second quarter of 2005, large-size glass substrates
accounted for 67% of total sales volumes, compared to 46% for the second quarter
of 2004. The sales of the Display Technologies segment are denominated in
Japanese yen and, as such, our revenues are susceptible to movements in the U.S.
dollar - Japanese yen exchange rate. Sales growth benefited by approximately 3%
from a weakening of the U.S. dollar compared to 2004.
For the six months ended June 30, 2005, the net sales increase is largely driven
by the same factors as those identified for the second quarter of 2005. For the
comparable six month periods, glass substrate volumes increased approximately
42%, while weighted average selling prices increased modestly. Sales of
large-size glass substrates accounted for 63% of year to date 2005 sales volumes
compared to 41% for the same period in 2004. Movements in the U.S. dollar -
Japanese yen exchange rate benefited sales by approximately 3% for the
comparable six month periods.
For the three and six months ended June 30, 2005, the increase in income before
equity earnings was primarily the result of higher volumes and ongoing
improvements in manufacturing efficiencies. For the three and six months ended
June 30, 2005, income before equity earnings includes approximately $10 million
of exchange gains and $5 million of exchange losses, respectively, related to
foreign currency denominated transactions. The impact of these losses on the
comparability of results was largely offset by a lower effective tax rate in
2005 than in 2004.
The increases in our equity earnings from Samsung Corning Precision for the
periods presented were largely driven by the same market factors identified for
our wholly-owned business. During the second quarter of 2005, Samsung Corning
Precision recorded a number of non-recurring charges and earnings were
negatively impacted by approximately 8% from movements in exchange rates. As a
result, the year over year increase in equity earnings was less than the sales
volume growth of 55% would have indicated. Equity earnings from Samsung Corning
Precision denominated in Korean won are susceptible to movements in the exchange
rate between the Korean won and the U.S. dollar.
The Display Technologies segment has and will continue to have a concentrated
customer base comprised of LCD panel makers primarily located in Japan and
Taiwan. The most significant customers in these markets are AU Optronics Corp.,
Chi Mei Optoelectronics Corp., Hannstar Display Corp., Quanta Display Inc.,
Sharp Corporation, and Toppan CFI (Taiwan) Co., Ltd. These customers accounted
for 71% and 74% of the Display Technologies segment sales for the three and six
months ended June 30, 2005, respectively. In addition, Samsung Corning
Precision's sales also continue to be concentrated. For the three and six months
ended June 30, 2005, sales to LCD panel makers located in Korea (Samsung
Electronics Co., Ltd., LG Philips LCD Co., and BOE Hydis Technology Co., Ltd.)
accounted for 89% and 87% of total Samsung Corning Precision sales,
respectively.
We expect the LCD market to continue to grow rapidly. We anticipate higher
demand for LCD televisions, for which our customers require large-size glass
substrates. During 2005 and 2004, Corning held discussions with several of its
customers to discuss how to meet this demand. As part of its discussions,
Corning has sought improved payment terms, including deposits against orders, to
provide a greater degree of assurance that we are effectively building capacity
to meet the needs of a rapidly growing industry.
In 2005 and 2004, Corning and several customers entered into long-term purchase
and supply agreements in which the Display Technologies segment will supply
large-size glass substrates to the customers over periods of up to six years. As
part of the agreements, these customers have agreed to make advance cash
deposits to Corning for a portion of the contracted glass to be purchased. We
now have customer deposit agreements with five customers of the Display
Technologies segment.
In the event the customers do not make all customer deposit installment payments
or elect not to purchase the agreed upon quantities of product, subject to
specific conditions outlined in the agreements, Corning may retain certain
amounts of the customer deposits. If Corning does not deliver agreed upon
product quantities, subject to specific conditions outlined in the agreements,
Corning may be required to return certain amounts of the customer deposits.
Outlook:
- --------
We expect to see a continuation of the overall industry growth and the trend
toward large-size substrates. We anticipate adding capacity to meet volume
growth in the LCD market, which is anticipated to be more than 50% in 2005. This
market growth is expected to occur at varying rates in the principal LCD markets
of Japan, Taiwan, China and Korea. Sales of our wholly-owned business are
primarily to panel manufacturers in Japan, Taiwan, and China with customers in
Korea being serviced by Samsung Corning Precision. The actual growth rates in
these markets will impact our sales and earnings performance. For the third
quarter of 2005, we expect volumes for our wholly-owned business and Samsung
Corning Precision may grow between 10% and 20%, both individually and in the
aggregate, compared to the second quarter of 2005. Pricing in the third quarter
is expected to be flat to down slightly. We also expect continued strong
manufacturing performance. However, in the third quarter of 2005 we will begin
production at our new Taichung, Taiwan manufacturing facility. The ramp of
production and our ability to efficiently start up operations may impact
profitability in the second half of 2005. There can be no assurance that the
end-market rates of growth will continue at the high rates experienced in recent
quarters, that we will be able to pace our capacity expansions to actual demand,
or that the rate of cost declines will offset price declines in any given
period. While the industry has grown rapidly, consumer preferences for panels of
differing sizes, or price or other factors, may lead to pauses in market growth,
and it is possible that glass manufacturing capacity may exceed demand from time
to time. In addition, changes in foreign exchange rates, principally the
Japanese yen, will continue to impact the profitability of this segment.
Telecommunications
The following table provides net sales and other data for the Telecommunications
segment (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
------------------------ % Change ---------------------- % Change
2005 2004 05 vs. 04 2005 2004 05 vs. 04
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 213 $ 192 11% $ 425 $ 341 25%
Hardware and equipment 202 200 1% 417 363 15%
------- -------- ------- --------
Total net sales $ 415 $ 392 6% $ 842 $ 704 20%
======= ======== ======= ========
Net loss $ (13) $ (21) (38)% $ (4) $ (64) (94)%
- ------------------------------------------------------------------------------------------------------------------------------------
For the second quarter of 2005, fiber volumes increased 15% while prices
declined 5% compared to the second quarter of 2004. The 2005 increase in fiber
volumes was largely driven by sales in North America and Europe, offset by lower
volumes in China. The stronger North America volumes were primarily due to
increased sales to Verizon Communications Inc. (Verizon) to support their
fiber-to-the-premises project. Sales to Verizon also accounted for the majority
of the increase in hardware and equipment product sales. The lower volume in
China was due to continued weakness in the market as the result of over capacity
and pricing pressure. Based on these ongoing market conditions, we have been
unable to regain the market share we lost prior to the successful resolution of
the 2004 anti-dumping preliminary determination. The comparison of sales of the
Telecommunications segment between the second quarter of 2005 and 2004 was
negatively affected by the 2004 sale of our frequency controls business. During
the second quarter of 2004, the frequency controls business recorded sales of
$24 million. Excluding the impact of this divestiture, net sales for the
Telecommunications segment increased 13% for the second quarter of 2005 compared
to the year ago period. Movements in foreign exchange rates, primarily the Euro
and Japanese yen, did not have a significant impact on sales for the second
quarter of 2005 compared to the second quarter of 2004.
For the six months ended June 30, 2005, the net sales increase is largely driven
by the same factors as those identified for the second quarter of 2005.
Excluding the cumulative impact of the divestiture of our frequency controls
business, net sales for the Telecommunications segment increased 28% for the six
months ended June 30, 2005 compared to the prior year period. For the comparable
six month periods, fiber volumes increased 31% and prices declined 6%. Movements
in exchange rates did not significantly impact sales for the comparable six
month periods.
For the three and six months ended June 30, 2005, the net loss recognized in the
Telecommunications segment represented significant reductions from the losses
incurred in the comparable 2004 periods. The reduced losses were primarily
driven by operational efficiencies from increases in sales volumes. Movements in
exchange rates did not significantly impact net loss for the comparable periods.
The Telecommunications segment continues to have a concentrated customer base.
For the three and six months ended June 30, 2005, 10 customers accounted for 51%
and 53% of total segment net sales, respectively. For the same periods, Verizon
accounted for 14% and 17% of total segment net sales, respectively.
Outlook:
- --------
For the third quarter of 2005, we expect net sales to be comparable to those of
the second quarter. We expect fiber volumes to be flat to down 5% compared to
those of the second quarter and pricing declines of less than 5%. Segment net
sales continue to be impacted by Verizon's fiber-to-the-premises project. Third
quarter sales volumes of fiber-to-the-premises products should be approximately
flat with the second quarter. Fiber-to-the-premises sales to Verizon in the
third and fourth quarters are dependent on Verizon's planned targets for homes
passed and connected in 2006. Changes in the expected Verizon deployment plan,
or additional reductions in their inventory levels of fiber-to-the-premises
products, could also affect the sales level. For China, we do not anticipate any
significant recovery of volumes during the third quarter.
Environmental Technologies
The following table provides net sales and other data for the Environmental
Technologies segment (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
----------------------- % Change --------------------- % Change
2005 2004 05 vs. 04 2005 2004 05 vs. 04
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Automotive $ 125 $ 121 3% $ 252 $ 246 2%
Diesel 21 20 5% 42 36 17%
------- -------- ------- --------
Total net sales $ 146 $ 141 4% $ 294 $ 282 4%
======= ======== ======= ========
Net (loss) income $ (4) $ 4 (200)% $ (6) $ 10 (160)%
- ------------------------------------------------------------------------------------------------------------------------------------
The increase in net sales for the second quarter of 2005 is primarily the result
of demand for our ceramic filters and substrates for automotive and diesel
emission control applications. For automotive products, overall volumes were
down modestly from 2004, however, sales continue to benefit from a higher mix of
our thin-wall and ultra thin-wall substrates, which allow engine manufacturers
to meet increasingly tighter emissions control requirements in a more cost
effective manner. Strong sales driven by non-U.S. auto manufacturers compensated
for weaker demand from U.S. auto manufacturers due to slowdowns in their
production. Our diesel products sales growth was driven by demand from retrofit
markets, particularly in Asia. During the second quarter of 2005, we received
additional letters of intent from diesel engine manufacturers to supply filters
for their 2007 model year platforms. We are actively negotiating with several
diesel engine manufacturers to develop these letters of intent into supply
agreements. Negotiations are likely to continue through the next several
quarters. A portion of this segment's sales are susceptible to movements in the
U.S. dollar-Euro exchange rate. Movements in exchange rates did not have a
significant impact on sales for the second quarter of 2005 compared to the
second quarter of 2004.
For the six months ended June 30, 2005, the net sales increase is largely driven
by the same factors as those identified for the second quarter of 2005.
For the three and six months ended June 30, 2005, the decline in net income
compared to the respective 2004 periods is primarily the result of increased
development costs and plant start-up costs to support our emerging diesel
products. These costs offset the anticipated gross margin benefits of increased
volumes and the higher mix of premium automotive products. Movements in exchange
rates did not significantly impact net income for the comparable periods.
Outlook:
- --------
For the third quarter of 2005, we expect net sales to be comparable to those of
the second quarter. For automotive products, we expect to see stable demand
based on anticipated worldwide auto production. We do not anticipate any adverse
impact to sales from the recent production slowdowns by U.S. auto manufacturers
as continued slowdowns should be offset by increases in the production levels of
non-U.S. auto manufacturers. Additionally, we expect a continuation of the shift
to premium products, although at slightly slower rates than 2004. Diesel product
sales are expected to grow slightly in the third quarter as demand from the
retrofit market is anticipated to remain stable. The retrofit market is
volatile, and any unanticipated declines in demand could adversely impact sales.
Life Sciences
The following table provides net sales and net (loss) income for the Life
Sciences segment (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
----------------------- % Change ---------------------- % Change
2005 2004 05 vs. 04 2005 2004 05 vs. 04
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 75 $ 79 (5)% $ 149 $ 158 (6)%
Net (loss) income $ (4) $ 5 (180)% $ (6) $ 10 (160)%
- ------------------------------------------------------------------------------------------------------------------------------------
The decrease in net sales for the second quarter of 2005 is primarily due to
volume decreases as a result of the change in our distribution channel
previously disclosed in our 2004 Annual Report on Form 10-K. Movements in
foreign exchange rates, primarily the Euro, did not have a significant impact on
the comparability of sales.
For the six months ended June 30, 2005, the net sales decrease is largely driven
by the same factors as those identified for the second quarter of 2005.
For the three and six months ended June 30, 2005, the 2005 net loss compared to
income in the respective 2004 periods is largely attributable to the gross
margin impact from the lower sales volumes. Additionally, the Life Sciences
segment incurred higher operating expenses for both the three and six month
periods ended June 30, 2005 compared to their respective 2004 periods to
implement the change in distribution channels and to support new product
development efforts.
Outlook:
- --------
For the third quarter of 2005, we expect net sales to be comparable to those of
the second quarter. We remain encouraged by the results of our efforts to alter
our distribution channel in response to one of our 2004 primary distributors
changing its business strategy. However, it is unlikely that we will be
successful in migrating all of our 2004 sales made through this distributor to
our existing primary distributor and other channels, as end user preferences for
distribution models, price or other factors may adversely impact sales in the
second half of 2005. For the full year, we expect sales may be negatively
impacted by approximately 10% as a result of this change in our distribution
channel.
LIQUIDITY AND CAPITAL RESOURCES
Customer Deposits
Certain customers of our Display Technologies segment have entered into
long-term supply agreements and agreed to make advance cash deposits to secure
supply of large-size glass substrates. The deposits will be applied in the form
of credits against future product purchases, thus reducing operating cash flows
in later periods as credits are applied for cash deposits received in earlier
periods. During the current year, we received a total of $323 million of
deposits against orders, of which $234 million was received in the first half of
2005.
Customer deposits will be received in the following periods (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Six
months ended Remainder Estimated 2006
2004 June 30, 2005 of 2005 and Beyond Total
- ------------------------------------------------------------------------------------------------------------------------------------
Customer deposits received $ 204 $ 234 $ 248 $ 295 $ 981
- ------------------------------------------------------------------------------------------------------------------------------------
The majority of customer deposits will be received through 2006. For the three
and six months ended June 30, 2005, we issued $2 million in credit memoranda,
not reflected in the above amounts, which were applied against customer
receivables.
Financing Structure
Second Quarter
- --------------
In the second quarter of 2005, we completed the following debt and common stock
transactions:
.. We issued $100 million of 6.05% senior unsecured notes for net proceeds of
approximately $99 million. The notes mature on June 15, 2015. We may call
the debentures at any time on or after June 15, 2010.
.. We redeemed for cash the $100 million principal amount of our 7% debentures
due March 15, 2007, which at the time had a book value of $88 million. We
recognized a loss of $12 million upon the early redemption of these
debentures.
.. We redeemed the remaining $191 million of our outstanding 3.50% convertible
debentures. The bondholders elected to convert substantially all of their
debentures into Corning common stock at a conversion ratio of 103.3592
shares per $1,000 debenture. We issued 20 million shares upon the
conversion of the debentures, resulting in an increase to equity of $191
million.
.. We completed a common stock offering of 20 million shares for net proceeds
of approximately $323 million. The net proceeds from this stock offering
are intended to be used primarily to reduce debt by repurchasing for cash
the remaining zero coupon convertible debentures due on November 8, 2015.
We may call the debentures at any time on or after November 8, 2005. At
June 30, 2005, the debentures had a carrying value of $275 million.
Both the $100 million of 6.05% debentures and the 20 million shares of common
stock were issued under our existing $5 billion universal shelf registration
statement. At June 30, 2005, our remaining capacity under the shelf registration
is approximately $2.1 billion.
In the second half of 2005, we will contribute up to 10 million shares of
Corning common stock to our domestic pension plan.
First Quarter
- -------------
In the first quarter of 2005, we completed the following debt transactions:
.. We obtained a loan of approximately $48 million, bearing interest at 2.1%,
from a Japanese bank. This loan is part of a 10-year loan agreement entered
into in 2004 to fund certain capital expansion activities in Japan.
.. We redeemed $100 million of our outstanding 3.50% convertible debentures.
The bondholders affected by this redemption elected to convert $98 million
of their debentures into Corning common stock at a conversion ratio of
103.3592 shares per $1,000 debenture, with the remaining $2 million repaid
in cash. Separately, bondholders elected to convert approximately $6
million of outstanding debentures into Corning common stock. In total, we
issued 11 million shares upon the conversion of the debentures, resulting
in an increase to equity of $105 million.
.. We repaid a total of $192 million of notes in accordance with their stated
repayment schedule. This was primarily comprised of our 5.625% Euro notes.
In addition, in the first quarter of 2005 we completed negotiations with a group
of banks on a new revolving credit facility. The new facility provides us access
to a $975 million unsecured multi-currency revolving line of credit and expires
in March 2010. The facility includes two financial covenants, a leverage test
(debt to capital ratio not greater than 50%) and an interest coverage ratio of
no less than 3.5 times (calculated on the most recent four quarters). Concurrent
with the closing of this credit facility, we terminated our previous $2 billion
revolving line of credit that was set to expire in August 2005. As of and for
the period ended June 30, 2005, our interest coverage ratio was 10.3 times, and
our debt to capital ratio was 31%.
Capital Spending
Capital spending totaled $698 million and $302 million during the six months
ended June 30, 2005 and 2004. Our 2005 forecasted consolidated capital spending
has increased to about $1.5 billion. Of this amount, approximately $1.2 billion
will be directed toward expanding manufacturing capacity for LCD glass
substrates in the Display Technologies segment and approximately $150 million
will be directed toward our Environmental Technologies segment.
Key Balance Sheet Data
Balance sheet and working capital measures are provided in the following table
(dollars in millions):
- --------------------------------------------------------------------------------
As of June 30, As of December 31,
-------------- ------------------
2005 2004
- --------------------------------------------------------------------------------
Working capital $ 1,517 $ 945
Working capital, excluding cash
and short-term investments $ (598) $ (936)
Current ratio 1.7:1 1.4:1
Trade accounts receivable,
net of allowances $ 645 $ 585
Days sales outstanding 51 52
Inventories $ 552 $ 535
Inventory turns 4.8 4.9
Days payable outstanding 86 67
Long-term debt $ 1,915 $ 2,214
Total debt to total capital 31% 41%
- --------------------------------------------------------------------------------
Credit Rating
Our credit ratings were updated from those disclosed in our 2004 Annual Report
on Form 10-K as follows:
- --------------------------------------------------------------------------------
RATING AGENCY Rating Outlook
Last Update Long-Term Debt Last Update
- --------------------------------------------------------------------------------
Fitch BBB- Stable
April 27, 2005 April 27, 2005
Standard & Poor's BBB- Stable
April 27, 2005 April 27, 2005
Moody's (a) Ba2 Positive
July 29, 2002 January 14, 2005
- --------------------------------------------------------------------------------
(a) On July 11, 2005, Moody's Investor Service placed Corning's debt rating
under review for a possible upgrade.
Management Assessment of Liquidity
Our major source of funding for 2005 and beyond will be our existing balance of
cash, cash equivalents and short-term investments. Beyond our first quarter and
second quarter 2005 debt and equity offerings, from time to time, we may also
issue debt or equity securities for general corporate purposes. We believe we
have sufficient liquidity for the next several years to fund operations, the
asbestos settlement, research and development, capital expenditures and
scheduled debt repayments.
Contractual Obligations
Other than the early debt repayments described in Note 4 (Debt) to the
consolidated financial statements, there have been no material changes outside
the ordinary course of business in the contractual obligations disclosed in our
2004 Annual Report on Form 10-K under the caption "Contractual Obligations."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported therein. The estimates that
required management's most difficult, subjective or complex judgments are
described in our 2004 Annual Report on Form 10-K and remain unchanged through
the second quarter of 2005.
NEW ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS 123(R)), which replaces SFAS 123 and supercedes APB 25. SFAS
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements at fair
value. On April 14, 2005, the SEC issued a new rule that amends the required
adoption dates of SFAS 123(R). Under SFAS 123(R), Corning must determine the
appropriate fair value model to be used for valuing share-based payments, the
amortization method for compensation cost, and the transition method to be used
at date of adoption. We will implement the provisions of SFAS 123(R) on January
1, 2006 following the "prospective adoption" transition method. This adoption
method requires Corning to begin expensing share-based payments effective
January 1, 2006. Prior periods will not be restated.
Corning grants restricted shares and stock options that are subject to specific
vesting conditions (e.g., three-year cliff vesting). The awards specify that the
employee will continue to vest in the award after retirement without providing
any additional service. Corning accounts for this type of arrangement by
recognizing compensation cost over the nominal vesting period (i.e., over the
three-year vesting period) and, if the employee retires before the end of the
vesting period, recognizing any remaining unrecognized compensation cost at the
date of retirement (the "nominal vesting period approach").
SFAS 123(R) specifies that an award is vested when the employee's retention of
the award is no longer contingent on providing subsequent service (the
"non-substantive vesting period approach"). That would be the case for Corning
awards that vest when employees retire and are granted to retirement eligible
employees. Accordingly, related compensation cost must be recognized immediately
for awards granted to retirement eligible employees or over the period from the
grant date to the date retirement eligibility is achieved, if that is expected
to occur during the nominal vesting period.
We will continue to follow the nominal vesting period approach for (1) any new
share-based awards granted prior to adopting SFAS 123(R) and (2) the remaining
portion of unvested outstanding awards after adopting SFAS 123(R). Upon adoption
of SFAS 123(R), we will apply the non-substantive vesting period approach to new
grants that have retirement eligibility provisions. Had we applied the
non-substantive vesting period approach versus the nominal vesting period
approach, stock-based compensation cost would have been $7 million and $3
million higher for the six months ended June 30, 2005 and 2004, respectively, to
stock options and restricted share awards.
In summary, we are currently evaluating the impact that SFAS 123(R) will have on
our consolidated results of operations and financial condition. Our current
estimate is that our incremental pretax and after-tax share-based compensation
expense will be up to $90 million in 2006 and beyond. This amount includes
approximately $20 million related to the impact of applying the non-substantive
vesting period approach.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations - an interpretation of FASB Statement
No. 143" (FIN 47), which clarifies the term "conditional asset retirement
obligation" used in SFAS No. 143, "Accounting for Asset Retirement Obligations,"
and specifically when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. Corning is required
to adopt FIN 47 no later than December 31, 2005. Corning does not expect the
adoption of FIN 47 to have a material impact on its consolidated results of
operations and financial condition.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" (SFAS 154), which replaces APB Opinion No. 20, "Accounting
Changes," (APB 20) and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements." SFAS 154 changes the requirements for the accounting for
and reporting of a change in accounting principle. Upon the adoption of SFAS 154
beginning January 1, 2006, Corning will apply the standard's guidance to changes
in accounting methods as required. At this time, Corning does not expect the
adoption of SFAS 154 will have a material impact on its consolidated results of
operations and financial condition.
ENVIRONMENT
We have been named by the Environmental Protection Agency (the Agency) under the
Superfund Act, or by state governments under similar state laws, as a
potentially responsible party for 11 active hazardous waste sites. Under the
Superfund Act, all parties who may have contributed any waste to a hazardous
waste site, identified by such Agency, are jointly and severally liable for the
cost of cleanup unless the Agency agrees otherwise. It is our policy to accrue
for the estimated liability related to Superfund sites and other environmental
liabilities related to property owned and operated by us based on expert
analysis and continual monitoring by both internal and external consultants. We
have accrued $13 million for the estimated liability for environmental cleanup
and related litigation at June 30, 2005. Based upon the information developed to
date, we believe that the accrued amount is a reasonable estimate of our
liability and that the risk of an additional loss in an amount materially higher
than that accrued is remote.
FORWARD-LOOKING STATEMENTS
Many statements in this Quarterly Report on Form 10-Q are forward-looking
statements. These typically contain words such as "believes," "expects,"
"anticipates," "estimates," "forecasts," or similar expressions. These
forward-looking statements involve risks and uncertainties that may cause the
actual outcome to be materially different. Such risks and uncertainties include,
but are not limited to the following:
- - global economic and political conditions;
- - tariffs, import duties and currency fluctuations;
- - product demand and industry capacity;
- - competitive products and pricing;
- - sufficiency of manufacturing capacity and efficiencies;
- - availability and costs of critical components and materials;
- - new product development and commercialization;
- - order activity and demand from major customers;
- - fluctuations in capital spending by customers;
- - possible disruption in commercial activities due to terrorist activity,
armed conflict, political instability or major health concerns;
- - facility expansions and new plant start-up costs;
- - effect of regulatory and legal developments;
- - capital resource and cash flow activities;
- - ability to pace capital spending to anticipated levels of customer demand,
which may fluctuate;
- - interest costs;
- - credit rating and ability to obtain financing and capital on commercially
reasonable terms;
- - adequacy and availability of insurance;
- - financial risk management;
- - capital spending;
- - acquisition and divestiture activities;
- - rate of technology change;
- - level of excess or obsolete inventory;
- - ability to enforce patents;
- - adverse litigation;
- - product and components performance issues;
- - stock price fluctuations;
- - rate of substitution by end-users purchasing LCDs for notebook computers,
desktop monitors and televisions;
- - downturn in demand for LCD glass substrates;
- - customer ability, most notably in the Display Technologies segment, to
maintain profitable operations and obtain financing to fund their
manufacturing expansions;
- - fluctuations in supply chain inventory levels;
- - equity company activities, principally at Dow Corning Corporation and
Samsung Corning Co., Ltd.;
- - movements in foreign exchange rates, primarily the Japanese yen, Euro and
Korean won; and
- - other risks detailed in Corning's Securities and Exchange Commission
filings.
Risk factors
Set forth below and elsewhere in this Quarterly Report on Form 10-Q and in other
documents we file with the SEC are some of the principal risks and uncertainties
that could cause our actual business results to differ materially from any
forward-looking statements or other projections contained in this Report. In
addition, future results could be materially affected by general industry and
market conditions, changes in laws or accounting rules, general U.S. and
non-U.S. economic and political conditions, including a global economic
slowdown, fluctuation of interest rates or currency exchange rates, terrorism,
political unrest or international conflicts, political instability or major
health concerns, natural disasters or other disruptions of expected economic and
business conditions. These risk factors should be considered in addition to our
cautionary comments concerning forward-looking statements in this Quarterly
Report on Form 10-Q, including statements related to markets for our products
and trends in our business that involve a number of risks and uncertainties. Our
separate statement labeled Forward-Looking Statements should be considered in
addition to the statements below.
Our sales could be negatively impacted if one or more of our key customers
substantially reduce orders for our products
Our customer base is relatively concentrated with 10 or fewer significant
customers accounting for a high percentage (greater than 50%) of net sales in
most of our businesses. However, no individual customer accounts for more than
10% of consolidated sales.
Our Display Technologies, Telecommunications, Environmental Technologies,
and Life Sciences segments have concentrated customer bases. If we lose a
significant customer in any of these businesses, or if one or more significant
customers reduce orders, our sales could be negatively impacted. Corning's
Display Technologies segment manufactures and sells glass substrates to a
concentrated customer base comprised of LCD panel makers primarily located in
Japan and Taiwan. The most significant customers in these markets are AU
Optronics Corp., Chi Mei Optoelectronics Corp., Hannstar Display Corp., Quanta
Display Inc., Sharp Corporation, and Toppan CFI (Taiwan) Co., Ltd. For the six
months ended June 30, 2005, these LCD customers accounted for 74% of the Display
Technologies segment sales. In addition, Samsung Corning Precision's sales were
also concentrated, with three LCD panel makers in Korea (Samsung Electronics
Co., Ltd., LG Philips LCD Co., and BOE Hydis Technology Co., Ltd.) accounting
for 87% of sales for the six months ended June 30, 2005.
Although the sale of LCD glass substrates has increased from quarter to
quarter in 2005, there can be no assurance that this positive trend will
continue. Our customers are LCD panel makers, and as they switch to larger size
glass, the pace of their orders may be uneven while they adjust their
manufacturing processes and facilities. Additionally, consumer preferences for
panels of differing sizes, or price or other factors, may lead to pauses in
market growth from time to time. There is further risk that our customers may
not be able to maintain profitable operations or access sufficient capital to
fund ongoing expansions, which may limit their pace of orders to us.
Our Telecommunications segment customers' purchases of our products are
affected by their capital expansion plans, general market and economic
uncertainty and regulatory changes, including broadband policy. For the six
months ended June 30, 2005, one customer accounted for 17% of our
Telecommunications segment sales, and 10 customers accounted for 53% of total
segment sales. Sales in the Telecommunications segment continue to be impacted
by Verizon's fiber-to-the-premises project. Fiber-to-the-premises sales to
Verizon are dependent on Verizon's planned targets for homes passed and
connected. Changes in Verizon's deployment plan, or additional reductions in
their inventory levels of fiber-to-the-premises products, could adversely affect
future sales.
In the Environmental Technologies segment, sales of our ceramic substrate
and filter products for automotive and diesel emissions and pollution control
fluctuate with production and sales of automobiles and other vehicles, as well
as changes in governmental laws and regulations for air quality and emission
controls. Sales in our Environmental Technologies segment are primarily to four
manufacturers of emission control systems who then sell to automotive and diesel
engine manufacturers. A portion of our automotive products are sold to U.S.
engine manufacturers, and as a result, our future sales could be adversely
impacted by slowdowns in automotive production by these manufacturers.
Sales in our Life Sciences segment in 2004 were primarily through two large
distributors to government entities, pharmaceutical and biotechnology companies,
hospitals, universities and other research facilities. One of Life Sciences
primary distributors changed its business strategy, and Corning notified this
distributor that it would not renew its existing distribution agreement, which
expired in April 2005. We are actively working to transition the sales through
this distributor to our remaining primary distributor and other existing and
developing channels. However, this change will likely adversely impact sales
volumes in the short term. For the full year, sales may be adversely impacted by
approximately 10% as a result of this change in our distribution channel. For
the six months ended June 30, 2005, our remaining primary distributor accounted
for 41% of total segment sales.
If we do not successfully adjust our manufacturing volumes and fixed cost
structure, or achieve manufacturing yields or sufficient product reliability,
our operating results could suffer, and we may not achieve profitability levels
anticipated
We are investing heavily in additional manufacturing capacity of certain
businesses, including forecasted 2005 capital spending of $1.1 billion to $1.2
billion to expand our liquid crystal display glass facilities in response to
anticipated increases in customer demand and approximately $150 million in
anticipation of the emerging market for diesel emission control systems. The
speed of constructing the new facilities presents challenges. We may face
technical and process issues in moving to commercial production capacity. There
can be no assurance that Corning will be able to pace its capacity expansion to
the actual demand. While the LCD industry has grown rapidly, it is possible that
glass manufacturing capacity may exceed customer demand during certain periods.
The manufacturing of our products involves highly complex and precise
processes, requiring production in highly controlled and clean environments.
Changes in our manufacturing processes or those of our suppliers could
significantly reduce our manufacturing yields and product reliability. In some
cases, existing manufacturing may be insufficient to achieve the volume or
requirements of our customers. We will need to develop new manufacturing
processes and techniques to achieve targeted volume, pricing and cost levels
that will permit profitable operations. While we continue to fund projects to
improve our manufacturing techniques and processes, we may not achieve
satisfactory cost levels in our manufacturing activities that will fully satisfy
our yield and margin targets.
Our future operating results depend on our ability to purchase a sufficient
amount of materials, parts and components to meet the demands of our customers.
Our ability to meet customer demands depends, in part, on our ability to
obtain timely and adequate delivery of materials, parts and components from our
suppliers and our internal manufacturing capacity. We may experience shortages
that could adversely affect our operations. Although we work closely with our
suppliers to avoid these types of shortages, there can be no assurances that we
will not encounter these problems in the future. Furthermore, certain of our
components are available only from a single source or limited sources. We may
not be able to find alternate sources in a timely manner. A reduction or
interruption in supplies, or a significant increase in the price of supplies
could have a material adverse effect on our businesses.
We have incurred, and may in the future incur, restructuring and other charges,
the amounts of which are difficult to predict accurately
We have recorded several charges for restructuring, impairment of assets,
and the write-off of cost and equity based investments. It is possible we may
record additional charges for restructuring or other asset impairments if
additional actions become necessary to align costs to a reduced level of demand,
or respond to increased competition, regulatory actions, or other factors
impacting our businesses.
If the markets for our products do not develop and expand as we anticipate,
demand for our products may decline, which would negatively impact our results
of operations and financial performance
The markets for our products are characterized by rapidly changing
technologies, evolving industry government standards and frequent new product
introductions. Our success is expected to depend, in substantial part, on the
timely and successful introduction of new products, upgrades of current products
to comply with emerging industry government standards, our ability to acquire
technologies needed to remain competitive and our ability to address competing
technologies and products. In addition, the following factors related to our
products and the markets for them, if not achieved, could have an adverse impact
on our results of operations and financial performance:
. our ability to introduce leading products such as glass substrates for
liquid crystal displays, optical fiber and cable and hardware and
equipment, and environmental substrate products that can command
competitive prices in the marketplace;
. our ability to maintain or achieve a favorable sales mix of large
generation sizes of liquid crystal display glass;
. our ability to continue to develop new product lines to address our
customers' diverse needs within the several market segments that we
participate in, which requires a high level of innovation, as well as
the accurate anticipation of technological and market trends;
. our ability to develop new products in response to favorable
government regulations and laws driving customer demand, particularly
environmental substrate diesel filter products in the Environmental
Technologies segment and Telecommunications segment products
associated with fiber-to-the-premises;
. continued strong demand for notebook computers;
. the rate of substitution by end-users purchasing LCD monitors to
replace cathode ray tube monitors;
. the rate of growth in purchases of LCD televisions to replace other
technologies;
. fluctuations in inventory levels in the supply chain of LCD-based
consumer electronics and fiber-to-the-premises products;
. the ability to reallocate LCD glass to other customers in response to
canceled orders; or
. the rate of growth of the fiber-to-the-premises build-out in North
America.
We face pricing pressures in each of our leading businesses that could adversely
affect our results of operations and financial performance
We periodically face pricing pressures in each of our leading businesses as
a result of intense competition, emerging new technologies, or over-capacity.
While we will work toward reducing our costs to respond to the pricing pressures
that may continue, we may not be able to achieve proportionate reductions in
costs. As a result of overcapacity and the current economic and industry
downturn in the Telecommunications segment, pricing pressures continued in 2005,
particularly in our optical fiber and cable products. We anticipate pricing
pressures will continue into 2006 and beyond. Increased pricing pressure may
develop in our Display Technologies segment as our customers strive to reduce
their costs and our competitors strive to expand production.
We have incurred, and may in the future incur, goodwill and other intangible
asset impairment charges
At June 30, 2005, Corning had goodwill of $277 million and other intangible
assets of $106 million. While we believe the estimates and judgments about
future cash flows used in the goodwill impairment tests are reasonable, we
cannot provide assurance that future impairment charges will not be required if
the expected cash flow estimates as projected by management do not occur or
change based on market conditions.
We may be limited in our ability to obtain additional capital on commercially
reasonable terms
Although we believe existing cash, short-term investments and borrowing
capacity, collectively, provide adequate resources to fund ongoing operating
requirements, we may be required to seek additional financing to compete
effectively in our markets. Our public debt ratings affect our ability to raise
capital and the cost of such capital. Our ratings as of July 29, 2005 were BBB-
from both Fitch, Inc. and Standard & Poor's, a division of the McGraw-Hill
Companies, Inc. and Ba2 from Moody's Investors Service, a subsidiary of Moody's
Corporation. Any downgrades may increase our borrowing costs and affect our
ability to access the debt capital markets.
We are subject under our revolving credit facility to financial covenants
that require us to maintain a ratio of total debt to capital and interest
coverage ratio, as defined under the revolving credit facility. These covenants
may limit our ability to borrow funds. Future losses or significant charges
could materially affect these ratios, which may reduce the amounts we are able
to borrow under our revolving credit facility.
If our products or materials purchased from our suppliers experience performance
issues, our business will suffer
Our business depends on the production of excellent products of
consistently high quality. To this end, our products, including materials
purchased from our suppliers, are tested for quality both by us and our
customers. Nevertheless, our products are highly complex, and our customers'
testing procedures are limited to evaluating our products under likely and
foreseeable failure scenarios. For various reasons (including, among others, the
occurrence of performance problems unforeseeable in testing), our products and
materials purchased from our suppliers may fail to perform as expected.
Performance issues could result from faulty design or problems in manufacturing
or testing. We have experienced such performance issues in the past and remain
exposed to such performance issues. In some cases, product redesigns or
additional capital equipment may be required to correct a defect. In addition,
any significant or systemic product failure could result in customer relations
problems and harm the future sales of our products.
We face intense competition in most of our businesses
We expect that we will face additional competition from existing
competitors, low cost manufacturers and new entrants. Because some of the
markets in which we compete have been historically characterized by rapid growth
and are characterized by rapid technology changes, smaller niche and start-up
companies, or companies with lower operating costs may become our principal
competitors in the future. We must invest in research and development, expand
our engineering, manufacturing and marketing capabilities, and continue to
improve customer service and support in order to remain competitive. We cannot
provide assurance that we will be able to maintain or improve our competitive
position.
We may experience difficulties in enforcing our intellectual property rights and
we may be subject to claims of infringement of the intellectual property rights
of others
We may encounter difficulties in protecting our intellectual property
rights or obtaining rights to additional intellectual property necessary to
permit us to continue or expand our businesses. We cannot assure you that the
patents that we hold or may obtain will provide meaningful protection against
our competitors or competitive technologies. Litigation may be necessary to
enforce our intellectual property rights, to protect our trade secrets and to
determine the validity and scope of our proprietary rights. Litigation is
inherently uncertain and the outcome is often unpredictable. Other companies
hold patents on technologies used in our industries and are aggressively seeking
to expand, enforce and license their patent portfolios.
The intellectual property rights of others could inhibit our ability to
introduce new products. We are, and may in the future be, subject to claims of
intellectual property infringement or misappropriation that may result in loss
of revenue or require us to incur substantial costs. We cannot assure you as to
the outcome of such claims.
Current or future litigation may harm our financial condition or results of
operations
Pending, threatened or future litigation is subject to inherent
uncertainties. Our financial condition or results of operations may be adversely
affected by unfavorable outcomes, expenses and costs exceeding amounts estimated
or insured. In particular, we have been named as a defendant in numerous
lawsuits against PCC and several other defendants involving claims alleging
personal injury from exposure to asbestos. As described in Legal Proceedings,
our negotiations with the representatives of asbestos claimants have produced a
tentative settlement, but certain cases may still be litigated and the final
approval of the tentative settlement is subject to a number of uncertainties.
Final approval of a global settlement through the PCC bankruptcy process may
impact the results of operations for the period in which such costs, if any, are
recognized. Total charges of $567 million have been incurred through June 30,
2005; however, additional charges are possible due to the potential fluctuation
in the price of our common stock, other adjustments in the proposed settlement,
and other litigation factors.
We face risks related to our international operations and sales
We have customers and significant operations, including manufacturing and
sales, located outside the U.S. We have large manufacturing operations for
liquid crystal display glass substrates in the Asia-Pacific region, including
equity investments in companies operating in South Korea that make liquid
crystal display glass and in China that make telecommunications products, and
several significant customers are located in this region. As a result of these
and other international operations, we face a number of risks, including:
. geographical concentration of our factories and operations;
. major health concerns such as Severe Acute Respiratory Syndrome
(SARS);
. difficulty of effectively managing our diverse global operations;
. change in regulatory requirements;
. tariffs, duties and other trade barriers including anti-dumping
duties;
. undeveloped legal systems; and
. political and economic instability in foreign markets.
Any of these items could cause our sales and/or profitability to be
significantly reduced.
We face risks through our equity method investments in companies that we do not
control
Corning's net income includes significant equity in earnings of associated
companies. For the six months ended June 30, 2005, we have recognized $338
million of equity earnings, of which $310 million came from our two largest
investments; Dow Corning Corporation (which makes silicone products) and Samsung
Corning Precision Glass Co., Ltd. (which makes liquid crystal display glass).
Samsung Corning Precision is located in the Asia-Pacific region and, as such, is
subject to those geographic risks referred to above. With 50% or lower
ownership, we do not control such equity companies nor their management and
operations. Performance of our equity investments may not continue at the same
levels in the future. During 2003, we recognized charges associated with Samsung
Corning Co., Ltd. (our 50% equity method investment that makes glass panels and
funnels for conventional televisions), which recorded significant fixed asset
impairment charges. As the conventional television market will be negatively
impacted by strong growth in the LCD glass market, it is reasonably possible
that Samsung Corning Co., Ltd. may incur additional restructuring or impairment
charges or net operating losses in the future.
We face risks due to foreign currency fluctuations
Because we have significant customers and operations outside the U.S.,
fluctuations in foreign currencies, especially the Japanese yen and Euro, affect
our sales and profit levels. Foreign exchange rates may make our products less
competitive in countries where local currencies decline in value relative to the
dollar. Sales in our Display Technologies segment are denominated in Japanese
yen. For the six months ended June 30, 2005, the Display Technologies segment
represented 34% of Corning's sales. Based on the expected sales growth of the
Display Technologies segment, our exposure to currency fluctuations is
increasing. Although we hedge significant transaction risk, we do not currently
hedge translation risk.
If the financial condition of our customers declines, our credit risks could
increase
We have experienced, and in the future may experience, losses as a result
of our inability to collect our accounts receivable, as well as the loss of such
customer's ongoing business. If our customers fail to meet their payment
obligations to us, including deposits due under long-term purchase and supply
agreements in our Display Technologies segment, we could experience reduced cash
flows and losses in excess of amounts reserved. As of June 30, 2005, reserves
for trade receivables totaled approximately $27 million.
We may not have adequate insurance coverage for claims against us
We face the risk of loss resulting from, and adverse publicity associated
with, product liability, securities, fiduciary liability, intellectual property,
antitrust, contractual, warranty, fraud and other lawsuits, whether or not such
claims are valid. In addition, our product liability, fiduciary, directors and
officers, property and comprehensive general liability insurance may not be
adequate to cover such claims or may not be available to the extent we expect.
Our insurance costs have increased and may increase further. We may not be able
to get adequate insurance coverage in the future at acceptable costs. A
successful claim that exceeds or is not covered by our policies could require us
to pay substantial sums. Some of the carriers in our excess insurance programs
are in liquidation and may not be able to respond if we should have claims
reaching into excess layers. The financial health of other insurers may
deteriorate and these insurers may not be able to respond if we should have
claims reaching into excess layers. In addition, we may not be able to insure
against certain risks or obtain some types of insurance, such as terrorism or
war insurance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
There have been no material changes to our market risk exposures during the
first six months of 2005. For a discussion of our exposure to market risk, refer
to Item 7A, Quantitative and Qualitative Disclosures About Market Risks,
contained in our 2004 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Corning carried out an evaluation, under the supervision and with the
participation of Corning's management, including Corning's chief executive
officer and its chief financial officer, of the effectiveness of the design and
operation of Corning's disclosure controls and procedures as of June 30, 2005,
the end of the period covered by this report. Based upon the evaluation, the
chief executive officer and chief financial officer concluded that Corning's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by Corning in reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
During the fiscal quarter covered by this report, there was one significant
change in our system of internal controls. On May 1, 2005, we opened a shared
services transaction processing center (the "center") located in Shanghai,
China. The center began processing transactions on behalf of our operations in
Japan. The transactions include general ledger processing, and operational
transactions primarily in the area of the revenue and payables cycles.
Additional sites in the Asia region will migrate similar processing of
transactions to the center in subsequent quarters. We have taken appropriate
action to ensure the design effectiveness of internal control over financial
reporting was implemented as of the end of the current quarter, and will
continue to be maintained as additional sites transition processes to the
center.
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
Environmental Litigation. Corning has been named by the Environmental Protection
Agency (the Agency) under the Superfund Act, or by state governments under
similar state laws, as a potentially responsible party at 11 active hazardous
waste sites. Under the Superfund Act, all parties who may have contributed any
waste to a hazardous waste site, identified by such Agency, are jointly and
severally liable for the cost of cleanup unless the Agency agrees otherwise. It
is Corning's policy to accrue for its estimated liability related to Superfund
sites and other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued $13 million for its estimated liability for
environmental cleanup and litigation at June 30, 2005. Based upon the
information developed to date, management believes that the accrued reserve is a
reasonable estimate of the Company's liability and that the risk of an
additional loss in an amount materially higher than that accrued is remote.
Schwinger and Stevens Toxins Lawsuits. In April 2002, Corning was named as a
defendant in two actions, Schwinger and Stevens, filed in the U.S. District
Court for the Eastern District of New York, which asserted various personal
injury and property damage claims against a number of corporate defendants.
These claims allegedly arise from the release of toxic substances from a
Sylvania nuclear materials processing facility near Hicksville, New York.
Amended complaints naming 205 plaintiffs and seeking damages in excess of $3
billion were served in September 2002. The sole basis of liability against
Corning was plaintiffs' claim that Corning was the successor to Sylvania-Corning
Nuclear Corporation (Sylvania-Corning), a Delaware corporation formed in 1957
and dissolved in 1960. Management intends to vigorously contest all claims
against Corning for the reason that Corning is not the successor to
Sylvania-Corning. Management will also defend on the grounds that almost all of
the wrongful death claims and personal injury claims are time-barred. At a
status conference in December 2002, the Court decided to "administratively
close" the Schwinger and Stevens cases and ordered plaintiffs' counsel to bring
new amended complaints with "bellwether" plaintiffs. In these actions, known as
Schwinger II and Astuto, the plaintiffs have not named Corning as a defendant.
Although it appears that plaintiffs may proceed only against the other corporate
defendants, the original Schwinger and Stevens cases remain pending, and no
order has been entered dismissing Corning. Based upon the information developed
to date, and recognizing that the outcome of litigation is uncertain, management
believes that the likelihood of a materially adverse impact to Corning's
financial statements is remote.
Dow Corning Bankruptcy. Corning and The Dow Chemical Company (Dow Chemical) each
own 50% of the common stock of Dow Corning Corporation (Dow Corning), which was
in reorganization proceedings under Chapter 11 of the U.S. Bankruptcy Code
between May 1995 and June 2004. Dow Corning filed for bankruptcy protection to
address pending and claimed liabilities arising from many thousand
breast-implant product lawsuits. On June 1, 2004, Dow Corning emerged from
Chapter 11 with a Plan of Reorganization (the Plan) which provided for the
settlement or other resolution of implant claims and includes releases for
Corning and Dow Chemical as shareholders in exchange for contributions to the
Plan.
Under the terms of the Plan, Dow Corning has established and is funding a
Settlement Trust and a Litigation Facility to provide a means for tort claimants
to settle or litigate their claims. Dow Corning has paid approximately $1.6
billion (inclusive of insurance) to the Settlement Trust and subject to a number
of conditions, may pay up to an additional $1.6 billion ($710 million after-tax)
over 16 years. Dow Corning has satisfied the claims of its commercial creditors,
except that certain commercial creditors continue to pursue an appeal to the
U.S. Court of Appeals of the Sixth Circuit seeking from Dow Corning an
additional sum of approximately $80 million for interest at default rates and
enforcement costs. Corning believes the risk of loss to Dow Corning (net of
amounts reserved) is remote.
In addition, Dow Corning has received a statutory notice of deficiency from the
United States Internal Revenue Service asserting tax deficiencies totaling
approximately $65 million relating to its federal income tax returns for the
1995 and 1996 calendar years. This matter is pending before the U.S. District
Court in Michigan. Dow Corning has also received a proposed adjustment from the
IRS (approximately $117 million) with respect to its federal income tax returns
for the 1997, 1998 and 1999 calendar years. Dow Corning is vigorously contesting
these deficiencies and proposed adjustments which it believes are excessive.
In 1995, Corning fully impaired its investment in Dow Corning upon its entry
into bankruptcy proceedings and did not recognize net equity earnings from the
second quarter of 1995 through the end of 2002. Corning began recognizing equity
earnings in the first quarter of 2003 when management concluded that its
emergence from bankruptcy protection was probable. Corning considers the
difference between the carrying value of its investment in Dow Corning and its
50% share of Dow Corning's equity to be permanent. This difference is $249
million. Subject to future rulings by the bankruptcy court and potential changes
in estimated bankruptcy-related liabilities, it is possible that Dow Corning may
record bankruptcy-related charges in the future. Corning received $15 million in
dividends from Dow Corning in the second quarter of 2005.
Federal Securities Cases. From December 2001 through April 2002, Corning and
three of its officers and directors were named defendants in lawsuits alleging
(a) violations of the U.S. securities laws in connection with Corning's November
2000 offering of 30 million shares of common stock and $2.7 billion zero coupon
convertible debentures, due November 2015 and (b) misleading disclosures and
non-disclosures that allegedly inflated the price of Corning's common stock in
the period from October 2000 through July 9, 2001. On April 12, 2004, the U.S.
District Court of the Western District of New York entered a decision and order
dismissing plaintiffs' complaint. That dismissal was affirmed by the U.S. Court
of Appeals of the Second Circuit by an order entered on March 30, 2005. The
dismissal of the complaint is now final.
Pittsburgh Corning Corporation. Corning and PPG Industries, Inc. (PPG) each own
50% of the capital stock of Pittsburgh Corning Corporation (PCC). Over a period
of more than two decades, PCC and several other defendants have been named in
numerous lawsuits involving claims alleging personal injury from exposure to
asbestos. On April 16, 2000, PCC filed for Chapter 11 reorganization in the U.S.
Bankruptcy Court for the Western District of Pennsylvania. As of the bankruptcy
filing, PCC had in excess of 140,000 open claims and had insufficient remaining
insurance and assets to deal with its alleged current and future liabilities.
More than 100,000 additional claims have been filed with PCC after its
bankruptcy filing. As a result of PCC's bankruptcy filing, Corning recorded an
after-tax charge of $36 million in 2001 to fully impair its investment in PCC
and discontinued recognition of equity earnings. At the time PCC filed for
bankruptcy protection, there were approximately 12,400 claims pending against
Corning in state court lawsuits alleging various theories of liability based on
exposure to PCC's asbestos products and typically requesting monetary damages in
excess of one million dollars per claim. Corning has defended those claims on
the basis of the separate corporate status of PCC and the absence of any facts
supporting claims of direct liability arising from PCC's asbestos products.
Corning is also currently named in approximately 11,500 other cases
(approximately 44,500 claims) alleging injuries from asbestos and similar
amounts of monetary damages per claim. Those cases have been covered by
insurance without material impact to Corning to date. Asbestos litigation is
inherently difficult, and past trends in resolving these claims may not be
indicators of future outcomes.
In the bankruptcy court in April 2000, PCC obtained a preliminary injunction
against the prosecution of asbestos actions arising from PCC's products against
its two shareholders to afford the parties a period of time in which to
negotiate a plan of reorganization for PCC (the PCC Plan).
On May 14, 2002, PPG announced that it had agreed with certain of its insurance
carriers and representatives of current and future asbestos claimants on the
terms of a settlement arrangement applicable to claims arising from PCC's
products.
On March 28, 2003, Corning announced that it had also reached agreement with
representatives of current and future asbestos claimants on a settlement
arrangement that was thereafter incorporated into the PCC Plan. This settlement
remains subject to a number of contingencies, including approval by the
Bankruptcy Court. Corning's settlement will require the contribution, if the
Plan is approved and becomes effective, of its equity interest in PCC, its
one-half equity interest in PCE, and 25 million shares of Corning common stock.
The settlement also requires Corning to make cash payments of $148 million (net
present value as of June 30, 2005) in six installments beginning one year after
the Plan is effective. In addition, Corning will assign policy rights or
proceeds under primary insurance from 1962 through 1984, as well as rights to
proceeds under certain excess insurance, most of which falls within the period
from 1962 through 1973. In return for these contributions, Corning expects to
receive a release and an injunction channeling asbestos claims against it into a
settlement trust under the PCC Plan.
Corning recorded an initial charge of $298 million in the period ending March
31, 2003 to reflect the settlement terms. However, the amount of the charge for
this settlement requires adjustment each quarter based upon the change in
Corning's common stock price prior to contribution of the shares to the trust.
During the second quarter of 2005, Corning recorded a charge of $137 million to
reflect the mark-to-market of Corning common stock. Beginning with the first
quarter of 2003 and through June 30, 2005, Corning recorded total net charges of
$567 million to reflect the initial settlement and subsequent mark-to-market
adjustments for the change in the value of Corning common stock.
Two of Corning's primary insurers and several excess insurers have commenced
litigation for a declaration of the rights and obligations of the parties under
insurance policies, including rights that may be affected by the settlement
arrangement described above. Corning is vigorously contesting these cases.
Management is unable to predict the outcome of this insurance litigation.
The PCC Plan received a favorable vote from creditors in March 2004. Hearings to
consider objections to the Plan were held in the Bankruptcy Court in May 2004.
The parties filed post-hearing briefs and made final oral arguments to the
Bankruptcy Court in November 2004. The Bankruptcy Court allowed an additional
round of briefing to address current case law developments and heard additional
oral arguments on March 16, 2005. In mid-April 2005, the proponents of the PCC
Plan requested that the court rule on the pending objections. If the Bankruptcy
Court does not approve the PCC Plan in its current form, changes to the Plan are
probable as it is likely that the Court will allow the proponents time to
propose amendments. The outcome of these proceedings is uncertain, and
confirmation of the current Plan or any amended Plan is subject to a number of
contingencies. However, apart from the quarterly mark-to-market adjustment in
the value of the 25 million shares of Corning stock, management believes that
the likelihood of a material adverse impact to Corning's financial statements is
remote.
Astrium. In December of 2000, Astrium, SAS and Astrium, Ltd. filed a complaint
for negligence in the U.S. District Court for the Central District of California
against TRW, Inc., Pilkington Optronics Inc., Corning NetOptix, Inc. (NetOptix),
OFC Corporation and Optical Filter Corporation claiming damages in excess of
$150 million. The complaint alleges that certain cover glasses for solar arrays
used to generate electricity from solar energy on satellites sold by Astrium's
corporate successor were negligently coated by NetOptix or its subsidiaries
(prior to Corning's acquisition of NetOptix) in such a way that the amount of
electricity the satellite can produce and their effective life were materially
reduced. NetOptix has denied that the coatings produced by NetOptix or its
subsidiaries caused the damage alleged in the complaint, or that it is legally
liable for any damages that Astrium may have experienced. In April 2002, the
Court granted motions for summary judgment by NetOptix and other defendants to
dismiss the negligence claims, but permitted plaintiffs to add fraud and
negligent misrepresentation claims against all defendants and a breach of
warranty claim against NetOptix and its subsidiaries. In October 2002, the Court
again granted defendants' motions for summary judgment and dismissed the
negligent misrepresentation and breach of warranty claims. The intentional fraud
claims were dismissed against all non-settling defendants on February 25, 2003.
On March 19, 2003, Astrium appealed all of the Court's rulings regarding the
various summary judgment motions to the Ninth Circuit Court of Appeals. The
period of briefing the appeal was extended, and oral argument has not been
scheduled. Recognizing that the outcome of litigation is uncertain, management
believes that the likelihood of a materially adverse impact to Corning's
financial statements is remote.
Furukawa Electric Company. On February 3, 2003, The Furukawa Electric Company
(Furukawa) filed suit in the Tokyo District Court in Japan against Corning Cable
Systems International Corporation (CCS International) alleging infringement of
Furukawa's Japanese Patent No. 2,023,966 which relates to separable fiber ribbon
units used in optical cable. Furukawa's complaint requests slightly over 6
billion Japanese yen in damages (approximately $56 million) and an injunction
against further sales in Japan of these fiber ribbon units. CCS International
has denied the allegation of infringement, asserted that the patent is invalid,
and is defending vigorously against this lawsuit. On October 29, 2004, the Tokyo
District Court issued its ruling in favor of CCS International on both
non-infringement and patent invalidity. Furukawa has filed an appeal from this
ruling to the Tokyo Court of Appeals. Management believes that the likelihood of
a materially adverse impact to Corning's financial statements is remote.
PicVue Electronics Ltd., PicVue OptoElectronics International, Inc., and
Eglasstrek Gmbh. In June 2002, Corning brought an action in the U.S. District
Court for the Western District of New York to restrain the use of its trade
secrets relating to certain machinery used for liquid crystal display glass
melting. In July 2003, the District Court granted a preliminary injunction in
favor of Corning, subject to Corning's posting a bond. PicVue, a Taiwanese
company, filed a counterclaim alleging violations of the antitrust laws and
appealed from the granting of the preliminary injunction. The U.S. Court of
Appeals affirmed and remanded the case to the District Court to clarify its
injunction and to determine the amount of the bond. In early July 2005, Corning
reached a settlement with the two PicVue entities resolving Corning's trade
secret claim and dismissing PicVue's counterclaim, through an agreed judgment
expected to be entered by the District Court within 30 days. Corning's claims
against Eglasstrek remain for further proceedings in the District Court,
although the parties have initiated settlement discussions.
Tyco Electronics Corporation and Tyco Technology Resources, Inc. On August 13,
2003, CCS Holdings Inc. (CCS), a Corning subsidiary, filed an action in the U.S.
District Court for the Middle District of North Carolina against Tyco
Electronics Corporation and Tyco Technology Resources, Inc. (Tyco), asking the
court to declare a Tyco patent invalid, unenforceable and not infringed by CCS.
The patent generally relates to a type of connector for optical fiber cables.
Tyco filed an answer and counterclaims alleging patent infringement by CCS of
the same patent and is seeking unspecified monetary damages and an injunction.
The Court has entered a stipulated discovery plan and discovery is ongoing. The
Court also ordered that the parties conduct mediation before October 1, 2005.
Recognizing that the outcome of litigation is uncertain, management believes
that the risk of a material impact on Corning's financial statements is remote.
Grand Jury Investigation of Conventional Cathode Ray Television Glass Business.
In August 2003, Corning Asahi Video Products Company (CAV) was served with a
federal grand jury document subpoena related to pricing, bidding and customer
practices involving conventional cathode ray television glass picture tube
components. A number of employees or former employees have received a related
subpoena. CAV is a general partnership, 51% owned by Corning and 49% owned by
Asahi Glass America, Inc. CAV's only manufacturing facility in State College,
Pennsylvania closed in the first half of 2003 due to declining sales. CAV is
cooperating with the government investigation. Management is not able to
estimate the likelihood that any charges will be filed as a result of the
investigation.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
This table provides information about our purchases of our common stock during
the fiscal second quarter of 2005:
Issuer Purchases of Equity Securities (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Average Total Number of Approximate Dollar
Number Price Shares Purchased as Value of Shares that
of Shares Paid per Part of Publicly May Yet Be Purchased
Period Purchased (b) Share (b) Announced Plan (a) Under the Plan (a)
- ------------------------------------------------------------------------------------------------------------------------------------
April 1-30, 2005 55,011 $13.45 0 $0
May 1-31, 2005 235,792 $14.70 0 $0
June 1-30, 2005 66,802 $16.25 0 $0
- ------------------------------------------------------------------------------------------------------------------------------------
Total 357,605 $14.80 0 $0
- ------------------------------------------------------------------------------------------------------------------------------------
(a) During the period ended June 30, 2005, we did not have a publicly announced
program for repurchase of shares of our common stock and did not repurchase
our common stock in open-market transactions outside of such a program.
(b) This column reflects the following transactions during the fiscal second
quarter of 2005: (i) the deemed surrender to us of 336,973 shares of common
stock to pay the exercise price and to satisfy tax withholding obligations
in connection with the exercise of employee stock options, and (ii) the
surrender to us of 20,632 shares of common stock to satisfy tax withholding
obligations in connection with the vesting of restricted stock issued to
employees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) - (c) Our annual meeting of shareholders was held on April 28, 2005. At that
meeting, shareholders elected John Seely Brown, Gordon Gund, John M. Hennessy
and H. Onno Ruding as directors for terms expiring at our annual meeting of
shareholders in 2008. In addition, shareholders voted to ratify the appointment
of PricewaterhouseCoopers LLP as our independent registered public accounting
firm for fiscal year 2005 and also approved the 2005 Employee Equity
Participation Program. Those elected and the results of voting are as follows:
Nomination and Election of Directors
Name Votes For Votes Withheld
John Seely Brown 1,149,786,336 133,256,051
Gordon Gund 1,138,772,764 144,269,623
John M. Hennessy 1,231,377,503 51,664,884
H. Onno Ruding 1,242,792,837 40,249,550
James B. Flaws, James R. Houghton, James J. O'Connor, Deborah D. Rieman and
Peter F. Volanakis continued as directors for terms expiring at the annual
meeting of shareholders in 2006 and Jeremy R. Knowles, Eugene C. Sit, William D.
Smithburg, Hansel E. Tookes II and Wendell P. Weeks continued as directors for
terms expiring at the annual meeting of shareholders in 2007.
Votes For Votes Against Abstain Broker Non-Votes
Approve 2005 724,875,246 268,780,577 10,985,200 278,401,364
Employee Equity
Participation
Program
Votes For Votes Against Abstain
Ratify 1,251,194,649 23,100,931 8,746,807
appointment of
PricewaterhouseCoopers
LLP as our independent
registered public
accounting firm
for fiscal year ending
December 31, 2005
ITEM 6. EXHIBITS
Exhibit Number Exhibit Name
-------------- ------------
12 Computation of Ratio of Earnings to Fixed Charges.
31.1 Certification Pursuant to Rule 13a-15(e) and 15d-15(e),
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification Pursuant to Rule 13a-15(e) and 15d-15(e),
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNING INCORPORATED
(Registrant)
July 29, 2005 /s/ JAMES B. FLAWS
- --------------- -----------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
July 29, 2005 /s/ KATHERINE A. ASBECK
- --------------- -----------------------------------------
Date Katherine A. Asbeck
Senior Vice President and Controller
(Principal Accounting Officer)
EXHIBIT INDEX
-------------
Exhibit Number Exhibit Name
- -------------- ------------
12 Computation of Ratio of Earnings to Fixed Charges.
31.1 Certification Pursuant to Rule 13a-15(e) and 15d-15(e),
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification Pursuant to Rule 13a-15(e) and 15d-15(e),
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Exhibit 12
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratios)
Six months ended
June 30, 2005
----------------
Income before income taxes $ 145
Adjustments:
Distributed income of equity investees 212
Fixed charges net of capitalized interest 78
--------
Income before taxes and fixed charges, as adjusted $ 435
========
Fixed charges:
Interest expense (a) $ 65
Portion of rent expense which represents an
appropriate interest factor (b) 13
Capitalized interest 11
--------
Total fixed charges 89
Capitalized interest (11)
--------
Total fixed charges, net of capitalized interest $ 78
========
Ratio of earnings to fixed charges 4.9x
========
(a) Interest expense includes amortization expense for capitalized interest and
debt costs.
(b) One-third of net rent expense is the portion deemed representative of the
interest factor.
Exhibit 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Wendell P. Weeks, President and Chief Executive Officer of Corning
Incorporated, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Corning Incorporated
(the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
July 29, 2005
/s/ Wendell P. Weeks
-------------------------------------
Wendell P. Weeks
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION
I, James B. Flaws, Vice Chairman and Chief Financial Officer, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Corning Incorporated
(the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
July 29, 2005
/s/ James B. Flaws
-----------------------------------------
James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
Exhibit 32
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 June 30, 2005 as filed with the Securities and
Exchange Commission on the date hereof (the Report), we, Wendell P. Weeks,
President and Chief Executive Officer, and James B. Flaws, Vice Chairman and
Chief Financial Officer, of the Company, certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: July 29, 2005
/s/ Wendell P. Weeks
-----------------------------------------
Wendell P. Weeks
President and Chief Executive Officer
/s/ James B. Flaws
-----------------------------------------
James B. Flaws
Vice Chairman and Chief Financial Officer