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, 2006
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________to____________
Commission file number 1-3247
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CORNING INCORPORATED
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(Exact name of Registrant as specified in its charter)
New York 16-0393470
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Riverfront Plaza, Corning, New York 14831
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-974-9000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
1,559,776,557 shares of Corning's Common Stock, $0.50 Par Value, were
outstanding as of July 14, 2006.
INDEX
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PART I - FINANCIAL INFORMATION
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Page
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Item 1. Financial Statements
Consolidated Statements of Operations (Unaudited) for the three
and six months ended June 30, 2006 and 2005 3
Consolidated Balance Sheets (Unaudited) at June 30, 2006 and
December 31, 2005 4
Consolidated Statements of Cash Flows (Unaudited) for the six
months ended June 30, 2006 and 2005 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 35
Item 3. Quantitative and Qualitative Disclosures About Market Risk 50
Item 4. Controls and Procedures 50
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings 52
Item 1A. Risk Factors 56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 57
Item 4. Submission of Matters to a Vote of Security Holders 58
Item 6. Exhibits 59
Signatures 60
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,
------------------------ ------------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Net sales $ 1,261 $ 1,141 $ 2,523 $ 2,191
Cost of sales 720 658 1,409 1,279
--------- --------- --------- ---------
Gross margin 541 483 1,114 912
Operating expenses:
Selling, general and administrative expenses 194 191 417 375
Research, development and engineering expenses 128 104 252 202
Amortization of purchased intangibles 3 3 6 8
Restructuring, impairment and other charges and (credits) (Note 3) 5 (1) 11 18
Asbestos settlement (Note 4) (61) 143 124 131
--------- --------- --------- ---------
Operating income 272 43 304 178
Interest income 26 13 50 23
Interest expense (18) (26) (38) (61)
Loss on repurchases and retirement of debt, net (Note 5) (11) (12) (11) (12)
Other income, net 14 20 34 11
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Income before income taxes 283 38 339 139
Provision for income taxes (Note 6) 24 44 22 63
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Income (loss) before minority interests and equity earnings 259 (6) 317 76
Minority interests (1) (5) (2) (6)
Equity in earnings of associated companies, net of impairments (Note 10) 256 176 456 345
--------- --------- --------- ---------
Net income $ 514 $ 165 $ 771 $ 415
========= ========= ========= =========
Basic earnings per common share (Note 7) $ 0.33 $ 0.11 $ 0.50 $ 0.29
========= ========= ========= =========
Diluted earnings per common share (Note 7) $ 0.32 $ 0.11 $ 0.48 $ 0.28
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except per share amounts)
June 30, December 31,
2006 2005
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Assets
Current assets:
Cash and cash equivalents $ 1,098 $ 1,342
Short-term investments, at fair value 1,377 1,092
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Total cash, cash equivalents and short-term investments 2,475 2,434
Trade accounts receivable, net of doubtful accounts and allowances - $28 and $24 633 629
Inventories (Note 9) 664 570
Deferred income taxes (Note 6) 65 44
Other current assets 198 183
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Total current assets 4,035 3,860
Investments (Note 10) 2,150 1,729
Property, net of accumulated depreciation - $3,893 and $3,632 5,032 4,675
Goodwill and other intangible assets, net (Note 11) 333 338
Deferred income taxes (Note 6) 51 10
Other assets 598 595
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Total Assets $ 12,199 $ 11,207
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt (Note 5) $ 22 $ 18
Accounts payable 705 690
Other accrued liabilities (Notes 4 and 12) 1,645 1,662
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Total current liabilities 2,372 2,370
Long-term debt (Note 5) 1,475 1,789
Postretirement benefits other than pensions 596 593
Other liabilities (Notes 4 and 12) 1,032 925
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Total liabilities 5,475 5,677
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Commitments and contingencies (Note 4)
Minority interests 40 43
Shareholders' equity:
Preferred stock - Par value $100.00 per share; Shares authorized: 10 million
Common stock - Par value $0.50 per share; Shares authorized: 3.8 billion;
Shares issued: 1,569 million and 1,552 million 787 776
Additional paid-in capital 11,872 11,548
Accumulated deficit (6,076) (6,847)
Treasury stock, at cost; Shares held: 17 million and 16 million (191) (168)
Accumulated other comprehensive income (Note 16) 292 178
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Total shareholders' equity 6,684 5,487
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Total Liabilities and Shareholders' Equity $ 12,199 $ 11,207
========= =========
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,
----------------------------
2006 2005
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Cash Flows from Operating Activities:
Net income $ 771 $ 415
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 290 246
Amortization of purchased intangibles 6 8
Asbestos settlement 124 131
Loss on repurchases and retirement of debt, net 11 12
Restructuring, impairment and other charges 11 18
Stock compensation charges 62 13
Undistributed earnings of affiliated companies (239) (133)
Deferred taxes (67) 7
Restructuring payments (6) (16)
Customer deposits, net of credits issued 74 232
Employee benefit payments less than expense 23 29
Changes in certain working capital items:
Trade accounts receivable 3 (89)
Inventories (93) (39)
Other current assets (5) (40)
Accounts payable and other current liabilities, net of restructuring payments (195) (129)
Other, net (8) 20
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Net cash provided by operating activities 762 685
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Cash Flows from Investing Activities:
Capital expenditures (554) (698)
Acquisitions of businesses, net of cash received (16)
Net proceeds from sale or disposal of assets 8 17
Net increase in long-term investments and other long-term assets (77)
Short-term investments - acquisitions (1,505) (703)
Short-term investments - liquidations 1,220 762
Other, net 10
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Net cash used in investing activities (924) (612)
-------- --------
Cash Flows from Financing Activities:
Repayments of short-term borrowings and current portion of long-term debt (7) (195)
Proceeds from issuance of long-term debt, net 147
Retirements of long-term debt (334) (102)
Proceeds from issuance of common stock, net 15 344
Proceeds from the exercise of stock options 251 59
Other, net (8) (6)
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Net cash (used in) provided by financing activities (83) 247
-------- --------
Effect of exchange rates on cash 1 (28)
-------- --------
Net (decrease) increase in cash and cash equivalents (244) 292
Cash and cash equivalents at beginning of period 1,342 1,009
-------- --------
Cash and cash equivalents at end of period $ 1,098 $ 1,301
======== ========
The accompanying notes are an integral part of these statements.
Certain amounts for 2005 were reclassified to conform to 2006 classifications.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies
Basis of Presentation
In these notes, the terms "Corning," "Company," "we," "us," or "our" mean
Corning Incorporated and subsidiary companies.
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/A for the year ended December 31, 2005 (2005 Form 10-K/A).
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 2005 were reclassified to conform with 2006 classifications.
Foreign Currency Translation and Transactions
The determination of the functional currency for Corning's foreign subsidiaries
is made based on the appropriate economic and management indicators. For most
foreign operations, the local currencies are generally considered to be the
functional currencies. Prior to 2005, non-U.S. operations which did not use the
local currency as the functional currency used the U.S. dollar. 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.
For foreign subsidiary functional currency financial statements, balance sheet
accounts are translated at current exchange rates, and statements of operations
accounts are translated at average exchange rates for the year. Translation
gains and losses are recorded as a separate component of accumulated other
comprehensive income (loss) in shareholders' equity. The effects of remeasuring
non-functional currency assets and liabilities into the functional currency are
included in current earnings.
Variable Interest Entities
Corning leases certain transportation equipment from a Trust that qualifies as a
variable interest entity under FIN 46R, Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51, Revised (FIN
46R). The sole purpose of this entity is leasing transportation equipment to
Corning. Since Corning is the primary beneficiary of this entity, the financial
statements of the entity are included in Corning's consolidated financial
statements. The entity's assets are primarily comprised of fixed assets which
are collateral for the entity's borrowings. These assets, amounting to
approximately $29.1 million and $29.5 million as of June 30, 2006 and December
31, 2005, respectively, are classified as long-term assets in the consolidated
balance sheet.
Corning leases certain transportation equipment from two additional Trusts that
qualify as variable interest entities under FIN 46R. The sole purpose of the
entities is leasing transportation equipment to Corning. Corning has been
involved with these entities as lessee since the inception of the Trusts. Lease
revenue generated by these Trusts was $1.2 million and $1.2 million for the six
months ended June 30, 2006 and 2005, respectively. Corning's maximum exposure to
loss as a result of its involvement with the Trusts is estimated at
approximately $16.0 million at June 30, 2006.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
"Share-Based Payment" (SFAS 123(R)), which replaces SFAS No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123), and supercedes Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" (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. Corning implemented the provisions of SFAS 123(R) on January 1, 2006
following the "prospective adoption" transition method and accordingly began
expensing share-based payments in the first quarter of 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 graded 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 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. Effective January 1, 2006, 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 continue to follow the nominal vesting period approach for any share-based
awards granted prior to adopting SFAS 123(R) and will continue to do so for the
remaining portion of such unvested outstanding awards after adopting SFAS
123(R). Effective with the adoption of SFAS 123(R), on January 1, 2006, we now
apply the non-substantive vesting period approach to new grants that have
retirement eligibility provisions.
Refer to Note 15 (Share-based Compensation) to the Consolidated Financial
Statements for additional information.
New Accounting Standards
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 has applied the standard's guidance to
changes in accounting methods as required. The adoption of SFAS 154 was not
material to Corning's consolidated results of operations and financial
condition.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140" (SFAS
155). SFAS 155 is effective for all financial instruments acquired or issued
after January 1, 2007, and amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. This
Statement resolves issues addressed in Statement 133 Implementation Issue No.
D1, "Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets." Corning does not expect the adoption of SFAS 155 to have a
material impact on its consolidated results of operations and financial
condition.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets--an amendment of FASB Statement No. 140" (SFAS 156). This
Statement amends SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
Corning adopted SFAS No. 156 on January 1, 2006. The impact of adopting SFAS 156
was not material to Corning's consolidated results of operations and financial
condition.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109" (FIN 48). This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS No.
109, "Accounting for Income Taxes." This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. Corning is currently evaluating the impact of FIN 48 on its consolidated
results of operations and financial condition.
2. Restatement of Prior Period Financial Statements
This Note should be read in conjunction with Note 2 of the Notes to Consolidated
Financial Statements in the Company's Annual Report on Form 10K/A for the year
ended December 31, 2005 filed May 9, 2006.
The Company's management and its audit committee concluded, on April 21, 2006,
that the Company would restate previously issued consolidated financial
statements to properly account for the asbestos settlement charges and liability
and for its investment in and equity earnings of Pittsburgh Corning Europe (PCE)
from March 31, 2003, through December 31, 2005. The Company also changed the
classification of accretion on a portion of the liability to be paid in cash
from interest expense to asbestos settlement charge for the same time period.
On March 28, 2003, we announced that we had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future asbestos claims against Corning and Pittsburgh Corning Corporation (PCC),
which might arise from PCC products or operations. The proposed settlement, if
the plan is approved and becomes effective, will require Corning to relinquish
its equity interest in PCC, contribute its equity interest in Pittsburgh Corning
Europe N.V. (PCE), a Belgian corporation, and contribute 25 million shares of
Corning common stock. Corning also agreed to make cash payments with a value of
$131 million, in March 2003, over six years from the effective date of the
settlement and to assign certain insurance policy proceeds from its primary
insurance and a portion of its excess insurance at the time of the settlement.
Between March 31, 2003, and December 31, 2005, the following accounting errors
occurred:
.. Corning's asbestos settlement charges and the related liability for the
asbestos settlement did not reflect the estimated fair value at initial
recognition or subsequent changes in fair value, of certain components of
the proposed settlement offer. As a result, asbestos settlement charges for
the years 2005, 2004, and 2003 were understated by $13 million, $24
million, and $117 million, respectively, and for the three and six months
ended June 30, 2005 was understated by $6 million and $10 million,
respectively.
.. Corning incorrectly suspended recording equity earnings of PCE between
March 31, 2003, and December 31, 2005. As a result, equity in earnings of
affiliated companies for the years 2005, 2004, and 2003 was understated by
$13 million, $11 million, and $7 million, respectively, and for the three
and six months ended June 30, 2005 was understated by $4 million and $7
million, respectively.
.. Accretion on the cash portion of the asbestos settlement offer was
incorrectly recorded as interest expense resulting in both an overstatement
of interest expense and an understatement of asbestos settlement expense
for the years 2005, 2004, and 2003, by $8 million, $8 million, and $5
million, respectively, and for the three and six months ended June 30, 2005
was understated by $2 million and $4 million, respectively.
In the restated financial statements, the higher asbestos settlement charges
have been tax-effected in 2003 and the first half of 2004. As Corning provided a
valuation allowance on most of its deferred tax assets in the third quarter of
2004, that quarter reflects an increase in the valuation allowance of $55
million for the deferred tax assets related to the higher asbestos settlement
charges.
The cumulative effect of these adjustments to Corning's balance sheet as of
December 31, 2005, resulted in an increase in investments in affiliate companies
of $32 million, an increase to other accrued liabilities of $154 million, an
increase to accumulated deficit of $123 million, and an increase to accumulated
other comprehensive income of $1 million.
The Company has filed an amended Annual Report on Form 10-K/A for the year ended
December 31, 2005, and amended quarterly reports on Form 10-Q/A for quarters
ended September 30, 2005, June 30, 2005, and March 31, 2005 to restate its
historical financial statements for the periods affected.
The impacts of the restatement adjustments on the consolidated financial
statements for the comparative periods presented in this filing are summarized
below (in millions):
Consolidated Statements of Operations
Summary of Restatement Impacts
(Unaudited; in millions, except per share amounts)
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For the three months ended
June 30, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Operating expenses:
Asbestos settlement $ 137 $ 6 $ 143
Operating income (loss) 49 (6) 43
Interest expense 28 (2) 26
Income (loss) from before income taxes 42 (4) 38
Provision for income taxes (44) (44)
--------- --------- ----------
Loss before minority interests and equity earnings (2) (4) (6)
Equity in earnings of associated companies, net of impairments 172 4 176
Net income $ 165 $ 165
Basic earnings per common share $ 0.11 $ 0.11
Diluted earnings per common share $ 0.11 $ 0.11
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For the six months ended
June 30, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Operating expenses:
Asbestos settlement $ 121 $ 10 $ 131
Operating income (loss) 188 (10) 178
Interest expense 65 (4) 61
Income (loss) from before income taxes 145 (6) 139
Provision for income taxes (63) (63)
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Income (loss) before minority interests and equity earnings 82 (6) 76
Equity in earnings of associated companies, net of impairments 338 7 345
Net income $ 414 $ 1 $ 415
Basic earnings per common share $ 0.29 $ 0.29
Diluted earnings per common share $ 0.28 $ 0.28
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Consolidated Balance Sheets
Summary of Restatement Impact
(Unaudited; in millions)
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As of June 30, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Investments $ 1,546 $ 27 $ 1,573
Total Assets $ 10,397 $ 27 $ 10,424
Other accrued liabilities $ 1,214 $ 147 $ 1,361
Total current liabilities $ 2,111 $ 147 $ 2,258
Total liabilities $ 5,506 $ 147 $ 5,653
Accumulated deficit $ (6,895) $ (122) $ (7,017)
Accumulated other comprehensive income $ 68 $ 2 $ 70
Total shareholders' equity $ 4,863 $ (120) $ 4,743
Total Liabilities and Shareholders' Equity $ 10,397 $ 27 $ 10,424
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As of December 31, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Investments $ 1,697 $ 32 $ 1,729
Total Assets $ 11,175 $ 32 $ 11,207
Other accrued liabilities $ 1,508 $ 154 $ 1,662
Total current liabilities $ 2,216 $ 154 $ 2,370
Total liabilities $ 5,523 $ 154 $ 5,677
Accumulated deficit $ (6,724) $ (123) $ (6,847)
Accumulated other comprehensive income $ 177 $ 1 $ 178
Total shareholders' equity $ 5,609 $ (122) $ 5,487
Total Liabilities and Shareholders' Equity $ 11,175 $ 32 $ 11,207
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Consolidated Statements of Cash Flows
Summary of Restatement Impacts
(Unaudited; in millions)
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For the six months ended
June 30, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Cash Flows from Operating Activities:
Net income $ 414 $ 1 $ 415
Adjustments to reconcile loss from continuing operations to net
cash (used in) provided by operating activities:
Asbestos settlement charge 121 10 131
Undistributed earnings of associated companies (126) (7) (133)
Other, net 60 (4) 56
Net cash provided by operating activities $ 685 $ 685
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3. Restructuring, Impairment and Other Charges
2006 Actions
Second Quarter
- --------------
In the second quarter of 2006, we recorded a $6 million impairment charge
related to certain manufacturing operations of our Life Sciences and Specialty
Materials operating segments. We also recorded a $1 million credit relating to
the sale of a previously impaired asset.
First Quarter
- -------------
In the first quarter of 2006, we recorded a $7 million charge for a revision to
an existing restructuring plan for a German location in our Telecommunications
segment.
The following table details the charges, credits and balances of the
restructuring reserves as of and for the six months ended June 30, 2006 (in
millions):
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Six Months Remaining
ended June Revisions Net Cash reserve at
January 1, 30, 2006 to existing charges/ payments June 30,
2006 charge plans (reversals) in 2006 2006
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 36 $ 7 $ 7 $ (3) $ 40
Other charges 49 (1) (1) (3) 45
--------------------------------------------------------------------------------
Total restructuring charges $ 85 $ 6 $ 6 $ (6) $ 85
--------------------------------------------------------------------------------
Impairment of assets:
Assets to be held for use $ 6 6
Assets to be disposed of by sale or
abandonment (1) (1)
--------------------------------------
Total impairment charges 6 (1) 5
--------------------------------------
Total restructuring, impairment and
other charges $ 6 $ 5 $ 11
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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. We sold our investments in Avanex
in the second half of 2005.
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):
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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 2007, while payments for other charges will be substantially complete by
the end of 2010.
4. Commitments and Contingencies
Asbestos Settlement
On March 28, 2003, we announced that we had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future asbestos claims against us and Pittsburgh Corning Corporation (PCC),
which might arise from PCC products or operations. The proposed settlement, if
the plan is approved and becomes effective, will require Corning to relinquish
its equity interest in PCC, contribute its equity interest in Pittsburgh Corning
Europe N.V. (PCE), a Belgian corporation, and contribute 25 million shares of
Corning common stock. Corning also agreed to make cash payments with a value of
$131 million, in March 2003, over six years from the effective date of the
settlement and to assign certain insurance policy proceeds from its primary
insurance and a portion of its excess insurance at the time of the settlement.
The PCC Plan received a favorable vote from creditors in March 2004. Hearings to
consider objections to the PCC Plan were held in the Bankruptcy Court in May
2004. The parties filed post-hearing briefs and made oral arguments to the
Bankruptcy Court in November 2004. The Bankruptcy Court allowed an additional
round of briefing to address current case law developments and heard additional
oral arguments on March 16, 2005. In mid-April 2005, the proponents of the PCC
Plan requested that the court rule on the pending objections. On February 28,
2006, the Bankruptcy Court requested the proponents to amend and refile the PCC
Plan. In late April 2006, the Bankruptcy Court allowed another round of briefing
on the objections leading to additional oral arguments on July 21, 2006. The
timing of the court's decision is uncertain. If the Bankruptcy Court does not
approve the PCC Plan in its current form, changes to the Plan are probable as it
is likely that the Court will allow the proponents time to propose amendments.
The outcome of these proceedings is uncertain, and confirmation of the current
Plan or any amended Plan is subject to a number of contingencies. However, apart
from the quarterly mark-to-market adjustment in the value of the 25 million
shares of Corning stock, management believes that the likelihood of a material
adverse impact to Corning's financial statements is remote.
As discussed in Note 2 (Restatement of Prior Period Financial Statements) we
have restated prior period financial statements to correct the accounting
related to the asbestos settlement.
In the second quarter of 2006, we recorded a credit to the asbestos settlement
expense of $61 million, including $68 million reflecting the decrease in the
value of Corning's common stock from March 31, 2006 to June 30, 2006, and $7
million to adjust the estimated fair value of the other components of the
proposed asbestos settlement.
In the second quarter of 2005, we recorded asbestos settlement expense of $143
million, including $137 million for the increase in the value of Corning's
common stock from March 31, 2005 to June 30, 2005, and a $6 million charge to
adjust the estimated fair value of the other components of the proposed asbestos
settlement.
For the six months ended June 30, 2006, we recorded asbestos settlement expense
of $124 million, including $114 million reflecting the increase in the value of
Corning's common stock since December 31, 2005, and $10 million to reflect
changes in the estimated fair value of other components of the settlement offer.
For the six months ended June 30, 2005, we recorded asbestos settlement expense
of $131 million, including $121 million reflecting the increase in the value of
Corning's common stock from December 31, 2004 to June 30, 2005, and $10 million
to reflect changes in the estimated fair value of the other components of the
proposed asbestos settlement.
If the book value of the assets to be contributed to the asbestos settlement
remains lower than their carrying value, as recorded in the asbestos settlement
liability, a gain would be recognized at the time of settlement.
Since March 28, 2003, we have recorded total net charges of $942 million to
reflect the initial settlement liability and subsequent adjustments for the
change in the fair value of the components of the liability.
The fair value of the liability expected to be settled by contribution of our
investment in PCE, the fair value of 25 million shares of our common stock and
assigned insurance proceeds (in aggregate totaling $786 million at June 30,
2006) is recorded in other accrued liabilities in our consolidated balance
sheets. As the timing of this obligation's settlement will depend on future
judicial rulings (i.e., controlled by a third party and not Corning), this
portion of the PCC liability is considered a "due on demand" obligation.
Accordingly, this portion of the obligation has been classified as a current
liability, even though it is possible that the contribution could be made beyond
one year. The remaining portion of the settlement liability (totaling $156
million at June 30, 2006), 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
In the normal course of our business, we do not routinely provide significant
third-party guarantees. When provided, these guarantees have various terms, and
none of these guarantees are individually significant. Generally, third party
guarantees provided by Corning are limited to certain financial guarantees
including stand-by letters of credit and performance bonds, and the incurrence
of contingent liabilities in the form of purchase price adjustment related to
attainment of milestones.
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
2005 Form 10-K/A. The funding of the Dow Corning $150 million credit facility is
subject to events connected to the Dow Corning Bankruptcy Plan.
As of June 30, 2006, contingent guarantees at notional value totaled $343
million, compared with $339 million at December 31, 2005. We also were
contingently liable for purchase obligations of $225 million and $219 million,
at June 30, 2006 and December 31, 2005, respectively. We believe a significant
majority of these guarantees and contingent liabilities will expire without
being funded.
Corning is a defendant in various lawsuits, including environmental,
product-related suits, the Dow Corning and PCC matters discussed in Note 8 to
the consolidated financial statements in our 2005 Form 10-K/A, and is subject to
various claims which arise in the normal course of business. In the opinion of
management, the likelihood that the ultimate disposition of these matters will
have a material adverse effect on Corning's consolidated financial position,
liquidity or results of operations, is remote.
We have been named by the Environmental Protection Agency under the Superfund
Act, or by state governments under similar state laws, as a potentially
responsible party for 11 active hazardous waste sites. Under the Superfund Act,
all parties who may have contributed any waste to a hazardous waste site,
identified by such Agency, are jointly and severally liable for the cost of
cleanup unless the Agency agrees otherwise. It is our policy to accrue for the
estimated liability related to Superfund sites and other environmental
liabilities related to property owned and operated by us based on expert
analysis and continual monitoring by both internal and external consultants. We
have accrued approximately $16 million (undiscounted) for the estimated
liability for environmental cleanup and related litigation at June 30, 2006.
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.
In August 2005, Corning was named as a fourth party defendant in a class action,
Ann Muniz v. Rexnord Corp, filed in the U.S. District Court for the N.D.
Illinois, claiming an unspecified amount of damages and asserting various
personal injury and property damage claims against a number of corporate
defendants. These claims allegedly arise from the release of solvents from the
operations of several manufacturers at the Ellsworth Industrial Park into soil
and ground water. As of June 2006, the District Court allowed two cross-claims
for contribution against Corning and two third-party complaints for contribution
against Corning. The Muniz case is scheduled for trial in November 2006.
In March 2006, Corning was named as an additional party defendant in two
actions, Jana Bendik v. Precision Products, Inc. and Kevin Pote v. Ames Supply
Company, filed in the Circuit Court of Cook County, Illinois, claiming an
unspecified amount of damages and asserting personal injury and wrongful death
against a number of corporate defendants as a result of alleged ground water
contamination by releases of solvents from manufacturing operations at the
Ellsworth Industrial Park site. In May 2006, a corporate defendant filed amended
fourth party complaints in both Bendik and Pote alleging that Corning is the
alter ego of Harper-Wyman Company.
The sole basis of liability against Corning in all of the cases related to
Ellsworth Industrial Park is the claim of several corporate defendants that
Corning is the successor to and/or alter ego of Harper-Wyman Company. Corning
has denied these allegations and management intends to vigorously contest all
claims against Corning. Management is not able at this time to estimate the
range of outcomes in this matter.
5. Debt
Second Quarter
- --------------
In the second quarter of 2006, we completed the following debt transactions:
.. We redeemed the entire $125 million principal amount of our 8.3%
medium-term notes due April 4, 2025 which at the time had a book value of
$129 million.
.. We redeemed $97 million of our 6.25% Euro notes due February 18, 2010. We
recognized a loss of $8 million upon the early redemption of these notes.
.. We repurchased $96 million principal amount of our 6.3% notes due March 1,
2009. We recognized a loss of $3 million upon the repurchase of these
notes.
The following table summarizes the activities related to our debt retirements
(both current and long-term) for the six months ended June 30, 2006 and 2005 (in
millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Book Value of Cash Shares
Debentures Retired Paid Issued Loss
- ------------------------------------------------------------------------------------------------------------------------------------
2006 activity:
Debentures, 8.3%, due 2025 (1) $ 129 $ 129
Euro Notes, 6.25%, due 2010 97 105 $ (8)
Debentures, 6.3%, due 2009 96 99 (3)
Other 8 8
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2006 activity $ 330 $ 341 $ (11)
- ------------------------------------------------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Book value includes a deferred gain related to an interest rate swap on the
8.3% coupon medium-term notes due April 4, 2025 of $5 million.
6. 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,
----------------------- ----------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 24 $ 44 $ 22 $ 63
Effective tax rate 8.5% 115.8% 6.5% 45.3%
- ------------------------------------------------------------------------------------------------------------------------------------
For the second quarter ended June 30, 2006, the tax provision reflected the
following items:
.. The impact of not recording tax benefits (expenses) on losses (income)
generated in the U.S. and certain foreign jurisdictions until appropriate
levels of profitability are reached and sustained in such jurisdictions;
.. The benefit of tax holidays and investment credits in Taiwan and tax
holidays in China; and
.. The release of a valuation allowance on deferred tax assets in Australian.
In addition to the items noted above, the tax provision for the six months ended
June 30, 2006, also reflected the release of a valuation allowance on a portion
of our deferred tax assets in Germany.
As more fully described in Note 7 (Income Taxes) to the consolidated financial
statements of the 2005 Form 10-K/A, most of Corning's deferred tax assets
(primarily in the U.S. and Germany) had full valuation allowances at December
31, 2005. In the second quarter of 2006, we released a valuation allowance of
$10 million on Australian deferred tax assets. Corning's deferred tax assets in
Australia are primarily related to net operating losses that have an indefinite
carryforward period. Due to sustained profitability in Australia and positive
future earnings projections for the Australian consolidated group, it is more
likely than not that the tax benefits are realizable. As such, the valuation
allowance was released. In the first quarter of 2006, we released a valuation
allowance of $38 million on a portion of our German deferred tax assets due to
sustained profitability in certain of our German operations leading us to
conclude that it is more likely than not that the underlying tax benefits are
realizable. Our remaining valuation allowance on deferred tax assets is expected
to remain until an appropriate level of profitability is sustained or we are
able to develop tax planning strategies that enable us to conclude that it is
more likely than not that our deferred tax assets are realizable. Until then,
our tax provision will generally include only the net tax expense attributable
to certain foreign operations.
Certain foreign subsidiaries in China and Taiwan are operating under tax holiday
arrangements. The nature and extent of such arrangements vary, and the benefits
of such arrangements phase out in various years (2007 through 2010) according to
the specific terms and schedules of the relevant taxing jurisdictions. The
impact of the tax holidays on our effective tax rate is a reduction in the rate
of 10% and 54% for the second quarter ended June 30, 2006 and 2005,
respectively, and a reduction in the rate of 15% and 21% for the six months
ended June 30, 2006 and 2005, respectively.
7. Earnings Per Common Share
The reconciliation of the amounts used in the basic and diluted earnings per
common share computations follows (in millions, except per share amounts):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30,
-------------------------------------------------------------------------------
2006 2005
------------------------------------- -------------------------------------
Net Weighted- Per Share Net Weighted- Per Share
Income Average Shares Amount Income Average Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 514 1,549 $ 0.33 $ 165 1,438 $ 0.11
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Stock compensation awards 48 38
7% mandatory convertible preferred stock 32
3.50% convertible debentures 1 9
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 514 1,597 $ 0.32 $ 166 1,517 $ 0.11
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
-------------------------------------------------------------------------------
2006 2005
------------------------------------- -------------------------------------
Net Weighted- Per Share Net Weighted- Per Share
Income Average Shares Amount Income Average Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 771 1,545 $ 0.50 $ 415 1,422 $ 0.29
Effect of dilutive securities:
Stock compensation awards 49 35
7% mandatory convertible preferred stock 32
3.50% convertible debentures 3 19
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 771 1,594 $ 0.48 $ 418 1,508 $ 0.28
- ------------------------------------------------------------------------------------------------------------------------------------
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,
------------------------ -----------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Potential common shares excluded from the calculation
of diluted earnings per common share:
4.875% convertible notes 6 6
Zero coupon convertible debentures 3 3
-------------------------------------------------------------
Total 9 9
=============================================================
Stock options excluded from the calculation of diluted
earnings per common share 29 50 28 57
- ------------------------------------------------------------------------------------------------------------------------------------
8. Significant Customer
For the three and six months ended June 30, 2006, AU Optronics Corporation
(AUO), a customer of our Display Technologies segment, represented 8% and 9%,
respectively, of the company's consolidated net sales. On April 7, 2006, AUO
announced that it had signed an agreement to merge Quanta Display Inc. (QDI),
another customer of Corning's Display Technologies segment, with and into AUO.
The consolidation date of the merger is targeted for October 1, 2006. For the
three and six months ended June 30, 2006, sales to QDI represented 1% and 2%,
respectively, of Corning's consolidated net sales. There were no customers in
the three and six months ended June 30, 2005 that represented 10% or more of
consolidated net sales.
9. Inventories
Inventories comprise the following (in millions):
- --------------------------------------------------------------------------------
June 30, 2006 December 31, 2005
- --------------------------------------------------------------------------------
Finished goods $ 113 $ 135
Work in process 269 198
Raw materials and accessories 150 124
Supplies and packing materials 132 113
- --------------------------------------------------------------------------------
Total inventories $ 664 $ 570
- --------------------------------------------------------------------------------
10. Investments
Investments comprise the following (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Ownership June 30, December 31,
Interest 2006 2005
------------- ---------------- ----------------
Affiliated companies accounted for by the equity method
Samsung Corning Precision Glass Co., Ltd. 50% $ 1,137 $ 859
Dow Corning Corporation 50% 626 473
Samsung Corning Co., Ltd. 50% 226 231
All other 25%-50% (1) 157 162
------- -------
2,146 1,725
Other investments 4 4
------- -------
Total $ 2,150 $ 1,729
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Amounts reflect Corning's direct ownership interests in the respective
affiliated companies. Corning does not control any such entities.
Related party information for these investments in affiliates follows (in
millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Related Party Transactions:
Corning sales to affiliates $ 3 $ 2 $ 5 $ 3
Corning purchases from affiliates $ 21 $ 6 $ 40 $ 17
Dividends received from affiliates $ 88 $ 15 $ 217 $ 212
Royalty income from affiliates $ 25 $ 19 $ 51 $ 36
Corning transfers of assets, at cost, to affiliates $ 16 $ 26 $ 29 $ 46
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Related Party Amounts:
Balances due from affiliates $ 5 $ 34
Balances due to affiliates $ 13 $ 45
- ------------------------------------------------------------------------------------------------------------------------------------
We have contractual agreements with several of our equity affiliates which
include sales, purchasing, licensing and technology agreements.
Summarized results of operations for our three 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,
---------------------- -----------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations
Net sales $ 513 $ 383 $ 1,008 $ 700
Gross profit $ 371 $ 278 $ 733 $ 515
Net income $ 271 $ 183 $ 556 $ 348
Corning's equity in earnings of Samsung Corning Precision $ 133 $ 85 $ 273 $ 165
Related Party Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Corning purchases from Samsung Corning Precision $ 17 $ 3 $ 34 $ 12
Dividends received from Samsung Corning Precision $ 127 $ 108
Royalty income from Samsung Corning Precision $ 20 $ 15 $ 39 $ 27
Corning transfers of machinery and equipment to Samsung
Corning Precision at cost (1) $ 16 $ 26 $ 29 $ 46
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Corning purchases machinery and equipment on behalf of Samsung Corning
Precision to support its capital expansion initiatives. The machinery and
equipment are transferred to Samsung Corning Precision at our cost basis,
resulting in no revenue or gain being recognized on the transaction.
As of June 30, 2006, balances due to Samsung Corning Precision were $11 million.
No amounts were due from Samsung Corning Precision as of June 30, 2006. As of
December 31, 2005, balances due to and from Samsung Corning Precision were $41
million and $18 million, respectively.
As of June 30, 2006, Samsung Corning Precision and Samsung Corning Co., Ltd.
were two of approximately 30 co-defendants in a lawsuit filed by Seoul Guarantee
Insurance Co. and 14 other creditors. Refer to Samsung Corning Co., Ltd. section
of this note for additional information.
In February 2006, Corning made a capital contribution to Samsung Corning
Precision in the amount of 75 billion Korean won (approximately $77 million
USD). Our ownership percentage was not affected by this capital contribution.
Dow Corning Corporation (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,
----------------------- -----------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 1,062 $ 1,007 $ 2,089 $ 1,990
Gross profit $ 361 $ 357 $ 713 $ 703
Net income $ 207 $ 154 $ 345 $ 290
Corning's equity in earnings of Dow Corning (1) $ 104 $ 77 $ 173 $ 145
Dividend received from Dow Corning $ 40 $ 15 $ 40 $ 15
- ------------------------------------------------------------------------------------------------------------------------------------
Related Party Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Corning purchases from Dow Corning $ 4 $ 2 $ 7 $ 4
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Corning's equity in earnings from Dow Corning includes the following:
. During the second quarter of 2006, Dow Corning recorded a gain related
to their settlement with the IRS regarding liabilities for tax years
1992 to 2003. This settlement resolves all Federal tax issues related
to Dow Corning's implant settlement. Our equity earnings included $33
million related to this gain.
. 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.
Balances due to Dow Corning were $1 million as of June 30, 2006 and $1 million
as of December 31, 2005.
Corning and The Dow Chemical Company (Dow Chemical) each own 50% of the common
stock of Dow Corning. In May 1995, Dow Corning filed for bankruptcy protection
to address pending and claimed liabilities arising from several 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. The Plan also includes releases for Corning
and Dow Chemical as shareholders in exchange for contributions to the Plan.
Under the terms of the Plan, Dow Corning has established and is funding a
Settlement Trust and a Litigation Facility to provide a means for tort claimants
to settle or litigate their claims. Inclusive of insurance, Dow Corning has paid
approximately $1.6 billion to the Settlement Trust. As of June 30, 2006, Dow
Corning had recorded a reserve for breast implant litigation of $1.8 billion and
anticipates insurance receivables of $211 million. Certain commercial creditors
have appealed from the denial of their claim for approximately $80 million in
additional interest at default rates and enforcement costs. This appeal was
argued in July 2005 and decided on July 26, 2006. On the appeal by the
commercial creditors, the Court of Appeals vacated the decision of the District
Court and remanded for further proceedings. The management of Dow Corning is
evaluating the decision. In the second quarter of 2006, Corning's equity
earnings from Dow Corning include a gain of $33 million related to Dow Corning's
settlement with the United States Internal Revenue Service regarding liabilities
for tax years 1992 to 2003. This settlement resolves all Federal tax issues
related to Dow Corning's implant settlement. There are a number of claims in the
bankruptcy proceedings against Dow Corning awaiting resolution by the U.S.
District Court, and it is reasonably possible that Dow Corning may record
bankruptcy-related charges in the future. There are no remaining tort claims
against Corning, other than those that will be channeled by the Plan into
facilities established by the Plan or otherwise defended by the Litigation
Facility.
In 1995, Corning fully impaired its investment in Dow Corning after it filed for
bankruptcy protection. Corning did not recognize net equity earnings from the
second quarter of 1995 through the end of 2002. Corning began recognizing equity
earnings in the first quarter of 2003 when management concluded that Dow
Corning's emergence from bankruptcy 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.
As part of their contributions to the Plan, Corning and Dow Chemical have each
agreed to provide a ten-year credit facility to Dow Corning of up to $150
million ($300 million in the aggregate), subject to the terms and conditions of
the Plan.
Corning received $45 million in dividends from Dow Corning in 2005 and $40
million in the second quarter of 2006.
Other - Samsung Corning Co., Ltd. (Samsung Corning)
Samsung Corning is a South Korea-based manufacturer of glass panels and funnels
for cathode ray tube (CRT) television and display monitors.
Samsung Corning's results of operations follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
---------------------- ----------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 199 $ 193 $ 384 $ 423
Gross profit $ 14 $ 30 $ 22 $ 76
Net (loss) income $ 7 $ 1 $ (37) $ 15
Corning's equity in (losses) earnings of Samsung Corning $ 3 $ (2) $ (19) $ 6
- ------------------------------------------------------------------------------------------------------------------------------------
Related Party Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Royalty income from Samsung Corning $ 1 $ 2 $ 1 $ 5
- ------------------------------------------------------------------------------------------------------------------------------------
In the three and six months ended June 30, 2006, Corning reduced its investment
in Samsung Corning by $3 million and $24 million, respectively, due to an
impairment of long-lived assets incurred by Samsung Corning. These impairment
charges also reduced Corning's equity earnings from Samsung Corning by the same
amounts noted.
In the third quarter of 2005, Samsung Corning incurred impairment and other
charges of $212 million as a result of a decline in the projected operating
results for its cathode-ray tube (CRT) glass business. The charge, which
included certain manufacturing assets and severance and exit costs, reduced
Corning's equity earnings by $106 million in the third quarter. None of the
charges is expected to result in cash expenditures by Corning.
In 2003 and 2005, Samsung Corning recorded significant fixed asset and other
impairment charges. In the six months ended June 30, 2006, additional impairment
charges of $24 million have been recognized. In addition, previously anticipated
charges for dismantling CRT capacity are expected in the third quarter of 2006.
As the conventional television glass market will be negatively impacted by
strong growth in the LCD glass market, it is reasonably possible that Samsung
Corning may incur additional restructuring or impairment charges or operating
losses in the foreseeable future. Samsung Corning is currently investing in
several developing businesses which Samsung Corning management believes will
offset the decline in conventional television glass market over time. Should
these new businesses not achieve expected results, additional operating losses,
asset impairments and restructuring charges are likely to occur and Samsung
Corning's long-term financial viability may come into question. These events
could result in Corning incurring an impairment of its investment in Samsung
Corning. Corning management believes it is more likely than not that an
impairment of our investment will occur in the foreseeable future. Corning's
investment in Samsung Corning was $226 million at June 30, 2006.
As of March 2005, Samsung Corning Precision Glass Co., Ltd. (Samsung Corning
Precision) and Samsung Corning Co. Ltd. (Samsung Corning) were two of
approximately thirty co-defendants in a lawsuit filed by Seoul Guarantee
Insurance Co. and 14 other creditors (SGI and Creditors) for alleged breach of
an agreement that approximately thirty affiliates of the Samsung group entered
into with SGI and Creditors in September 1999. The lawsuit is pending in the
courts of Korea. According to the agreement, the Samsung affiliates agreed to
sell 3.5 million shares of Samsung Life Insurance Co., Ltd. (SLI) by December
31, 2000, which were transferred to SGI and Creditors in connection with the
petition for court receivership of Samsung Motor Inc. In the lawsuit, SGI and
Creditors allege that, in the event that the proceeds of sale of the SLI shares
is less than 2.45 trillion Korean won (approximately $2.42 billion), the Samsung
affiliates allegedly agreed to compensate SGI and Creditors for the shortfall,
by other means, including Samsung affiliates' purchase of equity or subordinated
debentures to be issued by SGI and Creditors. Any excess proceeds are to be
distributed to the Samsung affiliates. As of March 2005, the shares of Samsung
Life Insurance Co., Ltd. had not been sold. The suit asks for damages of
approximately $4.68 billion plus penalty interest. Samsung Corning Precision and
Samsung Corning combined guarantees should represent no more than 3.1% of the
Samsung affiliates' total financial obligation. Although noting that the outcome
of these matters is uncertain, Samsung Corning Precision and Samsung Corning
have stated that these matters are not likely to result in a material ultimate
loss to their financial statements. No claim in these matters has been asserted
against Corning Incorporated.
11. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30,
2006 follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Telecom- Display
munications Technologies Other (1) Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2006 $ 118 $ 9 $ 150 $ 277
Foreign currency translation and other
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2006 $ 118 $ 9 $ 150 $ 277
- ------------------------------------------------------------------------------------------------------------------------------------
(1) This balance relates to our Specialty Materials operating segment.
Other intangible assets follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 2006 December 31, 2005
-------------------------------------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Patents and trademarks $ 145 $ 95 $ 50 $ 143 $ 88 $ 55
Non-competition agreements 114 114 111 111
Other 4 1 3 4 1 3
---------------------------------- -----------------------------------
Total amortized intangible assets 263 210 53 258 200 58
---------------------------------- -----------------------------------
Unamortized intangible assets:
Intangible pension assets 3 3 3 3
---------------------------------- -----------------------------------
Total $ 266 $ 210 $ 56 $ 261 $ 200 $ 61
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets are primarily related to the Telecommunications
segment.
Estimated amortization expense related to these intangible assets is $11 million
in 2006, $11 million in 2007, $11 million in 2008, $11 million in 2009, and
insignificant thereafter.
12. Customer Deposits
In 2005 and 2004, several of Corning's customers entered into long-term purchase
and supply agreements in which Corning's Display Technologies segment will
supply large-size glass substrates to these customers over periods of up to six
years. As part of the agreements, these customers agreed to make advance cash
deposits to Corning for a portion of the contracted glass to be purchased.
During the three and six month periods ended June 30, 2006, we received $134
million and $147 million, respectively, of deposits against orders. During the
three and six months ended June 30, 2005, we received $214 million and $234
million, respectively, of deposits against orders.
Upon receipt of the cash deposits made by customers, we record a customer
deposit liability. This liability is reduced at the time of future product sales
over the life of the agreements. As product is shipped to a customer, Corning
recognizes revenue at the selling price and issues credit memoranda for an
agreed amount of the customer deposit liability. The credit memoranda are
applied against customer receivables resulting from the sale of product, thus
reducing operating cash flows in later periods as these credits are applied for
cash deposits received in earlier periods.
Customer deposits have been or will be received in the following periods (in
millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Six
months ended Remainder Estimated 2007
2004 2005 June 30, 2006 of 2006 and Beyond Total
- ------------------------------------------------------------------------------------------------------------------------------------
Customer deposits received $204 $457 $147 $24 $105 $937
- ------------------------------------------------------------------------------------------------------------------------------------
In 2005, we began issuing credit memoranda which totaled $29 million for the
fiscal year 2005. During the three and six months ended June 30, 2006, we issued
$52 million and $73 million, respectively, in credit memoranda. These credits
are not included in the above amounts. During the three and six months ended
June 30, 2005, we issued $2 million in credit memoranda.
Customer deposit liabilities were $690 million and $595 million at June 30, 2006
and December 31, 2005, respectively, of which $178 million and $164 million,
respectively, were recorded in the current portion of other accrued liabilities
in our consolidated balance sheets. Account balances reflect the impact of
translation.
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, Corning may retain certain amounts of the
customer deposits. If Corning does not deliver agreed upon product quantities,
subject to specific conditions outlined in the agreements, Corning may be
required to return certain amounts of customer deposits.
13. Employee Retirement Plans
The following table summarizes the components of net periodic benefit cost for
Corning's 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,
-------------------- -------------------- -------------------- --------------------
2006 2005 2006 2005 2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 12 $ 14 $ 31 $ 30 $ 5 $ 3 $ 8 $ 5
Interest cost 35 40 68 85 10 9 22 21
Expected return on plan assets (42) (50) (83) (102)
Amortization of net loss 8 7 17 18 1 2 4 3
Amortization of prior service cost 2 4 4 4 (1) (2) (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Total expense $ 15 $ 15 $ 37 $ 35 $ 15 $ 14 $ 32 $ 27
- ------------------------------------------------------------------------------------------------------------------------------------
Corning and certain of its domestic subsidiaries also offer postretirement plans
that provide health care and life insurance benefits for retirees and eligible
dependents. Certain employees may become eligible for such postretirement
benefits upon reaching retirement age. Prior to January 1, 2003, our principal
retiree medical plans required retiree contributions each year equal to the
excess of medical cost increases over general inflation rates. In response to
rising health care costs, effective January 1, 2003, we changed our cost-sharing
approach for retiree medical coverage. For current retirees (including surviving
spouses) and active employees eligible for the salaried retiree medical program,
we are placing a "cap" on the amount we will contribute toward retiree medical
coverage in the future. The cap will equal 120% of our 2005 contributions toward
retiree medical benefits. Once our contributions toward salaried retiree medical
costs reach this cap, impacted retirees will have to pay the excess amount in
addition to their regular contributions for coverage.
14. Hedging Activities
We operate and conduct business in many foreign countries and as a result are
exposed to movements in foreign currency exchange rates. Our exposure to
exchange rate effects includes:
.. exchange rate movements on financial instruments and transactions
denominated in foreign currencies which impact earnings, and
.. exchange rate movements upon conversion of net assets in foreign
subsidiaries for which the functional currency is not the U.S. dollar,
which impact our net equity.
Our most significant foreign currency exposures relate to Japan, Korea, Taiwan
and western European countries. We selectively enter into foreign exchange
forward and option contracts with durations generally 18 months or less to hedge
our exposure to exchange rate risk on foreign source income and purchases. The
objective of these contracts is to neutralize the impact of exchange rate
movements on our operating results.
We engage in foreign currency hedging activities to reduce the risk that changes
in exchange rates will adversely affect the eventual net cash flows resulting
from the sale of products to foreign customers and purchases from foreign
suppliers. The hedge contracts reduce the exposure to fluctuations in exchange
rates because the gains and losses associated with foreign currency balances and
transactions are generally offset with gains and losses of the hedge contracts.
Because the impact of movements in foreign exchange rates on the value of hedge
contracts offsets the related impact on the underlying items being hedged, these
financial instruments help alleviate the risk that might otherwise result from
currency exchange rate fluctuations.
The following table summarizes the notional amounts and respective fair values
of Corning's derivative financial instruments, which mature at varying dates, at
June 30, 2006 (in millions):
- --------------------------------------------------------------------------------
Notional Amount Fair Value
- --------------------------------------------------------------------------------
Foreign exchange forward contracts $ 1,304 $ 24
Foreign exchange option contracts $ 584 $ 7
- --------------------------------------------------------------------------------
The forward and option contracts we use in managing our foreign currency
exposures contain an element of risk in that the counterparties may be unable to
meet the terms of the agreements. However, we minimize this risk by limiting the
counterparties to a diverse group of highly-rated major domestic and
international financial institutions with which we have other financial
relationships. We are exposed to potential losses in the event of
non-performance by these counterparties; however, we do not expect to record any
losses as a result of counterparty default. We do not require and are not
required to place collateral for these financial instruments.
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 value 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, 2006, the notional amount of the undesignated
derivatives was $793 million.
Cash Flow Hedges
- ----------------
Corning has cash flow hedges that relate to foreign exchange forward and option
contracts. The critical terms of each cash flow hedge are identical to the
critical terms of the hedged item. Therefore, Corning utilizes the critical
terms test under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133), and the presumption is that there is no hedge
ineffectiveness as long as the critical terms of the hedge and the hedged item
do not change. During the second quarter of 2006, the critical terms of the
hedge and the hedged item did not change. We did not have any gain or loss from
hedge ineffectiveness. We did not exclude any components of a hedge's gain or
loss from the assessment of hedge effectiveness.
Corning defers net gains and losses from cash flow hedges into accumulated other
comprehensive income on the consolidated balance sheet, until such time as the
hedged item impacts earnings. At that time Corning reclassifies net gains and
losses from cash flow hedges into the same line item of the consolidated
statement of operations as where the effects of the hedged item are recorded,
typically sales, cost of sales, or royalty income. Amounts are reclassified from
accumulated other comprehensive income when the underlying hedged item impacts
earnings. At June 30, 2006, the amount of net gains expected to be reclassified
into earnings within the next 12 months is $15 million.
Fair Value Hedges
- -----------------
Corning records net gains and losses from fair value hedges into the same line
item of the consolidated statement of operations as where the effects of the
hedged item are recorded. There were no outstanding fair value hedges as of June
30, 2006, or December 31, 2005.
Net Investment in Foreign Operations
- ------------------------------------
We have issued foreign currency denominated debt that has been designated as a
hedge of the net investment in a foreign operation. The effective portion of the
changes in fair value of the debt is reflected as a component of other
accumulated comprehensive income (loss) as part of the foreign currency
translation adjustment. Net losses included in the cumulative translation
adjustment at June 30, 2006 and December 31, 2005 were $127 million and $107
million, respectively.
15. Share-based Compensation
Stock Compensation Plans
Corning's share-based compensation programs include the following: employee
stock options, time-based restricted stock, performance-based restricted stock
and the Worldwide Employee Stock Purchase Plan (WESPP). At June 30, 2006, our
stock compensation programs were in accordance with the 2005 Employee Equity
Participation Program and the 2003 Equity Plan for Non-Employee Directors
Program. Any ungranted shares from prior years will be available for grant in
the current year. Any remaining shares available for grant, but not yet granted,
will be carried over and used in the following year. At June 30, 2006, there
were 103 million shares available for grant.
On January 1, 2006 the Company adopted SFAS 123(R). SFAS 123(R) requires the
measurement and recognition of compensation cost for all share-based payment
awards made to employees and directors, including grants of employee stock
options and employee stock purchases related to the WESPP, based on estimated
fair values. Prior to the adoption of SFAS 123(R), the Company accounted for
share-based awards to employees and directors using the intrinsic value method
in accordance with APB 25 as allowed under SFAS 123. Under the intrinsic value
method, no share-based compensation cost related to stock options had been
recognized in the Company's Consolidated Statements of Operations, because the
exercise price was at least equal to the market value of the common stock on the
grant date. As a result, the recognition of share-based compensation cost was
generally limited to the expense attributed to restricted stock awards, and
stock option modifications. SFAS 123(R) is a revision of SFAS 123 and supercedes
APB 25.
The Company elected to use the modified prospective transition method upon
adoption of SFAS 123(R), which requires the application of the accounting
standard as of January 1, 2006, the first day of the Company's fiscal year 2006.
In accordance with the modified prospective transition method, the Company's
Consolidated Financial Statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R).
For share-based payment grants on or after December 1, 2005, the Company
estimated the fair value of such grants using a lattice-based option valuation
model. Prior to December 1, 2005, the Company estimated the fair value of
share-based payment awards using the Black-Scholes option pricing model. Prior
to January 1, 2006, these fair values were utilized in developing the Company's
pro forma disclosure information required under SFAS 123.
Under SFAS 123(R), for share-based payment awards granted subsequent to January
1, 2006, the fair value of awards that are expected to ultimately vest is
recognized as expense over the requisite service periods. SFAS 123(R) requires
forfeitures to be estimated at the time of the grant in order to estimate the
amount of share-based payment awards that will ultimately vest. Forfeiture rates
are based on historical rates. The estimated forfeiture rate will be adjusted if
actual forfeitures differ from its original estimates. The effect of any change
in estimated forfeitures would be recognized through a cumulative catch-up
adjustment that would be included in compensation cost in the period of the
change in estimate. For share-based payment awards granted prior to January 1,
2006, the Company will recognize the remaining unvested SFAS 123 pro forma
expense according to their remaining vesting conditions.
Share-based compensation cost recognized under SFAS 123(R) for the three and six
months ended June 30, 2006 was $30 million and $62 million, respectively, and
included (i) employee stock options, (ii) time-based restricted stock, (iii)
performance-based restricted stock and (iv) the WESPP. Shared-based compensation
recognized under APB 25 for the three and six months ended June 30, 2005 was $9
million and $16 million, respectively, and included (i) time-based restricted
stock and (ii) performance-based restricted stock. Compensation cost was
included in operating activities on the consolidated statements of cash flows
for the six months ended June 30, 2006. No tax benefits were attributed to the
share-based compensation cost because a valuation allowance was maintained for
substantially all net deferred tax assets.
On November 10, 2005, The FASB issued FASB Staff Position No. SFAS 123(R)-3,
"Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards." The alternative method includes simplified methods to establish
the beginning balance of the additional paid-in capital pool (APIC pool) related
to the tax effects of employee share-based compensation, and to determine the
subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of
the tax effects of employee share-based compensation awards that are outstanding
upon adoption of SFAS 123(R). The Company may take up to one year from initial
adoption of SFAS 123(R) to evaluate its available transition alternatives and
make its on-time election.
Share-based compensation expense recognized in the Company's results of
operations follows (in millions, except per share amounts):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
---------------------- -----------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes $ 30 $ 9 $ 62 $ 16
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 30 $ 9 $ 62 $ 16
- ------------------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 30 $ 9 $ 62 $ 16
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per Common Share - Basic:
Income from continuing operations $ 0.02 $ 0.01 $ 0.04 $ 0.01
Net income $ 0.02 $ 0.01 $ 0.04 $ 0.01
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per Common Share - Diluted:
Income from continuing operations $ 0.02 $ 0.01 $ 0.04 $ 0.01
Net income $ 0.02 $ 0.01 $ 0.04 $ 0.01
- ------------------------------------------------------------------------------------------------------------------------------------
The following table illustrates the effect on 2005 net income and earnings per
share as if the Company had applied the fair value recognition provisions of
SFAS No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This standard preceded SFAS 123(R)
and required different measurement criteria (in millions, except per share
amounts):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, 2005 June 30, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders, as reported $ 165 $ 415
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 9 16
Deduct: Total stock-based compensation expense determined under
the fair value based method, net of related tax effects (22) (42)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders, pro forma $ 152 $ 389
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per Common Share - Basic:
As reported $ 0.11 $ 0.29
Pro forma $ 0.11 $ 0.27
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per Common Share - Diluted:
As reported $ 0.11 $ 0.28
Pro forma $ 0.10 $ 0.26
- ------------------------------------------------------------------------------------------------------------------------------------
Stock Options
Our stock option plans provide non-qualified and incentive stock options to
purchase authorized but unissued or treasury shares at the market price on the
grant date and generally become exercisable in installments from one to five
years from the grant date. The maximum term of non-qualified and incentive stock
options is 10 years from the grant date.
The following table summarizes information concerning options outstanding
including the related transactions under the options plans for the six months
ended June 30, 2006:
- --------------------------------------------------------------------------------
Number of Weighted Average
Shares (000's) Exercise Price
- --------------------------------------------------------------------------------
Options Outstanding as of December 31, 2005 120,504 $ 21.67
Granted 5,500 25.51
Exercised (21,678) 11.89
Forfeited and Expired (2,232) 48.09
- --------------------------------------------------------------------------------
Options Outstanding as of June 30, 2006 102,094 $ 23.39
- --------------------------------------------------------------------------------
Options Exercisable as of June 30, 2006 83,736 $ 25.03
Options Exercisable as of December 31, 2005 97,015 $ 24.55
- --------------------------------------------------------------------------------
The following table summarizes the status of the Company's stock options as of
June 30, 2006:
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------- ---------------------------------------------
Number Weighted-Average Weighted- Aggregate Number Weighted- Aggregate
of Shares Remaining Average Intrinsic of Shares Average Intrinsic
Range of Outstanding Contractual Exercise Value Outstanding Exercise Value
Exercise Prices (in thousands) Life in Years Price (in thousands) (in thousands) Price (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
$1.54 to 3.80 9,024 6.45 $ 3.33 $ 187,636 6,002 $ 3.10 $126,165
4.06 to 6.93 13,061 6.48 4.83 251,985 12,824 4.83 247,363
7.08 to 9.95 17,549 5.87 8.36 276,577 17,397 8.36 274,150
10.05 to 15.87 23,668 7.12 12.52 274,526 16,922 12.65 194,159
16.02 to 28.25 12,827 7.75 22.20 36,380 4,626 19.10 23,248
30.01 to 59.35 10,692 4.21 46.71 10,692 46.71
60.24 to 74.09 14,936 4.10 69.43 14,936 69.43
76.03 to 111.00 337 4.19 91.62 337 91.62
- ------------------------------------------------------------------------------------------------------------------------------------
102,094 6.09 $ 23.39 $1,027,104 83,736 $ 25.03 $865,085
- ------------------------------------------------------------------------------------------------------------------------------------
The aggregate intrinsic value (market value of stock less option exercise price)
in the preceding table represents the total pretax intrinsic value, based on the
Company's average stock price on June 30, 2006, which would have been received
by the option holders had all option holders exercised their options as of that
date. The total number of in-the-money options exercisable on June 30, 2006 was
approximately 57 million. The weighted average remaining contractual life on
June 30, 2006 for outstanding and exercisable options is 6.09 and 5.53 years,
respectively.
The weighted-average grant-date fair value for options granted for the six
months ended June 30, 2006 and 2005 was $9.85 and $5.42, respectively. The total
fair value of options that vested during the six months ended June 30, 2006 and
2005 was approximately $47 million and $66 million, respectively. The
weighted-average fair value of options that vested during the six months ended
June 30, 2006 and 2005 was approximately $4.04 and $6.52, respectively.
Compensation cost related to stock options was approximately $18 million and $37
million, respectively, for the three and six months ended June 30, 2006, and $0
million for the three and six months ended June 30, 2005.
Proceeds received from the exercise of stock options were $251 million for the
six months ended June 30, 2006, which was included in financing activities on
the consolidated statements of cash flows. The total intrinsic value of options
exercised for the six months ended June 30, 2006 and 2005 was approximately $278
million and $65 million, respectively, which is currently deductible for tax
purposes. However, these tax benefits were not realized due to net operating
loss carryforwards.
Prior to January 1, 2006, all share-based awards granted by Corning specified
that the employee will continue to vest in the award after retirement without
providing any additional services. Corning accounted for this type of
arrangement by recognizing compensation cost over the nominal 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. Effective January 1, 2006, 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. For those share-based awards granted during the three
and six months ended June 30, 2006, Corning recognized approximately $2 million
and $7 million, respectively, in additional compensation cost in applying the
non-substantive vesting period approach versus the nominal period approach.
As of June 30, 2006, there was approximately $62 million of unrecognized
compensation cost related to stock options granted under the Plan. The cost is
expected to be recognized over a weighted-average period of 0.92 years.
The lattice-based valuation model, used to estimate the fair values of option
and restricted stock grants after November 30, 2005, incorporates the
assumptions (including ranges of assumptions) noted in the table below. Expected
volatilities are based on implied volatilities from traded options on Corning's
stock, historical volatility of Corning's stock, and other factors.
In estimating option grant fair value under the lattice based model, Corning
uses historical data to estimate future option exercise and employee termination
within the valuation model. Separate groups of employees that have similar
historical exercise behavior are considered separately for valuation purposes.
The expected time to exercise of options granted is derived using a regression
model and represents the period of time that options granted are expected to be
outstanding. The range given below results from certain groups of employees
exhibiting different behavior. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
The following inputs for the lattice-based valuation model were used for option
grants under our Stock Option Plans:
- --------------------------------------------------------------------------------
Three months ended Six months ended
June 30, 2006 June 30, 2006
- --------------------------------------------------------------------------------
Expected volatility 38-54% 38-54%
Weighted-average volatility 51% 50%
Expected dividends 0 0
Risk-free rate 1.8-9.4% 1.0-9.4%
Expected time to exercise (in years) 2.7-6.4 2.7-6.4
Pre-vesting departure rate 1.6-2.3% 1.5-2.3%
Post vesting departure rate 3.9-7.1% 3.9-7.1%
- --------------------------------------------------------------------------------
Incentive Stock Plans
The Corning Incentive Stock Plan permits stock grants, either determined by
specific performance goals or issued directly, in most instances, subject to the
possibility of forfeiture and without cash consideration. Shares under the
Incentive Stock Plan are generally granted at-the-money, contingently vest over
a period of 1 to 10 years, and have contractual lives of 1 to 10 years.
The fair value of each restricted stock grant under the Incentive Stock Plans
was estimated on the date of grant for performance based grants assuming that
performance goals will be achieved. The expected term for grants under the
Incentive Stock Plans is 1 to 10 years.
Time-Based Restricted Stock:
- ----------------------------
Time-based restricted stock is issued by the Company on a discretionary basis,
and is payable in shares of the Company's common stock upon vesting. The fair
value is based on the market price of the Company's stock on the grant date.
Compensation cost is recognized over the requisite vesting period and adjusted
for actual forfeitures before vesting.
The following table represents a summary of the status of the Company's
nonvested time-based restricted stock as of December 31, 2005, and changes
during the six months ended June 30, 2006:
- --------------------------------------------------------------------------------
Weighted-Average
Grant-Date
Nonvested shares Shares (000's) Fair Value
- --------------------------------------------------------------------------------
Nonvested shares at December 31, 2005 861 $ 11.86
Granted 114 25.00
Vested (171) 9.75
Forfeited (14) 12.81
- --------------------------------------------------------------------------------
Nonvested shares at June 30, 2006 790 $ 14.21
- --------------------------------------------------------------------------------
As of June 30, 2006, there was approximately $5 million of unrecognized
compensation cost related to nonvested time-based restricted stock compensation
arrangements granted under the Plan. The cost is expected to be recognized over
a weighted average period of 3.13 years. Compensation cost related to time-based
restricted stock was approximately $1 million for the six months ended June 30,
2006 and 2005.
Performance-Based Restricted Stock:
- -----------------------------------
Performance-based restricted stock vests upon the achievement of certain
targets, and are payable in shares of the Company's common stock upon vesting
typically over a three-year period. The fair value is based on the market price
of the Company's stock on the grant date and assumes that the target payout
level will be achieved. Compensation cost is recognized over the requisite
vesting period and adjusted for actual forfeitures before vesting. During the
performance period, compensation cost may be adjusted based on changes in the
expected outcome of the performance-related target.
The following table represents a summary of the status of the Company's
nonvested performance-based restricted stock units as of December 31, 2005, and
changes during the six months ended June 30, 2006:
- --------------------------------------------------------------------------------
Weighted-Average
Grant-Date
Nonvested shares Shares (000's) Fair Value
- --------------------------------------------------------------------------------
Nonvested shares at December 31, 2005 6,718 $ 14.33
Granted 1,300 12.70
Vested (702) 12.08
Forfeited (146) 13.95
- --------------------------------------------------------------------------------
Nonvested shares at June 30, 2006 7,170 $ 14.26
- --------------------------------------------------------------------------------
As of June 30, 2006, there was approximately $54 million of unrecognized
compensation cost related to nonvested performance-based restricted stock
compensation arrangements granted under the Plan. The cost is expected to be
recognized over a weighted average period of 1.42 years. Compensation cost
related to performance-based restricted stock was approximately $21 million and
$14 million for the six months ended June 30, 2006 and 2005, respectively, and
$10 million and $8 million for the three months ended June 30, 2006 and June 30,
2005, respectively.
Worldwide Employee Stock Purchase Plan
In addition to the Stock Option Plan and Incentive Stock Plans, we have a
Worldwide Employee Share Purchase Plan (WESPP). Under the WESPP, substantially
all employees can elect to have up to 10% of their annual wages withheld to
purchase our common stock. The purchase price of the stock is 85% of the lower
of the beginning-of-quarter or end-of-quarter closing market price. For the
three and six months ended June 30, 2006, approximately $1 million and $3
million, respectively, of compensation cost related to the WESPP was recorded,
and there was zero expense for the three and six months ended June 30, 2005. For
the three and six months ended June 30, 2006, approximately 0.2 million and 0.6
million shares, respectively, were purchased by employees.
16. Comprehensive Income
Components of comprehensive income (loss), on an after-tax basis where
applicable, follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
------------------------ -----------------------
2006 (b) 2005 (b) 2006 (b) 2005 (b)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 514 $ 165 $ 771 $ 415
Other comprehensive income:
Change in unrealized gain (loss) on investments, net 1 (33)
Reclassification adjustment relating to investments
included in net income, net 19
Change in unrealized gain on derivative
instruments, net 6 12 11 38
Reclassification adjustment relating to derivatives, net (10) (2) (21) (15)
Foreign currency translation adjustment, net (a) 79 (83) 128 (98)
Change in minimum pension liability (1) 1 (5) 3
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 588 $ 93 $ 885 $ 329
- ------------------------------------------------------------------------------------------------------------------------------------
(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.
(b) Other comprehensive income items for the three and six months ended June
30, 2006 and 2005 include zero net tax effect. Refer to Note 6 (Income
Taxes) for an explanation of Corning's tax paying position.
17. Operating Segments
Our reportable operating segments include Display Technologies,
Telecommunications, Environmental Technologies, and Life Sciences. The
Environmental Technologies reportable segment is an aggregation of our
Automotive and Diesel operating segments, as these two segments share similar
economic characteristics, products, customer types, production processes and
distribution methods. The following provides a brief description of the products
and markets served by each reportable segment:
.. Display Technologies - manufactures liquid crystal display glass for flat
panel displays;
.. Telecommunications - manufactures optical fiber and cable, and hardware and
equipment components for the worldwide 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 have been grouped as "All Other."
On January 1, 2006, Corning changed its measurement of segment profit or loss as
follows:
.. We removed the net impact of financing costs, such as interest expense on
debt instruments and interest costs associated with benefit plans, from
reportable segments and included these amounts in Corporate unallocated
expense.
.. We changed the allocation method for taxes to more closely reflect the
company's current tax position.
.. We removed the impact of non-cash stock compensation expense from
reportable segments and included this amount in Corporate unallocated
expense.
.. We removed the allocation of exploratory research, development and
engineering expense from reportable segments and included these amounts in
Corporate unallocated expense.
.. We changed certain other allocation methods for corporate functions.
The following provides segment information reflecting these changes in the
measurement of segment profit or loss for all periods presented.
Operating Segments (in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Display Telecom- Environmental Life All
Technologies munications Technologies Sciences Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2006
Net sales $ 461 $ 472 $ 152 $ 75 $ 101 $ 1,261
Depreciation (1) $ 68 $ 43 $ 20 $ 5 $ 10 $ 146
Amortization of purchased intangibles $ 3 $ 3
Research, development and engineering expenses (2) $ 36 $ 18 $ 31 $ 12 $ 8 $ 105
Restructuring, impairment and other charges and
(credits) (before-tax and minority interest) $ (1) $ 2 $ 4 $ 5
Income tax provision $ (21) $ (13) $ (3) $ (1) $ (38)
Earnings (loss) before minority interest and equity
earnings (loss) (3) $ 209 $ 40 $ 9 $ (2) $ 1 $ 257
Minority interests (1) (1)
Equity in earnings of affiliated companies (4) 135 1 12 148
------- ------- -------- -------- -------- --------
Net income (loss) $ 344 $ 40 $ 9 $ (2) $ 13 $ 404
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2005
Net sales $ 415 $ 415 $ 146 $ 75 $ 90 $ 1,141
Depreciation (1) $ 44 $ 46 $ 18 $ 5 $ 9 $ 122
Amortization of purchased intangibles $ 2 $ 2
Research, development and engineering expenses (2) $ 24 $ 19 $ 26 $ 9 $ 6 $ 84
Restructuring, impairment and other charges and
(credits) (before-tax and minority interest) $ 8 $ (15) $ (7)
Income tax provision $ (33) $ (7) $ (3) $ (1) $ (2) $ (46)
Earnings (loss) before minority interests and equity
earnings (loss) (3) $ 199 $ (10) $ 4 $ 1 $ 17 $ 211
Minority interests (5) (5)
Equity in earnings of affiliated companies 87 1 8 96
------- ------- -------- -------- -------- --------
Net income (loss) $ 286 $ (8) $ 4 $ 1 $ 20 $ 303
- ------------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2006
Net sales $ 1,008 $ 869 $ 307 $ 147 $ 192 $ 2,523
Depreciation (1) $ 130 $ 85 $ 40 $ 10 $ 20 $ 285
Amortization of purchased intangibles $ 6 $ 6
Research, development and engineering expenses (2) $ 66 $ 38 $ 61 $ 25 $ 16 $ 206
Restructuring, impairment and other charges and
(credits) (before-tax and minority interest) $ 6 $ 2 $ 3 $ 11
Income tax provision $ (50) $ (19) $ (3) $ (4) $ (76)
Earnings (loss) before minority interest and equity
earnings (loss) (3) $ 484 $ 38 $ 9 $ (7) $ 3 $ 527
Minority interests (2) (2)
Equity in earnings (loss) of affiliated companies (4) 277 3 (1) (1) 278
------- ------- -------- -------- -------- --------
Net income (loss) $ 761 $ 41 $ 8 $ (7) $ $ 803
- ------------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2005
Net sales $ 735 $ 842 $ 294 $ 149 $ 171 $ 2,191
Depreciation (1) $ 85 $ 92 $ 35 $ 10 $ 18 $ 240
Amortization of purchased intangibles $ 7 $ 7
Research, development and engineering expenses (2) $ 45 $ 36 $ 49 $ 17 $ 13 $ 160
Restructuring, impairment and other charges and
(credits) (before-tax and minority interest) $ 8 $ (15) $ (7)
Income tax provision $ (41) $ (15) $ (6) $ (2) $ (4) $ (68)
Earnings before minority interest and equity
earnings (3) $ 318 $ 8 $ 13 $ 5 $ 20 $ 364
Minority interests (7) (7)
Equity in earnings of affiliated companies 168 1 25 194
------- ------- -------- -------- -------- --------
Net income $ 486 $ 9 $ 13 $ 5 $ 38 $ 551
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Depreciation expense for Corning's reportable segments is recorded based on
the assets of each segment and also includes an allocation of depreciation
of corporate property not specifically identifiable to a segment.
(2) Research, development, and engineering expenses includes direct project
spending which is identifiable to a segment.
(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) In the three and six months ended June 30, 2006, equity in earnings (loss)
of affiliated companies includes charges of $3 million and $24 million,
respectively, in All Other related to impairments for Samsung Corning.
A reconciliation of reportable segment net income to consolidated net income
follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
------------------------- --------------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Net income of reportable segments $ 404 $ 303 $ 803 $ 551
Unallocated amounts:
Net financing costs (1) (2) (24) (10) (61)
Stock-based compensation expense (30) (9) (62) (15)
Exploratory research (19) (17) (40) (36)
Corporate contributions (9) (7) (17) (12)
Equity in earnings of affiliated companies,
net of impairments (2) 108 81 178 152
Asbestos settlement (3) 61 (143) (124) (131)
Other corporate items (4) 1 (19) 43 (33)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 514 $ 165 $ 771 $ 415
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Net financing costs include interest expense, interest income, and interest
costs and investment gains associated with benefit plans.
(2) Equity in earnings of affiliated companies, net of impairments includes the
following items:
. In the three and six months ended June 30, 2006, a $33 million gain
representing our share of a tax settlement relating to an IRS
examination at Dow Corning.
. In the three and six months ended June 30, 2005, a gain of $11 million
for our share of a gain on the issuance of subsidiary stock at Dow
Corning.
(3) The asbestos settlement arrangement to be incorporated into the Pittsburgh
Corning Corporation (PCC) reorganization plan, when the reorganization plan
becomes effective, will require Corning to relinquish its equity interest
in PCC, contribute its equity interest in Pittsburgh Corning Europe (PCE),
and 25 million shares of Corning common stock to a trust. Corning also
agreed to make cash payments over the six years from the effective date of
the settlement and to assign certain insurance policy proceeds from its
primary insurance and a portion of its excess insurance at the time of the
settlement. The asbestos liability requires adjustment to fair value based
upon movements in Corning's common stock price prior to contribution of the
shares to the trust as well as change in the estimated fair value of the
other components of the settlement offer. In the second quarter of 2006 and
2005, Corning recorded a credit of $61 million and a charge of $143
million, respectively, to reflect changes in the estimated fair value of
the components of the settlement offer. In the six months ended 2006 and
2005, Corning recorded a charge of $124 million and $131 million,
respectively, to reflect changes in the estimated fair value of the
components of the settlement offer.
(4) Other corporate items include the tax impact of the unallocated amounts. In
addition, the following items are also included:
. In the three and six months ended June 30, 2006, tax benefits of $10
million and $48 million, respectively, from the release of valuation
allowances for certain foreign locations.
. In the three and six months ended June 30, 2005, impairment charges of
$19 million and $25 million for an other-than-temporary decline in our
investment in Avanex below its cost basis.
. In the three months and six months ended June 30, 2005, restructuring
credits of $7 million for adjustments to prior years' reserves.
In the Display Technologies operating segment, assets increased from $3.6
billion at December 31, 2005 to $4.3 billion at June 30, 2006. The increase is
due primarily to increased capital expenditures of $378 million and equity
earnings of associated companies of $277 million for the six months ended June
30, 2006. In the Environmental Technologies reportable operating segment, assets
increased from $0.7 billion at December 31, 2005 to $0.8 billion at June 30,
2006. The increase is due primarily to increased capital expenditures of $83
million for the six months ended June 30, 2006.
The sales of each of our reportable operating segments are concentrated across a
relatively small number of customers. In the second quarter of 2006, this small
number of customers, which individually accounted for 10% or more of each
segment's sales, represented the following concentration of segment sales:
.. In the Display segment, three customers accounted for 57% of total segment
sales.
.. In the Telecommunications segment, three customers accounted for 36% of
total segment sales.
.. In the Environmental Technologies segment, three customers accounted for
73% of total segment sales.
.. In the Life Sciences segment, one customer accounted for 45% of segment
sales.
For the six months ended June 30, 2006, the following number of customers, which
individually accounted for 10% or more of each segment's sales, represented the
following concentration of segment sales:
.. In the Display segment, four customers accounted for 69% of total segment
sales.
.. In the Telecommunications segment, two customers accounted for 25% of total
segment sales.
.. In the Environmental Technologies segment, three customers accounted for
74% of total segment sales.
.. In the Life Sciences segment, one customer accounted for 44% of segment
sales.
A significant amount of specialized manufacturing capacity for our Display
Technologies segment is concentrated in Asia. It is at least reasonably possible
that the use of a facility located outside of an entity's home country could be
disrupted. Due to the specialized nature of the assets, it would not be possible
to find replacement capacity quickly. Accordingly, loss of these facilities
could produce a near-term severe impact to our display business and the Company
as a whole.
18. Subsequent Event
On July 27, 2006, Corning committed to issue $250 million aggregate principal
amount of senior unsecured notes at 7.25%. The senior notes will mature on
August 15, 2036 and were issued pursuant to Corning's existing $5 billion
universal shelf registration statement. Subject to customary closing conditions,
the transaction is expected to close on August 1, 2006. Net proceeds of the
offering will be used for general corporate purposes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our key priorities for 2006 remain unchanged from the previous two years:
protect our financial health, improve our profitability, and invest in the
future. During the second quarter of 2006, we made the following progress
against these priorities:
Financial Health
Our balance sheet remains strong, and we continued to generate positive cash
flows from operating activities. Significant activities during the second
quarter of 2006 were as follows:
.. We reduced our long-term debt in the following transactions:
. We redeemed $97 million of our 6.25% Euro notes, due in 2010;
. We repurchased $96 million of our 6.3% notes due in 2009; and
. We redeemed $125 million of our 8.3% medium-term notes due in 2025.
.. Our debt to capital ratio declined to 18%.
.. We received $134 million in deposits against orders relating to our
multi-year supply agreements with customers in the Display Technologies
segment.
.. We ended the second quarter of 2006 with $2.5 billion in cash and
short-term investments. Operating cash flow in the second quarter more than
offset our capital spending.
Profitability
For the three months ended June 30, 2006, we generated net income of $514
million or $0.32 per share compared to a net income of $165 million or $0.11 per
share for the same period in 2005. The improvement in net income was due largely
to the following items:
.. Strong volume growth in our Display Technologies and Telecommunications
operating segments.
.. An increase in equity earnings which included a gain of $33 million related
to Dow Corning's settlement with the IRS regarding liabilities for tax
years 1992 to 2003. This settlement resolves all Federal tax issues related
to Dow Corning's implant settlement.
.. Asbestos settlement gain of $61 million compared to expense of $143 million
for the same period last year resulting from the change in fair value of
Corning's asbestos settlement liability. The change in fair value for the
second quarter of 2006 is due primarily to the decrease in the value of 25
million shares of Corning's common stock to be contributed to the proposed
settlement. Refer to Note 4 (Commitments and Contingencies) to the
consolidated financial statements.
For the six months ended June 30, 2006, we generated net income of $771 million
or $0.48 per share. This represents an improvement in net income of $356 million
(or 86%) over the same period in 2005. This improvement in net income was due
primarily to strong volume growth in our Display Technologies and
Telecommunications operating segments and higher equity earnings from Samsung
Corning Precision and Dow Corning Corporation. The improvement in Samsung
Corning Precision is explained in the discussion of the performance of our
Display Technologies segment.
Investing in Our Future
We continue to invest in a wide array of technologies, with a near-term focus on
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 for the three and six months
ended June 30, 2006, increased when compared to the same periods last year and
also remained relatively constant as percentage of net sales. We believe our
current spending levels are adequate to enable us to execute our longer-term
growth strategies.
Our capital expenditures remain 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, 2006, were $274 million $554 million,
respectively. Of these amounts, $192 million and $378 million, respectively,
were directed toward our Display Technologies segment, and $33 million and $83
million, respectively, were directed toward our Environmental Technologies
segment.
Restatement of Prior Period Financial Statements
The Company and its audit committee concluded, on April 21, 2006, that the
Company would restate previously issued historical financial statements to
properly account for the asbestos settlement charges and liability and for its
investment in and equity earnings of Pittsburgh Corning Europe (PCE) from March
31, 2003, through December 31, 2005. The Company also changed the classification
of accretion on a portion of the liability to be paid in cash from interest
expense to asbestos settlement expense for the same time period.
The cumulative effect of these adjustments resulted in an increase in
investments in affiliated companies of $32 million, an increase to other accrued
liabilities of $154 million, an increase to accumulated deficit of $123 million,
and an increase to accumulated other comprehensive income of $1 million as of
December 31, 2005. To correct these errors, the Company restated its
consolidated financial statements and, on May 9, 2006, filed an amended Annual
Report on Form 10-K/A for the fiscal year ended December 31, 2005. In addition,
on May 9, 2006, the Company filed amended reports on Form 10-Q/A for the
quarters ended March 31, 2005, June 30, 2005, and September 30, 2005, to restate
the financial statements provided for those quarterly periods.
The restatement adjustments had no impact on previously reported revenue, cash
balances, compliance with any debt covenants, or the Company's revolving credit
agreement.
All information in this document reflects the impact of the restatement
described in Note 2 (Restatement of Prior Period Financial Statements) to the
consolidated financial statements.
RESULTS OF OPERATIONS
Selected highlights for the second quarter follow (dollars in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
------------------------ --------------------
2006 2005 % Change 2006 2005 % Change
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,261 $ 1,141 11% $ 2,523 $ 2,191 15%
Gross margin $ 541 $ 483 12% $ 1,114 $ 912 22%
(gross margin %) 43% 42% 44% 42%
Selling, general and administrative
expenses $ 194 $ 191 2% $ 417 $ 375 11%
(as a % of net sales) 15% 17% 17% 17%
Research, development and engineering
expenses $ 128 $ 104 23% $ 252 $ 202 25%
(as a % of net sales) 10% 9% 10% 9%
Restructuring, impairment and other
charges and (credits) $ 5 $ (1) (600)% $ 11 $ 18 (39)%
(as a % of net sales) 1%
Asbestos settlement (gain) expense $ (61) $ 143 (143)% $ 124 $ 131 (5)%
(as a % of net sales) (5)% 13% 5% 6%
Income (loss) before income taxes $ 283 $ 38 645% $ 339 $ 139 144%
(as a % of net sales) 22% 3% 13% 6%
Provision for income taxes $ (24) $ (44) (45)% $ (22) $ (63) (65)%
(as a % of net sales) (2)% (4)% (1)% (3)%
Equity in earnings of associated companies $ 256 $ 176 45% $ 456 $ 345 32%
(as a % of net sales) 20% 15% 18% 16%
Net income $ 514 $ 165 212% $ 771 $ 415 86%
(as a % of net sales) 41% 14% 31% 19%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales
For the three months ended June 30, 2006, the net sales increase compared to the
same period in 2005 was the result of year-over-year increased demand for LCD
glass substrates in our Display Technologies segment and increased volume in the
Telecommunications segment. For the six months ended June 30, 2006, the net
sales increase compared to the same period in 2005 was primarily driven by sales
of our Display Technologies segment. Net sales for all other segments were
comparable to the respective prior year periods. Sales growth was negatively
impacted by approximately $33 million and $116 million from movements in foreign
exchange rates, primarily the Japanese yen, in the three and six months ended
June 30, 2006, respectively, when compared to the same periods in 2005.
Gross Margin
As a percentage of net sales, gross margin for the second quarter of 2006 was up
slightly with the same period last year. For the six months ended June 30, 2006,
gross margin as a percentage of net sales increased 2 percentage points. The
improvement in overall dollars and as a percentage of net sales was driven by
increased volume in our Display Technologies segment.
Cost of Sales
The types of expenses included in the cost of sales line item are: raw materials
consumption, including direct and indirect materials; salaries, wages and
benefits; depreciation and amortization; production utilities;
production-related purchasing; warehousing (including receiving and inspection);
repairs and maintenance; inter-location inventory transfer costs; production and
warehousing facility property insurance; rent for production facilities; and
other production overhead.
Selling, General and Administrative Expenses
For the second quarter of 2006, selling, general, and administrative expenses
remained even when compared to the same period in 2005. As a percentage of
sales, selling, general, and administrative expenses declined approximately two
percentage points due primarily to lower compensation expense in the quarter.
The increase in selling, general, and administrative expenses for the six months
ended June 30, 2006, over the same periods last year was caused principally by
an increase in compensation costs including increased stock-based compensation
expense as a result of the Company's adoption of FAS 123R effective January 1,
2006.
The types of expenses included in the selling, general and administrative
expenses line item are: salaries, wages and benefits; stock-based compensation
expense; travel; sales commissions; professional fees; depreciation and
amortization, utilities, and rent for administrative facilities.
Share Based Compensation
Prior to January 1, 2006, the Company accounted for share-based awards granted
under the Company's stock compensation programs using the intrinsic value method
in accordance with APB 25 and SFAS 123. Under the intrinsic value method, no
share-based compensation cost related to stock options had been recognized in
the Company's consolidated statements of operations, because the exercise price
was at least equal to the market value of the common stock on the grant date. As
a result, the recognition of share-based compensation cost was generally limited
to the expense attributed to restricted stock awards, and stock option
modifications. As permitted under SFAS 123, the Company reported pro-forma
disclosures presenting results and earnings per share as if we had used the fair
value recognition provisions of SFAS 123 in the notes to the Company's
consolidated financial statements.
Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R)
using the modified prospective application method. Under the modified
prospective application method, compensation cost recognized during the
quarterly period ended June 30, 2006 includes: (a) compensation cost for all
share-based awards granted prior to, but not yet vested as of January 1, 2006
based on the grant date fair value estimated in accordance with the original
provisions of SFAS 123, and (b) compensation cost for all share-based awards
granted subsequent to January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). Compensation cost is
recognized in the consolidated statements of operations over the period during
which an employee is required to provide service in exchange for the award. In
accordance with the modified prospective application method, results for prior
periods have not been restated. The adoption of SFAS 123(R) resulted in a
decrease of $0.02 and $0.04 in basic and diluted earnings per share for the
three and six months ended June 30, 2006, respectively. See Note 1 (Significant
Accounting Policies) and Note 15 (Share-based Compensation Plans) to the
consolidated financial statements for further detail on the impact of SFAS
123(R).
Research, Development and Engineering Expenses
Research, development and engineering expenses increased in both the three and
six month periods ended June 30, 2006, compared to the respective periods last
year but remained fairly consistent as a percentage of net sales. Expenditures
are currently focused on our Display Technologies, Environmental Technologies
and Telecommunications segments as we strive to capitalize on the current market
opportunities in those segments.
Restructuring, Impairment and Other Charges
In the second quarter of 2006, we recorded a $6 million impairment charge
related to certain manufacturing operations of our Life Sciences and Specialty
Materials segments. We also recorded a $1 million credit relating to the sale of
a previously impaired asset. In the first quarter of 2006, we recorded $6
million of restructuring expenses for revisions to existing plans.
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 was accounted for as an available-for-sale security under
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." In the fourth quarter of 2005, we completed the sale of our
remaining shares of Avanex.
Refer to Note 3 (Restructuring, Impairment and Other Charges) to the
consolidated financial statements for additional information.
Asbestos Settlement
The asbestos settlement activity relates to changes in the estimated fair value
of certain items to be contributed by Corning under the Pittsburgh Corning
Corporation (PCC) asbestos settlement agreement if the PCC Plan of
Reorganization receives judicial approval. For additional information on this
matter, refer to Note 4 (Commitments and Contingencies) to the consolidated
financial statements and Part II - Other Information, Item 1. Legal Proceedings.
Income Before Income Taxes
In addition to the items identified above, the following had a material effect
on the results of our income before income taxes:
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
---------------------- ----------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Loss on repurchases and retirement of debt, net $ (11) $ (12) $ (11) $ (12)
Net exchange rate (losses) and gains $ 12 $ (14)
- ------------------------------------------------------------------------------------------------------------------------------------
Movements in exchange rates did not have a significant impact on results for the
three and six months ended June 30, 2006; however, in the first quarter of 2005,
we incurred an exchange rate loss of $26 million. This 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 tax rates follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
------------------------ -----------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 24 $ 44 $ 22 $ 63
Effective tax rate 8.5% 115.8% 6.5% 45.3%
- ------------------------------------------------------------------------------------------------------------------------------------
For the second quarter ended June 30, 2006, the tax provision reflected the
following items:
.. The impact of not recording tax benefits (expenses) on losses (income)
generated in the U.S. and certain foreign jurisdictions until appropriate
levels of profitability are reached and sustained in such jurisdictions;
.. The benefit of tax holidays and investment credits in Taiwan and tax
holidays in China; and
.. The release of a valuation allowance on Australian deferred tax assets.
In addition to the items noted above, the tax provision for the six months also
reflected the release of a valuation allowance on a portion of our German
deferred tax assets.
As more fully described in Note 7 (Income Taxes) to the consolidated financial
statements of the 2005 Form 10-K/A, most of Corning's deferred tax assets
(primarily in the U.S. and Germany) were fully reserved at December 31, 2005. In
the second quarter of 2006, we released a valuation allowance of $10 million on
Australian deferred tax assets. Corning's deferred tax assets in Australia are
primarily related to net operating losses that have an indefinite carryforward
period. Due to sustained profitability in Australia and positive future earnings
projections for the Australian consolidated group, it is more likely than not
that the tax benefits are realizable. As such, the valuation allowance was
released. In the first quarter of 2006, we released a valuation allowance of $38
million on a portion of our German deferred tax assets due to sustained
profitability in certain of our German operations leading us to conclude that it
is more likely than not that the underlying tax benefits are realizable. Our
remaining valuation allowance on future tax benefits is expected to remain until
an appropriate level of profitability is sustained or we are able to develop tax
planning strategies that enable us to conclude that it is more likely than not
that our deferred tax assets are realizable. Until then, our tax provision will
generally include only the net tax expense attributable to certain foreign
operations.
Certain foreign subsidiaries in China and Taiwan are operating under tax holiday
arrangements. The nature and extent of such arrangements vary, and the benefits
of such arrangements phase out in various years (2007 through 2010) according to
the specific terms and schedules of the relevant taxing jurisdictions. The
impact of the tax holidays on our effective tax rate is a reduction in the rate
of 10% and 54% for the second quarter ended June 30, 2006 and 2005,
respectively, and a reduction in the rate of 15% and 21% for the six months
ended June 30, 2006 and 2005, respectively.
Equity in Earnings of Affiliated Companies, Net of Impairments
The following provides a summary of equity in earnings of associated companies
(in millions):
- --------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
-------------------- -------------------
2006 2005 2006 2005
- --------------------------------------------------------------------------------
Samsung Corning Precision $ 133 $ 85 $ 273 $ 165
Dow Corning Corporation 104 77 173 145
Samsung Corning 3 (2) (19) 6
All other 16 16 29 29
------ ------ ------ ------
Total equity earnings $ 256 $ 176 $ 456 $ 345
- --------------------------------------------------------------------------------
The improvement in equity earnings recognized from Samsung Corning Precision for
both the three and six months ended June 30, 2006 compared to their respective
2005 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, 2006 compared to the respective 2005 periods is
attributable to a gain of $33 million related to Dow Corning's settlement with
the IRS regarding liabilities for tax years 1992 to 2003. This settlement
resolves all Federal tax issues related to Dow Corning's implant settlement.
Refer to Note 10 (Investments) to the consolidated financial statements for
additional information relating to Samsung Corning Precision and Dow Corning's
operating results.
In 2003 and 2005, Samsung Corning recorded significant fixed asset and other
impairment charges. In the three and six months ended June 30, 2006, additional
impairment charges of $3 million and $24 million, respectively, were recognized.
In addition, previously anticipated charges for dismantling CRT capacity are
expected in the third quarter of 2006. As the conventional television glass
market will be negatively impacted by strong growth in the LCD glass market, it
is reasonably possible that Samsung Corning may incur additional restructuring
or impairment charges or operating losses in the foreseeable future. Samsung
Corning is currently investing in several developing businesses which Samsung
Corning management believes will offset the decline in conventional television
glass market over time. Should these new businesses not achieve expected
results, additional operating losses, asset impairments and restructuring
charges are likely to occur and Samsung Corning's long-term financial viability
may come into question. These events could result in Corning incurring an
impairment of its investment in Samsung Corning. Corning management believes it
is more likely than not that an impairment of our investment will occur in the
foreseeable future. Corning's investment in Samsung Corning was $226 million at
June 30, 2006.
Refer to Note 10 (Investments) to the consolidated financial statements for
additional information relating to Samsung Corning Precision, Dow Corning, and
Samsung Corning's operating results.
Net Income
As a result of the above, our net income and per share data follow (in millions,
except per share amounts):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
---------------------- -----------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 514 $ 165 $ 771 $ 415
Basic earnings per common share $ 0.33 $ 0.11 $ 0.50 $ 0.29
Diluted earnings per common share $ 0.32 $ 0.11 $ 0.48 $ 0.28
Shares used in computing per share amounts for:
Basic earnings per common share 1,549 1,438 1,545 1,422
Diluted earnings per common share 1,597 1,517 1,594 1,508
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING SEGMENTS
Our reportable operating segments include Display Technologies,
Telecommunications, Environmental Technologies, and Life Sciences. The
Environmental Technologies reportable segment is an aggregation of our
Automotive and Diesel operating segments, as these two segments share similar
economic characteristics, products, customer types, production processes and
distribution methods. The following provides a brief description of the products
and markets served by each reportable segment:
.. Display Technologies - manufactures liquid crystal display glass for flat
panel displays;
.. Telecommunications - manufactures optical fiber and cable, and hardware and
equipment components for the worldwide 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 have been grouped as "All Other."
We prepared the financial results for our reportable segments on a basis that is
consistent with the manner in which we internally disaggregate financial
information to assist in making internal operating decisions. We include the
earnings of equity affiliates that are closely associated with our operating
segments in the respective segment's net income. We have allocated certain
common expenses among segments differently than we would for stand-alone
financial information prepared in accordance with GAAP. Segment net income may
not be consistent with measures used by other companies. The accounting policies
of our reportable segments are the same as those applied in the consolidated
financial statements.
On January 1, 2006, Corning changed its measurement of segment profit or loss as
follows:
.. We removed the net impact of financing costs, such as interest expense on
debt instruments and interest costs associated with benefit plans, from
reportable segments and included these amounts in Corporate unallocated
expense.
.. We changed the allocation method for taxes to more closely reflect the
Company's current tax position.
.. We removed the impact of non-cash stock compensation expense from
reportable segments and included this amount in Corporate unallocated
expense.
.. We removed the allocation of exploratory research, development and
engineering expense from reportable segments and included these amounts in
Corporate unallocated expense.
.. We changed certain other allocation methods for corporate functions.
The following discussion reflects segment information that has been restated to
reflect the changes to segment performance measurement as described above.
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
2006 2005 06 vs. 05 2006 2005 06 vs. 05
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 461 $ 415 11% $ 1,008 $ 735 37%
Income before equity earnings $ 209 $ 199 5% $ 484 $ 318 52%
Equity earnings of associated companies $ 135 $ 87 55% $ 277 $ 168 65%
Net income $ 344 $ 286 20% $ 761 $ 486 57%
- ------------------------------------------------------------------------------------------------------------------------------------
The net sales increase for the second quarter of 2006 continues to reflect
overall LCD market growth. During the second quarter of 2006, glass substrate
volumes (measured in square feet of glass sold) increased 38% compared with the
same period in 2005 driven by increased LCD monitor and TV market penetration,
demand for larger-size substrates, and shipments of notebook computers. The
growth in net sales was partially offset by declines in weighted average selling
prices. For the second quarter of 2006, large-size glass substrates accounted
for 79% of total sales volumes, compared to 67% for the second quarter of 2005.
Because the sales of the Display Technologies segment are denominated in
Japanese yen, our sales are susceptible to movements in the U.S. dollar -
Japanese yen exchange rate. Sales growth was negatively impacted by
approximately $31 million from a weakening of the Japanese yen compared to the
second quarter of 2005.
Although volume and sales increased over the prior year periods, volume and
sales for the second quarter of 2006 were lower than the first quarter of 2006.
This was the first quarterly sequential decline in volume for this segment since
the third quarter of 2001. The lower volume was the result of a number of our
customers, primarily in Taiwan, idling part of their facilities and thus
reducing their demand for glass, as a result of a build-up of panel inventory in
the supply chain.
For the six months ended June 30, 2006, the net sales increase is largely driven
by the same factors as those identified above. For the comparable six month
periods, glass substrate volumes increased approximately 69%, while weighted
average selling prices experienced declines in the low teens. Sales of
large-size glass substrates accounted for 80% of year to date 2006 sales volumes
compared to 63% for the same period in 2005. Movements in the U.S. dollar -
Japanese yen exchange rate negatively impacted sales by approximately $97
million for the comparable six month periods.
For the three and six months ended June 30, 2006, the increase in income before
equity earnings was primarily the result of higher volumes as described above
offset somewhat by lower prices and by the impact of a power outage at our plant
in Japan which caused a limitation on production and incremental equipment
repair costs.
The increase 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. The impact of the panel inventory build in Korea in
the second quarter of 2006 was not as significant. During the three and six
months ended June 30, 2006, Samsung Corning Precision's earnings were negatively
impacted by approximately 10% and 15%, respectively, from movements in exchange
rates compared to the same periods in 2005. Equity earnings from Samsung Corning
Precision are susceptible to movements in the U.S. dollar-Japanese yen and U.S.
dollar-Korean won exchange rates.
The Display Technologies segment has a concentrated customer base comprised of
LCD panel and color filter makers primarily located in Japan and Taiwan. For the
second quarter of 2006, AU Optronics Corporation, Chi Mei Optoelectronics
Corporation, and Sharp Corporation, each of which accounted for more than 10% of
segment net sales, accounted for 57% of total segment sales. For the six months
ended June 30, 2006, AU Optronics Corporation, Chi Mei Optoelectronics
Corporation, Sharp Corporation, and Hannstar Display Corporation, each of which
accounted for more than 10% of segment net sales, accounted for 64% of total
segment sales.
In addition, Samsung Corning Precision's sales are concentrated across a small
number of its customers. For the three and six months ended June 30, 2006, sales
to two LCD panel makers located in Korea, Samsung Electronics Co., Ltd., LG and
Phillips LCD Co., accounted for 92% of total Samsung Corning Precision sales.
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 agreed to make advance cash deposits to
Corning for a portion of the contracted glass to be purchased. In the second
quarter of 2006, Corning received $134 million of customer deposits and issued
$52 million in credit memoranda. In the six months ended June 30, 2006, Corning
received $147 million of customer deposits and issued $73 million in credit
memoranda. Refer to Note 12 (Customer Deposits) to the consolidated financial
statements for additional information.
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. The Company continues to estimate that LCD glass
market volume will grow 40% to 50% in 2006. 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 and color
filter manufacturers in Japan, Taiwan, and China while customers in Korea are
serviced by Samsung Corning Precision. The actual growth rates in these markets
will impact our sales and earnings performance.
For the third quarter of 2006, we expect volumes for our wholly owned business
and Samsung Corning Precision to be up in the range of 5% to 15% both
individually and in the aggregate, compared to the second quarter of 2006. Sales
for our wholly owned business are expected to be up due to improved volumes
offset somewhat by modest price declines. The range of outcomes in the third
quarter is dependent on the extent to which customers restart capacity idled in
the second quarter. Although we believe that end market demand for LCD
notebooks, computers, and monitors remains strong, we are cautious about the
potential negative impact that economic conditions and political tensions could
have on consumer demand, particularly in the seasonally strong second half of
the year. There can be no assurance that the end-market rates of growth will
continue at the 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 sales and 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
2006 2005 06 vs. 05 2006 2005 06 vs. 05
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 234 $ 213 10% $ 439 $ 425 3%
Hardware and equipment 238 202 18% 430 417 3%
------- -------- ------- --------
Total net sales $ 472 $ 415 14% $ 869 $ 842 3%
======= ======== ======= ========
Net income (loss) $ 40 $ (8) 600% $ 41 $ 9 356%
- ------------------------------------------------------------------------------------------------------------------------------------
For the three and six months ended June 30, 2006, increases in segment sales
were driven by improved demand in many regions and product lines offset somewhat
by continued price declines when compared to the same periods last year.
Movements in foreign exchange rates, primarily the Euro and Japanese yen, did
not have a significant impact on sales for the three and six months ended June
30, 2006, when compared to the same periods last year.
Effective April 1, 2006, ACS, an equity company affiliate, assumed
responsibility for optical cable and hardware and equipment sales in Japan. As a
result, sales for the second quarter of 2006 were negatively impacted as ACS,
which is accounted for under the equity method, began to sell into the Japanese
market. Sales of optical cable and hardware and equipment in Japan, which are
now recorded by an equity affiliate, were $16 million in the second quarter of
2005.
The increase in net income for the three and six months ended June 30, 2006,
when compared to the same periods last year was due largely to the same factors
as described above. Movements in exchange rates did not significantly impact the
results for this operating segment.
The Telecommunications segment has a concentrated customer base. For the second
quarter of 2006, three customers of the Telecommunications segment, each of
which accounted for more than 10% of segment net sales, represented 36% of total
segment sales. For the six months ended June 30, 2006, two customers, each of
which accounted for more than 10% of total segment net sales, accounted for 25%
of total segment sales.
Outlook:
- --------
For the third quarter of 2006, we expect net sales to be flat to down slightly
compared to the second quarter of 2006 driven by continued strong volumes offset
by the impact of lower pricing. Fiber-to-the-premises sales continue to be
dependent on Verizon's planned targets for homes passed and connected in 2006
which are currently expected to be strong. Changes in the expected Verizon
deployment plan, or changes to in their inventory levels of
fiber-to-the-premises products could affect the sales level.
Environmental Technologies
The following table provides net sales and other data for the Environmental
Technologies reportable operating segment (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
----------------------- % Change --------------------- % Change
2006 2005 06 vs. 05 2006 2005 06 vs. 05
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Automotive $ 113 $ 125 (10)% $ 234 $ 252 (7)%
Diesel 39 21 86% 73 42 74%
------- -------- ------- --------
Total net sales $ 152 $ 146 4% $ 307 $ 294 4%
======= ======== ======= ========
Net income $ 9 $ 4 125% $ 8 $ 13 (38)%
- ------------------------------------------------------------------------------------------------------------------------------------
Sales of this segment for the second quarter of 2006 were slightly higher than
the same period last year. The decline in automotive sales was caused by reduced
volumes due largely to a lackluster automotive market in North America. Diesel
products sales reflect continued demand from heavy-duty diesel retrofit markets.
The Company continued to negotiate with several diesel engine manufacturers to
develop supply agreements for 2007 model year platforms when tighter emission
requirements in the U.S. are expected to become effective. Negotiations are
ongoing and will likely continue for the remainder of the year. Movements in
exchange rates did not have a significant impact on sales for this segment.
For the six months ended June 30, 2006, sales reflected the same factors as
described above for the second quarter.
For the second quarter of 2006, net income was up slightly due to higher sales.
For the six months ended June 30, 2006, the decrease in net income compared to
the same period last year was primarily the result of higher engineering and
manufacturing costs to support the expected increase in production levels for
diesel products in late 2006. Movements in foreign exchange rates did not
significantly impact net income (loss) for the comparable periods.
The Environmental Technologies reportable operating segment sells to a
concentrated customer base of manufacturers of catalyzers and emission control
systems, who then sell to automotive and diesel engine manufacturers. Although
our sales are to the emission control systems manufacturers, the use of our
substrates and filters is generally required by the specifications of the
automotive and diesel engine manufacturers. For the three and six months ended
June 30, 2006, three customers of the Environmental Technologies segment, each
of which accounted for more than 10% of segment net sales, accounted for 73% and
74%, respectively, of total segment sales.
Outlook:
- --------
For the third quarter of 2006, we expect net sales of this segment to be even
when compared to the second quarter. Automotive substrate sales are expected to
be even with the prior quarter while diesel product sales are expected to
reflect a slight increase volume. The ramp in sales of heavy duty diesel
products is now expected to occur later in the year than our original
expectations due to higher purchases of heavy duty vehicles in the second half
of this year in advance of the 2007 regulations that require filters such as
ours to meet the tighter emission standards. A portion of our automotive
products are sold to U.S. auto manufacturers, and as a result, changes in
automotive production by these manufacturers could adversely impact sales and
net income of this segment.
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
2006 2005 06 vs. 05 2006 2005 06 vs. 05
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 75 $ 75 $ 147 $ 149 (1)%
Net (loss) income $ (2) $ 1 (300)% $ (7) $ 5 (240)%
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales for the three and six months ended June 30, 2006, were even with the
same period last year driven by level volumes in the US and in international
markets. Movements in foreign exchange rates did not have a significant impact
on the comparability of sales.
In the second quarter of 2006, we recorded a $6 million impairment charge
related to certain manufacturing operations of our Life Sciences segment and our
Specialty Materials segment. Approximately $2 million of this charge was related
to the assets of Life Sciences and is included in segment results.
For the three and six months ended June 30, 2006, the increase in net loss
compared to the respective 2005 periods was largely attributable to the
impairment recorded in the second quarter, manufacturing performance, and
sluggish volumes.
In the Life Sciences segment, one customer accounted for approximately 45% of
this segment's net sales for the three and six month periods ended June 30,
2006.
Outlook:
- --------
For the third quarter of 2006, we expect net sales to be down slightly from the
second quarter of 2006 due to seasonally lower sales in North America and
Europe. Net income of this segment is expected to be even with the previous
quarter due to manufacturing efficiencies offset by seasonally lower sales
volume.
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 reduced through
future product purchases, thus reducing operating cash flows in later periods as
credits are applied for cash deposits received in earlier periods.
Customer deposits have been or will be received in the following periods (in
millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Six months ended Remainder Estimated 2007
2004 2005 June 30, 2006 of 2006 and Beyond Total
- ------------------------------------------------------------------------------------------------------------------------------------
Customer deposits received $204 $457 $147 $24 $105 $937
- ------------------------------------------------------------------------------------------------------------------------------------
In 2005, we issued $29 million in credit memoranda. During the three and six
months ended June 30, 2006, we issued $52 million and $73 million, respectively,
in credit memoranda. These credit amounts are not included in the above amounts,
and were applied against customer receivables.
In 2006, we expect to issue credits of approximately $160 million. Based on the
deposit arrangements currently in place, in 2007 and 2008, credits issued will
likely exceed deposits received.
Financing Structure
Second Quarter
- --------------
In the second quarter of 2006, we completed the following debt-related
transactions:
.. We redeemed the entire $125 million principal amount of our 8.3%
medium-term notes due 2025.
.. We redeemed $97 million of our 6.25% Euro notes due 2010 and recognized a
loss of $8 million upon the early redemption of these notes.
.. We repurchased $96 million of our 6.3% notes due 2009. We recognized a loss
of $3 million associated with this repurchase.
First Quarter
- -------------
In the first quarter of 2005 we entered a written agreement with a group of
banks on a new revolving credit facility. The facility provided 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 ratio and
an interest coverage ratio, both of which we comply with, and also includes
restrictions on the declaration of dividends.
At June 30, 2006, our remaining capacity under our shelf registration was
approximately $2.1 billion.
Capital Spending
Capital spending totaled $554 million and $698 million during the six months
ended June 30, 2006, and 2005, respectively. Our 2006 capital spending program
is expected to be in the range of $1.3 billion to $1.5 billion. Of this amount,
approximately $900 million to $1.1 billion will be used to expand manufacturing
capacity for LCD glass substrates in the Display Technologies segment and
approximately $200 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,
-------------- ------------------
2006 2005
- --------------------------------------------------------------------------------
Working capital $ 1,663 $ 1,490
Working capital, excluding cash,
cash equivalents, and
short-term investments $ (812) $ (944)
Current ratio 1.7:1 1.6:1
Trade accounts receivable, net
of allowances $ 633 $ 629
Days sales outstanding 45 49
Inventories $ 664 $ 570
Inventory turns 4.5 4.7
Days payable outstanding 93 89
Long-term debt $ 1,475 $ 1,789
Total debt to total capital 18% 25%
- --------------------------------------------------------------------------------
Credit Rating
Our credit ratings were updated from those disclosed in our 2005 Annual Report
on Form 10-K/A as follows:
- --------------------------------------------------------------------------------
RATING AGENCY Rating
Last Update Long-Term Debt Outlook
- --------------------------------------------------------------------------------
Fitch BBB Stable
April 26, 2006
Standard & Poor's BBB Stable
April 10, 2006
Moody's Baa2 Stable
July 17, 2006
- --------------------------------------------------------------------------------
Management Assessment of Liquidity
A major source of funding for 2006 and beyond is our existing balance of cash,
cash equivalents and short-term investments. From time to time, we may also
issue debt or equity securities for general corporate purposes. We believe we
have sufficient liquidity for the next several years to fund operations,
restructuring, the asbestos settlement, research and development, capital
expenditures and scheduled debt repayments.
Off Balance Sheet Arrangements
There have been no material changes outside the ordinary course of business in
off balance sheet arrangements disclosed in our 2005 Annual Report on Form
10-K/A under the caption "Off Balance Sheet Arrangements."
Contractual Obligations
Other than the early debt repayments described in Note 5 (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
2005 Annual Report on Form 10-K/A under the caption "Contractual Obligations."
CRITICAL ACCOUNTING 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 2005 Annual Report on Form 10-K/A and remain unchanged through
the second quarter of 2006.
SFAS 123R was adopted on January 6, 2006. Refer to Note 1 and 15 to our
unaudited consolidated financial statements for further information. There were
no other accounting policies adopted during the six months ended June 30, 2006,
that had a material effect on our financial condition and results of operations.
NEW ACCOUNTING STANDARDS
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 has applied the standard's guidance to
changes in accounting methods as required. The adoption of SFAS 154 was not
material to Corning's consolidated results of operations and financial
condition.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140" (SFAS
155). SFAS 155 is effective for all financial instruments acquired or issued
after January 1, 2007, and amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. This
Statement resolves issues addressed in Statement 133 Implementation Issue No.
D1, "Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets." Corning does not expect the adoption of SFAS 155 to have a
material impact on its consolidated results of operations and financial
condition.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets--an amendment of FASB Statement No. 140" (SFAS 156). This
Statement amends SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
Corning adopted SFAS No. 156 on January 1, 2006. The impact of adopting SFAS 156
was not material to Corning's consolidated results of operations and financial
condition.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109" (FIN 48). This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS No.
109, "Accounting for Income Taxes." This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. Corning is currently evaluating the impact of FIN 48 on its consolidated
results of operations and financial condition.
ENVIRONMENT
We have been named by the Environmental Protection Agency under the Superfund
Act, or by state governments under similar state laws, as a potentially
responsible party for 11 active hazardous waste sites. Under the Superfund Act,
all parties who may have contributed any waste to a hazardous waste site,
identified by such Agency, are jointly and severally liable for the cost of
cleanup unless the Agency agrees otherwise. It is our policy to accrue for the
estimated liability related to Superfund sites and other environmental
liabilities related to property owned and operated by us based on expert
analysis and continual monitoring by both internal and external consultants. We
have accrued approximately $16 million (undiscounted) for the estimated
liability for environmental cleanup and related litigation at June 30, 2006.
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 Form 10-Q are forward-looking
statements. These typically contain words such as "believes," "expects,"
"anticipates," "estimates," "forecasts," and 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:
- - 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;
- - the rate of substitution by end-users purchasing LCDs for notebook
computers, desktop monitors and televisions;
- - a 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, Samsung
Corning Precision, and Samsung Corning;
- - movements in foreign exchange rates, primarily the Japanese yen, Euro, and
Korean won; and
- - other risks detailed in Corning's SEC filings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
There have been no material changes to our market risk exposures during the
first six months of 2006. For a discussion of our exposure to market risk, refer
to Item 7A, Quantitative and Qualitative Disclosures About Market Risks,
contained in our 2005 Annual Report on Form 10-K/A.
ITEM 4. CONTROLS AND PROCEDURES
(a) Restatement
As discussed in Note 2 to the consolidated financial statements contained
herein, the Company has restated its consolidated financial statements for the
years 2003 through 2005 and its quarterly consolidated financial statements for
each of the quarterly periods in the years ended December 31, 2005 and 2004.
Specifically, between March 31, 2003, and December 31, 2005, the following
accounting errors occurred:
.. Corning's asbestos settlement charges and the related liability for the
asbestos settlement did not reflect the estimated fair value at initial
recognition or subsequent changes in fair value, of certain components of
the proposed settlement offer. As a result, asbestos settlement charges for
the years 2005, 2004, and 2003 were understated by $13 million, $24
million, and $117 million, respectively.
.. Corning incorrectly suspended recording equity earnings of Pittsburgh
Corning Europe, N.V. between March 31, 2003, and December 31, 2005. As a
result, equity in earnings of affiliated companies for the years 2005,
2004, and 2003 was understated by $13 million, $11 million, and $7 million,
respectively.
.. Accretion on the cash portion of the asbestos settlement offer was
incorrectly recorded as interest expense resulting in both an overstatement
of interest expense and an understatement of asbestos settlement expense
for the years 2005, 2004, and 2003, by $8 million, $8 million, and $5
million, respectively.
In the restated consolidated financial statements, the higher asbestos
settlement charges are tax-effected in 2003 and the first half of 2004. As
Corning provided a valuation allowance on most of its deferred tax assets in the
third quarter of 2004, that quarter reflects an increase in the valuation
allowance of $55 million for the deferred tax assets related to the higher
asbestos settlement charges.
(b) Evaluation of disclosure controls and procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Securities Exchange Act of 1934 (the Exchange
Act) is accumulated and communicated to our management, including our principal
executive and principal financial officers, or other persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
In the first quarter of 2006, management identified errors in the accounting for
its Pittsburgh Corning Corporation (PCC) Asbestos Litigation liability and
investments in affiliates and as noted above, has recorded the necessary
adjustments in the unaudited interim consolidated financial statements for the
quarter ended March 31, 2006 to correct these errors and has restated previously
issued financial statements.
Management, under the direction of its principal executive and principal
financial officers, has evaluated the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of June 30, 2006. Based upon this
evaluation and as a result of the material weaknesses discussed below, the
Company's principal executive and principal financial officers, have concluded
that its disclosure controls and procedures were not effective as of June 30,
2006 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.
A material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management determined that the following control deficiencies
constitute material weaknesses in internal control over financial reporting at
June 30, 2006:
(i) The Company did not maintain effective controls over the valuation of
its asbestos settlement charges and the valuation and reconciliation
of the related liability pertaining to the 2003 Pittsburgh Corning
Corporation Asbestos Litigation Bankruptcy Settlement. Specifically,
the Company did not maintain effective controls to ensure that certain
components of the liability, which may be settled by contributing the
Company's equity interest in Pittsburgh Corning Europe, N.V. and
assignment of rights to insurance proceeds, were appropriately
recorded at fair value rather than book value as required by generally
accepted accounting principles. This control deficiency resulted in
the restatement of our annual consolidated financial statements for
the years ended December 31, 2005, 2004, and 2003 and the quarterly
consolidated financial statements for each of the three quarterly
periods in the years ended December 31, 2005 and 2004. Additionally,
this control deficiency could result in a misstatement of our asbestos
settlement charges and related liability that would result in a
material misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected.
(ii) The Company did not maintain effective controls over the completeness
and accuracy of its equity investments. Specifically, the Company did
not maintain effective controls to ensure that earnings of its equity
investments were accurately and completely recorded. This control
deficiency resulted in the restatement of our annual consolidated
financial statements for the years ended December 31, 2005, 2004, and
2003 and the quarterly consolidated financial statements for each of
the three quarterly periods in the years ended December 31, 2005 and
2004. Additionally, this control deficiency could result in a
misstatement of our investments and equity in earnings of affiliated
companies that would result in a material misstatement to the annual
or interim consolidated financial statements that would not be
prevented or detected.
Plan for Remediation of Material Weaknesses - We believe the steps described
below, which occurred during the second quarter closing process, will remediate
the material weaknesses described above.
.. We enhanced the procedures and documentation associated with the
reconciliation of our PCC Asbestos Litigation liability in order to ensure
that all components are included in the evaluation process and are
accounted for in accordance with generally accepted accounting principles.
.. We augmented the resources in our Accounting Services department that will
enable us to have a stronger segregation of duties associated with the
reconciliation of the PCC Asbestos Litigation liability account to ensure
1) the analysis and preparation of the reconciliation and 2) a detailed
review of this work is done by separate individuals who have the requisite
skill set and training.
.. We updated our key controls within the Investments in Affiliates cycle to
specifically address 1) our ability to achieve full inclusion of all less
than 100% owned entities in our accounting analysis of Investments in
Affiliates and 2) to ensure proper monitoring and accounting for these
entities.
.. We improved our investments in affiliates reconciliation procedures and
documentation in order to ensure 1) the analysis and preparation of the
reconciliation and 2) a detailed review of the reconciliation is done by
separate individuals who have the requisite skill set and training.
As discussed above, since March 31, 2006, we have made improvements to our
internal control over financial reporting that have a material effect, or are
reasonably likely to materially affect, our internal control over financial
reporting and anticipate the control deficiencies described above can be
remediated by September 30, 2006.
(c) Changes in internal control over financial reporting
Other than the remedial actions taken to address the material weaknesses in our
internal controls over financial reporting related to accrued litigation and
investments in affiliates as detailed above, no changes in internal control over
financial reporting occurred during the quarter ended June 30, 2006, that
materially affected, or are reasonably likely to materially affect, such
internal control over financial reporting.
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 approximately $16 million (undiscounted) for
its estimated liability for environmental cleanup and litigation at June 30,
2006. 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.
Dow Corning Bankruptcy. Corning and The Dow Chemical Company (Dow Chemical) each
own 50% of the common stock of Dow Corning. In May 1995, Dow Corning filed for
bankruptcy protection to address pending and claimed liabilities arising from
many 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. The Plan also includes
releases for Corning and Dow Chemical as shareholders in exchange for
contributions to the Plan.
Under the terms of the Plan, Dow Corning has established and is funding a
Settlement Trust and a Litigation Facility to provide a means for tort claimants
to settle or litigate their claims. Inclusion of insurance, Dow Corning has paid
approximately $1.6 billion to the Settlement Trust. As of June 30, 2006, Dow
Corning had recorded a reserve for breast implant litigation of $1.8 billion and
anticipates insurance receivables of $211 million. Certain commercial creditors
have appealed from the denial of their claim for approximately $80 million in
additional interest at default rates and enforcement costs. This appeal was
argued in July 2005 and decided on July 26, 2006. On the appeal by the
commercial creditors, the Court of Appeals vacated the decision of the District
Court and remanded for further proceedings. The management of Dow Corning is
evaluating the decision. There are a number of other claims in the bankruptcy
proceedings against Dow Corning awaiting resolution by the U.S. District Court,
and it is reasonably possible that Dow Corning may record bankruptcy-related
charges in the future. There are no remaining tort claims against Corning, other
than those that will be channeled by the Plan into facilities established by the
Plan or otherwise defended by the Litigation Facility.
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 11,300 other cases
(approximately 43,600 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 reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future asbestos claims against us and Pittsburgh Corning Corporation (PCC),
which might arise from PCC products or operations. The proposed settlement, if
the Plan is approved and becomes effective, will require Corning to relinquish
its equity interest in PCC, contribute its equity interest in Pittsburgh Corning
Europe N.V. (PCE), a Belgian corporation, and contribute 25 million shares of
Corning common stock. Corning also agreed to make cash payments with a value of
$131 million, in March 2003, over six years from the effective date of the
settlement.
Since March 28, 2003, we have recorded total net charges of $942 million to
reflect the initial settlement liability and subsequent adjustments for the
change in the fair value of the components of the liability.
The fair value of the liability expected to be settled by contribution of our
investment in PCE, assigned insurance proceeds, and the fair value of 25 million
shares of our common stock (totaling $786 million at June 30, 2006) 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 (totaling $156 million at June 30,
2006), representing the net present value of the cash payments, is recorded in
the other liabilities component in our consolidated balance sheets.
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. On February 28,
2006, the Bankruptcy Court requested the Plan proponents to delete references to
Section 105(a) of the Bankruptcy Code and resubmit the Plan. In late April 2006,
the Bankruptcy Court allowed another round of briefing on the objections leading
to additional oral arguments on July 21, 2006. The timing of the court's
decision is uncertain. 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 2000, Astrium, SAS and Astrium, Ltd. filed a complaint in
the United States District Court for the Central District of California against
TRW, Inc., Pilkington Optronics Inc., Corning NetOptix, Inc., OFC Corporation
and Optical Filter Corporation claiming damages in excess of $150 million. The
complaint alleges that certain cover glasses for solar arrays used to generate
electricity from solar energy on satellites sold by Astrium's corporate
successor were negligently coated by NetOptix or its subsidiaries (prior to
Corning's acquisition of NetOptix) with the result that the amount of
electricity the satellite can produce is allegedly materially reduced, which
then reduces the effective life and value of each satellite. NetOptix has denied
causing the damages alleged and denied legal liability. In 2002, co-defendant
Pilkington settled for $20 million and is no longer in this case. In April 2002,
the Court granted motions for summary judgment by NetOptix and other defendants
on 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
Circuit Court had stayed the appeal pending a decision in the Robinson
Helicopter v. Dana case before the California Supreme Court involving similar
issues of law. The Robinson case was decided on December 23, 2004 and reversed.
The Ninth Circuit Court of Appeals granted the defendants' request for a
briefing schedule under which all appellate briefing was completed by March 15,
2006. In its appellate briefing, NetOptix continued to advocate for affirmance
of the lower court's ruling. Oral argument occurred on July 24, 2006.
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.
Seoul Guarantee Insurance Co. and other creditors against Samsung Group and
affiliates. As of March 2005, Samsung Corning Precision Glass Co., Ltd. (Samsung
Corning Precision) and Samsung Corning Co. Ltd. (Samsung Corning) were two of
approximately thirty co-defendants in a lawsuit filed by Seoul Guarantee
Insurance Co. and 14 other creditors (SGI and Creditors) for alleged breach of
an agreement that approximately thirty affiliates of the Samsung group entered
into with SGI and Creditors in September 1999. The lawsuit is pending in the
courts of Korea. According to the agreement, the Samsung affiliates agreed to
sell 3.5 million shares of Samsung Life Insurance Co., Ltd. (SLI) by December
31, 2000, which were transferred to SGI and Creditors in connection with the
petition for court receivership of Samsung Motor Inc. In the lawsuit, SGI and
Creditors allege that, in the event that the proceeds of sale of the SLI shares
is less than 2.45 trillion Korean won (approximately $2.42 billion), the Samsung
affiliates allegedly agreed to compensate SGI and Creditors for the shortfall,
by other means, including Samsung affiliates' purchase of equity or subordinated
debentures to be issued by SGI and Creditors. Any excess proceeds are to be
distributed to the Samsung affiliates. As of March 2005, the shares of Samsung
Life Insurance Co., Ltd. had not been sold. The suit asks for damages of
approximately $4.68 billion plus penalty interest. Samsung Corning Precision and
Samsung Corning combined guarantees should represent no more than 3.1% of the
Samsung affiliates' total financial obligation. Although noting that the outcome
of these matters is uncertain, Samsung Corning Precision and Samsung Corning
have stated that these matters are not likely to result in a material ultimate
loss to their financial statements. No claim in these matters has been asserted
against Corning Incorporated.
Ellsworth Industrial Park, Downers Grove, IL Environmental Litigation. In August
2005, Corning was named as a fourth party defendant in a class action, Ann Muniz
v. Rexnord Corp, filed in the U.S. District Court for the N.D. Illinois,
claiming an unspecified amount of damages and asserting various personal injury
and property damage claims against a number of corporate defendants. These
claims allegedly arise from the release of solvents from the operations of
several manufacturers at the Ellsworth Industrial Park into soil and ground
water. As of June 2006, the District Court allowed two cross-claims for
contribution against Corning and two third-party complaints for contribution
against Corning. The Muniz case is scheduled for trial in November 2006.
In March 2006, Corning was named as an additional party defendant in two
actions, Jana Bendik v. Precision Products, Inc. and Kevin Pote v. Ames Supply
Company, filed in the Circuit Court of Cook County, Illinois, claiming an
unspecified amount of damages and asserting personal injury and wrongful death
against a number of corporate defendants as a result of alleged ground water
contamination by releases of solvents from manufacturing operations at the
Ellsworth Industrial Park site. In May 2006, a corporate defendant filed amended
fourth party complaints in both Bendik and Pote alleging that Corning is the
alter ego of Harper-Wyman Company.
The sole basis of liability against Corning in all of the cases related to
Ellsworth Industrial Park is the claim of several corporate defendants that
Corning is the successor to and/or alter ego of Harper-Wyman Company. Corning
has denied these allegations and management intends to vigorously contest all
claims against Corning. Management is not able at this time to estimate the
range of outcomes in this matter.
ITEM 1A. RISK FACTORS
In addition to other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual
Report on Form 10-K/A for the year ended December 31, 2005 which could
materially impact our business, financial condition or future results. Risks
disclosed in our Annual Report on Form 10-K/A are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem immaterial may materially adversely impact our business,
financial condition or operating results.
The information presented below updates, and should be read in conjunction with,
the risk factor information disclosed in our Annual Report on Form 10-K/A for
the year ended December 31, 2005.
The Company has material weaknesses in internal control over financial
reporting.
Management identified material weaknesses in our internal control over financial
reporting as defined in the Public Company Accounting Oversight Board's Auditing
Standard No. 2 that resulted in the restatement of the Company's annual
consolidated financial statements as of and for the years ended December 31,
2005, 2004, and 2003 and the quarterly consolidated financial statements for
each of the quarterly periods in the years ended December 31, 2005 and 2004. See
"Item 9A. Controls and Procedures" in our Form 10-K/A filed May 9, 2006.
The material weaknesses in the our internal control over financial reporting
during these periods related to ineffective controls over 1) the valuation of
its asbestos settlement charges and the valuation and reconciliation of the
related liability related to the 2003 Pittsburgh Corning Corporation Asbestos
Litigation Bankruptcy Settlement, and 2) the completeness and accuracy of our
equity investments.
We anticipate the material weaknesses noted above will be fully remediated by
September 30, 2006. However, failure to maintain or implement the new or
improved controls could result in the continued existence of the material
weaknesses impacting the reliability of the Company's internal control over
financial reporting, causing the Company to fail to meet its periodic reporting
obligations, or result in material misstatements in the Company's financial
statements. Any such failure could also adversely affect the results of periodic
management evaluations and annual auditor reports regarding the effectiveness of
the Company's internal control over financial reporting required under Section
404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated under Section
404.
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 2006:
Issuer Purchases of Equity Securities
- ------------------------------------------------------------------------------------------------------------------------------------
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 (a) Share (a) Announced Plan (b) Under the Plan (b)
- ------------------------------------------------------------------------------------------------------------------------------------
April 1-30, 2006 31,276 $28.64 0 $0
May 1-31, 2006 303,024 $27.26 0 $0
June 1-30, 2006 36,673 $23.96 0 $0
- ------------------------------------------------------------------------------------------------------------------------------------
Total 370,973 $27.05 0 $0
- ------------------------------------------------------------------------------------------------------------------------------------
(a) This column reflects the following transactions during the fiscal second
quarter of 2006: (i) the deemed surrender to us of 73,787 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 297,186 shares of common stock to satisfy tax
withholding obligations in connection with the vesting of restricted stock
issued to employees.
(b) During the quarter ended June 30, 2006, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) - (c) Our annual meeting of shareholders was held on April 27, 2006. At that
meeting, shareholders elected James B. Flaws, James R. Houghton, James J.
O'Connor, Deborah D. Rieman, and Peter F. Volanakis as directors for terms
expiring at our annual meeting of shareholders in 2009, and Padmasree Warrior as
a director for a term 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 2006
and also approved amendment of the 2002 Worldwide Employee Stock Purchase Plan,
adoption of the 2006 Variable Compensation Plan and amendment of the 2003 Equity
Plan for Non-Employee Directors. Shareholders also voted in favor of a
shareholder proposal requesting the Board of Directors to adopt annual election
of each director. Those elected and the results of voting are as follows:
Nomination and Election of Directors
Name Votes For Votes Withheld
James B. Flaws 1,302,503,688 98,269,537
James R. Houghton 1,320,889,501 79,883,724
James J. O'Connor 1,344,326,941 56,446,284
Deborah D. Rieman 1,367,215,237 33,557,988
Peter F. Volanakis 1,341,373,770 59,399,455
Padmasree Warrior 1,368,230,353 32,542,872
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 and John Seely Brown, Gordon Gund, John M. Hennessy and
H. Onno Ruding continued as directors for terms expiring at the annual meeting
of shareholders in 2008.
Votes For Votes Against Abstain Broker Non-Votes
Approve amendment of 1,159,368,168 33,920,601 12,508,602 194,975,854
2002 Worldwide Employee
Share Purchase Plan
Approve adoption of 2006 1,117,126,831 75,063,865 13,606,674 194,975,854
Variable Compensation Plan
Approve amendment of 1,033,768,353 157,993,619 14,035,399 194,975,854
2003 Equity Plan for
Non-Employee Directors
Ratify appointment of 1,363,468,069 26,745,875 10,559,281
PricewaterhouseCoopers
LLP as our independent
registered public accounting
firm for fiscal year ending
December 31, 2006
Shareholder proposal 863,372,675 326,701,507 15,723,189 194,975,854
requesting that Directors
adopt annual election of
each director
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit Number Exhibit Name
-------------- ------------
12 Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of Chief Executive Officer Pursuant
to Rule 13a-14(a) under the Exchange Act
31.2 Certification of Chief Financial Officer Pursuant
to Rule 13a-14(a) under the Exchange Act
32 Certification Pursuant to 18 U.S.C. Section 1350
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 28, 2006 /s/ JAMES B. FLAWS
- ------------------- ---------------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
July 28, 2006 /s/ JANE D. POULIN
- ------------------- ---------------------------------------------
Date Jane D. Poulin
Chief Accounting Officer
(Principal Accounting Officer)
July 28, 2006 /s/ KATHERINE A. ASBECK
- ------------------- ---------------------------------------------
Date Katherine A. Asbeck
Senior Vice President - Finance
EXHIBIT INDEX
-------------
Exhibit Number Exhibit Name Page
- -------------- ------------ ----
12 Computation of Ratio of Earnings to Fixed Charges 62
31.1 Certification of Chief Executive Officer Pursuant
to Rule 13a-14(a) under the Exchange Act 63
31.2 Certification of Chief Financial Officer Pursuant
to Rule 13a-14(a) under the Exchange Act 64
32 Certification Pursuant to 18 U.S.C. Section 1350 65
Exhibit 12
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratios)
Six months ended
June 30, 2006
----------------
Income before income taxes $ 339
Adjustments:
Distributed income of equity investees 217
Fixed charges net of capitalized interest 65
--------
Income before taxes and fixed charges, as adjusted $ 621
========
Fixed charges:
Interest expense (a) $ 54
Portion of rent expense which represents an
appropriate interest factor (b) 11
Capitalized interest 20
--------
Total fixed charges 85
Capitalized interest (20)
--------
Total fixed charges, net of capitalized interest $ 65
========
Ratio of earnings to fixed charges 7.3x
========
(a) Interest expense includes amortization expense for capitalized interest and
debt costs.
(b) One-third of net rent expense is the portion deemed representative of the
interest factor.
Exhibit 31.1
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; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
July 28, 2006
/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; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
July 28, 2006
/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, 2006 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 28, 2006
/s/ Wendell P. Weeks
-----------------------------------------
Wendell P. Weeks
President and Chief Executive Officer
/s/ James B. Flaws
-----------------------------------------
James B. Flaws
Vice Chairman and Chief Financial Officer