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 September 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:
1,564,301,810 shares of Corning's Common Stock, $0.50 Par Value, were
outstanding as of October 16, 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 nine months ended September 30, 2006 and 2005 3
Consolidated Balance Sheets (Unaudited) at September 30, 2006 and
December 31, 2005 4
Consolidated Statements of Cash Flows (Unaudited) for the nine
months ended September 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 38
Item 3. Quantitative and Qualitative Disclosures About Market Risk 55
Item 4. Controls and Procedures 55
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings 57
Item 1A. Risk Factors 60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 61
Item 6. Exhibits 62
Signatures 63
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share amounts)
Three months Nine months
ended September 30, ended September 30,
------------------------ ------------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Net sales $ 1,282 $ 1,188 $ 3,805 $ 3,379
Cost of sales 716 643 2,125 1,922
--------- --------- --------- ---------
Gross margin 566 545 1,680 1,457
Operating expenses:
Selling, general and administrative expenses 218 178 635 553
Research, development and engineering expenses 127 118 379 320
Amortization of purchased intangibles 2 3 8 11
Restructuring, impairment and other charges (Note 3) 2 28 13 46
Asbestos settlement (Note 4) 13 73 137 204
--------- --------- --------- ---------
Operating income 204 145 508 323
Interest income 32 17 82 40
Interest expense (18) (23) (56) (84)
Loss on repurchases and retirement of debt, net (Note 5) (11) (12)
Other income, net 27 17 61 28
--------- --------- --------- ---------
Income before income taxes 245 156 584 295
Provision for income taxes (Note 6) 33 28 55 91
--------- --------- --------- ---------
Income before minority interests and equity earnings 212 128 529 204
Minority interests (6) (2) (8) (8)
Equity in earnings of associated companies, net of impairments (Note 10) 232 77 688 422
--------- --------- --------- ---------
Net income $ 438 $ 203 $ 1,209 $ 618
========= ========= ========= =========
Basic earnings per common share (Note 7) $ 0.28 $ 0.14 $ 0.78 $ 0.43
========= ========= ========= =========
Diluted earnings per common share (Note 7) $ 0.27 $ 0.13 $ 0.76 $ 0.41
========= ========= ========= =========
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)
September 30, December 31,
2006 2005
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Assets
Current assets:
Cash and cash equivalents $ 979 $ 1,342
Short-term investments, at fair value 1,833 1,092
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Total cash, cash equivalents and short-term investments 2,812 2,434
Trade accounts receivable, net of doubtful accounts and allowances - $26 and $24 753 629
Inventories (Note 9) 673 570
Deferred income taxes (Note 6) 64 44
Other current assets 184 183
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Total current assets 4,486 3,860
Investments (Note 10) 2,312 1,729
Property, net of accumulated depreciation - $4,006 and $3,632 5,082 4,675
Goodwill and other intangible assets, net (Note 11) 331 338
Deferred income taxes (Note 6) 56 10
Other assets 580 595
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Total Assets $ 12,847 $ 11,207
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt (Note 5) $ 20 $ 18
Accounts payable 574 690
Other accrued liabilities (Notes 4 and 12) 1,726 1,662
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Total current liabilities 2,320 2,370
Long-term debt (Note 5) 1,710 1,789
Postretirement benefits other than pensions 592 593
Other liabilities (Notes 4 and 12) 996 925
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Total liabilities 5,618 5,677
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Commitments and contingencies (Note 4)
Minority interests 41 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: 1,573 million and 1,552 million 790 776
Additional paid-in capital 11,935 11,548
Accumulated deficit (5,638) (6,847)
Treasury stock, at cost; Shares held: 17 million and 16 million (196) (168)
Accumulated other comprehensive income (Note 16) 297 178
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Total shareholders' equity 7,188 5,487
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Total Liabilities and Shareholders' Equity $ 12,847 $ 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)
Nine months ended
September 30,
----------------------------
2006 2005
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Cash Flows from Operating Activities:
Net income $ 1,209 $ 618
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 430 373
Amortization of purchased intangibles 8 11
Asbestos settlement 137 204
Loss on repurchases and retirement of debt, net 11 12
Restructuring, impairment and other charges 13 46
Stock compensation charges 95 28
Undistributed earnings of affiliated companies (384) (206)
Deferred taxes (64) (11)
Restructuring payments (9) (21)
Customer deposits, net 86 376
Employee benefit payments less than expense 26 44
Changes in certain working capital items:
Trade accounts receivable (119) (78)
Inventories (104) (46)
Other current assets (10) (14)
Accounts payable and other current liabilities, net of restructuring payments (181) (91)
Other, net 31 35
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Net cash provided by operating activities 1,175 1,280
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Cash Flows from Investing Activities:
Capital expenditures (892) (1,076)
Acquisitions of businesses, net of cash received (16)
Proceeds from sale or disposal of assets 11 17
Net increase in long-term investments and other long-term assets (77)
Short-term investments - acquisitions (2,343) (1,313)
Short-term investments - liquidations 1,603 1,163
Other, net 13
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Net cash used in investing activities (1,714) (1,196)
-------- --------
Cash Flows from Financing Activities:
Repayments of short-term borrowings and current portion of long-term debt (14) (198)
Proceeds from issuance of long-term debt, net 246 147
Retirements of long-term debt (343) (102)
Proceeds from issuance of common stock, net 20 356
Proceeds from the exercise of stock options 280 142
Other, net (12) (12)
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Net cash provided by financing activities 177 333
-------- --------
Effect of exchange rates on cash (1) (31)
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Net (decrease) increase in cash and cash equivalents (363) 386
Cash and cash equivalents at beginning of period 1,342 1,009
-------- --------
Cash and cash equivalents at end of period $ 979 $ 1,395
======== ========
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.
Short-Term Investments
The following is a summary of the fair value of available-for-sale securities
(in millions):
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September 30, December 31,
2006 2005
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Bonds, notes and other securities
U.S. government and agencies $ 310 $ 259
States and municipalities 63 77
Asset-backed securities 542 374
Commercial paper 350 57
Other debt securities 568 325
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Total short-term investments $ 1,833 $ 1,092
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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 $28.9 million and $29.5 million as of September 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 $1.6 million and $1.5 million for the nine
months ended September 30, 2006 and 2005, respectively. Corning's maximum
exposure to loss as a result of its involvement with the Trusts is estimated at
approximately $15.5 million at September 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). For stock options granted
prior to January 1, 2006, 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
on a pro forma disclosure basis over the requisite vesting period (the "stated
vesting period approach"). For time-based and performance-based restricted
shares granted prior to January 1, 2006, Corning specified that the employee
will 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.
We continue to follow the stated and nominal vesting period approaches 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 April 2006, the FASB issued a FASB Staff Position (FSP) FSP FIN 46R-6,
"Determining the Variability to Be Considered in Applying FASB Interpretation
No. 46(R)". This FSP addresses how a reporting enterprise should determine the
variability to be considered in applying FIN 46R and is effective on the first
day of the first reporting period beginning after June 15, 2006. Corning adopted
FIN 46R-6 on the effective date of July 1, 2006. Our current approach to
applying FIN 46-R is consistent with guidance in FSP FIN 46R-6. As a result, the
adoption of FSP FIN 46R-6 is not expected to be 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.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring fair
value in applying generally accepted accounting principles, and expands
disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007. Corning is currently evaluating the impact of
SFAS 157 on its consolidated results of operations and financial condition.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - An amendment of FASB
Statements No. 87, 88, 106, and 132(R)" (SFAS 158). SFAS 158 requires employers
to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity. The recognition
and disclosure requirements described above are effective for fiscal years ended
after December 15, 2006 except for the change in measurement date which is
effective as of the beginning of the fiscal year beginning after December 15,
2008. Currently, management estimates the impact of the provisions required to
be adopted at December 31, 2006, to be a reduction of equity and an increase in
long term liabilities of approximately $500 million. We also expect that Dow
Corning's adoption of this standard will result in a reduction of our equity
investment in Dow Corning and a decrease to equity of approximately $100
million. The adoption of the provisions of SFAS 158 at December 31, 2006, is not
expected to impact Corning's consolidated statements of operations and cash
flows and will not affect any of the Company's financial covenants.
In September 2006, the FASB issued FASB Staff Position ("FSP") No. AUG AIR-1,
"Accounting for Planned Major Maintenance Activities." The FSP prohibits
companies from accruing the cost of planned major maintenance in advance of the
activities actually occurring. This FSP is effective for fiscal years beginning
after December 15, 2006. The adoption of FSP No. AUG AIR-1 is not expected to
have a material impact on Corning's consolidated results of operations and
financial condition.
In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB),
"Financial Statements - Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements" (SAB 108). The
SEC staff is providing guidance on how prior year misstatements should be taken
into consideration when quantifying misstatements in current year financial
statements for purposes of determining whether the current year's financial
statements are materially misstated. SAB 108 is effective for fiscal years
beginning after November 15, 2006. The adoption of SAB 108 is not expected to be
material to Corning's 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 nine months
ended September 30, 2005 was understated by $5 million and $15 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 nine months ended September 30, 2005 was understated by $3 million and
$10 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 nine months ended September
30, 2005 was understated by $2 million and $6 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
September 30, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Operating expenses:
Asbestos settlement $ 68 $ 5 $ 73
Operating income (loss) 150 (5) 145
Interest expense 25 (2) 23
Income (loss) before income taxes 159 (3) 156
Provision for income taxes (28) (28)
-------- --------- --------
Income (loss) before minority interests and equity earnings 131 (3) 128
Equity in earnings of associated companies, net of impairments 74 3 77
Net income $ 203 $ 203
Basic earnings per common share $ 0.14 $ 0.14
Diluted earnings per common share $ 0.13 $ 0.13
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- ------------------------------------------------------------------------------------------------------------------------------------
For the nine months ended
September 30, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Operating expenses:
Asbestos settlement $ 189 $ 15 $ 204
Operating income (loss) 338 (15) 323
Interest expense 90 (6) 84
Income before income taxes 304 (9) 295
Provision for income taxes (91) (91)
-------- --------- ---------
Income before minority interests and equity earnings 213 (9) 204
Equity in earnings of associated companies, net of impairments 412 10 422
Net income $ 617 $ 1 $ 618
Basic loss per common share $ 0.43 $ 0.43
Diluted loss per common share $ 0.41 $ 0.41
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Consolidated Balance Sheets
Summary of Restatement Impact
(Unaudited; in millions)
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As of September 30, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Investments $ 1,605 $ 30 $ 1,635
Total Assets $ 10,883 $ 30 $ 10,913
Other accrued liabilities $ 1,384 $ 150 $ 1,534
Total current liabilities $ 2,231 $ 150 $ 2,381
Total liabilities $ 5,630 $ 150 $ 5,780
Accumulated deficit $ (6,692) $ (122) $ (6,814)
Accumulated other comprehensive income $ 35 $ 2 $ 37
Total shareholders' equity $ 5,226 $ (120) $ 5,106
Total Liabilities and Shareholders' Equity $ 10,883 $ 30 $ 10,913
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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 nine months ended
September 30, 2005
----------------------------------------------------
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Cash Flows from Operating Activities:
Net income $ 617 $ 1 $ 618
Adjustments to reconcile income from continuing operations to net
cash provided by operating activities:
Asbestos settlement charge 189 15 204
Undistributed earnings of associated companies (196) (10) (206)
Other, net 59 (6) 53
Net cash provided by operating activities $ 1,280 $ 1,280
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3. Restructuring, Impairment and Other Charges
2006 Actions
Third Quarter
- -------------
In the third quarter of 2006, we approved a disinvestment plan related to
certain manufacturing operations of our Life Sciences and Specialty Materials
operating segments. As a result, we recorded a charge of $5 million which is
comprised of severance and curtailment costs. We also recorded a $1 million
credit related to prior period severance costs and a $2 million credit relating
to the sale of previously impaired assets.
Second Quarter
- --------------
In the second quarter of 2006, we recorded a $6 million impairment charge
related to the manufacturing operations of our Life Sciences and Specialty
Materials operating segments identified above. 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 nine months ended September 30, 2006
(in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Nine months Remaining
ended Sept. Revisions Net Cash reserve at
January 1, 30, 2006 to existing charges/ payments Sept. 30,
2006 charge plans (reversals) in 2006 2006
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 36 $ 5 $ 5 $ 10 $ (4) $ 42
Other charges 49 (2) (2) (5) 42
-----------------------------------------------------------------------------------
Total restructuring charges $ 85 $ 5 $ 3 $ 8 $ (9) $ 84
-----------------------------------------------------------------------------------
Impairment of assets:
Assets to be disposed of by sale or
abandonment 6 (1) 5
--------------------------------------
Total impairment charges 6 (1) 5
--------------------------------------
Total restructuring, impairment and
other charges $ 11 $ 2 $ 13
- ------------------------------------------------------------------------------------------------------------------------------------
2005 Actions
Third Quarter
- -------------
In the third quarter of 2005, we approved a restructuring plan within the
Telecommunications segment to continue to reduce costs in this segment. As a
result, we recorded a charge of $30 million which is comprised of severance
costs. Additional expenses, not included in this charge, related to relocating
manufacturing assets, accelerated depreciation, and shutdown activities are not
expected to be material and will be expensed as incurred in future periods. We
also recorded net credits of $2 million related to adjustments to prior period
restructuring charges.
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 nine months ended September 30, 2005
(in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Nine months Remaining
ended Sept. Revisions Net Cash reserve at
January 1, 30, 2005 to existing charges/ payments Sept. 30,
2005 charge plans (reversals) in 2005 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 18 $ 30 $ (1) $ 29 $ (10) $ 37
Other charges 77 (14) (14) (11) 52
-----------------------------------------------------------------------------------
Total restructuring charges $ 95 $ 30 $ (15) $ 15 $ (21) $ 89
-----------------------------------------------------------------------------------
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) $ 55 $ (9) $ 46
- ------------------------------------------------------------------------------------------------------------------------------------
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, Corning announced that it had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future asbestos claims against it 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 pay a total of $140 million in six
annual installments (present value $131 million at March 2003), beginning one
year after the Plan becomes effective, with 5.5 percent interest from June 2004,
and to assign certain insurance policy proceeds from its primary insurance and a
portion of its excess insurance at the time of settlement.
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.
For more than two years, there have been several rounds of briefing and argument
in the Bankruptcy Court to address these objections. In February, 2006, the
Bankruptcy Court requested that the Plan proponents delete references to Section
105(a) of the Bankruptcy Code and resubmit the Plan. The final round of oral
argument was held on July 21, 2006. The Bankruptcy Court reserved decision. 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.
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. 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 third quarter of 2006, we recorded asbestos settlement expense of $13
million, including $6 million reflecting the increase in the value of Corning's
common stock from June 30, 2006 to September 30, 2006, and $7 million to adjust
the estimated fair value of the other components of the proposed asbestos
settlement.
In the third quarter of 2005, we recorded asbestos settlement expense of $73
million, including $68 million for the increase in the value of Corning's common
stock from June 30, 2005 to September 30, 2005, and a $5 million charge to
adjust the estimated fair value of the other components of the proposed asbestos
settlement.
For the nine months ended September 30, 2006, we recorded asbestos settlement
expense of $137 million, including $119 million reflecting the increase in the
value of Corning's common stock since December 31, 2005, and $18 million to
reflect changes in the estimated fair value of other components of the
settlement offer. For the nine months ended September 30, 2005, we recorded
asbestos settlement expense of $204 million, including $189 million reflecting
the increase in the value of Corning's common stock from December 31, 2004 to
September 30, 2005, and $15 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 in the asbestos settlement
remains lower than the carrying value of the settlement liability, a gain would
be recognized at the time of settlement.
Since March 28, 2003, we have recorded total net charges of $955 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, 25 million shares of our common stock and assigned insurance
proceeds (in aggregate totaling $797 million at September 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 $158 million at September 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. Please refer to
Note 10, Investments, for a discussion of contingent liabilities associated with
Dow Corning.
As of September 30, 2006, contingent guarantees at notional value totaled $321
million, compared with $339 million at December 31, 2005. We also were
contingently liable for purchase obligations of $251 million and $219 million,
at September 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.
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 12 active hazardous waste sites. Under the
Superfund Act, all parties who may have contributed any waste to a hazardous
waste site, identified by such Agency, are jointly and severally liable for the
cost of cleanup unless the Agency agrees otherwise. It is Corning's policy to
accrue for its estimated liability related to Superfund sites and other
environmental liabilities related to property owned by Corning based on expert
analysis and continual monitoring by both internal and external consultants.
Corning has accrued approximately $15 million (undiscounted) for its estimated
liability for environmental cleanup and litigation at September 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.
5. Debt
Third Quarter
- -------------
In the third quarter of 2006, we issued $250 million of 7.25% senior unsecured
notes for net proceeds of approximately $246 million. The notes mature on August
15, 2036. We may redeem the debentures at any time.
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 nine months ended September 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 24 24
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2006 activity $ 346 $ 357 $ (11)
- ------------------------------------------------------------------------------------------------------------------------------------
2005 activity:
Convertible debentures, 3.5%, due 2008 $ 297 $ 2 31
Other (primarily Euro notes, 5.625%, due 2005) 198 198
Oak 4 7/8% Subordinated notes, due 2005 96 6
Debentures, 7%, due 2007 88 100 $ (12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2005 activity $ 679 $ 300 37 $ (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 Nine months
ended September 30, ended September 30,
------------------- -------------------
2006 2005 2006 2005
- --------------------------------------------------------------------------------
Provision for income taxes $ 33 $ 28 $ 55 $ 91
Effective tax rate 13.5% 17.9% 9.4% 30.8%
- --------------------------------------------------------------------------------
For the third quarter ended September 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;
and
.. The benefit of tax holidays and investment credits in Taiwan and tax
holidays in China.
In addition to the items noted above, the tax provision for the nine months
ended September 30, 2006, also reflected the release of valuation allowances on
all Australian deferred tax assets and on a portion of our deferred tax assets
in Germany.
As more fully described in Note 7 (Income Taxes) to the consolidated financial
statements in 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. 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. 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 9% and 17% for the third quarter ended September 30, 2006 and 2005,
respectively, and a reduction in the rate of 13% and 14% for the nine months
ended September 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 September 30,
-------------------------------------------------------------------------------
2006 2005
-------------------------------------- -------------------------------------
Net Weighted- Per Share Net Weighted- Per Share
Income Average Shares Amount Income Average Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 438 1,553 $ 0.28 $ 203 1,488 $ 0.14
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Stock compensation awards 40 48
7% mandatory convertible preferred stock (a) 16
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 438 1,593 $ 0.27 $ 203 1,552 $ 0.13
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
-------------------------------------------------------------------------------
2006 2005
-------------------------------------- -------------------------------------
Net Weighted- Per Share Net Weighted- Per Share
Income Average Shares Amount Income Average Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 1,209 1,548 $ 0.78 $ 618 1,444 $ 0.43
Effect of dilutive securities:
Stock compensation awards 46 39
7% mandatory convertible preferred stock (a) 27
3.50% convertible debentures 3 13
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 1,209 1,594 $ 0.76 $ 621 1,523 $ 0.41
- ------------------------------------------------------------------------------------------------------------------------------------
(a) On the mandatory conversion date of August 16, 2005, the remaining shares
of our 7.00% Series C Mandatory Convertible Preferred Stock were converted
into Corning common stock at a conversion rate of 50.813 shares of common
stock for each preferred share. Upon conversion of the preferred shares, we
issued 31 million shares of Corning common stock resulting in an increase
to equity of $62 million.
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 Nine months
ended September 30, ended September 30,
--------------------- ---------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Potential common shares excluded from the calculation
of diluted earnings per common share:
4.875% convertible notes (a) 4 5
Zero coupon convertible debentures 3 3
----------------------------------------------------------
Total 7 8
==========================================================
Stock options excluded from the calculation of diluted
earnings per common share 30 37 29 50
- ------------------------------------------------------------------------------------------------------------------------------------
(a) In the third quarter of 2005, substantially all holders of our $96 million
outstanding Oak 4 7/8% subordinated notes elected to convert their notes
into Corning common stock. The conversion ratio was 64.41381 shares of
Corning common stock for each $1,000 principal amount of notes. Upon the
conversion of these notes, we issued 6 million shares of Corning common
stock resulting in an increase to equity of $95 million.
8. Significant Customer
On October 1, 2006, AU Optronics Corporation (AUO), a customer of the Display
Technologies segment, completed its previously announced merger with Quanta
Display Inc. (QDI), another customer of Corning's Display Technologies segment.
In addition, through two recently announced transactions, AUO now holds a 49%
equity stake in Toppan CFI, a subsidiary of Toppan Printing Co., Ltd., also a
customer of the Display Technologies segment.
For the three and nine months ended September 30, 2006, Corning's combined sales
to AUO, QDI and Toppan represented 13% of the company's consolidated net sales.
There were no customers in the three and nine months ended September 30, 2005
that represented 10% or more of consolidated net sales.
9. Inventories
Inventories comprise the following (in millions):
- --------------------------------------------------------------------------------
September 30, 2006 December 31, 2005
- --------------------------------------------------------------------------------
Finished goods $ 124 $ 135
Work in process 266 198
Raw materials and accessories 147 124
Supplies and packing materials 136 113
- --------------------------------------------------------------------------------
Total inventories $ 673 $ 570
- --------------------------------------------------------------------------------
10. Investments
Investments comprise the following (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Ownership September 30, December 31,
Interest 2006 2005
------------- ---------------- ----------------
Affiliated companies accounted for by the equity method
Samsung Corning Precision Glass Co., Ltd. 50% $ 1,208 $ 859
Dow Corning Corporation 50% 695 473
Samsung Corning Co., Ltd. 50% 226 231
All other 25%-50% (1) 179 162
------- -------
2,308 1,725
Other investments 4 4
------- -------
Total $ 2,312 $ 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 affiliates follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------- ---------------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Related Party Transactions:
Corning sales to affiliates $ 11 $ 2 $ 27 $ 6
Corning purchases from affiliates $ 7 $ 27 $ 55 $ 54
Dividends received from affiliates $ 87 $ 4 $ 304 $ 216
Royalty income from affiliates $ 23 $ 23 $ 64 $ 55
Corning transfers of assets, at cost, to affiliates $ 21 $ 20 $ 50 $ 67
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Related Party Amounts:
Balances due from affiliates $ 6 $ 22
Balances due to affiliates $ 2 $ 41
- ------------------------------------------------------------------------------------------------------------------------------------
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 Nine months
ended September 30, ended September 30,
----------------------- ------------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations
Net sales $ 536 $ 466 $ 1,544 $ 1,166
Gross profit $ 376 $ 346 $ 1,109 $ 861
Net income $ 275 $ 242 $ 830 $ 590
Corning's equity in earnings of Samsung Corning Precision $ 135 $ 114 $ 408 $ 279
Related Party Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Corning purchases from Samsung Corning Precision $ 4 $ 18 $ 38 $ 30
Corning sales to Samsung Corning Precision $ 3 $ 3
Dividends received from Samsung Corning Precision $ 83 $ 210 $ 108
Royalty income from Samsung Corning Precision $ 21 $ 18 $ 60 $ 45
Corning transfers of machinery and equipment to Samsung
Corning Precision at cost (1) $ 21 $ 20 $ 50 $ 67
- ------------------------------------------------------------------------------------------------------------------------------------
(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.
Corning and the Samsung Group each own 50% of the common stock of Samsung
Corning Precision Glass Co., Ltd.
As of September 30, 2006, balances due to and due from Samsung Corning Precision
were $1 million and $23 million, respectively. As of December 31, 2005, balances
due to and from Samsung Corning Precision were $41 million and $18 million,
respectively.
As of September 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 Nine months
ended September 30, ended September 30,
------------------------ -------------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 1,141 $ 946 $ 3,230 $ 2,936
Gross profit $ 396 $ 319 $ 1,109 $ 1,022
Net income $ 156 $ 117 $ 501 $ 407
Corning's equity in earnings of Dow Corning (1) $ 78 $ 58 $ 251 $ 203
Dividend received from Dow Corning $ 40 $ 15
- ------------------------------------------------------------------------------------------------------------------------------------
Related Party Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Corning purchases from Dow Corning $ 2 $ 2 $ 9 $ 7
- ------------------------------------------------------------------------------------------------------------------------------------
(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 September 30, 2006 and
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 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. Inclusive of insurance, Dow Corning has paid
approximately $1.6 billion to the Settlement Trust. As of September 30, 2006,
Dow Corning had recorded a reserve for breast implant litigation of $1.7 billion
and anticipates insurance receivables of $207 million. As a separate matter
arising from the bankruptcy proceedings, Dow Corning is defending claims
asserted by a collection of commercial creditors who claim additional interest
at default rates and enforcement costs, during the period from May 1995 through
June 2004. On July 26, 2006, the U.S. Court of Appeals vacated the judgment of
the District Court fixing the interest component, ruled that default interest
and enforcement costs may be awarded subject to equitable factors to be
determined, and directed that the matter be remanded for further proceedings.
Dow Corning filed a petition for rehearing by the Court of Appeals, which has
not yet been decided. As of September 30, 2006, Dow Corning has estimated the
interest payable to commercial creditors to be within the range of $67.4 million
to $207.4 million. As Dow Corning management believes no single amount within
the range appears to be a better estimate than any other amount within the
range, Dow Corning has recorded the minimum liability within the range. Should
Dow Corning not prevail in this matter, Corning's equity earnings would be
reduced by its 50% share of the amount in excess of $67.4 million, net of
applicable tax benefits. 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.
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.
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 Nine months
ended September 30, ended September 30,
----------------------- ----------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 198 $ 205 $ 582 $ 627
Gross profit $ 38 $ 28 $ 60 $ 104
Net loss $ (2) $ (232) $ (40) $ (222)
Corning's equity in losses of Samsung Corning $ (1) $ (115) $ (20) $ (108)
Dividends received from Samsung Corning $ 22
- ------------------------------------------------------------------------------------------------------------------------------------
Related Party Transactions:
- ------------------------------------------------------------------------------------------------------------------------------------
Royalty income from Samsung Corning $ 2 $ 4 $ 3 $ 9
- ------------------------------------------------------------------------------------------------------------------------------------
Corning and the Samsung Group each own 50% of the common stock of Samsung
Corning Co., Ltd.
As of September 30, 2006, balances due from Samsung Corning were $2 million. No
amounts were due to Samsung Corning as of September 30, 2006. As of December 31,
2005, balances due from Samsung Corning were $4 million.
In the three and nine months ended September 30, 2006, Corning reduced its
equity earnings and investment in Samsung Corning by $2 million and $26 million,
respectively, due to an impairment of long-lived assets incurred by Samsung
Corning.
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, 2005, and 2006, Samsung Corning recorded significant fixed asset and
other impairment charges. 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 September
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
There were no changes in the carrying amount of goodwill for the nine months
ended September 30, 2006 as follows (in millions):
- --------------------------------------------------------------------------------
Telecom- Display
munications Technologies Other (1) Total
- --------------------------------------------------------------------------------
Balance at January 1, 2006 $ 118 $ 9 $ 150 $ 277
- --------------------------------------------------------------------------------
Balance at September 30, 2006 $ 118 $ 9 $ 150 $ 277
- --------------------------------------------------------------------------------
(1) This balance relates to our Specialty Materials operating segment.
Other intangible assets follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, 2006 December 31, 2005
-------------------------------------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Patents and trademarks $ 146 $ 99 $ 47 $ 143 $ 88 $ 55
Non-competition agreements 115 114 1 111 111
Other 4 1 3 4 1 3
---------------------------------- -----------------------------------
Total amortized intangible assets 265 214 51 258 200 58
---------------------------------- -----------------------------------
Unamortized intangible assets:
Intangible pension assets 3 3 3 3
---------------------------------- -----------------------------------
Total $ 268 $ 214 $ 54 $ 261 $ 200 $ 61
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets are primarily related to the Telecommunications
segment.
Estimated amortization expense related to these intangible assets is $11 million
annually for 2006 through 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 nine month periods ended September 30, 2006, we received
$24 million and $171 million, respectively, of deposits against orders. During
the three and nine months ended September 30, 2005, we received $153 million and
$389 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):
- ------------------------------------------------------------------------------------------------------------------------------------
Nine months ended Remainder Estimated 2007
2004 2005 September 30, 2006 of 2006 and Beyond Total
- ------------------------------------------------------------------------------------------------------------------------------------
Customer deposits received $204 $457 $171 $0 $105 $937
- ------------------------------------------------------------------------------------------------------------------------------------
In 2005, we began issuing credit memoranda which totaled $29 million for the
fiscal year 2005. During the three and nine months ended September 30, 2006, we
issued $12 million and $85 million, respectively, in credit memoranda. These
credits are not included in the above table. During the three and nine months
ended September 30, 2005, we issued $11 million and $13 million in credit
memorandum, respectively.
Customer deposit liabilities were $680 million and $595 million at September 30,
2006 and December 31, 2005, respectively, of which $213 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 Nine months Three months Nine months
ended Sept. 30, ended Sept. 30, ended Sept. 30, ended Sept. 30,
-------------------- -------------------- -------------------- --------------------
2006 2005 2006 2005 2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 12 $ 9 $ 43 $ 39 $ 2 $ 2 $ 10 $ 7
Interest cost 34 26 102 111 11 12 33 33
Expected return on plan assets (42) (30) (125) (132)
Amortization of net loss 9 6 26 24 1 3 5 6
Amortization of prior service cost 2 2 6 6 (1) (1) (3) (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Total expense $ 15 $ 13 $ 52 $ 48 $ 13 $ 16 $ 45 $ 43
- ------------------------------------------------------------------------------------------------------------------------------------
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.
The Pension Protection Act of 2006 included a provision that raised the discount
rate for calculating the current liability in 2006, which improved our funded
ratio over 100% for our domestic qualified deferred pension plan. As a result,
we no longer expect to make a voluntary contribution to our pension plans this
year.
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 reduce 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
September 30, 2006 (in millions):
- --------------------------------------------------------------------------------
Notional Amount Fair Value
- --------------------------------------------------------------------------------
Foreign exchange forward contracts $ 1,244 $ 23
Foreign exchange option contracts $ 440 $ 8
- --------------------------------------------------------------------------------
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 September 30, 2006, the notional amount of the undesignated
derivatives was $1,058 million.
Cash Flow Hedges
- ----------------
Corning has cash flow hedges that are comprised of 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 third quarter of 2006, Corning determined that 2,174
million Japanese yen (19.6 million U.S. dollar equivalent) anticipated sales
transactions would not occur as originally specified. The hedges on these
anticipated sales transactions were considered to be ineffective as the critical
terms of the hedges and hedged items no longer matched. These derivative
financial instruments were de-designated as cash flow hedges and the gain was
recorded immediately in other income, net, in the consolidated statement of
operations. The notional amount of the hedges that were de-designated was $19.6
million; a corresponding gain of $0.9 million resulted from this
ineffectiveness.
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 September 30, 2006, the amount of net gains expected to be
reclassified into earnings within the next 12 months is $12.5 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
September 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 as part of the foreign currency translation
adjustment. Net losses included in the cumulative translation adjustment at
September 30, 2006 and December 31, 2005 were $129 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 September 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 September 30, 2006,
there were 104 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
nine months ended September 30, 2006 was $33 million and $95 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 nine months
ended September 30, 2005 was $12 million and $28 million, respectively, and
included (i) time-based restricted stock and (ii) performance-based restricted
stock. Compensation cost was included in operating activities on the Company's
Consolidated Statements of Cash Flows for the nine months ended September 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 the Company's 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 one-time election.
Share-based compensation expense recognized in the Company's results of
operations follows (in millions, except per share amounts):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
--------------------- ------------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes $ 33 $ 12 $ 95 $ 28
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 33 $ 12 $ 95 $ 28
- ------------------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 33 $ 12 $ 95 $ 28
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per Common Share - Basic:
Income from continuing operations $ 0.02 $ 0.01 $ 0.06 $ 0.02
Net income $ 0.02 $ 0.01 $ 0.06 $ 0.02
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per Common Share - Diluted:
Income from continuing operations $ 0.02 $ 0.01 $ 0.06 $ 0.02
Net income $ 0.02 $ 0.01 $ 0.06 $ 0.02
- ------------------------------------------------------------------------------------------------------------------------------------
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 Nine months ended
September 30, 2005 September 30, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders, as reported $ 203 $ 618
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 12 28
Deduct: Total stock-based compensation expense determined under
the fair value based method, net of related tax effects (23) (65)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders, pro forma $ 192 $ 581
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per Common Share - Basic:
As reported $ 0.14 $ 0.43
Pro forma $ 0.13 $ 0.40
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per Common Share - Diluted:
As reported $ 0.13 $ 0.41
Pro forma $ 0.12 $ 0.38
- ------------------------------------------------------------------------------------------------------------------------------------
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 nine months
ended September 30, 2006:
- --------------------------------------------------------------------------------
Number of Weighted Average
Shares (000's) Exercise Price
- --------------------------------------------------------------------------------
Options Outstanding as of December 31, 2005 120,504 $ 21.67
Granted 5,661 25.37
Exercised (25,864) 11.18
Forfeited and Expired (3,283) 46.92
- --------------------------------------------------------------------------------
Options Outstanding as of September 30, 2006 97,018 $ 23.85
- --------------------------------------------------------------------------------
Options Exercisable as of September 30, 2006 78,893 $ 25.65
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
September 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 8,130 6.19 $ 3.31 $ 173,429 5,157 $ 3.04 $ 111,403
4.06 to 6.93 11,611 6.23 4.88 229,524 11,376 4.88 224,804
7.08 to 9.95 16,588 5.65 8.36 270,213 16,475 8.36 268,325
10.05 to 15.87 22,692 7.18 12.48 276,135 15,998 12.59 192,865
16.02 to 28.25 12,793 7.57 22.23 41,867 4,683 19.14 26,361
30.01 to 59.35 10,294 3.94 46.65 10,294 46.65
60.24 to 74.09 14,617 3.86 69.52 14,617 69.52
76.03 to 111.00 293 3.90 93.47 293 93.47
- ------------------------------------------------------------------------------------------------------------------------------------
97,018 5.92 $ 23.85 $ 991,168 78,893 $ 25.65 $ 823,758
- ------------------------------------------------------------------------------------------------------------------------------------
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 September 29, 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 September
30, 2006 was approximately 53 million. The weighted average remaining
contractual life on September 30, 2006 for outstanding and exercisable options
is 5.92 and 5.35 years, respectively.
The weighted-average grant-date fair value for options granted for the nine
months ended September 30, 2006 and 2005 was $10.00 and $5.53, respectively. The
total fair value of options that vested during the nine months ended September
30, 2006 and 2005 was approximately $50 million and $67 million, respectively.
Compensation cost related to stock options was approximately $18 million and $54
million, respectively, for the three and nine months ended September 30, 2006,
and $0 million for the three and nine months ended September 30, 2005.
Proceeds received from the exercise of stock options were $280 million for the
nine months ended September 30, 2006, which was included in financing activities
on the Company's Consolidated Statements of Cash Flows. The total intrinsic
value of options exercised for the nine months ended September 30, 2006 and 2005
was approximately $333 million and $120 million, respectively, which is
currently deductible for tax purposes. However, these tax benefits were not
realized due to net operating loss carryforwards available to the Company. Refer
to Note 6 (Income Taxes) to the consolidated financial statements.
For stock options granted prior to January 1, 2006, 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 on a pro forma disclosure basis over the requisite
vesting period (the "stated vesting period approach"). For time-based and
performance-based restricted stock granted prior to January 1, 2006, Corning
specified that the employee will 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
stated or nominal vesting period. For those share-based awards granted during
the three and nine months ended September 30, 2006, Corning recognized
approximately $0 million and $6 million, respectively, in additional
compensation cost in applying the non-substantive vesting period approach versus
the stated and nominal period approaches.
As of September 30, 2006, there was approximately $47 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 0.85 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
volatility is based on the blended short-term volatility (the arithmetic average
of the implied volatility and the short-term historical volatility), long-term
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 Nine months ended
September 30, 2006 September 30, 2006
- --------------------------------------------------------------------------------
Expected volatility 42-54% 36-54%
Weighted-average volatility 53% 50-53%
Expected dividends 0 0
Risk-free rate 0.8-10.2% 0.4-10.2%
Expected time to exercise (in years) 3.0-6.5 2.6-6.5
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 nine months ended September 30, 2006:
- --------------------------------------------------------------------------------
Weighted-Average
Grant-Date
Nonvested shares Shares (000's) Fair Value
- --------------------------------------------------------------------------------
Nonvested shares at December 31, 2005 861 $ 11.86
Granted 133 24.34
Vested (178) 9.70
Forfeited (14) 12.81
- --------------------------------------------------------------------------------
Nonvested shares at September 30, 2006 802 $ 14.40
- --------------------------------------------------------------------------------
As of September 30, 2006, there was approximately $4 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 2.26 years. The total fair value of time-based
restricted stock that vested during the nine months ended September 30, 2006 and
2005 was approximately $2 million and $3 million, respectively. Compensation
cost related to time-based restricted stock was approximately $3 million and $2
million for the nine months ended September 30, 2006 and 2005, respectively, and
$2 million and $1 million for the three months ended September 30, 2006 and
2005, respectively.
Performance-Based Restricted Stock:
- -----------------------------------
Performance-based restricted stock earned 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 nine months ended September 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 (765) 12.08
Forfeited (146) 13.95
- --------------------------------------------------------------------------------
Nonvested shares at September 30, 2006 7,107 $ 14.28
- --------------------------------------------------------------------------------
As of September 30, 2006, there was approximately $57 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 1.28 years. The total fair value of
performance-based restricted stock that vested during the nine months ended
September 30, 2006 and 2005 was approximately $9 million and $0 million,
respectively. Compensation cost related to performance-based restricted stock
was approximately $33 million and $26 million for the nine months ended
September 30, 2006 and 2005, respectively, and $12 million for the three months
ended September 30, 2006 and 2005.
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 through
September 30, 2006. For the three and nine months ended September 30, 2006,
approximately $1 million and $4 million, respectively, of compensation cost
related to the WESPP was recorded, and there was zero expense for the three and
nine months ended September 30, 2005. For the three and nine months ended
September 30, 2006, approximately 0.2 million and 0.8 million shares,
respectively, were purchased by employees. Effective October 1, 2006, the
purchase price of the stock will be 85% of the end-of-quarter closing market
price.
16. Comprehensive Income
Components of comprehensive income, on an after-tax basis where applicable,
follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------ -----------------------
2006 (b) 2005 (b) 2006 (b) 2005 (b)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 438 $ 203 $ 1,209 $ 618
Other comprehensive income:
Change in unrealized gain (loss) on investments, net 2 3 (33)
Reclassification adjustment relating to investments
included in net income, net 19
Change in unrealized gain on derivative
instruments, net 1 16 12 54
Reclassification adjustment relating to derivatives, net (5) (7) (26) (22)
Foreign currency translation adjustment, net (a) 10 (42) 138 (140)
Change in minimum pension liability (3) 1 (8) 4
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 443 $ 171 $ 1,328 $ 500
- ------------------------------------------------------------------------------------------------------------------------------------
(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 nine months ended
September 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 September 30, 2006
Net sales $ 506 $ 456 $ 153 $ 68 $ 99 $ 1,282
Depreciation (1) $ 69 $ 36 $ 19 $ 5 $ 9 $ 138
Amortization of purchased intangibles $ 2 $ 2
Research, development and engineering expenses (2) $ 30 $ 20 $ 30 $ 12 $ 9 $ 101
Restructuring, impairment and other charges and
(credits) (before-tax and minority interest) $ (3) $ 3 $ 2 $ 2
Income tax provision $ (22) $ (11) $ (3) $ (1) $ (37)
Earnings (loss) before minority interest and equity
earnings (loss) (4) $ 257 $ 24 $ 7 $ (8) $ (1) $ 279
Minority interests (5) (1) (6)
Equity in earnings of affiliated companies (5) 138 1 9 148
------- ------- -------- -------- ------- -------
Net income (loss) $ 395 $ 20 $ 7 $ (8) $ 7 $ 421
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 2005
Net sales $ 489 $ 398 $ 144 $ 70 $ 87 $ 1,188
Depreciation (1) $ 48 $ 46 $ 18 $ 5 $ 8 $ 125
Amortization of purchased intangibles $ 3 $ 3
Research, development and engineering expenses (2) $ 29 $ 21 $ 26 $ 11 $ 7 $ 94
Restructuring, impairment and other charges and
(credits) (before-tax and minority interest) (3) $ 28 $ 28
Income tax provision $ (35) $ 2 $ 1 $ 1 $ (31)
Earnings (loss) before minority interests and equity
earnings (loss) (4) $ 268 $ (23) $ 9 $ (1) $ 1 $ 254
Minority interests 1 (2) (1)
Equity in earnings (loss) of affiliated companies (5) 117 6 (107) 16
------- ------- -------- -------- ------- -------
Net income (loss) $ 385 $ (17) $ 9 $ (1) $ (108) $ 268
- ------------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2006
Net sales $ 1,514 $ 1,325 $ 460 $ 215 $ 291 $ 3,805
Depreciation (1) $ 199 $ 121 $ 59 $ 15 $ 29 $ 423
Amortization of purchased intangibles $ 8 $ 8
Research, development and engineering expenses (2) $ 96 $ 58 $ 91 $ 37 $ 25 $ 307
Restructuring, impairment and other charges and
(credits) (before-tax and minority interest) $ 2 $ 5 $ 6 $ 13
Income tax provision $ (72) $ (30) $ (6) $ (5) $ (113)
Earnings (loss) before minority interest and equity
earnings (loss) (4) $ 741 $ 62 $ 16 $ (15) $ 2 $ 806
Minority interests (5) (3) (8)
Equity in earnings (loss) of affiliated companies (5) 415 4 (1) 8 426
------- ------- -------- -------- ------- -------
Net income (loss) $ 1,156 $ 61 $ 15 $ (15) $ 7 $ 1,224
- ------------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2005
Net sales $ 1,224 $ 1,240 $ 438 $ 219 $ 258 $ 3,379
Depreciation (1) $ 133 $ 138 $ 53 $ 15 $ 26 $ 365
Amortization of purchased intangibles $ 10 $ 10
Research, development and engineering expenses (2) $ 74 $ 57 $ 75 $ 28 $ 20 $ 254
Restructuring, impairment and other charges and
(credits) (before-tax and minority interest) (3) $ 36 $ (15) $ 21
Income tax provision $ (76) $ (13) $ (5) $ (2) $ (3) $ (99)
Earnings (loss) before minority interest and equity
earnings (loss) (4) $ 586 $ (15) $ 22 $ 4 $ 21 $ 618
Minority interests 1 (9) (8)
Equity in earnings (loss) of affiliated companies (5) 285 7 (82) 210
------- ------- -------- -------- ------- -------
Net income (loss) $ 871 $ (7) $ 22 $ 4 $ (70) $ 820
- ------------------------------------------------------------------------------------------------------------------------------------
(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) In the three and nine months ended September 30, 2005, restructuring,
impairment and other charges and (credits) includes a charge of $28 million
for a restructuring plan in the Telecommunications segment.
(4) Many of Corning's administrative and staff functions are performed on a
centralized basis. Where practicable, Corning charges these expenses to
segments based upon the extent to which each business uses a centralized
function. Other staff functions, such as corporate finance, human resources
and legal are allocated to segments, primarily as a percentage of sales.
(5) In the three and nine months ended September 30, 2006, equity in earnings
(loss) of affiliated companies includes charges of $2 million and $26
million, respectively, in All Other related to impairments for Samsung
Corning. In the three and nine months ended September 30, 2005, equity in
earnings (loss) of affiliated companies includes a charge of $106 million
for Corning's share of Samsung Corning's impairment of certain
manufacturing asset and other charges.
A reconciliation of reportable segment net income to consolidated net income
follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------- --------------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Net income of reportable segments $ 421 $ 268 $ 1,224 $ 820
Unallocated amounts:
Net financing costs (1) 5 (18) (5) (79)
Stock-based compensation expense (33) (12) (95) (27)
Exploratory research (22) (20) (62) (56)
Corporate contributions (7) (6) (24) (18)
Equity in earnings of affiliated companies, net of impairments (2) 84 61 262 212
Asbestos settlement (3) (13) (73) (137) (204)
Other corporate items (4) 3 3 46 (30)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 438 $ 203 $ 1,209 $ 618
- ------------------------------------------------------------------------------------------------------------------------------------
(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 nine months ended September 30, 2006, a $33 million
gain representing our share of a tax settlement relating to an IRS
examination at Dow Corning.
. In the nine months ended September 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 third quarter of 2006 and
2005, Corning recorded a charge of $13 million and $73 million,
respectively, to reflect changes in the estimated fair value of the
components of the settlement offer. In the nine months ended 2006 and 2005,
Corning recorded a charge of $137 million and $204 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 nine months ended September 30, 2006, tax benefits of $48
million from the release of valuation allowances for certain foreign
locations.
. In the nine months ended September 30, 2005, impairment charges of $25
million for an other-than-temporary decline in our investment in
Avanex below its cost basis.
. In the three months and nine months ended September 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 $4.5 billion at September 30, 2006. The increase
is due primarily to increased capital expenditures of $628 million and
investments in associated companies of $357 million for the nine months ended
September 30, 2006. In the Environmental Technologies reportable operating
segment, assets increased from $0.7 billion at December 31, 2005 to $0.8 billion
at September 30, 2006. The increase is due primarily to increased capital
expenditures of $113 million for the nine months ended September 30, 2006.
The sales of each of our reportable operating segments are concentrated across a
relatively small number of customers. In the third 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 64% of total segment
sales.
.. In the Telecommunications segment, two customers accounted for 26% 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 43% of segment
sales.
For the nine months ended September 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 74% 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 43% 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.
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 third 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 first nine months
of 2006 were as follows:
.. In the third quarter, we issued $250 million of 7.25% aggregate principal
amount of senior unsecured notes due 2036 for general corporate purposes.
.. In the second quarter of 2006, 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 19%.
.. We received $171 million in deposits against orders relating to our
multi-year supply agreements with customers in the Display Technologies
segment.
.. We ended the third quarter of 2006 with $2.8 billion in cash and short-term
investments. Operating cash flow in the third quarter and year-to-date
exceeded our capital spending.
Profitability
For the three months ended September 30, 2006, we generated net income of $438
million or $0.27 per share compared to net income of $203 million or $0.13 per
share for the same period in 2005. The improvement in net income was due largely
to the following items:
.. Lower asbestos settlement expense of $13 million compared to expense of $73
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 asbestos settlement liability is due primarily to the change 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.
.. An increase in equity earnings from Dow Corning Corporation and Samsung
Corning Precision. In addition, the third quarter of 2005 included $106
million for our share of an impairment charge at Samsung Corning
Corporation.
.. Strong volume growth in the Telecommunications operating segment.
For the nine months ended September 30, 2006, we generated net income of $1,209
million or $0.76 per share. This represents an improvement in net income of $591
million (or 96%) over the same period in 2005. The improvement in net income was
due primarily to strong volume growth in our Display Technologies operating
segment. In addition, the nine months ended September 30, 2006, also reflected
those same items as described above for the three month period.
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 nine months
ended September 30, 2006, increased when compared to the same periods last year
yet 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 nine month periods ended September 30, 2006, were $338 million and $892
million, respectively. Of these amounts, $250 million and $628 million,
respectively, were directed toward our Display Technologies segment, and $30
million and $113 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 third quarter follow (dollars in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
----------------------- ---------------------
2006 2005 % Change 2006 2005 % Change
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,282 $ 1,188 8% $ 3,805 $ 3,379 13%
Gross margin $ 566 $ 545 4% $ 1,680 $ 1,457 15%
(gross margin %) 44% 46% 44% 43%
Selling, general and administrative expenses $ 218 $ 178 22% $ 635 $ 553 15%
(as a % of net sales) 17% 15% 17% 16%
Research, development and engineering
expenses $ 127 $ 118 8% $ 379 $ 320 18%
(as a % of net sales) 10% 10% 10% 9%
Restructuring, impairment and other
charges and (credits) $ 2 $ 28 (93)% $ 13 $ 46 (72)%
(as a % of net sales) 0% 2% 0% 1%
Asbestos settlement (gain) expense $ 13 $ 73 (82)% $ 137 $ 204 (33)%
(as a % of net sales) 1% 6% 4% 6%
Income (loss) before income taxes $ 245 $ 156 57% $ 584 $ 295 98%
(as a % of net sales) 19% 13% 15% 9%
Provision for income taxes $ 33 $ 28 18% $ 55 $ 91 (40)%
(as a % of net sales) 3% 2% 1% 3%
Equity in earnings of associated companies $ 232 $ 77 201% $ 688 $ 422 63%
(as a % of net sales) 18% 6% 18% 12%
Net income $ 438 $ 203 116% $ 1,209 $ 618 96%
(as a % of net sales) 34% 17% 32% 18%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales
For the three months ended September 30, 2006, the net sales increase compared
to the same period in 2005 was primarily the result of year-over-year increased
volume in the Telecommunications segment. For the nine months ended September
30, 2006, the net sales increase compared to the same period in 2005 was
primarily driven by increased demand for LCD glass substrates in our Display
Technologies segment and increased volume in the Telecommunications segment. Net
sales for all other segments were comparable to the respective prior year
periods. Sales growth was negatively impacted by approximately $17 million and
$133 million from movements in foreign exchange rates, primarily the Japanese
yen, in the three and nine months ended September 30, 2006, respectively, when
compared to the same periods in 2005.
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.
Gross Margin
Gross margin for the third quarter of 2006 was down slightly when compared to
the same period last year due to price declines of LCD glass substrates and an
increase in the proportion of sales from our Telecommunications segment. For the
nine months ended September 30, 2006, gross margin as a percentage of net sales
was relatively even with the same period last year.
Selling, General and Administrative Expenses
For the three and nine months ended September 30, 2006, selling, general, and
administrative expenses increased $40 million and $82 million, respectively,
when compared to the same periods in 2005. As a percentage of sales, selling,
general, and administrative expenses increased for both periods due primarily to
an increase in stock-based compensation expense as a result of the Company's
adoption of SFAS 123(R) 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 $0.01 and $0.04 in basic and diluted earnings per share for the
three and nine months ended September 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
nine month periods ended September 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 third quarter of 2006, we recorded a $2 million net charge which included
a $5 million charge for certain manufacturing operations of our Life Sciences
and Specialty Materials segments and $3 million of credits for the sale of a
previously impaired asset and revisions to existing plans. 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
and 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.
In the third quarter of 2005, we recorded a charge of $30 million related to
continued cost reduction actions in the Telecommunications segment and credits
of $2 million related to adjustments to prior period restructuring charges.
Charges recorded for the nine months ended September 30, 2005 included the third
quarter charge associated with the Telecommunications segment and impairment
charges for other than temporary declines 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 items had an impact on
the results of our income before income taxes:
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Loss on repurchases and retirement of debt, net $(11) $(12)
Net exchange rate gains (losses) $ 4 $ 1 $ 8 $(13)
- ------------------------------------------------------------------------------------------------------------------------------------
Movements in exchange rates did not have a significant impact on results for the
three and nine months ended September 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 Nine months
ended September 30, ended September 30,
------------------- -------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 33 $ 28 $ 55 $ 91
Effective tax rate 13.5% 17.9% 9.4% 30.8%
- ------------------------------------------------------------------------------------------------------------------------------------
For the third quarter ended September 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;
and
.. The benefit of tax holidays and investment credits in Taiwan and tax
holidays in China.
In addition to the items noted above, the tax provision for the nine months
ended September 30, 2006, also reflected the release of valuation allowances on
all Australian deferred tax assets and 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) 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. 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. 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 9% and 17% for the third quarter ended September 30, 2006 and 2005,
respectively, and a reduction in the rate of 13% and 14% for the nine months
ended September 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 Nine months
ended September 30, ended September 30,
------------------- -------------------
2006 2005 2006 2005
- --------------------------------------------------------------------------------
Samsung Corning Precision $ 135 $ 114 $ 408 $ 279
Dow Corning Corporation 78 58 251 203
Samsung Corning (1) (115) (20) (108)
All other 20 20 49 48
------ ------ ------ ------
Total equity earnings $ 232 $ 77 $ 688 $ 422
- --------------------------------------------------------------------------------
The improvement in equity earnings recognized from Samsung Corning Precision for
both the three and nine months ended September 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
nine months ended September 30, 2006, compared to the same periods in 2005, is
largely attributable to the following:
.. Strong sales volumes for Dow Corning in 2006.
.. During the second quarter of 2006, Dow Corning reached settlement with the
IRS regarding liabilities for tax years 1992 to 2003. Equity earnings
reflected a $33 million gain as a result of the settlement which resolved
all Federal tax issues related to Dow Corning's implant settlement.
.. During the second quarter of 2005, Dow Corning recorded a gain on the
issuance of subsidiary stock. Corning's equity earnings included $11
million related to this gain.
In 2003, 2005, and 2006, Samsung Corning recorded significant fixed asset and
other impairment charges. As the conventional television glass market is
expected to be negatively impacted by continued 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 additional impairment of its investment in Samsung Corning.
Corning's 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 September 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 Nine months
ended September 30, ended September 30,
--------------------- ----------------------
2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 438 $ 203 $ 1,209 $ 618
Basic earnings per common share $ 0.28 $ 0.14 $ 0.78 $ 0.43
Diluted earnings per common share $ 0.27 $ 0.13 $ 0.76 $ 0.41
Shares used in computing per share amounts for:
Basic earnings per common share 1,553 1,488 1,548 1,444
Diluted earnings per common share 1,593 1,552 1,594 1,523
- ------------------------------------------------------------------------------------------------------------------------------------
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 Nine months
ended September 30, ended September 30,
------------------- % Change ------------------- % Change
2006 2005 06 vs. 05 2006 2005 06 vs. 05
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 506 $ 489 3% $ 1,514 $ 1,224 24%
Income before equity earnings $ 257 $ 268 (4)% $ 741 $ 586 26%
Equity earnings of associated companies $ 138 $ 117 18% $ 415 $ 285 46%
Net income $ 395 $ 385 3% $ 1,156 $ 871 33%
- ------------------------------------------------------------------------------------------------------------------------------------
The net sales increase for the third quarter of 2006 continues to reflect
overall LCD market growth. During the third quarter of 2006, glass substrate
volumes (measured in square feet of glass sold) increased 31% compared with the
same period in 2005 driven by increased LCD monitor and TV market penetration,
demand for larger-size substrates (generation 5 and above), and continued strong
demand for glass for notebook computers. The growth in net sales was partially
offset by declines in weighted average selling prices. For the third quarter of
2006, large-size glass substrates accounted for 84% of total sales volumes,
compared to 70% for the third 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 in
the third quarter of 2006 was negatively impacted by approximately $23 million
from a weakening of the Japanese yen compared to the third quarter of 2005.
In the second quarter of 2006, the Display Technologies segment reported its
first quarterly sequential decline in volume 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. In
comparison to the second quarter of 2006, both volume and sales increased in the
third quarter of 2006. As expected, our customers reduced their inventories and
began ramping up LCD panel production to meet seasonally stronger demand
expected in the fourth quarter.
For the nine months ended September 30, 2006, the net sales increase over the
same period last year was largely driven by those factors identified above. For
the comparable nine month periods, glass substrate volumes increased
approximately 54%, while weighted average selling prices experienced declines in
the mid-teens. Sales of large-size glass substrates accounted for 81% of year to
date 2006 sales volumes compared to 66% for the same period in 2005. Movements
in the U.S. dollar - Japanese yen exchange rate negatively impacted 2006 sales
by approximately $120 million (or 10%) compared to the nine month period in
2005.
For the three and nine months ended September 30, 2006, the increase in income
before equity earnings was primarily the result of higher volumes as described
above offset somewhat by lower prices.
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 except that the impact of the panel maker inventory
build in Korea in the second quarter of 2006 was not as significant. During the
three and nine months ended September 30, 2006, Samsung Corning Precision's
earnings were negatively impacted by approximately 5% and 11%, 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. On
October 1, 2006, AU Optronics Corporation (AUO), a customer of the Display
Technologies segment, completed its previously announced merger with Quanta
Display Inc. (QDI), another customer of Corning's Display Technologies segment.
In addition, through two recently announced transactions, AUO now holds a 49%
equity stake in Toppan CFI, a subsidiary of Toppan Printing Co., Ltd., also a
customer of the Display Technologies segment. As a result of these transactions,
AUO, QDI, and Toppan CFI are considered to be a single customer reported as AUO.
For the third quarter of 2006, AUO (including QDI and Toppan CFI), Chi Mei
Optoelectronics Corporation, and Sharp Corporation, which individually accounted
for more than 10% of segment net sales, accounted for 64% of total segment sales
when combined. For the nine months ended September 30, 2006, AUO (including QDI
and Toppan CFI), Chi Mei Optoelectronics Corporation, Sharp Corporation, and
Hannstar Display Corporation, which individually accounted for more than 10% of
segment net sales, accounted for 74% of total segment sales in aggregate.
In addition, Samsung Corning Precision's sales are concentrated across a small
number of its customers. For the three and nine months ended September 30, 2006,
sales to two LCD panel makers located in Korea, Samsung Electronics Co., Ltd.
and LG Phillips LCD Co., Ltd. accounted for approximately 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 agreed to 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 third
quarter of 2006, Corning received $24 million of customer deposits and issued
$12 million in credit memoranda. In the nine months ended September 30, 2006,
Corning received $171 million of customer deposits and issued $85 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 over 2005 volumes. 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 fourth quarter of 2006, we expect volumes for our wholly owned business
to be up in the range of 20% to 30% compared to the third quarter of 2006. Sales
for our wholly owned business are expected to be up due to improved volumes
offset somewhat by price declines. We expect volumes of Samsung Corning
Precision to be up in the range of 8% to 12% compared to the third quarter of
2006. 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 fourth quarter 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 Nine months
ended September 30, ended September 30,
----------------------- % Change ------------------- % Change
2006 2005 06 vs. 05 2006 2005 06 vs. 05
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 241 $ 216 12% $ 680 $ 641 6%
Hardware and equipment 215 182 18% 645 599 8%
------- ------- ------- -------
Total net sales $ 456 $ 398 15% $ 1,325 $ 1,240 7%
======= ======= ======= =======
Net income (loss) $ 20 $ (17) (218)% $ 61 $ (7) (971)%
- ------------------------------------------------------------------------------------------------------------------------------------
For the three and nine months ended September 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 nine months ended
September 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 three and nine months ended September 30, 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 $20
million in the third quarter of 2005 and $36 million for the six months from
April 1, 2005 through September 30, 2005.
In the third quarter of 2005, Corning recorded a $30 million charge for cost
reduction actions in the Telecommunications segment and credits of $2 million to
adjust prior period reserves.
The increase in net income for the three and nine months ended September 30,
2006, when compared to the same periods last year was due largely to the same
factors as described above along with the absence of restructuring charges in
2006. Movements in exchange rates did not significantly impact the results for
this operating segment.
The Telecommunications segment has a concentrated customer base. For the third
quarter of 2006, two customers of the Telecommunications segment, which
individually accounted for more than 10% of segment net sales, represented 26%
of total segment sales when combined. For the nine months ended September 30,
2006, two customers, which individually accounted for more than 10% of total
segment net sales, accounted for 25% of total segment sales when combined.
Outlook:
- --------
For the fourth quarter of 2006, we expect net sales to decline by 20% to 25%
when compared to the third quarter of 2006 driven by typical seasonality in the
telecommunications business, lower volumes of fiber-to-the-premises products,
which are dependent on the buying patterns of our largest Telecommunications
segment customer and lower prices.
Environmental Technologies
The following table provides net sales and other data for the Environmental
Technologies reportable operating segment (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
----------------------- % Change -------------------- % Change
2006 2005 06 vs. 05 2006 2005 06 vs. 05
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Automotive $ 112 $ 121 (7)% $ 346 $ 373 (7)%
Diesel 41 23 78% 114 65 75%
------- ------- ------- -------
Total net sales $ 153 $ 144 6% $ 460 $ 438 5%
======= ======= ======= =======
Net income $ 7 $ 9 (22)% $ 15 $ 22 (32)%
- ------------------------------------------------------------------------------------------------------------------------------------
Sales of this segment for the third quarter of 2006 were somewhat higher than
the same period last year due to improvements in Diesel products sales which
reflect continued demand from heavy-duty diesel retrofit markets. In early
October, the Company signed its first long-term agreement for the supply of
Corning diesel emissions control products with Cummins Emission Solutions, a
business unit of Cummins Inc. Corning will continue to negotiate with other
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 will likely continue for the remainder of the year. The
decline in automotive sales was caused by reduced volumes due largely to a shift
in market share among automotive manufacturers and slightly lower automotive
unit sales in North America. Movements in exchange rates did not have a
significant impact on sales for this segment.
For the nine months ended September 30, 2006, sales reflected the same factors
as described above for the third quarter.
For the three and nine months ended September 30, 2006, net income was down due
to higher operating expenses. Movements in foreign exchange rates did not
significantly impact net income 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 nine months ended
September 30, 2006, three customers of the Environmental Technologies segment,
which individually accounted for more than 10% of segment net sales, accounted
for 74% of total segment sales.
Outlook:
- --------
For the fourth quarter of 2006, we expect net sales of this segment to be even
when compared to the third quarter of 2006. Diesel products sales are expected
to increase in the fourth quarter in anticipation of 2007 regulations that
require filters such as ours to meet tighter emission standards in the U.S.
Automotive substrate sales are expected to be down from the prior quarter
reflecting seasonal declines. Changes in automotive production 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 Nine months
ended September 30, ended September 30,
------------------- % Change ------------------- % Change
2006 2005 06 vs. 05 2006 2005 06 vs. 05
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 68 $ 70 (3)% $ 215 $ 219 (2)%
Net (loss) income $ (8) $ (1) 700% $ (15) $ 4 (475)%
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales for the three and nine months ended September 30, 2006, were down only
slightly when compared to the same periods last year driven by level volumes in
the U.S. and in international markets. Movements in foreign exchange rates did
not have a significant impact on the comparability of sales.
In the third quarter of 2006, we recorded a $5 million charge for severance and
curtailment costs related to certain manufacturing operations of our Life
Sciences and Specialty Materials operating segments. Approximately $3 million of
this charge was related to the Life Sciences segment. In the second quarter of
2006, we recorded a $6 million impairment charge for those same manufacturing
operations. Approximately $2 million of this charge was related to the assets of
Life Sciences.
For the three and nine months ended September 30, 2006, the increase in net loss
compared to the respective 2005 periods was largely attributable to the charges
described above and manufacturing performance.
In the Life Sciences segment, one customer accounted for approximately 43% of
this segment's net sales for the three and nine month periods ended September
30, 2006.
Outlook:
- --------
For the fourth quarter of 2006, we expect net sales to be down from the third
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
seasonally lower sales volume and the absence of restructuring charges.
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):
- ------------------------------------------------------------------------------------------------------------------------------------
Nine months ended Remainder Estimated 2007
2004 2005 September 30, 2006 of 2006 and Beyond Total
- ------------------------------------------------------------------------------------------------------------------------------------
Customer deposits received $204 $457 $171 $0 $105 $937
- ------------------------------------------------------------------------------------------------------------------------------------
In 2005, we began issuing credit memoranda which totaled $29 million for the
fiscal year 2005. During the three and nine months ended September 30, 2006, we
issued $12 million and $85 million, respectively, in credit memoranda. These
credits are not included in the above amounts. During the three and nine months
ended September 30, 2005, we issued $11 million and $13 million in credit
memorandum, respectively.
In 2006, we expect to issue credits of approximately $123 million. Based on the
deposit arrangements currently in place, in 2007 and 2008, credits issued will
likely exceed deposits received.
Financing Structure
2006
Third Quarter
- -------------
.. In the third quarter of 2006, we issued $250 million of 7.25% aggregate
principal amount of senior unsecured notes due 2036 for general corporate
purposes.
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.
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 September 30, 2006, our remaining capacity under our 2001 shelf registration
statement was approximately $1.8 billion.
Capital Spending
Capital spending totaled $892 million and $1,076 million during the nine months
ended September 30, 2006, and 2005, respectively. Our 2006 capital spending
program is expected to be in the range of $1.2 billion to $1.3 billion. Of this
amount, approximately $900 million to $1.0 billion will be used to expand
manufacturing capacity for LCD glass substrates in the Display Technologies
segment and approximately $150 million will be directed toward our Environmental
Technologies segment.
Key Balance Sheet Data
Balance sheet and working capital measures are provided in the following table
(dollars in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
As of September 30, 2006 As of December 31, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Working capital $ 2,166 $ 1,490
Working capital, excluding cash, cash equivalents, and
short-term investments $ (646) $ (944)
Current ratio 1.9:1 1.6:1
Trade accounts receivable, net of allowances $ 753 $ 629
Days sales outstanding 53 49
Inventories $ 673 $ 570
Inventory turns 4.4 4.7
Days payable outstanding 74 89
Long-term debt $ 1,710 $ 1,789
Total debt to total capital 19% 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 debt transactions 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 third quarter of 2006.
SFAS 123R was adopted on January 1, 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 nine months ended September 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 April 2006, the FASB issued a FASB Staff Position (FSP) FSP FIN 46R-6,
"Determining the Variability to Be Considered in Applying FASB Interpretation
No. 46(R)". This FSP addresses how a reporting enterprise should determine the
variability to be considered in applying FIN 46R and is effective on the first
day of the first reporting period beginning after June 15, 2006. Corning adopted
FSP FIN 46R-6 on the effective date of July 1, 2006. Our current approach to
applying FIN 46R is consistent with guidance in FSP FIN 46R-6. As such, the
adoption of FSP FIN 46R-6 is not expected to be 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.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring fair
value in applying generally accepted accounting principles, and expands
disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007. Corning is currently evaluating the impact of
SFAS 157 on its consolidated results of operations and financial condition.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - An amendment of FASB
Statements No. 87, 88, 106, and 132(R)" (SFAS 158). SFAS 158 requires employers
to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity. The recognition
and disclosure requirements described above are effective for fiscal years ended
after December 15, 2006 except for the change in measurement date which is
effective as of the beginning of the fiscal year beginning after December 15,
2008. Currently, management estimates the impact of the provisions required to
be adopted at December 31, 2006, to be a reduction of equity and an increase in
long term liabilities of approximately $700 million. We also expect that Dow
Corning's adoption of this standard will result in a reduction of our equity
investment in Dow Corning and a decrease to equity of approximately $100
million. The adoption of the provisions of SFAS 158 at December 31, 2006, are
not expected to impact Corning's consolidated statements of income and cash
flows and will not affect any of the Company's financial covenants.
In September 2006, the FASB issued FASB Staff Position ("FSP") No. AUG AIR-1,
"Accounting for Planned Major Maintenance Activities." The FSP prohibits
companies from accruing the cost of planned major maintenance in advance of the
activities actually occurring. This FSP is effective for fiscal years beginning
after December 15, 2006. The adoption of FSP No. AUG AIR-1 is not expected to
have a material impact on Corning's consolidated results of operations and
financial condition.
In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB),
"Financial Statements - Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements" (SAB 108). The
SEC staff is providing guidance on how prior year misstatements should be taken
into consideration when quantifying misstatements in current year financial
statements for purposes of determining whether the current year's financial
statements are materially misstated. In providing this guidance, the SEC staff
references both the "iron curtain" and "rollover" approaches to quantifying a
current year misstatement for purposes of determining its materiality. The iron
curtain approach is focused on correction of the current year balance sheet
while the rollover approach focuses on the current year income statement impact.
SAB 108 requires that errors be evaluated using a combination of both approaches
and to adjust the financial statements if a quantitative misstatement is
material. SAB 108 is effective for fiscal years beginning after November 15,
2006. The adoption of SAB 108 is not expected to be material to Corning's
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 12 active hazardous waste sites. Under the Superfund Act,
all parties who may have contributed any waste to a hazardous waste site,
identified by such Agency, are jointly and severally liable for the cost of
cleanup unless the Agency agrees otherwise. It is our policy to accrue for the
estimated liability related to Superfund sites and other environmental
liabilities related to property owned and operated by us based on expert
analysis and continual monitoring by both internal and external consultants. We
have accrued approximately $15 million (undiscounted) for the estimated
liability for environmental cleanup and related litigation at September 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;
- - 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;
- - ability to pace capital spending to anticipated levels of customer demand,
which may fluctuate;
- - credit rating and ability to obtain financing and capital on commercially
reasonable terms;
- - adequacy and availability of insurance;
- - financial risk management;
- - acquisition and divestiture activities;
- - rate of technology change;
- - level of excess or obsolete inventory;
- - ability to enforce patents;
- - adverse litigation;
- - product and components performance issues;
- - retention of key personnel;
- - stock price fluctuations;
- - customer acceptance of LCD televisions;
- - a downturn in demand or decline in growth rates 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 nine 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.
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 September 30, 2006. Based upon this
evaluation the Company's principal executive and principal financial officers,
have concluded that its disclosure controls and procedures were effective as of
September 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 the
Securities and Exchange Commission rules and forms and that such information is
accumulated and communicated to the Company's management to allow timely
decisions regarding required disclosure.
(c) Remediation of previously reported material weaknesses
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
December 31, 2005:
(i) The Company did not maintain effective controls over the valuation of its
asbestos settlement charges and the valuation and reconciliation of the
related liability pertaining to the 2003 Pittsburgh Corning Corporation
Asbestos Litigation Bankruptcy Settlement. Specifically, the Company did
not maintain effective controls to ensure that certain components of the
liability, which may be settled by contributing the Company's equity
interest 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.
We implemented the steps described below in order to remediate the material
weaknesses described above:
.. We enhanced the procedures and documentation associated with the
reconciliation of our PCC Asbestos Litigation liability to ensure that (i)
all legal activity related to the PCC Asbestos Bankruptcy Settlement and
all components of the proposed settlement are included in the valuation
process and (ii) that an estimate of the fair value of the liability is
prepared in accordance with generally accepted accounting principles.
.. We augmented the resources in our Accounting Services department that
enabled us to have a stronger segregation of duties associated with the
reconciliation of the PCC Asbestos Litigation liability account to the
general ledger to ensure the preparation of the reconciliation is performed
by an individual separate from the individual responsible for the review of
the reconciliation and separate from the individual responsible for
performing and reviewing the valuation calculation and that the individuals
performing this work have the requisite skill set and training.
.. We updated our key controls within the Investments in Affiliates cycle to
ensure 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 to
ensure the analysis and preparation of the reconciliation is performed by
an individual separate from the individual responsible for the detailed
review of the reconciliation and that the individuals performing this work
have the requisite skill set and training.
Management concluded that the previously reported material weaknesses discussed
above no longer exist as of September 30, 2006.
(d) Changes in internal control over financial reporting
Management implemented changes in Corning's internal control over financial
reporting during the quarter ended September 30, 2006 as further described in
(c) above 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 12 active hazardous
waste sites. Under the Superfund Act, all parties who may have contributed any
waste to a hazardous waste site, identified by such Agency, are jointly and
severally liable for the cost of cleanup unless the Agency agrees otherwise. It
is Corning's policy to accrue for its estimated liability related to Superfund
sites and other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued approximately $15 million (undiscounted) for
its estimated liability for environmental cleanup and litigation at September
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. Inclusive of insurance, Dow Corning has paid
approximately $1.6 billion to the Settlement Trust. As of September 30, 2006,
Dow Corning had recorded a reserve for breast implant litigation of $1.7 billion
and anticipates insurance receivables of $207 million. As a separate matter
arising from the bankruptcy proceedings, Dow Corning is defending claims
asserted by a collection of commercial creditors who claim additional interest
at default rates and enforcement costs, during the period from May 1995 through
June 2004. On July 26, 2006, the U.S. Court of Appeals vacated the judgment of
the District Court fixing the interest component, ruled that default interest
and enforcement costs may be awarded subject to equitable factors to be
determined, and directed that the matter be remanded for further proceedings.
Dow Corning filed a petition for rehearing by the Court of Appeals, which has
not yet been decided. As of September 30, 2006, Dow Corning has estimated the
interest payable to commercial creditors to be within the range of $67.4 million
to $207.4 million. As Dow Corning management believes no single amount within
the range appears to be a better estimate than any other amount within the
range, Dow Corning has recorded the minimum liability within the range. Should
Dow Corning not prevail in this matter, Corning's equity earnings would be
reduced by its 50% share of the amount in excess of $67.4 million, net of
applicable tax benefits. 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 10,900 other cases
(approximately 42,700 claims) alleging injuries from asbestos and similar
amounts of monetary damages per claim. Those cases have been covered by
insurance without material impact to Corning to date. Asbestos litigation is
inherently difficult, and past trends in resolving these claims may not be
indicators of future outcomes.
In the bankruptcy court 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 it 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 pay a total of $140 million in six
annual installments (present value $131 million at March 2003), beginning one
year after the Plan becomes effective, with 5.5 percent interest from June 2004,
and to assign certain insurance policy proceeds from its primary insurance and a
portion of its excess insurance at the time of settlement.
Since March 28, 2003, we have recorded total net charges of $955 million to
reflect the agreed settlement contributions and subsequent adjustments for the
change in the fair value of the components.
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 $797 million at September 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, this portion of the PCC liability is considered a "due on
demand" obligation and is classified as a current liability. The remaining
portion of the settlement liability (totaling $158 million at September 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.
For more than two years, there have been several rounds of briefing and argument
in the Bankruptcy Court to address these objections. In February, 2006, the
Bankruptcy Court requested that the Plan proponents delete references to Section
105(a) of the Bankruptcy Code and resubmit the Plan. The final round of oral
argument was held on July 21, 2006. The Bankruptcy Court reserved decision. 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 alleged that certain cover glasses for solar arrays used to generate
electricity from solar energy on satellites were negligently coated by NetOptix
or its subsidiaries with the result that the amount of electricity the satellite
can produce is allegedly materially reduced, which then reduces the value of
each satellite. NetOptix denied causing the damages alleged and denied legal
liability. 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. In October 2002, the Court again
granted defendants' motions for summary judgment and dismissed the negligent
misrepresentation and breach of warranty claims. The 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. This Court heard oral
argument on July 24, 2006 and on August 9, 2006 issued an order affirming the
dismissal of all counts against Corning NetOptix and OFC. Astrium filed a
petition for rehearing and rehearing en banc by the Circuit Court that was
denied on October 3, 2006. In light of the Court's rulings, management believes
the risk of liability is remote.
Grand Jury Investigation of Conventional Cathode Ray Television Glass Business.
In August 2003, Corning Asahi Video Products Company (CAV) was served with a
federal grand jury document subpoena related to pricing, bidding and customer
practices involving conventional cathode ray television glass picture tube
components. 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. In
September 2006, CAV's counsel was notified by the Department of Justice that it
was closing this 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 summary judgment motions of Corning and three companies
asserting contribution claims against Corning are fully briefed and await a
ruling by the court. On July 10, 2006, plaintiffs settled with a number of
defendants and third-party defendants for $15.75 million, and the settling
defendants are mediating allocation. The Court had ordered mediation with a
magistrate judge on October 10, 2006 among non-settling parties, including
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 potential 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.
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 third 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)
- ------------------------------------------------------------------------------------------------------------------------------------
July 1-31, 2006 36,852 $23.68 0 $0
Aug. 1-31, 2006 188,076 $19.45 0 $0
Sept. 1-30, 2006 32,782 $22.85 0 $0
- ------------------------------------------------------------------------------------------------------------------------------------
Total 257,710 $20.48 0 $0
- ------------------------------------------------------------------------------------------------------------------------------------
(a) This column reflects the following transactions during the fiscal third
quarter of 2006: (i) the deemed surrender to us of 277,450 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 30,260 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 September 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 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)
October 31, 2006 /s/ JAMES B. FLAWS
- ----------------------- -----------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
October 31, 2006 /s/ JANE D. POULIN
- ----------------------- -----------------------------------------
Date Jane D. Poulin
Chief Accounting Officer
(Principal Accounting Officer)
October 31, 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 65
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) under the Exchange Act 66
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) under the Exchange Act 67
32 Certification Pursuant to 18 U.S.C. Section 1350 68
Exhibit 12
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratios)
Nine months ended
September 30, 2006
------------------
Income before income taxes $ 584
Adjustments:
Distributed income of equity investees 304
Fixed charges net of capitalized interest 98
--------
Income before taxes and fixed charges, as adjusted $ 986
========
Fixed charges:
Interest expense (a) $ 80
Portion of rent expense which represents an
appropriate interest factor (b) 18
Capitalized interest 28
--------
Total fixed charges 126
Capitalized interest (28)
--------
Total fixed charges, net of capitalized interest $ 98
========
Ratio of earnings to fixed charges 7.8x
========
(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.
October 31, 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.
October 31, 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 September 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: October 31, 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