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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
---------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________to____________
Commission file number 1-3247
CORNING INCORPORATED
--------------------
(Registrant)
New York 16-0393470
- ---------------------------------------- ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
One Riverfront Plaza, Corning, New York 14831
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-974-9000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
at least the past 90 days.
Yes X No ____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
951,747,751 shares of Corning's Common Stock, $0.50 Par Value, were outstanding
as of June 30, 2002.
INDEX
-----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Page
----
Consolidated Statements of Income (Unaudited) for the three
and six months ended June 30, 2002 and 2001 3
Consolidated Balance Sheets at June 30, 2002 (Unaudited),
December 31, 2001 and June 30, 2001 (Unaudited) 4
Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 33
Item 6. Exhibits and Reports on Form 8-K 37
Signatures 38
Exhibit 10 Agreement and Release between John W. Loose and
Corning Incorporated dated April 12, 2002. 39
Exhibit 12 Ratio of earnings to fixed charges for the
six months ended June 30, 2002, and 2001 49
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in millions, except per share amounts)
For the three months ended For the six months ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
--------- -------- --------- --------
Net sales $ 896 $ 1,868 $ 1,794 $ 3,789
Cost of sales 682 1,339 1,376 2,444
--------- -------- --------- --------
Gross margin 214 529 418 1,345
Operating expenses
Selling, general and administrative expenses 190 262 380 532
Research, development and engineering
expenses 132 171 260 331
Amortization of purchased intangibles 11 10 22 23
Amortization of goodwill 150 293
Restructuring, impairment and other charges 494 4,772 494 4,772
--------- -------- --------- --------
Operating loss (613) (4,836) (738) (4,606)
Interest income 10 11 24 35
Interest expense (44) (34) (92) (68)
Gain on repurchases of debt 68 68
Other expense, net (12) (9) (21)
--------- -------- --------- --------
Loss before income taxes (579) (4,871) (747) (4,660)
(Benefit) provision for income taxes (178) (77) (220) 31
--------- -------- --------- --------
Loss before minority interest and
equity earnings (401) (4,794) (527) (4,691)
Minority interest in losses (earnings) of subsidiaries 6 (7) 12 (12)
Equity in earnings of associated companies 25 46 55 80
--------- -------- --------- --------
Net loss $ (370) $ (4,755) $ (460) $ (4,623)
========= ======== ========= ========
Basic and diluted loss per share $ (0.39) $ (5.13) $ (0.49) $ (5.01)
========= ======== ========= ========
Net loss adjusted for the impact of
SFAS No. 142 in 2001 $ (370) $ (4,652) $ (460) $ (4,384)
========= ======== ========= ========
Basic and diluted loss per share
adjusted for the impact of SFAS No. 142 in 2001 $ (0.39) $ (5.02) $ (0.49) $ (4.75)
========= ======== ========= ========
Dividends declared per common share $ $ 0.06 $ $ 0.12
========= ======== ========= ========
Shares used in computing per share amounts for
basic and diluted loss per share 948 926 947 923
========= ======== ========= ========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
Unaudited Unaudited
June 30, 2002 December 31, 2001 June 30, 2001
------------- ----------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 940 $ 1,037 $ 614
Short-term investments, at fair value 383 1,182 697
--------- --------- ---------
Total cash and short-term investments 1,323 2,219 1,311
Trade accounts receivable, net of doubtful accounts and
allowances - $63, $60 and $42 605 593 1,246
Inventories 671 725 977
Deferred income taxes 400 347 308
Other current assets 333 223 236
--------- --------- ---------
Total current assets 3,332 4,107 4,078
Investments:
Associated companies, at equity 666 636 537
Others, at cost or fair value 74 142 190
--------- --------- ---------
Total investments 740 778 727
Property, plant and equipment, at cost, net of accumulated
depreciation - $3,302, $3,101 and $2,921 4,757 5,097 5,301
Goodwill, net of accumulated amortization - $661, $661 and $583 2,000 1,937 1,874
Other intangible assets, net of accumulated amortization
- $109, $90 and $75 390 352 409
Other assets 667 522 262
--------- --------- ---------
Total Assets $ 11,886 $ 12,793 $ 12,651
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable $ 57 $ 477 $ 473
Accounts payable 310 441 512
Other accrued liabilities 1,052 1,076 910
--------- --------- ---------
Total current liabilities 1,419 1,994 1,895
Long-term debt 4,285 4,461 3,855
Postretirement benefits other than pensions 614 608 600
Other liabilities 379 190 212
Commitments and contingencies (Note 11)
Minority interest in subsidiary companies 107 119 144
Convertible preferred stock 7 7 8
Common shareholders' equity:
Common stock, including excess over par value and other capital -
Par value $0.50 per share; Shares authorized: 3.8 billion;
Shares issued: 1.0 billion 10,028 10,044 9,774
Accumulated deficit (4,070) (3,610) (2,734)
Cost of 74 million, 79 million and 77 million
shares of common stock in treasury (775) (827) (804)
Accumulated other comprehensive loss (108) (193) (299)
--------- --------- ---------
Total common shareholders' equity 5,075 5,414 5,937
--------- --------- ---------
Total Liabilities and Shareholders' Equity $ 11,886 $ 12,793 $ 12,651
========= ========= =========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
For the six months ended
June 30,
--------------------------
2002 2001
-------- ---------
Cash flows from operating activities:
Net loss $ (460) $ (4,623)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Amortization of purchased intangibles 22 23
Amortization of goodwill 293
Depreciation 329 318
Restructuring, impairment and other charges 494 4,772
Inventory write-down 273
Gain on repurchases of debt (68)
Stock compensation charges 2 27
Equity in earnings of associated companies less than
(in excess of) dividends received 28 (23)
Minority interest, net of dividends paid (12) 5
Deferred tax benefit (107) (122)
Tax benefit on stock options 25
Interest expense on convertible debentures 21 20
Restructuring payments (116) (5)
Changes in certain working capital items (201) (306)
Other, net (80) 13
-------- ---------
Net cash (used in) provided by operating activities (148) 690
-------- ---------
Cash flows from investing activities:
Capital expenditures (213) (1,155)
Acquisitions of businesses, net of cash acquired (66)
Net proceeds from sale or disposal of assets 36 27
Net increase in long-term investments and other
long-term assets (9) (90)
Short-term investments - acquisitions (847) (232)
Short-term investments - liquidations 1,648 250
Other, net (2)
-------- ---------
Net cash provided by (used in) investing activities 613 (1,266)
-------- ---------
Cash flows from financing activities:
Net (repayments) borrowings of short-term debt (474) 263
Proceeds from issuance of long-term debt 11 68
Repayments of long-term debt (155) (93)
Proceeds from issuance of common stock 33 19
Redemption of common stock for income tax withholding (19)
Dividends paid (112)
-------- ---------
Net cash used in financing activities (585) 126
-------- ---------
Effect of exchange rates on cash 23 (6)
-------- ---------
Cash used in continuing operations (97) (456)
-------- ---------
Cash used in discontinued operations (9)
-------- ---------
Net decrease in cash and cash equivalents (97) (465)
Cash and cash equivalents at beginning of year 1,037 1,079
-------- ---------
Cash and cash equivalents at end of period $ 940 $ 614
======== =========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; in millions except per share amounts)
1. Basis of Presentation
General
- -------
Corning Incorporated is a world-leading provider of optical fiber, cable and
photonic products for the telecommunications industry; high-performance glass
for computers, television screens and other information display applications;
advanced optical materials for the semiconductor industry and the scientific
community; ceramic substrates for the automotive industry; specialized polymer
products for biotechnology applications; and other advanced materials and
technologies.
The unaudited Consolidated Financial Statements reflect all adjustments which,
in the opinion of management, are necessary for a fair statement of the results
of operations, financial position and cash flows for the interim periods
presented. All such adjustments are of a normal recurring nature. The
Consolidated Financial Statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and in accordance with
accounting principles generally accepted in the United States of America (GAAP)
for interim financial information.
GAAP requires management to make certain estimates and judgments that are
reflected in the reported amounts of assets, liabilities, revenues and expenses
and also in the disclosure of contingent liabilities. The actual results may
differ from the estimates. Management exercises judgment and makes estimates for
allowance of bad debts, inventory obsolescence, product warranty, in-process
research and development, restructuring charges, asset and goodwill impairments,
depreciation, pension and post-retirement benefits, income taxes, litigation and
other contingencies. Management reviews these estimates on a systematic basis
and, if necessary, any material adjustments are reflected in the consolidated
financial statements in the period that they are deemed necessary.
The results for interim periods are not necessarily indicative results which may
be expected for any other interim period, or for the full year. These interim
Consolidated Financial Statements should be read in conjunction with Corning's
Annual Report on Form 10-K/A for the year ended December 31, 2001.
Certain amounts for 2001 were reclassified to conform with 2002 classifications.
Goodwill and Other Intangible Assets
- ------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." Among other provisions, goodwill is no longer amortized but is subject
to impairment tests at least annually. Corning adopted SFAS No. 142 on January
1, 2002.
Corning completed its initial impairment review during the first quarter and
concluded a transitional impairment charge from the adoption of the standard
would not be required. On a prospective basis, Corning has selected the fourth
quarter to conduct annual impairment tests. The outcome of the impairment test
is primarily dependent upon the fair value of the reporting units. The current
business conditions in the telecommunications industry are depressed. Should
these conditions be prolonged or deteriorate, the fair value of Corning's
telecommunications reporting unit could be lower in future periods. As such,
management cannot provide assurance that future impairment tests will not result
in a charge to earnings.
The following table presents a reconciliation of reported net loss and loss per
share to adjusted net loss and loss per share, as if SFAS No. 142 had been in
effect as follows:
For the three months ended For the six months ended
(In millions, except per share amounts) June 30, 2001 June 30, 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Reported net loss $ (4,755) $ (4,623)
Addback: Amortization of goodwill, net of income taxes 103 239
--------- ---------
Adjusted net loss $ (4,652) $ (4,384)
========= =========
Reported loss per share - basic $ (5.13) $ (5.01)
Addback: Amortization of goodwill, net of income taxes 0.11 0.26
--------- ---------
Adjusted loss per share - basic $ (5.02) $ (4.75)
========= =========
Reported loss per share - diluted $ (5.13) $ (5.01)
Addback: Amortization of goodwill, net of income taxes 0.11 0.26
--------- ---------
Adjusted loss per share - diluted $ (5.02) $ (4.75)
========= =========
The changes in the carrying amount of goodwill for the six months ended June 30,
2002, by segment was as follows (in millions):
Telecom- Advanced Information
munications Materials Display Corporate (a) Total
----------- --------- ------- --------- -----
Balance at January 1, 2002 $ 1,768 $ 150 $ 15 $ 4 $ 1,937
Foreign currency translation 54 (1) 53
Reclassification 12 12
Divestitures (3) (3)
Acquisition 1 1
-------- -------- ------- ------ ---------
Balance at June 30, 2002 $ 1,832 $ 150 $ 15 $ 3 $ 2,000
======== ======== ======= ====== =========
(a) Included in non-segment assets in SFAS No. 131 reconciliation in Corning's
2001 Form 10-K/A.
Intangible assets totaled $390 million, net of accumulated amortization of $109
million at June 30, 2002. Of this amount $55 million related to deferred
financing costs and $81 million represented intangible pension assets. The
remaining identified intangible assets are primarily related to the
Telecommunications Segment and were comprised of the following (in millions):
Accumulated
Gross Amortization Net
--------- ------------ ---------
Amortized intangible assets:
Patents and trademarks $ 252 $ 55 $ 197
Non competition agreements 104 51 53
Other 7 3 4
--------- --------- ---------
Total $ 363 $ 109 $ 254
========= ========= =========
Amortization expense related to these intangible assets is expected to be in the
range of approximately $40 million to $45 million annually from 2002 to 2006.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This standard supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The standard retains the previously existing accounting
requirements related to the recognition and measurement of the impairment of
long-lived assets to be held and used while expanding the measurement
requirements of long-lived assets to be disposed of by sale to include
discontinued operations. It also expands on the previously existing reporting
requirements for discontinued operations to include a component of an entity
that either has been disposed of or is classified as held for sale. Corning
adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not
have a material impact on its consolidated financial position or results of
operations.
In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers" and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements and amends
SFAS No. 13, "Accounting for Leases." This statement updates, clarifies and
simplifies existing accounting pronouncements. As a result of rescinding SFAS
No. 4 and SFAS No. 64, the criteria in Accounting Principles Bulletin No. 30
will be used to classify gains and losses from extinguishment of debt. Corning
adopted the reporting guidance of SFAS No. 145 in the second quarter of 2002 in
its accounting for repurchases and retirement of debt. See Note 4 to the
Consolidated Financial Statements. The remaining provisions of SFAS No. 145 will
be adopted by Corning in fiscal year 2003. Corning does not expect the adoption
of the remaining provisions to have a material impact on its consolidated
financial position or results of operations.
New Accounting Standards
- ------------------------
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This standard addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Corning is required to implement SFAS No. 143
on January 1, 2003. Corning does not expect this standard to have a material
impact on its consolidated financial position or results of operations.
2. Operating Segments
Corning's reportable operating segments consist of Telecommunications, Advanced
Materials and Information Display. Corning includes the earnings of equity
affiliates that are closely associated with Corning's operating segments in
segment net income. In the second quarter of 2002, Corning revised its
definition of segment net income. Prior to the second quarter, Corning disclosed
restructuring and impairment charges by segment but excluded this from
quantitative segment results. These charges have been included in segment net
income and historical periods have been conformed to this presentation.
Information about the performance of Corning's three operating segments for the
second quarter and six months of 2002 and 2001 is presented below. These amounts
exclude revenues, expenses and equity earnings not specifically identifiable to
segments.
Corning prepared the financial results for its three operating segments on a
basis that is consistent with the manner in which Corning management internally
disaggregates financial information to assist in making internal operating
decisions. Corning has allocated some common expenses among segments differently
than it would for stand alone financial information prepared in accordance with
GAAP. Segment net income may not be consistent with measures used by other
companies.
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- -------- --------- ---------
Telecommunications
Net sales $ 437 $ 1,393 $ 902 $ 2,826
Research, development and engineering expenses $ 86 $ 134 $ 172 $ 256
Interest expense $ 25 $ 23 $ 57 $ 48
Segment (loss) earnings before equity (losses)
earnings and restructuring, impairment
and other charges $ (139) $ (7) $ (277) $ 170
Equity in (losses) earnings of associated companies (3) 8 (7) 11
--------- -------- --------- ---------
Segment (loss) earnings before restructuring,
impairment and other charges (142) 1 (284) 181
Restructuring, impairment and other charges, net of tax (259) (4,726) (259) (4,726)
--------- -------- --------- ---------
Segment net loss $ (401) $ (4,725) $ (543) $ (4,545)
========= ======== ========= =========
Advanced Materials
Net sales $ 242 $ 251 $ 475 $ 533
Research, development and engineering expenses $ 32 $ 28 $ 63 $ 56
Interest expense $ 8 $ 5 $ 16 $ 10
Segment earnings before equity earnings and
restructuring charges $ 9 $ 11 $ 10 $ 37
Equity in earnings of associated companies 12 7 20 13
--------- -------- --------- ---------
Segment earnings before restructuring charges 21 18 30 50
Restructuring charges, net of tax (1) (1)
--------- -------- --------- ---------
Segment net income $ 20 $ 18 $ 29 $ 50
========= ======== ========= =========
Information Display
Net sales $ 212 $ 218 $ 407 $ 419
Research, development and engineering expenses $ 14 $ 9 $ 25 $ 19
Interest expense $ 9 $ 6 $ 17 $ 10
Segment earnings before minority interest and
equity earnings $ 8 $ 25 $ 11 $ 46
Minority interest in (losses) earnings of subsidiaries 5 (7) 11 (12)
Equity in earnings of associated companies 29 29 54 54
--------- -------- --------- ---------
Segment net income $ 42 $ 47 $ 76 $ 88
========= ======== ========= =========
Total segments
Net sales $ 891 $ 1,862 $ 1,784 $ 3,778
Research, development and engineering expenses $ 132 $ 171 $ 260 $ 331
Interest expense $ 42 $ 34 $ 90 $ 68
Segment (loss) earnings before minority interest,
equity earnings and restructuring, impairment
and other charges $ (122) $ 29 $ (256) $ 253
Minority interest in losses (earnings) of subsidiaries 5 (7) 11 (12)
Equity in earnings of associated companies 38 44 67 78
--------- -------- --------- ---------
Segment (loss) earnings before restructuring,
impairment and other charges (79) 66 (178) 319
Restructuring, impairment and other charges, net of tax (260) (4,726) (260) (4,726)
--------- -------- --------- ---------
Segment net loss $ (339) $ (4,660) $ (438) $ (4,407)
========= ======== ========= =========
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as follows (in
millions):
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- --------
Net sales
Total segment net sales $ 891 $ 1,862 $ 1,784 $ 3,778
Non-segment net sales (a) 5 6 10 11
--------- --------- --------- --------
Total net sales $ 896 $ 1,868 $ 1,794 $ 3,789
========= ========= ========= ========
Net loss
Total segment net loss (b) $ (339) $ (4,660) $ (438) $ (4,407)
Unallocated items:
Non-segment loss and other (a) (1) (2) (2) (3)
Amortization of goodwill (c) (150) (293)
Non-segment restructuring, impairment and
other charges (d) (127) (127)
Interest income (e) 10 11 24 35
Gain on repurchases of debt 68 68
Income tax (f) 16 44 11 43
Minority interest 1 1
Equity in earnings of associated companies (a) 2 2 3 2
--------- --------- --------- --------
Net loss $ (370) $ (4,755) $ (460) $ (4,623)
========= ========= ========= ========
(a) Includes amounts derived from corporate investments and activities.
(b) Includes royalty, interest and dividend income.
(c) Amortization of goodwill relates primarily to the Telecommunications
Segment.
(d) Amount includes pension termination and postretirement benefit curtailment
charges of $30 million recorded in the second quarter of 2002. The balance
of the charge relates to restructuring and impairment charges in the
corporate research and administrative staff organizations.
(e) Corporate interest income is not allocated to reportable segments.
(f) Includes tax associated with unallocated items.
3. Restructuring, Impairment and Other Charges
2002 Restructuring Actions
- --------------------------
During the second quarter, Corning undertook actions to reduce its costs. The
intent to do so was announced in April 2002. At that time, it was estimated that
restructuring, fixed asset impairments, and impairments of investments could
total approximately $600 million and would be recorded over the second and third
quarters.
Actions approved and initiated in the second quarter include the following:
.. permanent abandonment of certain construction projects that had been
stopped in 2001 in the fiber and cable business within the
Telecommunications Segment,
.. closure of minor manufacturing facilities, primarily in the
Telecommunications Segment,
.. closure and consolidation of research facilities,
.. elimination of positions worldwide through voluntary and involuntary
programs, and
.. divestiture of a portion of the controls and connectors business in the
Telecommunications Segment.
In addition, Corning impaired cost based investments in a number of private
telecommunications companies.
Certain of the costs associated with these activities (estimated at
approximately $125 million to $150 million) will be recorded in the third
quarter as all conditions for recognition had not been satisfied at June 30,
2002. These third quarter charges relate primarily to severance and fixed asset
write-offs pertaining to facility closures outside the United States and early
retirement programs. Corning expects to pay approximately one-third of the total
charge for the second and third quarter in cash.
The charges recorded in the second quarter are summarized in the following table
and described in greater detail below:
Employee related costs $ 192
Exit costs 12
Adjustment to 2001 program reserves (5)
-------
Subtotal - restructuring charges 199
-------
Fixed asset impairments 224
Adjustment to 2001 program reserves (5)
-------
Subtotal - fixed asset impairments 219
-------
Cost based investment write-offs 60
Loss on disposal 16
-------
Total pre-tax charges 494
Tax benefit 166
-------
Total after-tax charges $ 328
=======
In addition, equity earnings include a $14 million charge to impair an
investment in an international cabling venture.
The following table illustrates the charge for restructuring actions as it
relates to Corning's operating segments:
- ------------------------------------------------------------------------------------------------------------------------------------
Charges for restructuring actions
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Functions
Telecom- Advanced Information Including Total
munications Materials Display Research Charges
- ------------------------------------------------------------------------------------------------------------------------------------
Net pre-tax charges for restructuring actions $ 364 $ 2 $ 1 $ 127 $ 494
=======================================================================
Restructuring Charges
---------------------
The second quarter restructuring charge of $204 million includes $192
million of employee separation costs (including curtailment losses related
to pension and postretirement health care plans) and $12 million in other
exit costs (principally lease termination and contract cancellation
payments). The charge entails the elimination of approximately 3,600
positions in the Telecommunications Segment and corporate research and
administrative staffs organizations. Employees have been informed of the
restructuring initiatives and benefits available to them under applicable
benefit plans. These benefits include involuntary separation, early
retirement and social programs.
The following table illustrates the headcount reduction amongst U.S.
Hourly, U.S. Salaried and Non-U.S. positions for 2002 actions:
-------------------------------------------------------------------------------------------------------------------------------
Headcount reduction
-------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
-------------------------------------------------------
Second quarter charge 850 1,800 950 3,600
Anticipated third quarter charge 175 225 400 800
------- ------- ------- -------
Total 1,025 2,025 1,350 4,400
======= ======= ======= =======
Separated at June 30, 2002 150 1,225 225 1,600
Impairment of Plant and Equipment
---------------------------------
Corning has evaluated the carrying value of certain long-lived assets in
the businesses taking restructuring actions. The carrying value of a
long-lived asset is considered impaired when the anticipated separately
identifiable undiscounted cash flows from that asset are less than the
carrying value of the asset. The impairment charges were determined based
on the amount by which the carrying value exceeded the fair market value of
the asset. Corning recorded $224 million to impair plant and equipment
relating to facilities to be shutdown or disposed, primarily in the fiber
and cable business, the photonic technologies business and certain research
facilities. Of this total charge, $107 million pertains to abandoned
construction projects in the fiber and cable business, primarily the latest
expansion in Concord, NC and Oklahoma City, OK. The impairment charges were
determined based on the amount by which the carrying value exceeded the
fair market value of the asset.
A significant portion of the assets impaired was recently acquired, or
built in connection with capacity expansions in anticipation of future
demand. Most of the impaired facilities are currently available for sale,
others will be demolished or abandoned. The impaired equipment will be
auctioned, sold, disposed or abandoned during 2002.
Loss on Divestiture
-------------------
In May 2002, Corning completed the sale of its appliance controls group
which was included in the controls and connectors business in the
Telecommunications Segment. In the second quarter of 2002, Corning received
cash of $24 million and note proceeds of $6 million and recorded a loss on
the sale of approximately $16 million ($10 million after-tax).
Impairment of Cost Investments
------------------------------
In the second quarter, Corning recorded a $60 million charge for other than
temporary declines in certain cost investments in the Telecommunications
Segment. These investments have been written off.
2001 Restructuring Actions
- --------------------------
In July and October of 2001, Corning announced a series of restructuring actions
in response to significant deteriorating business conditions which began
initially in its Telecommunications Segment, but eventually spread to its other
businesses as the year progressed. The following actions were approved and
undertaken in 2001:
.. closure of seven major manufacturing facilities and the consolidation of
several smaller facilities, primarily in the Telecommunications and
Advanced Materials Segments,
.. discontinuation of its initiative in Corning Microarray Technology
products, part of Corning's life sciences business, and
.. elimination of approximately 12,000 positions affecting all operating
segments, but especially impacting the photonic technologies, hardware and
equipment and the optical fiber and cable businesses. This action included
a selective voluntary early retirement program for certain employees along
with involuntary separations.
These actions resulted in a pre-tax charge totaling $961 million ($590 million
after-tax and minority interest) for the year ended December 31, 2001. The
charge includes restructuring costs of $419 million and $542 million for the
impairment of plant and equipment. Approximately one third of the total charge
was expected to be paid in cash. As of June 30, 2002, approximately 11,600 of
the 12,000 employees had been separated under the plans. Corning expects the
remaining 400 employees to be separated by December 31, 2002. Certain
obligations of the plans will be paid in 2003 and beyond.
The following table illustrates the charges, credits and balances of the
restructuring reserves as of June 30, 2002:
(In millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash
December 31, charges/ Non-cash payments June 30,
2001 credits charges in 2002 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring reserve:
Employee related costs $ 198 $ 187 (a) $ 30 $ 105 $ 250
Other charges 78 12 11 79
----------------------------------------------------------------------
Total restructuring reserve $ 276 $ 199 $ 30 $ 116 $ 329
----------------------------------------------------------------------
Impairment of long-lived assets:
Assets held for disposal $ 235 (b) $ 235
Cost investments 60 60
-------------------------
Total impairment charges $ 295 $ 295
-------------------------
Total restructuring and impairment
charges and credits $ 494
=========
(a) Amount is net of $5 million adjustment in employee related costs reflecting
the difference between estimated and actual costs.
(b) Amount is net of $5 million adjustment to assumed salvage values on asset
disposals.
4. Gain on Repurchases and Retirement of Debt
During the second quarter of 2002, Corning purchased and retired a portion of
its zero coupon convertible debentures due November 8, 2015, with an accreted
value of $220 million in exchange for cash of $148 million in a series of open
market purchases. Corning recorded a gain of $68 million on these transactions,
net of the write-off of the unamortized issuance costs. Corning recorded the
gain on repurchases as a component of income from continuing operations, as
permitted by SFAS No. 145. The debentures may be put back to Corning on November
8, 2005. Corning has the option of settling this obligation in cash, common
stock, or a combination of both.
5. Inventories
Inventories shown on the accompanying balance sheets were comprised of the
following:
June 30, December 31, June 30,
2002 2001 2001
--------- ------------ --------
Finished goods $ 257 $ 251 $ 310
Work in process 134 153 243
Raw materials and accessories 170 210 308
Supplies and packing materials 110 111 116
--------- --------- ------
Total inventories $ 671 $ 725 $ 977
========= ========= ======
6. Income Taxes
Corning's effective income tax benefit rate for the three and six month periods
ended June 30, 2002, was 30.7% and 29.5%, respectively. The tax benefit rate in
the second quarter of 2002 was impacted by specific tax benefit calculations for
restructuring, impairment and other charges and the gain on repurchases of debt.
The effective benefit rate without consideration of these items was 25% in both
2002 periods. The effective tax benefit rate in the quarter and year to date is
lower than the U.S. statutory income tax rate of 35% due to the impact of
unusable tax credits and nondeductible expenses and losses.
Federal tax legislation passed early in 2002 extended the net operating loss
carryback period from two to five years. Corning anticipates incurring a federal
tax net operating loss for 2002 and this change in the tax legislation will
allow Corning to carryback the net operating loss to open tax years and claim a
tax refund. Current assets at June 30, 2002, include a receivable of $135
million as a result of Corning availing itself of this opportunity.
The effective tax (benefit) rate for the three and six months ended June 30,
2001, was 1.6% and (0.7)%. These tax rates are much lower than the U.S.
statutory income tax rate primarily due to non-tax deductible impairment and
amortization of acquired intangibles and goodwill.
7. Comprehensive Loss
Comprehensive loss, net of tax, for the second quarter and first six months of
2002 and 2001 is as follows:
For the three months For the six months
ended June 30, ended June 30,
-------------------- ------------------
2002 2001 2002 2001
------- --------- ------- --------
Net loss $ (370) $ (4,755) $ (460) $ (4,623)
Other comprehensive income (loss) 110 (65) 85 (172)
------ -------- ------ --------
Total comprehensive loss $ (260) $ (4,820) $ (375) $ (4,795)
====== ======== ====== ========
8. Pensions
As a result of restructuring activities undertaken in the second quarter,
Corning incurred a curtailment event requiring a remeasurement of its pension
obligation at June 30, 2002. The provisions of SFAS No. 87, "Employers
Accounting for Pensions" require Corning to record an additional minimum
liability of $180 million at June 30, 2002. This liability represents the amount
by which the accumulated benefit obligation exceeds the sum of the fair market
value of plan assets and accrued amounts previously recorded. The additional
liability may be offset by an intangible asset to the extent of previously
unrecognized prior service cost. The intangible asset of $81 million at June 30,
2002, is included on the line item entitled "Other intangible assets" in the
Consolidated Balance Sheet. The remaining amount of $66 million is recorded as a
component of stockholders' equity and is net of related tax benefits of $33
million, on the line item titled "Accumulated other comprehensive loss" in the
Consolidated Balance Sheet at June 30, 2002, and in "Other comprehensive income
(loss)."
9. Supplementary Statement of Cash Flows Data
Supplemental disclosure of cash flow information is as follows (in millions):
For the six months
ended June 30,
------------------------
2002 2001
--------- ---------
Changes in certain working capital items:
Trade accounts receivable $ 10 $ 10
Inventories 27 (231)
Other current assets (56) 124
Accounts payable and other current liabilities,
net of restructuring payments (182) (209)
-------- --------
Total $ (201) $ (306)
======== ========
10. Loss Per Common Share
Basic and diluted loss per common share is calculated by dividing net loss by
the weighted average number of common shares outstanding during the period.
The potential common shares excluded from the calculation of diluted loss per
share because their effect would be anti-dilutive and the amount of stock
options excluded from the calculation of diluted loss per share because their
exercise price was greater than the average market price of the common shares of
the periods presented is as follows: (in millions)
For the three months For the six months
ended June 30, ended June 30
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Potential common shares excluded from the
calculation of diluted loss per share:
Stock options 7 10
Convertible preferred stock 1 1 1 1
Subordinated notes 6 6 6 6
Zero coupon convertible debentures 23 23 23 23
3.5% convertible debentures 69 69
--------- --------- --------- ---------
Total 99 37 99 40
========= ========= ========= =========
Stock options excluded from the calculation of diluted
loss per share because the exercise
price was greater than the average
market price of the common shares 86 49 79 43
========= ========= ========= =========
Common dividends of $56 million and $112 million, or $0.06 and $0.12 per share
were declared in the second quarter and six months of 2001.
11. Commitments and Contingencies
From time to time, Corning is subject to uncertainties and litigation and is not
always able to predict the outcome of these items with assurance. Various legal
actions, claims and proceedings are pending against Corning, including those
arising out of alleged product defects, shareholder matters, product warranties,
patents, asbestos and environmental matters. These issues are discussed fully in
Part II, Item 1. Legal Proceedings of this Form 10-Q. A significant matter
involves Pittsburgh Corning Corporation (PCC), a 50% owned joint venture of
Corning and is discussed below.
Pittsburgh Corning Corporation
- ------------------------------
Background:
Corning and PPG Industries, Inc. (PPG) each own 50% of the capital stock of
Pittsburgh Corning Corporation (PCC). PCC and several other defendants,
including PPG and Corning, have been named in numerous lawsuits involving claims
alleging personal injury from exposure to asbestos. On April 16, 2000, PCC filed
for Chapter 11 reorganization in the United States Bankruptcy Court for the
Western District of Pennsylvania. As of the bankruptcy filing, PCC had in excess
of 140,000 open claims and now has in excess of 240,000 open claims.
Status of Litigation and Current Events:
In the bankruptcy court, PCC in April 2000 obtained a preliminary injunction
against the prosecution of asbestos actions against its two shareholders to
afford the parties a period of time (the Injunction Period) in which to
negotiate a plan of reorganization for PCC.
On May 14, 2002, PPG announced that it had agreed with several other parties,
including certain of its insurance carriers and representatives of current and
future asbestos claimants, on the terms of a settlement arrangement relating to
asbestos claims against PPG and PCC. This settlement would be incorporated in a
plan of reorganization for PCC, and would be subject to a favorable vote by 75%
of the asbestos claimants voting on the PCC reorganization plan, and approval by
the Bankruptcy Court. According to its announcement, PPG would make
contributions to a trust under the reorganization plan consisting of:
.. cash payments by PPG's participating insurance carriers of approximately
$1.7 billion over a 21 year period;
.. the assignment of rights to certain proceeds of policies by certain
insurance carriers not participating in the settlement;
.. PPG's shares in PCC and Pittsburgh Corning Europe, a Belgian corporation;
.. 1,388,889 shares of PPG's common stock; and
.. cash payments from PPG of approximately $998 million over 21 years.
PPG announced on July 18, 2002, that it recorded a charge in its second quarter
of $495 million after-tax related to this settlement.
The Injunction Period has been extended as to Corning until July 31, 2002. Under
the terms of the Bankruptcy Court's Order, Corning will have 90 days following
expiration of the Injunction Period to seek removal and transfer of stayed cases
that have not been resolved through a plan of reorganization. At the time PCC
filed for bankruptcy protection, there were approximately12,400 claims pending
against Corning alleging various theories of liability based on exposure to
PCC's asbestos products. Although the outcome of litigation and the bankruptcy
case is uncertain, management believes that the separate corporate status of PCC
will continue to be upheld and that Corning has strong legal defenses to any
claims of direct liability arising from PCC's asbestos products.
After PPG announced its settlement, negotiations between representatives of the
asbestos claimants and Corning became more intensive but failed to produce a
settlement. In Corning's negotiations with the asbestos claimants, the range of
negotiations has been framed by demands translating into approximately $400
million to $500 million in net present value (inclusive of insurance), which is
significantly lower than that reflected in the PPG settlement. These
negotiations have been difficult, and no assurances can be offered that a
settlement can be concluded within this range.
Based on negotiations to date, management believes that a settlement (if one can
be reached) would probably include some combination of the following elements:
cash payments by Corning over time into a trust; contribution of Corning's
shares in PCC and Pittsburgh Corning Europe and common shares of Corning; and
insurance through cash payments or assignments of certain rights. However, the
structure of a settlement has not been agreed and management can not estimate
the likelihood that any settlement will emerge from negotiations with the
claimants or Corning's insurers, or the probability that Corning will be able to
secure a release through PCC's plan of reorganization upon terms and conditions
satisfactory to Corning.
At this time, it appears more likely than not that Corning will litigate the
asbestos cases, but will continue to explore a settlement through the bankruptcy
process. The exposure for this asbestos litigation (net of insurance) cannot be
estimated at this time due to the wide range of potential outcomes. Corning is
also currently named in approximately 14,000 other cases alleging injuries from
asbestos. Those cases have been covered by insurance without material impact to
Corning to date. Asbestos litigation is inherently difficult, and the outcome of
litigation is uncertain.
Accounting and Range of Outcomes
As a result of PCC's bankruptcy filing, Corning recorded an after-tax charge of
$36 million in the first quarter of 2000 to impair its entire investment in PCC
and discontinued recognition of equity earnings. At June 30, 2002, Corning has
not recorded any additional charges associated with the outcome of this
litigation. As noted above, management believes there are strong legal defenses
to the claims against Corning. Management estimates that the insurance coverage
available to Corning related to these matters exceeds $600 million and depending
on the outcome of potential coverage issues may exceed $1 billion. Management
estimates that the low end of the range of loss resulting from continued
litigation is not material. Due to the inherent uncertainty of asbestos related
litigation, management is unable to estimate the maximum exposure from this
litigation.
Alternatively, in the event that Corning and its insurers agree to a global
settlement of the PCC-related cases through the PCC bankruptcy process, the
outcome may be material to the results of operations for the period in which
such costs, if any, are recognized. Management expects that any after-tax charge
resulting from Corning's contributions as part of a possible settlement could
approximate $100 million to $150 million and will depend upon the timing of
contributions and relative participation of insurance carriers. Management
cannot provide assurances that the ultimate outcome of a settlement would be
within this range.
Under either alternative management believes these matters will be resolved
without material impact to Corning's overall financial position or its liquidity
12. Stock Compensation Plans
The following table presents changes in the status of outstanding options since
December 31, 2001:
Number of Shares Weighted-Average
(in thousands) Exercise Price
---------------- ----------------
Options outstanding December 31, 2001 72,391 $ 34.21
Options granted under plans 14,964 7.62
Options exercised (53) 1.95
Options terminated (818) 34.20
------- --------
Options outstanding June 30, 2002 86,484 $ 29.63
======= ========
13. Subsequent Event
On July 22, 2002, Corning purchased 5.5 million shares of its common stock for
$22 million in a privately negotiated transaction.
ITEM 2.
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Overview
Corning incurred a net loss in the second quarter and first half of 2002 driven
primarily by continued weak performance in the Telecommunications Segment.
Results for the quarter included charges that resulted from restructuring
activities and an impairment of an equity investment offset in part by a gain on
repurchases and retirement of debt. These items are described in more detail in
Results of Operations below.
The negative trends beginning in 2001 such as excess capacity, increased
intensity of competition and growing pressure on price and profits have
continued to hamper the telecommunications market in 2002. Major carriers
continue to withhold capital spending for a variety of reasons, some of which
include network over-capacity, bankruptcy of key telecommunications customers
and suppliers and the overall economic uncertainties in the world economy. As a
result of these uncertainties and lack of capital spending, Corning has
continued to see its revenues decline in its Telecommunications Segment. Corning
does not expect any meaningful recovery in the Telecommunications Segment in
2002.
The cost reduction activities announced in April 2002 are underway. The total
charges in the second and third quarter associated with actions approved in the
second quarter will slightly exceed the previously announced pre-tax charge of
$600 million. Corning is reviewing a number of other actions to further reduce
both the cost structure and capital requirements of the businesses going
forward. These actions could include the potential sale or discontinuation of
some non-core businesses. Additional consolidation of manufacturing capacity in
the Telecommunications Segment is also under review. The outcome of these
reviews could cause additional charges in 2002.
Results of Operations
Net sales totaled $896 million for the second quarter of 2002, a decrease of 52%
compared with sales of $1.9 billion in the prior year quarter. Net sales for the
six months ended June 30, 2002, were $1.8 billion, a decrease of 53% compared to
the comparable prior year period of $3.8 billion. The sales decline in both
periods was most pronounced in the Telecommunications Segment, where the impact
of significantly lower demand and price declines for Corning's fiber and cable
and photonic technologies products drove a sales decline of approximately 68%
for the quarter and six months.
Corning's net loss totaled $370 million, or $0.39 per share, in the second
quarter of 2002, compared to a net loss of $4,755 million or, $5.13 per share,
in the second quarter of 2001. On a year to date basis, Corning incurred a net
loss of $460 million, or $0.49 per share, compared to a net loss of $4,623
million, or $5.01 per share, for the six months ended June 30, 2001. The second
quarter 2001 net loss and diluted loss per share, after adjusting for the impact
of Statement of Financial Accounting Standards (SFAS) No. 142, was $4,652
million, or $5.02 per share. Net loss and diluted loss per share on a year to
date basis, adjusted for SFAS No. 142 was $4,384 million, or $4.75 per share.
Corning's second quarter and year to date results reflect lower volumes and
significantly lower prices in the Telecommunications Segment compared to the
same periods for the prior year. The second quarter 2002 results also include
net charges of $494 million ($327 million after-tax) resulting from
restructuring actions and impairment charges undertaken in the second quarter.
These charges are described in Restructuring, Impairment and Other Charges. In
addition, the second quarter results include a gain of $68 million ($42 million
after-tax) due to repurchases and retirement of a portion of Corning's zero
coupon convertible debentures. Equity earnings for the quarter include a $14
million loss on impairment of an international cabling venture.
The loss for the second quarter of 2001 included charges of $4.8 billion ($4.7
billion after-tax) for the impairment of goodwill and other intangible assets
related to the Pirelli and NetOptix acquisitions in 2000, and $273 million ($184
million after-tax) related to the write-down of excess and obsolete inventory in
the photonic technologies business.
Restructuring, Impairment and Other Charges
2002 Restructuring Actions
- --------------------------
During the second quarter, Corning undertook actions to reduce its costs. The
intent to do so was announced in April 2002. At that time, it was estimated that
restructuring, fixed asset impairments and impairments of investments could
total approximately $600 million and would be recorded over the second and third
quarters.
Actions approved and initiated in the second quarter include the following:
.. permanent abandonment of certain construction projects that had been
stopped in 2001 in the fiber and cable business within the
Telecommunications Segment,
.. closure of minor manufacturing facilities, primarily in the
Telecommunications Segment,
.. closure and consolidation of research facilities,
.. elimination of positions worldwide through voluntary and involuntary
programs, and
.. divestiture of a portion of the controls and connectors business in the
Telecommunications Segment.
In addition, Corning impaired cost based investments in a number of private
telecommunications companies.
Certain of the costs associated with these activities (estimated at
approximately $125 million to $150 million) will be recorded in the third
quarter as all conditions for recognition had not been satisfied at June 30,
2002. These third quarter charges relate primarily to severance and fixed asset
write-offs pertaining to facility closures outside the United States and early
retirement programs. Corning expects to pay approximately one-third of the total
charge for the second and third quarter in cash.
The charges recorded in the second quarter are summarized in the following table
and described in greater detail below:
Employee related costs $ 192
Exit costs 12
Adjustment to 2001 program reserves (5)
-------
Subtotal - restructuring charges 199
-------
Fixed asset impairments 224
Adjustment to 2001 program reserves (5)
-------
Subtotal - fixed asset impairments 219
-------
Cost based investment write-offs 60
Loss on disposal 16
-------
Total pre-tax charges 494
Tax benefit 166
-------
Total after-tax charges $ 328
=======
In addition, equity earnings include a $14 million charge to impair an
investment in an international cabling venture.
The following table illustrates the charge for restructuring actions as it
relates to Corning's operating segments:
- ------------------------------------------------------------------------------------------------------------------------------------
Charges for restructuring actions
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Functions
Telecom- Advanced Information Including Total
munications Materials Display Research Charges
- ------------------------------------------------------------------------------------------------------------------------------------
Net pre-tax charges for restructuring actions $ 364 $ 2 $ 1 $ 127 $ 494
=======================================================================
Restructuring Charges
---------------------
The second quarter restructuring charge of $204 million includes $192
million of employee separation costs (including curtailment losses related
to pension and postretirement health care plans) and $12 million in other
exit costs (principally lease termination and contract cancellation
payments). The charge entails the elimination of approximately 3,600
salaried positions in the Telecommunications Segment and corporate research
and administrative staffs organizations. Employees have been informed of
the restructuring initiatives and benefits available to them under
applicable benefit plans. These benefits include involuntary separation,
early retirement and social programs.
The following table illustrates the headcount reduction amongst U.S.
Hourly, U.S. Salaried and Non-U.S. positions for 2002 actions:
-------------------------------------------------------------------------------------------------------------------------------
Headcount reduction
-------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
-------------------------------------------------------
Second quarter charge 850 1,800 950 3,600
Anticipated third quarter charge 175 225 400 800
-------- --------- -------- ---------
Total 1,025 2,025 1,350 4,400
======== ========= ======== =========
Separated at June 30, 2002 150 1,225 225 1,600
Impairment of Plant and Equipment
---------------------------------
Corning has evaluated the carrying value of the long-lived assets in the
businesses taking restructuring actions. The carrying value of a long-lived
asset is considered impaired when the anticipated separately identifiable
undiscounted cash flows from that asset are less than the carrying value of
the asset. The impairment charges were determined based on the amount by
which the carrying value exceeded the fair market value of the asset.
Corning recorded $224 million to impair plant and equipment relating to
facilities to be shutdown or disposed, primarily in the fiber and cable
business, the photonic technologies business and certain research
facilities. Of this total charge, $107 million pertains to abandoned
construction projects in the fiber and cable business, primarily the latest
expansion in Concord, NC and Oklahoma City, OK. The impairment charges were
determined based on the amount by which the carrying value exceeded the
fair market value of the asset.
A significant portion of the assets impaired was recently acquired, or
built in connection with capacity expansions in anticipation of future
demand. Most of the impaired facilities are currently available for sale,
others will be demolished or abandoned. The impaired equipment will be
auctioned, sold, disposed or abandoned during 2002.
Loss on Divestiture
-------------------
In May 2002, Corning completed the sale of its appliance controls group
which was included in the controls and connectors business in the
Telecommunications Segment. In the second quarter of 2002, Corning received
cash of $24 million and note proceeds of $6 million and recorded a loss on
the sale of approximately $16 million ($10 million after-tax).
Impairment of Cost Investments
------------------------------
In the second quarter, Corning recorded a $60 million charge for other than
temporary declines in certain cost investments in the Telecommunications
Segment. These investments have been written off.
Cost Savings
- ------------
Corning expects to realize annualized savings of approximately $265 million as a
result of the 2002 restructuring actions. This number includes savings
associated with the actions recorded in the second quarter and those for which
the charge will be recorded in the third quarter. The savings are comprised of
lower wages and benefit costs, avoided depreciation and fixed costs on closed
facilities. This savings number does not include additional savings the company
could realize from cost management activities that are introduced concurrent
with restructuring activities, but not directly related to the actions
themselves.
Although certain of the cost reduction programs will positively impact second
half results, management does not expect to realize all of the savings until the
beginning of 2003. Approximately 40% of the savings from the restructuring
actions will be realized in cost of sales with the remainder split between
selling, general and administrative and research, development and engineering
expenses.
2001 Restructuring Actions
- --------------------------
In July and October of 2001, Corning announced a series of restructuring actions
in response to significant deteriorating business conditions which began
initially in its Telecommunications Segment, but eventually spread to its other
businesses as the year progressed. The following actions were approved and
undertaken in 2001:
.. closure of seven major manufacturing facilities and the consolidation of
several smaller facilities, primarily in the Telecommunications and
Advanced Materials Segments,
.. discontinuation of its initiative in Corning Microarray Technology
products, part of Corning's life sciences business, and
.. elimination of approximately 12,000 positions affecting all operating
segments, but especially impacting the photonic technologies, hardware and
equipment and the optical fiber and cable businesses. This action included
a selective voluntary early retirement program for certain employees along
with involuntary separations.
These actions resulted in a pre-tax charge totaling $961 million ($590 million
after-tax and minority interest) for the year ended December 31, 2001. The
charge includes restructuring costs of $419 million and $542 million for the
impairment of plant and equipment. Approximately one third of the total charge
was expected to be paid in cash. As of June 30, 2002, approximately 11,600 of
the 12,000 employees had been separated under the plans. Corning expects the
remaining 400 employees to be separated by December 31, 2002. Certain
obligations of the plans will be paid in 2003 and beyond.
The following table illustrates the charges, credits and balances of the
restructuring reserves as of June 30, 2002:
(In millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash
December 31, charges/ Non-cash payments June 30,
2001 credits charges in 2002 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring reserve:
Employee related costs $ 198 $ 187 (a) $ 30 $ 105 $ 250
Other charges 78 12 11 79
----------------------------------------------------------------------
Total restructuring reserve $ 276 $ 199 $ 30 $ 116 $ 329
----------------------------------------------------------------------
Impairment of long-lived assets:
Assets held for disposal $ 235 (b) $ 235
Cost investments 60 60
------------------------
Total impairment charges $ 295 $ 295
------------------------
Total restructuring and impairment
charges and credits $ 494
=========
(a) Amount is net of $5 million adjustment in employee related costs reflecting
the difference between estimated and actual costs.
(b) Amount is net of $5 million adjustment to assumed salvage values on asset
disposals.
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." Among other provisions, goodwill is no
longer amortized but is subject to impairment tests at least annually. Corning
adopted SFAS No. 142 on January 1, 2002. See Note 1 to Consolidated Financial
Statements.
Corning completed its initial impairment review during the first quarter and
concluded a transitional impairment charge from adoption of the standard would
not be required. On a prospective basis, Corning has selected the fourth quarter
to conduct annual impairment tests. The outcome of the impairment test is
primarily dependent upon the fair value of the reporting units. The current
business conditions in the telecommunications industry are depressed. Should
these conditions be prolonged or deteriorate, the fair value of Corning's
telecommunications reporting unit could be lower in future periods. As such,
management cannot provide assurance that future impairment tests will not result
in a charge to earnings.
Outlook
Management does not expect any meaningful recovery in the Telecommunications
Segment in 2002. As a result, management expects sales for 2002 to be
significantly below 2001 levels and anticipates Corning will continue to incur
losses in the short-term as it continues to restructure its operations.
Corning expects third quarter net sales to be in the range of $825 million to
$875 million and also anticipates a loss in a range of $0.07 to $0.10 per share,
excluding restructuring and impairment charges. The primary driver of the range
will be fiber and cable volume, which is expected to be flat to down 15%.
Continued price pressure will also impact revenues. Sales in the rest of the
telecommunications businesses are also expected to remain at depressed levels.
Corning expects revenues from its Advanced Materials and Information Display
Segments to remain strong in the third quarter led by its liquid crystal display
business, which continues to operate at full capacity. Third quarter results are
expected to reflect the positive impact of cost reduction programs; however
implementation costs and continued weakening of the fiber and cable business
could largely offset these gains.
Management continues to believe Corning has ample liquidity to meet its funding
needs for the remainder of 2002. Corning finished the second quarter with $1.3
billion in cash and short-term investments and an unused revolving credit
facility of $2.0 billion. Capital spending in the second half of 2002 is
expected to approximate $200 million. In addition, Corning expects to complete
the previously announced purchase of Lucent's controlling interest in two joint
ventures, Lucent Technologies Shanghai Fiber Optic Co., Ltd. and Lucent
Technologies Beijing Fiber Optic Cable Co., Ltd. for $225 million in the second
half of 2002.
Operating Segments
Corning's reportable operating segments consist of: Telecommunications, Advanced
Materials and Information Display. Corning includes the earnings of equity
affiliates that are closely associated with Corning's operating segments in
segment net income. In the second quarter of 2002, Corning revised its
definition of segment net income. Prior to the second quarter, Corning disclosed
restructuring and impairment charges by segment but excluded this from
quantitative segment results. These charges have been included in the segment
net income and historical periods have been conformed to this presentation.
Information about the performance of Corning's three operating segments for the
second quarter and six months of 2002 and 2001 is presented below. These amounts
exclude revenues, expenses and equity earnings not specifically identifiable to
segments. Note 2 to the Consolidated Financial Statements includes a
reconciliation of segment results to Corning's net loss.
Corning prepared the financial results for its three operating segments on a
basis that is consistent with the manner in which Corning management internally
disaggregates financial information to assist in making internal operating
decisions. Corning has allocated some common expenses among segments differently
than it would for stand alone financial information prepared in accordance with
accounting principles generally accepted in the U.S. (GAAP). Segment net income
may not be consistent with measures used by other companies. In the second
quarter of 2002, the operations of the optical network devices business were
merged with the photonic technologies business in the Telecommunications
Segment. As a result, historical periods have been combined in this
presentation.
- ------------------------------------------------------------------------------------------------------------------------------------
Telecommunications Three Months Ended Six Months Ended
(In millions) June 30, June 30,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 212 $ 939 $ 467 $ 1,814
Hardware and equipment 153 231 288 479
Photonic technologies 39 168 75 418
Controls and connectors 33 55 72 115
--------- --------- --------- ---------
Total net sales $ 437 $ 1,393 $ 902 $ 2,826
========= ========= ========= =========
Research, development and engineering expenses $ 86 $ 134 $ 172 $ 256
Interest expense $ 25 $ 23 $ 57 $ 48
Segment (loss) earnings before equity (losses) earnings
and restructuring, impairment and other charges $ (139) $ (7) $ (277) $ 170
Equity in (losses) earnings of associated companies (3) 8 (7) 11
--------- --------- --------- ---------
Segment (loss) earnings before restructuring,
impairment and other charges (142) 1 (284) 181
Restructuring, impairment and other charges, net of tax (259) (4,726) (259) (4,726)
--------- --------- --------- ---------
Segment net loss $ (401) $ (4,725) $ (543) $ (4,545)
========= ========= ========= =========
Segment (loss) earnings before equity (losses) earnings
and restructuring, impairment and other charges as a
percentage of segment sales (31.8)% (0.5)% (30.7)% 6.0%
Segment (loss) earnings before restructuring, impairment
and other charges as a percentage of segment sales (32.5)% 0.1% (31.5)% 6.4%
- ------------------------------------------------------------------------------------------------------------------------------------
The Telecommunications Segment produces optical fiber and cable, optical
hardware and equipment, and photonic modules and components for the worldwide
telecommunications industry. Sales of each business in the segment are provided
in the table above.
This segment incurred significant restructuring and impairment charges in both
years. The second quarter 2002 charge is described in detail in Restructuring,
Impairment and Other Charges. The activities were undertaken to reduce the
operating cost structure as a result of lower revenues. Approximately half of
the charge is impairment of fixed assets, primarily in the fiber and cable
business. The majority of the asset impairments in this business represent the
permanent abandonment of certain construction projects that had been stopped in
2001 in the fiber and cable business. The rest of the charge represents
impairments of cost based investments, primarily in the photonic technologies
business, and severance and benefits for retirees and separated personnel in all
businesses.
The impairment charge incurred in the second quarter of 2001 relates to goodwill
and certain acquired intangible assets from acquisitions in the photonic
technologies business.
The performance discussion below addresses losses and earnings before
restructuring, impairment and other charges.
Sales in the segment declined significantly from the second quarter and six
months of 2001 as each business in the segment experienced a significant
decline. The segment incurred a loss before restructuring, impairment and other
charges in the second quarter and six months of 2002, compared to income in the
prior year periods, primarily due to the significant decrease in sales volume.
Each business also reported a loss in 2002 for the second quarter and six
months. The declines from 2001 are caused by significantly reduced volumes in
all businesses as a result of the lack of capital spending in the
telecommunications industry.
The optical fiber and cable business is the largest business in the segment.
Sales in the fiber and cable business declined over 70% for both the quarter and
six months ended June 30, 2002, compared to the prior year periods. The volume
of fiber and cable products, including Corning's LEAF(R) and MetroCor(TM)
optical fiber, decreased more than 50% over the prior year quarter and prior
year six months. The overall weighted average price for Corning's optical fiber
and cable products decreased compared to the second quarter of 2001 and six
months of 2001 as the mix of premium fiber declined.
The optical fiber and cable business incurred a loss before restructuring,
impairment and other charges for both the quarter and six months of 2002
compared to record profits in the prior year periods due to significantly lower
sales volume, unfavorable product mix and declining prices.
Sales in the hardware and equipment business decreased 34% and 40% for the three
and six months ended June 30, 2002, compared to the same periods of 2001. The
sales decreases were primarily due to the overall lack of spending impacting the
entire telecommunications industry. The business incurred losses for both the
quarter and six months, compared to earnings in 2001 primarily due to lower
sales volumes.
Sales in the photonic technologies business declined 77% and 82% for the three
and six months ended June 30, 2002, primarily due to lower sales volume as
network buildouts in the telecommunications industry have declined resulting in
much lower demand for photonic products. The business incurred a loss for the
quarter and six months of 2002 primarily due to significantly lower sales
volumes. However, the loss was improved over those incurred in the comparable
periods of 2001, primarily due to the significant inventory write-down in the
second quarter of 2001. During the second quarter, the business favorably
resolved an open issue from the second quarter of 2001 with a major customer,
resulting in the recognition of revenue of $14 million and pre-tax income of $3
million. This revenue was recognized in part on shipment of inventory previously
reserved. In addition, the business settled an open matter with a significant
vendor resulting in the reversal of a vendor reserve of $20 million that was
recorded in the second quarter of 2001. In total, the impact of these
settlements in the second quarter was income of $23 million pre-tax. The
business also recorded inventory write-downs of $20 million pre-tax in the
second quarter of 2002.
Sales in the controls and connectors business decreased 40% and 37% for the
three and six months ended June 30, 2002, due to the sale of the appliance
controls group in May 2002 and the lack of capital spending in the
telecommunications industry. Earnings were also down due to the lower sales
volumes as the business incurred losses for the quarter and six months of 2002
compared to earnings in both periods in 2001. The loss on divestiture of $16
million ($10 million after-tax) is included in restructuring, impairment and
other charges.
The dynamics of the marketplace have changed dramatically since the second
quarter of 2001. As such, management believes the operating trends of the
businesses in this segment are best understood by comparison to the prior
quarter.
Second quarter 2002 segment sales declined 6% from the first quarter while the
loss before restructuring, impairment and other charges remained at $142
million. The decline in sales was caused by price declines, primarily in the
fiber and cable business due to flat volumes for the quarter and fiber price
decline of 10%-15%, mitigated in part by $14 million of photonics technologies
revenue from a settlement noted above.
- ------------------------------------------------------------------------------------------------------------------------------------
Advanced Materials Three Months Ended Six Months Ended
(In millions) June 30, June 30,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Environmental technologies $ 102 $ 96 $ 196 $ 204
Life sciences 74 69 144 139
Other advanced materials 66 86 135 190
--------- --------- --------- --------
Total net sales $ 242 $ 251 $ 475 $ 533
========= ========= ========= ========
Research, development and engineering expenses $ 32 $ 28 $ 63 $ 56
Interest expense $ 8 $ 5 $ 16 $ 10
Segment earnings before equity earnings and
restructuring charges $ 9 $ 11 $ 10 $ 37
Equity in earnings of associated companies 12 7 20 13
--------- --------- --------- --------
Segment earnings before restructuring charges 21 18 30 50
Restructuring charges, net of tax (1) (1)
--------- --------- --------- --------
Segment net income $ 20 $ 18 $ 29 $ 50
========= ========= ========= ========
Segment earnings before equity earnings and
restructuring charges as a percentage of segment sales 3.7% 4.4% 2.1% 6.9%
Segment earnings before restructuring charges
as a percentage of segment sales 8.7% 7.2% 6.3% 9.4%
- ------------------------------------------------------------------------------------------------------------------------------------
The Advanced Materials Segment manufactures specialized products with unique
applications utilizing glass, glass ceramic and polymer technologies. The
largest businesses in this segment are environmental technologies and life
sciences. Sales of these businesses are provided in the table above.
The restructuring costs recorded in 2002 in this segment consist entirely of
severance and benefits for retired and separated employees across all businesses
in the segment. The performance discussion below compares segment earnings
before restructuring charges.
Sales in the Advanced Materials Segment decreased 4% in the second quarter of
2002 compared to the second quarter of 2001, as decreasing demand for
semiconductor materials was partially offset by increased sales in environmental
technologies and life sciences. Sales declined 11% for the six months ended June
30, 2002, compared to the prior year period as the demand for semiconductor
materials fell sharply in the first quarter. Segment earnings before
restructuring charges increased 17% in the second quarter of 2002 compared to
the previous year quarter primarily due to improved performance in life
sciences. Segment earnings before restructuring charges declined 40% for the six
months ended June 30, 2002, compared to the prior year period, as improved
operating performance in the life sciences business and stronger equity earnings
was more than offset by decreased earnings in the environmental technologies and
semiconductor materials businesses.
Sales in the environmental technologies business increased 6% for the second
quarter of 2002 on higher sales volume. The sales growth was driven by economic
recovery in North America and sales growth in new products worldwide. Sales for
the first six months of 2002 decreased 4% compared to the prior year period due
to lower sales volume and downward pricing pressure. Earnings in this business
were flat for the second quarter and decreased over 30% for the six months ended
June 30, 2002, due to price declines as well as increased manufacturing and
development costs related to new products.
Sales in the life sciences business increased 7% and 4% for the second quarter
and six months of 2002 compared to the same periods of 2001 due to strong growth
in microplates. Earnings in the business for both the quarter and first six
months increased significantly over the comparable periods of 2001 primarily due
to cost savings achieved through the discontinuation of Corning's investment in
microarray technology products in the third quarter of 2001 and improved
manufacturing efficiencies.
Sales in Corning's other Advanced Materials businesses decreased 23% and 29%
from the second quarter and six months of 2001, respectively and earnings
decreased significantly over the same periods of 2001. These decreases were led
by lower sales volume of high purity fused silica products in the semiconductor
materials business due to soft demand in the semiconductor equipment industry as
capital spending continues to lag.
Many of the businesses in this segment are exposed to the general conditions of
the U.S. economy. As a result, these businesses incurred declines in performance
as the economy weakened at the end of the third quarter of 2001. A comparison of
current results to the prior quarter is useful as the economic conditions of
these two periods are more comparable.
Sales increased 4% over the first quarter of 2002 as sales improved 9% and 6%,
respectively at environmental technologies and life sciences while declining 4%
in the other businesses. Earnings in the segment more than doubled compared to
the first quarter of 2002 as most businesses improved, particularly
environmental technologies due to increased auto production.
- ------------------------------------------------------------------------------------------------------------------------------------
Information Display Three Months Ended Six Months Ended
(In millions) June 30, June 30,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Display technologies $ 102 $ 87 $ 195 $ 149
Precision lens 69 58 128 111
Conventional video components 41 73 84 159
--------- --------- --------- --------
Total net sales $ 212 $ 218 $ 407 $ 419
========= ========= ========= ========
Research, development and engineering expenses $ 14 $ 9 $ 25 $ 19
Interest expense $ 9 $ 6 $ 17 $ 10
Segment earnings before minority interest and
equity earnings $ 8 $ 25 $ 11 $ 46
Minority interest in losses (earnings) of subsidiaries 5 (7) 11 (12)
Equity in earnings of associated companies 29 29 54 54
--------- --------- --------- --------
Segment net income $ 42 $ 47 $ 76 $ 88
========= ========= ========= ========
Segment earnings before minority interest and equity
earnings as a percentage of segment sales 3.8% 11.5% 2.7% 11.0%
Segment net income as a percentage of segment sales 19.8% 21.6% 18.7% 21.0%
- ------------------------------------------------------------------------------------------------------------------------------------
The Information Display Segment manufactures glass panels and funnels for
televisions and CRTs (conventional video components), liquid crystal display
glass for flat panel display (display technologies) and precision lens
assemblies for projection video systems.
Sales in the Information Display Segment decreased 3% in both the second quarter
and six months of 2002, compared to the comparable periods of 2001 due to
extremely weak sales in the conventional video components business partially
offset by strong growth in the display technologies and precision lens
businesses. Segment net income in the second quarter and six months of 2002
declined 11% and 14% as significantly lower earnings at conventional video
components were only partially offset by improvements in the display
technologies business and the precision lens business.
Sales in the display technologies business increased 17% and 31% in the second
quarter and six months of 2002 compared to 2001, due to higher sales volume as
penetration in the desktop market increased. The prior year's first half sales
were unusually weak due to an inventory correction in the industry. Volume gains
of 29% and 55% for the quarter and six months of 2002 were partially offset by
price declines and foreign currency exposure to the yen. Earnings in the
business increased 10% for the quarter and over 25% for six months compared to
the prior year periods primarily due to volume gains and improved equity
earnings from Samsung Corning Precision, a Korean manufacturer of liquid crystal
display glass.
Sales in the precision lens business increased 19% and 15% in the second quarter
and first six months of 2002 compared to the prior year periods, as a result of
continued strong volume growth for digital projection televisions, particularly
in North America and Asia, driven by demand for larger size televisions in the
entertainment market sector. Earnings in this business for the second quarter of
2002 increased more than 50% over the prior year period due to sales volume
gains. Earnings for the six months ended June 30, 2002, increased 15% over the
prior year period as sales volume gains were partially offset by price declines.
Sales in the conventional video components business decreased 44% and 47% in the
second quarter and first six months of 2002. A significant portion of this
business is concentrated with few customers. One customer has exited the
business and sales demand from another key customer is uncertain. Management is
considering operational and strategic alternatives should the business continue
to decline. The loss in this business increased for the second quarter and six
months compared to 2001 due to decreased sales volume and a continued increase
in competitive pricing pressure. Samsung Corning, a 50% owned manufacturer of
glass panels based in South Korea, also experienced pricing pressure as equity
earnings were down for the second quarter and six months of 2002 compared to the
prior year periods.
On a sequential basis, sales in this segment improved 9% over the first quarter
as precision lens and display technologies increased 17% and 10%, respectively
while conventional video decreased 5%. Earnings improved over 20% compared to
the first quarter as earnings in precision lens more than doubled primarily due
to higher sales volumes.
Taxes on Income
Corning's effective income tax benefit rate for the three and six month periods
ended June 30, 2002, was 30.7% and 29.5%, respectively. The tax benefit rate in
the second quarter of 2002 was impacted by specific tax benefit calculations for
restructuring, impairment and other charges and the gain on repurchases of debt.
The effective benefit rate without consideration of these items was 25% in both
2002 periods. The effective tax benefit rate in the quarter and year to date is
lower than the U.S. statutory income tax rate of 35% due to the impact of
unusable tax credits and nondeductible expenses and losses.
Federal tax legislation passed early in 2002 extended the net operating loss
carryback period from two to five years. Corning anticipates incurring a federal
tax net operating loss for 2002 and this change in the tax legislation will
allow Corning to carryback the net operating loss to open tax years and claim a
tax refund. Current assets at June 30, 2002, include a receivable of $135
million as a result of Corning availing itself of this opportunity. Corning
expects to receive this refund in the second quarter of 2003.
The effective tax (benefit) rate for the three and six months ended June 30,
2001, was 1.6% and (0.7)%. These tax rates are much lower than the U.S.
statutory income tax rate primarily due to non-tax deductible amortization of
acquired intangibles and goodwill.
Liquidity and Capital Resources
At June 30, 2002, Corning had $1.3 billion in cash and short-term investments
and an unused revolving credit facility of $2.0 billion. Cash and cash
equivalents decreased $97 million from December 31, 2001, while short-term
investments decreased $799 million for the same period. The total decrease in
cash and short-term investments of $896 million includes $629 million of net
debt repayments and $116 million of restructuring payments. Cash and short-term
investments were essentially flat compared to June 30, 2001, as the proceeds
from issuance of convertible debt for $665 million in November 2001 was offset
by the debt repayments and restructuring payments.
During the first six months of 2002, Corning made payments of $88 million
related to employee costs and $11 million in other exit costs related to the
2001 restructuring actions. Corning expects additional payments related to the
2001 actions to approximate $45 million in the third quarter and $50 million in
the fourth quarter with approximately $70 million paid beyond 2002. In the
second quarter of 2002, Corning made payments of $17 million for employee costs
related to the 2002 restructuring actions. Corning expects additional payments
related to the 2002 actions to approximate $40 million in the third quarter and
$60 million in the fourth quarter with the remainder paid beyond 2002. Corning
expects approximately one-third of the 2002 restructuring charge to be paid in
cash.
On July 24, 2001, Corning announced that it had reached agreement with Lucent
Technologies to purchase Lucent's controlling interest in two Chinese ventures
for an aggregate purchase price of $225 million in cash. The closing of this
transaction is contingent upon government regulatory approval and the approval
of the minority equity shareholders. This transaction is expected to close in
the second half. Corning is in negotiations with Lucent that may result in
payment of a portion of these proceeds in Corning common stock.
Cash requirements for working capital, research and development, acquisitions,
capital expenditures, debt repayments, and restructuring liabilities are
expected to be funded from cash, short-term investments on hand, capital market
transactions and business dispositions. Corning is actively reviewing its
alternatives for accessing the capital markets through the issuance of
convertible securities. The timing and particulars remain under review and
depend on market conditions, but Corning may decide to access the markets as
early as the third quarter.
Cash Flows
For the six months ended June 30, 2002, cash used in operations was $148
million, primarily due to lower accounts payable and other current liabilities
and $116 million of cash payments for restructuring charges. Operations provided
cash of $690 million in the first six months of 2001. The trend between years is
primarily due to the 2002 net loss.
Cash provided by investing activities was $613 million through June 30, 2002,
reflecting net cash of $801 million from short-term investments and $24 million
from the sale of the appliance controls group partially offset by $213 million
of capital expenditures. This compares to a use of cash totaling $1,266 million
in the same period of 2001. The trend between years is primarily due to
decreased capital spending and acquisition activity.
Cash used in financing activities for the first six months of 2002 was $585
million and reflected $474 million of reduction of short-term debt, which
included the repayment of all commercial paper. In addition, $148 million was
used for the repurchase of a portion of the zero coupon convertible debentures.
This compares to cash provided by financing activities of $126 million in
2001which included dividend payments of $112 million.
During the second quarter of 2002, Corning purchased and retired a portion of
its zero coupon convertible debentures due November 8, 2015, with an accreted
value of $220 million in exchange for cash of $148 million in a series of open
market purchases. Corning recorded a gain of $68 million on these transactions,
net of the write-off of the unamortized issuance costs. Corning recorded the
gain on repurchases as a component of income from continuing operations, as
permitted by SFAS No. 145. The debentures may be put back to Corning on November
8, 2005. Corning has the option of settling this obligation in cash, common
stock, or a combination of both. From time to time, Corning may repurchase
certain additional debt securities in open market or privately negotiated
transactions.
Working Capital
Balance sheet and working capital measures are provided in the following table:
As of or for the six months ended
-------------------------------------------------------------
June 30, 2002 December 31, 2001 June 30, 2001
------------- ----------------- -------------
Working capital $1.9 billion $2.1 billion $2.2 billion
Working capital, excluding cash and short-term investments $590 million $(106) million $872 million
Current assets to current liabilities 2.3:1 2.1:1 2.2:1
Trade accounts receivable, net of allowances $605 million $593 million $1.3 billion
Days sales outstanding 61 55 65
Inventories $671 million $725 million $977 million
Inventory turns 3.9 4.5 4.9
The increase in working capital, excluding cash and short-term investments,
reflects lower short-term borrowings and accounts payable compared to December
31, 2001. The decrease in working capital, excluding cash and short-term
investments, compared to June 30, 2001, was primarily due to large decreases in
trade accounts receivable and inventories. The increase in days sales
outstanding, compared to December 31, 2001, resulted from lower December sales
due to the scheduled facility shutdowns at year-end. The large decrease in trade
accounts receivable and inventories, compared to June 30, 2001, was due to the
significant decline in revenues and demand for telecommunication products.
Financing Matters and Credit Ratings
Corning repaid all commercial paper borrowings as of June 30, 2002. Corning
maintains a $2.0 billion revolving credit facility with 18 banks, expiring on
August 17, 2005. As of June 30, 2002, there were no borrowings under the credit
facility. The facility includes a covenant requiring Corning to maintain a total
debt to capital ratio, as defined, not greater than 60%. At June 30, 2002, and
December 31, 2001, this ratio was 46% and 47%, respectively compared with 42% at
June 30, 2001. The decrease in total debt to capital was due to the repayments
of a portion of the zero coupon convertible debentures and commercial paper. The
ratio increase from June 2001 to June 2002 was due to the 2001 net loss and the
issuance of convertible debt in November 2001. As disclosed in Goodwill and
Other Intangible Assets, further declines in Corning's Telecommunications
Segment could cause further impairments of goodwill, tangible or intangible
assets or restructuring charges. These items could cause a material increase to
Corning's debt to capital ratio. Corning does not anticipate issuing commercial
paper for the foreseeable future. As of June 30, 2002, Corning had not provided
vendor financing to any of its customers.
Corning's credit ratings as of July 24, 2002, were as follows:
RATING AGENCY Rating Rating
Last Update Long-Term Debt Commercial Paper
- ------------------ -------------- ----------------
Standard & Poor's BBB- A-3
April 25, 2002
Moody's (a) Baa3 P-3
May 7, 2002
Fitch BB B
July 24, 2002
(a) Maintains a Negative Watch for possible downgrade.
Fitch announced a downgrade on July 24, 2002, which is reflected in the ratings
above. In April and May 2002, Corning's credit rating was downgraded by Standard
& Poor's and Moody's. Although the downgrades preclude Corning's access to the
commercial paper market, Corning's overall financial flexibility continues to be
adequate as a result of its cash position, short-term investment holdings and
committed revolving credit facilities.
A further downgrade could impact Corning's ability to enter into foreign
exchange hedge contracts with a duration of greater than a year. Such limitation
would not significantly impact the company's current hedging program. In
addition, a sub-investment grade credit rating could result in requirements to
deposit cash with counterparties under performance bond or letter of credit
arrangements.
Obligations, Commitments and Contingencies
The only material change to Corning's cash obligations, commercial commitments
and contingencies from those disclosed in Corning's Form 10-K/A filed March 7,
2002, was a decrease of approximately $100 million primarily in contingencies
related to acquisitions and performance bonds. See Note 11 to Consolidated
Financial Statements for an updated discussion of Corning's litigation exposure
associated with Pittsburgh Corning Corporation.
In-Process Research and Development
Corning completed a number of purchase acquisitions in 2000. As part of
analyzing each of these acquisitions, Corning made a decision to buy technology
that had not yet been commercialized rather than develop the technology
internally. Corning based this decision on a number of factors, including the
amount of time it would take to bring the technology to market. Corning also
considered its internal research resource allocation and its progress on
comparable technology, if any. Corning expects to use the same decision process
in the future.
NZ Applied Technologies
- -----------------------
On May 5, 2000, Corning completed the acquisition of NZ Applied Technologies
(NZAT). NZAT was developing a line of high speed, solid-state components for
dense wavelength division multiplexing systems, such as variable optical
attenuators, that will meet industry demands for speed and quality. Of these
projects, four were determined to meet the criteria for purchased in-process
research and development (IPRD) as of the acquisition date. Projected debt-free
income was initially discounted using a rate of 21% to reflect the
weighted-average cost of capital (entity risk) for NZAT. Each product was also
discounted to account for the research project's stage of development. The
completion percentages ranged from 10%-80%. At the acquisition date, the
projected costs to complete the IPRD programs approximated $10 million. A $44
million non-tax deductible IPRD charge was recognized and the value of
individual projects ranged from $1 million to $29 million.
In the second quarter, due to the significant downturn in demand for
telecommunication's products, Corning decided to suspend the research related to
these projects. When the demand for Corning's telecommunication products
rebounds, management will reevaluate the market at that time and a decision will
be made as to whether research and development on these projects should resume.
Critical Accounting Policies
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported therein. Corning described the
items that require management's most difficult, subjective or complex judgments
in its Form 10-K/A filed March 7, 2002. This disclosure continues to be relevant
to the current year.
The current economic depression in the telecommunications industry has
introduced additional uncertainty and makes judgments in 2002 about allowances
for bad debts and inventory realization more complex. The creditworthiness of
customers requires reliance on information provided by analysts if the company
is public and judgments about the liquidity of other companies based on
incomplete information. Inventory realization requires estimates of market
demand for product on hand and forecasting of future technological developments.
Inventory reserves are the most judgmental in the photonics business where the
items are highly technical and built to customer specifications. At June 30,
2002, the inventory carrying value associated with this business approximated
$40 million.
The telecommunication industry downturn is also adversely impacting many private
companies in which Corning made investments at high valuations accounted for
under the cost method. In the second quarter of 2002, Corning wrote off its
balance in a number of such investments despite the continued operation of the
entities. Certain events such as completed, planned or failed financing
activities at each company make it likely that Corning will not realize any
proceeds from its investment.
New Accounting Standards
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This standard addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Corning is required to implement SFAS No. 143
on January 1, 2003. Corning does not expect this standard to have a material
impact on its consolidated financial position or results of operations.
Forward-Looking Statements
The statements in this Quarterly Report on Form 10-Q, in reports subsequently
filed by Corning with the SEC on Form 8-K and related comments by management
which are not historical facts or information and contain words such as
"believes," "expects," "anticipates," "estimates," "forecasts," and similar
expressions are forward-looking statements. These forward-looking statements
involve risks and uncertainties that may cause the actual outcome to be
materially different. Such risks and uncertainties include, but are not limited
to:
- - global economic conditions,
- - currency fluctuations,
- - product demand and industry capacity,
- - competitive products and pricing,
- - sufficiency of manufacturing capacity and efficiencies,
- - cost reductions,
- - availability and costs of critical materials,
- - new product development and commercialization,
- - attracting and retaining key personnel,
- - order activity and demand from major customers,
- - fluctuations in capital spending by customers in the telecommunications
industry and other business segments,
- - changes in the mix of sales between premium and non-premium products,
- - facility expansions and new plant start-up costs,
- - adverse litigation or regulatory developments,
- - capital resource and cash flow activities,
- - capital spending,
- - equity company activities,
- - interest costs,
- - acquisition and divestiture activity,
- - the rate of technology change,
- - the ability to enforce patents,
- - product performance issues,
- - stock price fluctuations, and
- - other risks detailed in Corning's SEC filings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
There have been no material changes to Corning's market risk exposure since
December 31, 2001, except for the following change described below.
Interest Rate Risk Management
In March and April of 2002, Corning entered into interest rate swaps that are
fair value hedges and economically exchanged $275 million of fixed rate
long-term debt to floating rate debt. Under the terms of the swap agreements,
Corning will pay the counterparty a floating rate that is indexed to the
six-month LIBOR rate and receive the fixed rates of 8.3% to 8.875%, which are
the stated interest rates on the long-term debt instruments. As a result of
these transactions, Corning is exposed to the impact of interest rate changes.
The interest rate on these instruments is reset every six months and they expire
in 14 to 23 years. It is Corning's policy to conservatively manage its exposure
to changes in interest rates. Corning's policy is that total floating and
variable rate debt will not exceed 35% of the total debt portfolio at anytime.
At June 30, 2002, Corning's consolidated debt portfolio contained approximately
6% of variable rate instruments.
Part II - Other Information
---------------------------
ITEM 1. LEGAL PROCEEDINGS
Environmental Litigation. Corning has been named by the Environmental Protection
Agency under the Superfund Act, or by state governments under similar state
laws, as a potentially responsible party at 12 active hazardous waste sites.
Under the Superfund Act, all parties who may have contributed any waste to a
hazardous waste site, identified by such Agency, are jointly and severally
liable for the cost of cleanup unless the Agency agrees otherwise. It is
Corning's policy to accrue for its estimated liability related to Superfund
sites and other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued approximately $23 million for its estimated
liability for environmental cleanup and litigation at June 30, 2002. Based upon
the information developed to date, management believes that the accrued reserve
is a reasonable estimate of the Company's estimated liability and that the risk
of an additional loss in an amount materially higher than that accrued is
remote.
Schwinger Toxins Lawsuit. In April 2002, Corning was served with a complaint by
44 plaintiffs alleging past and current injuries allegedly arising from release
of hazardous and toxic substances from a Sylvania nuclear materials processing
facility near Hicksville, New York. The complaint names more than 20 other
corporate defendants and is pending in the United States District Court for the
Eastern District of New York and seeks damages in excess of $1.6 billion. On
June 13, 2002, Corning submitted a letter to the Eastern District Court,
pursuant to the Court's rules, in anticipation of filing a motion to dismiss.
The Court has not responded to the letter; however, the Court has requested a
preliminary conference that will be held on July 22, 2002.
Dow Corning Bankruptcy. Corning and The Dow Chemical Company each own 50% of the
common stock of Dow Corning Corporation. On May 15, 1995, Dow Corning sought
protection under the reorganization provisions of Chapter 11 of the United
States Bankruptcy Code and thereby obtained a stay of approximately 19,000
breast-implant product liability lawsuits. On November 8, 1998, Dow Corning and
the Tort Claimants Committee jointly filed a revised Plan of Reorganization
(Joint Plan) which was confirmed by the Bankruptcy Court on November 30, 1999.
On December 21, 1999, the Bankruptcy Court issued an opinion that approved the
principal elements of the Joint Plan with respect to tort claimants, but
construed the Joint Plan as providing releases for third parties (including
Corning and Dow Chemical as shareholders) only with respect to tort claimants
who voted in favor of the Joint Plan. On November 13, 2000, the District Court
entered an Order reversing the Bankruptcy Court's December 21, 1999, Opinion on
the release and injunction provisions and confirmed the Joint Plan. On January
29, 2002, the U.S. Court of Appeals for the Sixth Circuit affirmed the
determinations made in the District Court with respect to the foreign claimants,
but remanded to the District Court for further proceedings with respect to
certain lien claims of the U.S. government and with respect to the findings
supporting the non-debtor releases in favor of Dow Corning's shareholders,
foreign subsidiaries and insurers. On May 3, 2002, the Sixth Circuit denied the
U.S. Government's petition for rehearing en banc. In the District Court, the
Plan proponents and opponents filed briefs on the open issues, which include the
issues surrounding the non-debtor releases, and the District Court heard
arguments on the remanded issues on June 14. The District Court reserved
decision. Certain tort claimants have filed a petition with the U.S. Supreme
Court requesting review of the Sixth Circuit's ruling regarding the power of a
bankruptcy court to grant third party releases. If the Joint Plan is upheld but
the shareholder releases are not given their full effect, Corning would expect
to defend any remaining claims against it (and any new claims) on the same
grounds that led to a series of orders and judgments dismissing all claims
against Corning in the federal courts and in many state courts as described
under the heading Implant Tort Lawsuits immediately hereafter. Management
believes that the claims against Corning lack merit and that the breast implant
litigation against Corning will be resolved without material impact on Corning's
financial statements.
Under the terms of the Joint Plan, Dow Corning would be required to establish a
Settlement Trust and a Litigation Facility to provide a means for tort claimants
to settle or litigate their claims. Dow Corning would have the obligation to
fund the Trust and the Facility, over a period of up to 16 years, in an amount
up to approximately $3.3 billion, subject to the limitations, terms and
conditions stated in the Joint Plan. Corning and Dow Chemical have each agreed
to provide a credit facility to Dow Corning of up to $150 million ($300 million
in the aggregate), subject to the terms and conditions stated in the Joint Plan.
The Joint Plan also provides for Dow Corning to make full payment, through cash
and the issuance of senior notes, to its commercial creditors. The commercial
creditors have contested the Bankruptcy Court's disallowance of their claims for
post-petition interest at default rates of interest, and have appealed to the
District Court. While the amounts at issue on this appeal are subject to a
variety of contingencies, it is possible that the aggregate claim against Dow
Corning exceeds $100 million on a pre-tax basis. The District Court held oral
argument on May 2, 2002, to consider the merits of the commercial creditors
appeal, which Dow Corning has vigorously contested, and has not yet ruled. If
and when Dow Corning emerges from bankruptcy, Corning expects to resume the
recognition of equity earnings from Dow Corning. Corning does not expect to
receive dividends from Dow Corning in the foreseeable future.
Implant Tort Lawsuits. Corning and Dow Chemical, the shareholders of Dow Corning
Corporation, were named in a number of state and federal tort lawsuits alleging
injuries arising from Dow Corning's implant products. The claims against the
shareholders alleged a variety of direct or indirect theories of liability. In
1992, the federal breast implants cases were coordinated for pretrial purposes
in the United States District Court, Northern District of Alabama (Judge Sam C.
Pointer, Jr.). In April 1995, the District Court granted Corning a summary
judgment dismissing it from over 4,000 federal court cases. On March 12, 1996,
the U.S. Court of Appeals for the Eleventh Circuit dismissed the plaintiffs'
appeal from that judgment. In state court litigation, Corning was awarded
summary judgment in California, Connecticut, Illinois, Indiana, Michigan,
Mississippi, New Jersey, New York, Pennsylvania, Tennessee, and Dallas, Harris
and Travis Counties in Texas, thereby dismissing approximately 7,000 state
cases. In Louisiana, Corning's summary judgment was vacated by an intermediate
appeals court in Louisiana as premature. The Louisiana cases were transferred to
the United States District Court for the Eastern District of Michigan, Southern
Division (Michigan Federal Court) to which substantially all breast implant
cases were transferred in 1997. In the Michigan Federal Court, Corning is named
as a defendant in approximately 70 pending cases (including some cases with
multiple claimants), in addition to the transferred Louisiana cases. The
Michigan Federal Court heard Corning's motion for summary judgment on February
27, 1998, but has not ruled. Based upon the information developed to date and
recognizing that the outcome of complex litigation is uncertain, management
believes that the risk of a materially adverse result in the implant litigation
against Corning is remote and believes the implant litigation against Corning
will be resolved without material impact on Corning's financial statements.
Federal Securities Cases. A federal securities class action lawsuit was filed in
1992 against Corning and certain individual defendants by a class of purchasers
of Corning stock who allege misrepresentations and omissions of material facts
relative to the silicone gel breast implant business conducted by Dow Corning.
This action is pending in the United States District Court for the Southern
District of New York. The class consists of those purchasers of Corning stock in
the period from June 14, 1989, to January 13, 1992, who allegedly purchased at
inflated prices due to the non-disclosure or concealment of material
information. No amount of damages is specified in the complaint. In 1997, the
Court dismissed the individual defendants from the case. In December 1998,
Corning filed a motion for summary judgment requesting that all claims against
it be dismissed. Plaintiffs requested the opportunity to take depositions before
responding to the motion for summary judgment. The discovery process is
continuing and the Court has set no schedule to address the still pending
summary judgment motion. Corning intends to continue to defend this action
vigorously. Based upon the information developed to date and recognizing that
the outcome of litigation is uncertain, management believes that the likelihood
of a materially adverse verdict is remote.
From December 2001 through April 2002, Corning and three of its officers and
directors were named defendants and served in four different lawsuits alleging
violations of the U.S. securities laws in connection with Corning's November
2000 offering of $2.7 billion zero coupon convertible debentures, due November
2015 and 30 million shares of common stock. These lawsuits are pending in the
United States District Court for the Western District of New York and seek class
action status. In addition, the Company and the same three officers and
directors were named and served in ten lawsuits alleging selective disclosures
and non-disclosures that allegedly inflated the price of Corning's Common Stock
in the period from September 2000 through June 2001. The plaintiffs in these
actions seek to represent classes of purchasers of Corning's stock in all or
part of the period indicated. Another lawsuit has been filed by a participant in
the Company's Investment Plan for Salaried Employees, purportedly as a class
action on behalf of participants in the Plan who purchased or held Corning stock
in a Plan account. Corning has not yet answered these lawsuits and there has
been no determination if they will proceed as a class action or who will be lead
counsel for plaintiffs. Management is prepared to defend these lawsuits
vigorously and, recognizing that the outcome of litigation is uncertain,
believes it has strong defenses to the claims alleged in the complaints.
Pittsburgh Corning Corporation. Corning and PPG Industries, Inc. (PPG) each own
50% of the capital stock of Pittsburgh Corning Corporation (PCC). PCC and
several other defendants, including PPG and Corning, have been named in numerous
lawsuits involving claims alleging personal injury from exposure to asbestos. On
April 16, 2000, PCC filed for Chapter 11 reorganization in the United States
Bankruptcy Court for the Western District of Pennsylvania. As of the bankruptcy
filing, PCC had in excess of 140,000 open claims and now has in excess of
240,000 open claims.
In the bankruptcy court, PCC in April 2000 obtained a preliminary injunction
against the prosecution of asbestos actions against its two shareholders to
afford the parties a period of time (the Injunction Period) in which to
negotiate a plan of reorganization for PCC.
On May 14, 2002, PPG announced that it had agreed with several other parties,
including certain of its insurance carriers and representatives of current and
future asbestos claimants, on the terms of a settlement arrangement relating to
asbestos claims against PPG and PCC. This settlement would be incorporated in a
plan of reorganization for PCC, and would be subject to a favorable vote by 75%
of the asbestos claimants voting on the PCC reorganization plan, and approval by
the Bankruptcy Court. According to its announcement, PPG would make
contributions to a trust under the reorganization plan consisting of:
.. cash payments by PPG's participating insurance carriers of approximately
$1.7 billion over a 21 year period;
.. the assignment of rights to certain proceeds of policies by certain
insurance carriers not participating in the settlement;
.. PPG's shares in PCC and Pittsburgh Corning Europe, a Belgian corporation;
.. 1,388,889 shares of PPG's common stock; and
.. cash payments from PPG of approximately $998 million over 21 years.
PPG announced on July 18, 2002, that it recorded a charge in its second quarter
results of $495 million after-tax related to this settlement.
The Injunction Period has been extended as to Corning until July 31, 2002. Under
the terms of the Bankruptcy Court's Order, Corning will have 90 days following
expiration of the Injunction Period to seek removal and transfer of stayed cases
that have not been resolved through a plan of reorganization. At the time PCC
filed for bankruptcy protection, there were approximately12,400 claims pending
against Corning alleging various theories of liability based on exposure to
PCC's asbestos products. Although the outcome of litigation and the bankruptcy
case is uncertain, management believes that the separate corporate status of PCC
will continue to be upheld and that Corning has strong legal defenses to any
claims of direct liability arising from PCC's asbestos products.
After PPG announced its settlement, negotiations between representatives of the
asbestos claimants and Corning became more intensive but failed to produce a
settlement. In Corning's negotiations with the asbestos claimants, the range of
negotiations has been framed by demands translating into approximately $400
million to $500 million in net present value (inclusive of insurance), which is
significantly lower than that reflected in the PPG settlement. These
negotiations have been difficult, and no assurances can be offered that a
settlement can be concluded within this range.
Based on negotiations to date, management believes that a settlement (if one can
be reached) would probably include some combination of the following elements:
cash payments by Corning over time into a trust; contribution of Corning's
shares in PCC and Pittsburgh Corning Europe and common shares of Corning; and
insurance through cash payments or assignments of certain rights. However, the
structure of a settlement has not been agreed and management can not estimate
the likelihood that any settlement will emerge from negotiations with the
claimants or Corning's insurers, or the probability that Corning will be able to
secure a release through PCC's plan of reorganization upon terms and conditions
satisfactory to Corning.
At this time, it appears more likely than not that Corning will litigate the
asbestos cases, but will continue to explore a settlement through the bankruptcy
process. The exposure for this asbestos litigation (net of insurance) cannot be
estimated at this time due to the wide range of potential outcomes. Corning is
also currently named in approximately 14,000 other cases alleging injuries from
asbestos. Those cases have been covered by insurance without material impact to
Corning to date. Asbestos litigation is inherently difficult, and the outcome of
litigation is uncertain.
As a result of PCC's bankruptcy filing, Corning recorded an after-tax charge of
$36 million in the first quarter of 2000 to impair its entire investment in PCC
and discontinued recognition of equity earnings. At June 30, 2002, Corning has
not recorded any additional charges associated with the outcome of this
litigation. As noted above, management believes there are strong legal defenses
to the claims against Corning. Management estimates that the insurance coverage
available to Corning related to these matters exceeds $600 million and depending
on the outcome of potential coverage issues may exceed $1 billion. Management
estimates that the low end of the range of loss resulting from continued
litigation is not material. Due to the inherent uncertainty of asbestos related
litigation, management is unable to estimate the maximum exposure from this
litigation.
Alternatively, in the event that Corning and its insurers agree to a global
settlement of the PCC-related cases through the PCC bankruptcy process, the
outcome may be material to the results of operations for the period in which
such costs, if any, are recognized. Management expects that any after-tax charge
resulting from Corning's contributions as part of a possible settlement could
approximate $100 million to $150 million and will depend upon the timing of
contributions and relative participation of insurance carriers. Management
cannot provide assurances that the ultimate outcome of a settlement would be
within this range.
Under either alternative management believes these matters will be resolved
without material impact to Corning's overall financial position or its liquidity
Astrium. In December of 2000, Astrium, SAS and Astrium, Ltd. filed a complaint
for negligence in the United States District Court for the Central District of
California against TRW, Inc., Pilkington Optronics Inc., Corning NetOptix, Inc.,
OFC Corporation and Optical Filter Corporation claiming damages in excess of
$150 million. The complaint alleges that certain cover glasses for solar arrays
used to generate electricity from solar energy on satellites sold by Astrium's
corporate successor were negligently coated by NetOptix or its subsidiaries
(prior to Corning's acquisition of NetOptix) in such a way that the amount of
electricity the satellite can produce and their effective life were materially
reduced. Corning has denied that the coatings produced by NetOptix or its
subsidiaries caused the damage alleged in the complaint, or that it is legally
liable for any damages which Astrium may have experienced. Formal discovery
through document production and depositions has begun and will continue through
August 2002. In April 2002, the Court granted motions for summary judgment by
Corning and other defendants to dismiss the negligence claims. The Court has
permitted plaintiffs to add fraud and negligent misrepresentation claims against
all defendants and a breach of warranty claim against Corning NetOptix, Inc.,
OFC Corporation and Optical Filter Corporation. Based upon the current case
management order, a trial has been scheduled for April 15, 2003. Based upon the
information developed to date and recognizing that the outcome of litigation is
uncertain, management believes that there are strong defenses to these claims
and believes they will be resolved without material impact on Corning's
financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10. Agreement and Release between John W. Loose and Corning
Incorporated dated April 12, 2002.
12. Ratio of earnings to fixed charges for the six months ended
June 30, 2002, and 2001.
(b) Reports on Form 8-K
A report on Form 8-K dated April 15, 2002, was filed in
connection with expected first quarter results and restructuring
actions.
A report on Form 8-K dated April 22, 2002, was filed in
connection with the registrant's first quarter 2002 results.
Other items under Part II are not applicable.
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNING INCORPORATED
(Registrant)
July 24, 2002 /s/ JAMES B. FLAWS
- --------------------- --------------------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
July 24, 2002 /s/ KATHERINE A. ASBECK
- --------------------- --------------------------------------------------
Date Katherine A. Asbeck
Senior Vice President and Controller
(Principal Accounting Officer)
EXHIBIT 10
----------
AGREEMENT AND RELEASE
---------------------
This Agreement and Release (the "Agreement") is entered into as of April 12,
2002 (the "Effective Date") between Corning Incorporated (together with its
successor and assigns, "Corning") and John W. Loose (the "Executive"). Corning
and Executive (individually, a "Party" and together, the "Parties") in exchange
for their mutual promises herein set forth, hereby agree to the covenants as set
forth below.
I. Effective April 12, 2002, Executive resigned as President and Chief
Executive Officer of Corning and effective April 25, 2002, Executive
resigned as a director of Corning and its affiliates. Executive shall
continue to be an employee and paid his full compensation and benefits
through April 30, 2002 ("Last Paid Day"). Effective May 1, 2002 (the
"Retirement Date"), Executive will retire and will be eligible to
commence pension benefits from Corning retroactive to such date in
accordance with the provisions of Section II-5 below. As of April 12,
2002, Executive shall have no responsibility to act on behalf of
Corning or any affiliate and shall not be deemed by Corning to have
any management responsibilities with respect to the business or
operations of Corning or any affiliate.
II. The following benefits shall be provided by Corning:
1. SALARY AND BONUS AND OTHER DIRECT PAYMENTS
------------------------------------------
Executive will receive his current base salary through his Last
Paid Day. No prorated cash payments will be made for 2002 under
the Variable Compensation or GoalSharing programs; full
consideration for these amounts has already been considered
within the lump-sum payment specified below.
Within 30 days of his Last Paid Day, Executive will receive a
gross lump-sum payment of $5,242,500, less applicable payroll
taxes. This payment represents payment of:
- three (3) years of base salary at $850,000 per year,
- three (3) years of target Variable Compensation at 100% of
base salary,
- three (3) years of target GoalSharing at 5% of base salary,
and
- a payment of $15,000 in lieu of outplacement assistance.
Within 30 days of his Last Paid Day, Executive will receive a
gross lump-sum payment of $660,000, less applicable payroll
taxes. This payment is in lieu of continuing office support,
access to aircraft, payment of legal fees to review these
agreements or payment for any unused vacation days. Through
December 31, 2002, Executive shall have reasonable access to the
services of his current secretary on a mutually acceptable basis.
Other than as set forth herein, Corning will have no ongoing
commitments to Executive for office support or access to
aircraft.
None of the payments referenced above will be considered to be
eligible earnings for purposes of any company-sponsored
retirement or benefit plan.
2. GROUP INSURANCE
---------------
Medical, dental and life insurance coverage, subject to
conditions heretofore in effect, will remain in effect though the
Retirement Date. Thereafter, Executive and his eligible
dependents shall be entitled to such retiree medical coverage
(subject to any applicable cost sharing provisions) and Executive
shall be entitled to retiree life insurance coverage, both as may
be provided by Corning to employees of comparable status and
years of service who retired on or after their normal retirement
date.
3. LONG-TERM DISABILITY
--------------------
Under the terms of the long-term disability plans, long-term
disability coverage is provided only to active employees. As a
result, this coverage ceases on Executive's Last Paid Day.
4. INVESTMENT AND DEFERRAL PLANS
-----------------------------
All moneys in Executive's Corning Investment Plan account,
Management Deferral Plan account and Supplemental Investment Plan
account are fully vested. Balances accrued under the Management
Deferral Plan and the Corning Supplemental Investment Plan will
be distributed to Executive after his Retirement Date in a
lump-sum within 30 days of the Retirement Date, with earnings
credited to such account balances up to and including the date
preceding the date of distribution. Executive's account balances
in the Corning Investment Plan shall be subject to the continuing
terms of the Plan.
5. PENSION PLAN
------------
In lieu of the pension benefit to which he would be entitled
pursuant to Corning's Executive Supplemental Pension Plan (the
"SERP"), commencing on the Retirement Date Executive shall be
entitled to a total (qualified and nonqualified) annual unreduced
single life annuity gross taxable pension benefit of $925,000
(Total Benefit) for Executive's life (with a six-year term
certain). The nonqualified benefit (Nonqualified Benefit) will be
the Total Benefit less the annual pension benefit, if any, due to
him pursuant to Corning's qualified Pension Plan for Salaried
Employees. Executive may elect alternative forms of payment (e.g.
a joint and survivor annuity benefit with his spouse);
alternative forms of payment will be actuarially determined in
accordance with the provisions of Corning retirement plans. Any
amounts held for the benefit of Executive under the secular trust
for the SERP, of which U.S. Trust is currently trustee,
(including earnings credited on such amounts from time to time
under such trust) shall be factored into determining how much of
the Total Benefit will be offset as a result of these prefundings
by Corning. Subject to this Section II-5, the Nonqualified
Benefit hereunder (which, as paid out pursuant to the annuity
contract described herein, shall take into account tax
considerations as noted in the next sentence) shall be provided
pursuant to a fixed annuity contract acquired from MetLife and
transferred to Executive as soon as administratively practicable
after the execution of this Agreement. It is understood that the
annuity contract will provide an annual payment which takes into
account tax treatment to the executive of (i) the transfer of the
annuity contract to him and (ii) the subsequent annual annuity
payments to him pursuant to the annuity contract. The terms of
the annuity contract shall be subject to Executive's reasonable
review and Corning shall seek to provide such terms as Executive
may reasonably request. In lieu of having such Nonqualified
Benefit (which, as paid out pursuant to the aforesaid annuity
contract, shall take into account tax considerations as set forth
above) provided pursuant to the aforesaid annuity contract,
Executive may elect on or prior to May 28, 2002 to receive a
taxable lump-sum payment which after all taxes on that amount
equals the price that would have been charged to Corning by
MetLife to acquire the annuity contract from MetLife as set forth
above. Executive may make such election by giving Corning written
notice to that effect. In the event Executive fails to make such
an election on or prior to May 28, 2002, the Nonqualified Benefit
(which, as paid out pursuant to the aforesaid annuity contract
shall take into account tax considerations as set forth above)
shall be provided to him in the form of the aforesaid annuity
contract. For the avoidance of doubt, whether Executive elects to
receive his Nonqualified Benefit (which shall take into account
tax considerations as set forth above) in the form of an annuity
contract or a lump-sum payment, he will be entitled to gross
taxable income which after taxes will provide him with an amount
equal to the price of the MetLife annuity contract contemplated
by this Agreement as set forth above and Corning shall withhold
from such gross taxable income an appropriate estimate of all
taxes applicable to Executive, such withholding to be made by
Corning in accordance with its past practices.
6. STOCK OPTIONS
-------------
In accordance with IRS rules and regulations, all Incentive Stock
Options ("ISOs") will automatically be converted into
nonqualified stock options 90 days after Executive's Retirement
Date.
Executive has been granted Corning stock options during his
career with Corning. Except as noted above, all other stock
option terms will remain unchanged. For all stock options,
including the ISOs, the stock options will continue to vest in
accordance with their original schedules and all stock options
shall remain exercisable for their originally scheduled terms.
7. RESTRICTED STOCK AWARDS
-----------------------
Executive has a total of 60,000 shares of restricted stock,
subject to restrictions on continued employment until retirement.
Executive will have all restrictions on all of these shares
lifted as of the Retirement Date, at which point these shares
will become taxable. All shares delivered to Executive shall be
fully registered and freely transferable and not subject to any
restrictions (other than restrictions noted in IV below).
Corning will withhold a portion of these shares for required tax
withholdings and distribute the net shares to Executive free and
clear of all restrictions.
8. GENERAL
-------
A. Aircraft/Financial Counseling Program/Home Security
---------------------------------------------------
Executive may request personal use of the corporate aircraft up
through the Retirement Date and any charges for personal use, if
any, shall be determined in accordance with Corning policy and
applied against his annual perquisite allowance. After the
Retirement Date, any unused balance in Executive's 2002
Aircraft/Financial Counseling perquisite may be used for payment
of actual financial counseling, legal and home security invoices
incurred and submitted in accordance with Corning's policies up
through November 30, 2002.
B. Relocation And Support
----------------------
Up until December 31, 2004, within 30 days' of Executive's
written request, Corning will cause Executive's principal
residence in Corning, New York to be purchased by Prudential
Relocation Services at a value not less than Executive's total
cost for the residence. At Corning's request, Executive will
provide Corning with the information necessary to document his
total cost for such residence.
Corning will also pay for the reasonable costs of transporting
Executive's household goods to a domestic U.S. location (or up to
two domestic U.S. locations) of Executive's choice and will pay
for the reasonable costs of storing such household goods for up
to 12 months, provided that Corning will not pay for any monthly
storage expenses incurred for storage after January 1, 2005.
As of April 12, 2002 and up until such residence is purchased in
accordance with this Section II-8.B, Corning agrees to maintain
the home security system and the monitoring of such system and to
provide support and servicing for all operating systems including
the fiber optic service and to continue the provision of all
existing data fees. Corning also agrees to continue to provide IT
support to Executive, as needed.
C. Vacation
--------
All vacation allowances have been factored into the payments
being made under this Agreement so that no additional payments
for unused vacation will be made.
D. Home Security System
--------------------
After the Retirement Date, Corning agrees to install a home
security system in a residence of Executive's choice, up to a
maximum of $35,000.
E. Indemnification
---------------
(a) Corning agrees that, if Executive is made a party to, is
threatened to be made a party to, receives any legal process in,
or receives any discovery request or request for information in
connection with, any action, suit or proceeding, whether civil,
criminal, administrative, investigative or otherwise (a
"Proceeding"), by reason of the fact that he was a director,
officer, employee, consultant, representative or agent of
Corning, one of its subsidiaries, affiliates or equity companies,
including service with respect to employee benefit plans, whether
or not the basis of such Proceeding is Executive's alleged action
in an official capacity while serving as a director, officer,
member, employee, trustee, consultant, representative or agent of
Corning or one of its subsidiaries, affiliates or equity
companies, including service with respect to employee benefit
plans, Executive shall be indemnified and held harmless by
Corning to the fullest extent permitted or authorized by
Corning's Certificate of Incorporation and By-Laws or, if
greater, by applicable law, including, without limitation,
Sections 721 through 725 of the Business Corporation Law of the
State of New York, as in effect as of the Effective Date, against
any and all costs, expenses, liabilities and losses (including,
without limitation, reasonable attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) incurred or suffered by Executive in connection
therewith, and such indemnification shall continue as to
Executive even though he has ceased to be a director, officer,
member, employee, trustee, consultant, representative or agent of
Corning or one of its subsidiaries, affiliates or equity
companies, including any employee benefit plans, and shall inure
to the benefit of Executive's heirs, executors and
administrators. Corning shall reimburse Executive for all
reasonable costs, expenses, liabilities and losses (as defined
above) incurred by him in connection with any Proceeding within
30 business days after receipt by Corning of a written request
for such reimbursement, with sufficient documentation of the
amounts and details of such costs, expenses, liabilities and
losses. Such request shall include an undertaking by Executive to
repay within 30 business days after demand by Corning the full
amount of such reimbursements, or such portion thereof he is
obligated to repay, as the case may be, if it shall ultimately be
determined that he is not entitled to be indemnified against such
costs, expenses, liabilities or losses. Nothing in this Section
II-8.E shall be construed as reducing or waiving any right to
indemnification, or advancement of expenses, Executive would
otherwise have under Corning's or any affiliates' Certificate of
Incorporation or other governing document, by-laws, any board of
directors' resolution, any other agreement or under applicable
law.
(b) As of April 12, 2002 and thereafter, Corning agrees to
continue and maintain a directors' and officers' liability
insurance policy covering Executive at a level, and on terms and
conditions, no less favorable to him than the coverage Corning
provides its directors and senior-level officers, until such time
as suits against Executive are no longer permitted by law.
F. Reimbursement of Business Expenses
----------------------------------
Executive will be reimbursed for all business expenses incurred
by him up to and including the Retirement Date in accordance with
Corning's policies, provided that all such expenses and customary
documentation are submitted to Corning no later than July 31,
2002.
G. 280G Gross-Up
-------------
If there is a Change of Control of Corning (as that term is
defined within the stock option agreements between Corning and
Executive) within twelve months following the Effective Date of
this Agreement, and in the event that any payment or benefit made
or provided to or for the benefit of Executive in connection with
this Agreement or his employment with Corning or the termination
thereof (a "Payment") is determined to be subject to any excise
tax ("Excise Tax") imposed by Section 4999 of the Internal
Revenue Code (or any successor to such Section), Corning shall
pay to Executive, prior to the time any Excise Tax is payable
with respect to such Payment (through withholding or otherwise),
an additional amount which, after the imposition of all income,
employment, excise and other taxes thereon, is equal to the sum
of (i) the Excise Tax on such Payment plus (ii) any penalty and
interest assessments associated with such Excise Tax. The
determination of whether any Payment is subject to any Excise Tax
and, if so, the amount to be paid by Corning to Executive and the
time of payment pursuant to this Section II-8.G shall be made by
an independent auditor jointly selected by the Parties and paid
by Corning. Executive will make all reasonable efforts to assist
Corning in rebutting any presumption that such Payments are
subject to the Excise Tax and Executive will promptly notify
Corning of any IRS notice (within 30 days of receipt thereof)
demanding such Payment or alleging that Executive is subject to
such Excise Tax.
H. Charitable Insurance Program
----------------------------
So long as Corning maintains the Charitable Insurance Program
(the "CIP") for any former external or internal members of its
board of directors, Executive shall continue to be a participant
in the CIP on terms and conditions no less favorable than those
provided other former internal board participants in the CIP.
I. Other Agreements
----------------
Executive agrees and acknowledges that this Agreement supersedes
and replaces the letter from Corning to Executive dated July 27,
1998 dealing with the Executive Severance Policy and the Change
In Control Agreement between Executive and Corning dated October
4, 2000. Upon executing this Agreement, the July 27, 1998 and
October 4, 2000 agreements referenced in this section will become
null and void.
III. Except as otherwise provided in Sections II-5 and II-8.G, Executive shall
be responsible for the payment of any and all required Federal, state and
local taxes incurred, or to be incurred, in connection with any amounts
payable to Executive under this Agreement. Notwithstanding any other
provision of this Agreement, Corning may withhold from amounts payable
under this Agreement all Federal, state and local taxes that are required
to be withheld by applicable laws and regulations.
IV. Executive further acknowledges and understands that Executive will remain
subject to all SEC insider rules and regulations in accordance with
applicable law. Both parties agree to provide all of the timely information
necessary to assist Corning and/or Executive to prepare and file any
filings required to be filed by Executive under Federal or state securities
law.
Executive acknowledges and understands that Corning will disclose to the
SEC all of the information that is legally required to be disclosed about
this Agreement and Executive's retirement from Corning (e.g., proxy
reporting). Until this Agreement is publicly disclosed, the Parties hereto
agree that the terms of this Agreement are to be kept completely
confidential and will not be revealed other than to the Party's legal,
financial or tax counsel. Anything herein to the contrary notwithstanding,
Executive may disclose all or a portion of this Agreement (a) to his spouse
or immediate family members, (b) as necessary to assert his legal rights or
discharge his legal obligations hereunder or under any other agreement with
Corning or an affiliate or (c) to any prospective employer but only to the
extent necessary to inform such employer concerning any restrictions or
lack thereof on Executive's ability to perform services for such employer.
V. Anything herein to the contrary notwithstanding, nothing in this Section V
shall preclude Executive from owning up to one percent (1%) of the voting
stock or other equity securities of any publicly traded entity and nothing
in this Agreement is intended to prevent Executive from serving on the
Board, or on any executive committee, of Polaroid. In order to prevent
improper disclosure or use of confidential information and other trade
secrets, and to protect Corning from unfair competition, Executive agrees
that, absent the prior express written consent of Corning, through December
31, 2002 (the "Restricted Period"), he shall not, directly or indirectly,
by himself or through or on behalf of any other person, firm, partnership,
company, corporation, representative or agent within the "Restricted
Territory" set forth below:
(i) Engage in or be employed by any business in competition with Corning by
soliciting, selling, manufacturing, developing, or providing goods or
services similar to those manufactured, developed or provided by Corning
during Executive's tenure as an executive officer with Corning in the two
years prior to the Effective Date; or
(ii) Solicit or attempt to solicit or induce any person employed by Corning
or any parent, subsidiary or affiliated corporation of Corning to leave
such employment by improper means or to break his or her non-compete and
non-disclosure agreement, or any other employment agreement, with Corning.
Notwithstanding anything to the contrary in this subsection, Executive may
provide, from time to time, individual personal references (that do not
indicate a pattern of making such personal references) to individuals who
request such references from Executive.
For the purposes of this Section V, in view of Executive's roles and
responsibilities as President and Chief Executive Officer of Corning, the
"Restricted Territory" shall consist of the NAFTA countries, and any
country, region or state in which Executive or other executives or senior
managers of Corning actively solicited, sold, manufactured, developed or
provided goods or services on behalf of Corning.
VI. Except as otherwise provided in Section II-8.B above, Executive agrees that
he will return to Corning all company-owned property in his possession as
of the Retirement Date, including keys to the premises owned by Corning,
and all papers, work papers, files, documents, blueprints, microfilms,
data-disks and diskettes, booklets, manuals, customer lists, credit cards,
and other material and property Executive has received in connection with
Executive's employment with Corning without retaining any copies thereof.
Anything herein to the contrary notwithstanding, Executive will be entitled
to retain (a) any computers and other office equipment at his home offices,
(b) personal awards and recognition gifts, (c) papers and other materials
of a personal nature, including, but not limited to, photographs, personal
diaries, calendars, Rolodexes, personal files and phone books, (d)
information showing his compensation or relating to reimbursement of
expenses, (e) information that he reasonably believes may be needed for tax
purposes and (f) copies of plans, programs and agreements relating to his
employment, or termination thereof, with Corning. Corning agrees to
maintain Executive's email address at Corning and to provide Executive with
access thereto through December 31, 2002.
VII. Executive shall not intentionally disclose or make accessible to any
business, person or entity, or intentionally make use of, any trade
secrets, confidential proprietary knowledge or other confidential
information of Corning, which he shall have obtained during his employment
by Corning. "Confidential Information" means all confidential and
proprietary information regarding or relating to any aspect of Corning's
business, including, but not limited to, that relating to existing or
contemplated business plans, activities or procedures, current or
prospective customers, current or prospective contracts or other business
arrangements which information Executive acquired in connection with his
employment with Corning; provided however, that Confidential Information
shall not include any information publicly known or known within the
relevant trade or industry (other than as a result on unauthorized
disclosure by Executive in violation of this Section VII) or any specific
information or type of information generally not considered Confidential
Information or any information disclosed by Corning or any officer thereof
to a third party without restriction on the use or further disclosure of
such information. Anything herein to the contrary notwithstanding, the
provision of this Section VII will not apply (a) when disclosure is
required by law or by any court, arbitrator, mediator or administrative or
legislative body (including any committee thereof) with apparent
jurisdiction to order Executive to disclose or make accessible any
information or (b) with respect to any other litigation, arbitration or
mediation involving this Agreement, including, but not limited to, the
enforcement of this Agreement.
VIII.Until the second anniversary of the Retirement Date, Executive hereby
agrees to assist Corning, upon reasonable request by Corning, in connection
with any pending or future dispute, litigation or investigation ("Dispute")
involving Corning, provided such Dispute relates to a matter of which
Executive has such knowledge as to reasonably warrant such request for his
assistance or for which he had direct or close supervisory responsibilities
prior to the Effective Date. Corning shall promptly reimburse Executive for
reasonable costs and expenses incurred by Executive in connection with
rendering assistance to Corning in connection with any such Dispute. Such
expenses shall be reimbursed or advanced promptly after Executive's
submission to Corning of statements in such reasonable detail as Corning
may require. For assistance provided pursuant to this Section VIII, Corning
shall pay Executive a per diem of $4,000. Unless Executive otherwise
consents, time devoted by Executive in assisting Corning pursuant to this
Section VIII shall not exceed 10 days for each 12-month period ending on
the anniversary of the Retirement Date. Nothing in this paragraph shall
require Corning to provide a per diem payment when the appearance of
Executive is required pursuant to legal process.
IX. Executive irrevocably and unconditionally releases and forever discharges
any claims, demands, obligations, liabilities and causes of action, whether
known or unknown (including, but not limited to, claims for attorneys'
fees, expenses and/or costs), arising out of or relating to his employment
with Corning, or the termination thereof, that he has or may have against
Corning, its past or present affiliates or subsidiaries and/or any of their
predecessors or successors (cumulatively referred to as "Corning" for
purposes of this Section IX and Section X below) and/or the past or present
officers and directors of Corning (collectively, the "Company Released
Parties"), up to and including the Effective Date, including, without
limitation, any claim, demand, obligation, liability or cause of action for
discrimination under the Age Discrimination in Employment Act (ADEA), the
Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans With
Disabilities Act of 1990, other federal, state and local statutes,
ordinances, executive orders and regulations prohibiting age, race, sex and
other types of discrimination, the Employee Retirement Income Security Act
(ERISA) (other than any claim which cannot be waived by law), the New York
Executive Law 290 et. seq. and any other federal or state law. Anything to
the contrary notwithstanding in this Agreement, nothing herein shall
release any Company Release Party from any claims or damages based on (i)
any right Executive may have to enforce this Agreement, (ii) any right or
claim that arises after the Effective Date, (iii) any right Executive may
have to vested benefits or entitlements under any applicable retirement,
medical, life insurance or equity plan or program of Corning, (iv)
Executive's eligibility for indemnification in accordance with applicable
laws, the certificate of incorporation and/or by-laws of Corning or any
affiliate, under any other agreement or otherwise, (v) Executive's coverage
under any applicable insurance policy or (vi) any right Executive may have
to obtain contribution as permitted by law in the event of entry of
judgment against him as a result of any act or failure to act for which
Executive and Corning are jointly liable.
X. Corning, on behalf of itself and all other Company Released Parties,
irrevocably and unconditionally releases and forever discharges any claims,
demands, obligations, liabilities and causes of action, whether known or
unknown (including, but not limited to, claims for attorneys' fees,
expenses and/or costs), arising out of or relating to Executive's
employment with Corning, or the termination thereof, that it has or may
have against Executive, his dependents, heirs, administrators, agents,
executors, successors and assigns (collectively, the "Executive Released
Parties"), up to and including the Effective Date, including, without
limitation, any claim, demand, obligation, liability or cause of action
arising under Federal, state or local employment law or ordinance, tort,
contract, breach of public policy theory or alleged violation of any other
legal or fiduciary obligation. Anything herein to the contrary
notwithstanding in this Agreement, nothing herein shall release the
Executive Released Parties from any claims or damages based on (i) any
right Corning may have to enforce this Agreement, (ii) any right or claim
that arises after the Effective Date or (iii) any right Corning may have to
obtain contribution as permitted by law in the event of entry of judgment
against it as a result of any act or failure to act for which Corning and
Executive are jointly liable.
XI. Executive acknowledges that he has been given the opportunity to consider
this Agreement for at least 21 days, which is a reasonable period of time,
that he has been advised to consult with an attorney in relation thereto
prior to executing this Agreement, and that he has consulted with and
engaged an attorney to represent him in connection with the negotiation and
drafting of this Agreement.
XII. For a period of seven days following the Effective Date, Executive may
revoke this Agreement by delivery of a written notice revoking the same,
within that seven-day period, to the office of John P. MacMahon, Vice
President, Worldwide Compensation. Upon such revocation, this Agreement
shall become null and void.
XIII.This Agreement shall be governed by and construed in accordance with New
York statutory and decisional law, without reference to principles of
conflicts of law. Further, this Agreement and all the terms and provisions
thereof shall be binding upon and/or shall inure to, as the case may be,
the Parties and also upon or to their respective heirs (in the case of
Executive), personal representatives, successors and assigns. No rights or
obligations of Corning under this Agreement may be assigned or transferred
by Corning without Executive's prior written consent, except that such
rights and obligations may be assigned or transferred pursuant to a merger
or consolidation in which Corning is not the continuing entity, or a sale,
liquidation or other disposition of all or substantially all of the
business or assets of Corning, provided that the assignee or transferee is
the successor to all or substantially all of the business or assets of
Corning and assumes the liabilities, obligations and duties of Corning
under this Agreement. Corning further agrees that, in the event of any
disposition of its business or assets described in the preceding sentence,
it shall take whatever action it can to cause such assignee or transferee
expressly to assume the liabilities, obligations and duties of Corning
hereunder. No rights or obligations of Executive may be assigned or
transferred by Executive, without Corning's prior written consent, other
than his rights to compensation and benefits, which may be transferred only
by will or operation of law, provided, however, that Executive shall be
entitled, to the extent permitted by applicable law or the relevant plans,
to select and change a beneficiary or beneficiaries to receive any
compensation or benefit hereunder following his death by giving Corning
written notice thereof. In the event of Executive's death or a judicial
determination of his incompetence, references in this Agreement to
Executive shall be deemed, where appropriate, to refer to his beneficiary,
estate or other legal representative.
XIV. Executive intends to be legally bound by this Agreement and has read,
signed, sealed and delivered it voluntarily, without coercion and with
knowledge of the nature and consequences thereof, and acknowledges receipt
of good consideration in addition to the provisions of this Agreement.
XV. Corning represents and warrants that (i) the execution, delivery and
performance of this Agreement by Corning has been fully and validly
authorized by all necessary corporate action (including, without
limitation, any action required to be taken by the Board of Directors of
Corning or any committee thereof), (ii) the officer signing this Agreement
is duly authorized and empowered to do so, (iii) the execution, delivery
and performance of this Agreement does not violate any applicable law,
regulation, order, judgment or decree or any agreement, plan or corporate
governance document to which Corning is a party or by which it is bound and
(iv) upon execution and delivery of this Agreement by the Parties, it shall
be a valid and binding obligation of Corning enforceable against it in
accordance with its terms, except to the extent that enforceability may be
limited by applicable bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights generally.
XVI. Any controversy, dispute or claim arising out of or relating to this
Agreement, any other agreement or arrangement between Executive and
Corning, Executive's employment with Corning, or the termination thereof
(collectively, "Covered Claims") shall be resolved by binding arbitration,
to be held in the Borough of Manhattan in New York City, in accordance with
the Commercial Arbitration Rules (and not the National Rules for the
Resolution of Employment Disputes) of the American Arbitration Association
and this Section XVI. Judgment upon the award rendered by the arbitrator(s)
may be entered in any court having jurisdiction thereof. Each party will
pay its own costs and expenses (including without limitation attorney's
fees and other charges of counsel) incurred in resolving any such Covered
Claim.
XVII.Executive shall be under no obligation to seek other employment and there
shall be no offset against amounts due to him on account of any
remuneration or benefits provided by any subsequent employment he may
obtain. Corning's obligation to make any payment pursuant to, and otherwise
to perform its obligations under, this Agreement shall not be affected by
any offset, counterclaim or other right that the Corning may have against
Executive for any reason.
XVIII. This Agreement may be modified only by a written document signed by
Executive and a duly authorized officer of Corning. Any waiver by any
person of any provision of this Agreement shall be effective only if in
writing and signed by the person against whom enforcement of the waiver is
sought. For any waiver or modification to be effective, it must
specifically refer to this Agreement and to the terms or provisions being
modified or waived. No waiver of any provision of this Agreement shall be
effective as to any other provision of this Agreement except to the extent
specifically provided in an effective written waiver. In the event of any
inconsistency between the terms of this Agreement and the terms of any
other Corning agreement, arrangement, plan or policy (including that of an
affiliate), the terms of this Agreement shall control to the extent more
favorable to Executive.
XIX. In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, the remaining
provisions or portions of this Agreement shall be unaffected thereby and
shall remain in full force and effect to the fullest extent permitted by
law.
XX. Any notice, request or other communication given in connection with this
Agreement shall be in writing and shall be deemed to have been given (i)
when personally delivered to the recipient or (ii) provided that a written
acknowledgement of receipt is obtained, three days after being sent by
prepaid certified or registered mail, or two days after being sent by a
nationally recognized overnight courier, to the address specified in this
Section XX (or such other address as the recipient shall have specified by
ten (10) days' advance written notice given in accordance with this Section
XX). Such communication should be addressed to Executive at his principal
residence and to Corning at its corporate headquarters. Executive will
promptly notify John MacMahon, Vice President, Worldwide Compensation at
Corning Incorporated of any change of home address.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective
Date.
On Behalf of Executive: On Behalf of Corning:
/s/ John W. Loose /s/ John P. MacMahon
- -------------------------- ------------------------------------
John W. Loose John P. MacMahon
VP, Worldwide Compensation
EXHIBIT 12
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CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
DIVIDENDS
(In millions, except ratios)
For the six months ended
------------------------
June 30, June 30,
2002 2001
-------- ----------
Loss before taxes on income $ (747) $ (4,660)
Adjustments:
Distributed income of equity investees 75 64
Amortization of capitalized interest 4 5
Fixed charges net of capitalized interest 113 85
------- ----------
Loss before taxes and fixed charges as adjusted (555) (4,506)
======= ==========
Fixed charges:
Interest incurred 96 96
Portion of rent expense which represents
interest factor 21 15
Amortization of debt costs 3 2
------- ----------
Total fixed charges 120 113
Capitalized interest (7) (28)
------- ----------
Total fixed charges net of capitalized interest 113 85
======= ==========
Preferred dividends:
Preferred dividend requirement
Ratio of pre-tax income to income before
minority interest and equity earnings 1.4 1.0
Pre-tax preferred dividend requirement
------- ----------
Total fixed charges 120 113
------- ----------
Fixed charges and pre-tax preferred dividend
requirement 120 113
======= ==========
Ratio of earnings to combined fixed charges
and preferred dividends * *
======= ==========
Ratio of earnings to fixed charges * *
======= ==========
* Loss before taxes and fixed charges as adjusted were inadequate to cover
total fixed charges by approximately $675 million and $4.6 billion at June
30, 2002 and 2001, respectively.