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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 September 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:
1,147,999,772 shares of Corning's Common Stock, $0.50 Par Value, were
outstanding as of September 30, 2002.
INDEX
-----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Page
Consolidated Statements of Income (Unaudited) for the three
and nine months ended September 30, 2002 and 2001 3
Consolidated Balance Sheets at September 30, 2002 (Unaudited),
December 31, 2001 and September 30, 2001 (Unaudited) 4
Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 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 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 48
Item 4. Controls and Procedures 49
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 50
Item 6. Exhibits and Reports on Form 8-K 55
Signatures 56
Certifications 57
Exhibit 12 Ratio of earnings to fixed charges for the 59
nine months ended September 30, 2002 and 2001
Exhibit 99.1 Certification of James R. Houghton pursuant to 60
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification of James B. Flaws pursuant to 61
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in millions, except per share amounts)
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 837 $ 1,509 $ 2,631 $ 5,298
Cost of sales 674 994 2,050 3,438
--------- --------- --------- ---------
Gross margin 163 515 581 1,860
Operating expenses
Selling, general and administrative expenses 158 267 538 799
Research, development and engineering
expenses 115 153 375 484
Amortization of purchased intangibles 11 13 33 36
Amortization of goodwill 35 328
Restructuring, impairment and other charges 125 339 619 5,111
--------- --------- --------- ---------
Operating loss (246) (292) (984) (4,898)
Interest income 10 15 34 50
Interest expense (44) (37) (136) (105)
Gain on repurchases of debt 22 90
Other expense, net (1) (6) (10) (27)
--------- --------- --------- ---------
Loss before income taxes (259) (320) (1,006) (4,980)
Benefit for income taxes (79) (60) (299) (29)
--------- --------- --------- ---------
Loss before minority interest and
equity earnings (180) (260) (707) (4,951)
Minority interest in losses (earnings) of subsidiaries 5 1 17 (11)
Equity in earnings of associated companies 42 39 97 119
--------- --------- --------- ---------
Net loss (133) (220) (593) (4,843)
Dividends and beneficial conversion on
Series C preferred stock (127) (127)
--------- --------- --------- ---------
Loss attributable to common shareholders $ (260) $ (220) $ (720) $ (4,843)
========= ========= ========= =========
Basic and diluted loss per common share $ (0.25) $ (0.24) $ (0.74) $ (5.21)
========= ========= ========= =========
Net loss adjusted for the impact of
SFAS No. 142 in 2001 $ (133) $ (145) $ (593) $ (4,529)
========= ========= ========= =========
Basic and diluted loss per common share
adjusted for the impact of SFAS No. 142 in 2001 $ (0.25) $ (0.15) $ (0.74) $ (4.88)
========= ========= ========= =========
Dividends declared per common share $ $ $ $ 0.12
========= ========= ========= =========
Shares used in computing per share amounts for
basic and diluted loss per common share 1,036 936 977 929
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(In millions)
Unaudited December 31, Unaudited
Sept. 30, 2002 2001 Sept. 30, 2001
-------------- ------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 983 $ 1,037 $ 568
Short-term investments, at fair value 618 1,182 1,027
--------- --------- ---------
Total cash and short-term investments 1,601 2,219 1,595
Trade accounts receivable, net of doubtful accounts
and allowances - $48, $60 and $63 541 593 904
Inventories 619 725 958
Deferred income taxes 380 347 263
Other current assets 374 223 228
--------- --------- ---------
Total current assets 3,515 4,107 3,948
Restricted cash and investments 70
Investments:
Associated companies, at equity 696 636 581
Others, at cost or fair value 74 142 143
--------- --------- ---------
Total investments 770 778 724
Property, plant and equipment, at cost, net of accumulated
depreciation - $3,405, $3,101 and $3,072 4,592 5,097 5,300
Goodwill, net of accumulated amortization - $661, $661 and $632 2,113 1,937 2,008
Other intangible assets, net of accumulated amortization
- $120, $90 and $80 378 352 338
Other assets 744 522 366
--------- --------- ---------
Total Assets $ 12,182 $ 12,793 $ 12,684
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable $ 213 $ 477 $ 347
Accounts payable 286 441 430
Other accrued liabilities 976 1,076 1,029
--------- --------- ---------
Total current liabilities 1,475 1,994 1,806
Long-term debt 4,171 4,461 3,901
Postretirement benefits other than pensions 618 608 593
Other liabilities 383 190 204
Commitments and contingencies (Note 11)
Minority interest in subsidiary companies 138 119 141
Series B convertible preferred stock 7 8
Shareholders' equity:
Preferred stock - Par value $100.00 per share;
Shares authorized: 10 million
Series C mandatory convertible preferred stock - Shares
issued: 5.75 million; Shares outstanding: 2.45 million 245
Common stock - Par value $0.50 per share; Shares
authorized: 3.8 billion; Shares issued: 1,222 million,
1,023 million and 1,023 million 611 512 512
Additional paid in capital 9,738 9,532 9,448
Accumulated deficit (4,330) (3,610) (2,954)
Cost of 74 million, 79 million and 78 million
shares of common stock in treasury (736) (827) (811)
Accumulated other comprehensive loss (131) (193) (164)
--------- --------- ---------
Total shareholders' equity 5,397 5,414 6,031
--------- --------- ---------
Total Liabilities and Shareholders' Equity $ 12,182 $ 12,793 $ 12,684
========= ========= =========
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 nine months ended
September 30,
-------------------------
2002 2001
-------- ---------
Cash flows from operating activities:
Net loss $ (593) $ (4,843)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Amortization of purchased intangibles 33 36
Amortization of goodwill 328
Depreciation 489 476
Restructuring, impairment and other charges 619 5,111
Inventory write-down 273
Gain on repurchases of debt (90)
Stock compensation charges 2 36
Equity in earnings of associated companies
in excess of dividends received (4) (58)
Minority interest, net of dividends paid (17) 2
Deferred tax benefit (127) (182)
Tax (expense) benefit on stock options (1) 27
Interest expense on convertible debentures 30 30
Restructuring payments (193) (22)
Increases in restricted cash (20)
Changes in certain working capital items (204) 2
Other, net (73) 8
-------- ---------
Net cash (used in) provided by operating activities (149) 1,224
-------- ---------
Cash flows from investing activities:
Capital expenditures (283) (1,532)
Acquisitions of businesses, net of cash acquired (56) (66)
Net proceeds from sale or disposal of assets 62 49
Net increase in long-term investments and other
long-term assets (18) (93)
Short-term investments - acquisitions (1,557) (829)
Short-term investments - liquidations 2,123 517
Restricted investments - acquisitions (117)
Restricted investments - liquidations 67
Other, net (2)
-------- ---------
Net cash provided by (used in) investing activities 219 (1,954)
-------- ---------
Cash flows from financing activities:
Net (repayments) borrowings of short-term debt (475) 136
Proceeds from issuance of long-term debt 11 70
Repayments of long-term debt (190) (93)
Redemption of Series B preferred stock (7)
Proceeds from issuance of Series C preferred stock, net 558
Proceeds from issuance of common stock, net 47 246
Redemption of common stock for income tax withholding (1) (25)
Repurchases of common stock for treasury (23)
Cash dividends paid to preferred/common shareholders (67) (112)
-------- ---------
Net cash (used in) provided by financing activities (147) 222
-------- ---------
Effect of exchange rate changes on cash and cash equivalents 23 6
-------- ---------
Cash used in continuing operations (54) (502)
-------- ---------
Cash used in discontinued operations (9)
-------- ---------
Net decrease in cash and cash equivalents (54) (511)
Cash and cash equivalents at beginning of year 1,037 1,079
-------- ---------
Cash and cash equivalents at end of period $ 983 $ 568
======== =========
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 computer monitors, 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 for bad debts, inventory obsolescence, product warranty, in-process
research and development, restructuring charges, asset and goodwill impairments,
depreciation, pension and post-retirement benefits, income taxes, litigation and
other contingencies. Management reviews these estimates on a systematic basis
and, if necessary, any material adjustments are reflected in the consolidated
financial statements in the period that they are deemed necessary.
The results for interim periods are not necessarily indicative 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 was not required.
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. Business conditions in the telecommunications industry have
deteriorated during the year and are depressed such that it appears the fair
value of Corning's telecommunications reporting unit is currently lower than at
the benchmark assessment date of January 2002. As part of the annual impairment
test, management is currently studying short and long-term market indicators and
alternative growth patterns. Based on the work performed to date, it appears
reasonably possible that a portion, but not all of the company's goodwill is
impaired. Management will complete the impairment test in the fourth quarter and
record any required goodwill impairment charge. The goodwill related to the
Telecommunications Segment is $1.9 billion at September 30, 2002. Management
believes there are a range of possible outcomes and no assurance can be given
that an impairment charge will not be required. A charge would lower the
company's equity and could reduce availability under the unused $2.0 billion
revolving credit facility. See Liquidity and Capital Resources for further
information.
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 nine months ended
(In millions, except per share amounts) September 30, 2001 September 30, 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Reported net loss $ (220) $ (4,843)
Addback: Amortization of goodwill, net of income taxes 75 314
--------- ---------
Adjusted net loss $ (145) $ (4,529)
========= =========
Reported basic and diluted loss per common share $ (0.24) $ (5.21)
Addback: Amortization of goodwill, net of income taxes 0.09 0.33
--------- ---------
Adjusted basic and diluted loss per common share $ (0.15) $ (4.88)
========= =========
Other New Standards Adopted
- ---------------------------
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 5 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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." This standard requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred rather than the date of an entity's commitment to an exit plan. Corning
is required to implement SFAS No. 146 on January 1, 2003. Corning has not yet
determined the impact, if any, that this standard will have on its consolidated
financial position or results of operations.
2. Business Combinations
On September 30, 2002, Corning completed the acquisition of a 56% interest in
Lucent Technologies Shanghai Fiber Optic Co., Ltd. and a 68% interest in Lucent
Technologies Beijing Fiber Optic Cable Co., Ltd. from Lucent Technologies. The
Shanghai-based company manufactures optical fiber and the Beijing-based company
manufactures fiber cable.
In connection with an amendment dated September 30, 2002, the consideration paid
to Lucent by Corning was changed from cash to a combination of cash and stock.
Corning paid Lucent total consideration of $198 million, comprised of cash of
$123 million, a note payable of $27 million due in the fourth quarter of 2002,
and common stock valued at $48 million. The value of 30 million common shares
was determined based on the average market price of Corning's common shares over
the 2-day period before and after the acquisition date. The transaction requires
a further cash payment of $25 million if certain milestones are achieved in the
fourth quarter.
As Corning holds a controlling interest in both investments, it has consolidated
both entities in its financial statements. At September 30, 2002, the entities
had cash of $100 million and a dividend payable to minority shareholders of $15
million in the fourth quarter.
The excess purchase price over tangible net assets acquired totaled $110
million. This entire amount has been recorded as goodwill at September 30, 2002.
As the transaction was completed on September 30, 2002, this purchase allocation
is preliminary. During the fourth quarter, Corning will finalize the purchase
price allocation, which may result in reclassifying a portion of this premium to
intangible assets. The $110 million of goodwill was assigned to the
Telecommunications Segment. The goodwill is not deductible for tax purposes.
The pro forma financial effect of this transaction would not be significantly
different from reported results.
3. 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 now 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
third quarter and nine 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. These expenses include interest, taxes, and corporate functions.
Allocation methodologies are described in Corning's 2001 Form 10-K/A. Segment
net income may not be consistent with measures used by other companies.
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- -------- --------- ---------
Telecommunications
Net sales $ 366 $ 1,089 $ 1,268 $ 3,915
Research, development and engineering expenses $ 71 $ 110 $ 243 $ 366
Interest expense $ 27 $ 24 $ 84 $ 72
Segment (loss) earnings before
equity (losses) earnings and restructuring, impairment
and other charges $ (132) $ 14 $ (409) $ 184
Equity in (losses) earnings of associated companies (5) 4 (12) 15
--------- -------- --------- ---------
Segment (loss) earnings before restructuring, impairment
and other charges (137) 18 (421) 199
Restructuring, impairment and other charges, net of tax (61) (222) (320) (4,948)
--------- -------- --------- ---------
Segment net loss $ (198) $ (204) $ (741) $ (4,749)
========= ======== ========= =========
Advanced Materials
Net sales $ 239 $ 234 $ 714 $ 767
Research, development and engineering expenses $ 31 $ 31 $ 94 $ 87
Interest expense $ 9 $ 7 $ 25 $ 17
Segment earnings before equity earnings and
restructuring charges $ 2 $ 2 $ 12 $ 39
Equity in earnings of associated companies 11 6 31 19
--------- -------- --------- ---------
Segment earnings before restructuring charges 13 8 43 58
Restructuring charges, net of tax (3) (4)
--------- -------- --------- ---------
Segment net income $ 10 $ 8 $ 39 $ 58
========= ======== ========= =========
Information Display
Net sales $ 228 $ 183 $ 635 $ 602
Research, development and engineering expenses $ 13 $ 12 $ 38 $ 31
Interest expense $ 10 $ 6 $ 27 $ 16
Segment earnings before minority interest, equity
earnings and restructuring charges $ 17 $ 11 $ 28 $ 57
Minority interest in losses (earnings) of subsidiaries 5 1 16 (11)
Equity in earnings of associated companies 32 27 86 81
--------- -------- --------- ---------
Segment earnings before restructuring charges 54 39 130 127
Restructuring charges, net of tax (1) (1)
--------- -------- --------- ---------
Segment net income $ 53 $ 39 $ 129 $ 127
========= ======== ========= =========
Total Segments
Net sales $ 833 $ 1,506 $ 2,617 $ 5,284
Research, development and engineering expenses $ 115 $ 153 $ 375 $ 484
Interest expense $ 46 $ 37 $ 136 $ 105
Segment (loss) earnings before minority interest,
equity earnings and restructuring, impairment and
other charges $ (113) $ 27 $ (369) $ 280
Minority interest in losses (earnings) of subsidiaries 5 1 16 (11)
Equity in earnings of associated companies 38 37 105 115
--------- -------- --------- ---------
Segment (loss) earnings before restructuring, impairment
and other charges (70) 65 (248) 384
Restructuring, impairment and other charges, net of tax (65) (222) (325) (4,948)
--------- -------- --------- ---------
Segment net loss $ (135) $ (157) $ (573) $ (4,564)
========= ======== ========= =========
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements was as follows
(in millions):
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- -------- --------- ---------
Net sales
Total segment net sales $ 833 $ 1,506 $ 2,617 $ 5,284
Non-segment net sales (a) 4 3 14 14
--------- -------- --------- ---------
Total net sales $ 837 $ 1,509 $ 2,631 $ 5,298
========= ======== ========= =========
Net loss
Total segment net loss (b) $ (135) $ (157) $ (573) $ (4,564)
Unallocated items:
Non-segment loss and other (a) (2) (1) (4) (4)
Amortization of goodwill (c) (35) (328)
Non-segment restructuring, impairment and
other charges (d) (28) (155)
Interest income (e) 10 15 34 50
Gain on repurchases of debt (e) 22 90
Income tax (f) (3) (44) 8 (1)
Minority interest 1
Equity in earnings of associated companies (a) 3 2 6 4
--------- -------- --------- ---------
Net loss $ (133) $ (220) $ (593) $ (4,843)
========= ======== ========= =========
(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 special termination benefit charges of $5 million and
pension and postretirement benefit curtailment charges of $35 million
recorded in the third quarter and nine months of 2002, respectively. The
balance of the charge relates to restructuring and impairment charges in
the corporate research and administrative staff organizations.
(e) Corporate interest income and gain on repurchases of debt is not allocated
to reportable segments.
(f) Includes tax associated with unallocated items.
4. Restructuring, Impairment and Other Charges
2002 Restructuring Actions
- --------------------------
Second Quarter
- --------------
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.
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 included a $14 million charge to impair an
investment in an international cabling venture.
Restructuring Charges
---------------------
The second quarter restructuring charge of $204 million included $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 entailed the elimination of approximately 3,600
hourly and 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 included involuntary
separation, early retirement and social programs.
Impairment of Plant and Equipment
---------------------------------
Corning has evaluated the carrying value of the long-lived assets at each
site impacted by the restructuring actions for impairment. 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 in the second
quarter 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 pertained to abandoned construction projects in the
fiber and cable business, primarily the latest expansion in Concord, NC and
Oklahoma City, OK.
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 and 2003.
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 and third 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 ($37 million
after-tax) charge for other than temporary declines in certain cost
investments in the Telecommunications Segment. These investments have been
written off.
Third Quarter
-------------
The charges recorded in the third quarter are summarized in the following
table and described in greater detail below:
Employee related costs $ 47
Exit costs 11
-------
Subtotal - restructuring charges 58
Fixed asset impairments 67
-------
Total pre-tax charges 125
Tax benefit and minority interest 40
-------
Total after-tax and minority interest charges $ 85
=======
Restructuring Charges
---------------------
The third quarter restructuring charge of $58 million includes $47 million
of employee separation costs (including special termination benefits to
pension and postretirement health care plans) and $11 million in other exit
costs (principally lease termination and contract cancellation payments).
The charge entails the elimination of approximately 1,000 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 summarizes the headcount reduction for the second and
third quarter 2002 actions:
U.S. Hourly U.S. Salaried Non-U.S. Total
--------------------------------------------------------
Second quarter charge 850 1,800 950 3,600
Third quarter charge 200 350 450 1,000
-------- --------- -------- ---------
Total 1,050 2,150 1,400 4,600
======== ========= ======== =========
Separated at September 30, 2002 475 1,875 650 3,000
Corning expects the remaining 1,600 employees to be separated by September
30, 2003.
Impairment of Plant and Equipment
---------------------------------
Corning recorded $67 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.
Fourth Quarter
--------------
On October 30, 2002, Corning announced its intent to take additional
measures to attain profitability in 2003. The continued decline in demand
in the Telecommunications Segment requires further restructuring to bring
capacity in line with current revenues. The fourth quarter pre-tax charge
is expected to approximate $550 million to $650 million and impact
approximately 2,200 employees. Approximately one quarter of this charge is
expected to be paid in cash. The fourth quarter actions will include:
. permanent closing of Corning's optical fiber manufacturing facility in
Noble Park, Victoria, Australia, and the proposed closing of its
Neustadt Bei Coburg, Germany plant. These closures are proposed to be
completed by early 2003. Corning will also mothball its optical fiber
manufacturing facility in Concord, NC and transfer certain
capabilities to its Wilmington, NC facility. Corning believes that the
Concord facility can be returned to productive capacity within six to
nine months of a decision to reopen,
. proposed reductions in capacity and employment in Corning's cabling
and hardware and equipment locations worldwide to reduce costs, and
. permanent closure of its photonic technologies thin film filter
manufacturing facility in Marlborough, MA by the end of 2002.
The charge for these actions includes exit costs and impairment of the closed
facilities and severance costs associated with closed and mothballed locations.
Management is still considering additional actions that may be announced later
in the fourth quarter. It is possible that additional impairments and
restructuring charges will result from these actions or decreases in expected
cash flows from assets not abandoned.
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 included 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 September 30, 2002, approximately 11,800
of the 12,000 employees had been separated under the plans. Corning expects the
remaining 200 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 September 30, 2002:
(In millions)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash
December 31, charges/ Non-cash payments Sept. 30,
2001 credits charges in 2002 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Restructuring reserve:
Employee related costs $ 198 $ 234 (a) $ 35 $ 177 $ 220
Other charges 78 23 16 85
----------------------------------------------------------------------
Total restructuring reserve $ 276 $ 257 $ 35 $ 193 $ 305
----------------------------------------------------------------------
Impairment of long-lived assets:
Assets held for disposal $ 302 (b) $ 302
Cost investments 60 60
------------------------
Total impairment charges $ 362 $ 362
------------------------
Total restructuring and impairment
charges and credits $ 619
=========
(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.
5. Gain on Repurchases and Retirement of Debt
During the third quarter of 2002, Corning repurchased and retired a portion of
its zero coupon convertible debentures due November 8, 2015, with an accreted
value of $58 million in exchange for cash of $35 million in a series of open
market purchases. Corning recorded a gain of $22 million ($13 million after-tax)
on these transactions, net of the write-off of the unamortized issuance costs.
Corning repurchased and retired zero-coupon convertible debentures with an
accreted value of $278 million in exchange for cash of $183 million for the nine
months ended September 30, 2002. Corning has recorded gains of $90 million ($55
million after-tax) on these transactions for the nine months ended September 30,
2002. Corning recorded the gain on repurchases as a component of income from
continuing operations, as permitted by SFAS No. 145. The remaining debentures
may be put back to Corning on November 8, 2005 at $819.54 per debenture and on
November 8, 2010 at $905.29 per debenture. Corning has the option of settling
this obligation in cash, common stock, or a combination of both.
6. Inventories
Inventories shown on the accompanying balance sheets were comprised of the
following:
September 30, December 31, September 30,
2002 2001 2001
------------- ------------ -------------
Finished goods $ 244 $ 251 $ 385
Work in process 121 153 212
Raw materials and accessories 151 210 240
Supplies and packing materials 103 111 121
--------- --------- ------
Total inventories $ 619 $ 725 $ 958
========= ========= ======
7. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the nine months ended
September 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 55 (1) 54
Reclassification 12 12
Divestitures (3) (3)
Acquisitions 113 113
-------- -------- ------- ------ ---------
Balance at Sept. 30, 2002 $ 1,945 $ 150 $ 15 $ 3 $ 2,113
======== ======== ======= ====== =========
(a) Included in non-segment assets in SFAS No. 131 reconciliation in Corning's
2001 Form 10-K/A.
Intangible assets totaled $378 million, net of accumulated amortization of $120
million at September 30, 2002. Of this amount, $52 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 $ 254 $ 61 $ 193
Non competition agreements 104 56 48
Other 7 3 4
------ ------ ------
Total $ 365 $ 120 $ 245
====== ====== ======
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.
8. Comprehensive Loss
Comprehensive loss, net of tax, for the third quarter and first nine months of
2002 and 2001 was as follows:
For the three months For the nine months
ended September 30, ended September 30,
---------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net loss $ (133) $ (220) $ (593) $ (4,843)
Other comprehensive (loss) income (23) 135 62 (37)
--------- --------- --------- ---------
Total comprehensive loss $ (156) $ (85) $ (531) $ (4,880)
========= ========= ========= =========
9. 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" required Corning to record an additional minimum
liability of $180 million in the second quarter of 2002. This liability
represents the amount by which the accumulated benefit obligation exceeded 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 September 30, 2002, is included on the line item entitled "Other
intangible assets" in the Consolidated Balance Sheet. The remaining amount of
$61 million is recorded as a component of stockholders' equity and is net of
related tax benefits of $38 million, on the line item titled "Accumulated other
comprehensive loss" in the Consolidated Balance Sheet at September 30, 2002, and
in "Other comprehensive income (loss)."
10. Loss Per Common Share
Basic and diluted loss per common share is calculated by dividing net loss
attributable to common shareholders by the weighted average number of common
shares outstanding during the period.
The potential common shares excluded from the calculation of diluted loss per
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 was as follows: (in millions)
For the three months For the nine months
ended September 30, ended September 30
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Potential common shares excluded from the
calculation of diluted loss per share:
Stock options 1 4 1 8
Convertible preferred stock 73 1 18 1
Subordinated notes 6 6 6 6
Zero coupon convertible debentures 20 23 22 23
3.5% convertible debentures 69 69
--------- --------- --------- ---------
Total 169 34 116 38
========= ========= ========= =========
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 54 81 46
========= ========= ========= =========
Common dividends of $112 million, or $0.12 per share were declared through the
nine 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
discussed below involves Pittsburgh Corning Corporation (PCC), an entity in
which Corning maintains a 50% interest.
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
results of $495 million after-tax related to this settlement.
The Injunction Period as to Corning was extended through September 30, 2002,
when it expired by its terms. Under the terms of the Bankruptcy Court's Order,
Corning has 90 days from September 30, 2002, to seek removal and transfer of
pending cases in which it is named as a defendant. 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. These negotiations have
failed to produce a settlement, but discussions continue intermittently. 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 to insurance
proceeds. 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 11,400 other cases (approximately 34,000
claims) alleging injuries from asbestos. Those cases have been covered by
insurance without material impact to Corning to date. Asbestos litigation is
inherently difficult, and 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 September 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. 7% Series C Mandatory Convertible Preferred Stock and Series B Convertible
Preferred Stock
In July and August 2002, Corning issued 5.75 million shares of 7% Series C
mandatory convertible preferred stock having a liquidation preference of $100
per share, plus accrued and unpaid dividends, and recorded proceeds of $558
million. The mandatory convertible stock has an annual dividend rate of 7%,
payable quarterly in cash. The first dividend payment date will be November 16,
2002. The dividends are also payable immediately upon conversion to Corning
common stock. At the time Corning issued the Series C convertible stock, a
one-time dividend was declared for all dividends that will be payable from
issuance through the mandatory conversion date of August 16, 2005. Corning
secured the payment of the dividends through the issuance of a promissory note
and used a portion of the proceeds from the sale of the Series C preferred stock
to purchase $117 million of U.S. treasury securities that were pledged as
collateral to secure the payments on the promissory note. As a result, net
proceeds of the offering were $441 million. In addition, Corning redeemed the
remaining 69 thousand shares of Series B preferred stock for $7 million in
August.
The Series C preferred stock will automatically convert on the mandatory
conversion date of August 16, 2005, into between 50.813 and 62.5 shares of
Corning common stock, depending on the then current market price. At any time
prior to the mandatory conversion date, holders may elect to convert in whole or
part of their shares of Series C preferred stock into 50.813 shares of common
stock plus an amount of cash equal to the market value at that time of the pro
rata share of the collateral portfolio that secures the promissory note. At
September 30, 2002, approximately 3.3 million shares of the Series C preferred
stock had been converted into 167.9 million common shares.
As the closing price of Corning common stock was $1.60 on July 31, 2002, the
holder could immediately convert the Series C preferred stock and obtain a value
of $101.72 (50.813 shares valued at $1.60 plus $20.42 in future dividends)
indicating that the preferred stock contains a beneficial conversion feature of
$1.72 per preferred share. The beneficial conversion totaled approximately $10
million and was charged to retained earnings in the third quarter. The
beneficial conversion is also deducted from earnings attributable to common
shareholders in the third quarter and nine months earnings per share
calculations of 2002.
13. 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 17,478 6.76
Options exercised (53) 1.95
Options terminated (1,169) 34.28
--------- --------
Options outstanding September 30, 2002 88,647 $ 28.81
========= ========
Corning applies APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
for its stock-based compensation plans. Compensation expense is recorded for
awards of shares or share rights over the period earned. Compensation expense of
$0 million and $2 million was recorded in the third quarter and nine months of
2002, compared with $1 million and $28 million in the same periods of 2001. If
Corning had elected to recognize compensation expense under SFAS No. 123,
"Accounting for Stock-based Compensation," Corning's net loss, loss attributable
to common shareholders and basic and diluted loss per share in the third quarter
and first nine months of 2002 and 2001 would have been as follows:
(In millions, except per share amounts)
- --------------------------------------------------------------------------------------------------------------------------------
For the three months For the nine months
ended September 30, ended September 30
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net loss - as reported $ (133) $ (220) $ (593) $ (4,843)
Net loss - pro forma $ (201) $ (311) $ (841) $ (5,090)
Loss attributable to common shareholders - as reported $ (260) $ (220) $ (720) $ (4,843)
Loss attributable to common shareholders - pro forma $ (328) $ (311) $ (968) $ (5,090)
Basic and diluted loss per common share - as reported $ (0.25) $ (0.24) $ (0.74) $ (5.21)
Basic and diluted loss per common share - pro forma $ (0.32) $ (0.33) $ (0.99) $ (5.48)
- --------------------------------------------------------------------------------------------------------------------------------
For purposes of SFAS No. 123 the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model. The following
are weighted-average assumptions used for grants under Corning stock plans in
2002 and 2001, respectively:
- -------------------------------------------------------------------------------
Nine Months Ended Twelve Months Ended
- -------------------------------------------------------------------------------
For Options September 30, December 31,
Granted During 2002 2001
- -------------------------------------------------------------------------------
Expected life in years 6 6
Risk free interest rate 4.29% 4.8%
Dividend yield 0.46%
Expected volatility 78% 75%
- -------------------------------------------------------------------------------
Corning discontinued payment of dividends on its common stock in July 2001. The
dividend yield assumption applies to grants prior to July 2001.
14. Supplementary Statement of Cash Flows Data
Supplemental disclosure of cash flow information was as follows (in millions):
For the nine months
ended September 30,
2002 2001
--------- ---------
Changes in certain working capital items:
Trade accounts receivable $ 81 $ 384
Inventories 87 (198)
Other current assets (118) 127
Accounts payable and other current liabilities,
net of restructuring payments (254) (311)
-------- --------
Total $ (204) $ 2
======== ========
ITEM 2.
- -------
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Business
- --------
Corning traces its origins to a glass business established in 1851. The present
corporation was incorporated in the State of New York in December 1936, and its
name was changed from Corning Glass Works to Corning Incorporated on April 28,
1989.
Corning is a global, technology-based corporation, which operates in three
reportable business segments: Telecommunications, Advanced Materials and
Information Display.
The Telecommunications Segment produces optical fiber and cable, optical
hardware and equipment, photonic modules and components and optical networking
devices for the worldwide telecommunications industry. Within Corning's optical
fiber and cable business, Corning invented the first low-loss optical fiber more
than 30 years ago and offers a range of optical fiber technology products and
enhancements for a variety of applications, including premises, access,
metropolitan, long-haul and submarine networks. Corning -- the first
manufacturer to introduce laser-optimized fiber(TM) for premises applications --
offers Infinicor(R) fibers for local area networks, data centers and central
offices. Corning's SMF-28(R) fiber, the most widely deployed single-mode fiber
in the world, offers customers an industry-leading package of specifications, as
well as world-class reliability, splicing and handling capability. Corning
SMF-28e(TM) fiber enables additional transmission wavelengths in metro and
access networks. LEAF(R) fiber enables greater capability for long-haul,
regional and metropolitan networks. Corning's Vascade(R) family of submarine
fibers includes technologically advanced solutions for transoceanic and
short-haul undersea networks. Corning has two large optical fiber manufacturing
facilities in North Carolina, as well as a controlling interest in Lucent
Technologies Shanghai Fiber Optic Co. Ltd. in China, purchased from Lucent on
September 30, 2002. On October 30, 2002, Corning announced the permanent closing
of its optical fiber manufacturing facility in Noble Park, Victoria, Australia,
and the proposed closing of its Neustadt Bei Coburg, Germany plant. These
closures are proposed to be completed by early 2003. Corning will also mothball
its optical fiber manufacturing facility in Concord, NC and transfer certain
capabilities to its Wilmington, NC facility. Corning believes that the Concord
facility can be returned to productive capacity within six to nine months of a
decision to reopen.
Some of Corning's optical fiber production is transferred to partially and
wholly-owned subsidiaries or equity ventures to be cabled prior to being sold to
end users and the remaining fiber production is sold directly to end users or
third party cablers around the world. Corning's cabling operations include large
facilities in North Carolina and in Germany and smaller regional locations or
equity affiliates.
Corning's hardware and equipment products include cable assemblies, fiber optic
hardware, fiber optic connectors, optical components and couplers, splice
equipment, test equipment, accessories, network management solutions and optical
manufacturing services for optical connectivity. For broadband access, Corning's
products include connection and protection devices, digital subscriber lines,
closures, subscriber demarcation points, outside plant enclosures, metal
enclosures and shelters, plastic pedestals and copper data communication
products. Corning manufacturing operations for hardware and equipment products
are in North Carolina and Texas, as well as Europe and the Caribbean.
Corning's photonic technologies products are made primarily in New York and
Massachusetts. These include erbium doped fiber amplifiers (EDFAs), Raman
amplifier modules and pumps, and semiconductor optical amplifiers for long-haul,
metro and access markets. Corning's optical compensation products include
dispersion compensation devices for long-haul and metro networks. Corning offers
a variety of modules and single-channel devices for dense wavelength division
multiplexing (DWDM) for long-haul and metro networks for high data rate
transmissions and signal generation products, optical transmission modules and
components in optical system networks. Corning's controls and connectors
products include coaxial connectors and associated assembly tools for use in
cable television and broadband communication systems, satellite, wireless,
telecommunications and military applications. These products are manufactured in
Arizona and Denmark. The Telecommunications Segment represented approximately
48% of total Corning sales during the first nine months of 2002.
The Advanced Materials Segment manufactures specialized products with unique
properties for customer applications utilizing glass, glass ceramic and polymer
technologies. Businesses within this segment include environmental products,
life science products, semiconductor materials, optical and technical products.
Corning's environmental products manufactured in New York, Virginia, China,
Germany and South Africa include ceramic technologies and solutions for
emissions and pollution control in mobile and stationary applications around the
world, including automotive and diesel substrate and filter products. As
regulations and laws on emission controls standards have tightened over time and
additional countries have instituted requirements related to clean air, Corning
continued to develop more efficient emission-control catalytic converter
substrates with higher density and greater surface area for ultra-low emissions
vehicles. Cormetech, an equity venture, manufactures ceramic environmental
substrate products for use in power plants. Corning is investing in new
substrate technologies for diesel emission control devices, with a new
production facility under construction in New York to produce diesel products
for Europe, Japan and the United States.
Life sciences laboratory products are manufactured in Maine, New York, England
and Mexico, and include microplate products, coated slides, filter plates for
genomics sample preparation, plastic cell culture dishes, flasks, cryogenic
vials, roller bottles, mass cell culture products, liquid handling instruments,
Pyrex(R) glass beakers, pipettors, serological pipettes, centrifuge tubes and
laboratory filtration products. Corning markets these products primarily through
large distributors.
Semiconductor materials manufactured by Corning include high-performance optical
materials, optical-based metrology instruments and technical solutions for
applications in the global semiconductor industry. Corning's high purity fused
silica (HPFS(R)) materials applications include projection and illuminator lens
blanks in microlithography, spacecraft windows and optics used in high-energy
laser fusion systems. Corning's ultra low expansion glass is used in
manufacturing integrated circuits, mirror blanks for use in space and
ground-based systems requiring high mobility. Corning also makes fluoride
crystals and fabricates optical components, including calcium fluoride for
customers who make projection and illuminator lens systems used in scanner and
stepper systems. Corning's semiconductor materials are manufactured in New York,
Massachusetts and South Carolina.
Other specialty materials made by Corning in New York, Virginia, England and
France include ophthalmic glass and plastic products, technical products, such
as polarizing glass, glass for high temperature applications, machinable glass
ceramic for high temperature applications, large telescope mirrors and windows
for use in outer space. Corning's Eurokera equity venture manufactures smooth
cooktop glass/ceramic. The Advanced Materials Segment accounted for
approximately 27% of Corning's sales during the first nine months of 2002.
The Information Display Segment manufactures glass panels and funnels for
televisions and cathode ray tubes, liquid crystal display glass for flat panel
displays and precision lens assemblies for projection video systems. For use in
notebook computers, flat panel desktop monitors and other electronic products,
Corning's display technologies business manufactures glass substrates for
displays, including Corning 1737 and Eagle 2000(TM) glass substrates. Corning's
facilities in Kentucky, Japan and Taiwan and its Samsung Corning Precision
equity venture in South Korea develop, manufacture and supply high quality glass
substrates using a proprietary fusion forming technology and know-how to meet
ever-tightening customer specifications. Corning's precision lens business in
Ohio manufactures precision lens assemblies for projection video systems
primarily for large consumer electronics manufacturers. Corning's conventional
glass television business includes a 51% partnership interest in Corning Asahi
Video, a producer of glass panels and funnels for cathode ray television tubes
in Pennsylvania and a 50% interest in Samsung Corning Corporation, a producer of
glass panels and funnels for cathode ray tubes for televisions and computer
monitors in Asia and Europe. The Information Display Segment represented
approximately 24% of Corning's sales during the first nine months of 2002.
Corning and its subsidiaries manufacture and process products at more than 70
plants in 15 countries.
Except as otherwise indicated by the context, the terms "Corning" or "Company"
as used herein, mean Corning Incorporated and its consolidated subsidiaries.
Additional discussion of Corning and each of its segments is discussed in
Management's Discussion and Analysis of Financial Condition under Operating
Review and Note 3 (Operating Segments) to the Consolidated Financial Statements.
Competition
- -----------
Corning competes across all of its product lines with many large and varied
manufacturers, both domestic and foreign. Some of these competitors are larger
than Corning, and some have broader product lines.
Competition within the telecommunications industry is intense among several
significant companies. Corning represents an important market presence in the
segment's principal product lines. Price and new product innovations are
significant competitive factors. The current downturn in the telecommunications
industry may change the competitive landscape in the future.
In the Telecommunications Segment, the primary competing producers of optical
fiber are Furukawa OFS, Fujikura, Sumitomo, Alcatel, Pirelli and Draka. Furukawa
OFS is Corning's largest competitor. Corning obtained the first significant
optical fiber patents, and its large scale manufacturing experience, fiber
process, technology leadership and intellectual property assets yield cost
advantages relative to several of its competitors. Corning is the largest
producer of optical fiber and cable, but faces significant competition due to
excess capacity in the market place, price pressure and new product innovations.
For optical fiber cable, Corning's primary competitors are OFS, Furukawa,
Pirelli, Alcatel, Alcoa Fujikura and Sumitomo. For hardware and equipment,
significant competitors are 3M, Molex, ADC Communications, Marconi and Avaya.
For photonic technologies products, the largest competitor is JDS Uniphase and
other competitors include Furukawa OFS, Lucent (Agere), as well as Marconi,
Siemens, Bosch and Alcatel. Primary controls and connectors competitors include
PPC, Thomas and Betts, CDI, Andrews Corporation and Rosenberger.
Within the Advanced Materials Segment, Corning's principal products face
competition from a variety of materials manufacturers, some of which manufacture
similar products made from materials other than glass and ceramics. Among other
things, innovation, product quality, performance and service are key competitive
elements.
Within the Advanced Materials Segment, Corning's environmental technologies
business faces its principal competition from NGK, Denso and Emitec. The rest of
the segment includes a wide range of products ranging from glass and plastic
science laboratory products, semiconductor stepper lenses, to ophthalmic glass,
each of which has a range of competitive producers. For laboratory products,
Schott Glaswerke, Kavalier, Kimble and Becton Dickinson & Co. are the principal
worldwide competitors. For Corning's semiconductor stepper lenses, Schott
Glaswerke is a principal competitor. For ophthalmic products, Schott Glaswerke
is the main competitor.
Competition is also intense for certain businesses within the Information
Display Segment. Within the Information Display Segment, competition for
Corning's liquid crystal display products comes from Asahi Glass, Nippon
Electric Glass and NH Techno. For conventional television glass, Nippon Electric
Glass, Techneglas, as well as various Asian manufacturers are the competitors.
Corning strives to maintain its position through technology and product
innovation. For the future, Corning's competitive advantage lies in its
commitment to research and development, its financial resources and its
commitment to quality. There is no assurance that Corning will be able to
maintain its market position or competitive advantage.
Patents and Trademarks
- ----------------------
Inventions by members of Corning's research and engineering staff have been, and
continue to be, important to the Company's growth. Patents have been granted on
many of these inventions in the United States and other countries. Some of these
patents have been licensed to other manufacturers, including Corning's equity
investees. Many of the earlier patents have now expired, but Corning continues
to seek and obtain patents protecting its newer innovations.
Each business segment possesses its own patent portfolio that provides
competitive advantage in protecting Corning's innovations. Corning has
historically enforced, and will continue to enforce, its intellectual property
rights. At the end of 2001, Corning and its subsidiaries owned over 6,000
patents in various countries of which over 1,900 were United States patents.
The Telecommunications Segment had over 3,500 patents in various countries of
which over 900 were United States patents. Although no one patent is considered
material to this business segment, and new patents are frequently granted to
Corning, some of the important issued U.S. patents in this segment include: (i)
patents relating to optical fiber products including dispersion compensating
fiber, low loss optical fiber and high data rate optical fiber and processes and
equipment for manufacturing optical fiber including methods for making optical
fiber preforms and methods for drawing, cooling and winding optical fiber; (ii)
patents relating to packaging of lasers, and designs for optical switch and
amplifier products; (iii) patents relating to optical fiber ribbons and methods
for making such ribbon, fiber optic cable designs and methods for installing
optical fiber cable; and (iv) patents relating to optical fiber connectors and
associated methods of manufacture.
The Advanced Materials Segment had over 1,200 patents in various countries of
which over 600 were United States patents. Although no one patent is considered
material to this business segment, and new patents are frequently granted to
Corning, some of the important issued U.S. patents in this segment include: (i)
patents relating to cellular ceramic honeycomb products, together with ceramic
batch and binder system compositions, honeycomb extrusion and firing processes,
and honeycomb extrusion dies and equipment for the high-volume, low-cost
manufacture of such products; (ii) patents relating to UV-absorbing copper
halide glasses, polymer lens matrix material for use as ophthalmic lens and dyes
for use in polymer ophthalmic lenses; (iii) patents relating to glasses and
glass-based products including fused silica and calcium fluoride glass for use
in optical lithography/stepper lens and photomask blanks, collimating and
tapered lensed fiber, and gradient index/grind lenses; and (iv) patents relating
to methods and apparatus for the manufacture and use of scientific laboratory
equipment including nucleic acid arrays, multiwell plates, and cell culture
products.
The Information Display Segment had over 200 patents in various countries of
which over 140 were United States patents. Although no one patent is considered
material to this business segment, and new patents are frequently granted to
Corning, some of the important issued U.S. patents in this segment include
patents relating to glass compositions and methods for the use and manufacture
of flat panel glass for display applications. Many of these patents are used in
Corning's operations or are licensed for use by others, and Corning is licensed
to use patents owned by others. The company has entered into cross licensing
arrangements with some major competitors, but the scope of such licenses has
been limited to specific product areas or technologies.
Most of Corning's products are marketed under the following trademarks: Corning,
Celcor, FiberGain, HPFS, LEAF, MetroCor, PurePath, Pyrex, Steuben, and Vycor.
Subsidiaries and divisions of Corning frequently use their own trademarks.
Overview
Corning incurred a net loss in the third quarter and first nine months of 2002
driven primarily by continued weak performance in the Telecommunications
Segment. Results for the quarter and nine months included charges that resulted
from restructuring activities offset in part by a gain on repurchases and
retirement of debt. These items are described in more detail in Results of
Operations and Restructuring, Impairment and Other Charges below.
The negative trends beginning in 2001 such as softness in demand, excess
manufacturing 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 and profitability
decline in its Telecommunications Segment. Corning does not expect any
meaningful recovery in the Telecommunications Segment through at least 2003. As
a result, Corning announced further restructuring initiatives in October 2002 to
help achieve profitability in 2003. The total pre-tax restructuring and
impairment charges for the full year are currently expected to range between
$1.2 billion and $1.3 billion.
Corning has undertaken actions to generate cash and strengthen its balance
sheet. These include:
.. issuance in July and August 2002 of 7% Series C Mandatory Convertible
Preferred Stock generating net cash proceeds of $441 million, and
.. repurchase and retirement of debt with an accreted value of $278 million
for cash of $183 million for the nine months ended September 30, 2002. In
addition, Corning has repurchased and retired additional debt with an
accreted value of $204 million for $118 million in cash through October 29,
2002. These transactions resulted in pre-tax gains of $90 million through
September 30, 2002 and $83 million through October 29, 2002.
Results of Operations
Net sales totaled $837 million for the third quarter of 2002, a decrease of 45%
compared with sales of $1.5 billion in the prior year third quarter. Net sales
for the nine months ended September 30, 2002, were $2.6 billion, a decrease of
50% compared to the prior year period of $5.3 billion. The sales decline in both
periods was most pronounced in the Telecommunications Segment. Significantly
lower demand and price declines for Corning's fiber and cable and photonic
technologies products drove a sales decline in that segment of approximately 66%
and 68% for the quarter and nine months of 2002 compared to the prior year
periods.
As a percentage of net sales, third quarter gross margin decreased to 19% from
34% in the prior year quarter and nine months gross margin decreased to 22% from
35% in the prior nine-month period. Gross margin continues to be impacted by
lower sales volumes, particularly in the Telecommunications Segment where the
lower volumes are insufficient to cover the fixed manufacturing costs. Downward
pricing pressure also continues to negatively impact margins, primarily in the
optical fiber and cable business.
Selling, general and administrative (SG&A) expenses decreased 41% to $158
million for the third quarter compared to the prior year quarter, however SG&A
increased 1 point as a percentage of net sales to 19%. On a year to date basis,
SG&A declined 33% to $538 million while SG&A increased 5 points as a percentage
of net sales to 20%. The decreases in expense for the quarter and nine months
reflect the impact of the restructuring actions and, for the quarter,
approximately $20 million of favorable adjustments to compensation and benefit
accruals and property tax refunds while the increases as a percentage of net
sales indicate the decline in revenues continues to outpace the cost savings
impact of restructuring actions.
Research, development and engineering expenses (RD&E) totaled $115 million and
$375 million for the quarter and nine months which represented a decline of 25%
and 23%, respectively, compared to the prior year periods. As a percentage of
net sales, RD&E increased 4 points and 5 points for the quarter and nine months,
respectively, to 14% for both periods. The decreases in total expense for the
quarter and nine months reflect the impact of the restructuring actions while
the increases as a percentage of net sales indicate the decline in revenues
continues to outpace the cost savings impact of restructuring actions.
Corning's operating loss as a percentage of net sales deteriorated 10 points to
29% for the third quarter of 2002 compared to the prior year period, primarily
due to the deterioration in gross margin, in addition to SG&A and RD&E as
discussed above. For the nine months ended September 30, 2002 and 2001,
operating loss as a percentage of net sales improved 55 points to 37%. The 2001
results were impacted by a $4.8 billion charge for the impairment of goodwill
and intangible assets in the second quarter.
Equity earnings for the quarter totaled $42 million for an 8% increase over the
same period in 2001 primarily due to higher equity earnings in the display
technologies business. As a percentage of net sales, equity earnings improved 2
points over the third quarter of 2001 to 5%. On a year to date basis, equity
earnings were $97 million for an 18% decline over the nine month period of 2001
primarily due to the impairment of an equity investment in the second quarter of
2002. As a percentage of net sales, equity earnings increased 2 points over the
same period of 2001 to 4% of net sales primarily due to the decline in sales.
Corning's net loss totaled $133 million, or $0.25 per share, in the third
quarter of 2002, compared to a net loss of $220 million or, $0.24 per share, in
the third quarter of 2001. On a year to date basis, Corning incurred a net loss
of $593 million, or $0.74 per share, compared to a net loss of $4,843 million,
or $5.21 per share, for the nine months ended September 30, 2001. The third
quarter 2001 net loss and diluted loss per share, after adjusting for the impact
of Statement of Financial Accounting Standards (SFAS) No. 142, was $145 million,
or $0.15 per share. Net loss and diluted loss per share on a year to date basis
for 2001 and adjusted for SFAS No. 142 was $4,529 million, or $4.88 per share.
Corning's third quarter and year to date results reflect significantly lower
volumes and prices in the Telecommunications Segment compared to the same
periods for the prior year. The third quarter 2002 results also include net
charges of $125 million ($85 million after-tax) resulting from restructuring
actions and impairment charges undertaken in the third quarter. These charges
are described in Restructuring, Impairment and Other Charges. In addition, the
third quarter results include a gain of $22 million ($13 million after-tax) due
to repurchases and retirement of a portion of Corning's zero coupon convertible
debentures.
Corning's results for the third quarter of 2001 were impacted by restructuring
actions of $339 million ($222 million after-tax) which included charges for
headcount reduction, exit costs and impairment of property, plant and equipment.
The year to date loss for 2001 was largely attributable to a charge of
approximately $4.8 billion ($4.7 billion after-tax) in the second quarter to
impair goodwill and certain other intangible assets of the photonic technologies
business. Restructuring charges through nine months of 2001 totaled $347 million
($227 million after-tax). In addition, year to date results were also affected
by a charge of $273 million ($184 million after-tax) in the second quarter to
write-down excess and obsolete inventory in the photonic technologies business.
Net loss as a percentage of net sales deteriorated 1 point to 16% for the third
quarter of 2002 compared to the same period in 2001. The deterioration reflected
in gross margin and operating loss was partially offset by the gains on
repurchases of debt and increased income tax benefits for the quarter.
Comparisons of a percentage on a year to date basis are not meaningful due to
the very large after-tax second quarter 2001 impairment charge of $4.7 billion.
Restructuring, Impairment and Other Charges
2002 Restructuring Actions
- --------------------------
Second Quarter
- --------------
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.
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 included a $14 million charge to impair an
investment in an international cabling venture.
Restructuring Charges
---------------------
The second quarter restructuring charge of $204 million included $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 entailed the elimination of approximately 3,600
hourly and 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 included involuntary
separation, early retirement and social programs.
Impairment of Plant and Equipment
---------------------------------
Corning has evaluated the carrying value of the long-lived assets at each
site impacted by the restructuring actions for impairment. 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 in the second
quarter 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 pertained to abandoned construction projects in the
fiber and cable business, primarily the latest expansion in Concord, NC and
Oklahoma City, OK.
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 and 2003.
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 and third 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 ($37 million
after-tax) charge for other than temporary declines in certain cost
investments in the Telecommunications Segment. These investments have been
written off.
Third Quarter
-------------
The charges recorded in the third quarter are summarized in the following
table and described in greater detail below:
Employee related costs $ 47
Exit costs 11
-------
Subtotal - restructuring charges 58
Fixed asset impairments 67
-------
Total pre-tax charges 125
Tax benefit and minority interest 40
-------
Total after-tax and minority interest charges $ 85
=======
Restructuring Charges
---------------------
The third quarter restructuring charge of $58 million includes $47 million
of employee separation costs (including special termination benefits
related to pension and postretirement health care plans) and $11 million in
other exit costs (principally lease termination and contract cancellation
payments). The charge entails the elimination of approximately 1,000
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 summarizes the headcount reduction for the second and
third quarter 2002 actions:
U.S. Hourly U.S. Salaried Non-U.S. Total
--------------------------------------------------------
Second quarter charge 850 1,800 950 3,600
Third quarter charge 200 350 450 1,000
-------- --------- -------- ---------
Total 1,050 2,150 1,400 4,600
======== ========= ======== =========
Separated at September 30, 2002 475 1,875 650 3,000
Corning expects the remaining 1,600 employees to be separated by September
30, 2003.
Impairment of Plant and Equipment
---------------------------------
Corning recorded $67 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.
Cost Savings
- ------------
Corning expects to realize annualized savings of approximately $265 million as a
result of the second and third quarter 2002 restructuring actions. The savings
consist of lower wage and benefit costs, avoided depreciation and fixed costs on
closed facilities.
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.
Fourth Quarter
- --------------
On October 30, 2002, Corning announced its intent to take additional measures to
attain profitability in 2003. The continued decline in demand in the
Telecommunications Segment requires further restructuring to bring capacity in
line with current revenues. The fourth quarter pre-tax charge is expected to
approximate $550 million to $650 million and impact approximately 2,200
employees. Corning expects to realize annualized cost savings of approximately
$165 million as a result of the fourth quarter actions. Approximately one
quarter of this charge is expected to be paid in cash. The fourth quarter
actions will include:
.. permanent closing of Corning's optical fiber manufacturing facility in
Noble Park, Victoria, Australia, and the proposed closing of its Neustadt
Bei Coburg, Germany plant. These closures are proposed to be completed by
early 2003. Corning will also mothball its optical fiber manufacturing
facility in Concord, NC and transfer certain capabilities to its
Wilmington, NC facility. Corning believes that the Concord facility can be
returned to productive capacity within six to nine months of a decision to
reopen,
.. proposed reductions in capacity and employment in Corning's cabling and
hardware and equipment locations worldwide to reduce costs, and
.. permanent closure of its photonic technologies thin film filter
manufacturing facility in Marlborough, MA by the end of 2002.
The charge for these actions includes exit costs and impairment of the closed
facilities and severance costs associated with closed and mothballed locations.
Management is still considering additional actions that may be announced later
in the fourth quarter. It is possible that additional impairments and
restructuring charges will result from these actions or decreases in expected
cash flows from assets not abandoned.
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 included 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 September 30, 2002, approximately 11,800
of the 12,000 employees had been separated under the plans. Corning expects the
remaining 200 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 September 30, 2002:
(In millions)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash
December 31, charges/ Non-cash payments Sept. 30,
2001 credits charges in 2002 2002
- ----------------------------------------------------------------------------------------------------------------------------------
Restructuring reserve:
Employee related costs $ 198 $ 234 (a) $ 35 $ 177 $ 220
Other charges 78 23 16 85
----------------------------------------------------------------------
Total restructuring reserve $ 276 $ 257 $ 35 $ 193 $ 305
----------------------------------------------------------------------
Impairment of long-lived assets:
Assets held for disposal $ 302 (b) $ 302
Cost investments 60 60
------------------------
Total impairment charges $ 362 $ 362
------------------------
Total restructuring and impairment
charges and credits $ 619
=========
(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 (FASB) 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. Corning completed its initial
impairment review during the first quarter and concluded a transitional
impairment charge from the adoption of the standard was not required.
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. Business conditions in the telecommunications industry have
deteriorated during the year and are depressed such that it appears the fair
value of Corning's telecommunications reporting unit is currently lower than at
the benchmark assessment date of January 2002. As part of the annual impairment
test, management is currently studying short and long-term market indicators and
alternative growth patterns. Based on the work performed to date, it appears
reasonably possible that a portion, but not all of the company's goodwill is
impaired. Management will complete the impairment test in the fourth quarter and
record any required goodwill impairment charge. The goodwill related to the
Telecommunications Segment is $1.9 billion at September 30, 2002. Management
believes there are a range of possible outcomes and no assurance can be given
that an impairment charge will not be required. A charge would lower the
company's equity and could reduce availability under the unused $2.0 billion
revolving credit facility. See Liquidity and Capital Resources for further
information.
Outlook
Business conditions in the Telecommunications Segment have been very difficult
due to sharply reduced capital spending by telecommunications companies.
Management expects that these difficult conditions may continue through at least
the end of 2003. While management ultimately expects a recovery, it is difficult
to forecast when capital spending by Corning's customers will return to normal
levels and therefore difficult to forecast future revenues and earnings in this
segment in the short term.
Corning expects fourth quarter net sales to be in the range of $775 million to
$825 million and also anticipates a loss in a range of $0.08 to $0.12 per share,
excluding restructuring and impairment charges. Continued pricing pressure will
impact revenues and sales in the telecommunications businesses are expected to
remain at depressed levels. Corning anticipates revenues from its Advanced
Materials and Information Display Segments to remain strong in the fourth
quarter led by its liquid crystal display business, which continues to operate
at full capacity.
Management continues to believe Corning has ample liquidity to meet its funding
needs for the foreseeable future. Corning finished the third quarter with $1.6
billion in cash and short-term investments and an unused revolving credit
facility of $2.0 billion. Capital spending for 2002 is expected to approximate
$400 million.
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 now 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 third quarter and nine 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. These expenses include interest, taxes, and corporate functions.
Allocation methodologies are described in Corning's 2001 Form 10-K/A. Segment
net income may not be consistent with measures used by other companies.
- ------------------------------------------------------------------------------------------------------------------------------------
Telecommunications Three Months Ended Nine Months Ended
(In millions) September 30, September 30,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 195 $ 779 $ 662 $ 2,593
Hardware and equipment 136 187 424 666
Photonic technologies 17 76 92 494
Controls and connectors 18 47 90 162
--------- --------- --------- ---------
Total net sales $ 366 $ 1,089 $ 1,268 $ 3,915
========= ========= ========= =========
Research, development and engineering expenses $ 71 $ 110 $ 243 $ 366
Interest expense $ 27 $ 24 $ 84 $ 72
Segment (loss) earnings before equity (losses) earnings
and restructuring, impairment and other charges $ (132) $ 14 $ (409) $ 184
Equity in (losses) earnings of associated companies (5) 4 (12) 15
--------- --------- --------- ---------
Segment (loss) earnings before restructuring,
impairment and other charges (137) 18 (421) 199
Restructuring, impairment and other charges, net of tax (61) (222) (320) (4,948)
--------- --------- --------- ---------
Segment net loss $ (198) $ (204) $ (741) $ (4,749)
========= ========= ========= =========
Segment (loss) earnings before equity (losses) earnings
and restructuring, impairment and other charges as a
percentage of segment sales (36.1)% 1.3% (32.3)% 4.7%
Segment (loss) earnings before restructuring, impairment
and other charges as a percentage of segment sales (37.4)% 1.7% (33.2)% 5.1%
- ------------------------------------------------------------------------------------------------------------------------------------
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.
Segment Restructuring Actions and Impairment Charges
- ----------------------------------------------------
This segment incurred significant restructuring and impairment charges in both
years. The second and third quarter 2002 charges are described in detail in
Restructuring, Impairment and Other Charges. The activities were undertaken to
reduce the operating cost structure as a result of continued lower revenues.
Approximately half of the 2002 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 restructuring actions announced for
the fourth quarter will impact all of the businesses within this segment.
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.
Segment Overview
- ----------------
As the restructuring and impairment charges are described above, the performance
discussion below addresses losses and earnings before restructuring, impairment
and other charges.
Sales in the segment declined 66% and 68% from the third quarter and nine months
of 2001, respectively, as each business in the segment experienced a significant
decline in volume. The segment incurred losses of $137 million and $421 million
before restructuring, impairment and other charges in the third quarter and nine
months of 2002, compared to income of $18 million and $199 million in the prior
year periods, primarily due to the significant decrease in sales volume. Each
business also reported a loss in 2002 for the third quarter and nine 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.
Optical Fiber and Cable
- -----------------------
The optical fiber and cable business is the largest business in the segment.
Sales in the optical fiber and cable business declined 75% for both the quarter
and nine months ended September 30, 2002, compared to the prior year periods.
The decrease was primarily due to a sales volume decline for fiber and cable
products of more than 60% for the quarter and nine months over the comparable
prior year periods as well as double digit price declines.
The optical fiber and cable business incurred a loss before restructuring,
impairment and other charges for both the quarter and nine months of 2002,
compared to profits in the prior year periods due to significantly lower sales
volume, declining prices and unfavorable product mix.
As discussed earlier in the MD&A, this business will undertake significant
restructuring actions in the fourth quarter. The actions will include permanent
closure of two smaller international fiber manufacturing plants and the
mothballing of the Concord facility. In addition, cabling operations will
continue to be consolidated. Corning is not exiting any product or business
lines as a result of the decision to reduce capacity but is adjusting capacity
to most efficiently meet expected demand levels through at least 2003.
Management believes that the Concord facility can be returned to productive
capacity within six to nine months of a decision to do so and construction in
progress at the Concord facility can be completed efficiently. Management
believes the Concord and Wilmington plants will provide sufficient capacity for
the foreseeable future of this business.
Hardware and Equipment
- ----------------------
Sales in the hardware and equipment business decreased 27% and 36% for the three
and nine months ended September 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 loss for the quarter doubled over
the loss incurred in the third quarter of 2001, primarily due to the decrease in
sales volume. The year to date loss was also driven by lower volumes and price
pressure compared to earnings in 2001.
This business will undertake restructuring actions in the fourth quarter. These
actions are expected to include exiting certain product lines, headcount
reductions and asset impairments.
Photonic Technologies
- ---------------------
Sales in the photonic technologies business declined 78% and 81% for the three
and nine months ended September 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 nine months of 2002, primarily due to significantly lower sales
volumes. However, the 2002 losses improved over the losses incurred in the
comparable periods of 2001, primarily due to the significant inventory
write-down in the second quarter of 2001. The results in 2002 also reflect cost
reductions resulting from restructuring actions taken in 2001 and early 2002.
The 2001 year to date results for this business include a write-down of
inventory of $274 million. During the second quarter of 2002, the business
favorably resolved an open issue from the third 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 third 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.
The photonic technologies business operates in a severely depressed market
environment. In the third quarter, certain competitors indicated they will exit
the business and others announced decisions to consolidate or restructure.
Industry consolidation could impact Corning's sales adversely in the short term.
Management is evaluating the consequences of these industry events on the long
term positioning of this business in the marketplace and is continuing to
evaluate alternative strategic decisions for the photonic technologies business.
While certain product lines are promising in the event of industry recovery, the
pace of that recovery is uncertain. Some of the alternatives under consideration
may entail significant restructuring charges or write-downs in tangible or
intangible assets. Long-lived assets of this business adjusted for announced
fourth quarter impairments approximate $400 million at September 30, 2002.
Controls and Connectors
- -----------------------
Sales in the controls and connectors business decreased 62% and 45% for the
three and nine months ended September 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 nine 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. Restructuring actions to be taken in the fourth quarter are
intended to reduce operating costs within this business.
- ------------------------------------------------------------------------------------------------------------------------------------
Advanced Materials Three Months Ended Nine Months Ended
(In millions) September 30, September 30,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Environmental technologies $ 102 $ 90 $ 298 $ 294
Life sciences 71 65 215 204
Other advanced materials 66 79 201 269
--------- --------- --------- --------
Total net sales $ 239 $ 234 $ 714 $ 767
========= ========= ========= ========
Research, development and engineering expenses $ 31 $ 31 $ 94 $ 87
Interest expense $ 9 $ 7 $ 25 $ 17
Segment earnings before equity earnings and
restructuring charges $ 2 $ 2 $ 12 $ 39
Equity in earnings of associated companies 11 6 31 19
--------- --------- --------- --------
Segment earnings before restructuring charges 13 8 43 58
Restructuring charges, net of tax (3) (4)
--------- --------- --------- --------
Segment net income $ 10 $ 8 $ 39 $ 58
========= ========= ========= ========
Segment earnings before equity earnings and
restructuring charges as a percentage of segment sales 0.8% 0.9% 1.7% 5.1%
Segment earnings before restructuring charges
as a percentage of segment sales 5.4% 3.4% 6.0% 7.6%
- ------------------------------------------------------------------------------------------------------------------------------------
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 in the third quarter of 2002 were
relatively flat compared to the third quarter of 2001, as decreased demand for
semiconductor materials and the exit of lighting products was offset by
increased sales in environmental technologies and life sciences. Sales declined
7% for the nine months ended September 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 63% in the
third quarter of 2002 compared to the prior year quarter primarily due to
improved performance in life sciences and environmental technologies. Segment
earnings before restructuring charges declined 26% for the nine months ended
September 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 13% for the third
quarter of 2002, compared to 2001 primarily due to higher sales volume. The
sales growth was driven by increased auto production due to financing incentives
by automobile manufacturers. Sales for the first nine months of 2002 were
relatively flat compared to the prior year period as higher sales volume was
offset by downward pricing pressure. Earnings in this business increased over
50% for the third quarter, primarily due to higher equity earnings. Earnings
decreased over 10% for the nine months ended September 30, 2002, as the increase
in equity earnings was offset by price declines as well as increased
manufacturing and development costs related to new products.
Sales in the life sciences business increased 9% and 5% for the third quarter
and nine months of 2002, compared to the same periods of 2001 due to strong
growth in all product lines. Earnings in the business for both the quarter and
nine months of 2002 more than doubled over the comparable periods of 2001,
primarily due to cost savings resulting from the discontinuation of Corning's
investment in microarray technology products in the third quarter of 2001,
improved manufacturing efficiencies and higher sales.
Sales in Corning's other Advanced Materials businesses decreased 16% and 25%
from the third quarter and nine months of 2001, respectively. These decreases
were led by lower sales volume of high purity fused silica products in the
semiconductor materials business as capital spending in the semiconductor
equipment industry continues to be down. The loss for the quarter doubled over
the loss incurred in the prior year quarter while the business went from a
modest profit for the nine months of 2001 to a loss in the same period of 2002.
The losses are due to significantly lower sales volume and increased spending in
development and engineering for calcium fluoride products.
- ------------------------------------------------------------------------------------------------------------------------------------
Information Display Three Months Ended Nine Months Ended
(In millions) September 30, September 30,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Display technologies $ 106 $ 79 $ 301 $ 228
Precision lens 75 57 203 168
Conventional video components 47 47 131 206
--------- --------- --------- --------
Total net sales $ 228 $ 183 $ 635 $ 602
========= ========= ========= ========
Research, development and engineering expenses $ 13 $ 12 $ 38 $ 31
Interest expense $ 10 $ 6 $ 27 $ 16
Segment earnings before minority interest,
equity earnings and restructuring charges $ 17 $ 11 $ 28 $ 57
Minority interest in losses (earnings) of subsidiaries 5 1 16 (11)
Equity in earnings of associated companies 32 27 86 81
--------- --------- --------- --------
Segment net income before restructuring charges 54 39 130 127
Restructuring charges, net of tax (1) (1)
--------- --------- --------- --------
Segment net income $ 53 $ 39 $ 129 $ 127
========= ========= ========= ========
Segment earnings before minority interest, equity earnings
and restructuring charges as a percentage of segment sales 7.5% 6.0% 4.4% 9.5%
Segment net income before restructuring charges as a percentage
of segment sales 23.7% 21.3% 20.5% 21.1%
- ------------------------------------------------------------------------------------------------------------------------------------
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 increased 25% and 5% in the third
quarter and nine months of 2002, respectively, compared to the comparable
periods of 2001. Strong growth in the display technologies and precision lens
businesses drove the quarter increase while on a year to date basis the strong
growth in both businesses was partially offset by extremely weak sales in the
conventional video components business. Segment net income in the third quarter
increased 38% compared to the same period in 2001 primarily due to display
technologies and precision lens while segment net income remained relatively
flat for nine months of 2002, compared to the prior year as significantly lower
earnings at conventional video components were offset by performance
improvements in the display technologies and precision lens businesses.
Sales in the display technologies business increased 34% and 32% in the third
quarter and nine months of 2002 compared to 2001, due to higher sales volume, as
penetration in the desktop market increased, and less pressure on the yen. The
prior year's nine month sales were unusually weak due to an inventory correction
in the industry in the first quarter of 2001. Volume gains of over 50% for the
quarter and nine months of 2002 were partially offset by price declines and
foreign currency exposure to the yen. Earnings in the business increased over
30% for the quarter and nine 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. This business is expected
to continue its growth. Both Corning and Samsung Corning Precision Glass Co.
have recently approved expansions of manufacturing capacity in Taiwan and Korea,
respectively. These capital projects are expected to begin with production
anticipated to start in 2003.
Sales in the precision lens business increased 32% and 21% in the third quarter
and nine 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 third quarter of
2002 increased more than 50% over the prior year period due to sales volume
gains. Earnings for the nine months ended September 30, 2002, increased more
than 30% over the prior year period as sales volume gains were partially offset
by price declines.
Sales in the conventional video components business were flat in the third
quarter of 2002 compared to 2001 while sales declined 36% over the nine months
of 2002 compared to 2001. Pricing pressure is strong in this market due to
increased competition. A significant portion of this business is concentrated
with few customers, two of which have recently merged. One significant 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 the base business increased for the
third quarter and nine months, compared to 2001 due to decreased sales volume
and a continued increase in competitive pricing pressure. Corning's investment
in the long-lived assets of this business totaled approximately $115 million at
September 30, 2002. Samsung Corning, a 50% owned manufacturer of glass panels
and funnels based in South Korea, also experienced pricing pressure resulting in
a decline in equity earnings for the third quarter and nine months of 2002
compared to the prior year periods.
The totals of Corning's operating segments were as follows:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- -------- --------- ---------
Total Segments
Net sales $ 833 $ 1,506 $ 2,617 $ 5,284
Research, development and engineering expenses $ 115 $ 153 $ 375 $ 484
Interest expense $ 46 $ 37 $ 136 $ 105
Segment (loss) earnings before minority interest,
equity earnings and restructuring, impairment and
other charges $ (113) $ 27 $ (369) $ 280
Minority interest in losses (earnings) of subsidiaries 5 1 16 (11)
Equity in earnings of associated companies 38 37 105 115
--------- -------- --------- ---------
Segment (loss) earnings before restructuring, impairment
and other charges (70) 65 (248) 384
Restructuring, impairment and other charges, net of tax (65) (222) (325) (4,948)
--------- -------- --------- ---------
Segment net loss $ (135) $ (157) $ (573) $ (4,564)
========= ======== ========= =========
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements was as follows
(in millions):
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- -------- --------- ---------
Net sales
Total segment net sales $ 833 $ 1,506 $ 2,617 $ 5,284
Non-segment net sales (a) 4 3 14 14
--------- -------- --------- ---------
Total net sales $ 837 $ 1,509 $ 2,631 $ 5,298
========= ======== ========= =========
Net loss
Total segment net loss (b) $ (135) $ (157) $ (573) $ (4,564)
Unallocated items:
Non-segment loss and other (a) (2) (1) (4) (4)
Amortization of goodwill (c) (35) (328)
Non-segment restructuring, impairment and
other charges (d) (28) (155)
Interest income (e) 10 15 34 50
Gain on repurchases of debt (e) 22 90
Income tax (f) (3) (44) 8 (1)
Minority interest 1
Equity in earnings of associated companies (a) 3 2 6 4
--------- -------- --------- ---------
Net loss $ (133) $ (220) $ (593) $ (4,843)
========= ======== ========= =========
(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 special termination benefit charges of $5 million and
pension and postretirement benefit curtailment charges of $35 million
recorded in the third quarter and nine months of 2002, respectively. The
balance of the charge relates to restructuring and impairment charges in
the corporate research and administrative staff organizations.
(e) Corporate interest income and gain on repurchases of debt is not allocated
to reportable segments.
(f) Includes tax associated with unallocated items.
Income Taxes
Corning's effective income tax benefit rate for the three and nine month periods
ended September 30, 2002, was 30.3% and 29.7%, respectively. The income tax
benefit rate in the third quarter and nine months 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 31.1% and 27%, respectively, for the quarter
and nine months of 2002. The effective income 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.
In 2002, the U.S. enacted tax legislation that extended the net operating loss
carryback period from two to five years. Due to this legislation change, Corning
will be able to carryback the anticipated 2002 U.S. federal net operating loss
and claim a refund which would not have otherwise been available. Current assets
at September 30, 2002, include a receivable of $185 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 income tax benefit rate for the three and nine months ended
September 30, 2001, was 18.8% and 0.6%. 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 September 30, 2002, Corning had $1.6 billion in cash and short-term
investments and an unused revolving credit facility of $2.0 billion. Cash and
cash equivalents decreased $54 million from December 31, 2001, while short-term
investments decreased $564 million for the same period. Significant uses of cash
and short-term investments in 2002 include $654 million of net debt repayments
and $193 million of restructuring payments. Cash and short-term investments were
essentially flat compared to September 30, 2001, as the proceeds from issuance
of 3.5% convertible debt in November 2001 and 7% Series C mandatory convertible
preferred stock in August 2002 (as discussed below) were offset by the debt
repayments and restructuring payments.
During the first nine months of 2002, Corning made payments of $177 million
related to employee costs and $16 million in other exit costs related to the
restructuring actions. Corning expects additional payments to approximate $143
million in the fourth quarter and $350 million in 2003. Corning expects
approximately one-third of the 2002 restructuring charges to be paid in cash.
In July and August 2002, Corning issued 5.75 million shares of 7% Series C
mandatory convertible preferred stock having a liquidation preference of $100
per share, plus accrued and unpaid dividends, resulting in proceeds of $558
million. The mandatory convertible stock has an annual dividend rate of 7%,
payable quarterly in cash. The first dividend payment date will be November 16,
2002. The dividends are also payable immediately upon conversion to Corning
common stock. At the time Corning issued the Series C convertible stock, a
one-time dividend was declared for all dividends that will be payable from
issuance through the mandatory conversion date of August 16, 2005. Corning
secured the payment of the dividends through the issuance of a promissory note
and used a portion of the proceeds from the sale of the Series C preferred stock
to purchase $117 million of U.S. treasury securities that was pledged as
collateral to secure the payments on the promissory note evidencing its
obligation to pay dividends resulting in net proceeds of $441 million. In
addition, Corning redeemed the remaining 69 thousand shares of Series B
preferred stock for $7 million in August.
The Series C preferred stock will automatically convert on the mandatory
conversion date of August 16, 2005, into between 50.813 and 62.5 shares of
Corning common stock, depending on the then current market price. At any time
prior to the mandatory conversion date, holders may elect to convert in whole or
part of their shares of Series C preferred stock into 50.813 shares of common
stock plus an amount of cash equal to the market value at that time of the pro
rata share of the collateral portfolio that secures the promissory note. At
September 30, 2002, approximately 3.3 million shares of the Series C preferred
stock had been converted into 167.9 million common shares.
As the closing price of Corning common stock was $1.60 on July 31, 2002, the
holder could immediately convert the Series C preferred stock and obtain a value
of $101.72 (50.813 shares valued at $1.60 plus $20.42 in future dividends)
indicating that the preferred stock contains a beneficial conversion feature of
$1.72 per preferred share. The beneficial conversion totaled approximately $10
million and was charged to retained earnings in the third quarter. The
beneficial conversion is also deducted from earnings attributable to common
shareholders in the third quarter and nine months earnings per share
calculations of 2002.
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 and business
dispositions.
Cash Flows
For the nine months ended September 30, 2002, cash used in operations was $149
million, primarily due to reduced sales, lower accounts payable and other
current liabilities and $193 million of cash payments for restructuring charges.
Operations provided cash of $1,224 million in the first nine months of 2001
after adjustment for non cash items primarily due to restructuring, impairment
and other charges. The adverse trend is primarily due to the sharp decline in
revenues in the Telecommunications Segment.
Cash provided by investing activities was $219 million through September 30,
2002, reflecting net cash of $566 million from short-term investments and $30
million from the sale of the appliance controls group partially offset by $283
million of capital expenditures and $56 million of acquisitions. This compares
to a use of cash totaling $1,954 million in the same period of 2001. The
variance between years is primarily due to significantly lower capital spending
which was reduced 82% from 2001.
Cash used in financing activities for the first nine months of 2002 was $147
million and reflected $558 million in proceeds from the issuance of preferred
stock offset by a $475 million reduction of short-term debt, which included the
repayment of all commercial paper. In addition, $183 million was used for open
market repurchases of a portion of the zero coupon convertible debentures and
$67 million was used for preferred stock dividends. This compares to cash
provided by financing activities of $222 million in 2001 which included proceeds
of $225 million from a common stock offering in August 2001 and dividend
payments of $112 million to common shareholders.
As of September 30, 2002, Corning repurchased and retired a portion of its zero
coupon convertible debentures due November 8, 2015, with an accreted value of
$278 million in exchange for cash of $183 million in a series of open market
purchases. Corning recorded a pre-tax gain of $90 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, at $819.54 per debenture and on November 8, 2010, at $905.29 per
debenture. 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
---------------------------------------------------------------
Sept. 30, 2002 December 31, 2001 Sept. 30, 2001
-------------- ----------------- --------------
Working capital $2.0 billion $2.1 billion $2.1 billion
Working capital, excluding cash and short-term investments $442 million $(106) million $547 million
Current assets to current liabilities 2.4:1 2.1:1 2.2:1
Trade accounts receivable, net of allowances $541 million $593 million $904 million
Days sales outstanding 58 55 60
Inventories $619 million $725 million $958 million
Inventory turns 4.2 4.5 4.1
The increase in working capital, excluding cash and short-term investments,
reflects lower short-term borrowings and accounts payable and higher deferred
taxes compared to December 31, 2001. The decrease in working capital, excluding
cash and short-term investments, compared to September 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
September 30, 2001, was due to the significant decline in revenues and demand
for telecommunication products.
Financing Matters and Credit Ratings
Corning had no commercial paper borrowings as of September 30, 2002, nor does it
anticipate issuing commercial paper for the foreseeable future. Corning
maintains a $2.0 billion revolving credit facility with 18 banks, expiring on
August 17, 2005. As of September 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 September
30, 2002, and December 31, 2001, this ratio was 44% and 47%, respectively
compared with 41% at September 30, 2001. The decrease in total debt to capital
from December 31, 2001, to September 30, 2002, was due to the issuance of
mandatory convertible preferred stock and open market purchases of a portion of
the zero coupon convertible debentures and repayment of commercial paper. The
ratio increase from September 2001 to September 2002 was due to the net losses
incurred in 2002 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 future impairments of goodwill, tangible
or intangible assets or restructuring charges. These items could cause a
material increase to Corning's debt to capital ratio. Management believes there
are a range of possible outcomes and no assurance can be given that an
impairment charge will not be required. As of September 30, 2002, Corning had
not provided vendor financing to any of its customers.
Corning's credit ratings as of October 30, 2002, were as follows:
RATING AGENCY Rating Rating
Last Update Long-Term Debt Commercial Paper
- ----------------- -------------- ----------------
Standard & Poor's BB+ B
July 29, 2002
Moody's Ba2 Not Prime
July 29, 2002
Fitch BB B
July 24, 2002
Note: All three rating agencies maintain a Negative Outlook.
In July 2002, all three rating agencies announced a downgrade which is reflected
in the ratings above. Although the sub-investment grade ratings 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.
An additional downgrade could further 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, the sub-investment grade credit rating has in some instances
resulted in requirements to deposit cash with counterparties under performance
surety bond and letter of credit arrangements.
Obligations, Commitments and Contingencies
Corning's cash obligations, commercial commitments and contingencies were
relatively the same as those disclosed in Corning's Form 10-K/A filed March 7,
2002, except for a decrease of approximately $75 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 third 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 September
30, 2002, the inventory carrying value associated with this business
approximated $38 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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." This standard requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred rather than the date of an entity's commitment to an exit plan. Corning
is required to implement SFAS No. 146 on January 1, 2003. Corning has not yet
determined the impact, if any, that this standard will have 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,
- - financial condition of customers
- - changes in the mix of sales between premium and non-premium products,
- - facility expansions and new plant start-up costs,
- - adverse litigation or regulatory developments, including future or pending
tax legislation,
- - adequacy and availability of insurance per Series C Prospectus
- - 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.
Risk Factors
Set forth below and elsewhere in this Quarterly Report, and in other documents
we file with the SEC, are some of the principal risks and uncertainties that
could cause our actual business results to differ materially from any
forward-looking statements or other projections contained in this Quarterly
Report. In addition, future results could be materially affected by general
industry and market conditions, general U.S. and non-U.S. economic and political
conditions, including a global economic slowdown, fluctuation of interest rates
or currency exchange rates, terrorism or international conflicts, natural
disasters or other disruptions of expected economic conditions.
Our sales could be negatively impacted if one or more of our key customers
substantially reduce orders for our products
Our customer base is relatively concentrated with less than 10 significant
customers accounting for a high percentage (greater than 50%) of net sales in
most of our businesses. However, no individual customer accounts for more than
10% of consolidated sales.
Over recent periods, most of our major customers in the Telecommunications
Segment have reduced their purchases of our products and have expressed
uncertainty as to their future requirements. As a result, our sales have
declined and it is difficult to predict future sales accurately. The conditions
contributing to this difficulty include:
. the prolonged downturn in the telecommunications industry;
. uncertainty regarding the capital spending plans of the major
telecommunications carriers, upon which our customers and, ultimately
we, depend for sales;
. the telecommunications carriers' current limited access to the capital
required for expansion; and
. general market and economic uncertainty.
While we have responded to the depressed market by reducing excess capacity
and cutting costs, we cannot assure you that our plans will be successful in
mitigating the adverse effects of a prolonged downturn. The current downturn in
the telecommunications industry may be more severe and prolonged than expected.
If our net sales continue to decline, our ability to meet financial expectations
for future periods may be impaired.
If we do not successfully adjust our manufacturing volumes and fixed cost
structure, or achieve manufacturing yields or sufficient product reliability,
our operating results could suffer
In the current economic and industry downturn, we have responded to the
softer market by cutting costs, including the reduction of our manufacturing
volumes. In 2001, we closed seven major manufacturing facilities and downsized
our workforce by approximately 12,000 positions. We have continued to execute
our restructuring plans in 2002 and expect to close two fiber facilities and
mothball another and to close several smaller photonics, cabling and hardware
and equipment locations. We have announced plans in 2002 to reduce our workforce
by approximately 6,800 positions by early 2003. We may not be able to complete
our planned restructuring and facility consolidation activities as expected or,
even if we do so, we may not achieve all of the cost reductions that we
anticipate. We cannot assure you that our plans will be successful in mitigating
the adverse effects of a softer market, nor can we assure you that additional
adjustments will not be necessary to respond to further market changes.
The manufacturing of our products involves highly complex and precise
processes, requiring production in highly controlled and clean environments. Any
changes in our manufacturing processes or those of our suppliers could
significantly reduce our manufacturing yields and product reliability. In some
cases, existing manufacturing may be insufficient to achieve the volume or cost
targets of our customers. We will need to develop new manufacturing processes
and techniques to achieve targeted volume and cost levels. While we continue to
fund projects to improve our manufacturing techniques and processes, we may not
achieve cost levels in our manufacturing activities that will fully satisfy our
customers.
We have incurred, and may in the future incur, restructuring, inventory-related
and other charges, the amounts of which are difficult to predict accurately
The negative trends, primarily in the telecommunications industry,
beginning in 2001 such as excess manufacturing capacity, increased intensity of
competition and growing pressure in price and profits have continued to hamper
the industry in 2002. In the nine months ended September 30, 2002, we have
recorded charges totaling $619 million ($413 million after-tax and minority
interest). The charges included $257 million for restructuring charges, $286
million for impairment of assets, $60 million for the write-off of cost based
investments and $16 million for the loss on disposal of a business.
We also anticipate an additional pre-tax restructuring charge in the fourth
quarter of 2002 in the range of $550 million to $650 million. Management is
still considering additional actions that may be announced later in the fourth
quarter. It is possible that additional impairments and restructuring charges
will result from these actions or decreases in expected cash flows from assets
not abandoned.
Our ability to forecast our customers' needs for our products in the
current economic and industry environment is very limited. Our results in 2001
included significant charges for inventory write-downs, primarily in the
photonic technologies business. Write-downs in this business have continued in
2002.
Corning may record additional charges for restructuring, inventory
adjustments, or other asset impairments if the downturn is more severe or
prolonged than we currently anticipate.
If the markets for our products do not develop and expand as we anticipate,
demand for our products may decline further, which would negatively impact our
results of operations and financial performance
The markets for our products are characterized by rapidly changing
technologies, evolving industry standards and frequent new product
introductions. Our success is expected to depend, in substantial part, on the
timely and successful introduction of new products, upgrades of current products
to comply with emerging industry standards, our ability to acquire technologies
needed to remain competitive and our ability to address competing technologies
and products. In addition, the following factors related to our products and the
markets for them, if not achieved, could have an adverse impact on our results
of operations and financial performance:
. our ability to introduce leading products such as optical fiber, glass
for flat panel displays, and environmental substrate products that can
command competitive prices in the marketplace;
. our ability to maintain or achieve a favorable mix of sales between
premium and non-premium products;
. our ability to continue to develop new product lines to address our
customers' diverse needs within the several market segments in which
we participate. This requires a high level of innovation, as well as
the accurate anticipation of technological and market trends; or
. our ability to create the infrastructure required to support
anticipated growth in certain businesses.
Corning's reduced investment in research, development and engineering could
limit our ability to develop new products for the future.
We face pricing pressures in each of our leading businesses that could adversely
affect our results of operations and financial performance
We periodically face pricing pressures in each of our leading businesses as
a result of intense competition, emerging new technologies, and manufacturing
efficiencies in both the domestic and the international marketplaces. While we
will work toward reducing our costs to respond to the pricing pressures that may
continue, we may not be able to achieve proportionate reductions in costs. As a
result of overcapacity and the current economic and industry downturn in the
Telecommunications Segment, pricing pressures may increase in the foreseeable
future, particularly in our optical fiber and cable business, which has
experienced price declines of 10% to 15% in the third quarter of 2002.
We have incurred, and may in the future incur, goodwill and other intangible
asset impairment charges
Acquisitions recorded as purchases for accounting purposes have resulted,
and in the future may result, in the recognition of significant amounts of
goodwill and other purchased intangibles. The potential impairment of these
assets could reduce our net income and shareholders' equity.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142 pursuant to which goodwill will no
longer be amortized, but will be subject to impairment tests at least annually.
SFAS No. 142 was effective for us on January 1, 2002.
We completed our initial impairment review during the first quarter of 2002
and concluded that a transitional impairment charge from adoption of the
standard was not required. 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. Business conditions in the
telecommunications industry have deteriorated during the year and are depressed
such that it appears the fair value of Corning's telecommunications reporting
unit is currently lower than at the benchmark assessment date of January 2002.
As part of the annual impairment test, management is currently studying short
and long-term market indicators and alternative growth patterns. Based on the
work performed to date, it appears reasonably possible that a portion, but not
all of the company's goodwill is impaired. Management will complete the
impairment test in the fourth quarter and record any required goodwill
impairment charge. The goodwill related to the Telecommunications Segment is
$1.9 billion at September 30, 2002. Management believes there are a range of
possible outcomes and no assurance can be given that an impairment charge will
not be required. A charge would lower the company's equity and could reduce
availability under the unused $2.0 billion revolving credit facility.
We may be limited in our ability to obtain additional capital on commercially
reasonable terms
Although we believe existing cash, short-term investments and borrowing
capacity, collectively, provide adequate resources to fund ongoing operating
requirements, we may be required to seek additional financing to compete
effectively in our markets. Our public debt ratings affect our ability to raise
capital and the cost of such capital. In July 2002, Fitch downgraded our senior
unsecured long-term debt rating from BBB- to BB. In July 2002, Standard & Poor's
downgraded our senior unsecured long-term debt rating from BBB- to BB+ and
short-term debt credit rating from A-3 to B. Also, in July 2002, Moody's reduced
our senior unsecured long-term debt rating from Baa3 to Ba2 and short-term debt
credit rating from Prime-3 to Not Prime. All of the rating agencies have
maintained negative outlooks. These and any further downgrades may increase our
cost of capital borrowing costs and affect our ability to access the debt
capital markets on a consistent basis. In addition, the pricing of our common
stock may limit our ability to access the equity capital markets on terms and in
amounts that would be satisfactory to us.
We may experience difficulties as a result of our lower debt ratings
including but not limited to the following:
. Customers may seek alternative suppliers if they become concerned
about Corning's financial condition.
. We may face increasing requirements to post cash collateral for
performance bonds.
. Counter parties may not want to accept the risk in foreign exchange
hedging transactions with Corning.
We are subject under our revolving credit facility to a covenant that
requires us to maintain a ratio of total debt to capital, as defined under the
credit facility, of not greater than 0.60 to 1.00. Our total debt to capital
ratio was 0.44 at September 30, 2002. This covenant may also limit our ability
to borrow additional funds. Further declines in our Telecommunications Segment
could cause impairments of goodwill, tangible or intangible assets or
restructuring charges related to our overall business. These items could cause a
material increase in our total debt to capital ratio.
If our products or components purchased from our suppliers experience
performance issues, our business will suffer
Our business depends on our producing excellent products of consistently
high quality. To this end, our products, including components purchased from our
suppliers, are rigorously tested for quality both by us and our customers.
Nevertheless, our products are highly complex and our customers' testing
procedures are limited to evaluating our products under likely and foreseeable
failure scenarios. For various reasons (including, among others, the occurrence
of performance problems unforeseeable in testing), our products and components
purchased from our suppliers may fail to perform as expected. Performance issues
could result from faulty design or problems in manufacturing. We have
experienced such performance issues in the past and remain exposed to such
performance issues. In some cases, product redesigns or additional capital
equipment may be required to correct a defect. In addition, any significant or
systemic product failure could result in lost future sales of the affected
product and other products, as well as result in customer relations problems.
Interruptions of supplies from our key suppliers may affect our results of
operations and financial performance
Interruptions of supplies from our key suppliers could disrupt production
or impact our ability to increase production and sales. We do not have long-term
or volume purchase agreements with every supplier, and may have limited options
for alternative supply if these suppliers fail, for any reason, including their
business failure or financial difficulties, to continue the supply of
components.
We face intense competition in most of our businesses
We expect that we will face additional competition from existing
competitors and from a number of companies that may enter our markets. Because
some of the markets in which we compete have been historically characterized by
rapid growth and are characterized by rapid technology changes, smaller niche
and start-up companies may become our principal competitors in the future. We
must invest in research and development, expand our engineering, manufacturing
and marketing capabilities, and continue to improve customer service and support
in order to remain competitive. While we expect to undertake the investment and
effort in each of these areas, we are reducing our expenditure levels and cannot
assure you that we will be able to maintain or improve our competitive position.
In particular, the net losses in our Telecommunications Segment may constrain
our ability to invest as much as we would like in each of these areas. In
addition, while some of our competitors are similarly experiencing the effects
of this market turmoil, they may have greater financial, engineering,
manufacturing, marketing or other support resources.
We may experience difficulties in enforcing our intellectual property rights and
we may be subject to claims of infringement of the intellectual property rights
of others
We may encounter difficulties in protecting our intellectual property
rights or obtaining rights to additional intellectual property necessary to
permit us to continue or expand our businesses. We cannot assure you that the
patents that we hold or may obtain will provide meaningful protection against
our competitors or competitive technologies. Litigation may be necessary to
enforce our intellectual property rights, to protect our trade secrets and to
determine the validity and scope of our proprietary rights. Litigation is
inherently uncertain and the outcome is often unpredictable. Other companies
hold patents on technologies used in our industries and are aggressively seeking
to expand, enforce and license their patent portfolios.
The intellectual property rights of others could inhibit our ability to
introduce new products. We are, and may in the future be, subject to claims of
intellectual property infringement or misappropriation and we cannot assure you
as to the outcome of such claims. Litigation or claims against us could force us
to cease selling or using any of our products that incorporate the intellectual
property that is the subject of such claims, obtain a license from a third
party, or redesign or rename our products. These actions, if possible, could
result in substantial costs or loss of revenue.
Current or future litigation may harm our financial condition or results of
operations
Pending, threatened or future litigation is subject to inherent
uncertainties. Our financial condition or results of operations may be adversely
affected by unfavorable outcomes, expenses and costs exceeding amounts estimated
or insured. In particular, we have been named as a defendant in numerous
lawsuits against Pittsburgh Corning Corporation and several other defendants
involving claims alleging personal injury from exposure to asbestos. As
described in Legal Proceedings in our reports filed with the SEC, our recent
negotiations with the representatives of asbestos claimants have failed to
produce a settlement to date and it currently appears more likely than not that
we will litigate these cases. Alternatively, in the event that we reach a global
settlement through the Pittsburgh Corning Corporation 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.
We face risks related to our international operations and sales
We have customers located outside the United States, as well as significant
non-United States operations, including manufacturing and sales. As a result of
these international operations, we face a number of risks, including:
. difficulty of effectively managing our diverse global operations;
. change in regulatory requirements;
. tariffs and other trade barriers;
. political and economic instability in foreign markets; and
. fluctuations in foreign currencies which may make our products less
competitive in countries in which local currencies decline in value
relative to the dollar.
If we fail to retain and attract key personnel, our results of operations and
financial performance may suffer
Our future success will be determined in part by our ability to retain and
attract key scientific and technical personnel for our research, development and
engineering efforts. Our business also depends on the continued contributions of
our executive officers and other key management. We may also find it more
difficult to retain or attract qualified employees due to our uncertain outlook
and reductions affecting compensation, benefits, and employee equity
participation programs. While we believe that we have been successful in
retaining and attracting key personnel, we cannot assure you that we will
continue to be successful in the future.
If the financial condition of our customers declines, our credit risks could
increase
Recently, certain of our customers have filed with the courts seeking
protection under the applicable bankruptcy or reorganization laws or have been
experiencing financial difficulties. We have experienced, and in the future may
experience, losses as a result of our inability to collect our accounts
receivable, as well as the loss of such customer's ongoing business. If our
customers fail to meet their payment obligations to us, we could experience
reduced cash flows and losses in excess of amounts reserved. As of September 30,
2002, reserves for trade receivables totaled approximately $48 million.
We may not have adequate insurance coverage for claims against us
We face the risk of loss resulting from, and adverse publicity associated
with, product liability, securities, fiduciary liability, intellectual property,
contractual, warranty, fraud and other lawsuits, whether or not such claims are
valid. In addition, our product liability, fiduciary, directors and officers,
property and comprehensive general liability insurance may not be adequate to
cover such claims, insurance costs may increase substantially and we may not be
able to get adequate insurance coverage in the future at acceptable costs. A
successful claim that exceeds or is not covered by our policy limits could
require us to pay substantial sums. In addition, we may not be able to insure
against certain risks or obtain some types of insurance, such as terrorism
insurance.
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 September 30, 2002, Corning's consolidated debt portfolio contained
approximately 8% of variable rate instruments.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Corning's Chief Executive Officer and Chief Financial Officer have
evaluated the company's disclosure controls and procedures as of October
29, 2002, and they concluded that these controls and procedures are
effective.
(b) Changes in Internal Controls
There are no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to October 29,
2002.
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 September 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 for
plaintiffs past and current injuries allegedly arising from the release of
hazardous and toxic substances from a Sylvania nuclear materials processing
facility near Hicksville, New York. An amended complaint was served in September
2002, naming 205 plaintiffs and seeking damages in excess of $3 billion. 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. Plaintiffs
claim to have sustained numerous types of cancer and other medical conditions;
some plaintiffs seek recovery for alleged injuries to their decedents who died
as many as 20 years ago. A status conference originally set for September 17,
2002, was reset for October 31, 2002. It is anticipated that the filing date for
defendants' motion to dismiss will be December 2, 2002. Based upon the
information developed to date and recognizing that the outcome of litigation is
uncertain, management believes that the risk of a materially adverse verdict is
remote.
Stevens Toxins Lawsuit. In April 2002, Stevens, and eight other named
plaintiffs, initiated a proposed class action, in the Supreme Court of the State
of New York against many of the same defendants named in the Schwinger action.
At that time Corning was not named as a defendant. That action was amended and
filed in September 2002 to include Corning as a defendant and removed to the
United States District Court for the Eastern District of New York. Based upon
the information developed to date and recognizing that the outcome of litigation
is uncertain, management believes that the risk of a materially adverse verdict
is remote.
Dow Corning Bankruptcy. Corning and The Dow Chemical Company each own 50% of the
common stock of Dow Corning Corporation. 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. 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, 2002. The District Court reserved decision. It
is probable that any decision by the District Court will be subject to further
appeals. The Plan proponents agreed to settle the lien claims of the U.S.
government for $9.8 million to be paid from the Settlement Fund under the Plan.
This settlement was approved by the District Court in the third quarter of 2002.
If the Joint Plan with shareholder releases is upheld after all appeals, any
remaining personal injury claims against Corning in these matters will be
channeled to the resolution procedures under the Plan. If the Joint Plan with
shareholder releases is not upheld after all appeals, Corning would expect to
defend any remaining claims against it (and any new claims) on the same grounds
that led to a series of orders and judgments dismissing all claims against
Corning in the federal courts and in many state courts as described under the
heading Implant Tort Lawsuits immediately hereafter. Management believes that
the claims against Corning lack merit and that the breast implant litigation
against Corning will be resolved without material impact on Corning's financial
statements.
Under the terms of the Joint Plan, Dow Corning would be required to establish a
Settlement Trust and a Litigation Facility to provide a means for tort claimants
to settle or litigate their claims. Dow Corning would have the obligation to
fund the Trust and the Facility, over a period of up to 16 years, in an amount
up to approximately $3.3 billion, subject to the limitations, terms and
conditions stated in the Joint Plan. Corning and Dow Chemical have each agreed
to provide a credit facility to Dow Corning of up to $150 million ($300 million
in the aggregate), subject to the terms and conditions stated in the Joint Plan.
The Joint Plan also provides for Dow Corning to make full payment, through cash
and issuance of senior notes, to its commercial creditors. These creditors claim
approximately $810 million in principal plus an additional sum for pendency
interest, costs and fees from the petition date (May 15, 1995) through the
effective date under the Plan when payment is made. The commercial creditors
have contested the Bankruptcy Court's disallowance of their claims for
post-petition interest at default rates of interest, and have appealed to the
District Court. The District Court heard oral argument this appeal on May 2,
2002, and has not yet ruled. The amount of additional interest cost and fees
claimed by the commercial creditors is approximately $100 million pre-tax more
than Dow Corning believes it should pay. If and when it appears likely Dow
Corning will emerge 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 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. 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. On August 2, 2002, the
District Court entered an order consolidating these actions for all purposes,
designating lead plaintiffs and lead counsel, and directing that a consolidated
complaint be served within sixty days. The deadline for serving the consolidated
complaint was later extended through October 25, 2002. This order provides that
defendants shall have sixty days after service of the consolidated complaint to
answer, move or respond. The order further sets a schedule for briefing a motion
to dismiss and provides that a motion to certify the action as a class action
shall be filed after all motions to dismiss are resolved. Another lawsuit has
been filed, also in the Western District of New York, on behalf of participants
in the Company's Investment Plan for Salaried Employees, purportedly as a class
action on behalf of participants in the Plan who purchased or held Corning stock
in a Plan account. The defendants in that action responded with a motion to
dismiss the lawsuit on a variety of grounds. The plaintiffs filed opposing
papers on October 10, 2002. After defendants file reply papers, a hearing will
be scheduled for oral argument on the motion. Management is prepared to defend
these lawsuits vigorously and, recognizing that the outcome of litigation is
uncertain, believes that these will be resolved, net of applicable insurance,
without material impact on Corning's financial statements.
Pittsburgh Corning Corporation. Corning and PPG Industries, Inc. (PPG) each own
50% of the capital stock of Pittsburgh Corning Corporation (PCC). 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 as to Corning was extended through September 30, 2002,
when it expired by its terms. Under the terms of the Bankruptcy Court's Order,
Corning has 90 days from September 30, 2002 to seek removal and transfer of
pending cases in which it is named as a defendant. At the time PCC filed for
bankruptcy protection, there were approximately 12,400 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. These negotiations have
failed to produce a settlement, but discussions continue intermittently. 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 to insurance
proceeds. 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 11,400 other cases (approximately 34,000
claims) alleging injuries from asbestos. Those cases have been covered by
insurance without material impact to Corning to date. Asbestos litigation is
inherently difficult, and 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 September 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. NetOptix has denied that the coatings produced by NetOptix or its
subsidiaries caused the damage alleged in the complaint, or that it is legally
liable for any damages which Astrium may have experienced. Formal discovery
through document production and depositions has begun and will continue through
October 2002 for fact witnesses and January 2003 for experts. In April 2002, the
Court granted motions for summary judgment by NetOptix and other defendants to
dismiss the negligence claims, but permitted plaintiffs to add fraud and
negligent misrepresentation claims against all defendants and a breach of
warranty claim against NetOptix and its subsidiaries. In October 2002 the Court
again granted defendants' motions for summary judgment and dismissed the
negligent misrepresentation and breach of warranty claims. The only claims
remaining are claims by plaintiff for intentional fraud against all defendants.
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.
Optel Arbitration. On June 28, 2002, Madeco S.A. and Madeco Brasil Ltda. filed a
notice of arbitration and statement of claim against Corning International
Corporation with the American Arbitration Association in New York, New York,
alleging "breaches of its contractual duties and partnership obligations to
Madeco." Among other things, Madeco requested "no less than $20 Million to
compensate Madeco for the breach of its rights under the Put Option, plus
additional damages caused by Corning's failure to perform under the Investment
Agreement and related contracts." The arbitration panel has been convened and
mediation is a possibility, but not yet scheduled. It is anticipated that
arbitration hearings will not commence until the first quarter of 2003. Based
upon the information developed to date and recognizing that the outcome of
arbitration is uncertain, management believes that the risk of a materially
adverse verdict is remote.
Astarte/Tellium. In July of 2002, Corning filed a demand for binding arbitration
between Corning and Astarte Fiber Networks Inc.; Tellium, Inc.; AFN, LLC; and
their related parties. The arbitration concerns a contract relating to certain
patents and patent applications previously owned by Astarte and now held by AFN
and Tellium, Astarte's successor. Corning's demand includes a claim for
approximately $38 million from those parties due to material misrepresentations
and fraud, as well as a claim to have the contract cancelled for breach. AFN has
counterclaimed in the arbitration, asking the arbitrators to decide that Corning
remains obligated under the contract for future contingent payments to AFN of up
to $50 million. While the outcome of arbitration proceedings concerning complex
contracts involving intellectual property matters cannot be predicted with
certainty, based upon the information discovered to date, management believes
that Corning's claims are well founded and that the dispute will be resolved in
Corning's favor without material negative impact on Corning's financial
statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
3. The Company filed a Certificate of Amendment to its Certificate
of Incorporation with the New York State Secretary of State on
August 5, 2002 and filed a Form 8-K on August 7, 2002 containing
that full text, which is hereby incorporated by reference.
10. The Company entered into a Pledge, Assignment and Collateral
Agency Agreement with Citibank, N.A. and a Paying Agency
Agreement with Citibank, N.A. on August 6, 2002 and filed a Form
8-K on August 7, 2002 containing the full text of both
agreements, which are hereby incorporated by reference.
12. Ratio of earnings to fixed charges for the nine months ended
September 30, 2002 and 2001.
99.1 Certification of James R. Houghton pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification of James B. Flaws pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
Nine reports on Form 8-K were filed July 23, 2002, July 23, 2002, July
29, 2002, July 30, 2002*, July 30, 2002*, August 1, 2002, August 2,
2002, August 7, 2002, and August 26, 2002 during the quarter ended
September 30, 2002 reporting matters under Item 5, Other Events,
reporting a Certificate of Amendment of the Certificate of
Incorporation of Corning Incorporated (filed on August 7) and
incorporated by reference under Item 7, Financial Statements, Pro
Forma Financial Information, and Exhibits and furnishing material
under Item 9*.
*Information furnished under Item 9 of Form 8-K is not incorporated by
reference, is not deemed filed and is not subject to liability under
Section 11 of the Securities Act of 1933 or Section 18 of the
Securities Exchange Act of 1934 for such Regulation FD disclosures.
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)
November 1, 2002 /s/ JAMES B. FLAWS
- ------------------------- ---------------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
November 1, 2002 /s/ KATHERINE A. ASBECK
- ------------------------- ---------------------------------------------
Date Katherine A. Asbeck
Senior Vice President and Controller
(Principal Accounting Officer)
CERTIFICATIONS
--------------
I, James R. Houghton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Corning Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 1, 2002 /s/ JAMES R. HOUGHTON
- -------------------------- --------------------------------------------
Date James R. Houghton
Chairman and Chief Executive Officer
CERTIFICATIONS
--------------
I, James B. Flaws, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Corning Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 1, 2002 /s/ JAMES B. FLAWS
- -------------------------- ---------------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
EXHIBIT 12
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
DIVIDENDS
(In millions, except ratios)
For the nine months ended
-----------------------------
Sept. 30, Sept. 30,
2002 2001
------------ -----------
Loss before taxes on income $ (1,006) $ (4,980)
Adjustments:
Distributed income of equity investees 81 69
Amortization of capitalized interest 7 8
Fixed charges net of capitalized interest 167 130
----------- -----------
Loss before taxes and fixed charges as adjusted (751) (4,773)
=========== ===========
Fixed charges:
Interest incurred 141 145
Portion of rent expense which represents interest factor 31 22
Amortization of debt costs 5 3
----------- -----------
Total fixed charges 177 170
Capitalized interest (10) (40)
----------- -----------
Total fixed charges net of capitalized interest 167 130
=========== ===========
Preferred dividends:
Preferred dividend requirement 127
Ratio of pre-tax income to income before minority interest
and equity earnings 1.0 1.0
Pre-tax preferred dividend requirement 127
----------- -----------
Total fixed charges 177 170
----------- -----------
Fixed charges and pre-tax preferred dividend requirement 304 170
=========== ===========
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 $928 million and $4.9 billion at
September 30, 2002 and 2001, respectively and inadequate to cover fixed
charges and pre-tax dividend requirement by approximately $1.1 billion and
$4.9 billion at September 30, 2002 and 2001, respectively.
Exhibit 99.1
CORNING INCORPORATED
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Corning Incorporated (the "Company")
on Form 10-Q for the period ended September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, James
R. Houghton, Chairman and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
November 1, 2002 /s/ JAMES R. HOUGHTON
- --------------------------- ------------------------------------------
Date James R. Houghton
Chairman and Chief Executive Officer
Exhibit 99.2
CORNING INCORPORATED
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Corning Incorporated (the "Company")
on Form 10-Q for the period ended September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, James
B. Flaws, Vice Chairman and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
November 1, 2002 /s/ JAMES B. FLAWS
- -------------------------- ---------------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer