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United States
Securities and
Exchange Commission
Washington, D.C. 20549
Form 10-K
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year ended December 31, 2002
Commission file number 1-3247
Corning Incorporated
One Riverfront Plaza, Corning, NY 14831
607-974-9000
New York
(State of incorporation)
16-0393470
(I.R.S. employer identification no.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.50 par value, with New York Stock Exchange
attached Preferred Share Purchase Right SWX Swiss Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 such filing requirements for
the past 90 days. Yes X No
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Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Exchange Act Rule 12b-2). Yes X No
----- -----
As of June 30, 2002, shares held by non-affiliates of Corning Incorporated had
an aggregate market value of approximately $3.4 billion. Shares of Corning's
common stock outstanding as of February 5, 2003, were 1,198,688,205.
Documents Incorporated by Reference
Portions of the Registrant's definitive Proxy Statement dated March 3, 2003, and
filed for the Registrant's 2003 Annual Meeting of Shareholders are incorporated
into Part III, as specifically set forth in Part III.
PART I
Corning Incorporated and its consolidated subsidiaries is hereinafter sometimes
referred to as the "the Company," "the Registrant," "Corning," or "we."
This report contains forward-looking statements that involve a number of risks
and uncertainties. These statements relate to our future plans, objectives,
expectations and estimates and may contain words such as "believes," "expects,"
"anticipates," "estimates," "forecasts," or similar expressions. Our actual
results could differ materially from what is expressed or forecasted in our
forward-looking statements. Some of the factors that could contribute to these
differences include those discussed under "Forward-Looking Statements," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere in this report.
Item 1. Business
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General
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 two
reportable business segments: Telecommunications and Technologies.
Telecommunications Segment
The Telecommunications Segment produces optical fiber and cable, optical
hardware and equipment and photonic modules and components 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 makes and sells Infinicor(R) fibers for local area
networks, data centers and central offices; SMF-28(R) and SMF-28e(TM) single
mode optical fiber, providing additional transmission wavelengths in
metropolitan and access networks; LEAF(R) optical fiber for long-haul, regional
and metropolitan networks; and Vascade(R) submarine optical fibers for use in
undersea networks. Corning has two large optical fiber manufacturing facilities
in North Carolina, as well as a controlling interest in Shanghai COF Fiber
Optics Co. Ltd. in China, purchased from Lucent Technologies in September 2002.
As a result of lowered demand for optical fiber, in 2002 Corning mothballed its
optical fiber manufacturing facility in Concord, NC and transferred 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 is transferred to subsidiaries such as CCS
Holdings, Inc. (Corning Cable Systems), Corning Cable Systems Verwaltungs GmbH,
Norddeutsche Seekabelwerke GmbH & Co., KG (NSW) and Beijing CCS Optical Fiber
Cable Co., Ltd. or equity ventures such as Aberdare Fiber Optic Cables (Pty.)
Ltd. in South Africa, Advanced Cable Systems Corporation in Japan, Chengdu CCS
Optical Fiber Cable Co. in China, Leader Optic Fiber Cable Sdn Bhd in Malaysia
and PT Communication Cable Systems in Indonesia. The transferred optical fiber
is cabled prior to being sold. 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 and accessories 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. For the cable television industry, products include
coaxial connectors and associated tools. Corning has manufacturing operations
for hardware and equipment products in North Carolina and Texas, as well as
Europe, Mexico and the Caribbean. Corning Gilbert Inc. has manufacturing
operations for coaxial connectors and associated assembly tools in Arizona and
Denmark.
Corning's photonic technologies products include erbium doped fiber amplifiers
(EDFAs), Raman amplifier modules and pumps, and semiconductor optical amplifiers
for long-haul, metropolitan and access markets and dispersion compensation
devices for long-haul and metropolitan networks. These photonic technologies
products maintain and control light signals in optical fiber telecommunications
systems. These products are made primarily by Corning in New York and by Corning
Photonic Technologies Inc. and other subsidiaries in Massachusetts.
Corning's controls and connectors products include high performance oscillators
and crystals for use in various telecommunication applications. Corning
manufactures these products in Pennsylvania, Kansas, Canada, China and Germany.
The Telecommunications Segment represented approximately 52% of total Corning
sales during 2002.
Technologies Segment
The Technologies Segment manufactures specialized products with unique
properties for customer applications utilizing glass, glass ceramic and polymer
technologies. Businesses within this segment include liquid crystal display
glass for flat panel displays, environmental products, life science products,
glass panels and funnels for televisions and cathode ray products, semiconductor
materials, optical and technical products.
Corning's display technologies business manufactures glass substrates for
displays, which are used in notebook computers, flat panel desktop monitors and
other electronic products. Corning's facilities in Kentucky, Japan and Taiwan
and its Samsung Corning Precision Glass Co., Ltd. equity venture in South Korea
develop, manufacture and supply high quality glass substrates using a
proprietary fusion forming technology and know-how. These glass substrates are
sold in Japan, Korea and Taiwan to manufacturers of liquid crystal display
panels.
Corning's environmental products 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
has continued to develop more efficient emission-control catalytic converter
substrates with higher density and greater surface area for improved emissions
controls. Corning manufactures these products in New York, Virginia, China,
Germany and South Africa. Cormetech Inc., an equity venture with Mitsubishi
Heavy Industries Ltd. of Japan, manufactures ceramic environmental substrate
products at its North Carolina and Tennessee facilities 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 such products for diesel vehicles in Europe, Japan and the United
States.
Life sciences laboratory products 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 manufactures these
products in Maine, New York, England and Mexico and markets them worldwide
primarily through large distributors to government entities, pharmaceutical and
biotechnology companies, hospitals, universities and other laboratories.
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. Corning also owns a 50% interest
in Samsung Corning Corporation, a producer of glass panels and funnels for
cathode ray tubes for televisions and computer monitors, with manufacturing
facilities in Japan, Taiwan, Korea and Europe.
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 used 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 and mirror blanks for use in space and
ground-based systems. 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 include ophthalmic glass and plastic
products, technical products, such as polarizing glass, glass for high
temperature applications and machinable glass ceramic for high temperature
applications. These products are made in New York, Virginia, England and France.
Corning's Eurokera and Keraglass equity ventures with Saint Gobain Vitrage S.A.
of France manufacture smooth cooktop glass/ceramic in France and in South
Carolina.
The Technologies Segment represented approximately 48% of Corning's sales during
2002.
Corning and its subsidiaries manufacture and process products at more than 70
plants in 19 countries.
Additional discussion of Corning and its two segments is discussed in
Management's Discussion and Analysis of Financial Condition under Operating
Review and Note 22 (Operating Segments) to the Consolidated Financial
Statements.
Corporate Investments
Corning and The Dow Chemical Company each own half of Dow Corning Corporation,
an equity company in Michigan that manufactures silicones. Dow Corning is
expected to emerge from its Chapter 11 bankruptcy proceedings during 2004.
Additional discussion about this company appears in the Legal Proceedings
section.
Corning and PPG Industries Inc. each own half of Pittsburgh Corning Corporation,
an equity company in Pennsylvania that manufactures glass products for
architectural and industrial uses. Pittsburgh Corning Corporation filed for
Chapter 11 bankruptcy reorganization in April 2000. Additional discussion about
Pittsburgh Corning appears in the Legal Proceedings section. Corning also owns
half of Pittsburgh Corning Europe N.V., a Belgian corporation, that manufactures
glass products for industrial uses primarily in Europe.
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.
Telecommunications Segment
Competition within the telecommunications industry is intense among several
significant companies. Corning is a leading, or one of the leading, competitors
in the segment's principal product lines. Price and new product innovations are
significant competitive factors. The current downturn in the telecommunications
industry, particularly in Europe and North America, has changed the competitive
landscape by increasing competition based upon pricing. These competitive
conditions may persist.
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. Corning obtained the first significant
optical fiber patents and believes its large scale manufacturing experience,
fiber process, technology leadership and intellectual property assets yield cost
advantages relative to several of its competitors. The primary competing
producers of optical fiber are Furukawa OFS, Fujikura, Sumitomo, Alcatel,
Pirelli and Draka. Furukawa OFS is Corning's largest competitor. For optical
fiber cable, Corning's primary competitors are Furukawa, OFS, Pirelli, Alcatel,
Alcoa Fujikura and Sumitomo.
For hardware and equipment, significant competitors are 3M, Molex, ADC
Communications, Marconi, Avaya, PPC, Thomas and Betts, CDI, Andrews Corporation
and Rosenberger. For photonic technologies products, the largest competitor is
JDS Uniphase and other competitors include Furukawa, Sumitomo, Bookham
Technologies plc, Alcatel Optronics and TriQuint Semiconductor.
Technologies 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.
Corning is the largest worldwide producer of advanced liquid crystal display
glass substrates and that market position remained relatively stable over the
past year. Corning believes it has competitive advantages in liquid crystal
display glass substrates by investing in new technologies, offering a consistent
source of reliable supply, using its proprietary fusion manufacturing process at
facilities in Kentucky, Japan and Korea and delivering thinner, lighter weight
and larger size products. Asahi Glass, Nippon Electric Glass and NH Techno are
Corning's principal competitors in the display glass substrates business. In
addition, new entrants are seeking to expand their presence in this business.
In the worldwide automotive ceramic substrates business, Corning has a leading
market position that has remained relatively stable over the past year. Corning
believes its competitive advantage in automotive ceramic substrates for
catalytic converters is based upon global presence, customer service,
engineering design services and product innovation. Corning's environmental
technologies business faces its principal competition from NGK, Denso and
Emitec.
Corning is a leading supplier of glass and plastic science laboratory products,
with a growing glass market presence in North America and a relatively stable
laboratory plastic market presence during the past year. Corning seeks to
maintain competitive advantages relative to its competitors by emphasizing
product quality, product availability, supply chain efficiency, a wide product
line and superior product attributes. For laboratory products, Schott Glaswerke,
Kavalier, Kimble and Becton Dickinson & Co. are the principal worldwide
competitors.
Corning Asahi Video Products Company is the second largest producer of
conventional television glass in North America. Its market position has declined
as the market shifted from conventional cathode ray tubes to flat panel cathode
ray tubes and other technologies, and as additional competition has emerged from
tube suppliers based in China. Samsung Corning Corporation is the third largest
worldwide producer of cathode ray tube glass for conventional televisions. Its
relative competitive position has remained stable over the past year. Samsung
Corning Corporation and Corning Asahi Video Products Company seek to maintain
their competitive advantage through customer support, logistics expertise and a
lower cost manufacturing structure. For conventional television glass, Nippon
Electric Glass, Techneglas, as well as various Asian manufacturers are the
competitors.
Corning is a leading supplier of materials for lithography optics in the
semiconductor industry and that market position remained relatively stable
during the past year. Corning seeks to compete by providing superior optical
quality, and a local Corning presence supporting its customers. For Corning's
materials for semiconductor stepper lenses and ophthalmic products, Schott
Glaswerke is the main competitor.
Corning strives to maintain its position through technology and product
innovation. For the future, Corning believes its 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.
Raw Materials
Corning's production of specialty glasses and related materials requires
significant quantities of energy and batch materials.
Although energy shortages have not been a problem recently, Corning has achieved
flexibility through important engineering changes to take advantage of the
lowest-cost energy source in most significant processes. Specifically, Corning's
principal manufacturing processes can now be operated with natural gas, propane,
oil or electricity, or a combination of these energy sources.
As to resources (ores, minerals, and processed chemicals) required in
manufacturing operations, availability appears to be adequate. Corning's
suppliers from time to time may experience capacity limitations in their own
operations, or may eliminate certain product lines; nevertheless, Corning
believes it has adequate programs to ensure a reliable supply of batch chemicals
and raw materials. For many products, Corning has alternative glass compositions
that would allow operations to continue without interruption in the event of
specific materials shortages.
Certain key optical components used in the manufacturing of products within
Corning's Telecommunications Segment are currently available only from a limited
number of sources. Any future difficulty in obtaining sufficient and timely
delivery of components could result in delays or reductions in product
shipments, or reduce Corning's gross margins.
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. In 2002, Corning
was granted over 350 patents in the United States and over 600 patents in
countries outside the United States.
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 2002, Corning and its subsidiaries owned over 5,000
patents in various countries of which over 1,900 were United States patents.
Between 2003 and 2005, approximately 5% of these patents will expire, while at
the same time Corning intends to seek patents protecting its newer innovations.
Worldwide, Corning has over 5,000 patent applications in process, with over 750
in process in the U.S. As a result, Corning believes that its patent portfolio
will continue to provide a competitive advantage in protecting Corning's
innovation, although Corning's competitors in each of its businesses are
actively seeking patent protection as well.
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. While particular U.S. patents related to
methods of making one type of optical fiber preform and one type of low loss
optical fiber will expire between 2003 and 2005, there is no group of important
Telecommunications Segment patents set to expire between 2003 and 2005.
The Technologies Segment had over 1,400 patents in various countries of which
over 740 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 glass compositions and
methods for the use and manufacture of flat panel glass for display
applications; (iii) 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; (iv) 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/grin lenses; and (v) 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.
While a particular U.S. patent related to the process of mixing and extruding
certain ceramic materials will expire in 2004, there is no group of important
Technologies Segment patents set to expire between 2003 and 2005.
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, Eagle 2000, Eagle APT, HPFS, LEAF, Pyrex, SMF-28, Steuben and Vycor.
Protection of the Environment
Corning has a program to ensure that its facilities are in compliance with
state, federal and foreign pollution-control regulations. This program resulted
in capital and operating expenditures during the past several years. In order to
maintain compliance with such regulations, capital expenditures for pollution
control in continuing operations were approximately $6 million in 2002 and are
estimated to be $11 million in 2003.
Corning's 2002 operating results from continuing operations were charged with
approximately $33 million for depreciation, maintenance, waste disposal and
other operating expenses associated with pollution control. Corning believes
that its compliance program will not place it at a competitive disadvantage.
Risk factors
Set forth below and elsewhere in this Annual 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 Annual 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, political unrest or international conflicts, natural
disasters or other disruptions of expected economic conditions. These risk
factors should be considered in addition to our cautionary comments concerning
forward-looking statements in this Report, including statements related to
markets for our products and trends in our business that involve a number of
risks and uncertainties. Our separate statement labeled Forward-Looking
Statements should be considered in addition to the statements below.
Our sales could be negatively impacted if one or more of our key customers
substantially reduce orders for our products
Our customer base is relatively concentrated with 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.
In our Technologies Segment, several of our businesses also have a
concentrated customer base. These businesses include Corning's display
technologies, environmental products, and semiconductor materials. If we lose a
significant customer in any of these businesses, our sales could be negatively
impacted. In the conventional video components business, one major customer has
already exited this market and demand from another key customer is uncertain. As
discussed in Item 7, under Impairment of Long-Lived Assets Other Than Goodwill
and Note 6 to the Consolidated Financial Statements, the loss of sales may
require us to record additional impairment charges or exit this business.
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 economic and industry downturn for our Telecommunications Segment,
we have responded to the softer market by cutting costs, including the reduction
of our manufacturing volumes. We have continued to execute our restructuring
plans in 2002 and into 2003. We have closed two fiber facilities and mothballed
another and closed several factories that made photonics, cabling or hardware
and equipment. We announced plans in 2002 to reduce our workforce by
approximately 7,100 positions by early 2003. Although we expect to complete our
planned restructuring and facility consolidation activities, 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 and charges 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 and other charges,
the amounts of which are difficult to predict accurately
The telecommunications industry was severely hampered in 2002 by excess
manufacturing capacity, increased intensity of competition and growing pressure
in price and profits. These negative trends are expected to continue in 2003. In
2002, we recorded charges for restructuring, impairment of assets and the
write-off of cost based investments. Management is considering additional
actions and strategic options for its photonic technologies business. It is
possible that additional impairments, restructuring charges and inventory
write-downs will result from these actions.
Our ability to forecast our customers' needs for our products in the
current economic and industry environment is limited. Our results in 2002
included significant charges for impairment of long-lived assets, primarily in
the conventional television glass and photonic technologies businesses. If
adverse trends continue in these businesses, it is possible that additional
charges may be taken.
Corning may record additional charges for restructuring or other asset
impairments if additional actions become necessary to respond to align costs to
a reduced level of demand.
In the event we incur continued operating losses, we may be unable to
recognize future deferred tax assets and may be required to make an assessment
of our ability to realize the deferred tax assets already recorded.
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, or over-capacity.
While we will work toward reducing our costs to respond to the pricing pressures
that may continue, we may not be able to achieve proportionate reductions in
costs. As a result of overcapacity and the current economic and industry
downturn in the Telecommunications Segment, pricing pressures increased in 2002,
particularly in our optical fiber and cable business. Pricing pressures are
expected to continue in 2003. Pricing pressure has also increased in our display
glass business as the manufacturers of desktop displays strive to reduce their
costs.
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.
Management completed the impairment test in the fourth quarter of 2002 and
recorded required goodwill impairment charges totaling $400 million for the
Telecommunications Segment. While we believe the estimates and judgments about
future cash flows in the Telecommunications Segment are reasonable, no assurance
can be given that the businesses in this segment will stabilize and recover as
projected. We cannot provide assurance that future impairment charges will not
be required if the telecommunications industry does not recover as projected by
management in its expected cash flow estimates.
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; 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; and 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 borrowing costs and affect our
ability to access the debt capital markets. In addition, the pricing of our
common stock may limit our ability to access the equity capital markets without
a significant dilution to current shareholders.
As a result of our lower debt ratings, we may face difficulties in our
business. For example, we may face increasing requirements to post cash
collateral for performance bonds and some customers may seek alternative
suppliers.
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 0.47 at December 31, 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. Additional impairments or
charges could materially increase our total debt to capital ratio which may
reduce the amounts we are able to borrow under the revolving credit facility.
If our products or components purchased from our suppliers experience
performance issues, our business will suffer
Our business depends on the production of excellent products of
consistently high quality. To this end, our products, including components
purchased from our suppliers, are tested for quality both by us and our
customers. Nevertheless, our products are highly complex and our customers'
testing procedures are limited to evaluating our products under likely and
foreseeable failure scenarios. For various reasons (including, among others, the
occurrence of performance problems unforeseeable in testing), our products and
components purchased from our suppliers may fail to perform as expected.
Performance issues could result from faulty design or problems in manufacturing
or testing. We have experienced such performance issues in the past and remain
exposed to such performance issues. In some cases, product redesigns or
additional capital equipment may be required to correct a defect. In addition,
any significant or systemic product failure could result in customer relations
problems and harm the future sales of our products.
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
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 $125 million to $175 million and will depend upon the timing of
contributions and relative participation, if any, 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. We have large
manufacturing operations in the Asian-Pacific region, including equity
investments in companies operating in South Korea, and several significant
customers are located in this region. As a result of these and other
international operations, we face a number of risks, including:
. 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
In 2002, certain of our customers experienced financial difficulties and
several filed with the courts seeking protection under bankruptcy or
reorganization laws. 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 December 31, 2002, reserves for
trade receivables totaled approximately $59 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 or may not be available to the extent we expect. Our insurance
costs have increased substantially and may increase further. We may not be able
to get adequate insurance coverage in the future at acceptable costs. A
successful claim that exceeds or is not covered by our policy limits could
require us to pay substantial sums. Some of the carriers in our historic excess
insurance program are not rated, or may have lower ratings, and may not be able
to respond if we should have claims reaching into excess layers. In addition, we
may not be able to insure against certain risks or obtain some types of
insurance, such as terrorism insurance.
Other
Additional information in response to Item I is found in Note 22 (Operating
Segments) to the Consolidated Financial Statements and Item 6. Selected
Financial Data.
Internet Access
Copies of Corning's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
available free of charge through Corning's website (www.corning.com) as soon as
reasonably practicable after Corning electronically files the material with, or
furnishes it to, the Securities and Exchange Commission.
Item 2. Properties
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Corning operates more than 70 manufacturing plants and processing facilities, of
which approximately half are located in the United States. Corning owns
substantially all of its executive and corporate buildings, which are located in
Corning, NY. Corning also owns substantially all of its manufacturing and
research and development facilities and more than half of its sales and
administrative facilities.
During the last five years, Corning has invested $5.2 billion in property,
construction, expansion, and modernization for continuing operations. Of the
$316 million spent in 2002, $83 million was spent on facilities outside the
United States. Due to the downturn in the telecommunications industry many of
the facilities and expansions were not completed, have been abandoned or were
written-off. See Note 5 to the Consolidated Financial Statements.
Manufacturing, sales and administrative, and research and development facilities
at consolidated locations have an aggregate floor space of approximately 20
million square feet. Distribution of this total area is:
- --------------------------------------------------------------------------------
(million square feet) Total Domestic Foreign
- --------------------------------------------------------------------------------
Manufacturing 15 9 6
Sales and administrative 3 1 2
Research and development 2 2
- --------------------------------------------------------------------------------
20 12 8
- --------------------------------------------------------------------------------
Some facilities manufacture products included in more than one operating
segment. Total assets and capital expenditures by operating segment are included
in Note 22 (Operating Segments) to the Consolidated Financial Statements.
Information concerning lease commitments is included in Note 16 (Commitments,
Contingencies, Guarantees and Hedging Activities) to the Consolidated Financial
Statements.
During 2002, Corning continued the restructuring program that closed several
manufacturing facilities and consolidated certain smaller facilities. In the
opinion of management, Corning's facilities are now suitable and adequate for
production and distribution of the Company's products based upon the level of
demand we anticipate in 2003. At December 31, 2002, and throughout 2003, Corning
expects to have excess capacity and will not utilize a portion of space in the
facilities listed above. The largest unused portion is our optical fiber
manufacturing facility in Concord, NC which has been mothballed until fiber
demand rebounds. 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.
Item 3. Legal Proceedings
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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 $22 million for its estimated
liability for environmental cleanup and litigation at December 31, 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 and Stevens Toxins Lawsuits. In April 2002, Corning was named as a
defendant in two actions, Schwinger and Stevens, filed in the United States
District Court for the Eastern District of New York, which asserted various
personal injury and property damage claims against a number of corporate
defendants. These claims allegedly arise from the release of toxic substances
from a Sylvania nuclear materials processing facility near Hicksville, New York.
Amended complaints naming 205 plaintiffs and seeking damages in excess of $3
billion were served in September 2002. The sole basis of liability against
Corning was plaintiffs' claim that Corning was the successor to Sylvania-Corning
Nuclear Corporation, a Delaware corporation formed in 1957 and dissolved in
1960. Management intends to vigorously contest all claims against Corning for
the reason that Corning is not the successor to Sylvania-Corning. Management
will also defend on the grounds that almost all of the wrongful death claims and
personal injury claims are time-barred. At a status conference in December, the
Court decided to "administratively close" the Schwinger and Stevens cases and
ordered plaintiffs' counsel to bring new amended complaints with "bellwether"
plaintiffs. In these actions, known as Schwinger II and Astuto, the plaintiffs
have not named Corning as a defendant. Although it appears that plaintiffs may
proceed only against the other corporate defendants, the original Schwinger and
Stevens cases remain pending and no order has been entered dismissing Corning.
Based upon the information developed to date, and recognizing that the outcome
of litigation is uncertain, management believes that the 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, which has been in reorganization
proceedings under Chapter 11 of the United States Bankruptcy Code since May,
1995. Dow Corning filed for bankruptcy protection to address pending and claimed
liabilities arising from breast-implant product lawsuits. On November 8, 1998,
Dow Corning and the Tort Claimants Committee jointly filed a revised Plan of
Reorganization (Joint Plan) which provided for the settlement or other
resolution of implant claims. The Joint Plan included releases for third parties
(including Corning and Dow Chemical as shareholders) in exchange for
contributions to the Joint Plan. By an order dated November 30, 1999, the
Bankruptcy Court confirmed the Joint Plan, but with certain limitations
concerning the third party releases as reflected in an opinion issued on
December 21, 1999. On November 13, 2000, the U.S. District Court for the Eastern
District of Michigan reversed the Bankruptcy Court's order with respect to these
limitations on the third-party releases and confirmed the Joint Plan. Certain
foreign claimants, the U.S. government, and certain other tort claimants
appealed from the District Court's order. 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. 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. On December 11,
2002, the District Court entered further findings and conclusions supporting the
non-debtor releases. Certain tort claimants have filed a notice of appeal to the
U.S. Court of Appeals for the Sixth Circuit from the District Court's order.
Management expects the appellate process may take another 12 to 16 months. 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 Joint 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 arguments on this appeal on May 2,
2002, and has not ruled. The amount of additional interest, costs and fees
claimed by the commercial creditors is approximately $100 million pre-tax more
than Dow Corning believes it should pay.
In 1995, Corning fully reserved its investment in Dow Corning upon its filing
for bankruptcy and has not recognized equity earnings since the second quarter
of 1995. Corning has determined that this decline in the value of its investment
in Dow Corning is other than temporary. Management has assessed the December 11,
2002, findings by Judge Hood and concluded that emergence of Dow Corning
Corporation from bankruptcy protection is probable. Management has also
concluded that it has adequately provided for the other than temporary decline
associated with the bankruptcy. With the exception of the remote possibility of
a future bankruptcy related charge, Corning considers the difference between the
carrying value of its investment in Dow Corning and its 50 percent share of Dow
Corning's equity to be permanent. This difference is $270 million at December
31, 2002.
Corning will resume recognition of equity earnings from Dow Corning in the first
quarter of 2003. Corning does not expect to receive dividends from Dow Corning
in 2003.
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 in lawsuits alleging violations of the U.S.
securities laws in connection with Corning's November 2000 offering of 30
million shares of common stock and $2.7 billion zero coupon convertible
debentures, due November 2015. In addition, the Company and the same three
officers and directors were named in lawsuits alleging selective disclosures and
non-disclosures that allegedly inflated the price of Corning's Common Stock in
the period from September 2000 through July 9, 2001. The plaintiffs in these
actions seek to represent classes of purchasers of Corning's stock in all or
part of the period indicated. These lawsuits are pending in the United States
District Court for the Western District of New York. 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 consolidated amended complaint was
served at the end of October, 2002. The defendants have until February 10, 2003
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. On
December 12, 2002, the Court entered judgment dismissing the claims as to each
of the defendants. On December 19, 2002, plaintiffs filed a motion to open the
judgment and for leave to file an amended complaint. This motion will be
scheduled for a hearing in March, 2003. 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, and
later for a period from December 23, 2002 through January 23, 2003, when it
expired by its terms. Under the terms of the Bankruptcy Court's Order, Corning
has 90 days from the expiration of the Injunction Period 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 and past trends
may not be indicators of future 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 December 31, 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 $125 million to $175 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 was completed for fact witnesses and
will continue through 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.
In November 2002, American Motorists Insurance Company and Lumbermens Mutual
Casualty Company (collectively "AIMCO") filed a declaratory judgment action
against Corning, as well as Corning NetOptix, Inc., OFC Corporation and Optical
Filter Corporation. In the complaint, AIMCO seeks a ruling that its duty to
defend the insureds in the underlying Astrium action ceased with the dismissal
of the negligence claims. AIMCO also seeks reimbursement of approximately $4
million dollars spent for defense costs through November 2002. Corning believes
that AIMCO remains responsible for the continued representation of all insureds
and for any amount spent on the defense of the insureds to date. Answers were
filed in January 2003 on behalf of the defendants other than Corning. Corning
has moved to dismiss all claims filed against it as it was not a party to the
underlying Astrium action. Based upon the information developed to date and
recognizing that the outcome of litigation is uncertain, management believes
that there are strong defenses to the reimbursement claim for $4 million.
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 ("CIC") with the American Arbitration Association in New York, New
York, alleging "breaches of its contractual duties and partnership obligations
to Madeco." Madeco asserts that it has the right, under a "Put Option," to sell
shares of another company to CIC for approximately $18 million. 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 the arbitration hearings
are scheduled for late March 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 canceled 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. Management expects that the disputes in
arbitration will be resolved without material negative impact on Corning's
financial statements.
Furukawa Electric Company. On February 3, 2003, The Furukawa Electric Company
filed suit in the Tokyo District Court in Japan against CCS International
Corporation alleging infringement of Furukawa's Japanese Patent No. 2,023,966
which relates to separable fiber ribbon units used in optical cable. Furukawa's
complaint requests slightly over (Y)6 billion in damages and an injunction
against further sales in Japan of these fiber ribbon units. CCS intends to deny
the allegation of infringement and will defend vigorously against this lawsuit.
Because it only recently received the legal complaint, CCS is still
investigating the complaint and preparing its answer, which may assert
additional defenses. While recognizing that litigation is inherently uncertain,
based upon the information developed to date, management believes that the
claims against CCS will not have material impact on the Company's financial
statements.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
(a) Market Information
Corning Incorporated common stock is listed on the New York Stock Exchange and
the Zurich Stock Exchange. In addition, it is traded on the Boston, Midwest,
Pacific and Philadelphia stock exchanges. Common stock options are traded on the
Chicago Board Options Exchange. The abbreviated ticker symbol for Corning
Incorporated is "GLW."
The following table sets forth the high and low sales price of Corning's common
stock as reported on the Composite Tape and the quarterly dividends declared for
the past two years.
- -------------------------------------------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------------------------------------
2002
- -------------------------------------------------------------------------------------------------------------
Price range
High $ 10.70 $ 7.78 $ 4.12 $ 4.99
Low $ 6.25 $ 3.15 $ 1.46 $ 1.10
- -------------------------------------------------------------------------------------------------------------
2001
- -------------------------------------------------------------------------------------------------------------
Common dividend declared $ 0.06 $ 0.06 $ 0.12
Price range
High $ 70.25 $ 26.70 $ 16.82 $ 10.30
Low $ 19.98 $ 13.00 $ 8.35 $ 7.01
- -------------------------------------------------------------------------------------------------------------
(b) Holders
As of December 31, 2002, the approximate number of record holders of common
stock was 22,940.
(c) Dividends
On July 9, 2001, Corning announced the discontinuation of the payments of
dividends on its common stock. Dividends paid to common shareholders in 2001
totaled $112 million.
(d) Securities Authorized for Issuance under Equity Compensation Plans
The section entitled "Equity Compensation Plan Information" in our Definitive
Proxy Statement for our 2003 annual meeting of shareholders to be held on April
24, 2003, is incorporated by reference in this Annual Report on Form 10-K.
Item 6. Selected Financial Data (Unaudited)
- --------------------------------------------
(In millions, except per share amounts and number of employees)
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Results of Operations
Net sales $ 3,164 $ 6,047 $ 6,920 $ 4,586 $ 3,687
Research, development and engineering expenses $ 483 $ 622 $ 531 $ 372 $ 301
Equity in earnings of associated companies, net of
impairments $ 116 $ 148 $ 149 $ 112 $ 97
(Loss) income from continuing operations $ (1,780) $ (5,532) $ 363 $ 482 $ 333
Income from discontinued operations,
net of income taxes 478 34 59 34 88
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (1,302) $ (5,498) $ 422 $ 516 $ 421
- ------------------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per common share (1)
Continuing operations $ (1.85) $ (5.93) $ 0.42 $ 0.63 $ 0.45
Discontinued operations 0.46 0.04 0.07 0.04 0.12
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) earnings per common share $ (1.39) $ (5.89) $ 0.49 $ 0.67 $ 0.57
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted (loss) earnings per common share (1)
Continuing operations $ (1.85) $ (5.93) $ 0.41 $ 0.61 $ 0.44
Discontinued operations 0.46 0.04 0.07 0.05 0.12
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) earnings per common share $ (1.39) $ (5.89) $ 0.48 $ 0.66 $ 0.56
- ------------------------------------------------------------------------------------------------------------------------------------
Common dividends declared $ 0.12 $ 0.24 $ 0.24 $ 0.24
Shares used in computing per share amounts: (1)
Basic earnings per common share 1,030 933 858 765 733
Diluted earnings per common share 1,030 933 879 795 778
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Position
Working capital $ 2,145 $ 2,113 $ 2,685 $ 430 $ 348
Total assets $ 11,548 $ 12,793 $ 17,526 $ 6,526 $ 5,464
Long-term debt $ 3,963 $ 4,463 $ 3,966 $ 1,490 $ 1,218
Shareholders' equity $ 4,691 $ 5,414 $ 10,633 $ 2,463 $ 1,707
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Data for SFAS No. 142
Adjusted net (loss) income excluding
amortization of goodwill $ (1,302) $ (5,153) $ 625 $ 534 $ 434
Basic (loss) earnings per common share (1)
Continuing operations $ (1.85) $ (5.56) $ 0.66 $ 0.65 $ 0.47
Discontinued operations 0.46 0.04 0.07 0.05 0.12
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) earnings per common share $ (1.39) $ (5.52) $ 0.73 $ 0.70 $ 0.59
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted (loss) earnings per common share (1)
Continuing operations $ (1.85) $ (5.56) $ 0.64 $ 0.64 $ 0.46
Discontinued operations 0.46 0.04 0.07 0.04 0.11
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) earnings per common share $ (1.39) $ (5.52) $ 0.71 $ 0.68 $ 0.57
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Data
Capital expenditures $ 357 $ 1,741 $ 1,485 $ 748 $ 723
Depreciation and amortization $ 661 $ 1,060 $ 747 $ 391 $ 308
Number of employees (2) 23,200 30,300 40,400 20,400 18,200
- ------------------------------------------------------------------------------------------------------------------------------------
Reference should be made to the notes to the Consolidated Financial Statements
and Management's Discussion and Analysis of Financial Condition and Results of
Operations.
(1) Adjusted to reflect the three-for-one stock split of Corning common stock,
in the form of a 200% stock dividend, paid on October 3, 2000.
(2) Amounts do not include employees of discontinued operations.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The financial data related to the precision lens business which was sold in the
fourth quarter of 2002 is reported as discontinued operations for all periods
presented. See Note 2 to the Consolidated Financial Statements and Results of
Discontinued Operations below.
Overview
During 2002 Corning continued the restructuring efforts that began in the second
quarter of 2001. The telecommunications industry continued to decline over the
course of the year as the trends exhibited in 2001 such as softness in demand,
excess capacity, increased intensity of competition and growing pressure on
price and profits have persisted. Major carriers have reduced 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. The significant lack of capital
spending by these carriers resulted in drastically reduced sales volumes for
Corning in 2002. As a result, Corning continued to see revenues decline in its
Telecommunications Segment and thus incurred significant losses again in 2002.
These current business conditions caused Corning to revise future expectations
for its Telecommunications Segment which resulted in the recognition of the
following fourth quarter charges in 2002:
.. a pre-tax charge of $400 million ($294 million after-tax) to impair a
portion of the goodwill in its Telecommunications Segment, and
.. a pre-tax charge of $269 million ($195 million after-tax) to impair
tangible and intangible assets in its photonic technologies business.
In addition, Corning recorded the following fourth quarter charges in 2002:
.. a pre-tax charge of $140 million ($44 million after-tax and minority
interest) to impair tangible assets in its conventional video components
business due to the maturation of the conventional television market in
North America, and
.. a pre-tax charge of $652 million ($516 million after-tax) for restructuring
actions, primarily in the Telecommunications Segment that resulted in
recording a total of $1.3 billion of restructuring and impairment charges
for the full year.
Corning took the following actions to compensate for a decrease in cash from
operations and preserve liquidity:
.. in December 2002, Corning completed the sale of its precision lens business
for approximately $850 million and recorded a gain of $652 million ($415
million after-tax),
.. in July 2002, Corning issued 5.75 million shares of 7% Series C mandatory
convertible preferred stock which generated net proceeds of $440 million
and declared a one-time dividend of $117 million on the offering, and
.. from time to time throughout the year, Corning retired zero coupon
convertible debentures with an accreted value of $493 million for cash of
$308 million and recorded total gains of $176 million ($108 million
after-tax). Corning also spent a total of $490 million to repay its
commercial paper borrowings and a portion of other long-term debt.
RESULTS OF CONTINUING OPERATIONS
Selected highlights from Corning's continuing operations were as follows (in
millions, except per share amounts and percentages):
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 3,164 $ 6,047 $ 6,920
Gross margin $ 602 $ 1,820 $ 2,911
(gross margin %) 19% 30% 42%
Selling, general and administrative expenses $ 716 $ 1,090 $ 1,041
(as a % of revenues) 23% 18% 15%
Research, development and engineering expenses $ 483 $ 622 $ 531
(as a % of revenues) 15% 10% 8%
Amortization of goodwill $ 363 $ 216
(as a % of revenues) 6% 3%
Operating (loss) income $(2,720) $(6,048) $ 631
(as a % of revenues) (86)% (100)% 9%
(Loss) income from continuing operations $(1,780) $(5,532) $ 363
(as a % of revenues) (56)% (91)% 5%
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales
Consolidated net sales for 2002 were $3.2 billion, a decrease of 48%, or $2.9
billion, from 2001 sales of $6.1 billion. The sales decline was most pronounced
in the Telecommunications Segment where significantly lower demand and price
declines for Corning's optical fiber and cable and photonic technologies
products drove a sales decline in that segment of 63%, or $2.8 billion year to
year. Sales in the Technologies Segment for 2002 decreased 4%, or $55 million,
compared to 2001. Consolidated net sales for 2001 decreased 13%, or $873 million
from 2000 net sales of $6.9 billion. Excluding the impact of acquisitions,
Corning's consolidated sales in 2001 decreased 17%, compared to 2000. Sales
declines for 2001 occurred in both operating segments, but were most pronounced
in the Telecommunications Segment where sales fell 14%.
Gross margin
As a percentage of net sales, gross margin decreased from 30% to 19% in 2002.
Gross margin continued to be impacted by lower sales volumes in the
Telecommunications Segment where the lower volumes were insufficient to cover
the fixed manufacturing costs. Downward pricing pressure also continued to
negatively impact gross margins, primarily in the optical fiber and cable
business. These negative trends were offset by significant fixed cost reductions
as manufacturing capacity was shut down. Gross margin in the Technologies
Segment decreased approximately 2 points from 2001. In 2001, gross margin
decreased to 30% from 42% in 2000. The decrease was primarily due to the loss of
sales volume in premium fiber and photonics products and a total of $333 million
of charges for the write-down of inventory in the photonic technologies business
over the second and fourth quarters of 2001.
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses decreased 34% to $716
million in 2002 while SG&A increased 5 points as a percentage of net sales to
23% over 2001. The decrease in SG&A for the year reflected the cost savings
which resulted from the restructuring actions which began in 2001, while the
increase as a percentage of net sales indicated the decline in revenues
continued to outpace the cost benefit of restructuring actions. Management
expects SG&A as a percentage of sales to decline in 2003 as a result of 2002
restructuring actions. SG&A increased 5% in 2001 over 2000 to $1,090 million,
while SG&A as a percentage of net sales also increased 3 points over 2000. The
increase was primarily due to a $90 million charge related to the release of
restrictions on shares of Corning common stock held by employees partially
offset by the benefits of cost reduction activities. The Compensation Committee
removed the restrictions on approximately 4.8 million shares, primarily because
they were no longer effective as a retention tool due to the sharp reduction in
share price from their grant date.
Research, development and engineering
Research, development and engineering expenses (RD&E) totaled $483 million for
2002, which represented a decline of 22%, compared to 2001. As a percentage of
net sales, RD&E increased 5 points from 2001. The decrease in expense for the
year reflected the impact of the restructuring actions, while the increase as a
percentage of net sales was caused by the decline in revenues. Management
expects to continue to invest in RD&E in 2003, but expects RD&E to decline to
10% of sales. In 2001, RD&E increased 17% to $622 million from 2000, while RD&E
as a percentage of net sales increased 2 points over 2000. The increase as a
percentage of sales was due to higher spending and lower revenues in 2001,
compared to 2000.
Amortization of Goodwill
Effective January 1, 2002, Corning adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which eliminated
the amortization of goodwill. The new standard is discussed further under New
Accounting Standards and Note 1 to the Consolidated Financial Statements.
Amortization of goodwill totaled $363 million ($344 million after-tax) in 2001,
compared to $216 million ($202 million after-tax) in 2000. Amortization of
goodwill increased in 2001 as it included charges for the entire year related to
transactions completed late in 2000. The amortization of goodwill was reduced by
the impairment of goodwill charge taken in the second quarter of 2001.
Operating (loss) income
Corning incurred a significant operating loss of $2.7 billion in 2002. The loss
was primarily due to restructuring charges and goodwill and asset impairments
totaling $2.1 billion. Further discussion of these charges begins under
Restructuring, Impairment and Other Charges. The 2001 operating loss of $6.0
billion is 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. Corning's results for
2001 were also impacted by charges for restructuring actions of $953 million,
which included charges for headcount reductions, exit costs and impairment of
plant and equipment, an operating charge of $333 million to write-down excess
and obsolete inventory, a $90 million charge related to the release of
restrictions on shares of Corning common stock and a $28 million charge to
write-down an investment in intellectual property.
Corning's 2000 results included purchased in-process research and development
(IPRD) charges of $416 million and other acquisition-related charges of $47
million.
Gain on Repurchases and Retirement of Debt
Corning repurchased and retired zero-coupon convertible debentures with an
accreted value of $493 million in exchange for cash of $308 million resulting in
gains of $176 million ($108 million after-tax) on these transactions for the
year ended December 31, 2002. See Liquidity and Capital Resources.
Income taxes
Corning's (benefit) provision for income taxes and the related effective
(benefit) income tax rates for continuing operations were as follows (in
millions):
- --------------------------------------------------------------------------------
For the years ended December 31,
-----------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
(Benefit) provision for income taxes $ (726) $ (468) $ 383
Effective (benefit) income tax rate (26.7)% (7.6)% 61.7%
- --------------------------------------------------------------------------------
The effective benefit rate in 2002 was impacted by restructuring, impairment and
other charges and the gain on repurchases of debt. The effective benefit rate
without consideration of these items was 30% for 2002. The effective income tax
(benefit) rate for the year is lower than the U.S. statutory income tax rate of
35% due to the impact of nondeductible expenses and losses.
The effective income tax (benefit) rate for 2001 was much lower than the U.S.
statutory income tax rate, primarily due to non-tax deductible amortization of
acquired intangibles and goodwill, which partially offset the U.S. statutory
income tax (benefit) rate. The effective income tax rate for 2000 was much
higher than the U.S. statutory income tax rate, primarily due to non-tax
deductible amortization of acquired intangibles and goodwill, in addition to the
write-offs of non-tax deductible IPRD. Note 9 to the Consolidated Financial
Statements reconciles the statutory tax rate to the effective tax rate.
Equity earnings
Equity earnings in 2002 were $116 million and declined 22% from 2001, primarily
due to the impairment of an equity investment in the second quarter of 2002 for
$14 million and a $20 million reduction in equity earnings in the fourth
quarter, primarily due to restructuring and impairment charges recorded by
Samsung Corning Micro Optics. Excluding these items, equity earnings
approximated those in 2001. As a percentage of net sales, equity earnings
increased 2 points over 2001, primarily due to the decline in sales. Equity
earnings in 2001 were $148 million and relatively flat, compared to 2000. As a
percentage of net sales, equity earnings were also relatively flat, compared to
2000.
In the first quarter of 2000, Corning discontinued recognition of equity
earnings from Pittsburgh Corning Corporation (PCC) and recorded a charge to
impair its investment for $36 million due to PCC's decision to file for
bankruptcy protection and reorganization under Chapter 11 for asbestos
litigation. See Legal Proceedings and Note 10 to the Consolidated Financial
Statements for further detail.
(Loss) income from continuing operations
As a result of the above, the (loss) income from continuing operations and per
share data were as follows (in millions, except per share amounts):
- --------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
(Loss) income from continuing operations $ (1,780) $ (5,532) $ 363
Basic (loss) earnings per common share from
continuing operations $ (1.85) $ (5.93) $ 0.42
Diluted (loss) earnings per common share from
continuing operations $ (1.85) $ (5.93) $ 0.41
Shares used in computing per share amounts:
Basic 1,030 933 858
Diluted 1,030 933 879
- --------------------------------------------------------------------------------
RESULTS OF DISCONTINUED OPERATIONS
Precision lens business
On December 13, 2002, Corning completed the sale of its Cincinnati, OH precision
lens business to 3M Company (3M). This business manufactures precision lens
assemblies for projection video systems. Corning sold the precision lens
business for cash proceeds up to $850 million, of which $50 million has been
deposited in an escrow account. A portion of the escrow account balance will be
used to pay state income taxes relating to the transaction. The remaining
balance plus accrued interest will be paid to Corning in December 2003, subject
to any amounts due to 3M relating to certain indemnifications made by Corning.
The transaction price is also subject to adjustment due to changes in working
capital between signing and closing.
In 2002, proceeds from the sale of precision lens were approximately $800
million in cash. The gain on the sale was $415 million, net of tax, which has
been recorded in income from discontinued operations in the Consolidated
Statements of Operations. In 2003, Corning could record an additional gain on
the sale of up to $25 million, net of tax. This amount is conditional upon the
ultimate amount paid to Corning from the escrow account. Management currently
expects to receive additional proceeds of $10 million from 3M in the first
quarter of 2003 and $40 million in the fourth quarter of 2003, which is
currently held in escrow.
The precision lens business is accounted for as a discontinued operation and
therefore, the results of operations and cash flows have been removed from
Corning's results of continuing operations for all periods presented. The
precision lens business was part of Corning's former Information Display
Segment. The results of operations for the precision lens business have been
excluded from the Operating Segments data.
Sales from discontinued operations increased 19%, or $43 million in 2002,
compared to 2001. The increase was primarily due to 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. Excluding the gain on sale, earnings for the business increased more
than 85% over 2001 to $63 million as sales volume gains and manufacturing
efficiencies from new capacity were realized.
Sales from discontinued operations increased 9%, or $18 million in 2001,
compared to 2000. The increase was due to the growth of digital projection
televisions in the U.S. and in China where the demand for high definition
television was growing. Despite the increase in sales, earnings for 2001
decreased approximately 26% to $34 million, primarily due to manufacturing costs
related to capacity expansion of projection television assemblies.
Summarized selected financial information for the discontinued operations
related to the precision lens business is as follows (in millions):
- --------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Net sales $ 268 $ 225 $ 207
================================
Income before taxes $ 100 $ 50 $ 70
Gain on sale before taxes 652
Provision for income taxes 274 16 24
--------------------------------
Net income $ 478 $ 34 $ 46
================================
- --------------------------------------------------------------------------------
Distribution of Shares of Quest Diagnostics and Covance Inc.
On December 31, 1996, Corning distributed shares of Quest Diagnostics
Incorporated and Covance Inc., which collectively comprised Corning's Health
Care Services Segment, to its shareholders on a pro rata basis (the
Distributions). Corning agreed to indemnify Quest Diagnostics on an after-tax
basis for the settlement of certain government claims and against certain other
claims that were pending at December 31, 1996. Coincident with the
Distributions, Corning recorded a payable to Quest Diagnostics of approximately
$25 million, which was management's best estimate of amounts which were probable
of being paid by Corning to Quest Diagnostics to satisfy the remaining
indemnified claims on an after-tax basis. Quest Diagnostics settled a
significant matter with the Department of Justice late in 2000 requiring Corning
to reimburse Quest Diagnostics $9 million. As a result, in the fourth quarter of
2000 Corning released reserves totaling $13 million after-tax in excess of the
indemnified settlement between Quest Diagnostics and the Department of Justice.
OUTLOOK
Corning expects 2003 net sales to approximate 2002, reflecting a year over year
decline in the Telecommunications Segment and an improvement in the Technologies
Segment. Corning also expects, at a minimum, to significantly reduce operating
losses in 2003 versus 2002 as a result of restructuring actions in the second
half of 2002 in Telecommunications and an expected strong performance in
Technologies. Corning's goal is to return to profitability in 2003 before
consideration of restructuring or other one-time charges. Corning's goal to
return to profitability is dependent upon stabilization of revenues and
continued strength in North America and world economies.
Corning will begin recognizing equity earnings from Dow Corning Corporation in
the first quarter of 2003. Corning does not expect to receive any dividends from
Dow Corning in 2003.
For the first quarter of 2003, Corning expects sales in the range of $700
million to $730 million. Corning expects a net loss in the range of $0.01 per
share to $0.04 per share, excluding gains on debt repurchases and restructuring
charges in the quarter. This loss is net of expected equity earnings in the
range of $10 million to $20 million from Dow Corning.
Management continues to believe Corning has sufficient liquidity to meet its
funding needs for 2003 and beyond. Corning finished the year with $2.1 billion
in cash and short-term investments and full access to an unused revolving credit
facility of $2.0 billion. Capital spending is expected to approximate $350
million to $450 million in 2003. The anticipated spending will focus primarily
on the planned expansion in the liquid crystal display and environmental
businesses.
RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
Corning recorded significant charges in 2002 and 2001. These charges are
summarized in the following table and discussed in the following three
subsections of Management Discussion and Analysis (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Impairment of goodwill $ 400 $ 4,648
Restructuring actions 1,271 953
Impairment of long lived assets other than goodwill:
Photonic technologies business 269 116
Conventional video components business 140
----------------------------
Total restructuring, impairment and other charges $ 2,080 $ 5,717
============================
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Impairment Of Goodwill
2002 Charge
As discussed in New Accounting Standards and Note 1 to the Consolidated
Financial Statements, in January 2002, Corning adopted SFAS No. 142, which
requires companies to stop amortizing goodwill and certain intangible assets
with an indefinite useful life. Instead, SFAS No. 142 requires that goodwill be
reviewed for impairment upon adoption of SFAS No. 142 (January 1, 2002) and
annually thereafter. Corning performed an initial benchmark assessment upon
adoption at January 1, 2002, and determined that a transition charge was not
required. Corning chose the fourth quarter to conduct its annual impairment
test.
Under SFAS No. 142, goodwill impairment occurs if the net book value of a
reporting unit exceeds its estimated fair value. The majority of Corning's
goodwill is included in the telecommunications reporting unit, which is the same
as the Telecommunications Segment. The test completed in the fourth quarter
indicated that the recorded book value of this reporting unit exceeded its fair
value, as determined by discounted cash flows.
Management believes the telecommunication industry is currently depressed but
will ultimately recover. Management does not expect growth in this segment in
the short-term, but believes that growth will return to this segment by 2005.
Corning's view that the industry will recover is based on the fact that
bandwidth demand continues to grow currently, and the belief that a combination
of public policy changes, consolidation and recovery of industry players, and
the advancement of profitable broadband business models will drive recovery in
the future. The decrease in fair value from that measured in the benchmark
assessment primarily reflects:
.. a delay in the timing of the expected recovery from late 2002, or early
2003 to 2005,
.. a reduction in the short-term cash flow expectations of the fiber and cable
business and a lower base from which the expected recovery will occur, and
.. a reduction in the short and long-term cash flow expectations of the
photonic technologies business.
Management retained valuation specialists to assist in the valuation of its
tangible and identifiable intangible assets for purposes of determining the
implied fair value of goodwill at December 31, 2002. Upon completion of the
annual assessment, Corning recorded a non-cash impairment charge of $400 million
($294 million after-tax) to reduce the carrying value of goodwill in the
telecommunications reporting unit to its estimated fair value of $1.6 billion.
Management cannot provide assurance that future impairment charges will not be
required if the telecommunications industry does not recover as projected by
management in its expected future cash flow estimates. Management must exercise
judgment in assessing the recoverability of goodwill. See Critical Accounting
Estimates for related discussion.
2001 Charge
During the first half of 2001, Corning experienced a significant decrease in the
rate of growth of its Telecommunications Segment, primarily in the photonic
technologies business, due to a dramatic decline in infrastructure spending in
the telecommunications industry. During the second quarter, major customers in
the photonic technologies business reduced their order forecasts and canceled
orders already placed. As a result, management determined that the growth
prospects of this business were significantly less than previously expected and
those of historical periods.
Corning reviews the recoverability of its long-lived assets, including goodwill
and other intangible assets, when events or changes in circumstances occur that
indicate the carrying value of the asset may not be recoverable. As a result of
the business conditions noted above, Corning concluded such an assessment was
required for its photonic technologies business in the second quarter. Corning
assesses recoverability of the carrying value based upon cumulative expected
future pre-tax cash flows (undiscounted and without interest charges) of the
related operations.
As a result of this test, Corning determined that the long-lived assets,
including goodwill and other intangibles related to the acquisition of the
Pirelli optical components and devices business (the Pirelli transaction) in
December 2000, as well as those of the unit into which NetOptix Corporation
(acquired in May 2000) had been integrated, were not recoverable under SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of," which was the governing U.S. generally accepted
accounting principle (GAAP) guidance at that time. The impairment assessment was
performed at these levels as discrete cash flows were available for these
divisions within the photonic technologies business. Corning's policy is to
write-down long-lived assets to fair value in such circumstances.
Management estimated fair value using several techniques. While each method
generated comparable fair values, management adjusted the assets to estimates
based on average multiples of forecasted revenues and earnings of comparable
publicly traded companies with operations in the optical component market
segment. This valuation method is consistent with that used in the original
valuation of the acquisitions of Net Optix and certain assets from the Pirelli
transaction. The fair value of these assets were lower in June 2001 from their
acquisition dates as market multiples had changed from those reflected in
transactions consummated in 2000.
In the second quarter of 2001, Corning recorded pre-tax charges of $4,648
million to impair a significant portion of goodwill and $116 million to impair
other intangible assets. Of the total goodwill charge of $4,648 million, $3,038
million related to the Pirelli transaction and $1,610 million related to
goodwill resulting from the acquisition of NetOptix Corporation.
In the second quarter of 2001, it was determined that there were events of
impairment within portions of the photonic technologies business. The accounting
literature effective at that time (SFAS No. 121) required that intangible assets
be assessed for recoverability at the lowest level for which discrete cash flows
can be measured. As a result of this analysis, Corning recorded a charge of $116
million to impair a portion of the patents acquired in the Pirelli transaction.
The valuation methods from which this results are described above.
Restructuring Actions
2002 Restructuring Actions
The continued decline in demand in the Telecommunications Segment during 2002
required additional restructuring beyond that taken in 2001 to bring
manufacturing capacity in line with revenue projections. Corning recorded a
total of $1.3 billion in pre-tax charges over the second, third and fourth
quarters. Actions approved and initiated in 2002 included the following:
.. permanent closing of Corning's optical fiber manufacturing facilities in
Noble Park, Victoria, Australia, and Neustadt bei Coburg, Germany. Corning
also mothballed its optical fiber manufacturing facility in Concord, NC and
transferred certain capabilities to its Wilmington, NC facility,
.. reductions in capacity and employment in Corning's cabling and hardware and
equipment locations worldwide to reduce costs,
.. permanent closure of its photonic technologies thin film filter
manufacturing facility in Marlborough, MA,
.. 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 based upon a decision in the fourth quarter of 2002
to divest the portfolio.
Restructuring Charges
---------------------
The 2002 restructuring charges of $447 million included $376 million of
employee separation costs (including special termination and curtailment
losses related to pension and postretirement health care plans), $85
million in other exit costs (principally lease termination and contract
cancellation payments) and a $14 million credit related to the 2001
restructuring actions. The charge entailed the elimination of approximately
7,100 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 $712 million in 2002 to
impair plant and equipment related to facilities to be shutdown or
disposed, primarily in the fiber and cable business, the photonic
technologies business and certain research facilities. The charge was
partially offset by an $11 million adjustment to assumed salvage values on
asset disposals, related to the 2001 restructuring actions. Of the 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 were 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 remaining impaired equipment
will be auctioned, sold, disposed of or abandoned during 2003.
Loss on Divestiture
-------------------
In the second quarter of 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, note proceeds of $6 million and
recorded a loss on the sale of approximately $16 million ($10 million
after-tax) which is included in impairment charges.
Impairment of Cost Investments
------------------------------
During the second and fourth quarters of 2002, Corning recorded total
charges of $107 million ($66 million after-tax) for other than temporary
declines in certain cost investments in the Telecommunications Segment. In
the fourth quarter, Corning decided to divest its remaining portfolio of
cost investments in private telecommunications related companies. These
investments have been written down to their estimated fair value based upon
information available from prospective purchasers.
The following table illustrates the charges, credits and balances of the
restructuring reserves as of December 31, 2002 (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Remaining
Net Cash reserve at
January 1, charges/ Non-cash payments Dec. 31,
2002 credits charges in 2002 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring charges:
Employee related costs $ 198 $ 371 (a) $ 40 $ 256 $ 273
Other charges 78 76 (b) 22 132
----------------------------------------------------------------------
Total restructuring charges $ 276 $ 447 $ 40 $ 278 $ 405
----------------------------------------------------------------------
Impairment of long-lived assets:
Assets to be disposed of by sale or abandonment $ 717 (c) $ 717
Cost investments 107 107
------------------------
Total impairment charges $ 824 $ 824
------------------------
Total restructuring and impairment
charges and credits $ 1,271
Tax benefit and minority interest 342
---------
Restructuring and impairment charges and credits, net $ 929
=========
- ------------------------------------------------------------------------------------------------------------------------------------
(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 $9 million adjustment in other exit costs reflecting the
difference between estimated and actual costs.
(c) Amount is net of $11 million adjustment to assumed salvage values on asset
disposals and includes $16 million loss on divestiture.
The following table illustrates the charges for 2002 restructuring actions as it
relates to Corning's operating segments (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Charges for restructuring actions
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Functions
Telecom- Including
munications Technologies Research Total
- ------------------------------------------------------------------------------------------------------------------------------------
Charges for restructuring actions $ 1,053 $ 10 $ 208 $ 1,271
============================================================
- ------------------------------------------------------------------------------------------------------------------------------------
The following table illustrates the headcount reduction amongst U.S. Hourly,
U.S. Salaried and Non-U.S. positions:
- ------------------------------------------------------------------------------------------------------------------------------------
Headcount reduction
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
- ------------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 1,650 2,950 2,500 7,100
============================================================
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2002, approximately 5,100 of the 7,100 employees had been
separated under the plans. Although Corning expects the remaining employees to
be separated by December 31, 2003, the majority of these employees will be
separated by the end of the first quarter of 2003. Corning expects approximately
one third of the 2002 restructuring charges to be paid in cash. If the
restructuring actions are successfully implemented, Corning expects such actions
to yield approximately $465 million in annual savings. The savings consist of
lower wage and benefit costs, avoided depreciation and fixed costs on closed
facilities. Approximately 40% of the savings from the restructuring actions will
be realized in cost of sales with the remainder split between selling, general
and administrative and research, development and engineering expenses.
2001 Restructuring Actions
In July and October of 2001, Corning announced a series of restructuring actions
in response to significant deteriorating business conditions which began
initially in its Telecommunications Segment, but eventually spread to its other
businesses as the year progressed. The following actions were approved and
undertaken in 2001:
.. closure of seven major manufacturing facilities and the consolidation of
several smaller facilities, in the Telecommunications and Technologies
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 $953 million ($585 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 of which $3 million and $5 million,
respectively related to discontinued operations. Approximately one third of the
total charge was expected to be paid in cash. As of December 31, 2002, all of
the 12,000 employees had been separated under the plans. 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 December 31, 2001 (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Non- Cash Remaining
Total cash payments reserve at
charges charges in 2001 Dec. 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring charges:
Employee related costs $ 324 $ 66 $ 60 $ 198
Other charges 95 17 78
------------------------------------------------------------
Total restructuring charges $ 419 $ 66 $ 77 $ 276
------------------------------------------------------------
Impairment of long-lived assets:
Assets held for use $ 46 $ 46
Assets held for disposal 496 496
-------------------------
Total impairment charges $ 542 $ 542
-------------------------
Total restructuring and impairment charges $ 961
Discontinued operations (8)
---------
Restructuring and impairment charges
from continuing operations 953
Tax benefit and minority interest 368
---------
Restructuring and impairment charges, net $ 585
=========
- ------------------------------------------------------------------------------------------------------------------------------------
The following table illustrates the charge for 2001 restructuring actions as it
relates to Corning's operating segments (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Charges for restructuring actions
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Functions
Telecom- Including
munications Technologies Research Total
- ------------------------------------------------------------------------------------------------------------------------------------
Charges for restructuring actions $ 640 $ 122 $ 191 $ 953
=============================================================
- ------------------------------------------------------------------------------------------------------------------------------------
The following table illustrates the headcount reduction amongst U.S. Hourly,
U.S. Salaried and Non-U.S. positions:
- ------------------------------------------------------------------------------------------------------------------------------------
Headcount reduction
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
- ------------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 6,000 3,100 2,900 12,000
============================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Impairment Of Long-Lived Assets Other Than Goodwill
Photonic technologies business
The photonic technologies business is a manufacturer of photonic modules and
components for the worldwide telecommunications industry and is reported in the
Telecommunications Segment. The telecommunications market is undergoing a
dramatic decline in demand for telecommunication products as major buyers of
network equipment in this industry have reduced their capital spending plans
over the past two years and are expected to continue such reductions in the near
future. The lack of demand for optical component products started in early 2001
and resulted in restructuring and impairment charges in 2001 and 2002. This
negative trend is expected to continue into the foreseeable future.
As disclosed in Corning's third quarter Form 10-Q, certain competitors indicated
that they will exit the business and others announced decisions to consolidate
or restructure. Corning continues to evaluate strategic alternatives for this
business. While certain product lines are promising in the event of industry
recovery, the pace and extent of that recovery is uncertain. Alternatives under
consideration for this business include staying in the business with scaled down
operations or contract manufacturing, partnering, sale or abandonment. In
February 2003, Corning announced it would close its optical switching product
line and record a pre-tax charge of $20 million to $30 million in the first
quarter of 2003. As short term projections reflect continued operating and cash
losses and the long-term expectations are uncertain, it was determined that the
long-lived assets of this business (property, plant and equipment and patents)
should be evaluated for impairment.
The impairment evaluation required management to develop operating cash flow
projections for each strategic alternative and make assessments as to the
probability of each outcome. It was determined that the long-lived assets of
this business were not recoverable through future cash flows. The assets were
written down to estimated salvage value, as this amount is the best reflection
of fair value. This resulted in a $269 million ($195 million after-tax)
write-down of the assets, which was reflected in the line item "restructuring,
impairment and other charges" in the Consolidated Statements of Operations. The
charge included $90 million related to patents. The estimate of salvage value is
an area of management judgement. See Critical Accounting Estimates for related
discussion. The remaining long-term assets of this business approximate $24
million and are classified as "held for use."
Conventional video components business
Corning Asahi Video Products Company, a 51% owned consolidated subsidiary,
(conventional video components business), is a manufacturer of glass panels and
funnels for use in conventional tube televisions and is reported in the
Technologies Segment for SFAS No. 131 reporting. The conventional tube
television segment of the market in North America is very mature and highly
competitive. The market has been impacted by a decline in demand for
conventional television glass associated with shifting consumer preference for
flat panel and projection television sets, as well as other competing
technologies. The segment has also been impacted by dramatic increases in the
importation of television glass, tubes and sets from Asia. The conventional
television tube market is undergoing intense competition at this time and as a
result is experiencing tremendous price pressure. One major customer has already
exited this market and industry consolidation continues. Demand from another key
customer is uncertain. Competition from imported products has increased
significantly within the last year, while the demand for flat screen televisions
has been increasing for several years. These trends are expected to continue
into the foreseeable future.
These market trends combined with cash losses in this business in the short-term
indicated an evaluation for the recoverability of the long-lived assets of the
business was required and management determined that the long-lived assets of
the business have been impaired. The impairment evaluation required management
to develop operating cash flow projections for each strategic alternative and
make assessments as to the probability of each outcome. It was determined that
the long lived assets were not recoverable through future cash flows. Management
estimated the fair value of the long-lived assets, which were limited to
property, plant and equipment, using the expected cash flow approach as a
measure of fair value. This resulted in a $140 million ($44 million after-tax
and minority interest) write-down of the assets, which was reflected in the line
item "restructuring, impairment and other charges" in the Consolidated
Statements of Operations.
The cash flow realized by this business will be impacted by actions taken by
competitors and customers. Should our future performance differ adversely from
our projections, Corning could be required to record additional impairment
charges. It is also possible that Corning could choose to exit the business
should cash flows be less than projected. The remaining net assets of this
business approximate $77 million.
OPERATING SEGMENTS
Corning previously grouped its products into three operating segments:
Telecommunications, Advanced Materials and Information Display. Beginning in the
fourth quarter of 2002, Corning's reportable segments consist of the following:
Telecommunications and Technologies. As a result of the fourth quarter sale of
the precision lens business and the reduced significance of the conventional
video components business, management realigned the remainder of the Information
Display Segment with the businesses previously reported in Advanced Materials to
create the Technologies Segment. The precision lens business is reported as a
discontinued operation and therefore its results have been excluded from segment
reporting and historical periods have been conformed to this presentation. Also,
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 and acquisition-related charges by segment, but excluded
these from quantitative segment results. These charges have now been included in
the segment net income and historical periods have been conformed to this
presentation. This change was made to increase the transparency of the impact of
these charges on segment results. Corning excludes the restructuring and
impairment charges and acquisition-related charges in discussing the results of
each business in the segment to provide clarity on the underlying business
trends. Corning also includes the earnings of equity affiliates that are closely
associated with Corning's operating segments in segment net income. Segment
amounts exclude revenues, expenses and equity earnings not specifically
identifiable to segments.
Corning prepared the financial results for its 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 certain 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. Segment net income may not be consistent with measures used by other
companies.
- ------------------------------------------------------------------------------------------------------------------------------------
Telecommunications
(In millions) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,631 $ 4,458 $ 5,186
Research, development and engineering expenses (1) $ 308 $ 474 $ 395
Acquisition-related charges $ 463
Restructuring, impairment and other charges (related tax
benefit of $452 and $282) $ 1,722 $ 5,404
Interest expense (2) $ 99 $ 104 $ 70
Income tax (benefit) expense $ (722) $ (336) $ 308
Segment (loss) earnings before minority interests
and equity earnings (3)(4) $ (1,838) $ (5,215) $ 250
Minority interests 1 3
Equity in (losses) earnings of associated companies,
net of impairments (60) 12 1
-------- -------- --------
Segment net (loss) income $ (1,897) $ (5,203) $ 254
======== ======== ========
Segment (loss) earnings before minority interests and
equity earnings as a percentage of segment sales (112.7)% (117.0)% 4.8%
Segment net (loss) income as a percentage of segment sales (116.3)% (116.7)% 4.9%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Technologies
(In millions) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,513 $ 1,568 $ 1,708
Research, development and engineering expenses (1) $ 177 $ 151 $ 136
Restructuring, impairment and other charges (related tax
benefit of $30 and $48) $ 150 $ 122
Interest expense (2) $ 71 $ 48 $ 37
Income tax (benefit) expense $ (28) $ (38) $ 54
Segment (loss) earnings before minority interests
and equity earnings (3)(4) $ (145) $ (53) $ 130
Minority interests (5) 96 13 (27)
Equity in earnings of associated companies 168 132 167
-------- -------- --------
Segment net income $ 119 $ 92 $ 270
======== ======== ========
Segment (loss) earnings before minority interests and
equity earnings as a percentage of segment sales (9.6)% (3.4)% 7.6%
Segment net income as a percentage of segment sales 7.9% 5.9% 15.8%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total Segments
(In millions) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 3,144 $ 6,026 $ 6,894
Research, development and engineering expenses (1) $ 485 $ 625 $ 531
Acquisition-related charges $ 463
Restructuring, impairment and other charges $ 1,872 $ 5,526
Interest expense (2) $ 170 $ 152 $ 107
Income tax (benefit) expense $ (750) $ (374) $ 362
Segment (loss) earnings before minority interests
and equity earnings (3)(4) $ (1,983) $ (5,268) $ 380
Minority interests (5) 97 13 (24)
Equity in earnings of associated companies,
net of impairments 108 144 168
-------- -------- --------
Segment net (loss) income $ (1,778) $ (5,111) $ 524
======== ======== ========
Segment (loss) earnings before minority interests and
equity earnings as a percentage of segment sales (63.1)% (87.4)% 5.5%
Segment net (loss) income as a percentage of segment sales (56.6)% (84.8)% 7.6%
- ------------------------------------------------------------------------------------------------------------------------------------
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as follows (in
millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales
Total segment net sales $ 3,144 $ 6,026 $ 6,894
Non-segment net sales 20 21 26
-----------------------------------------------
Total net sales $ 3,164 $ 6,047 $ 6,920
===============================================
(Loss) Income from Continuing Operations
Total segment net (loss) income (6) $ (1,778) $ (5,111) $ 524
Unallocated items:
Non-segment income (loss) and other (7) 4 (33) (9)
Amortization of goodwill (8) (363) (216)
Non-segment restructuring, impairment and other charges (9) (208) (191)
Interest income (10) 41 68 104
Gain on repurchases of debt 176
Income tax (expense) benefit (11) (24) 94 (21)
Equity in earnings (losses) of associated companies, net of
impairments 8 4 (19)
Minority interests 1
-----------------------------------------------
(Loss) income from continuing operations $ (1,780) $ (5,532) $ 363
===============================================
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Non-direct research, development and engineering expenses are allocated
based upon direct project spending for each segment.
(2) Interest expense is allocated to segments based on a percentage of segment
net operating assets. Consolidated subsidiaries with independent capital
structures do not receive additional allocations of interest expense.
(3) Includes an allocation of depreciation of corporate property, plant and
equipment not specifically identifiable to a segment. Related depreciable
assets are not allocated to segment assets.
(4) Many of Corning's administrative and staff functions are performed on a
centralized basis. Where practicable, Corning charges these expenses to
segments based upon the extent to which each business uses a centralized
function. Other staff functions, such as corporate finance, human resources
and legal are allocated to segments, primarily as a percentage of sales.
(5) Includes $68 million related to impairment of long-lived assets in
conventional video components business.
(6) Includes royalty, interest and dividend income.
(7) Includes amounts derived from corporate investments. Non-segment (loss)
income also includes nonoperating gains and losses. Includes one-time gain
of $11 million included in equity earnings from Samsung Corning related to
divestment of its interest in Samsung Corning Precision in 2000.
(8) Amortization of goodwill relates primarily to the Telecommunications
Segment.
(9) See Restructuring, Impairment and Other Charges for further discussion of
the restructuring actions.
(10) Corporate interest income is not allocated to reportable segments.
(11) Includes tax associated with non-segment impairment and restructuring
charges, amortization of goodwill and nonoperating gains.
Telecommunications
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. The following table
provides net sales for the Telecommunications Segment:
- --------------------------------------------------------------------------------
Telecommunications
(In millions) 2002 2001 2000
- --------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 859 $ 2,889 $ 2,875
Hardware and equipment 552 817 1,020
Photonic technologies 111 547 1,050
Controls and connectors 109 205 241
-------- -------- --------
Total net sales $ 1,631 $ 4,458 $ 5,186
======== ======== ========
- --------------------------------------------------------------------------------
2002 vs. 2001
This segment incurred significant restructuring and impairment charges in 2002
and 2001. The 2002 and 2001 charges are described in detail in Restructuring,
Impairment and Other Charges. The restructuring activities were undertaken to
reduce the operating cost structure due to continued market declines. More than
half of the 2002 charge is impairment of fixed assets, primarily in the fiber
and cable business. A significant portion of the asset impairments in this
business represent the closure of two fiber plants and permanent abandonment of
certain construction projects that had been stopped in 2001 in the optical fiber
and cable business. The balance 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.
In addition, the segment incurred a $400 million charge for the impairment of
goodwill and a $269 million charge for long-lived asset impairments at photonic
technologies. 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. These charges are described in Impairment of
Goodwill and Impairment of Other Long-Lived Assets.
Sales in the segment declined 63%, or $2,827 million, from 2001 as each business
in the segment experienced a significant decline in volume with the largest
declines in optical fiber and cable and the photonic technologies businesses.
The segment incurred losses of $1.9 billion in 2002, compared to a net loss of
$5.2 billion in 2001. The 2002 loss was primarily due to the significant
decrease in sales volume and restructuring and impairment charges. Each business
also reported a loss in 2002. The trend between years reflects lower
restructuring and impairment charges. Excluding these restructuring and
impairment charges, segment net loss was $592 million compared to a loss of $81
million in 2001. The increase in the loss in 2002 reflects reduced sales volumes
and lower prices in each business offset by cost reductions resulting from
restructuring actions.
The optical fiber and cable business is the largest business in the segment.
Sales in the optical fiber and cable business declined 70%, or $2,030 million in
2002. The decrease was primarily due to a sales volume decline for fiber and
cable products of more than 50% for the year as well as double digit price
declines. Excluding restructuring and impairment charges, the optical fiber and
cable business incurred a significant loss in 2002, compared to profits in the
prior year, primarily due to significantly lower sales volume, declining prices
and unfavorable product mix.
As discussed in Restructuring Actions, the optical fiber and cable business
undertook significant restructuring actions in the fourth quarter. These actions
included permanent closure of two international fiber manufacturing plants and
the mothballing of the Concord, NC 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 the end of
2004. 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.
Sales in the hardware and equipment business decreased 32%, or $265 million,
compared to 2001. The sales decreases were primarily due to the overall lack of
spending impacting the entire telecommunications industry. Excluding
restructuring charges, the business incurred a loss driven by lower volumes and
pricing pressure in 2002, compared to a near breakeven performance in 2001. This
business also undertook restructuring actions in the fourth quarter. These
actions included exiting certain product lines, headcount reductions and asset
abandonments.
The photonic technologies business manufactures photonic modules and components,
primarily for the optical amplification market. Sales in the photonic
technologies business declined 80%, or $436 million, compared to 2001, primarily
due to lower sales volume as network buildouts in the telecommunications
industry declined resulting in much lower demand for photonic products. The
business incurred a significant loss for 2002 before restructuring and
impairment charges, primarily due to dramatically lower sales volumes. However,
the 2002 losses decreased more than 50%, compared to the losses incurred in
2001, which included inventory writedowns of $333 million. The results in 2002
reflect cost reductions resulting from restructuring actions taken in 2001 and
2002.
During the second quarter of 2002, the business favorably resolved an open issue
from the second quarter of 2001 with a major customer, resulting in the
recognition of revenue of $14 million and pre-tax income of $3 million. This
revenue was recognized in part on shipment of inventory previously reserved. In
addition, the business settled an open matter with a significant vendor in 2002
resulting in the reversal of a vendor reserve of $20 million that was recorded
as part of the charge in the second quarter of 2001.
The lack of demand for optical component products started in early 2001 and
resulted in restructuring and impairment charges in 2001 and 2002. This negative
trend is expected to continue into the foreseeable future.
As disclosed in Corning's third quarter Form 10-Q, certain competitors indicated
that they will exit the business and others announced decisions to consolidate
or restructure. Corning continues to evaluate strategic alternatives for this
business. While certain product lines are promising in the event of industry
recovery, the pace and extent of that recovery is uncertain. Alternatives under
consideration for this business include staying in the business with scaled down
operations or contract manufacturing, partnering, sale or abandonment. In
February 2003, Corning announced it will stop commercialization of its optical
switching product in 2003 and will incur pre-tax charges of $20 million to $30
million related to the exit representing severance and cash exit costs.
Management estimates that severance and exit costs related to a complete
abandonment of remaining product lines could approximate $70 million to $80
million in total pre-tax charges.
The controls and connectors business manufactures high performance oscillators
and crystals used in various telecommunications applications. Sales in the
controls and connectors business decreased 47%, or $96 million, compared to
2001, due to the sale of the appliance controls group in May 2002 and the lack
of capital spending in the telecommunications industry. Excluding restructuring
charges, earnings were also down due to lower sales volumes as the business
incurred a loss for the year, compared to earnings in 2001. The loss on
divestiture of $16 million ($10 million after-tax) is included in restructuring,
impairment and other charges. The business undertook restructuring actions in
the fourth quarter that are expected to reduce operating costs in 2003.
2001 vs. 2000
Sales in the Telecommunications Segment decreased 14%, or $728 million from 2000
to $4.5 billion. Excluding the impact of acquisitions, the sales decline was
19%. The decrease in sales was primarily due to sales volume decreases in most
businesses throughout the segment as capital spending in the telecommunications
industry decreased significantly. Segment net income fell precipitously,
compared to 2000's strong results as net income in the optical fiber and cable
business was more than offset by losses in all other businesses and the
significant restructuring and impairment charges. The loss of sales volume in
premium fiber and photonic products reduced gross margins and the segment
incurred operating charges totaling $333 million ($221 million after-tax) to
write-down excess and obsolete inventory, including estimated purchase
commitments, further lowering gross margin percentages. Segment net income for
2000 was impacted by $463 million ($442 million after-tax) of
acquisition-related charges, primarily IPRD. See IPRD section for more detail.
Sales in the optical fiber and cable business in 2001 remained flat at $2.9
billion, compared with 2000, although sales declined significantly in the fourth
quarter of 2001. Excluding the impact of acquisitions, sales declined 4%,
compared to 2000. The lack of growth reflects the loss of volume in premium
products beginning in the second quarter due to the decline in long-haul demand
as capital spending for network buildouts diminished and the business began to
experience volume decreases in sales of single-mode fiber in the third quarter.
As a result, most fiber manufacturing facilities were idled in the fourth
quarter. Overall, fiber and cable volume decreased approximately 15% for the
year as a result of an increase of approximately 30% in the first half of the
year, offset by a decrease of approximately 50% in the second half. The
weighted-average price for Corning's optical fiber and cable products remained
relatively stable, compared to 2000, as higher prices were offset by
significantly decreased volumes for premium products. Premium fiber as a
percentage of total fiber demand was approximately 20% in 2001.
Net income for the optical fiber and cable business decreased over 5%, compared
to 2000, as the loss of sales volume in premium products was partially offset by
increased sales of lower margin single-mode products. In response to reduced
demand for fiber products, Corning announced it will permanently close its
optical fiber operations in Deeside, North Wales and its cabling operations in
Saskatoon, Canada in addition to temporarily ceasing production at smaller
cabling facilities.
Sales in the hardware and equipment business declined 20%, or $203 million in
2001, compared to 2000. Excluding the impact of acquisitions, sales declined
28%, compared to 2000. The decrease was primarily due to lower sales volumes as
capital spending in the cable television industry fell significantly from prior
year levels. Business performance decreased significantly to a small loss in
2001 primarily due to considerably lower sales volumes. This business reduced
its headcount during the year and closed a small manufacturing facility.
Sales in the photonic technologies business declined 48%, or $503 million,
compared to 2000. The sales decrease reflected significant declines in orders
from major customers caused by the decrease in capital spending in the
telecommunications industry. The business incurred a significant operating loss
for the year largely due to lower sales volumes, excess capacity, a higher fixed
cost structure and charges for excess and obsolete inventory in the second and
fourth quarters.
During the second quarter, major customers in the photonic technologies business
reduced their order forecasts and canceled orders already placed. As a result,
management determined that certain products were not likely to be sold in their
product life cycle. Corning recorded a charge to writedown excess and obsolete
inventory, including estimated purchase commitments, of $273 million ($184
million after-tax) in cost of sales in the second quarter of 2001. The business
recorded an additional charge of $60 million ($37 million after-tax) in the
fourth quarter as a result of lower revenue forecasts for 2002.
Corning has, or is in the process of disposing all such inventory, except
approximately $100 million. Corning has retained and isolated this inventory,
and in the unlikely event that product is sold, Corning will fully disclose the
impact on its margins.
Corning announced a downsizing of the photonic technologies business and closed
the following three manufacturing facilities in 2001:
.. Benton Park facility in Benton Township, PA,
.. Corning Lasertron's facility in Nashua, NH, and
.. Monroe Park manufacturing and development operations in Henrietta, NY.
In addition, Corning scaled back its photonic technologies operations in Erwin
Park, NY and the remainder of its photonic facilities to adjust its
manufacturing capacity levels and headcount to lower revenue expectations. The
business reduced its headcount approximately 75% from peak employment levels in
2001.
Sales in the controls and connectors business decreased 15%, or $36 million in
2001, compared to 2000. Lower sales volume was the primary reason for the
decline due to the weak U.S. economy. The business incurred an insignificant
loss for the year, compared to an insignificant profit in 2000 due to the
depressed volume.
Outlook: Business conditions in the Telecommunications Segment have been very
difficult due to sharply reduced capital spending by telecommunications
companies. Management anticipates that these difficult conditions will 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 increase and therefore difficult to predict revenues and earnings
in this segment in the short-term. Corning expects sales to deteriorate $200
million to $250 million from 2002 sales. The industry continues to experience
significant excess capacity, resulting in pricing pressure that is expected to
continue throughout 2003. Corning expects the loss in the segment to be
significantly less than 2003 due to significantly lower restructuring and
impairment charges. The results will also reflect cost savings from actions
undertaken in 2002.
Technologies
The Technologies Segment manufactures specialized products with unique
properties for customer applications utilizing glass, glass ceramic and polymer
technologies. Its primary products include liquid crystal display glass for flat
panel displays, ceramic substrates for automobile and diesel applications,
scientific laboratory products, glass panels and funnels for televisions and
cathode ray tubes.
The following table provides net sales for the Technologies Segment:
- --------------------------------------------------------------------------------
Technologies
(In millions) 2002 2001 2000
- --------------------------------------------------------------------------------
Net sales:
Display technologies $ 405 $ 323 $ 333
Environmental technologies 394 379 411
Life sciences 280 267 248
Conventional video components 166 252 354
Other technologies businesses 268 347 362
-------- -------- --------
Total net sales $ 1,513 $ 1,568 $ 1,708
======== ======== ========
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2002 vs. 2001
Sales in the Technologies Segment during 2002 decreased 4%, or $55 million,
compared to 2001, as increased sales in display technologies, environmental
technologies and life sciences were offset by much lower sales in the mature
conventional video components business, decreased demand for semiconductor
materials and the impact of Corning's exit of its lighting products line in
2002. Segment earnings increased 29%, or $27 million, compared to 2001, as
improved operating performance in display technologies and the life sciences
business and stronger equity earnings were partially offset by restructuring and
impairment charges and decreased earnings in the semiconductor materials and
conventional video components businesses. The 2002 restructuring costs recorded
in this segment consisted entirely of severance and benefits for retired and
separated employees in several businesses. The impairment charges related to
assets held for use in the conventional video components business. See
Impairment of Long-Lived Assets Other than Goodwill.
Sales in the display technologies business, the largest business in the segment
and a leading supplier of ultra-thin glass substrates used to produce flat panel
display, increased 25%, or $82 million, compared to 2001. The increase was
primarily due to higher sales volume as penetration in the desktop market
increased. The prior year's sales were negatively impacted by an inventory
correction in the industry in the first quarter of 2001. Volume gains of over
46% for the current year were partially offset by price declines of 10% on a
constant currency basis. Earnings in the business increased over 30% for the
year, compared to 2001, primarily due to volume gains and a more than 30%
improvement in equity earnings from Samsung Corning Precision Glass Company Ltd.
(Samsung Corning Precision), a Korean manufacturer of liquid crystal display
glass. Both Corning and Samsung Corning Precision have recently approved
expansions of manufacturing capacity in Taiwan and Korea, respectively. These
capital projects are expected to begin production in 2003.
Sales in the environmental technologies business, a manufacturer of catalytic
converter substrates, increased 4%, or $15 million, compared to 2001, primarily
due to increased U.S. auto production driven by financing incentives and strong
growth in Europe and Japan. Earnings in this business improved 8%, compared to
2001, as a significant increase in equity earnings from Cormetech, a U.S.
designer and manufacturer of industrial catalysts, was partially offset by price
declines and increased manufacturing and development costs related to new
products.
In October 2001, Corning announced the construction of a new diesel emission
control product manufacturing facility. The new plant is being built in Erwin,
NY. Construction on the project began in 2002 and is expected to be completed in
2004.
Sales in the life sciences business, a supplier of advanced microplates and
other laboratory products, increased 5%, or $13 million, compared to 2001,
primarily due to strong growth in most product lines. Earnings in the business
more than doubled over 2001, primarily due to cost savings from the
discontinuation of Corning's investment in microarray technology products in the
third quarter of 2001, as well as improved manufacturing efficiencies and higher
sales.
Sales in the conventional video components business, a manufacturer of optically
pure, mechanically precise face plates and funnels for larger-screen television
tubes, decreased 34%, or $86 million, 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. Corning recorded
an impairment of the property, plant and equipment of this business, recognizing
a charge of $140 million in the fourth quarter of 2002. See Restructuring,
Impairment and Other Charges for further detail. Excluding the asset impairment
and restructuring charges, the loss in the business increased almost 50% for the
year, compared to 2001, primarily due to decreased sales volume and continued
competitive pricing pressures. Samsung Corning Company Ltd. (Samsung Corning), a
50% owned manufacturer of glass panels and funnels based in South Korea, also
experienced pricing pressure resulting in an approximate 10% decline in equity
earnings for 2002, compared to the prior year.
Sales in Corning's other technologies businesses, including semiconductor
materials and ophthalmic products, decreased 23%, or $79 million, compared to
2001. The decrease was led by the exit of the lighting business and lower sales
volume of high purity fused silica products in the semiconductor materials
business as capital spending in the semiconductor equipment industry remained at
relatively low levels. The businesses incurred a loss for the year compared to
break-even results in 2001. The losses were primarily due to significantly lower
sales volume and increased spending in development and engineering for calcium
fluoride products.
2001 vs. 2000
Sales in 2001 for the Technologies Segment decreased 8%, or $140 million,
compared to 2000. Excluding the impact of acquisitions, sales declined 10%.
Sales increases in the life sciences business were more than offset by declines
in every other business in this segment. Segment net income also declined in
2001 as the segment recorded net income of $92 million, compared to $270 million
in 2000, for a 66% decrease, or $178 million. The decline in profitability was
primarily due to restructuring charges and weaker performance by most businesses
in the segment, which was partially offset by improved performance in the life
sciences business.
Sales in the display technology business decreased 3%, or $10 million, in 2001,
compared to 2000. A significant shift in customer demand from Japan to Korea
caused volume to increase approximately 35% at Samsung Corning Precision and 17%
in the consolidated business. This volume growth, when offset by the impact of
price declines and the deterioration of the yen, resulted in the sales decline
of 3%. Earnings for 2001 decreased approximately 25%, primarily due to lower
operating margins driven by pricing pressures, start-up costs incurred for the
May opening of a new manufacturing facility in Taiwan and additional development
and engineering expenses for Eagle2000(TM), a new glass substrate used in active
matrix liquid crystal displays. Additionally, equity earnings from Samsung
Corning Precision decreased over 15% compared to 2000, primarily due to Corning
having a smaller ownership interest in the company in 2001 versus 2000.
Sales in the environmental technologies business decreased 8%, or $32 million,
in 2001, compared to 2000. The business experienced lower sales volumes,
compared to 2000, due to decreased vehicle production. Volume growth in Asia was
more than offset by declining volumes in North America and Europe. Earnings for
the year were down almost 50%, primarily due to lower sales volumes,
manufacturing inefficiencies related to the introduction of new ultra thin wall
products, excess capacity and start-up costs in South Africa and China.
Sales in the life sciences business increased 8%, or $19 million, in 2001,
compared to 2000. The improvement was primarily due to an increase in sales
volume. Earnings in the base business (excluding microarray technology) almost
doubled over 2000, primarily due to a shift to higher margin products in sales
mix along with improvements in manufacturing costs and selling, general and
administrative expenses. Overall earnings in the business were diluted due to
the investment in microarray technology, which Corning discontinued at the end
of 2001.
Sales in the conventional video components business decreased 29%, or $102
million, in 2001, compared to 2000. The decline was primarily due to a weak U.S.
economy and increased competitive pricing pressure. Earnings were down almost
50% due to lower sales volumes, decreased margins, a production slowdown in the
fourth quarter and lower equity earnings. Samsung Corning also experienced lower
sales volumes and increased competitive pricing pressure, and thus lower
earnings.
Sales in Corning's other technologies businesses decreased 4%, or $15 million,
in 2001, compared to 2000. Excluding the acquisition of Tropel in March 2001,
sales decreased 11%. The decrease was due to softness in the market for
ophthalmic products and high purity fused silica. Earnings for the year were
approximately breakeven and down slightly, compared to 2000. Lower sales volumes
and production slowdowns were partially offset by a marginal increase in equity
earnings from Eurokera, a French based manufacturer of glass ceramic cooktops,
which resulted in comparable earnings between years. Corning exited the lighting
and tubing businesses in 2002 and shutdown manufacturing facilities in
Greenville, OH and Corning, NY.
Outlook: Management expects sales in the Technologies Segment to increase in
2003 versus 2002 due to increased desktop monitor penetration rates, continued
global clean air emission requirements and a recovery in the semiconductor
market. Most businesses in this segment are expected to increase sales with the
display technologies business at the forefront. Thus, management anticipates
sales may improve $175 million to $225 million over 2002. Corning expects
profitability in this segment to improve approximately $100 million to $120
million in 2003, primarily through increased sales volume and the achievement of
significant manufacturing gains. This segment includes South Korean based equity
companies that generated equity earnings of $124 million in 2002. Political or
economic instability in that region could adversely impact these operations and
the results of this segment overall.
NON-SEGMENT RESULTS
Corning's non-segment results include the operations of Steuben, a crystal glass
manufacturer, and equity earnings from small nonstrategic investments that are
not aligned with Corning's two operating segments. In addition, the results of
operating segments do not include amortization of goodwill, gain on repurchases
and retirement of debt and impairment charges related to Pittsburgh Corning
Corporation.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash Flow and Key 2002 Activities
In 2002, Corning's short and long-term debt ratings were downgraded to
sub-investment grade. At this sub-investment grade level, Corning is precluded
from accessing the short-term commercial paper market. Corning's access to the
long-term debt markets has been and will likely continue to be limited. The
terms that Corning could receive on new debt issues will likely be consistent
with those generally available to high yield issuers.
As an additional source of funds, Corning currently has full unrestricted access
to a $2.0 billion revolving credit facility with 16 banks, expiring on August
17, 2005. As of December 31, 2002, there were no borrowings under the credit
facility. The facility includes one financial covenant limiting the ratio of
total debt to total capital, as defined, to not greater than 60%. At December
31, 2002 and 2001, this ratio was 47%. As disclosed in Restructuring, Impairment
and Other Charges, Corning recorded an impairment of goodwill in the fourth
quarter. Further declines in the fair value of Corning's Telecommunications
Segment could cause future impairments of goodwill, tangible or intangible
assets or prompt restructuring actions. Such charges could cause a material
increase to Corning's debt to capital ratio.
On December 13, 2002, Corning completed the sale of its precision lens business
to 3M for net proceeds of $787 million in cash. The transaction resulted in a
gain of $652 million ($415 million after-tax). In addition, Corning could
receive an additional $50 million in cash in 2003, the majority of which is
currently on deposit in escrow.
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 gross proceeds of
$557 million. The mandatory convertible stock has an annual dividend rate of 7%,
payable quarterly in cash. The first dividend payment date was November 16,
2002. The dividends are also payable immediately upon conversion to Corning
common sock. At the time Corning issued the Series C convertible preferred
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 $440 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
December 31, 2002, approximately 4.2 million shares of the Series C preferred
stock had been converted into 213.3 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 contained a beneficial conversion feature of
$1.72 per preferred share. The beneficial conversion totaled approximately $10
million and was charged to the accumulated deficit in the third quarter. The
beneficial conversion was also deducted from earnings attributable to common
shareholders in the 2002 earnings per share calculations.
In March 2001, Corning filed a universal shelf registration statement with the
U.S. Securities and Exchange Commission (SEC) that became effective in the first
quarter. The shelf permits the issuance of up to $5.0 billion of various debt
and equity securities. Subsequent to the issuance above and as of December 31,
2002, Corning's remaining capacity under its shelf registration was
approximately $3.5 billion.
Uses of Cash and Key 2002 Activities
In addition to funding operations in 2002, Corning used cash for debt
repurchases, capital spending and restructuring actions.
During 2002, Corning repurchased and retired zero-coupon convertible debentures
with an accreted value of $493 million in exchange for cash of $308 million for
the year ended December 31, 2002. Corning recorded gains of $176 million ($108
million after-tax) on these transactions for the year ended December 31, 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. From time to
time, Corning may repurchase certain additional debt securities in open-market
or privately negotiated transactions. Through February 14, 2003, Corning spent
an additional $165 million to repurchase and retire more zero coupon convertible
debentures and expects to record a pre-tax gain of approximately $34 million in
the first quarter of 2003.
Corning also spent $233 million to retire its commercial paper borrowings during
2002. Corning had no commercial paper borrowings as of December 31, 2002, nor
does it anticipate issuing commercial paper in the foreseeable future. In total,
Corning spent $815 million in 2002 to pay down short and long-term debt.
Corning reduced its capital spending dramatically in 2002, which reflected the
downturn in telecommunications and was part of a comprehensive effort to
conserve cash. Capital spending totaled $0.4 billion, $1.7 billion and $1.5
billion in 2002, 2001 and 2000, respectively. The high level of capital spending
in 2001 and 2000 related primarily to capacity expansions in Corning's
Telecommunications Segment and expanded research and development facilities.
Corning's 2003 capital spending program is expected to be limited to $350
million to $450 million. Capital spending activity in 2003 is primarily expected
to be the planned expansion in the liquid crystal display and environmental
businesses.
During 2002, Corning made payments of $256 million related to employee severance
and termination costs and $22 million in other exit costs resulting from
restructuring actions. Corning expects additional payments for actions taken in
2001 and 2002 to approximate $290 million in 2003. In February 2003, Corning
announced it will exit its optical switching product line and incur cash charges
of $20 million to $30 million.
In the third quarter of 2002, Corning repurchased 5.5 million shares of its
common stock in a privately negotiated transaction for $23 million.
Key Balance Sheet Data
At December 31, 2002, cash and short-term investments totaled $2.1 billion,
compared with $2.2 billion at December 31, 2001. The decrease from December 31,
2001 was primarily due to short and long-term debt repayments, restructuring
payments and the use of working capital. These items were partially offset by
significantly lower capital spending, the sale of the precision lens business
and proceeds from the issuance of Series C mandatory convertible preferred
stock.
Balance sheet and working capital measures are provided in the following table
(dollars in millions):
- --------------------------------------------------------------------------------
As of December 31,
------------------
2002 2001
- --------------------------------------------------------------------------------
Working capital $2,145 $2,113
Working capital, excluding cash and short-term investments $55 $(106)
Current assets to current liabilities 2.3:1 2.1:1
Trade accounts receivable, net of allowances $470 $593
Days sales outstanding (1) 56 55
Inventories $559 $725
Inventory turns 4.4 4.5
Days payable outstanding 46 42
Long-term debt $3,963 $4,463
Total debt to total capital 47% 47%
- --------------------------------------------------------------------------------
(1) Days sales outstanding are calculated on the fourth quarter of each
respective year.
The increase in working capital, excluding cash and short-term investments,
reflected lower short-term borrowings and accounts payable and the recognition
of an income tax receivable compared to December 31, 2001. The increase in the
current ratio was primarily due to the elimination of commercial paper
borrowings. Trade accounts receivable and inventories decreased largely due to
significantly lower sales and sales volumes compared to 2001.
In 2001, tax legislation was enacted in the U.S. 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.
Other accounts receivable at December 31, 2002, included a receivable of $192
million as a result of Corning availing itself of this opportunity. Corning
expects to receive this refund in the second quarter of 2003.
Credit Ratings
Corning's credit ratings as of February 18, 2003 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. Should business performance decline further from the
levels experienced in 2002, these ratings could receive further review for
possible downgrade. Although the sub-investment grade ratings preclude Corning's
access to the commercial paper market, Corning's overall financial flexibility
remains adequate as a result of its cash position, short-term investments and
committed revolving credit facilities. Corning's debt agreements do not include
covenants that accelerate the maturity of borrowings as a result of changes in
credit ratings.
If business performance should decline further from levels seen in the fourth
quarter of 2002, Corning's ability to enter into foreign exchange contracts with
a duration of greater than one year could be adversely impacted. 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. At December 31, 2002, $82 million
of restricted cash was included in other long-term assets.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each rating should be evaluated independently of any other rating.
Management Assessment of Liquidity
Corning's 2002 earnings were not adequate to cover its fixed charges
(principally interest and related charges on debt), primarily as a result of
losses incurred in Corning's Telecommunication's Segment. Corning's earnings
will likely not be sufficient to cover its fixed charges in 2003.
Corning's major source of funds in 2003 will be its cash and short-term
investments. Management believes Corning has ample liquidity to meet its funding
needs for 2003 and beyond, which includes funding operations, restructuring
payments, research and development and capital expenditures.
Obligations
At December 31, 2002, the contractual obligations of Corning were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
2007 and
2003 2004 2005 2006 thereafter Total
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 191 $ 127 $ 1,910 $ 11 $ 1,964 $ 4,203
Minimum rental commitments 48 42 36 33 195 354
- ------------------------------------------------------------------------------------------------------------------------------------
Total contractual cash obligations $ 239 $ 169 $ 1,946 $ 44 $ 2,159 $ 4,557
- ------------------------------------------------------------------------------------------------------------------------------------
Off Balance Sheet Arrangements
- ------------------------------------------------------------------------------------------------------------------------------------
Amount of commitment and contingency expiration per period
----------------------------------------------------------
Less than 1 to 2 2 to 3 3 to 4 5 years and
(In millions) Total 1 year years years years thereafter
- ------------------------------------------------------------------------------------------------------------------------------------
Performance bonds and guarantees $ 189 $ 49 $ 5 $ 21 $ 114
Contingent purchase price for acquisitions 126 48 24 2 52
Dow Corning credit facility 150 150
Stand-by letters of credit 33 33
Loan guarantees 37 5 1 1 $ 1 29
- ------------------------------------------------------------------------------------------------------------------------------------
Total other commercial commitments
and contingencies $ 535 $ 135 $ 30 $ 24 $ 1 $ 345
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2002, Corning had guaranteed debt of equity affiliates which
totaled $14 million. In addition, Corning and certain of its subsidiaries have
provided other financial guarantees and contingent liabilities in the form of
purchase price adjustments related to attainment of milestones, stand-by letters
of credit and performance bonds, some of which do not have fixed or scheduled
expiration dates. Corning has agreed to provide a credit facility related to Dow
Corning Corporation as discussed in Note 10 to the Consolidated Financial
Statements. The funding of the Dow Corning credit facility is subject to events
connected to the Bankruptcy Plan as described in Note 10. Management believes
the significant majority of these guarantees and contingent liabilities will
expire without being funded.
Corning has leased equipment from three unconsolidated special purpose entities
(SPE) for which the sole purpose is the leasing of equipment to Corning. These
SPEs are not consolidated in the 2002 financial statements since the equity
investor of the SPE has made a substantial investment that is at risk for the
life of the SPE. However, the Financial Accounting Standards Board (FASB) issued
Interpretation 46, Consolidation of Variable Interest Entities in January 2003.
Interpretation 46 will require the consolidation of variable interest entities
(VIE) by the primary beneficiary. Management is still assessing the impacts of
this interpretation, however, it is reasonably possible that Corning will be
considered the primary beneficiary of the three VIEs, and therefore will
consolidate these entities beginning on July 1, 2003. As of December 31, 2002,
the total assets in unconsolidated VIEs were $46 million. In addition, Corning's
maximum loss exposure as a result of its involvement with these VIEs is $46
million. This amount represents payments that would be due to the VIE in the
event of a total loss of the equipment. Corning carries insurance coverage for
this risk.
Pensions
Corning has a number of defined benefit pension plans covering certain domestic
and international employees. Its largest single pension plan is Corning's U.S.
qualified plan. At December 31, 2002, this plan accounted for 83% of Corning's
consolidated defined benefit pension plans' projected benefit obligation and 89%
of the related plans' assets. In 2002, global capital market developments
resulted in negative returns on this plan's assets and a decline in the discount
rate used to estimate the related pension liability. As a result, at December
31, 2002, this U.S. plan's accumulated benefit obligation (ABO) exceeded the
fair value of its assets, which required Corning to record an additional minimum
pension liability in accordance with SFAS No. 87, "Employer's Accounting for
Pensions." The effect of this non-cash adjustment was to increase pension
liabilities by $322 million, increase intangible assets by $61 million and
increase other comprehensive loss by $261 million ($161 million after-tax).
Corning has traditionally contributed to this qualified U.S. pension plan on an
annual basis. Over the last ten years, voluntary contributions averaged $25
million a year. Corning has historically contributed in excess of the IRS
minimum requirements, and as a result, mandatory contributions are not expected
to be required for this U.S. plan until 2006. In the fourth quarter of 2002,
Corning made voluntary pension contributions to this U.S. plan of $30 million,
resulting in total contributions for the year of $56 million. Corning expects to
increase the level of voluntary contributions to this U.S. plan over the next
few years. For 2003, Corning anticipates making voluntary contributions totaling
$60 million to this plan.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported therein. The estimates that
required management's most difficult, subjective or complex judgments are
described below.
Impairment of goodwill in the telecommunications reporting unit
SFAS No. 142, "Goodwill and Other Intangible Assets," requires management to
make judgments about the fair value of its reporting unit. Corning measures fair
value on the basis of discounted expected future cash flows. The determination
of expected future cash flows involves judgment. Corning's judgment was based
upon our historical experience in the telecommunications business, our current
knowledge from our commercial relationships, and available external information
about future trends. With this input, it is management's expectation that there
will be minimal volume growth in the short term, volume growth is assumed to
accelerate beginning in 2005 commensurate with overall market recovery. Terminal
value of the business assumes a growth in perpetuity of 3%. These cash flows are
also used to value intangible and tangible assets which determine the implied
value of reporting unit goodwill. The discount rate applied to these cash flows
represents a telecommunications weighted average cost of capital based upon
current debt and equity activity of 11 public companies representing a cross
section of worldwide competitors of the reporting unit. Corning used a discount
rate of 12% in its calculation of fair value of the expected future cash flows
and recorded an impairment charge of $400 million. Had Corning used a discount
rate of 11.5%, the fair value of the reporting unit would have exceeded its
carrying value and there would not have been an impairment. Had Corning used a
discount rate of 12.5%, the pre-tax impairment charge would have been
approximately $225 million higher.
Impairment of assets held for use
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
requires management to assess the recoverability of the carrying value of
long-lived assets when an event of impairment has occurred. Management must
exercise judgment in assessing whether an event of impairment has occurred.
Corning concluded events of impairment had occurred in two of its businesses in
the fourth quarter of 2002 and the company recorded pre-tax charges totaling
$409 million. In each circumstance, behavior of external parties, including
customers and competitors, were considered in the determination that an
assessment for impairment was required. Management must also exercise judgment
in the determination of expected future cash flows against which to compare the
carrying value of the asset group being evaluated. In both measurements, the
carrying value far exceeded the expected cash flows. Management then exercised
judgment in determining the fair value of the assets from which the impairment
charge was measured. For its photonic technologies business, management based
the fair value of its long-lived assets on the actual results of recent asset
auctions of similar equipment. For the conventional television business,
management exercised judgment about alternative volume and sales price
scenarios, computed discounted cash flows and assigned its best estimate of
probability to each alternative. Management has reduced the useful lives of the
fixed assets of this business as a result of this assessment.
Restructuring charges and impairments resulting from restructuring actions
During 2001 and 2002, Corning recorded write-downs of property, plant and
equipment as a result of decisions to exit facilities, primarily in the
Telecommunications Segment. Assets impaired were primarily equipment,
construction in progress and buildings. Some of the equipment is to be sold and
some abandoned. Corning used information available from recent auctions of
telecommunications equipment to estimate salvage value when measuring
impairment. The estimated salvage values are very low, primarily due to the
currently depressed market for telecommunications related equipment. The salvage
values of property impaired were also estimated to be minimal as certain
facilities will be abandoned and not sold. It is possible that actual results
will differ from assumptions and require adjustments to reserves.
Valuation allowances for deferred income taxes
SFAS No. 109, "Accounting for Income Taxes," requires management to exercise
judgment about its future results in assessing the realizability of its deferred
tax assets. At December 31, 2002, Corning had gross deferred tax assets of $1.8
billion. Corning determined that the likelihood of realization of certain
deferred tax assets is less than 50% and recorded valuation allowances of $417
million. If future taxable income differs from management's estimate,
adjustments to these allowances will be required and will impact future net
income.
Probability of litigation outcomes
SFAS No. 5, "Accounting for Contingencies," requires management to make
judgments about future events that are inherently uncertain. In making its
determinations of likely outcomes of litigation matters, management considers
the evaluation of outside counsel knowledgeable about each matter, as well as
known outcomes in case law. See Item 3, "Legal Proceedings" for a detailed
discussion of the key litigation matters the Company faces. The most significant
matter involving management's most complex judgment is that of Pittsburgh
Corning Corporation. There are a number of factors bearing upon the Company's
potential liability, including the inherent complexity of a Chapter 11 filing,
the Company's history of success in defending itself against asbestos claims,
the Company's assessment of the strength of its corporate veil defenses, the
Company's continuing dialogue with its insurance carriers and the claimant's
representatives, and other factors. The Company's conclusion, subject to change
as future events unfold, is that there is no guarantee that a global settlement
can or will be reached, and that it is more likely than not that the Company
will continue to litigate.
Pension assumptions
In 2002, management made a change in assumption that will impact pension expense
in future periods. Specifically, management has lowered its expected long-term
rate of return on pension assets from 9% to 8.5%. Management has not altered the
nature of the pension trust investments. Recent asset performance has been below
the 9% assumption. As such, it is lowering its long-term rate of return
assumption. This will increase Corning's pension expense as measured in
accordance with SFAS No. 87, "Employers' Accounting for Pension," compared to
amounts recorded in 2002. The increase will approximate $8 million in 2003.
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.
In connection with the acquisitions accounted for under the purchase method,
management is responsible for estimating the fair value of the assets and
liabilities acquired. Management has made estimates and assumptions that affect
the reported amounts of assets, liabilities and expenses resulting from such
acquisitions.
Amounts allocated to purchased IPRD were established through recognized
valuation techniques in the high technology communications industry. Certain
projects were acquired for which technological feasibility had not been
established at the date of acquisition and for which no alternative future uses
existed. In accordance with SFAS No. 2, "Accounting for Research and Development
Costs," as interpreted by FASB Interpretation No. 4, "Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by the Purchase Method,"
amounts assigned to IPRD meeting the above criteria must be charged to expense
at the date of consummation of the purchase.
The value allocated to projects for which a charge was recorded was determined
by the traditional income approach, which discounts expected future debt-free
income to present value. The discount rates used were specific to each project
and were derived from a cost of capital for each specific acquisition target,
adjusted upward for the stage of completion of each project.
Expected future debt-free income was derived with the following considerations:
.. revenues were estimated based on relevant market size, growth trends in the
industry and individual product sales cycles,
.. estimated operating expenses included cost of goods sold, selling, general
and administrative expenses, and research and development expenses to
maintain the products once they have been introduced,
.. estimated tax expenses were specific to each acquired entity and its tax
profile, and
.. for certain projects, as appropriate, a return on core technology was
deducted based upon market standards for licensed existing technology and a
return on assets was deducted based upon industry comparisons.
The nature of the efforts to develop the acquired technology into commercially
viable products consists principally of planning, designing and testing
activities necessary to determine that the product can meet market expectations.
Corning expected that products incorporating the acquired technology from these
projects will be completed and will begin to generate cash flows over the five
years following integration.
The timing and success of development of the technologies not abandoned remains
a risk due to the remaining effort to achieve technical viability, rapidly
changing customer markets, uncertain standards for new products and significant
competition in the marketplace.
The following is a more detailed discussion of the valuations associated with
acquisitions for which such charges have been recorded:
Acquisition of Pirelli's Optical Components and Devices Business
- ----------------------------------------------------------------
On December 12, 2000, Corning completed the Pirelli transaction. This business
had a significant number of research and development projects ongoing at the
time of acquisition of which 12 were valued as IPRD projects. Projected
debt-free income was initially discounted using a rate of 17% to reflect the
weighted-average cost of capital (entity risk) for this entity. Each product was
also discounted to account for the research project's stage of development.
Corning recorded a non-tax deductible IPRD charge of $323 million in the fourth
quarter of 2000.
Costs to complete the in-process research programs were originally estimated to
approximate $25 million to $30 million at the valuation date. These projects
have been categorized into four product technologies as follows:
Lithium Niobate Modulators
The business is developing a number of different lithium niobate modulators.
Lithium niobate modulators are ideally suited for use in high-speed, long-haul
optical communications networks. The technology has been chosen by a majority of
long-haul equipment suppliers because it has the best combination of optical,
electronic and reliability performance. Five of the research projects qualified
as IPRD projects and the completion percentages of these five projects ranged
from 10% to 90%. A non-tax deductible charge of $235 million was recognized and
the value of individual modulator projects in-process ranged from $19 million to
$83 million.
Corning plans to continue research on lithium niobate modulators. However, due
to the downturn in the telecommunications industry future revenues expected from
these projects will be significantly less than originally estimated.
Submarine Products
The business had planned to develop high reliability 980 nanometer (nm) pump
laser chips and modules for submarine use. These devices are components within
an optical amplifier. At the acquisition date, two IPRD projects with completion
percentages of 10% and 50% were valued. A non-tax deductible charge of $26
million resulted from 980 nm pump laser submarine projects in process.
Individual research values were $3 million and $23 million.
As part of the downsizing of the photonic technologies business announced on
July 9, 2001, Corning abandoned this project. This action did not have a
material impact on cash flow, or the results of operations.
Gratings
At the date of acquisition, three qualifying gratings programs with completion
percentages ranging from 20% to 85% were valued. A non-tax deductible IPRD
charge of $16 million resulted from gratings programs. Individual in-process
projects were valued between $2 million and $11 million.
As part of the downsizing of the photonic technologies business announced on
July 9, 2001, Corning abandoned this project. This action did not have a
material impact on cash flow, or the results of operations.
Specialty Fiber
Two specialty fiber programs at the business met the definition of IPRD.
Specialty fibers are used in conjunction with several other components to make
an erbium doped fiber amplifier, which boosts the strength of the optical
signal. At the acquisition date, these projects were 40% and 60% complete. A
non-tax deductible IPRD charge of $46 million resulted from specialty fiber
programs, with the largest program being valued at $42 million.
Corning plans to continue research in specialty fiber.
IntelliSense
- ------------
On June 12, 2000, Corning completed the acquisition of the remaining shares of
IntelliSense, a manufacturer and developer of micro-electro-mechanical systems
(MEMs), or small electro-mechanical, micro-fabricated devices. MEMs technology,
when integrated with optics and packaging expertise, enables the development of
optical add-drop switches and optical cross connects, that are expected to play
a key role in the development and buildout of the optical networking layer. As
of the acquisition date, IntelliSense had three qualifying research projects
underway. These research and development projects are anticipated to result
primarily in the development of new telecommunications products. Projected
debt-free income was initially discounted using a rate of 20% to reflect the
weighted-average cost of capital (entity risk) for IntelliSense. Each product
was also discounted to account for the research project's stage of development.
The completion percentages ranged from 10% to 90%. At the acquisition date, the
projected costs to complete the IPRD programs approximated $20 million. Corning
recorded a $7 million IPRD charge in the second quarter of 2000. No project
valued exceeded $5 million.
Failure of any single project would not materially impact Corning's financial
condition, results of operations or liquidity.
As of December 31, 2002, one of the projects has been canceled, the other two
projects are continuing with one at a reduced level. As a result, the future
revenues expected from these projects will be significantly less than originally
estimated.
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 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% to 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 of 2002, due to the significant downturn in demand for
telecommunication products, Corning decided to suspend the research related to
these projects. When the demand for Corning's telecommunication products
rebound, 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.
Photonics Technology Research Center
- ------------------------------------
On February 14, 2000, Corning acquired the Photonics Technology Research Center
(PTRC). Located in Suffolk, UK, the PTRC had extensive research and development
efforts underway at the acquisition date including work on planar integrated
optics, semiconductor optical amplifiers, electro-absorption modulators and
optical networking devices. Seven projects were determined to meet the criteria
for purchased IPRD. Projected debt-free income was determined for each of the
projects and initially discounted using a rate of 35% to reflect the
weighted-average cost of capital (entity risk) for PTRC. Each product was also
discounted to account for the research project's stage of development. The
completion percentages ranged from 50% to 80%. At the acquisition date, the
projected costs to complete the IPRD programs approximated $40 million. A $42
million ($25 million after-tax) IPRD charge was recognized and the value of
individual projects ranged from less than $1 million to $16 million.
In the fourth quarter of 2002, due to the significant downturn in demand for
telecommunication products, Corning announced it would close this facility and
abandon most of the projects. Research will continue related to semiconductor
optical amplifiers and electro-absorption modulators at other research
facilities. As a result, the future revenues expected from these projects will
be significantly less than originally estimated.
ENVIRONMENT
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 for 12 active hazardous waste sites. Under the
Superfund Act, all parties who may have contributed any waste to a hazardous
waste site, identified by such Agency, are jointly and severally liable for the
cost of cleanup unless the Agency agrees otherwise. It is Corning's policy to
accrue for its estimated liability related to Superfund sites and other
environmental liabilities related to property owned and operated by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued approximately $22 million for its estimated
liability for environmental cleanup and related litigation at December 31, 2002.
Based upon the information developed to date, management believes that the
accrued amount is a reasonable estimate of Corning's estimated liability and
that the risk of an additional loss in an amount materially higher than that
accrued is remote.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." Among other provisions, all
future business combinations will be accounted for using the purchase method of
accounting and the use of the pooling-of-interests method is prohibited for
transactions initiated after June 30, 2001. In addition, goodwill will no longer
be amortized but will be subject to impairment tests at least annually. SFAS No.
142 was effective for Corning on January 1, 2002. An assessment of the
recoverability of goodwill recorded on the date of adoption was completed in the
first quarter indicating that the carrying value of goodwill was recoverable. At
December 31, 2002, goodwill approximated $1.7 billion. Corning recorded a $400
million ($294 million after-tax) charge for impairment of a portion of the
goodwill in its Telecommunications Segment after completing its annual
assessment in the fourth quarter. See Impairment of Goodwill for further
discussion of the charge recorded.
The following table presents a reconciliation of reported net (loss) income and
(loss) earnings per share to adjusted net (loss) income and (loss) earnings per
share, as if SFAS No. 142 had been in effect as follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
----------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Reported net (loss) income $ (1,302) $ (5,498) $ 422
Goodwill amortization, net of income taxes 345 203
----------------------------------------
Adjusted net (loss) income $ (1,302) $ (5,153) $ 625
========================================
Reported net (loss) income per share - basic $ (1.39) $ (5.89) $ 0.49
Goodwill amortization, net of income taxes 0.37 0.24
----------------------------------------
Adjusted net (loss) income per share - basic $ (1.39) $ (5.52) $ 0.73
========================================
Reported net (loss) income per share - diluted $ (1.39) $ (5.89) $ 0.48
Goodwill amortization, net of income taxes 0.37 0.23
----------------------------------------
Adjusted net (loss) income per share - diluted $ (1.39) $ (5.52) $ 0.71
========================================
- ------------------------------------------------------------------------------------------------------------------------------------
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 was 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 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. Corning has followed this standard to
measure impairments of long-lived assets through 2002 and report business
divestitures.
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 (APB) 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 14 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.
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 does not
expect this standard to have a material impact on its consolidated financial
position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," which expands previously issued accounting guidance and
disclosure requirements for certain guarantees. The Interpretation requires an
entity to recognize an initial liability for the fair value of an obligation
assumed by issuing a guarantee. The provision for initial recognition and
measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. Corning does not expect
this Interpretation to have a material impact on its consolidated financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123," which provides optional transition guidance for those companies electing
to voluntarily adopt the accounting provisions of SFAS No. 123. In addition, the
statement mandates certain interim disclosures that are incremental to those
required by SFAS No. 123. Corning will continue to account for stock-based
compensation in accordance with APB No. 25. As such, Corning does not expect
this standard to have a material impact on its consolidated financial position
or results of operations. Corning has adopted the disclosure-only provisions of
SFAS No. 148 at December 31, 2002.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51," which requires all
VIEs to be consolidated by the primary beneficiary. The primary beneficiary is
the entity that holds the majority of the beneficial interests in the VIE. In
addition, the interpretation expands disclosure requirements for both VIEs that
are consolidated as well as VIEs from which the entity is the holder of a
significant amount of the beneficial interests, but not the majority. The
disclosure requirements of this interpretation are effective for all financial
statements issued after January 31, 2003. The consolidation requirements of this
interpretation are effective for all periods beginning after June 15, 2003.
Management is still assessing the impacts of this interpretation, however, it is
reasonably possible that Corning will be considered the primary beneficiary of
three existing SPEs and therefore would need to consolidate these entities
beginning on July 1, 2003. The assets and debt of these entities at December 31,
2002, approximates $46 million.
FORWARD-LOOKING STATEMENTS
The statements in this Annual Report, in reports subsequently filed by Corning
with the SEC on Forms 10-Q and 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 and political 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,
- - capital resource and cash flow activities,
- - capital spending,
- - equity company activities,
- - interest costs,
- - acquisition and divestiture activity,
- - the rate of technology change,
- - the ability to enforce patents,
- - product performance issues,
- - stock price fluctuations, and
- - other risks detailed in Corning's SEC filings.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
- ---------------------------------------------------------------------
Corning operates and conducts business in many foreign countries and as a result
is exposed to movements in foreign currency exchange rates. Corning's exposure
to exchange rate effects includes:
.. exchange rate movements on financial instruments and transactions
denominated in foreign currencies which impact earnings, and
.. exchange rate movements upon conversion of net assets in foreign
subsidiaries for which the functional currency is not the U.S. dollar,
which impact Corning's net equity.
Corning's most significant foreign currency exposures relate to Japan, Korea,
Taiwan and Western European countries. Corning selectively enters into foreign
exchange forward and option contracts with durations generally 12 months or less
to hedge its exposure to exchange rate risk on foreign source income and
purchases. The hedges are scheduled to mature coincident with the timing of the
underlying foreign currency commitments and transactions. The objective of these
contracts is to neutralize the impact of exchange rate movements on Corning's
operating results. Corning also enters into foreign exchange forward contracts
when situations arise where its foreign subsidiaries or Corning Incorporated
enter into lending situations, generally on an intercompany basis, denominated
in currencies other than their local currency. Corning holds a derivative
contract that hedges certain foreign currency denominated net asset exposures.
Corning does not hold or issue derivative financial instruments for trading
purposes.
Equity in earnings of associated companies has historically represented a
significant amount of Corning's (loss) income from continuing operations. Equity
in earnings of associated companies net of impairments was $116 million in 2002
with foreign-based affiliates comprising over 100% of this amount due to the
impairments recorded in equity income. Samsung Corning and Samsung Corning
Precision Glass totaled $124 million in equity earnings for 2002. Exchange rate
fluctuations and actions taken by management of these entities to reduce this
risk can affect the earnings of these companies.
Corning uses a sensitivity analysis to assess the market risk associated with
its foreign currency exchange risk. Market risk is defined as the potential
change in fair value of assets and liabilities resulting from an adverse
movement in foreign currency exchange rates. At December 31, 2002, Corning and
its consolidated subsidiaries had open forward contracts, open option contracts,
foreign denominated debt and foreign cash and cash equivalent holdings with
values exposed to exchange rate movements, all of which were designated as
hedges at December 31, 2002. A 10% adverse movement in quoted foreign currency
exchange rates could result in a loss in fair value of these instruments of $117
million.
The nature of Corning's foreign exchange rate risk exposures has not changed
materially from December 31, 2001.
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 December 31, 2002, Corning's consolidated debt portfolio contained
approximately 8% of variable rate instruments.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
See Item 15 (a) 1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
PART III
Item 10. Directors and Executive Officers
- ------------------------------------------
The sections entitled "Nominees for Election as Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in our Definitive Proxy Statement
relating to our annual meeting of shareholders to be held on April 24, 2003, is
incorporated by reference in this Annual Report on Form 10-K.
Executive Officers of the Registrant
James R. Houghton Chairman and Chief Executive Officer
Mr. Houghton joined Corning in 1962. He was elected a vice president of Corning
and general manager of the Consumer Products Division in 1968, vice chairman in
1971, chairman of the executive committee and chief strategic officer in 1980
and chairman and chief executive officer in April 1983, retiring in April 1996.
Mr. Houghton was the non-executive Chairman of the Board of Corning from June
2001 to April 2002. Mr. Houghton came out of retirement in April 2002 when he
was elected to his current position. Mr. Houghton is a director of Metropolitan
Life Insurance Company and Exxon Mobil Corporation. He is a trustee of the
Metropolitan Museum of Art, the Pierpont Morgan Library and the Corning Museum
of Glass and a member of the Harvard Corporation. Mr. Houghton has been a member
of Corning's Board of Directors since 1969. Age 67.
James B. Flaws Vice Chairman and Chief Financial Officer
Mr. Flaws joined Corning in 1973 and served in a variety of controller and
business management positions. Mr. Flaws was elected assistant treasurer of
Corning in 1993, vice president and controller in 1997 and vice president of
finance and treasurer in May 1997, senior vice president and chief financial
officer in December 1997, executive vice president and chief financial officer
in 1999 and to his current position in 2002. Mr. Flaws is a director of Dow
Corning Corporation. Mr. Flaws has been a member of Corning's Board of Directors
since 2000. Age 54.
Kirk P. Gregg Executive Vice President and Chief Administrative Officer
Mr. Gregg joined Corning in 1993 as director of Executive Compensation. He was
named vice president of Executive Resources and Employee Benefits in 1994,
senior vice president, administration in December 1997 and to his current
position in 2002. Prior to joining Corning, Mr. Gregg was with General Dynamics
Corporation as corporate director, Key Management Programs, and was responsible
for executive compensation and benefits, executive development and recruiting.
Age 43.
Joseph A. Miller Executive Vice President and Chief Technology Officer,
Science and Technology
Dr. Miller joined Corning in 2001 as senior vice president and chief technology
officer. He was appointed to his current position in 2002. Prior to joining
Corning, Dr. Miller was with E.I. DuPont de Nemours, Inc., where he served as
chief technology officer and senior vice president for research and development
since 1994. He began his career with DuPont in 1966. Age 61.
Peter F. Volanakis President, Corning Technologies
Mr. Volanakis joined Corning in 1982 and subsequently held various marketing,
development and commercial positions in several divisions. He was named managing
director Corning GmbH in 1992, executive vice president of CCS Holding, Inc.,
formerly known as Siecor Corporation, in 1995, senior vice president of Advanced
Display Products in 1997, executive vice president of Display Technologies and
Life Sciences in 1999 and to his current position in 2001. Mr. Volanakis is a
director of Dow Corning Corporation. Mr. Volanakis has been a member of
Corning's Board of Directors since 2000. Age 47.
Wendell P. Weeks President and Chief Operating Officer
Mr. Weeks joined Corning in 1983 and has served in various accounting, business
development, and business manager positions. He was named a vice president and
deputy general manager of the Opto-Electronics Components Business in 1995, vice
president and general manager of Telecommunications Products in 1996, senior
vice president in 1997, senior vice president of Opto-Electronics in 1998,
executive vice president of Optical Communications in 1999, president of Corning
Optical Technologies in 2001 and to his current position in 2002. Mr. Weeks has
been a member of Corning's Board of Directors since 2000. Age 43.
Larry Aiello Jr. President and Chief Executive Officer, Corning Cable Systems
Mr. Aiello joined Corning in 1973 and served in several positions in
manufacturing from 1975 to 1981. He was named manager-Domestic Accounting in
1981, controller-Telecommunications Products Division in 1984, director-Control
and Analysis in 1987 and assistant controller and director in 1989. He was named
division vice president and director-Business Development and Planning,
Opto-Electronics Group in 1990, general manager-Component Products Group in
1992, vice president and controller, Corning Incorporated in 1993, senior vice
president-International and President-Corning International Corporation in 1997,
senior vice president and chief of staff-Corning Optical Communications in 2000
and to his current position in 2002. Age 53.
Katherine A. Asbeck Senior Vice President and Controller
Ms. Asbeck joined Corning in 1991 as director of accounting. She was appointed
assistant controller in 1993, designated chief accounting officer in 1994,
elected vice president and controller in 1997 and to her current position in
2001. Age 46.
Robert B. Brown Vice President and General Manager, Optical Fiber
Mr. Brown joined Corning in 1972 and served in a variety of manufacturing and
engineering positions. He was appointed division vice president-manufacturing
and engineering, Telecommunications Products Division in 1995, vice president
manufacturing and engineering, Opto-Electronics in 1999, president-Corning
Lasertron in February 2000, vice president and general manager-Amplification
Products in December 2000 and to his current position in 2002. Age 52.
Robert L. Ecklin Executive Vice President, Environmental Technologies and
Strategic Growth
Mr. Ecklin joined Corning in 1961 and served in a variety of U.S. and
international manufacturing and engineering managerial positions. He was named
vice president of Corning Engineering in 1982, president of Corning Engineering
in 1983, vice president of Business Development in 1986, general manager of the
Industrial Products Division in 1989 and senior vice president of the Industrial
Products Division in 1990. He was appointed executive vice president of the
Environmental Products Division in 1999, executive vice president, Optical
Communications in 2001 and to his current position in 2002. Age 64.
William D. Eggers Senior Vice President and General Counsel
Mr. Eggers joined Corning in 1997 as vice president and deputy general counsel.
He was elected senior vice president and general counsel in February 1998. Mr.
Eggers was a Partner with the Rochester firm of Nixon, Hargrave, Devans & Doyle,
LLP, before joining Corning, and was outside litigation counsel for Corning in a
number of commercial matters. Age 58.
Gerald J. Fine Senior Vice President and General Manager, Photonic
Technologies
Dr. Fine joined Corning in 1985 as a research scientist in a variety of research
and managerial positions. He was named deputy general manager-Advanced Display
Products in 1995, vice president and general manager-Photonic Technologies
Division in 1997 and to his current position in 2001. Age 45.
Donald B. McNaughton Vice President, Information Display
Mr. McNaughton joined Corning in 1989 and served in a variety of managerial
positions. He was named general manager, Display Technologies in 1999,
president, Display Technologies in Asia in 2000 and to his current position in
2002. Age 43.
Mark S. Rogus Vice President and Treasurer
Mr. Rogus joined Corning in 1996 as manager of corporate finance. He was
appointed assistant treasurer in 1999 and to his current position in 2000. Prior
to joining Corning, Mr. Rogus held various business development positions at
Wachovia Bank. Age 43.
Item 11. Executive Compensation
- --------------------------------
The sections entitled "Executive Compensation," "Option SAR Grants in Last
Fiscal Year," "Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal
Year-End Option/SAR Values" and "Pension Plan" in our Definitive Proxy Statement
relating to the annual meeting of shareholders to be held on April 24, 2003, is
incorporated by reference in this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The section entitled "Security Ownership of Certain Beneficial Owners," in our
Definitive Proxy Statement relating to the annual meeting of shareholders to be
held on April 24, 2003, is incorporated by reference in this Annual Report on
Form 10-K.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The section entitled "Other Matters - Certain Business Relationships" in our
Definitive Proxy Statement relating to the annual meeting of shareholders to be
held on April 24, 2003, is incorporated by reference in this Annual Report on
Form 10-K.
Item 14. Controls and Procedures
- ---------------------------------
Within the 90-day period prior to the date of the report, Corning carried out an
evaluation, under the supervision and with the participation of the management,
including its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of Corning's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon the evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that Corning's
disclosure controls and procedures are effective to timely alert them to
material information related to Corning (including its consolidated
subsidiaries) required to be included in Corning's Exchange Act filings.
Subsequent to the date of our management's evaluation, there were no significant
changes in our internal controls or in other factors that could significantly
affect these controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) Documents filed as part of this report:
Page
1. Financial statements and financial statement schedule,
filed as part of this report:
See separate index to financial statements
and financial statement schedule 58
2. Supplementary Data:
Quarterly Operating Results 106
3. Exhibits filed as part of this report: see (c) below.
(b) Reports on Form 8-K filed during the last quarter of fiscal 2002:
Five reports on Form 8-K were filed October 1, 2002, October 9, 2002*,
October 30, 2002, November 12, 2002*, and December 5, 2002 during the
quarter ended December 31, 2002 reporting matters under Item 5, Other
Events, 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
and Exchange Act of 1934 for such Regulation FD disclosures.
(c) Exhibits filed as part of this report:
3(i)1 Restated Certificate of Incorporation dated December 6, 2000,
filed with the Secretary of State of the State of New York on
January 22, 2001 (Incorporated by reference to Exhibit 3(i) of
Corning's Annual Report on Form 10-K for the year ended December
31, 2000)
3(i)2 Certificate of Amendment to Restated Certificate of Incorporation
filed with the Secretary of State of the State of New York on
August 5, 2002 (Incorporated by reference to Exhibit 99.1 to
Corning's Form 8-K filed on August 7, 2002)
3(ii)1 Bylaws of Corning effective as of December 6, 2000 (Incorporated
by reference to Exhibit 3(ii) of Corning's Annual Report on Form
10-K for the year ended December 31, 2000)
3(ii)2 Amendment to Article III, Section 9, of Bylaws of Corning
effective as of February 5, 2003.
4 Rights Agreement of Corning dated as of June 5, 1996
(Incorporated by reference to Exhibit 1 to Corning's Form 8-K
filed on July 10, 1996)
10 Agreement and Release between John W. Loose and Corning dated as
of April 12, 2002 (Incorporated by reference to Exhibit 10 of
Corning's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002)
12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Dividends.
21 Subsidiaries of the Registrant at December 31, 2002.
23 Consent of Independent Accountants.
24 Powers of Attorney.
99.1 Certification of Principal Executive Officer pursuant to Section
906 of The Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer pursuant to Section
906 of The Sarbanes-Oxley Act of 2002.
Signatures
Pursuant to the requirements of Sections 13 or 15(d) of the Securities 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
Principal Executive Officer
By /s/ James R. Houghton Chairman and February 20, 2003
---------------------------------------- Chief Executive Officer
(James R. Houghton)
Principal Financial Officer
By /s/ James B. Flaws Vice Chairman and February 20, 2003
---------------------------------------- Chief Financial Officer
(James B. Flaws)
Principal Accounting Officer
/s/ Katherine A. Asbeck
By ---------------------------------------- Senior Vice President and Controller February 20, 2003
(Katherine A. Asbeck)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
on the date indicated.
Capacity Date
* Chairman of the Board of Directors February 20, 2003
- -----------------------------------------------
(James R. Houghton)
* Director February 20, 2003
- -----------------------------------------------
(John Seely Brown)
* Director February 20, 2003
- -----------------------------------------------
(James B. Flaws)
* Director February 20, 2003
- -----------------------------------------------
(Gordon Gund)
* Director February 20, 2003
- -----------------------------------------------
(John M. Hennessy)
* Director February 20, 2003
- -----------------------------------------------
(Jeremy R. Knowles)
* Director February 20, 2003
- -----------------------------------------------
(James J. O'Connor)
* Director February 20, 2003
- -----------------------------------------------
(Deborah D. Rieman)
* Director February 20, 2003
- -----------------------------------------------
(H. Onno Ruding)
* Director February 20, 2003
- -----------------------------------------------
(William D. Smithburg)
* Director February 20, 2003
- -----------------------------------------------
(Hansel E. Tookes II)
* Director February 20, 2003
- -----------------------------------------------
(Peter F. Volanakis)
* Director February 20, 2003
- -----------------------------------------------
(Wendell P. Weeks)
/s/ William D. Eggers
*By
----------------------------------------
(William D. Eggers, Attorney-in-fact)
Certifications of Principal Executive Officer and Principal Financial Officer
Regarding Facts and Circumstances Relating to Annual Reports
I, James R. Houghton, certify that:
1. I have reviewed this annual report on Form 10-K of Corning Incorporated;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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 functions):
(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
annual report whether 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.
Dated: February 20, 2003 /s/ James R. Houghton
-----------------------------------------
James R. Houghton
Chairman and Chief Executive Officer
Certifications of Principal Executive Officer and Principal Financial Officer
Regarding Facts and Circumstances Relating to Annual Reports
I, James B. Flaws, certify that:
1. I have reviewed this annual report on Form 10-K of Corning Incorporated;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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 functions):
(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
annual report whether 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.
Dated: February 20, 2003 /s/ James B. Flaws
-----------------------------------------
James B. Flaws
Vice Chairman and Chief Financial Officer
Corning Incorporated
2002 Annual Report
Index to Financial Statements and Financial Statement Schedule
Page
Statement of Management Responsibility for Financial Statements 59
Report of Independent Accountants 60
Consolidated Statements of Operations 61
Consolidated Balance Sheets 62
Consolidated Statements of Cash Flows 63
Consolidated Statements of Changes in Shareholders' Equity 64
Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Policies 65
2. Discontinued Operations 70
3. Inventory Write-down 71
4. Impairment of Goodwill 71
5. Restructuring Actions 73
6. Impairment of Long-Lived Assets Other Than Goodwill 76
7. Short-Term Investments 77
8. Inventories 78
9. Income Taxes 78
10. Investments 80
11. Property, Net 84
12. Goodwill and Other Intangible Assets 84
13. Other Accrued Liabilities 85
14. Long-Term Debt and Loans Payable 86
15. Employee Retirement Plans 87
16. Commitments, Contingencies, Guarantees and Hedging Activities 90
17. Series B Convertible Preferred Stock 91
18. Shareholders' Equity 91
19. (Loss) Earnings Per Common Share 94
20. Stock Compensation Plans 95
21. Business Combinations and Divestitures 97
22. Operating Segments 99
Financial Statement Schedule:
II. Valuation Accounts and Reserves 105
STATEMENT OF MANAGEMENT RESPONSIBILITY
FOR FINANCIAL STATEMENTS
The management of Corning Incorporated is responsible for the preparation,
presentation and integrity of the consolidated financial statements and other
information included in this annual report. The financial statements have been
prepared in accordance with generally accepted accounting principles and include
certain amounts based on management's best estimates and judgments.
In meeting its responsibility for the reliability of these financial statements,
Corning maintains comprehensive systems of internal accounting control. These
systems are designed to provide reasonable assurance at reasonable cost that
corporate assets are protected against loss or unauthorized use and that
transactions and events are properly recorded. Such systems are reinforced by
written policies, selection and training of competent financial personnel,
appropriate division of responsibilities and a program of internal audits.
The consolidated financial statements have been audited by our independent
accountants, PricewaterhouseCoopers LLP. Their responsibility is to express an
independent, professional opinion with respect to the consolidated financial
statements on the basis of an audit conducted in accordance with generally
accepted auditing standards.
The Audit Committee of the Board of Directors is responsible for reviewing and
monitoring Corning's financial reporting and accounting practices and the annual
appointment of the independent accountants. The Committee, comprised of
independent directors, meets periodically with management, the internal auditors
and the independent accountants to review and assess the activities of each.
Both the independent accountants and the internal auditors meet with the
Committee, without management present, to review the results of their audits and
their assessment of the adequacy of the systems of internal accounting control
and the quality of financial reporting.
James R. Houghton James B. Flaws
Chairman and Chief Executive Officer Vice Chairman and Chief Financial Officer
Katherine A. Asbeck
Senior Vice President and Controller
Report of Independent Accountants
PricewaterhouseCoopers LLP
To the Board of Directors and Shareholders of Corning Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Corning Incorporated and its subsidiaries at December 31,
2002 and 2001, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(1) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Notes 1, 2 and 4 of the consolidated financial statements, as of
January 1, 2002, the Company ceased amortization of goodwill and changed its
method of accounting for discontinued operations to conform with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", respectively.
PricewaterhouseCoopers LLP
New York, New York
January 21, 2003
Consolidated Statements of Operations Corning Incorporated and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 3,164 $ 6,047 $ 6,920
Cost of sales (Note 3) 2,562 4,227 4,009
--------------------------------------------
Gross margin 602 1,820 2,911
Operating expenses:
Selling, general and administrative expenses 716 1,090 1,041
Research, development and engineering expenses 483 622 531
Amortization of purchased intangibles (Note 12) 43 76 29
Amortization of goodwill (Note 1) 363 216
Acquisition-related charges (Note 21) 463
Restructuring, impairment and other charges (Notes 4, 5 and 6) 2,080 5,717
--------------------------------------------
Operating (loss) income (2,720) (6,048) 631
Interest income 41 68 105
Interest expense (Note 14) (179) (153) (107)
Gain on repurchases of debt (Note 14) 176
Other expense, net (38) (28) (8)
--------------------------------------------
(Loss) income from continuing operations before income taxes (2,720) (6,161) 621
(Benefit) provision for income taxes (Note 9) (726) (468) 383
--------------------------------------------
(Loss) income from continuing operations before minority interests
and equity earnings (1,994) (5,693) 238
Minority interests 98 13 (24)
Equity in earnings of associated companies, net of impairments (Note 10) 116 148 149
--------------------------------------------
(Loss) income from continuing operations (1,780) (5,532) 363
Income from discontinued operations, net of income taxes (Note 2) 478 34 59
--------------------------------------------
Net (loss) income (1,302) (5,498) 422
Dividend requirements of preferred stock (Note 18) (128) (1) (1)
--------------------------------------------
(Loss) earnings attributable to common shareholders $ (1,430) $ (5,499) $ 421
============================================
Basic (loss) earnings per common share from (Note 19):
Continuing operations $ (1.85) $ (5.93) $ 0.42
Discontinued operations (Note 2) 0.46 0.04 0.07
--------------------------------------------
(Loss) earnings per common share $ (1.39) $ (5.89) $ 0.49
============================================
Diluted (loss) earnings per common share from (Note 19):
Continuing operations $ (1.85) $ (5.93) $ 0.41
Discontinued operations (Note 2) 0.46 0.04 0.07
--------------------------------------------
(Loss) earnings per common share $ (1.39) $ (5.89) $ 0.48
============================================
The accompanying notes are an integral part of these statements.
Consolidated Balance Sheets Corning Incorporated and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions, except share and per share amounts) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (Note 1) $ 1,471 $ 1,037
Short-term investments, at fair value (Note 7) 619 1,182
----------------------------------
Total cash and short-term investments 2,090 2,219
Trade accounts receivable, net of doubtful accounts and allowances - $59 and $60 470 593
Inventories (Note 8) 559 725
Deferred income taxes (Note 9) 296 347
Other accounts receivable 358 149
Prepaid expenses and other current assets 52 74
----------------------------------
Total current assets 3,825 4,107
----------------------------------
Restricted cash and investments (Note 1) 82
Investments (Note 10) 769 778
Property, net (Note 11) 3,705 5,097
Goodwill (Note 12) 1,715 1,937
Other intangible assets, net (Note 12) 261 352
Deferred income taxes (Note 9) 887 313
Other assets 304 209
----------------------------------
Total Assets $ 11,548 $ 12,793
==================================
Liabilities and Shareholders' Equity
Current liabilities:
Loans payable (Note 14) $ 204 $ 477
Accounts payable 339 441
Other accrued liabilities (Note 13) 1,137 1,076
----------------------------------
Total current liabilities 1,680 1,994
----------------------------------
Long-term debt (Note 14) 3,963 4,463
Postretirement benefits other than pensions (Note 15) 617 608
Pensions (Note 15) 455 92
Other liabilities 83 96
Commitments and contingencies (Note 16)
Minority interests 59 119
Series B convertible preferred stock (Note 17) 7
Shareholders' equity (Note 18):
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: 1.55 million 155
Common stock - Par value $0.50 per share; Shares authorized:
3.8 billion; Shares issued: 1,267 million and 1,023 million 634 512
Additional paid-in capital 9,695 9,532
Accumulated deficit (4,921) (3,610)
Treasury stock, at cost: 70 million and 79 million (702) (827)
Accumulated other comprehensive loss (170) (193)
----------------------------------
Total shareholders' equity 4,691 5,414
----------------------------------
Total Liabilities and Shareholders' Equity $ 11,548 $ 12,793
==================================
The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows Corning Incorporated and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
(Loss) income from continuing operations $ (1,780) $(5,532) $ 363
Adjustments to reconcile (loss) income from continuing operations
to net cash (used in) provided by operating activities:
Amortization of purchased intangibles 43 76 29
Amortization of goodwill 363 216
Depreciation 618 621 502
Restructuring, impairment and other charges 2,080 5,717
Gain on repurchases of debt (176)
Acquisition-related charges 463
Inventory write-down 333
Stock compensation charges 130 31
Equity in earnings of associated companies, net of impairments,
in excess of dividends received (25) (94) (104)
Minority interests, net of dividends paid (98) (22) (83)
Deferred tax benefit (432) (528) (47)
Interest expense on convertible debentures 38 41 7
Tax benefit on stock options 27 321
Restructuring payments (278) (77)
Increases in restricted cash (53)
Changes in certain working capital items (Note 1) (233) 240 (389)
Other, net (28) 87 64
------------------------------------
Net cash (used in) provided by operating activities (324) 1,382 1,373
------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (357) (1,741) (1,485)
Acquisitions of businesses, net of cash acquired (56) (66) (5,053)
Net proceeds from sale of precision lens business 787
Net proceeds from sale or disposal of assets 92 67 80
Net increase in long-term investments and other long-term assets (31) (113) (55)
Short-term investments - acquisitions (2,177) (1,320) (1,482)
Short-term investments - liquidations 2,742 853 767
Restricted investments - acquisitions (117)
Restricted investments - liquidations 88
Other, net (2) 4 5
------------------------------------
Net cash provided by (used in) investing activities 969 (2,316) (7,223)
------------------------------------
Cash Flows from Financing Activities:
Net (repayments of) proceeds from loans payable (490) 181 (386)
Proceeds from issuance of long-term debt 11 735 2,728
Repayments of long-term debt (325) (104) (169)
Redemption of Series B preferred stock (7)
Proceeds from issuance of Series C preferred stock, net 557
Proceeds from issuance of common stock, net 52 247 4,744
Repurchases of common stock (23)
Redemption of common stock for income tax withholding (1) (42) (57)
Cash dividends paid to preferred and common shareholders (88) (113) (211)
------------------------------------
Net cash (used in) provided by financing activities (314) 904 6,649
------------------------------------
Effect of exchange rates on cash 43 (7) (5)
------------------------------------
Cash provided by (used in) continuing operations 374 (37) 794
Cash provided by (used in) discontinued operations (Note 2) 60 (5) 5
------------------------------------
Net increase (decrease) in cash and cash equivalents 434 (42) 799
Cash and cash equivalents at beginning of year 1,037 1,079 280
------------------------------------
Cash and cash equivalents at end of year $ 1,471 $ 1,037 $ 1,079
====================================
The accompanying notes are an integral part of these statements.
Consolidated Statements of Changes in Shareholders' Equity Corning Incorporated and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions)
Retained Accumulated
Series C Capital in earnings other Total
Preferred Common excess of Unearned (accumulated Treasury comprehensive shareholders'
stock stock par value compensation deficit) stock income (loss) equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 136 $ 1,479 $ (255) $ 1,790 $ (656) $ (31) $ 2,463
Net income 422 422
Foreign currency translation
adjustment (118) (118)
Net unrealized gain on
investments, net of tax 22 22
-----------
Total comprehensive income 326
Shares issued in acquisitions 10 2,980 2,990
Shares issued in equity offerings 32 4,560 4,592
Other shares issued 3 261 264
Stock split 320 (320)
Shares issued to benefit plans 45 (26) 19
Tax benefit from exercise of
options 321 321
Dividends on stock ($0.24 per
share) (211) (211)
Other, net (11) (23) (97) (131)
---------------------------------------------------------------------------------------------------
Balance, December 31, 2000 501 9,315 (304) 2,001 (753) (127) 10,633
Net loss (5,498) (5,498)
Foreign currency translation
adjustment (31) (31)
Net unrealized loss on
investments, net of tax (45) (45)
Other comprehensive income 10 10
-----------
Total comprehensive loss (5,564)
Shares issued in acquisitions 2 163 165
Shares issued in equity offerings 7 218 225
Other shares issued 2 77 79
Shares issued to benefit plans (166) 239 (33) 40
Tax benefit from exercise of
options 27 27
Dividends on stock ($0.12 per
share) (113) (113)
Other, net (97) 60 (41) (78)
---------------------------------------------------------------------------------------------------
Balance, December 31, 2001 512 9,537 (5) (3,610) (827) (193) 5,414
Net loss (1,302) (1,302)
Foreign currency translation
adjustment 208 208
Minimum pension liability
adjustment (173) (173)
Net unrealized gain on
investments, net of tax 6 6
Other comprehensive loss (18) (18)
-----------
Total comprehensive loss (1,279)
Issuance of Series C preferred
stock, net $ 575 (18) 557
Series C preferred stock
conversions (420) 107 313
Shares issued in acquisitions 15 34 49
Shares issued to benefit plans (97) 148 51
Purchase of common stock
for treasury (23) (23)
Dividends on preferred stock (118) (118)
Other, net 46 3 (9) 40
---------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 155 $ 634 $ 9,697 $ (2) $(4,921) $ (702) $ (170) $ 4,691
===================================================================================================
The accompanying notes are an integral part of these statements.
Notes to Consolidated Financial Statements
Corning Incorporated and Subsidiary Companies
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of all entities
controlled by Corning and its majority-owned domestic and foreign subsidiaries,
after elimination of all material intercompany accounts, transactions and
profits.
The equity method of accounting is used for investments in associated companies
which are not controlled by Corning and in which Corning's interest is generally
between 20% and 50%. Corning's share of earnings or losses of associated
companies, in which at least 20% of the voting securities is owned, is included
in the consolidated operating results except for investments where Corning is
not able to exercise considerable influence over the operating and financial
decisions of the investee, in which case, the cost method is used.
On December 13, 2002, Corning completed the sale of its precision lens business
to 3M Company (3M). Corning's Consolidated Statements of Operations, Cash Flows
and related footnotes present the precision lens business as discontinued
operations.
Certain amounts for 2001 and 2000 have been reclassified to conform with the
2002 classifications.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires management to
make estimates and assumptions that affect amounts reported therein. Due to the
inherent uncertainty involved in making estimates, actual results reported in
future periods may be based upon amounts that could differ from those estimates.
Revenue Recognition
Corning recognizes revenue when it is realized or realizable and has been
earned. Product revenue is recognized when persuasive evidence of an arrangement
exists, the product has been delivered and legal title and all risks of
ownership have been transferred, written contract and sales terms are complete,
customer acceptance has occurred and payment is reasonably assured. Corning
reduces revenue for estimated product returns, allowances and price discounts
based on past experience.
Foreign Currencies
Balance sheet accounts of foreign subsidiaries are translated at current
exchange rates and statements of operations accounts are translated at average
exchange rates for the year. Translation gains and losses are reported as a
separate component of accumulated other comprehensive income (loss). Foreign
currency transaction gains and losses affecting cash flows are included in
current earnings.
Stock-Based Compensation
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," Corning applies the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," to its stock options and other
stock-based compensation plans. These plans are more fully described in Note 20.
In accordance with APB No. 25, compensation cost for stock options is recognized
in income based on the excess, if any, of the quoted market price of the stock
at the grant date of the award or other measurement date over the amount an
employee must pay to acquire the stock. Generally, the exercise price for stock
options granted to employees equals or exceeds the fair market value of
Corning's common stock at the date of grant, thereby resulting in no recognition
of compensation expense by Corning.
1. Summary of Significant Accounting Policies (continued)
The following table illustrates the effect on income from continuing operations
and earnings per share if Corning had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation. The estimated
fair value of each Corning option is calculated using the Black-Scholes
option-pricing model.
(In millions, except per share amounts):
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations - as reported $ (1,780) $ (5,532) $ 363
Less: Dividend requirements of preferred stock (128) (1) (1)
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations available to common
shareholders - as reported (1,908) (5,533) 362
Add: Stock-based employee compensation expense
determined under APB No. 25, included in reported
(loss) income from continuing operations, net of tax 1 79 19
Less: Stock-based employee compensation expense
determined under fair value based method, net of tax (278) (446) (131)
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations available to common
shareholders - pro forma $ (2,185) $ (5,900) $ 250
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) earnings per common share from continuing operations:
Basic - as reported $ (1.85) $ (5.93) $ 0.42
Basic - pro forma $ (2.12) $ (6.32) $ 0.29
Diluted - as reported $ (1.85) $ (5.93) $ 0.41
Diluted - pro forma $ (2.12) $ (6.32) $ 0.28
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents
All short-term, highly liquid investments with original maturities of 90 days or
less, are considered cash equivalents.
Supplemental disclosure of cash flow information was as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------
(In millions) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Changes in certain working capital items:
Trade accounts receivable $ 153 $ 666 $ (232)
Inventories 135 (47) (279)
Other current assets (363) 92 (192)
Accounts payable and other current liabilities, net of restructuring payments (158) (471) 314
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ (233) $ 240 $ (389)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash paid for interest and income taxes:
Interest $ 112 $ 111 $ 132
Income taxes, net of refunds $ 60 $ 99 $ 127
- ------------------------------------------------------------------------------------------------------------------------------------
Short-Term Investments
Corning's short-term investments consist of debt securities classified as
available-for-sale, which are stated at estimated fair value. These debt
securities include U.S. treasury notes, state and municipal bonds, asset-backed
securities, corporate bonds, commercial paper and certificates of deposit. These
investments are on deposit with a major financial institution. Unrealized gains
and losses, net of tax, are computed on the basis of specific identification and
are reported as a separate component of accumulated other comprehensive income
(loss) in shareholders' equity until realized.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
1. Summary of Significant Accounting Policies (continued)
Restricted Cash and Investments
Restricted cash and investments represents cash and investments Corning is
temporarily unable to access or funds set aside for other legally restricted
purposes. Restricted cash consists primarily of cash provided as collateral as
financial assurance for performance bonds and self-insured workers compensation
liabilities. Restricted investments include U.S. treasury securities pledged as
collateral to secure the payments on a promissory note. The note was issued in
connection with a one-time dividend that was declared at the issuance of the
Series C convertible preferred stock.
Other Investments
Corning has other cost-based investments primarily in nonpublicly traded
companies. These investments are included in Investments on Corning's balance
sheet and are generally carried at cost. A decline in the value of these
cost-based investments below cost that is deemed other than temporary is charged
to earnings, resulting in a new cost basis for that investment.
Property and Depreciation
Land, buildings and equipment are recorded at cost. Depreciation is based on
estimated useful lives of properties using the straight-line method. The
estimated useful lives range from 20 to 40 years for buildings and 3 to 20 years
for the majority of Corning's equipment.
Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," Corning
has selected the fourth quarter to perform an annual impairment test for
goodwill. Goodwill is allocated to Corning's various reporting units which are
the same as Corning's reportable operating segments. SFAS No. 142 requires
Corning to compare the fair value of the reporting unit to its carrying amount
on an annual basis to determine if there is potential impairment. If the fair
value of the reporting unit is less than its carrying value, an impairment loss
is recorded to the extent that the fair value of the goodwill within the
reporting unit is less than the carrying value. The fair value for goodwill is
determined based on discounted cash flows, market multiples or appraised values
as appropriate.
Other intangible assets are recorded at cost and amortized over periods
generally ranging from 5 to 20 years.
Impairment of Long-Lived Assets
Corning reviews the recoverability of its long-lived assets, such as plant and
equipment, goodwill, intangible assets and investments, when events or changes
in circumstances occur that indicate that the carrying value of the asset or
asset group may not be recoverable. The assessment of possible impairment is
based on Corning's ability to recover the carrying value of the asset or asset
group from the expected future pre-tax cash flows (undiscounted and without
interest charges) of the related operations. If these cash flows are less than
the carrying value of such asset, an impairment loss is recognized for the
difference between estimated fair value and carrying value. The measurement of
impairment requires management to estimate future cash flows and the fair value
of long-lived assets.
Treasury Stock
Shares of common stock repurchased by Corning are recorded at cost as treasury
stock and result in a reduction of stockholders' equity in the consolidated
balance sheets. From time to time, treasury shares may be reissued under
Corning's employee benefit plans. When shares are reissued, the company uses an
average cost method for determining cost. The difference between the cost of the
shares and the reissuance price is added or deducted from additional paid-in
capital.
Income Taxes
Corning uses the asset and liability approach to account for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the expected
future tax consequences of differences between the carrying amounts of assets
and liabilities and their respective tax basis using enacted tax rates in effect
for the year in which the differences are expected to reverse. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period when the change is enacted. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
1. Summary of Significant Accounting Policies (continued)
Derivative Instruments
Corning participates in a variety of foreign exchange forward contracts, foreign
exchange option contracts and interest rate swaps entered into in connection
with the management of its exposure to fluctuations in foreign exchange and
interest rates. These financial exposures are managed in accordance with
corporate policies and procedures.
All derivatives are recorded at fair value on the balance sheet. Effective
changes in the fair value of derivatives designated as cash flow hedges and
hedges of net investments in foreign operations are recorded in accumulated
other comprehensive income (loss). Amounts are reclassified from accumulated
other comprehensive income (loss) when the underlying hedged item impacts
earnings. Changes in the fair value of derivatives designated as fair value
hedges are recorded currently in earnings offset to the extent the derivative
was effective by the changes in the fair value of the hedged item. Changes in
the fair value of derivatives not designated as hedging instruments are recorded
currently in earnings.
Accounting Changes
Derivative Instruments and Hedging Activities
- ---------------------------------------------
Effective January 1, 2001, Corning adopted Financial Accounting Standards Board
(FASB) SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 requires
that all derivative financial instruments be recognized in the financial
statements and measured at fair value regardless of the purpose or intent for
holding them. Changes in the fair value of derivative financial instruments are
either recognized periodically in net earnings or shareholders' equity, as a
component of other comprehensive income, depending on whether the derivative is
being used to hedge changes in fair value or cash flows. Changes in fair value
of derivatives not designated as hedging instruments and the ineffective
portions of hedges are recognized in earnings in the current period. The
adoption of SFAS No. 133 as of January 1, 2001, resulted in a cumulative
after-tax credit to comprehensive income of $3 million. For the year ended
December 31, 2001, an after-tax loss of $4 million was recorded in "other
expense, net" for the ineffective portion of cash flow hedges. Corning did not
have any ineffective hedges for the year ended December 31, 2002. The amount
expected to be reclassified from other comprehensive loss to earnings over the
next 12 months is a loss of approximately $14 million after-tax.
Corning has issued foreign currency denominated debt that has been designated as
a hedge of the net investment in a foreign operation. The effective portion of
the changes in fair value of the debt is reflected as a component of other
comprehensive income (loss) as part of the foreign currency translation
adjustment. During 2001, the after-tax amounts included in other comprehensive
income (loss) as a result of the net investment hedge was $6 million.
Goodwill and Other Intangible Assets
- ------------------------------------
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and 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 selected the fourth quarter to perform an annual impairment
test for goodwill. Corning adopted SFAS No. 142 on January 1, 2002. Corning
completed its initial impairment review during the first quarter of 2002 and
concluded a transitional impairment charge from the adoption of the standard was
not required. As described in Note 4, during the fourth quarter of 2002, Corning
recorded a goodwill impairment charge in accordance with SFAS No. 142.
1. Summary of Significant Accounting Policies (continued)
The following table presents a reconciliation of reported net (loss) income and
(loss) earnings per share to adjusted net (loss) income and (loss) earnings per
share, as if SFAS No. 142 had been in effect as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------------
(In millions) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Reported net (loss) income $ (1,302) $ (5,498) $ 422
Goodwill amortization, net of income taxes 345 203
-----------------------------------------
Adjusted net (loss) income $ (1,302) $ (5,153) $ 625
=========================================
Reported net (loss) income per share - basic $ (1.39) $ (5.89) $ 0.49
Goodwill amortization, net of income taxes 0.37 0.24
-----------------------------------------
Adjusted net (loss) income per share - basic $ (1.39) $ (5.52) $ 0.73
=========================================
Reported net (loss) income per share - diluted $ (1.39) $ (5.89) $ 0.48
Goodwill amortization, net of income taxes 0.37 0.23
-----------------------------------------
Adjusted net (loss) income per share - diluted $ (1.39) $ (5.52) $ 0.71
=========================================
- ------------------------------------------------------------------------------------------------------------------------------------
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 APB 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 14. 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 does not
expect this standard to have a material impact on its consolidated financial
position or results of operations.
1. Summary of Significant Accounting Policies (concluded)
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," which expands previously issued accounting guidance and
disclosure requirements for certain guarantees. The interpretation requires an
entity to recognize an initial liability for the fair value of an obligation
assumed by issuing a guarantee. The provision for initial recognition and
measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. Corning does not expect
this interpretation to have a material impact on its consolidated financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123," which provides optional transition guidance for those companies electing
to voluntarily adopt the accounting provisions of SFAS No. 123. In addition, the
statement mandates certain new disclosures that are incremental to those
required by SFAS No. 123. Corning will continue to account for stock-based
compensation in accordance with APB No. 25. As such, Corning does not expect
this standard to have a material impact on its consolidated financial position
or results of operations. Corning has adopted the disclosure-only provisions of
SFAS No. 148 at December 31, 2002.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51," which requires all
variable interest entities (VIEs) to be consolidated by the primary beneficiary.
The primary beneficiary is the entity that holds the majority of the beneficial
interests in the VIE. In addition, the interpretation expands disclosure
requirements for both variable interest entities that are consolidated as well
as VIEs from which the entity is the holder of a significant amount of the
beneficial interests, but not the majority. The disclosure requirements of this
interpretation are effective for all financial statements issued after January
31, 2003. The consolidation requirements of this interpretation are effective
for all periods beginning after June 15, 2003. Management is still assessing the
impacts of this interpretation, however, it is reasonably possible that Corning
will be considered the primary beneficiary of three existing special purpose
entities and therefore would need to consolidate these entities beginning on
July 1, 2003. The assets and debt of these entities at December 31, 2002,
approximates $46 million.
2. Discontinued Operations
Precision Lens Business
On December 13, 2002, Corning completed the sale of its Cincinnati, OH precision
lens business to 3M Company (3M). This business manufactures precision lens
assemblies for projection video systems. Corning sold the precision lens
business for cash proceeds up to $850 million, of which $50 million has been
deposited in an escrow account. A portion of the escrow account balance will be
used to pay state income taxes relating to the transaction. The remaining
balance plus accrued interest will be paid to Corning in December 2003, subject
to any amounts due to 3M relating to certain indemnifications made by Corning.
The transaction price is also subject to adjustment due to changes in working
capital between signing and closing.
In 2002, proceeds from the sale of precision lens were approximately $800
million in cash. The gain on the sale was $415 million, net of tax, which has
been recorded in income from discontinued operations in the Consolidated
Statements of Operations. In 2003, Corning could record an additional gain on
the sale of up to $25 million, net of tax. This amount is conditional upon the
ultimate amount paid to Corning from the escrow account. Management currently
expects to receive additional proceeds of $10 million from 3M in the first
quarter of 2003 and $40 million in the fourth quarter of 2003, which is
currently held in escrow.
The precision lens business is accounted for as a discontinued operation and
therefore, the results of operations and cash flows have been removed from
Corning's results of continuing operations for all periods presented. The
precision lens business was part of Corning's former Information Display
Segment. The results of operations for the precision lens business have been
excluded from the Operating Segments data.
2. Discontinued Operations (concluded)
Summarized selected financial information for the discontinued operations
related to the precision lens business is as follows (in millions):
- --------------------------------------------------------------------------------
For the years ended December 31,
----------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Net sales $ 268 $ 225 $ 207
========================================
Income before taxes $ 100 $ 50 $ 70
Gain on sale before taxes 652
Provision for income taxes 274 16 24
----------------------------------------
Net income $ 478 $ 34 $ 46
========================================
- --------------------------------------------------------------------------------
Distribution of Shares of Quest Diagnostics and Covance Inc.
On December 31, 1996, Corning distributed shares of Quest Diagnostics
Incorporated and Covance Inc., which collectively comprised Corning's Health
Care Services Segment, to its shareholders on a pro rata basis (the
Distributions). Corning agreed to indemnify Quest Diagnostics on an after-tax
basis for the settlement of certain government claims and against certain other
claims that were pending at December 31, 1996. Coincident with the
Distributions, Corning recorded a payable to Quest Diagnostics of approximately
$25 million, which was management's best estimate of amounts which were probable
of being paid by Corning to Quest Diagnostics to satisfy the remaining
indemnified claims on an after-tax basis. Quest Diagnostics settled a
significant matter with the Department of Justice late in 2000 requiring Corning
to reimburse Quest Diagnostics $9 million. As a result, in the fourth quarter of
2000 Corning released reserves totaling $13 million after-tax in excess of the
indemnified settlement between Quest Diagnostics and the Department of Justice.
3. Inventory Write-down
During the second quarter of 2001, major customers in the photonic technologies
business reduced their order forecasts and canceled orders already placed. As a
result, management determined that certain products were not likely to be sold
in their product life cycle. Corning recorded a charge to write-down excess and
obsolete inventory, including estimated purchase commitments, of $273 million
($184 million after-tax) in "cost of sales" in the second quarter of 2001. In
the fourth quarter of 2001, Corning recorded an additional charge of $60 million
($37 million after-tax) in "cost of sales" for excess and obsolete inventory
primarily in the photonic technologies business in response to continued weak
demand.
During the second quarter of 2002, the photonic technologies business favorably
resolved an open issue from the second quarter of 2001 with a major customer,
which resulted 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, which resulted in the reversal of a vendor reserve of $20
million that was included in the second quarter 2001 charge. In total, the
impact of these settlements in the second quarter was pre-tax income of $23
million.
4. Impairment of Goodwill
2002 Charge
As discussed in New Accounting Standards and Note 1 to the Consolidated
Financial Statements, in January 2002, Corning adopted SFAS No. 142, which
requires companies to stop amortizing goodwill and certain intangible assets
with an indefinite useful life. Instead, SFAS No. 142 requires that goodwill be
reviewed for impairment upon adoption of SFAS No. 142 (January 1, 2002) and
annually thereafter. Corning performed an initial benchmark assessment upon
adoption at January 1, 2002, and determined that a transition charge was not
required. Corning chose the fourth quarter to conduct its annual impairment
test.
Under SFAS No. 142, goodwill impairment occurs if the net book value of a
reporting unit exceeds its estimated fair value. The majority of Corning's
goodwill is included in the telecommunications reporting unit, which is the same
as the Telecommunications Segment. The test completed in the fourth quarter
indicated that the recorded book value of this reporting unit exceeded its fair
value, as determined by discounted cash flows.
4. Impairment of Goodwill (concluded)
Management believes the telecommunication industry is currently depressed but
will ultimately recover. Management does not expect growth in this segment in
the short-term, but believes that growth will return to this segment by 2005.
Corning's view that the industry will recover is based on the fact that
bandwidth demand continues to grow currently, and the belief that a combination
of public policy changes, consolidation and recovery of industry players, and
the advancement of profitable broadband business models will drive recovery in
the future. The decrease in fair value from that measured in the benchmark
assessment primarily reflects:
.. a delay in the timing of the expected recovery from late 2002, or early
2003 to 2005,
.. a reduction in the short-term cash flow expectations of the fiber and cable
business and a lower base from which the expected recovery will occur, and
.. a reduction in the short and long-term cash flow expectations of the
photonic technologies business.
Management retained valuation specialists to assist in the valuation of its
tangible and identifiable intangible assets for purposes of determining the
implied fair value of goodwill at December 31, 2002. Upon completion of the
annual assessment, Corning recorded a non-cash impairment charge of $400 million
($294 million after-tax) to reduce the carrying value of goodwill in the
telecommunications reporting unit to its estimated fair value of $1.6 billion.
Management cannot provide assurance that future impairment charges will not be
required if the telecommunications industry does not recover as projected by
management in its expected future cash flow estimates. Management must exercise
judgment in assessing the recoverability of goodwill. See Critical Accounting
Estimates for related discussion.
2001 Charge
During the first half of 2001, Corning experienced a significant decrease in the
rate of growth of its Telecommunications Segment, primarily in the photonic
technologies business, due to a dramatic decline in infrastructure spending in
the telecommunications industry. During the second quarter, major customers in
the photonic technologies business reduced their order forecasts and canceled
orders already placed. As a result, management determined that the growth
prospects of this business were significantly less than previously expected and
those of historical periods.
Corning reviews the recoverability of its long-lived assets, including goodwill
and other intangible assets, when events or changes in circumstances occur that
indicate the carrying value of the asset may not be recoverable. As a result of
the business conditions noted above, Corning concluded such an assessment was
required for its photonic technologies business in the second quarter. Corning
assesses recoverability of the carrying value based upon cumulative expected
future pre-tax cash flows (undiscounted and without interest charges) of the
related operations.
As a result of this test, Corning determined that the long-lived assets,
including goodwill and other intangibles related to the acquisition of the
Pirelli optical components and devices business (the Pirelli transaction) in
December 2000, as well as those of the unit into which NetOptix Corporation
(acquired in May 2000) had been integrated, were not recoverable under SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of," which was the governing U.S. generally accepted
accounting principle (GAAP) guidance at that time. The impairment assessment was
performed at these levels as discrete cash flows were available for these
divisions within the photonic technologies business. Corning's policy is to
write-down long-lived assets to fair value in such circumstances.
Management estimated fair value using several techniques. While each method
generated comparable fair values, management adjusted the assets to estimates
based on average multiples of forecasted revenues and earnings of comparable
publicly traded companies with operations in the optical component market
segment. This valuation method is consistent with that used in the original
valuation of the acquisitions of Net Optix and certain assets from the Pirelli
transaction. The fair value of these assets were lower in June 2001 from their
acquisition dates as market multiples had changed from those reflected in
transactions consummated in 2000.
In the second quarter of 2001, Corning recorded pre-tax charges of $4,648
million to impair a significant portion of goodwill and $116 million to impair
other intangible assets. Of the total goodwill charge of $4,648 million, $3,038
million related to the Pirelli transaction and $1,610 million related to
goodwill resulting from the acquisition of NetOptix Corporation.
In the second quarter of 2001, it was determined that there were events of
impairment within portions of the photonic technologies business. The accounting
literature effective at that time (SFAS No. 121) required that intangible assets
be assessed for recoverability at the lowest level for which discrete cash flows
can be measured. As a result of this analysis, Corning recorded a charge of $116
million to impair a portion of the patents acquired in the Pirelli transaction.
The valuation methods from which this results are described above.
5. Restructuring Actions
2002 Restructuring Actions
The continued decline in demand in the Telecommunications Segment during 2002
required additional restructuring beyond that taken in 2001 to bring
manufacturing capacity in line with revenue projections. Corning recorded a
total of $1.3 billion in pre-tax charges over the second, third and fourth
quarters. Actions approved and initiated in 2002 included the following:
.. permanent closing of Corning's optical fiber manufacturing facilities in
Noble Park, Victoria, Australia, and Neustadt bei Coburg, Germany. Corning
also mothballed its optical fiber manufacturing facility in Concord, NC and
transferred certain capabilities to its Wilmington, NC facility,
.. reductions in capacity and employment in Corning's cabling and hardware and
equipment locations worldwide to reduce costs,
.. permanent closure of its photonic technologies thin film filter
manufacturing facility in Marlborough, MA,
.. 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 based upon a decision in the fourth quarter of 2002
to divest the portfolio.
Restructuring Charges
---------------------
The 2002 restructuring charges of $447 million included $376 million of
employee separation costs (including special termination and curtailment
losses related to pension and postretirement health care plans), $85
million in other exit costs (principally lease termination and contract
cancellation payments) and a $14 million credit related to the 2001
restructuring actions. The charge entailed the elimination of approximately
7,100 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 $712 million in 2002 to
impair plant and equipment related to facilities to be shutdown or
disposed, primarily in the fiber and cable business, the photonic
technologies business and certain research facilities. The charge was
partially offset by an $11 million adjustment to assumed salvage values on
asset disposals, related to the 2001 restructuring actions. Of the 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 were 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 remaining impaired equipment
will be auctioned, sold, disposed of or abandoned during 2003.
Loss on Divestiture
-------------------
In the second quarter of 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, note proceeds of $6 million and
recorded a loss on the sale of approximately $16 million ($10 million
after-tax) which is included in impairment charges.
5. Restructuring Actions (continued)
Impairment of Cost Investments
------------------------------
During the second and fourth quarters of 2002, Corning recorded total
charges of $107 million ($66 million after-tax) for other than temporary
declines in certain cost investments in the Telecommunications Segment. In
the fourth quarter, Corning decided to divest its remaining portfolio of
cost investments in private telecommunications related companies. These
investments have been written down to their estimated fair value based upon
information available from prospective purchasers.
The following table illustrates the charges, credits and balances of the
restructuring reserves as of December 31, 2002 (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Remaining
Net Cash reserve at
January 1, charges/ Non-cash payments Dec. 31,
2002 credits charges in 2002 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring charges:
Employee related costs $ 198 $ 371 (a) $ 40 $ 256 $ 273
Other charges 78 76 (b) 22 132
----------------------------------------------------------------------
Total restructuring charges $ 276 $ 447 $ 40 $ 278 $ 405
----------------------------------------------------------------------
Impairment of long-lived assets:
Assets to be disposed of by sale or abandonment $ 717 (c) $ 717
Cost investments 107 107
------------------------
Total impairment charges $ 824 $ 824
------------------------
Total restructuring and impairment
charges and credits $ 1,271
Tax benefit and minority interest 342
---------
Restructuring and impairment charges and credits, net $ 929
=========
- ------------------------------------------------------------------------------------------------------------------------------------
(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 $9 million adjustment in other exit costs reflecting the
difference between estimated and actual costs.
(c) Amount is net of $11 million adjustment to assumed salvage values on asset
disposals and includes $16 million loss on divestiture.
The following table illustrates the charges for 2002 restructuring actions as it
relates to Corning's operating segments (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Charges for restructuring actions
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Functions
Telecom- Including
munications Technologies Research Total
- ------------------------------------------------------------------------------------------------------------------------------------
Charges for restructuring actions $ 1,053 $ 10 $ 208 $ 1,271
============================================================
- ------------------------------------------------------------------------------------------------------------------------------------
The following table illustrates the headcount reduction amongst U.S. Hourly,
U.S. Salaried and Non-U.S. positions:
- ------------------------------------------------------------------------------------------------------------------------------------
Headcount reduction
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
- ------------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 1,650 2,950 2,500 7,100
============================================================
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2002, approximately 5,100 of the 7,100 employees had been
separated under the plans. Although Corning expects the remaining employees to
be separated by December 31, 2003, the majority of these employees will be
separated by the end of the first quarter of 2003. Corning expects approximately
one third of the 2002 restructuring charges to be paid in cash.
5. Restructuring Actions (continued)
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, in the Telecommunications and Technologies
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 $953 million ($585 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 of which $3 million and $5 million,
respectively related to discontinued operations. Approximately one third of the
total charge was expected to be paid in cash. As of December 31, 2002, all of
the 12,000 employees had been separated under the plans. 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 December 31, 2001 (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Non- Cash Remaining
Total cash payments reserve at
charges charges in 2001 Dec. 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring charges:
Employee related costs $ 324 $ 66 $ 60 $ 198
Other charges 95 17 78
------------------------------------------------------------
Total restructuring charges $ 419 $ 66 $ 77 $ 276
------------------------------------------------------------
Impairment of long-lived assets:
Assets held for use $ 46 $ 46
Assets held for disposal 496 496
-------------------------
Total impairment charges $ 542 $ 542
-------------------------
Total restructuring and impairment charges $ 961
Discontinued operations (8)
---------
Restructuring and impairment charges
from continuing operations 953
Tax benefit and minority interest 368
---------
Restructuring and impairment charges, net $ 585
=========
- ------------------------------------------------------------------------------------------------------------------------------------
The following table illustrates the charge for 2001 restructuring actions as it
relates to Corning's operating segments (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Charges for restructuring actions
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate
Functions
Telecom- Including
munications Technologies Research Total
- ------------------------------------------------------------------------------------------------------------------------------------
Charges for restructuring actions $ 640 $ 122 $ 191 $ 953
=============================================================
- ------------------------------------------------------------------------------------------------------------------------------------
5. Restructuring Actions (concluded)
The following table illustrates the headcount reduction amongst U.S. Hourly,
U.S. Salaried and Non-U.S. positions:
- ------------------------------------------------------------------------------------------------------------------------------------
Headcount reduction
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
- ------------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 6,000 3,100 2,900 12,000
============================================================
- ------------------------------------------------------------------------------------------------------------------------------------
6. Impairment of Long-Lived Assets Other Than Goodwill
Photonic technologies business
The photonic technologies business is a manufacturer of photonic modules and
components for the worldwide telecommunications industry and is reported in the
Telecommunications Segment. The telecommunications market is undergoing a
dramatic decline in demand for telecommunication products as major buyers of
network equipment in this industry have reduced their capital spending plans
over the past two years and are expected to continue such reductions in the near
future. The lack of demand for optical component products started in early 2001
and resulted in restructuring and impairment charges in 2001 and 2002. This
negative trend is expected to continue into the foreseeable future.
As disclosed in Corning's third quarter Form 10-Q, certain competitors indicated
that they will exit the business and others announced decisions to consolidate
or restructure. Corning continues to evaluate strategic alternatives for this
business. While certain product lines are promising in the event of industry
recovery, the pace and extent of that recovery is uncertain. As short term
projections reflect continued operating and cash losses and the long-term
expectations are uncertain, it was determined that the long-lived assets of this
business (property, plant and equipment and patents) should be evaluated for
impairment.
The impairment evaluation required management to develop operating cash flow
projections for each strategic alternative and make assessments as to the
probability of each outcome. It was determined that the long-lived assets of
this business were not recoverable through future cash flows. The assets were
written down to estimated salvage value, as this amount is the best reflection
of fair value. This resulted in a $269 million ($195 million after-tax)
write-down of the assets, which was reflected in the line item "restructuring,
impairment and other charges" in the Consolidated Statements of Operations. The
charge included $90 million related to patents. The estimate of salvage value is
an area of management judgement. See Critical Accounting Estimates for related
discussion. The remaining long-term assets of this business approximate $24
million and are classified as "held for use."
Conventional video components business
Corning Asahi Video Products Company, a 51% owned consolidated subsidiary,
(conventional video components business), is a manufacturer of glass panels and
funnels for use in conventional tube televisions and is reported in the
Technologies Segment for SFAS No. 131 reporting. The conventional tube
television segment of the market in North America is very mature and highly
competitive. The market has been impacted by a decline in demand for
conventional television glass associated with shifting consumer preference for
flat panel and projection television sets, as well as other competing
technologies. The segment has also been impacted by dramatic increases in the
importation of television glass, tubes and sets from Asia. The conventional
television tube market is undergoing intense competition at this time and as a
result is experiencing tremendous price pressure. One major customer has already
exited this market and industry consolidation continues. Demand from another key
customer is uncertain. Competition from imported products has increased
significantly within the last year, while the demand for flat screen televisions
has been increasing for several years. These trends are expected to continue
into the foreseeable future.
These market trends combined with cash losses in this business in the short-term
indicated an evaluation for the recoverability of the long-lived assets of the
business was required and management determined that the long-lived assets of
the business have been impaired. The impairment evaluation required management
to develop operating cash flow projections for each strategic alternative and
make assessments as to the probability of each outcome. It was determined that
the long lived assets were not recoverable through future cash flows. Management
estimated the fair value of the long-lived assets, which were limited to
property, plant and equipment, using the expected cash flow approach as a
measure of fair value. This resulted in a $140 million ($44 million after-tax
and minority interest) write-down of the assets, which was reflected in the line
item "restructuring, impairment and other charges" in the Consolidated
Statements of Operations.
6. Impairment of Long-Lived Assets Other Than Goodwill (concluded)
The cash flow realized by this business will be impacted by actions taken by
competitors and customers. Should our future performance differ adversely from
our projections, Corning could be required to record additional impairment
charges. It is also possible that Corning could choose to exit the business
should cash flows be less than projected. The remaining net assets of this
business approximate $77 million.
7. Short-Term Investments
Short-term investments held by Corning are debt securities classified as
available-for-sale. Corning invests in publicly traded, highly liquid securities
of entities with credit ratings of A, or better. Unrealized gains and losses,
net of related income taxes, for available-for-sale securities are included as a
separate component of shareholders' equity. Corning determines cost on the
specific identification basis. The following is a summary of available-for-sale
securities (in millions):
- --------------------------------------------------------------------------------
Amortized Fair Unrealized
December 31, 2002 Cost Value Gains
- --------------------------------------------------------------------------------
Bonds, notes, and other securities
United States government and agencies $ 314 $ 315 $ 1
States and municipalities 127 127
Asset-backed securities 54 54
Commercial paper 10 10
Other debt securities 112 113 1
- --------------------------------------------------------------------------------
Total short-term investments $ 617 $ 619 $ 2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Amortized Fair Unrealized
December 31, 2001 Cost Value Gains
- --------------------------------------------------------------------------------
Bonds, notes, and other securities
United States government and agencies $ 262 $ 262
States and municipalities 206 206
Asset-backed securities 365 369 $ 4
Corporate bonds 206 206
Commercial paper 20 20
Certificates of deposit 16 16
Other debt securities 103 103
- --------------------------------------------------------------------------------
Total short-term investments $1,178 $1,182 $ 4
- --------------------------------------------------------------------------------
Unrealized losses were under $1 million in 2002 and 2001.
All of these securities are available for immediate sale. The following table
summarizes the contractual maturities of debt securities at December 31, 2002
(in millions):
- --------------------------------------------------------------------------------
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
Less than one year $ 120 $ 121
Due in 1-2 years 324 325
Due in 2-5 years 103 103
Due after 5 years 70 70
- --------------------------------------------------------------------------------
Total $ 617 $ 619
- --------------------------------------------------------------------------------
Proceeds from sales of short-term investments totaled $2,204 million and $660
million in 2002 and 2001. The gross realized gains related to sales of
short-term investments were $10 million in 2002 and $2 million in 2001. The
gross realized losses related to sales of short-term investments were $8 million
in 2002 and $2 million in 2001.
8. Inventories
Inventories consisted of the following (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Finished goods $ 212 $ 251
Work in process 115 153
Raw materials and accessories 135 210
Supplies and packing materials 97 111
- ------------------------------------------------------------------------------------------------------------------------------------
Total inventories $ 559 $ 725
- ------------------------------------------------------------------------------------------------------------------------------------
9. Income Taxes
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------
(In millions) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations before income taxes:
U.S. companies $ (2,045) $ (2,995) $ 692
Non-U.S. companies (675) (3,166) (71)
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations before income taxes $ (2,720) $ (6,161) $ 621
- ------------------------------------------------------------------------------------------------------------------------------------
Current and deferred (benefit) provision for income taxes:
Current:
Federal $ (330) $ (22) $ 283
State and municipal (7) 9 64
Foreign 43 73 83
Deferred:
Federal (263) (420) (36)
State and municipal (70) (72) (17)
Foreign (99) (36) 6
- ------------------------------------------------------------------------------------------------------------------------------------
(Benefit) provision for income taxes $ (726) $ (468) $ 383
- ------------------------------------------------------------------------------------------------------------------------------------
Effective tax rate reconciliation:
Statutory U.S. income tax (benefit) rate (35.0)% (35.0)% 35.0%
State income (benefit) tax, net of federal benefit (2.7) (0.8) 4.2
Nondeductible goodwill and other expenses 1.1 28.4 32.1
Foreign and other tax credits (0.3)
Lower taxes on subsidiary earnings (0.1) (0.3) (7.9)
Valuation allowance 10.2 0.5 (0.9)
Other items, net (0.2) (0.1) (0.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Effective income tax (benefit) rate (26.7)% (7.6)% 61.7%
- ------------------------------------------------------------------------------------------------------------------------------------
9. Income Taxes (concluded)
The tax effects of temporary differences and carryforwards that gave rise to
significant portions of the deferred tax assets and liabilities included the
following (in millions):
- --------------------------------------------------------------------------------
December 31,
----------------------------
2002 2001
- --------------------------------------------------------------------------------
Loss and tax credit carryforwards $ 435 $ 293
Capitalized research and development 182
Restructuring reserves 532 279
Postretirement medical and life benefits 240 243
Inventory 93 131
Intangible and other assets 111 100
Other accrued liabilities 121 74
Other employee benefits 45 19
Other 68 14
- --------------------------------------------------------------------------------
Gross deferred tax assets 1,827 1,153
Valuation allowance (417) (189)
- --------------------------------------------------------------------------------
Deferred tax assets 1,410 964
- --------------------------------------------------------------------------------
Fixed assets (224) (261)
Pensions (37)
Other (3) (6)
- --------------------------------------------------------------------------------
Deferred tax liabilities (227) (304)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 1,183 $ 660
- --------------------------------------------------------------------------------
The change in the total valuation allowance for the years ended December 31,
2002 and 2001, was an increase of $228 million and $117 million, respectively.
The increase in the 2002 valuation allowance was primarily due to the
uncertainty regarding the realization of certain foreign tax benefits, foreign
net operating losses and foreign tax credits.
Corning currently provides income taxes on the earnings of foreign subsidiaries
and associated companies to the extent these earnings are currently taxable or
expected to be remitted. Taxes have not been provided on approximately $1
billion of accumulated foreign unremitted earnings which are expected to remain
invested indefinitely.
Corning does not provide income taxes on the post-1992 earnings of domestic
subsidiaries which Corning expects to recover tax-free without significant cost.
Income taxes have been provided for post-1992 unremitted earnings of domestic
corporate joint ventures which Corning does not expect to recover tax-free.
Unremitted earnings of domestic subsidiaries and corporate joint ventures that
arose in fiscal years beginning on or before December 31, 1992, have been
indefinitely reinvested.
At December 31, 2002, Corning had tax benefits attributable to loss
carryforwards and credits aggregating $435 million that expire at various dates
beginning in 2003 through 2022, if not utilized. A portion of the valuation
allowance arises from uncertainty as to the realization of certain of these tax
credit and net operating loss carryovers.
In 2001, tax legislation was enacted in the U.S. that temporarily extended the
net operating loss carryback period from two to five years. Due to this
legislative 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. Other accounts receivable at December 31, 2002, include a
receivable of $192 million as a result of Corning availing itself of this
opportunity. Corning expects to receive this refund in the second quarter of
2003.
10. Investments
Associated Companies at Equity
Samsung Corning Company Ltd. (Samsung Corning), a 50%-owned South Korea-based
manufacturer of glass panels and funnels for television and display monitors,
represented $381 million and $315 million of Corning's investments accounted for
by the equity method at year-end 2002 and 2001, respectively.
The financial position and results of operations of Samsung Corning and
Corning's other equity companies are summarized as follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Samsung Total Samsung Total Samsung Total
Corning Equity Corning Equity Corning Equity
Co. Ltd. Companies Co. Ltd. Companies Co. Ltd. Companies
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 854 $ 1,846 $ 886 $ 1,892 $ 1,011 $ 1,739
Gross profit 222 645 244 648 346 650
Net income 99 317 107 340 211 366
-----------------------------------------------------------------------------
Corning's equity in net income (1) (2) $ 44 $ 116 $ 51 $ 148 $ 104 $ 149
-----------------------------------------------------------------------------
Current assets $ 344 $ 851 $ 332 $ 821 $ 410 $ 1,091
Long-lived assets 864 1,562 872 1,398 866 1,311
-----------------------------------------------------------------------------
Current liabilities $ 175 $ 516 $ 174 $ 557 $ 293 $ 823
Long-term debt 89 180 164 220 152 275
Long-term liabilities 116 181 173 198 178 217
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Equity in earnings shown above and in the Consolidated Statements of
Operations is net of amounts recorded for income tax.
(2) Includes $34 million and $36 million of charges for impairment in 2002 and
2000, respectively.
Dividends received from Samsung Corning and Corning's other equity companies
totaled $84 million, $73 million and $45 million in 2002, 2001 and 2000,
respectively. At December 31, 2002, approximately $613 million of equity in
undistributed earnings of equity companies was included in Corning's accumulated
deficit.
Samsung Corning's 2000 results include a nonoperating gain of $23 million from
the sale of its interest in Samsung Corning Precision Glass Company Ltd.
(Samsung Corning Precision). Corning's 50% share of this gain is included in its
equity earnings. Corning continues to maintain a 50% interest in Samsung Corning
Precision.
10. Investments (continued)
Dow Corning Corporation
Corning and The Dow Chemical Company each own 50% of the common stock of Dow
Corning Corporation, which has been in reorganization proceedings under Chapter
11 of the United States Bankruptcy Code since May, 1995. Dow Corning filed for
bankruptcy protection to address pending and claimed liabilities arising from
breast-implant product lawsuits. On November 8, 1998, Dow Corning and the Tort
Claimants Committee jointly filed a revised Plan of Reorganization (Joint Plan)
which provided for the settlement or other resolution of implant claims. The
Joint Plan included releases for third parties (including Corning and Dow
Chemical as shareholders) in exchange for contributions to the Joint Plan. By an
order dated November 30, 1999, the Bankruptcy Court confirmed the Joint Plan,
but with certain limitations concerning the third party releases as reflected in
an opinion issued on December 21, 1999. On November 13, 2000, the U.S. District
Court for the Eastern District of Michigan reversed the Bankruptcy Court's order
with respect to these limitations on the third-party releases and confirmed the
Joint Plan. Certain foreign claimants, the U.S. government, and certain other
tort claimants appealed from the District Court's order. 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. 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.
On December 11, 2002, the District Court entered further findings and
conclusions supporting the non-debtor releases. Certain tort claimants have
filed a notice of appeal to the U.S. Court of Appeals for the Sixth Circuit from
the District Court's order. Management expects the appellate process may take
another 12 to 16 months. 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 Joint 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 in Legal Proceedings
(Item 3). 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 arguments on this appeal on May 2,
2002, and has not ruled. The amount of additional interest, costs and fees
claimed by the commercial creditors is approximately $100 million pre-tax more
than Dow Corning believes it should pay.
In 1995, Corning fully reserved its investment in Dow Corning upon its filing
for bankruptcy and has not recognized equity earnings since the second quarter
of 1995. Corning has determined that this decline in the value of its investment
in Dow Corning is other than temporary. Management has assessed the December 11,
2002, findings by Judge Hood and concluded that emergence of Dow Corning
Corporation from bankruptcy protection is probable. Management has also
concluded that it has adequately provided for the other than temporary decline
associated with the bankruptcy. With the exception of the remote possibility of
a future bankruptcy related charge, Corning considers the difference between the
carrying value of its investment in Dow Corning and its 50 percent share of Dow
Corning's equity to be permanent. This difference is $270 million at December
31, 2002.
Corning will resume recognition of equity earnings from Dow Corning in the first
quarter of 2003. Corning does not expect to receive dividends from Dow Corning
in 2003.
10. Investments (continued)
The financial position and results of operations of Dow Corning are summarized
in the table below as follows (in millions):
- --------------------------------------------------------------------------------
Years ended December 31,
----------------------------------
2002 2001 (2) 2000 (2)
- --------------------------------------------------------------------------------
Net sales $ 2,610 $ 2,438 $ 2,751
Gross profit 727 541 725
Net income (loss) 59 (28) 101
- --------------------------------------------------------------------------------
Current assets $ 2,164 $ 2,014 $ 1,801
Long-lived assets 3,511 3,115 4,676
- --------------------------------------------------------------------------------
Current liabilities $ 1,170 $ 880 $ 947
Long-term debt 55 39 92
Long-term liabilities 242 207 257
Liabilities subject to compromise (1) 3,667 3,524 4,618
Shareholders' equity 541 479 563
- --------------------------------------------------------------------------------
(1) Dow Corning's financial statements for 2002, 2001 and 2000 have been
prepared in conformity with the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting by Entities
in Reorganization under the Bankruptcy Code," (SOP 90-7). SOP 90-7 requires
a segregation of liabilities subject to compromise by the Bankruptcy Court
as of the filing date (May 15, 1995) and identification of all transactions
and events that are directly associated with the reorganization.
(2) In 2002, Dow Corning changed it inventory valuation methodology from
last-in, first-out (LIFO) to first-in, first-out (FIFO). Prior periods have
been restated.
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, and
later for a period from December 23, 2002, through January 23, 2003, when it
expired by its terms. Under the terms of the Bankruptcy Court's Order, Corning
has 90 days from the expiration of the Injunction Period 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.
10. Investments (concluded)
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 and past trends
may not be indicators of future 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 December 31, 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 $125 million to $175 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
Other Investments
Corning's other investments include equity securities, which are classified as
available-for-sale. At December 31, 2002, the fair value and cost of Corning's
equity securities was $23 million. At December 31, 2001, the fair value and cost
of Corning's equity securities was $142 million and $148 million, respectively.
The difference included gross unrealized losses of $6 million.
Proceeds from sales of other investments were $1 million and $38 million in 2002
and 2001, respectively, and related gross realized (losses) gains included in
income were $(1) million and $22 million in 2002 and 2001, respectively.
In 2002, Corning management decided to divest its portfolio of cost based
investments related to start-up companies with emerging technologies in the
telecommunications industry. As a result, management impaired the portfolio to
estimated fair market value.
11. Property, Net
Property, net included the following (in millions):
- --------------------------------------------------------------------------------
December 31,
------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Land $ 93 $ 97
Buildings 1,828 1,808
Equipment 4,620 5,011
Construction in progress 539 1,282
- --------------------------------------------------------------------------------
7,080 8,198
Accumulated depreciation (3,375) (3,101)
- --------------------------------------------------------------------------------
Property, net $ 3,705 $ 5,097
- --------------------------------------------------------------------------------
Approximately $13 million, $49 million and $57 million of interest costs were
capitalized as part of property, net in 2002, 2001 and 2000, respectively.
12. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the year ended December 31,
2002, by segment follow (in millions):
- --------------------------------------------------------------------------------
Telecom-
munications Technologies Total
- --------------------------------------------------------------------------------
Balance at January 1, 2002 $ 1,772 $ 165 $ 1,937
Foreign currency translation 90 90
Impairment (400) (400)
Divestitures (16) (6) (22)
Acquisitions 110 110
- --------------------------------------------------------------------------------
Balance at December 31, 2002 $ 1,556 $ 159 $ 1,715
- --------------------------------------------------------------------------------
Other intangible assets consisted of the following (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Patents and trademarks $ 138 $ 40 $ 98 $ 262 $ 46 $ 216
Non-competition agreements 106 62 44 101 40 61
Other 5 2 3 17 4 13
-------------------------------------------------------------------------------
Total amortized intangible assets 249 104 145 380 90 290
-------------------------------------------------------------------------------
Other intangible assets:
Intangible pension assets 68 68
Deferred financing costs 48 48 62 62
-------------------------------------------------------------------------------
Total other intangible assets 116 116 62 62
-------------------------------------------------------------------------------
Total $ 365 $ 104 $ 261 $ 442 $ 90 $ 352
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets are primarily related to the Telecommunications
Segment.
Amortization expense related to these intangible assets is expected to be in the
range of approximately $20 million to $30 million annually from 2003 to 2007.
13. Other Accrued Liabilities
Other accrued liabilities included the following (in millions):
- --------------------------------------------------------------------------------
December 31,
-----------------------------------
2002 2001
- --------------------------------------------------------------------------------
Restructuring reserves $ 405 $ 276
Wages and employee benefits 224 230
Income taxes 153 139
Other 355 431
- --------------------------------------------------------------------------------
Other accrued liabilities $ 1,137 $ 1,076
- --------------------------------------------------------------------------------
Provisions for estimated expenses related to product warranties are made at the
time the products are sold using historical experience as a prediction of
expected settlements. Reserves are adjusted when experience indicates an
expected settlement will differ from initial estimates. Corning's reserve
relates primarily to its Telecommunications Segment. Reserves for warranty items
are included in other current liabilities. A reconciliation of the changes in
the product warranty liability during 2002 is as follows (in millions):
- --------------------------------------------------------------------------------
Balance at December 31, 2001 $ 60
Provision based on 2002 sales 15
Adjustments to liability existing on January 1, 2002 (4)
Foreign currency translation 4
Settlements made during 2002 (11)
------
Balance at December 31, 2002 $ 64
- --------------------------------------------------------------------------------
14. Long-Term Debt and Loans Payable
Long-term debt and loans payable consisted of the following (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Loans Payable
Current portion of long-term debt $ 191 $ 244
Other short-term borrowings 13 233
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans payable $ 204 $ 477
- ------------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt
Debentures, 8.25%, due 2002 $ 75
Debentures, 6%, due 2003 $ 100 100
Euro notes, 5.625%, due 2005 206 178
Debentures, 7%, due 2007, net of unamortized discount of
$25 million in 2002 and $28 million in 2001 75 72
Convertible notes, 4.875%, due 2008 96 96
Convertible debentures, 3.5%, due 2008 665 665
Notes, 6.3%, due 2009 150 150
Euro notes, 6.25%, due 2010 310 267
Debentures, 6.75%, due 2013 100 100
Zero coupon convertible debentures, 2%, due 2015, redeemable
and callable in 2005 1,606 2,059
Debentures, 8.875%, due 2016 86 74
Debentures, 8.875%, due 2021 88 75
Debentures, 7.625%, putable in 2004, due 2024 100 100
Medium-term notes, average rate 7.9%, due through 2025 242 231
Debentures, 6.85%, due 2029 150 150
Other, average rate 1.9%, due through 2015 180 315
- ------------------------------------------------------------------------------------------------------------------------------------
Total long-term debt 4,154 4,707
Less current portion of long-term debt 191 244
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 3,963 $ 4,463
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2002 and 2001, the weighted-average interest rate on short-term
borrowings was 5.5% and 4.6%, respectively.
Based on borrowing rates currently available to Corning for loans with similar
terms and maturities, the fair value of long-term debt was $3.105 billion at
year-end 2002.
The following table shows the maturities by year of the total long-term debt
obligations at December 31 (in millions):
- --------------------------------------------------------------------------------
2003 2004 2005 2006 2007-2029
- --------------------------------------------------------------------------------
$191 $127 $1,910 $11 $1,964
- --------------------------------------------------------------------------------
The zero coupon convertible debentures are presented in the above table as due
in 2005 representing the earliest possible redemption date.
During 2002, Corning repurchased and retired a portion of its zero coupon
convertible debentures due November 8, 2015, with an accreted value of $493
million in exchange for cash of $308 million in a series of open-market
purchases. Corning recorded a gain of $176 million ($108 million after-tax) 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.
14. Long-Term Debt and Loans Payable (concluded)
In November 2001, Corning completed a convertible debt offering of $665 million
due November 1, 2008 and convertible into approximately 69 million shares of
common stock. Each $1,000 debenture was issued at par and pays interest of 3.5%
semi-annually on May 1 and November 1 of each year. The debentures are available
for conversion into 103.3592 shares of Corning common stock if certain
conditions are met. Corning may repurchase securities at certain redemption
prices beginning on November 8, 2004.
In November 2000, Corning completed an offering of $2.7 billion (amount due at
maturity) of zero coupon convertible debentures which generated net proceeds of
approximately $2.0 billion. The initial price of the debentures was $741.92 with
a 2% annual yield. Interest is compounded semi-annually with a 25% conversion
factor. The remaining debentures mature on November 8, 2015, and are convertible
into approximately 17 million shares of Corning common stock at the rate of
8.3304 per $1,000 debenture. Corning may call the debentures at any time on or
after November 8, 2005. The debentures may be redeemed for $819.54 on November
8, 2005 and $905.29 on November 8, 2010. The holder can convert the debenture
into Corning common stock at any time prior to maturity or redemption. Corning
has the option of settling this obligation in cash, common stock, or a
combination of both.
In February 1998, Oak Industries Inc. (Oak) issued $100 million of convertible
subordinated notes bearing interest at 4.875%, due in 2008. The notes are
convertible into 6 million shares of Corning common stock at a conversion price
of approximately $16 per share.
Corning has full access to a revolving line of credit with a syndicate of banks
for $2.0 billion. The line of credit expires in August 2005. There were no
borrowings under the agreement at December 31, 2002. The revolving credit
agreements provide for borrowing of U.S. dollars and Eurocurrency at various
rates and supports Corning's commercial paper program when available. The
facility includes a covenant requiring Corning to maintain a total debt to total
capital ratio, as defined, not greater than 60%. At December 31, 2002, this
ratio was 47%.
15. Employee Retirement Plans
Corning has defined benefit pension plans covering certain domestic and
international employees. Corning's funding policy has been to contribute, as
necessary, an amount determined jointly by Corning and its consulting actuaries,
which provides for the current cost and amortization of prior service cost. In
2002, Corning made a voluntary incremental contribution of $40 million to the
pension trust. In 2000, Corning amended its U.S. pension plan to include a cash
balance pension feature. All salaried and non-union hourly employees hired
before July 1, 2000, were given the choice of staying in the existing plan or
participating in the cash balance plan beginning January 1, 2001. Salaried
employees hired after July 1, 2000, automatically became participants in the new
cash balance plan. Under the cash balance plan, employee accounts are credited
monthly with a percentage of eligible pay based on age and years of service.
Benefits remain 100% vested after five years of service.
Corning and certain of its domestic subsidiaries also offer defined benefit
postretirement plans that provide health care and life insurance benefits for
retirees and eligible dependents. Certain employees may become eligible for such
postretirement benefits upon reaching retirement age. Prior to January 1, 2003,
Corning's principal retiree medical plans required retiree contributions each
year equal to the excess of medical cost increases over general inflation rates.
In response to rising health care costs, effective January 1, 2003, Corning
changed its cost-sharing approach for retiree medical coverage. For current
retirees (including surviving spouses) and active employees eligible for the
salaried retiree medical program, Corning is placing a "cap" on the amount it
will contribute toward retiree medical coverage in the future. The cap will
equal 150% of Corning's 2001 contributions toward retiree medical benefits. Once
Corning's contributions toward retiree medical costs reach this cap, impacted
retirees will have to pay the excess amount, in addition to their regular
contributions for coverage.
15. Employee Retirement Plans (continued)
The change in benefit obligation and funded status of Corning's employee
retirement plans follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
------------------------- ------------------------
December 31, 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 1,742 $ 1,610 $ 631 $ 556
Service cost 37 38 11 14
Interest cost 125 118 52 43
Plan participants' contributions 3 4 4 3
Amendments 22 (3) (80) (3)
Curtailment (gain) loss (15) 14 (9) (13)
Special termination benefits 21 18 11 17
Actuarial losses 82 92 151 57
Benefits paid (147) (144) (53) (43)
Foreign currency exchange rate changes 20 (5)
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 1,890 1,742 718 631
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at beginning of year 1,628 1,872
Actual loss on plan assets (76) (152)
Employer contributions 96 51
Plan participants' contributions 3 4
Benefits paid (147) (144)
Foreign currency exchange rate changes 13 (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 1,517 1,628
- ------------------------------------------------------------------------------------------------------------------------------------
Unfunded status (373) (114) (718) (631)
Unrecognized transition asset (1) (1)
Unrecognized prior service cost (credit) 70 79 (71) (3)
Unrecognized actuarial loss (gain) 402 111 127 (15)
- ------------------------------------------------------------------------------------------------------------------------------------
Recognized asset (liability) $ 98 $ 75 $ (662) $ (649)
- ------------------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid benefit cost $ 205 $ 75
Accrued benefit liability (107) $ (662) $ (649)
Additional minimum liability (348)
Intangible asset 68
Accumulated other comprehensive loss 280
- ------------------------------------------------------------------------------------------------------------------------------------
Recognized asset (liability) $ 98 $ 75 $ (662) $ (649)
- ------------------------------------------------------------------------------------------------------------------------------------
In 2002, global capital market developments resulted in negative returns on
Corning's pension funds and a decline in the discount rate used to estimate the
pension liability. As a result, the accumulated benefit obligation exceeded the
fair value of plan assets, which required Corning to record a minimum pension
liability in the consolidated balance sheet. The effect of this adjustment was
to increase pension liabilities by $348 million, increase intangible assets by
$68 million and increase accumulated other comprehensive loss by $280 million.
Defined benefit pension plan assets are comprised principally of publicly traded
debt and equity securities. Corning common stock represented 0.1% and 0.3% of
plan assets at year-end 2002 and 2001, respectively. Corning has not funded its
postretirement benefit obligations.
At December 31, 2002, the defined pension benefit plans in which the fair value
of plan assets exceeded the benefit obligation had obligations of $104 million
and assets of $109 million. The defined benefit plans in which the benefit
obligation exceeded the fair value of plan assets had obligations of $1,786
million and assets of $1,408 million.
15. Employee Retirement Plans (concluded)
At December 31, 2001, the defined benefit plan in which the fair value of plan
assets exceeded the benefit obligation had obligations of $1,522 million and
assets of $1,535 million. The defined benefit plans in which the benefit
obligation exceeded the fair value of plan assets had obligations of $220
million and assets of $93 million.
The weighted-average assumptions for Corning's domestic employee retirement
plans follow:
- ------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
Years ended December 31, 2002 2001 2000 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Discount rate 6.75% 7.25% 7.75% 6.75% 7.25% 7.75%
Expected return on plan assets 9.0% 9.0% 9.0%
Rate of compensation increase 4.5% 4.5% 4.5%
- ------------------------------------------------------------------------------------------------------------------------------------
The expected rate of return on plan assets that will be used to determine 2003
net periodic benefit cost is 8.5%.
Corning's consolidated postretirement benefit obligation is determined by
application of the terms of health care and life insurance plans, together with
relevant actuarial assumptions and health care cost trend rates. Assumed health
care trend rates have a significant effect on the amounts reported for the
health care plans. For measurement purposes, a 10% annual rate of increase in
the per capita cost of covered health care benefits was assumed in 2002. The
rate was assumed to decline to 9% in 2003 and decrease on a linear basis to 5%
in 2007 and remain at that level thereafter.
A one-percentage-point change in 2002 assumed health care trend rates would have
the following effects (in millions):
- --------------------------------------------------------------------------------
One-Percentage-Point
Increase Decrease
- --------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 6.8 $ (5.8)
Effect on postretirement benefit obligation 43.2 (38.0)
- --------------------------------------------------------------------------------
The components of net periodic benefit expense for Corning's employee retirement
plans follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
--------------------------------- ----------------------------------
Years ended December 31, 2002 2001 2000 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 37 $ 38 $ 32 $ 11 $ 14 $ 10
Interest cost 125 118 117 52 43 41
Expected return on plan assets (159) (161) (148)
Amortization of transition asset (1) (1)
Amortization of net loss (gain) 2 (6) (1) 2 (2)
Amortization of prior service cost (credit) 11 14 16 (1) (1) (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit expense 16 2 15 64 56 48
- ------------------------------------------------------------------------------------------------------------------------------------
Discontinued operations - precision lens business 9 (1) 2 (7) (1) 1
Curtailment loss (gain) 10 (2) 44 (2) 11 (2) (2) (13) (2)
Special termination benefits 21 (2) 18 (2) 11 (2) 17 (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Total expense $ 56 $ 66 $ 26 $ 66 $ 61 $ 48
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes pension and postretirement benefit curtailment loss (gain) of $7
and ($8), respectively.
(2) Included in restructuring charges. See Note 5.
Measurement of postretirement benefit expense is based on assumptions used to
value the postretirement benefit obligation at the beginning of the year. In
addition to defined benefit retirement plans, Corning offers defined
contribution plans covering employees meeting certain eligibility requirements.
Total consolidated defined contribution expense was $44 million, $56 million and
$81 million for the years ended December 31, 2002, 2001 and 2000, respectively.
16. Commitments, Contingencies, Guarantees and Hedging Activities
Commitments, Contingencies and Guarantees
Minimum rental commitments under leases outstanding at December 31, 2002, were
(in millions):
- --------------------------------------------------------------------------------
2003 2004 2005 2006 2007 2008 and thereafter
- --------------------------------------------------------------------------------
$48 $42 $36 $33 $42 $153
- --------------------------------------------------------------------------------
Total rental expense amounted to approximately $85 million for 2002, $89 million
for 2001 and $75 million for 2000.
Corning and PPG Industries, Inc. each own 50% of the capital stock of PCC. PCC
and several other defendants have been named in numerous lawsuits involving
claims alleging personal injury from exposure to asbestos. 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. Management
estimates that the low end of the range of loss resulting from continued
litigation is not material. Alternatively, in the event that Corning and its
insurers agree to a global settlement through the bankruptcy process, management
expects any after-tax charge could approximate $125 million to $175 million.
Management cannot provide assurances that the ultimate outcome of a settlement
would be within this range. See Note 10 for a more complete discussion.
The ability of certain subsidiaries and associated companies to transfer funds
is limited by provisions of certain loan agreements and foreign government
regulations. At December 31, 2002, the amount of equity subject to such
restrictions for consolidated subsidiaries totaled $53 million. While this
amount is legally restricted, it does not result in operational difficulties
since Corning has generally permitted subsidiaries to retain a majority of
equity to support their growth programs. At December 31, 2002, loans of equity
affiliates guaranteed by Corning totaled $14 million. In addition, Corning and
certain of its subsidiaries have provided other financial guarantees and
contingent liabilities in the form of purchase price adjustments related to
attainment of milestones, stand-by letters of credit and performance bonds.
Corning has agreed to provide a credit facility related to Dow Corning
Corporation as discussed in Note 10. The funding of the Dow Corning credit
facility is subject to events connected to the Bankruptcy Plan as described in
Note 10. Management believes the significant majority of these guarantees and
contingent liabilities will expire without being funded. The amounts of these
obligations are represented in the following table (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Amount of commitment and contingency expiration per period
-----------------------------------------------------------
Less than 1 to 2 2 to 3 3 to 4 5 years and
Total 1 year years years years thereafter
- ------------------------------------------------------------------------------------------------------------------------------------
Performance bonds and guarantees $ 189 $ 49 $ 5 $ 21 $ 114
Contingent purchase price for acquisitions 126 48 24 2 52
Dow Corning credit facility 150 150
Stand-by letters of credit 33 33
Loan guarantees 37 5 1 1 $ 1 29
- ------------------------------------------------------------------------------------------------------------------------------------
Total other commercial commitments
and contingencies $ 535 $ 135 $ 30 $ 24 $ 1 $ 345
- ------------------------------------------------------------------------------------------------------------------------------------
Corning has leased equipment from three unconsolidated special purpose entities
(SPEs) for which the sole purpose is the leasing of equipment. These SPEs are
not consolidated in the 2002 financial statements since the equity investor of
the SPE has made a substantial investment that is at risk for the life of the
SPE. However, the FASB issued Interpretation 46, Consolidation of Variable
Interest Entities in January 2003. FASB Interpretation 46 will require the
consolidation of variable interest entities (VIEs) by the primary beneficiary.
Management is still assessing the impacts of this interpretation, however, it is
reasonably possible that Corning will be considered the primary beneficiary of
the three VIEs and therefore will consolidate these entities beginning on July
1, 2003. As of December 31, 2002, the total assets in unconsolidated VIEs were
$46 million. In addition, Corning's maximum loss exposure as a result of its
involvement with these VIEs is $46 million. This amount represents payments that
would be due to the VIE in the event of a total loss of the equipment. Corning
carries insurance coverage for this risk.
Hedging Activities
Corning operates and conducts business in many foreign countries. As a result,
there is exposure to potentially adverse movement in foreign currency rate
changes. Corning enters into foreign exchange forward and option contracts with
durations generally 12 months or less to reduce its exposure to exchange rate
risk on foreign source income and purchases. The objective of these contracts is
to neutralize the impact of foreign currency exchange rate movements on
Corning's operating results.
16. Commitments, Contingencies, Guarantees and Hedging Activities (concluded)
Corning engages in foreign currency hedging activities to reduce the risk that
changes in exchange rates will adversely affect the eventual net cash flows
resulting from the sale of products to foreign customers and purchases from
foreign suppliers. The hedge contracts reduce the exposure to fluctuations in
exchange rate movements because the gains and losses associated with foreign
currency balances and transactions are generally offset with gains and losses of
the hedge contracts. Because the impact of movements in foreign exchange rates
on hedge contracts offsets the related impact on the underlying items being
hedged, these financial instruments help alleviate the risk that might otherwise
result from currency exchange rate fluctuations.
The following table (in millions) summarizes the notional amounts and respective
fair values of the derivative financial instruments at December 31, 2002. These
contracts are held by Corning and its subsidiaries and mature at varying dates:
- --------------------------------------------------------------------------------
Notional Amount Fair Value
- --------------------------------------------------------------------------------
Foreign exchange forward contracts $ 578 $ (17)
Foreign exchange option contracts $ 317 $ (7)
- --------------------------------------------------------------------------------
The forward and option contracts used by Corning in managing its foreign
currency exposures contain an element of risk in that the counterparties may be
unable to meet the terms of the agreements. However, Corning minimizes this risk
by limiting the counterparties to a diverse group of highly-rated major domestic
and international financial institutions with which Corning has other financial
relationships. Corning is exposed to potential losses in the event of
non-performance by these counterparties; however, Corning does not expect to
record any losses as a result of counterparty default. Corning does not require
and is not required to place collateral for these financial instruments.
17. Series B Convertible Preferred Stock
In August 2002, in connection with its issuance of 7% Series C mandatory
convertible preferred stock, as discussed below, Corning redeemed and retired 69
thousand shares of Series B convertible preferred stock for $7 million. At
December 31, 2001 and 2000, 72,400 and 86,800 shares of Series B convertible
preferred stock were outstanding, respectively. See Note 18 for more information
on preferred stock.
18. Shareholders' Equity
Preferred Stock
Corning has 10 million authorized shares of Preferred Stock, par value $100 per
share.
Series A Junior Participating Preferred Stock
- ---------------------------------------------
Of the authorized shares, Corning has designated 2.4 million shares as Series A
Junior Participating Preferred Stock for which no shares have been issued.
In June 1996, the Board of Directors approved the renewal of the Preferred Share
Purchase Right Plan which entitles shareholders to purchase 0.01 of a share of
Series A Junior Participating Preferred Stock upon the occurrence of certain
events. In addition, the rights entitle shareholders to purchase shares of
common stock at a 50% discount in the event a person or group acquires 20% or
more of Corning's outstanding common stock. The preferred share purchase rights
became effective July 15, 1996 and expire July 15, 2006.
Series C Mandatory 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 resulting in gross proceeds of
$557 million. The mandatory convertible stock has an annual dividend rate of 7%,
payable quarterly in cash. The first dividend payment date was 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 $440 million.
18. Shareholders' Equity (continued)
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
December 31, 2002, approximately 4.2 million shares of the Series C preferred
stock had been converted into 213.3 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 the accumulated deficit in the third quarter. The
beneficial conversion was also deducted from earnings attributable to common
shareholders in the 2002 earnings per share calculations.
Common Stock
On August 16, 2001, Corning completed an equity offering of 14.2 million shares
of common stock generating net proceeds to Corning of approximately $225
million.
On July 9, 2001, Corning announced the discontinuation of the payment of
dividends on its common stock. Dividends paid to common shareholders in 2001
totaled $112 million, compared with $210 million in 2000.
Treasury Stock
On July 22, 2002, Corning repurchased 5.5 million shares of common stock for $23
million in a privately negotiated transaction. Corning did not repurchase any
common stock in 2001 or 2000.
18. Shareholders' Equity (concluded)
Accumulated Other Comprehensive Loss
Components of other comprehensive income (loss), accumulated in shareholders'
equity, are reported net of income taxes, as follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Net
Net unrealized
Foreign Minimum unrealized gains Accumulated
currency pension gains (losses) on other
translation liability (losses) on cash flow comprehensive
adjustment adjustment investments hedges income (loss)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 $ (50) $ 19 $ (31)
Foreign currency translation adjustment (118) (118)
Unrealized gain on investments (net of tax of $21 million) 33 33
Realized gains on securities (net of tax of $7 million) (11) (11)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 (168) 41 (127)
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment (31) (31)
Unrealized loss on investments (net of tax of $17 million) (27) (27)
Realized gains on securities (net of tax of $12 million) (18) (18)
Cumulative effect of adoption of SFAS No. 133 $ 3 3
Unrealized derivative gain on cash flow hedges
(net of tax of $7 million) 11 11
Reclassification adjustments on cash flow hedges
(net of tax of $2 million) (4) (4)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 $ (199) $ (4) $ 10 $ (193)
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment 208 208
Minimum pension liability adjustment $ (173) (173)
Unrealized gain on investments (net of tax of $1 million) 1 1
Realized loss on securities (net of tax of $3 million) 5 5
Unrealized derivative loss on cash flow hedges
(net of tax of $17 million) (27) (27)
Reclassification adjustments on cash flow hedges
(net of tax of $6 million) 9 9
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2002 $ 9 $ (173) $ 2 $ (8) $ (170)
- ------------------------------------------------------------------------------------------------------------------------------------
19. (Loss) Earnings Per Common Share
Basic (loss) earnings per common share is computed by dividing (loss) income
available to common shareholders (the numerator) by the weighted-average number
of common shares outstanding (the denominator) for the period. The net loss
available to common shareholders for 2002 is further increased by the Series C
mandatory convertible preferred stock dividend requirement.
Diluted (loss) earnings per common share is computed by dividing net (loss)
income available to common shareholders, adjusted for the preferred dividend
requirements in 2002, by the weighted average shares outstanding. Since Corning
reported a loss from continuing operations in 2002 and 2001, the diluted loss
per share is the same as basic, as any potentially dilutive securities would
reduce the loss per share from continuing operations. In 2000, diluted earnings
per share assumes that outstanding common shares were increased by shares
issuable upon exercise of those stock options for which market price exceeds the
exercise price, less shares which could have been purchased by Corning with the
related proceeds.
A reconciliation of the basic and diluted (loss) earnings per share from
continuing operations computations for 2002, 2001 and 2000 was as follows (in
millions, except per share amounts):
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------- ------------------------------ -----------------------------
Weighted- Weighted- Weighted-
Average Per Share Average Per Share Average Per Share
Loss Shares Amount Loss Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) income from
continuing operations $(1,780) $(5,532) $ 363
Less: Preferred stock
dividend requirements 128 1 1
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing
operations available to
common shareholders (1,908) (5,533) 362
- ------------------------------------------------------------------------------------------------------------------------------------
Basic (Loss) Earnings
Per Common Share (1,908) 1,030 $(1.85) (5,533) 933 $(5.93) 362 858 $0.42
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of Dilutive
Securities
Options 21
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted (Loss) Earnings
Per Common Share $ 1,908 1,030 $(1.85) $(5,533) 933 $(5.93) $ 362 879 $0.41
- ------------------------------------------------------------------------------------------------------------------------------------
19. (Loss) Earnings Per Common Share (concluded)
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 years ended December 31,
--------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Potential common shares excluded from the
calculation of diluted loss per share:
Stock options 1 6
7% mandatory convertible preferred stock 31
Convertible preferred stock 1 1
4.875% convertible notes 6 6 6
3.5% convertible debentures 69 9
Zero coupon convertible debentures 20 23 4
------------------------------
Total 127 45 11
==============================
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 84 48 1
==============================
- --------------------------------------------------------------------------------
20. Stock Compensation Plans
At December 31, 2002, Corning's stock compensation programs are in accordance
with the 2000 Employee Equity Participation Program and 2000 Equity Plan for
Non-Employee Directors Program. For calendar years beginning January 1, 2001,
3.5% of Corning's common stock outstanding at the beginning of the year and any
ungranted shares from prior years will be available for grant in the current
year. At December 31, 2002, 69.3 million shares will be available under the
Programs for 2003. Any remaining shares available for grant, but not yet granted
will be carried over and used in the following year.
Stock Option Plan
Corning stock option plans provide non-qualified and incentive stock options to
purchase unissued or treasury shares at the market price on the grant date and
generally become exercisable in installments from one to five years from the
grant date. The maximum term of non-qualified and incentive stock options is 10
years from the grant date.
20. Stock Compensation Plans (continued)
Changes in the status of outstanding options were as follows:
- --------------------------------------------------------------------------------
Number Weighted-
of Shares Average
(in thousands) Exercise Price
- --------------------------------------------------------------------------------
Options outstanding January 1, 2000 35,289 $ 12.63
Options granted under plans 23,549 $ 66.27
Options issued in acquisitions 4,456 $ 26.55
Options exercised (17,297) $ 10.62
Options terminated (994) $ 42.78
- --------------------------------------------------------------------------------
Options outstanding December 31, 2000 45,003 $ 42.27
- --------------------------------------------------------------------------------
Options granted under plans 29,784 $ 21.02
Options exercised (1,258) $ 9.40
Options terminated (1,138) $ 37.53
- --------------------------------------------------------------------------------
Options outstanding December 31, 2001 72,391 $ 34.21
- --------------------------------------------------------------------------------
Options granted under plans 26,852 $ 4.55
Options exercised (56) $ 1.86
Options terminated (1,860) $ 23.20
- --------------------------------------------------------------------------------
Options outstanding December 31, 2002 97,327 $ 26.47
- --------------------------------------------------------------------------------
Options exercisable at December 31, 2002 42,428 $ 28.96
- --------------------------------------------------------------------------------
Options exercisable at December 31, 2001 20,882 $ 26.33
Options exercisable at December 31, 2000 11,983 $ 11.32
- --------------------------------------------------------------------------------
The weighted-average fair value of options granted was $3.64 in 2002, $13.83 in
2001 and $38.46 in 2000.
The following table summarizes information about Corning's stock option plans at
December 31, 2002:
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
Number Weighted-Average Number
Outstanding at Remaining Weighted- Exercisable at Weighted-
Range of December 31, 2002 Contractual Life Average December 31, 2002 Average
Exercise Prices (in thousands) in Years Exercise Price (in thousands) Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
$ 0.47 to 3.71 4,981 9.5 $ 1.62 118 $ 2.21
$ 4.06 to 8.74 25,456 8.5 $ 6.80 3,445 $ 8.27
$ 8.84 to 9.84 6,140 5.4 $ 9.36 5,770 $ 9.37
$ 9.95 to 13.50 7,635 8.0 $ 10.60 3,818 $ 11.20
$ 13.52 to 15.28 7,444 8.5 $ 15.19 3,727 $ 15.10
$ 15.36 to 19.83 6,982 7.4 $ 17.14 6,849 $ 17.15
$ 19.94 to 31.78 7,846 8.3 $ 21.47 3,673 $ 21.38
$ 31.83 to 47.37 6,830 7.6 $ 40.89 4,040 $ 37.03
$ 48.33 to 55.08 6,196 7.8 $ 53.65 3,706 $ 53.75
$ 55.48 to 69.56 4,592 7.3 $ 61.76 2,617 $ 61.77
$ 70.08 to 70.75 5,616 7.9 $ 70.75 3,748 $ 70.75
$ 71.04 to 72.38 6,882 7.4 $ 72.11 418 $ 72.11
$72.99 to 111.00 727 7.7 $ 91.35 499 $ 90.89
- ------------------------------------------------------------------------------------------------------------------------------------
97,327 7.9 $ 26.47 42,428 $ 28.96
- ------------------------------------------------------------------------------------------------------------------------------------
Incentive Stock Plans
The Corning Incentive Stock Plan permits stock grants, either determined by
specific performance goals or issued directly, in most instances, subject to the
possibility of forfeiture and without cash consideration.
20. Stock Compensation Plans (concluded)
In 2002, 2001 and 2000, grants of 88,500 shares, 1,028,000 shares and 1,429,000
shares, respectively, were made under this plan. The weighted-average price of
the grants was $7.15 in 2002, $36.89 in 2001 and $61.07 in 2000, respectively. A
total of 0.7 million shares issued remain subject to forfeiture at December 31,
2002.
Corning applies APB No. 25 accounting for its stock-based compensation plans.
Compensation expense is recorded for awards of shares or share rights over the
period earned. Compensation expense of $2 million, $130 million and $31 million
was recorded in 2002, 2001 and 2000, respectively.
Corning has adopted the disclosure-only provisions of SFAS No. 123. If Corning
had elected to recognize compensation expense under SFAS No. 123, Corning's net
income in 2002, 2001 and 2000, respectively, would have decreased by $277
million, $367 million and $112 million, respectively.
SFAS No. 123 requires that reload options be treated as separate grants from the
related original option grants. Under Corning's reload program, upon exercise of
an option, employees may tender unrestricted shares owned at the time of
exercise to pay the exercise price and related tax withholding, and receive a
reload option covering the same number of shares tendered for such purposes at
the market price on the date of exercise. The reload options vest in one year
and are only granted in certain circumstances according to the original terms of
the option being exercised. The existence of the reload feature results in a
greater number of options being measured.
For purposes of SFAS No. 123 disclosure, 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 and predecessor Oak plans in 2002, 2001 and 2000, respectively:
- --------------------------------------------------------------------------------
For Options Granted During 2002 2001 2000
- --------------------------------------------------------------------------------
Expected life in years 5 6 5
Risk free interest rate 4.0% 4.8% 5.8%
Dividend yield 0.46% 0.36%
Expected volatility 80% 75% 65%
- --------------------------------------------------------------------------------
Corning discontinued payment of dividends on its common stock in July 2001. The
dividend yield assumption applies to grants prior to July 2001.
Worldwide Employee Share Purchase Plan
In addition to the Stock Option Plan and Incentive Stock Plans, Corning has a
Worldwide Employee Share Purchase Plan (WESPP). Under the WESPP, substantially
all employees can elect to have up to 10% of their annual wages withheld to
purchase Corning common stock. The purchase price of the stock is 85% of the
lower of the beginning-of-quarter or end-of-quarter market price.
21. Business Combinations and Divestitures
Pooling-of-Interests
On January 28, 2000, Corning merged with Oak in a pooling-of-interests
transaction. Corning issued 44.3 million shares of Corning common stock and 2.7
million options to purchase Oak common shares to complete the transaction.
During the first quarter of 2000, Corning recognized a charge of $47 million
($43 million after-tax) for one-time acquisition costs related to Oak. The
acquisition costs are primarily related to investment banking, legal and other
fees of approximately $30 million. The charge also included approximately $17
million of severance and other termination benefits for Oak corporate officers
and headquarters employees.
Purchases
The transactions listed on the following table were all accounted for under the
purchase method of accounting. Management is responsible for estimating the fair
value of the assets and liabilities acquired. Management has made estimates and
assumptions that affect the reported amounts of assets, liabilities and expenses
resulting from such acquisitions. From time to time Corning uses its common
stock as consideration for business combinations. The value of the common stock
is based upon the average closing price of Corning common stock for a range of
days surrounding the agreement or announcement and adjusted for a discount
commensurate with restrictions on the shares, if applicable.
21. Business Combinations and Divestitures (continued)
Amounts allocated to purchased in-process research and development (IPRD) were
established through recognized valuation techniques in the high technology
communications industry. Certain projects were acquired for which technological
feasibility had not been established at the date of acquisition and for which no
alternative future uses existed. In accordance with SFAS No. 2, "Accounting for
Research and Development Costs" as interpreted by FASB Interpretation No. 4,
"Applicability of FASB Statement No. 2 to Business Combinations Accounted for by
the Purchase Method," amounts assigned to IPRD meeting the above criteria must
be charged to expense at the date of consummation of the purchase.
The value allocated to projects for which a charge was recorded was determined
by the traditional income approach which discounts expected future debt-free
income to present value. The discount rates used were specific to each project
and were derived from a cost of capital for each specific acquisition target,
adjusted upward for the stage of completion of each project. The acquired entity
discount rates ranged from 17% to 35%, and the stage of completion assigned to
IPRD projects varied from 10% to 90%.
Corning expected that products incorporating the acquired technology from these
projects will be completed and will begin to generate cash flows over the first
five years following integration.
The following table presents information related to Corning's acquisitions for
the years ended December 31, 2002, 2001 and 2000 (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Initial Goodwill &
Acquisition Date Price Form IPRD Intangibles
- ------------------------------------------------------------------------------------------------------------------------------------
2002
Lucent Technologies Joint Ventures (a) 9/02 $ 198 Cash/Stock $ 110
- ------------------------------------------------------------------------------------------------------------------------------------
2001
Tropel Corporation (b) 3/01 $ 160 Cash/Stock $ 155
- ------------------------------------------------------------------------------------------------------------------------------------
2000
Pirelli's optical components business (c) 12/00 $ 4,000 Cash/Stock $ 323 $ 3,624
Champion Products Inc. (d) 10/00 $ 85 Cash $ 69
IntelliSense Corporation (e) 6/00 $ 410 Stock/Options $ 7 $ 483
NetOptix Corporation (f) 5/00 $ 2,000 Stock/Options $ 2,066
NZ Applied Technologies (NZAT) (g) 5/00 $ 75 Stock/Options $ 44 $ 73
Photonics Technology Research Center (h) 2/00 $ 66 Cash $ 42 $ 24
Siemens Transaction (i) 2/00 $ 1,400 Cash/Debt $ 650
Other 2000 Various $ 67 Cash $ 64
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Acquisition of 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. Purchase price included 30 million shares of Corning common stock
valued at $48 million. These entities are included in the
Telecommunications Segment.
(b) Manufacturer of precision optics and metrology instruments for the
semiconductor and other industries. Purchase price included 1.95 million
shares of Corning common stock valued at $94 million.
(c) Manufacturer of lithium niobate modulators, pump lasers, certain specialty
fibers and fiber gratings used in optical networks. Purchased from Pirelli
S.p.A., based in Milan, Italy (90%) and Cisco Systems Inc. (10%), the
"Pirelli transaction," for $3.6 billion in cash to Pirelli S.p.A. and 5.5
million shares of Corning common stock valued at approximately $400 million
to Cisco Systems. Corning impaired $3,154 million of goodwill and other
intangible assets in 2001. See Note 4.
(d) Manufacturer of enclosures, power pedestals, shelters and a unique patented
design for temperature controlled enclosures for telecommunications.
(e) Manufacturer of micro-electro-mechanical devices. Purchase of the remaining
67% interest for 6.1 million shares of Corning common stock and assumption
of stock options convertible into 2 million shares of Corning common stock.
An additional 1 million shares valued at $77 million were issued in 2000
when certain product milestones were achieved.
(f) Manufacturer of thin film filters for use in dense wavelength division
multiplexing components. Purchase price included 33.7 million shares of
Corning common stock and assumption of stock options convertible into 2.5
million Corning shares. Corning impaired $1,610 million of goodwill in
2001. See Note 4.
(g) Manufacturer of photonic components for telecommunication applications.
Purchase of the remaining 84% interest for 1.3 million shares of Corning
common stock valued at $75 million. NZAT earned an additional 0.5 million
shares of Corning common stock valued at $42 million in 2000. An additional
0.6 million shares valued at $14 million were issued in 2001 for achieving
certain product milestones. An additional 0.2 million shares valued at $1.3
million were issued in 2002 when certain milestones were achieved.
(h) Acquired from British Telecommunications.
(i) Purchase of the worldwide optical cable and hardware business of Siemens AG
and the remaining 50% in Siecor Corporation and Siecor GmbH. Purchase price
included $120 million of assumed debt and $145 million of contingent
performance payments to be paid, if earned, over a four-year-period. Total
cash paid to Siemens as of December 31, 2002 was $1.1 billion.
21. Business Combinations and Divestitures (concluded)
Divestitures
Appliance Controls Group
- ------------------------
In May 2002, Corning completed the sale of its appliance controls group, which
was included in the controls and connectors business within the
Telecommunications Segment. During 2002, Corning received proceeds of $30
million and realized a loss on the sale of approximately $16 million ($10
million after-tax). This loss is included in restructuring, impairment and other
charges in the consolidated statements of operations.
22. Operating Segments
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," set standards for reporting information regarding operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance.
Corning's chief operating decision-making group is comprised of the Chief
Executive Officer and the officers who report to him directly.
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
technologies.
Corning previously grouped its products into three operating segments:
Telecommunications, Advanced Materials and Information Display. Corning's
reportable segments now consist of the following: Telecommunications and
Technologies. As a result of the fourth quarter sale of the precision lens
business and the reduced significance of the conventional video components
business, management realigned the remainder of the Information Display Segment
with the businesses previously reported under Advanced Materials to create the
Technologies Segment. The precision lens business is reported as a discontinued
operation and therefore its results have been excluded from segment reporting
and historical periods have been conformed to this presentation. Also, 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 and acquisition-related charges by segment, but excluded these from
quantitative segment results. These charges have now been included in the
segment net income and historical periods have been conformed to this
presentation. This change was made to increase the transparency of the impact of
these charges on segment results. Corning also includes the earnings of equity
affiliates that are closely associated with Corning's operating segments in
segment net income. Segment amounts exclude revenues, expenses and equity
earnings not specifically identifiable to segments.
Corning prepared the financial results for its 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 certain 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. Segment net income may not be consistent with measures used by other
companies. Revenue attributed to geographic areas is based on the location of
the customer.
22. Operating Segments (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Segments Telecom- Total
(In millions) munications Technologies Segments
- ------------------------------------------------------------------------------------------------------------------------------------
2002
Net sales $ 1,631 $ 1,513 $ 3,144
Depreciation (1) $ 379 $ 245 $ 624
Amortization of purchased intangibles $ 41 $ 41
Research, development and engineering expenses (2) $ 308 $ 177 $ 485
Impairment, restructuring and other charges (related tax benefit, $452, $30
and $482, respectively) $ 1,722 $ 150 $ 1,872
Interest expense (3) $ 99 $ 71 $ 170
Income tax benefit $ (722) $ (28) $ (750)
Segment loss before minority interests and equity earnings (4) $ (1,838) $ (145) $ (1,983)
Minority interests 1 96 97
Equity in (losses) earnings of associated companies, net of impairments (5) (60) 168 108
- ------------------------------------------------------------------------------------------------------------------------------------
Segment net (loss) income $ (1,897) $ 119 $ (1,778)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 72 $ 655 $ 727
Segment assets (6) $ 2,466 $ 2,554 $ 5,020
Capital expenditures $ 49 $ 183 $ 232
- ------------------------------------------------------------------------------------------------------------------------------------
2001
Net sales $ 4,458 $ 1,568 $ 6,026
Depreciation (1) $ 401 $ 215 $ 616
Amortization of purchased intangibles $ 76 $ 76
Research, development and engineering expenses (2) $ 474 $ 151 $ 625
Impairment and restructuring charges (related tax benefit, $282, $48 and
$330, respectively) $ 5,404 $ 122 $ 5,526
Interest expense (3) $ 104 $ 48 $ 152
Income tax benefit $ (336) $ (38) $ (374)
Segment loss before minority interests and equity earnings (4) $ (5,215) $ (53) $ (5,268)
Minority interests 13 13
Equity in earnings of associated companies 12 132 144
- ------------------------------------------------------------------------------------------------------------------------------------
Segment net (loss) income $ (5,203) $ 92 $ (5,111)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 101 $ 511 $ 612
Segment assets (6) $ 3,972 $ 2,571 $ 6,543
Capital expenditures $ 941 $ 403 $ 1,344
- ------------------------------------------------------------------------------------------------------------------------------------
22. Operating Segments (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Segments Telecom- Total
(In millions) munications Technologies Segments
- ------------------------------------------------------------------------------------------------------------------------------------
2000
Net sales $ 5,186 $ 1,708 $ 6,894
Depreciation (1) $ 342 $ 163 $ 505
Amortization of purchased intangibles $ 29 $ 29
Research, development and engineering expenses (2) $ 395 $ 136 $ 531
Acquisition-related charges $ 463 $ 463
Interest income $ 1 $ 1
Interest expense (3) $ 70 $ 37 $ 107
Nonoperating gain $ 7 $ 7
Income tax expense $ 308 $ 54 $ 362
Segment earnings before minority interests and equity earnings (4) $ 250 $ 130 $ 380
Minority interests 3 (27) (24)
Equity in earnings of associated companies, net of impairments 1 167 168
- ------------------------------------------------------------------------------------------------------------------------------------
Segment net income $ 254 $ 270 $ 524
- ------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 34 $ 447 $ 481
Segment assets (6) $ 4,089 $ 2,339 $ 6,428
Capital expenditures $ 944 $ 447 $ 1,391
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes an allocation of depreciation of corporate property, plant and
equipment not specifically identifiable to a segment. Related depreciable
assets are not allocated to segment assets.
(2) Non-direct research, development and engineering expenses are allocated
based upon direct project spending for each segment.
(3) Interest expense is allocated to segments based on a percentage of segment
net operating assets. Consolidated subsidiaries with independent capital
structures do not receive additional allocations of interest expense.
(4) Many of Corning's administrative and staff functions are performed on a
centralized basis. Where practicable, Corning charges these expenses to
segments based upon the extent to which each business uses a centralized
function. Other staff functions, such as corporate finance, human resources
and legal are allocated to segments, primarily as a percentage of sales.
(5) Equity losses included $20 million of charges, primarily related to
restructuring and impairments.
(6) Includes inventory, accounts receivable, plant, property and equipment and
investments in associated equity companies.
22. Operating Segments (continued)
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):
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales
Total segment net sales $ 3,144 $ 6,026 $ 6,894
Non-segment net sales 20 21 26
- ------------------------------------------------------------------------------------------------------------------------------------
Total net sales $ 3,164 $ 6,047 $ 6,920
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) Income from Continuing Operations
Total segment net (loss) income (1) $ (1,778) $ (5,111) $ 524
Unallocated items:
Non-segment income (loss) and other (2) 4 (33) (9)
Amortization of goodwill (3) (363) (216)
Non-segment restructuring, impairment and other charges (208) (191)
Interest income (4) 41 68 104
Gain on repurchases of debt 176
Income tax (expense) benefit (5) (24) 94 (21)
Equity in earnings (losses) of associated companies, net of impairments 8 4 (19)
Minority interests 1
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations $ (1,780) $ (5,532) $ 363
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Total segment assets $ 5,020 $ 6,543 $ 6,428
Non-segment assets:
Property, net (6) 508 636 1,100
Investments (7) 25 80 140
Other assets (8) 3,249 2,811 7,577
Remaining corporate assets (9) 2,746 2,723 2,281
- ------------------------------------------------------------------------------------------------------------------------------------
Total consolidated assets $ 11,548 $ 12,793 $ 17,526
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes royalty, interest and dividend income.
(2) Includes amounts derived from corporate investments. Non-segment (loss)
income also includes nonoperating gains and losses. Includes one-time gain
of $11 million included in equity earnings from Samsung Corning related to
divestment of its interest in Samsung Corning Precision in 2000.
(3) Amortization of goodwill relates primarily to the Telecommunications
Segment.
(4) Corporate interest income is not allocated to reportable segments.
(5) Includes tax associated with the non-segment impairment and restructuring
charges, amortization of goodwill and nonoperating gains.
(6) Represents corporate property, plant and equipment not specifically
identifiable to a segment.
(7) Represents corporate investments in associated companies, both at cost and
at equity.
(8) Includes long-term corporate assets, primarily goodwill and other
intangible assets, pension assets and deferred taxes.
(9) Includes current corporate assets, primarily cash, short-term investments
and deferred taxes.
22. Operating Segments (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions) Segment Reconciling Consolidated
Other Significant Items Total Adjustments Total
- ------------------------------------------------------------------------------------------------------------------------------------
2002
Depreciation $ 624 $ (6) $ 618
Amortization of purchased intangibles $ 41 2 $ 43
Interest expense $ 170 9 $ 179
Income tax (benefit) expense $ (750) 24 $ (726)
Equity in earnings of associated companies, net of impairments $ 108 8 $ 116
Minority interests $ 97 1 $ 98
Investment in associated companies, at equity $ 727 19 $ 746
Capital expenditures $ 232 $ 84 (2) $ 316 (3)
- ------------------------------------------------------------------------------------------------------------------------------------
2001
Depreciation $ 616 $ 5 $ 621
Interest expense $ 152 1 $ 153
Income tax benefit $ (374) (94) $ (468)
Equity in earnings of associated companies $ 144 4 $ 148
Investment in associated companies, at equity $ 612 24 $ 636
Capital expenditures $ 1,344 $ 273 (2) $ 1,617 (3)
- ------------------------------------------------------------------------------------------------------------------------------------
2000
Depreciation $ 505 $ (3) $ 502
Income tax expense $ 362 21 $ 383
Equity in earnings (losses) of associated companies, net of impairments (1) $ 168 (19) $ 149
Investment in associated companies, at equity $ 481 13 $ 494
Capital expenditures $ 1,391 $ 290 (2) $ 1,681 (3)
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes a nonoperating gain of $11 million (Corning's share) recorded by
Samsung Corning upon divestment of its interest in Samsung Corning
Precision in 2000.
(2) Includes capital spending on shared research facilities of $9 million, $147
million and $116 million in 2002, 2001 and 2000, respectively.
(3) Represents committed capital expenditures in the period including amounts
accrued at December 31, 2002, 2001 and 2000.
22. Operating Segments (concluded)
Information concerning principal geographic areas was as follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Long-lived Net Long-lived Net Long-lived
Sales Assets (1) Sales Assets (1) Sales Assets (1)
- ------------------------------------------------------------------------------------------------------------------------------------
North America
United States $ 1,446 $ 4,730 $ 2,665 $ 6,249 $ 3,407 $ 7,516
Canada 122 66 238 54 846 95
Mexico 56 73 85 3 98 83
- ------------------------------------------------------------------------------------------------------------------------------------
Total North America 1,624 4,869 2,988 6,306 4,351 7,694
- ------------------------------------------------------------------------------------------------------------------------------------
Asia Pacific
Japan 372 292 518 264 571 257
China 102 189 511 170 141 121
Korea 57 574 50 454 67 385
Other 331 129 373 79 125 52
- ------------------------------------------------------------------------------------------------------------------------------------
Total Asia Pacific 862 1,184 1,452 967 904 815
- ------------------------------------------------------------------------------------------------------------------------------------
Europe
Germany 210 236 443 484 464 505
France 46 121 141 123 253 115
United Kingdom 82 83 223 97 243 173
Italy 47 265 114 319 68 3,489
Other 183 39 479 37 404 47
- ------------------------------------------------------------------------------------------------------------------------------------
Total Europe 568 744 1,400 1,060 1,432 4,329
- ------------------------------------------------------------------------------------------------------------------------------------
Latin America
Brazil 15 2 59 7 59 20
Other 6 1 39 3 22 7
- ------------------------------------------------------------------------------------------------------------------------------------
Total Latin America 21 3 98 10 81 27
- ------------------------------------------------------------------------------------------------------------------------------------
All Other 89 36 109 30 152 27
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 3,164 $ 6,836 $ 6,047 $ 8,373 $ 6,920 $ 12,892
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Long-lived assets primarily include investments, plant and equipment,
goodwill and other intangible assets.
Corning Incorporated and Subsidiary Companies
Schedule II - Valuation Accounts and Reserves
(In millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year ended December 31, 2002 Beginning of Period Additions and Other End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 60 $ 15 $ 16 $ 59
Deferred tax assets valuation allowance $ 189 $ 228 $ 417
Accumulated amortization of
purchased intangible assets $ 90 $ 43 $ 29 $ 104
Reserves for accrued costs of
business restructuring $ 276 $ 461 $ 332 $ 405
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year ended December 31, 2001 Beginning of Period Additions and Other End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 47 $ 32 $ 19 $ 60
Deferred tax assets valuation allowance $ 72 $ 117 $ 189
Accumulated amortization of goodwill $ 303 $ 363 $ 5 $ 661
Accumulated amortization of purchased
intangible assets $ 52 $ 76 $ 38 $ 90
Reserves for accrued costs of
business restructuring $ 419 $ 143 $ 276
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year ended December 31, 2000 Beginning of Period Additions and Other End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 20 $ 30 $ 3 $ 47
Deferred tax assets valuation allowance $ 50 $ 27 $ 5 $ 72
Accumulated amortization of goodwill $ 100 $ 216 $ 13 $ 303
Accumulated amortization of purchased
intangible assets $ 23 $ 29 $ 52
Reserves for accrued costs of
business restructuring $ 8 $ 8
- ------------------------------------------------------------------------------------------------------------------------------------
QUARTERLY OPERATING RESULTS
(unaudited)
(In millions, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Total
2002 Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 839 $ 827 $ 762 $ 736 $ 3,164
Gross margin $ 184 $ 184 $ 129 $ 105 $ 602
Restructuring, impairment and other charges $ 494 $ 125 $ 1,461 $ 2,080
Loss from continuing operations before income
taxes, minority interests and equity earnings $ (184) $ (606) $ (290) $ (1,640) $ (2,720)
Benefit for income taxes (50) (184) (91) (401) (726)
Minority interests 6 6 5 81 98
Equity in earnings of associated companies, net
of impairments 30 25 42 19 116
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (98) (391) (152) (1,139) (1,780)
Income from discontinued operations, net of income tax (1) 8 21 19 430 478
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $ (90) $ (370) $ (133) $ (709) $ (1,302)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted (loss) earnings per common share
Continuing operations $ (0.10) $ (0.41) $ (0.27) $ (0.96) $ (1.85)
Discontinued operations (1) 0.02 0.02 0.36 0.46
- ------------------------------------------------------------------------------------------------------------------------------------
Loss per common share $ (0.10) $ (0.39) $ (0.25) $ (0.60) $ (1.39)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Total
2001 Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,867 $ 1,811 $ 1,452 $ 917 $ 6,047
Gross margin $ 795 $ 512 $ 492 $ 21 $ 1,820
Restructuring, impairment and other charges $ 4,772 $ 339 $ 606 $ 5,717
Income (loss) from continuing operations before income
taxes, minority interest and equity earnings $ 194 $ (4,886) $ (339) $ (1,130) $ (6,161)
Provision (benefit) for income taxes 102 (85) (74) (411) (468)
Minority interests (5) (7) 1 24 13
Equity in earnings of associated companies 34 46 39 29 148
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 121 (4,762) (225) (666) (5,532)
Income from discontinued operations, net of income tax 11 7 5 11 34
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 132 $ (4,755) $ (220) $ (655) $ (5,498)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings (loss) per common share
Continuing operations $ 0.13 $ (5.14) $ (0.24) $ (0.71) $ (5.93)
Discontinued operations 0.01 0.01 0.02 0.04
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share $ 0.14 $ (5.13) $ (0.24) $ (0.69) $ (5.89)
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Discontinued operations are described in Note 2 to the Consolidated
Financial Statements.
Exhibit 99.1
Certification Required by 18 U.S.C. Section 1350
(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
- ----------------------------------------------------------------------
In connection with the Annual Report of Corning Incorporated ("the Company") on
Form 10-K for the period ended December 31, 2002, as filed with the Securities
and Exchange Commission on the date hereof ("the Report"), I, James R. Houghton,
as Chairman and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. ss 1350, as adopted pursuant to Section 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.
Dated: February 20, 2003
/s/ James R. Houghton
-----------------------------------------
James R. Houghton
Chairman and Chief Executive Officer
Exhibit 99.2
Certification Required by 18 U.S.C. Section 1350
(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
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In connection with the Annual Report of Corning Incorporated ("the Company") on
Form 10-K for the period ended December 31, 2002, as filed with the Securities
and Exchange Commission on the date hereof ("the Report"), I, James B. Flaws, as
Vice Chairman and Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. ss 1350, as adopted pursuant to Section 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.
Dated: February 20, 2003
/s/ James B. Flaws
-----------------------------------------
James B. Flaws
Vice Chairman and Chief Financial Officer
The following exhibits are included only in copies of the 2002 Annual Report on
Form 10-K filed with Securities and Exchange Commission or are incorporated by
reference herein. Any document incorporated by reference is identified by a
parenthetical reference to the SEC filing which included such document.
3(i)1 Restated Certificate of Incorporation dated December 6, 2000, filed
with the Secretary of State of the State of New York on January 22,
2001 (Incorporated by reference to Exhibit 3(i) of Corning's Annual
Report on Form 10-K for the year ended December 31, 2000).
3(i)2 Certificate of Amendment to Restated Certificate of Incorporation
filed with the Secretary of State of the State of New York on August
5, 2002 (Incorporated by reference to Exhibit 99.1 to Corning's Form
8-K filed on August 7, 2002).
3(ii)1 Bylaws of Corning effective as of December 6, 2000 (Incorporated by
reference to Exhibit 3(ii) of Corning's Annual Report on Form 10-K for
the year ended December 31, 2000).
3(ii)2 Amendment to Article III, Section 9, of Bylaws of Corning effective as
of February 5, 2003.
4 Rights Agreement of Corning dated as of June 5, 1996 (Incorporated by
reference to Exhibit 1 to Corning's Form 8-K filed on July 10, 1996).
10 Agreement and Release between John W. Loose and Corning dated as of
April 12, 2002 (Incorporated by reference to Exhibit 10 of Corning's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
24 Powers of Attorney.
Copies of these exhibits may be obtained by writing to Ms. Denise Hauselt,
assistant general counsel and secretary, Corning Incorporated, MP-HQ-E2-10,
Corning, New York 14831.