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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
-------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to____________
Commission file number 1-3247
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CORNING INCORPORATED
--------------------
(Registrant)
New York 16-0393470
- ---------------------------------------- --------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
One Riverfront Plaza, Corning, New York 14831
- ---------------------------------------- --------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-974-9000
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
at least the past 90 days.
Yes X No ____
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No ____
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
1,329,745,677 shares of Corning's Common Stock, $0.50 Par Value, were
outstanding as of September 30, 2003.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
INDEX
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PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Page
----
Consolidated Statements of Operations (Unaudited) for the
three and nine months ended September 30, 2003 and 2002 3
Consolidated Balance Sheets at September 30, 2003
(Unaudited) and December 31, 2002 4
Consolidated Statements of Cash Flows (Unaudited) for the
nine months ended September 30, 2003 and 2002 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
Item 4. Controls and Procedures 40
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 41
Item 6. Exhibits and Reports on Form 8-K 47
Signatures 48
Exhibit Index 49
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share amounts)
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
2003 2002 2003 2002
--------- --------- -------- ---------
Net sales $ 772 $ 762 $ 2,270 $ 2,428
Cost of sales 546 633 1,663 1,931
--------- --------- -------- ---------
Gross margin 226 129 607 497
Operating expenses:
Selling, general and administrative expenses 147 157 447 533
Research, development and engineering expenses 80 113 258 370
Amortization of purchased intangibles 10 11 28 33
Restructuring, impairment and other charges and credits (Note 2) (10) 125 90 619
--------- --------- -------- ---------
Operating loss (1) (277) (216) (1,058)
Interest income 7 10 24 34
Interest expense (36) (44) (118) (136)
Asbestos settlement (Note 3) (51) (388)
Gain on repurchases of debt, net (Note 4) 2 22 19 90
Other income (expense), net 5 (1) 11 (10)
--------- --------- -------- ---------
Loss from continuing operations before income taxes (74) (290) (668) (1,080)
Benefit for income taxes (30) (91) (208) (325)
--------- --------- -------- ---------
Loss from continuing operations before minority interests
and equity earnings (44) (199) (460) (755)
Minority interests 2 5 72 17
Equity in earnings of associated companies, net of impairments 75 42 194 97
--------- --------- -------- ---------
Income (loss) from continuing operations 33 (152) (194) (641)
Income from discontinued operations, net of income taxes (Note 5) 19 48
--------- --------- -------- ---------
Net income (loss) 33 (133) (194) (593)
Dividend requirements of preferred stock (128) (128)
--------- --------- -------- ---------
Income (loss) attributable to common shareholders $ 33 $ (261) $ (194) $ (721)
========= ========= ======== =========
Basic earnings (loss) per common share from (Note 12):
Continuing operations $ 0.03 $ (0.27) $ (0.15) $ (0.79)
Discontinued operations (Note 5) 0.02 0.05
--------- --------- -------- ---------
Basic earnings (loss) per common share $ 0.03 $ (0.25) $ (0.15) $ (0.74)
========= ========= ======== =========
Diluted earnings (loss) per common share from (Note 12):
Continuing operations $ 0.02 $ (0.27) $ (0.15) $ (0.79)
Discontinued operations (Note 5) 0.02 0.05
--------- --------- -------- ---------
Diluted earnings (loss) per common share $ 0.02 $ (0.25) $ (0.15) $ (0.74)
========= ========= ======== =========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
Unaudited
Sept. 30, December 31,
2003 2002
--------- ------------
Assets
Current assets:
Cash and cash equivalents $ 809 $ 1,426
Short-term investments, at fair value 608 664
--------- ---------
Total cash and short-term investments 1,417 2,090
Trade accounts receivable, net of doubtful accounts and allowances - $45 and $59 498 470
Inventories (Note 6) 491 559
Deferred income taxes 375 296
Other accounts receivable 117 358
Prepaid expenses and other current assets 70 52
--------- ---------
Total current assets 2,968 3,825
Restricted cash and investments 66 82
Investments 985 769
Property, net of accumulated depreciation - $3,357 and $3,375 3,582 3,705
Goodwill (Note 7) 1,730 1,715
Other intangible assets, net (Note 7) 175 213
Deferred income taxes 1,106 887
Other assets 202 210
--------- ---------
Total assets $ 10,814 $ 11,406
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Loans payable $ 49 $ 204
Accounts payable 310 339
Other accrued liabilities (Note 8) 1,089 1,137
--------- ---------
Total current liabilities 1,448 1,680
Long-term debt 2,819 3,963
Postretirement benefits other than pensions 614 617
Other liabilities 615 396
Commitments and contingencies (Note 9)
Minority interests 36 59
Shareholders' equity (Note 10):
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: 1.05 million and 1.55 million 105 155
Common stock - Par value $0.50 per share; Shares authorized: 3.8 billion;
Shares issued: 1,388 million and 1,267 million 694 634
Additional paid-in capital 10,275 9,695
Accumulated deficit (5,115) (4,921)
Treasury stock, at cost; Shares held: 58 million and 70 million (581) (702)
Accumulated other comprehensive loss (96) (170)
--------- ---------
Total shareholders' equity 5,282 4,691
--------- ---------
Total liabilities and shareholders' equity $ 10,814 $ 11,406
========= =========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
For the nine months ended
September 30,
-------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Loss from continuing operations $ (194) $ (641)
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by (used in) operating activities:
Amortization of purchased intangibles 28 33
Depreciation 363 471
Asbestos settlement 388
Restructuring, impairment and other charges and credits 90 619
Gain on repurchases of debt, net of inducements (19) (90)
Undistributed earnings of associated companies (84) (4)
Minority interests, net of dividends paid (76) (17)
Deferred tax benefit (259) (145)
Interest expense on convertible debentures 15 30
Restructuring payments (201) (193)
Decreases (increases) in restricted cash 1 (20)
Income tax refund 191
Employee benefits in excess of expense (93) (27)
Changes in certain working capital items:
Trade accounts receivable 5 97
Inventories 73 88
Other current assets 34 (117)
Accounts payable and other current liabilities, net of restructuring payments (228) (259)
Other, net 32 (46)
-------- -------
Net cash provided by (used in) operating activities 66 (221)
-------- -------
Cash flows from investing activities:
Capital expenditures (204) (279)
Acquisitions of businesses, net of cash acquired (29)
Proceeds from sale of precision lens business 9
Net proceeds from sale or disposal of assets 39 62
Increase in long-term investments and other long-term assets (4) (18)
Short-term investments - acquisitions (1,426) (1,557)
Short-term investments - liquidations 1,481 2,123
Restricted investments - acquisitions (117)
Restricted investments - liquidations 15 67
Other, net 1 (2)
-------- -------
Net cash (used in) provided by investing activities (89) 250
-------- -------
Cash flows from financing activities:
Net (repayments of) proceeds from loans payable (160) (502)
Proceeds from issuance of long-term debt 11
Repayments of long-term debt (1,100) (190)
Proceeds from issuance of Series C preferred stock, net 558
Proceeds from issuance of common stock, net 651 47
Repurchases of common stock for treasury (23)
Cash dividends paid to preferred shareholders (15) (67)
Other, net (8)
-------- -------
Net cash used in financing activities (624) (174)
-------- -------
Effect of exchange rates on cash 30 23
-------- -------
Cash used in continuing operations (617) (122)
Cash provided by discontinued operations (Note 5) 68
-------- -------
Net decrease in cash and cash equivalents (617) (54)
Cash and cash equivalents at beginning of period 1,426 1,037
-------- -------
Cash and cash equivalents at end of period $ 809 $ 983
======== =======
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
General
Corning Incorporated and its consolidated subsidiaries is hereinafter sometimes
referred to as "the Company," "Registrant," "Corning," "we," "our" or "us."
Corning Incorporated is a world-leading provider of optical fiber, cable, and
hardware and equipment products for the telecommunications industry;
high-performance glass for computer monitors; advanced optical materials for the
semiconductor industry and the scientific community; scientific laboratory
products for the scientific community; ceramic substrates for the automotive
industry; specialized polymer products for biotechnology applications; and other
technologies.
The unaudited consolidated financial statements reflect all adjustments which,
in the opinion of management, are necessary for a fair statement of the results
of operations, financial position and cash flows for the interim periods
presented. All such adjustments are of a normal recurring nature. The
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and in accordance with
accounting principles generally accepted in the United States of America (GAAP)
for interim financial information.
GAAP requires management to make certain estimates and judgments that are
reflected in the reported amounts of assets, liabilities, revenues and expenses
and also in the disclosure of contingent liabilities. The actual results may
differ from the estimates. Management exercises judgment and makes estimates for
allowance for bad debts, inventory obsolescence, product warranty, restructuring
charges, fixed asset, goodwill and other asset impairments, depreciation,
pension benefits, postretirement benefits other than pensions, deferred tax
asset valuation allowance and income taxes, litigation and other contingencies.
Management reviews these estimates on a systematic basis and, if necessary, any
material adjustments are reflected in the consolidated financial statements in
the period that they are deemed necessary.
The results for interim periods are not necessarily indicative of results which
may be expected for any other interim period, or for the full year. These
interim consolidated financial statements should be read in conjunction with
Corning's Annual Report on Form 10-K for the year ended December 31, 2002.
We began recognizing equity earnings from Dow Corning Corporation ("Dow
Corning") in the first quarter of 2003 since we concluded that the emergence of
Dow Corning from bankruptcy protection is probable based on the Bankruptcy
Court's findings on December 11, 2002. See Part II-Other Information, Item 1.
Legal Proceedings for a history of this matter.
Certain amounts for 2002 were reclassified to conform with 2003 classifications.
Stock-Based Compensation
We apply Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting
for Stock Issued to Employees," for our stock-based compensation plans. The
following table illustrates the effect on income (loss) from continuing
operations and earnings (loss) per share from continuing operations if we had
applied the fair value recognition provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
to stock-based employee compensation.
(In millions, except per share amounts):
- ------------------------------------------------------------------------------------------------------------------------------------
For the three months For the nine months
ended September 30, ended September 30,
------------------------- -------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations - as reported $ 33 $ (152) $ (194) $ (641)
Less: Dividend requirements of preferred stock (128) (128)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations attributable to
common shareholders - as reported 33 (280) (194) (769)
Add: Stock-based employee compensation expense
determined under APB No. 25, included in reported
income (loss) from continuing operations, net of tax 1 2
Less: Stock-based employee compensation expense
determined under fair value based method, net of tax (38) (69) (106) (210)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations attributable to common
shareholders - pro forma $ (5) $ (349) $ (299) $ (977)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share from continuing operations:
Basic - as reported $ 0.03 $ (0.27) $ (0.15) $ (0.79)
Basic - pro forma $ 0.00 $ (0.34) $ (0.24) $ (1.00)
Diluted - as reported $ 0.02 $ (0.27) $ (0.15) $ (0.79)
Diluted - pro forma $ 0.00 $ (0.34) $ (0.24) $ (1.00)
- ------------------------------------------------------------------------------------------------------------------------------------
For purposes of SFAS No. 123, the fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model. The following
are weighted-average assumptions used for grants under our stock plans in 2003
and 2002, respectively:
- ------------------------------------------------------------------------------------------------------------------------------------
For the three months ended Sept. 30, For the nine months ended Sept. 30,
For Options ------------------------------------ -----------------------------------
Granted During 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Expected life in years 5 6 5 6
Risk free interest rate 3.59% 3.57% 3.02% 4.29%
Expected volatility 80.4% 80.2% 78.7% 77.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Changes in the status of outstanding options were as follows:
- --------------------------------------------------------------------------------
Number of Options Weighted-Average
(in thousands) Exercise Price
----------------- ----------------
Options outstanding December 31, 2002 97,327 $ 26.47
Options granted under plans 32,613 $ 5.35
Options exercised (253) $ 5.08
Options terminated (442) $ 13.11
--------
Options outstanding September 30, 2003 129,245 $ 21.06
======== ========
Options exercisable September 30, 2003 66,836 $ 26.63
======== ========
- --------------------------------------------------------------------------------
New Accounting Standards
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin 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 VIEs that are consolidated as well as VIEs from which the
entity is the holder of a significant, but not the majority amount of the
beneficial interests. We have leased equipment from three unconsolidated VIEs
for which the sole purpose is the leasing of equipment to us. We assessed the
impact of this interpretation and determined that we are the primary beneficiary
of one existing VIE, and therefore, began to consolidate this entity beginning
on July 1, 2003. The assets and debt of this entity at September 30, 2003,
approximated $32 million and $34 million, respectively. We also evaluated the
impact of this interpretation on two other entities and determined that we are
not the primary beneficiary for both entities. The assets and debt of these
entities total $12 million. The adoption of this accounting standard did not
have a material effect on our results of operations or financial position.
The FASB also recently issued the following pronouncements which became
effective July 1, 2003:
SFAS No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and
Hedging Activities," and
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity."
The adoption of these accounting standards did not have a material effect on our
results of operations or financial position.
2. Restructuring, Impairment and Other Charges and Credits
First Quarter
- -------------
In the first quarter of 2003, we recorded charges for the shut-down of the
conventional video components business and the optical switching product line
which were announced on April 15, 2003 and February 13, 2003, respectively. We
also recorded credits related to prior years' restructuring and impairment
charges discussed below. A summary of these charges and credits follows:
Conventional video components business
Corning Asahi Video Products Company (conventional video components business, or
CAV), a 51% owned partnership included in our consolidated results, is a
manufacturer of glass panels and funnels for use in conventional tube
televisions and is reported in the Technologies segment. In the fourth quarter
of 2002, we impaired certain assets of this business and indicated that we could
be required to record additional impairment charges, or that we could choose to
exit the business if performance differed from expectations. During the first
quarter, operating results and cash flows were less than expected, and certain
customers significantly reduced forecasted orders for the year.
On April 15, 2003, we announced that we had agreed with our partner to cease
production. We impaired the long-lived assets of this business to estimated
salvage value and recorded a charge of $62 million ($19 million after-tax and
minority interest). In connection with the cessation of operations, the partners
have reached agreement on the shared funding of CAV's obligations.
Optical Switching
We recorded a charge of $17 million ($11 million after-tax) associated with the
discontinuance of the optical switching product line in the photonic
technologies business due to the downturn in the telecommunications industry.
The charge included $13 million for employee separation costs and $4 million for
asset impairments related to equipment.
Impairment of Cost Investments
In the first quarter, we recorded a $5 million ($3 million after-tax) charge for
other than temporary declines in certain cost investments in the
Telecommunications segment.
Credits
During the first quarter, we reversed $33 million ($21 million after-tax)
related to revised cost estimates of existing restructuring plans, of which $24
million related to employee separation and exit costs which were less than
estimated, while $9 million related to proceeds in excess of assumed salvage
values for assets that were previously impaired.
Second Quarter
- --------------
In the second quarter of 2003, we recorded restructuring, impairment and other
charges of $125 million ($62 million after-tax and minority interest), offset by
credits related to prior years' restructuring charges of $76 million ($59
million after-tax), resulting in a net pre-tax charge of $49 million ($3 million
after-tax and minority interest). These charges primarily relate to the exit of
the conventional video components business and the photonic technologies
business. The charges also reflect certain restructuring actions taken during
the second quarter of 2003 relating to our other businesses. A summary of these
charges and credits follows:
Conventional Video Components
In the second quarter of 2003, we recorded a restructuring charge of $54 million
($15 million after-tax and minority interest). The charge included $18 million
for employee separation costs, $19 million for exit costs and $17 million for
curtailments related to pension and postretirement health care benefits.
In June, CAV announced that it had signed a definitive agreement to sell
tangible assets to Henan Anyang CPT Glass Bulb Group, Electronic Glass Co., Ltd.
(Henan Anyang), located in China. The proceeds from this sale may offset a
significant portion of the cash spending on restructuring. We recognized a $5
million gain in the third quarter of 2003 as described under Third
Quarter-Credits below. The sale is expected to be completed in the first half of
2004 at which time we anticipate recognizing the remainder of the original
estimated gain of approximately $40 million ($13 million after-tax and minority
interest). We expect the restructuring costs to require $45 million to $60
million in cash spending. In addition, we concluded that this business does not
meet the requirements for discontinued operations treatment under SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
Photonic Technologies
In the second quarter of 2003, we recorded a charge of $33 million ($22 million
after-tax) related to the exit of the photonic technologies business. The charge
included $7 million for employee separation costs, $14 million for exit costs,
$7 million for curtailments related to pension and postretirement benefits and
$5 million to impair the remaining assets.
Also in the second quarter, we increased the deferred tax valuation allowance by
$21 million as we do not expect to realize certain deferred tax assets in Italy
related to the photonic technologies business. This charge is reflected in the
statement of operations under "Benefit for income taxes."
Finally, we impaired $7 million of equity investments in this business that will
be abandoned as part of the exit from the business. This charge is reflected in
the statement of operations under, "Equity in earnings of associated companies,
net of impairments."
Other
We also recorded $38 million of restructuring and impairment charges primarily
related to the telecommunications businesses and administrative staffs. The
charge included $17 million for employee separation costs, $2 million for
curtailments related to pension and postretirement benefits and $19 million for
impairments for assets held for sale or abandonment.
Credits
In the second quarter of 2003, we recorded a $76 million ($59 million after-tax)
credit related to prior years' restructuring and impairment charges, primarily
in the Telecommunications segment. The reversals included $27 million related to
employee separation costs which were less than estimated, $25 million related to
a decision to change the restructuring plans and not exit a small cabling
business and $24 million related to proceeds in excess of assumed salvage values
for assets that were previously impaired and certain assets we decided to
retain.
Third Quarter
- -------------
In the third quarter of 2003, we recorded restructuring, impairment and other
charges of $16 million ($13 million after-tax), offset by credits of $26 million
($21 million after-tax and minority interest), resulting in a net pre-tax credit
of $10 million ($8 million after-tax and minority interest). A summary of these
charges and credits follow:
Photonic Technologies
On July 31, 2003, we completed the sale of certain photonic technologies
business assets to Avanex Corporation ("Avanex") in exchange for 21 million
restricted shares of Avanex common stock, which we valued at approximately $53
million. These shares are restricted from sale for approximately one year at
which point the restrictions are lifted at intervals beginning July 2004 and
ending October 2005. As the shares become unrestricted, we will mark-to-market
the shares through other comprehensive income as available-for-sale securities.
The Avanex restricted shares are reflected as a cost investment and recorded
under "Investments" in our consolidated balance sheet. The transaction generated
a loss on sale of $13 million ($9 million after-tax) and resulted in a $21
million reduction of our goodwill. See Note 7. In accordance with the sale
agreement, Avanex acquired assets related to the optical amplifier facility in
Erwin, NY and the optical component plant in Milan, Italy. We also paid Avanex
$22 million in cash. Approximately 400 employees of the photonic technologies
business became employees of Avanex in the third quarter.
In the third quarter of 2003, we recorded a charge of $3 million ($4 million
after-tax) related to the exit of the photonic technologies business for
employee separation costs. The after-tax amount included a $2 million write-off
related to a state net operating loss.
We expect to close our pump laser facility in Bedford, MA by the end of the
year. Pursuant to a separate arrangement with Avanex, we are manufacturing pump
lasers for sale to Avanex during the fourth quarter of 2003. This activity will
be completed and the facility closed by December 31, 2003.
Credits
In the third quarter of 2003, we reversed $20 million ($18 million after-tax) of
restructuring reserves related to prior years' restructuring charges, primarily
in the Telecommunications segment. The reversals included $10 million related to
employee separation costs which were less than estimated, $6 million related to
exit costs which were less than estimated and $4 million related to proceeds in
excess of assumed salvage values for assets that were previously impaired and
certain assets management decided to retain as abandoned factories were being
dismantled. Approximately $5 million of the reduced exit costs will not be
incurred due to the Avanex transaction.
In addition to the above, we also recorded the following:
- - a $5 million ($2 million after-tax and minority interest) credit related to
assets from CAV that were previously impaired but later sold to Henan
Anyang, and
- - a $1 million gain on the sale of previously-impaired cost investments in
the Telecommunications segment that were sold in the third quarter.
The current restructuring reserve continues to be evaluated as plans are being
executed. As a result, there may be additional charges or reversals in future
periods. In addition, since the restructuring program is an aggregation of many
individual plans currently being executed, actual costs have differed from
estimated amounts.
The following table illustrates the charges, credits and balances of the
restructuring reserves as of and for the nine months ended September 30, 2003
(in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Nine months Nine months ended Remaining
ended Sept. Reversals Net Sept. 30, 2003 Cash reserve at
January 1, 30, 2003 to existing charges/ Non-cash payments Sept. 30,
2003 charge plans (reversals) charges in 2003 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring charges:
Employee related costs $ 273 $ 84 $ (59) $ 25 $ (27) $ (170) $ 101
Other charges 132 33 (21) 12 (31) 113
----------------------------------------------------------------------------------------
Total restructuring charges $ 405 $ 117 $ (80) $ 37 $ (27) $ (201) $ 214
----------------------------------------------------------------------------------------
Impairment of long-lived assets:
Assets to be held and used $ 62 $ 62
Assets to be disposed of by sale
or abandonment 28 $ (54) (26)
Cost investments 5 (1) 4
------------------------------------
Total impairment charges $ 95 $ (55) $ 40
------------------------------------
Other charges:
Loss on Avanex transaction $ 13 $ 13
Total restructuring, impairment and
other charges and credits $ 225 $ (135) $ 90
Tax (benefit) expense and minority
interest (117) 35 (82)
------------------------------------
Restructuring, impairment and other
charges and credits, net $ 108 $ (100) $ 8
------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Almost one-quarter of the remaining $214 million restructuring reserve is
expected to be paid by December 31, 2003. Cash payments for employee-related
costs will be substantially completed by mid-2004, while payments for exit
activities will be substantially completed by 2005.
The following table illustrates the headcount reduction amongst U.S. hourly,
U.S. salaried and non-U.S. positions related to the 2003 plans:
- --------------------------------------------------------------------------------
Headcount reduction
- --------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
- --------------------------------------------------------------------------------
Headcount reduction 950 700 150 1,800
=========================================================
- --------------------------------------------------------------------------------
As of September 30, 2003, approximately 6,700 of the 7,100 employees had been
separated under the 2002 plans and approximately 1,350 of the 1,800 employees
had been separated under the 2003 plans.
2002 Restructuring Actions
- --------------------------
Third Quarter
- -------------
During the third quarter, we undertook actions to reduce our costs, primarily
related to the Telecommunications segment and our corporate research and
administrative staffs.
The following table illustrates the charges, credits and balances of the
restructuring reserves as of and for the nine months ended September 30, 2002:
(In millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Nine months
Nine months ended Remaining
ended Sept. 30, 2002 Cash reserve at
January 1, Sept. 30, Non-cash payments Sept. 30,
2002 2002 charge charges in 2002 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring charges:
Employee related costs $ 198 $ 234 (a) $ (35) $ (177) $ 220
Other charges 78 23 (16) 85
-----------------------------------------------------------------------------
Total restructuring charges $ 276 $ 257 $ (35) $ (193) $ 305
-----------------------------------------------------------------------------
Impairment of long-lived assets:
Assets held for disposal $ 302 (b) $ 302
Cost investments 60 60
-----------------------------
Total impairment charges $ 362 $ 362
-----------------------------
Total restructuring, impairment and
charges and credits $ 619
Tax benefit and minority interest (206)
---------
Restructuring, impairment and other charges
and credits, net $ 413
=========
(a) Amount is net of $5 million adjustment in employee related costs reflecting
the difference between estimated and actual costs.
(b) Amount is net of $5 million adjustment to assumed salvage values on asset
disposals.
The charges recorded in the third quarter of 2002 are summarized in the
following table and described below:
Employee related costs $ 47
Exit costs 11
------
Total restructuring charges 58
Impairment of long-lived assets 67
------
Total restructuring, impairment and other charges and credits 125
Tax benefit and minority interest (40)
------
Restructuring, impairment and other charges and credits, net $ 85
======
Restructuring Charges
The third quarter restructuring charge of $58 million included $47 million of
employee separation costs (including special termination benefits to pension and
postretirement health care plans) and $11 million in other exit costs
(principally lease termination and contract cancellation payments). The charge
entailed the elimination of approximately 1,000 positions in the
Telecommunications segment and corporate research and administrative staffs
organizations.
Impairment of Plant and Equipment
We recorded a $67 million charge to impair plant and equipment relating to
facilities to be shutdown or disposed, primarily in the fiber and cable
business, the photonic technologies business and certain research facilities.
See Restructuring, Impairment and Other Charges and Credits in our MD&A.
3. Asbestos Settlement
On March 28, 2003, we announced that we had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future non-premises asbestos claims against us and Pittsburgh Corning
Corporation (PCC), which might arise from PCC products or operations.
The agreement is expected to be incorporated into a settlement fund as part of a
reorganization plan for PCC. The plan will be submitted to the federal
bankruptcy court in Pittsburgh for approval, and is subject to a number of
contingencies, including a favorable vote by 75 percent of the asbestos
claimants voting on the PCC reorganization plan. We will make our contributions
to the settlement trust under the agreement after the plan is approved, becomes
effective and no longer subject to appeal. The approval process could take one
year or longer.
Our settlement will require when the plan becomes effective, the contribution of
our equity interest in PCC, our one-half equity interest in Pittsburgh Corning
Europe N.V. (PCE), a Belgian corporation, and 25 million shares of our common
stock. The common stock will be marked-to-market each quarter until it is
contributed to the settlement trust, thus resulting in adjustments to income and
the settlement liability as appropriate. We will also make cash payments with a
current value of $134 million over six years beginning in June 2005. In
addition, we will assign insurance policy proceeds from our primary insurance
and a portion of our excess insurance as part of the settlement. We recorded a
charge of $298 million ($192 million after-tax) in the first quarter of 2003. In
the third quarter, we recorded an additional $51 million charge ($31 million
after-tax) to mark-to-market the value of our common stock. We have recorded
total charges of $388 million ($247 million after-tax) to reflect the settlement
and to mark-to-market the value of our common stock for the nine months ended
September 30, 2003. The carrying value of our stock in PCE and the fair value as
of September 30, 2003, of 25 million shares of our common stock have been
reflected in current liabilities. The remaining $134 million, representing the
net present value of the cash payments, discounted at 5.5%, is recorded in
noncurrent liabilities. See Part II-Other Information, Item 1. Legal Proceedings
for a history of this matter.
4. Gain on Repurchases of Debt, Net
During the nine months ended September 30, 2003 and 2002, we repurchased and
retired a significant portion of our zero coupon convertible debentures through
a combination of open market purchases, debt for equity exchanges and a modified
Dutch tender offer. The following table summarizes the activity related to our
zero coupon convertible debentures (dollars in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
For the three months For the nine months
ended September 30, ended September 30,
---------------------------- ---------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Bonds repurchased 288,500 75,500 1,476,000 362,687
Book value $ 226 $ 58 $ 1,152 $ 278
Fair value $ 219 $ 35 $ 1,069 $ 183
Pre-tax gain (a) $ 3 $ 22 $ 20 $ 90
After-tax gain (a) $ 2 $ 13 $ 13 $ 55
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Net of the write-off of unamortized issuance and deal costs.
In the first quarter of 2003, we issued 6.5 million shares of common stock from
treasury in exchange for 55,000 debentures with an accreted value of $43
million. In accordance with SFAS No. 84, "Induced Conversions of Convertible
Debt," we recognized a charge of $34 million reflecting the fair value of the
incremental shares issued beyond those required by the terms of the debentures.
The increase in equity due to the issuance of shares from treasury stock was $77
million. This transaction is reflected in the table above.
The balance of zero coupon convertible debentures was as follows:
- --------------------------------------------------------------------------------
September 30, 2003 December 31, 2002
- --------------------------------------------------------------------------------
Zero coupon convertibles $ 470 $ 1,606
- --------------------------------------------------------------------------------
Additionally in the third quarter of 2003, we repurchased and retired 60,000
euro notes with a book value of 60 million euros for cash of 63 million euros
(including accrued interest) or $70 million. We recorded a loss of $1 million
($1 million after-tax) on the transaction in the third quarter.
5. Discontinued Operations
We completed the sale of the precision lens business to 3M Company in December
2002. The transaction was treated as a discontinued operation under SFAS No.
144. Summarized selected financial information for the discontinued operations
related to the precision lens business was as follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
For the three months ended For the nine months ended
September 30, 2002 September 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 75 $ 203
======== =======
Income before taxes $ 31 $ 74
Provision for income taxes 12 26
-------- -------
Income from discontinued operations $ 19 $ 48
======== =======
- ------------------------------------------------------------------------------------------------------------------------------------
6. Inventories
Inventories shown on the accompanying balance sheets were comprised of the
following (in millions):
- --------------------------------------------------------------------------------
September 30, December 31,
2003 2002
- --------------------------------------------------------------------------------
Finished goods $ 140 $ 212
Work in process 127 115
Raw materials and accessories 135 135
Supplies and packing materials 89 97
- --------------------------------------------------------------------------------
Total inventories $ 491 $ 559
- --------------------------------------------------------------------------------
7. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2003, were as follows (in millions):
- --------------------------------------------------------------------------------
Telecom-
munications Technologies Total
- --------------------------------------------------------------------------------
Balance at January 1, 2003 $ 1,556 $ 159 $ 1,715
Foreign currency translation 31 31
Divestitures (See Note 2) (21) (21)
Other 5 5
- --------------------------------------------------------------------------------
Balance at September 30, 2003 $ 1,571 $ 159 $ 1,730
- --------------------------------------------------------------------------------
Other intangible assets consisted of the following (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, 2003 December 31, 2002
-------------------------------------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Patents and trademarks $ 140 $ 52 $ 88 $ 138 $ 40 $ 98
Non-competition agreements 110 81 29 106 62 44
Other 4 1 3 5 2 3
----------------------------------- -----------------------------------
Total amortized intangible assets 254 134 120 249 104 145
----------------------------------- -----------------------------------
Other intangible assets:
Intangible pension assets 55 55 68 68
----------------------------------- -----------------------------------
Total $ 309 $ 134 $ 175 $ 317 $ 104 $ 213
- ------------------------------------------------------------------------------------------------------------------------------------
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 $35 million annually from 2003 to 2007.
8. Product Warranty Liability
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. Our reserves relate
primarily to the Telecommunications segment. Reserves for warranty items are
included in other accrued liabilities. A reconciliation of the changes in the
product warranty liability during the nine months ended September 30, 2003, was
as follows (in millions):
- --------------------------------------------------------------------------------
Balance at January 1, 2003 $ 64
Accruals 3
Adjustments to liability existing on January 1, 2003 (18) (a)
Settlements made during 2003 (11)
Effect of foreign currency translation 2
------
Balance at September 30, 2003 $ 40
- --------------------------------------------------------------------------------
(a) Primarily due to the exit of the photonic technologies business.
9. Commitments and Contingencies
In 2003, we adopted the initial recognition and measurement provisions of FASB
Interpretation No. 45 (FIN 45). We do not routinely provide significant
third-party guarantees and, as a result, this interpretation has not had a
material effect on our financial statements. The initial recognition and
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002.
We provide financial guarantees and incur contingent liabilities in the form of
purchase price adjustments related to attainment of milestones, stand-by letters
of credit and performance bonds. These guarantees have various terms, and none
of these guarantees are individually significant. We have also agreed to provide
a credit facility related to Dow Corning as discussed in Note 10 to the
Consolidated Financial Statements in our 2002 Form 10-K. The funding of the Dow
Corning $150 million credit facility is subject to events connected to the
Bankruptcy Plan as described in Note 10. As of September 30, 2003, we were
contingently liable for the items described above totaling $433 million,
compared with $535 million at December 31, 2002. We believe a significant
majority of these guarantees and contingent liabilities will expire without
being funded.
From time to time, we are subject to uncertainties and litigation and are not
always able to predict the outcome of these items with assurance. Various legal
actions, claims and proceedings are pending against us, including those arising
out of alleged product defects, shareholder matters, product warranties,
patents, asbestos and environmental matters. These issues are discussed in Part
II-Other Information, Item 1. Legal Proceedings of this Form 10-Q.
10. Shareholders' Equity
In July 2003, we completed an equity offering of 45 million shares of common
stock generating net proceeds of approximately $363 million. We expect to use
the net proceeds of this offering to reduce debt through open market
repurchases, public tender offers or other methods, and for general corporate
purposes. We invest the net proceeds in short-term, interest bearing, investment
grade obligations until they are applied as described.
In April 2003, we completed an equity offering of 50 million shares of common
stock generating net proceeds of approximately $267 million. We used the net
proceeds of this offering and approximately $356 million of existing cash to
reduce debt through a public tender offer in the second quarter of 2003 as
discussed in Note 4.
11. Comprehensive Income (Loss)
Comprehensive income (loss), net of tax, was as follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
For the three months For the nine months
ended September 30, ended September 30,
---------------------------- ---------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 33 $ (133) $ (194) $ (593)
Other comprehensive income (loss) 46 (23) 74 62
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ 79 $ (156) $ (120) $ (531)
- ------------------------------------------------------------------------------------------------------------------------------------
12. Earnings (Loss) Per Common Share
The reconciliation of the amounts used in the basic and diluted earnings (loss)
per common share from continuing operations computations was as follows (in
millions, except per share amounts):
- ------------------------------------------------------------------------------------------------------------------------------------
For the three months ended September 30,
--------------------------------------------------------------------------------
2003 2002
---------------------------------------- -------------------------------------
Weighted- Per Share Weighted- Per Share
Income Average Shares Amount Loss Average Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 33 $ (152)
Less: Dividend requirements of preferred stock (128)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
attributable to common shareholders $ 33 $ (280)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share $ 33 1,314 $ 0.03 $ (280) 1,036 $ (0.27)
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Stock options 20
7% mandatory convertible preferred stock 56
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share $ 33 1,390 $ 0.02 $ (280) 1,036 $ (0.27)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
For the nine months ended September 30,
--------------------------------------------------------------------------------
2003 2002
---------------------------------------- -------------------------------------
Weighted- Per Share Weighted- Per Share
Loss Average Shares Amount Loss Average Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations $ (194) $ (641)
Less: Dividend requirements of preferred stock (128)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations
attributable to common shareholders $ (194) $ (769)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per common share $ (194) 1,253 $ (0.15) $ (769) 977 $ (0.79)
- ------------------------------------------------------------------------------------------------------------------------------------
The potential common shares excluded from the calculation of diluted earnings
(loss) per common share because their effect would be anti-dilutive and the
amount of stock options excluded from the calculation of diluted earnings (loss)
per common share because their exercise price was greater than the average
market price of the common shares of the periods presented was as follows (in
millions):
- ------------------------------------------------------------------------------------------------------------------------------------
For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Potential common shares excluded from the
calculation of diluted earnings (loss) per common share:
Stock options 1 14 1
7% mandatory convertible preferred stock 73 70 25
4.875% convertible notes 6 6 6 6
3.5% convertible debentures 69 69 69 69
Zero coupon convertible debentures 6 20 11 22
---------------------------------------------------
Total 81 169 170 123
===================================================
Stock options excluded from the calculation of diluted earnings
(loss) per share because the exercise price was greater
than the average market price of the common shares 69 86 83 81
===================================================
- ------------------------------------------------------------------------------------------------------------------------------------
13. Operating Segments
Corning's reportable operating segments consist of Telecommunications and
Technologies. We include the earnings of equity affiliates that are closely
associated with our operating segments in segment results.
We prepared the financial results for the operating segments on a basis that is
consistent with the manner in which we internally disaggregate financial
information to assist in making internal operating decisions. We allocated
certain common expenses among segments differently than we would for stand-alone
financial information prepared in accordance with GAAP. These expenses include
interest, taxes and corporate functions. This method of preparation may not be
consistent with methods used by other companies. The accounting policies of our
operating segments are the same as those applied in the consolidated financial
statements.
Telecom- Non-segment/ Consolidated
munications Technologies Other items Total
----------- ----------- ------------ ------------
For the three months ended September 30, 2003
Net sales $ 370 $ 396 $ 6 $ 772
Research, development and engineering expenses (1) $ 25 $ 55 $ 80
Restructuring, impairment and other charges and credits (2) $ (2) $ (11) $ 3 $ (10)
Interest expense (3) $ 16 $ 20 $ 36
(Benefit) provision for income taxes $ (16) $ 5 $ (19) $ (30)
(Loss) income before minority interests and equity earnings (4)(5) $ (28) $ 14 $ (30) $ (44)
Minority interests 2 2
Equity in earnings of associated companies 1 53 21 75
-------- -------- ------- --------
Net (loss) income $ (27) $ 69 $ (9) $ 33
======== ======== ======= ========
For the three months ended September 30, 2002
Net sales $ 366 $ 392 $ 4 $ 762
Research, development and engineering expenses (1) $ 71 $ 42 $ 113
Restructuring, impairment and other charges and credits (2) $ 90 $ 6 $ 29 $ 125
Interest expense (3) $ 27 $ 19 $ (2) $ 44
(Benefit) provision for income taxes $ (91) $ 1 $ (1) $ (91)
Loss before minority interests and equity (losses) earnings (4)(5) $ (193) $ (5) $ (1) $ (199)
Minority interests 5 5
Equity in (losses) earnings of associated companies (5) 43 4 42
Income from discontinued operations 19 19
-------- -------- ------- --------
Net (loss) income $ (198) $ 43 $ 22 $ (133)
======== ======== ======= ========
For the nine months ended September 30, 2003
Net sales $ 1,069 $ 1,184 $ 17 $ 2,270
Research, development and engineering expenses (1) $ 95 $ 165 $ (2) $ 258
Restructuring, impairment and other charges and credits (2) $ (30) $ 107 $ 13 $ 90
Interest expense (3) $ 59 $ 59 $ 118
Benefit for income taxes (6) $ (46) $ (10) $ (152) $ (208)
Loss before minority interests and equity (losses) earnings (4)(5) $ (141) $ (84) $ (235) $ (460)
Minority interests (7) 72 72
Equity in (losses) earnings of associated companies (8) (10) 140 64 194
-------- -------- ------- --------
Net (loss) income $ (151) $ 128 $ (171) $ (194)
======== ======== ======= ========
For the nine months ended September 30, 2002
Net sales $ 1,268 $ 1,146 $ 14 $ 2,428
Research, development and engineering expenses (1) $ 243 $ 127 $ 370
Restructuring, impairment and other charges and credits (2) $ 459 $ 9 $ 151 $ 619
Interest expense (3) $ 84 $ 52 $ 136
(Benefit) provision for income taxes $ (346) $ 5 $ 16 $ (325)
Loss before minority interests and equity (losses) earnings (4)(5) $ (715) $ (13) $ (27) $ (755)
Minority interests 16 1 17
Equity in (losses) earnings of associated companies (8) (26) 117 6 97
Income from discontinued operations 48 48
-------- -------- ------- --------
Net (loss) income $ (741) $ 120 $ 28 $ (593)
======== ======== ======= ========
(1) Non-direct research, development and engineering expenses are allocated
based upon direct project spending for each segment.
(2) Related tax benefit (expense):
Three months ended September 30, 2003: $2, $(2), $0 and $0.
Three months ended September 30, 2002: $28, $2, $9 and $39.
Nine months ended September 30, 2003: $0, $22, $4 and $26.
Nine months ended September 30, 2002: $153, $3, $49 and $205.
(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) 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.
(6) Benefit for income taxes related to the Telecommunications segment in 2003
includes an increase to the deferred tax asset valuation allowance of
approximately $21 million for the nine months of 2003.
(7) Includes $59 million for the nine months of 2003 related to impairments of
CAV.
(8) Includes $7 million for the nine months of 2003 to impair equity
investments in Telecommunications. Includes $14 million for the nine months
of 2002 to impair equity investments in Telecommunications.
Non-segment/other items net (loss) income is detailed below:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- -------- --------- ---------
Non-segment (loss) income and other (1) $ (4) $ (5) $ (29) $ 16
Non-segment restructuring, impairment and other charges (3) (29) (13) (151)
Interest income 7 10 24 34
Asbestos settlement (51) (388)
Gain on repurchases of debt, net 2 22 19 90
Benefit (provision) for income taxes 19 1 152 (16)
Minority interests 1
Equity in earnings of associated companies (2) 21 4 64 6
Income from discontinued operations 19 48
--------- -------- --------- ---------
Net (loss) income $ (9) $ 22 $ (171) $ 28
========= ======== ========= =========
(1) Includes non-segment operations and other corporate activities.
(2) Includes amounts derived from corporate investments and activities,
primarily Dow Corning Corporation in 2003.
ITEM 2.
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
The following management's discussion and analysis of financial condition and
results of operations (MDA) should be read in conjunction with the MDA included
in our Annual Report on Form 10-K for the year ended December 31, 2002.
Overview
A strong performance from our display technologies business coupled with the
realization of cost savings from our restructuring actions led to profitability
in the third quarter of 2003 for the first time since the initial quarter of
2001. Our net income for the third quarter of 2003 was $33 million, or $0.02 per
diluted share, compared to a net loss of $133 million, or $0.25 per share, in
the third quarter of 2002. Our Technologies segment experienced earnings growth
of 60% in the third quarter, compared to the prior year quarter, primarily due
to strong growth in the liquid crystal display glass and ceramic substrate
product lines which was partially offset by continued softness in demand for
high-purity fused silica products. In addition, we continued to see weakness in
our Telecommunications segment as major carriers continue to withhold capital
spending.
We completed the sale of the major remaining components of our photonic
technologies business to Avanex Corporation ("Avanex") on July 31, 2003, and
recorded a loss of $13 million ($9 million after-tax). In addition, we recorded
the following items which were included in our earnings for the third quarter:
.. a $51 million ($31 million after-tax) mark-to-market charge on the
settlement liability for Pittsburgh Corning Corporation ("PCC"),
.. a net credit of $23 million ($17 million after-tax ) related to
restructuring, and
.. a credit of $ 1 million for the net gain on debt buybacks.
We also improved our balance sheet by completing an equity offering of 45
million shares of our common stock for proceeds of $363 million in the third
quarter. We retired approximately $466 million in debt during the third quarter
to improve our debt to capital ratio by five points. At the end of the third
quarter our long-term debt totaled $2.8 billion. This is the lowest level our
long-term debt has reached since the third quarter of 2000.
We believe our reduced debt levels together with our current $1.4 billion
balance of cash and short-term investments and $2 billion revolving credit
facility provide us with sufficient liquidity for the next several years to fund
operations, restructuring, research and development, capital expenditures and
scheduled debt repayments.
RESULTS OF CONTINUING OPERATIONS
Selected highlights from our results of continuing operations for the third
quarter and nine months were as follows (in millions, except per share amounts
and percentages):
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 772 $ 762 $ 2,270 $ 2,428
Gross margin $ 226 $ 129 $ 607 $ 497
(gross margin %) 29% 17% 27% 20%
Selling, general and administrative expenses $ 147 $ 157 $ 447 $ 533
(as a % of net sales) 19% 21% 20% 22%
Research, development and engineering expenses $ 80 $ 113 $ 258 $ 370
(as a % of net sales) 10% 15% 11% 15%
Restructuring, impairment and other charges
and credits $ (10) $ 125 $ 90 $ 619
(as a % of net sales) (1)% 16% 4% 25%
Operating loss $ (1) $ (277) $ (216) $(1,058)
(as a % of net sales) 0% (36)% (10)% (44)%
Asbestos settlement $ (51) $ (388)
(as of % of net sales) (7)% (17)%
Equity earnings, net of impairments $ 75 $ 42 $ 194 $ 97
(as a % of net sales) 10% 6% 9% 4%
Income (loss) from continuing operations $ 33 $ (152) $ (194) $ (641)
(as a % of net sales) 4% (20)% (9)% (26)%
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales
Consolidated net sales for the third quarter of 2003 increased $10 million,
compared to sales reported in the prior year quarter. Net sales for the
nine-month period ended September 30, 2003, decreased 7%, or $158 million,
compared to the prior year period. Sales for the quarter increased $4 million in
the Telecommunications segment where significantly lower demand in most
businesses was more than offset by an increase in optical fiber and cable. For
the nine months ended September 30, 2003, sales in Telecommunications declined
$199 million as all businesses experienced decreases. Sales in the Technologies
segment for the third quarter of 2003 increased $4 million, compared to the
third quarter of 2002, while net sales for the nine months ended September 30,
2003, increased 3%, or $38 million, compared to the prior year period. The
increase for both periods was primarily due to strong demand for liquid crystal
display glass and our ceramic substrate products, partially offset by the exit
from our conventional television glass business and weak demand for high-purity
fused silica.
Gross margin
As a percentage of net sales, gross margin improved 12 points in the third
quarter of 2003 to 29%, compared to the prior year quarter and improved seven
points in the nine months ended September 30, 2003, to 27%, compared to the
prior year period. The improvement in both periods was primarily due to lower
depreciation and other fixed costs due to the restructuring actions taken
primarily in the Telecommunications segment in 2002. Gross margin in the
Telecommunications segment improved 19 points over the prior year quarter and
eight points over the prior year nine-month period. The improvements were due to
cost reductions achieved from the 2002 restructuring actions which was partially
offset by downward pricing pressure that continued to negatively impact gross
margins, primarily in the optical fiber and cable business. Gross margin in the
Technologies segment increased approximately five points from the third quarter
of 2002 as strong gains in display technologies and environmental technologies
were partially offset by weak performance in the semiconductor business and the
conventional video components business. Gross margin in the Technologies segment
improved four points over the nine-month period of 2002. Improvements in the
display technologies business and the environmental technologies business were
partially offset by the write-down of inventory in the conventional video
components business and weak performance in the semiconductor business.
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses decreased 6%, or $10
million, in the third quarter of 2003, compared to the prior year quarter, while
SG&A as a percentage of net sales improved two points, compared with the third
quarter of 2002. SG&A expenses decreased 16%, or $86 million, for the nine
months ended September 30, 2003, compared to the prior year period, while SG&A
as a percentage of net sales improved two points, compared to the prior year
period. The decrease in SG&A for the quarter and nine months reflected the cost
savings which resulted from the restructuring actions that began in 2001.
Research, development and engineering
Research, development and engineering (RD&E) expenses decreased 29%, or $33
million, in the third quarter of 2003, compared to the prior year quarter, while
RD&E as a percentage of net sales, decreased five points, compared with the
third quarter of 2002. RD&E expenses decreased 30%, or $112 million, for the
nine months ended September 30, 2003, compared to the prior year period, while
RD&E as a percentage of net sales improved four points, compared to the prior
year period. The decrease in RD&E for the quarter and nine months reflected the
cost savings which resulted from the restructuring actions that began in 2001
and the exit of the photonic technologies business.
Restructuring, impairment and other charges and credits
First Quarter
- -------------
In the first quarter of 2003, we recorded charges for the shut-down of the
conventional video components business and the optical switching product line
which were announced on April 15, 2003 and February 13, 2003, respectively. We
also recorded credits related to prior years' restructuring and impairment
charges discussed below. A summary of these charges and credits follows:
Conventional video components business
Corning Asahi Video Products Company (conventional video components business, or
CAV), a 51% owned partnership included in our consolidated results, is a
manufacturer of glass panels and funnels for use in conventional tube
televisions and is reported in the Technologies segment. In the fourth quarter
of 2002, we impaired certain assets of this business and indicated that we could
be required to record additional impairment charges, or that we could choose to
exit the business if performance differed from expectations. During the first
quarter, operating results and cash flows were less than expected, and certain
customers significantly reduced forecasted orders for the year.
On April 15, 2003, we announced that we had agreed with our partner to cease
production. We impaired the long-lived assets of this business to estimated
salvage value and recorded a charge of $62 million ($19 million after-tax and
minority interest). In connection with the cessation of operations, the partners
have reached agreement on the shared funding of CAV's obligations.
Optical Switching
We recorded a charge of $17 million ($11 million after-tax) associated with the
discontinuance of the optical switching product line in the photonic
technologies business due to the downturn in the telecommunications industry.
The charge included $13 million for employee separation costs and $4 million for
asset impairments related to equipment.
Impairment of Cost Investments
In the first quarter, we recorded a $5 million ($3 million after-tax) charge for
other than temporary declines in certain cost investments in the
Telecommunications segment.
Credits
During the first quarter, we reversed $33 million ($21 million after-tax)
related to revised cost estimates of existing restructuring plans, of which $24
million related to employee separation and exit costs which were less than
estimated, while $9 million related to proceeds in excess of assumed salvage
values for assets that were previously impaired.
Second Quarter
- --------------
In the second quarter of 2003, we recorded restructuring, impairment and other
charges of $125 million ($62 million after-tax and minority interest), offset by
credits related to prior years' restructuring charges of $76 million ($59
million after-tax), resulting in a net pre-tax charge of $49 million ($3 million
after-tax and minority interest). These charges primarily relate to the exit of
the conventional video components business and the photonic technologies
business. The charges also reflect certain restructuring actions taken during
the second quarter of 2003 relating to our other businesses. A summary of these
charges and credits follows:
Conventional Video Components
In the second quarter of 2003, we recorded a restructuring charge of $54 million
($15 million after-tax and minority interest). The charge included $18 million
for employee separation costs, $19 million for exit costs and $17 million for
curtailments related to pension and postretirement health care benefits.
In June, CAV announced that it had signed a definitive agreement to sell
tangible assets to Henan Anyang CPT Glass Bulb Group, Electronic Glass Co., Ltd.
(Henan Anyang), located in China. The proceeds from this sale may offset a
significant portion of the cash spending on restructuring. We recognized a $5
million gain in the third quarter of 2003 as described under Third
Quarter-Credits below. The sale is expected to be completed in the first half of
2004 at which time we anticipate recognizing the remainder of the original
estimated gain of approximately $40 million ($13 million after-tax and minority
interest). We expect the restructuring costs to require $45 million to $60
million in cash spending. In addition, we concluded that this business does not
meet the requirements for discontinued operations treatment under Statement of
Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
Photonic Technologies
In the second quarter of 2003, we recorded a charge of $33 million ($22 million
after-tax) related to the exit of the photonic technologies business. The charge
included $7 million for employee separation costs, $14 million for exit costs,
$7 million for curtailments related to pension and postretirement benefits and
$5 million to impair the remaining assets.
Also in the second quarter, we increased the deferred tax valuation allowance by
$21 million as we do not expect to realize certain deferred tax assets in Italy
related to the photonic technologies business. This charge is reflected in the
statement of operations under "Benefit for income taxes."
Finally, we impaired $7 million of equity investments in this business that will
be abandoned as part of the exit from the business. This charge is reflected in
the statement of operations under, "Equity in earnings of associated companies,
net of impairments."
Other
We also recorded $38 million of restructuring and impairment charges primarily
related to the telecommunications businesses and administrative staffs. The
charge included $17 million for employee separation costs, $2 million for
curtailments related to pension and postretirement benefits and $19 million for
impairments for assets held for sale or abandonment.
Credits
In the second quarter of 2003, we recorded a $76 million ($59 million after-tax)
credit related to prior years' restructuring and impairment charges, primarily
in the Telecommunications segment. The reversals included $27 million related to
employee separation costs which were less than estimated, $25 million related to
a decision to change the restructuring plans and not exit a small cabling
business and $24 million related to proceeds in excess of assumed salvage values
for assets that were previously impaired and certain assets we decided to
retain.
Third Quarter
- -------------
In the third quarter of 2003, we recorded restructuring, impairment and other
charges of $16 million ($13 million after-tax), offset by credits of $26 million
($21 million after-tax and minority interest), resulting in a net pre-tax credit
of $10 million ($8 million after-tax and minority interest). A summary of these
charges and credits follows:
Photonic Technologies
On July 31, 2003, we completed the sale of certain photonic technologies
business assets to Avanex in exchange for 21 million restricted shares of Avanex
common stock, which we valued at approximately $53 million. These shares are
restricted from sale for approximately one year at which point the restrictions
are lifted at intervals beginning July 2004 and ending October 2005. As the
shares become unrestricted, we will mark-to-market the shares through other
comprehensive income as available-for-sale securities. The Avanex restricted
shares are reflected as a cost investment and recorded under "Investments" in
our consolidated balance sheet. The transaction generated a loss on sale of $13
million ($9 million after-tax) and resulted in a $21 million reduction of our
goodwill. In accordance with the sale agreement, Avanex acquired assets related
to the optical amplifier facility in Erwin, NY and the optical component plant
in Milan, Italy. We also paid Avanex $22 million in cash. Approximately 400
employees of the photonic technologies business became employees of Avanex in
the third quarter.
In the third quarter of 2003, we recorded a charge of $3 million ($4 million
after-tax) related to the exit of the photonic technologies business for
employee separation costs. The after-tax amount included a $2 million write-off
related to a state net operating loss.
We expect to close our pump laser facility in Bedford, MA by the end of the
year. Pursuant to a separate arrangement with Avanex, we are manufacturing pump
lasers for sale to Avanex during the fourth quarter of 2003. This activity will
be completed and the facility closed by December 31, 2003.
Credits
In the third quarter of 2003, we reversed $20 million ($18 million after-tax) of
restructuring reserves related to prior years' restructuring charges, primarily
in the Telecommunications segment. The reversals included $10 million related to
employee separation costs which were less than estimated, $6 million related to
exit costs which were less than estimated and $4 million related to proceeds in
excess of assumed salvage values for assets that were previously impaired and
certain assets management decided to retain as abandoned factories were being
dismantled. Approximately $5 million of the reduced exit costs will not be
incurred due to the Avanex transaction.
In addition to the above, we also recorded the following:
- - a $5 million ($2 million after-tax and minority interest) credit related to
assets from CAV that were previously impaired but later sold to Henan
Anyang, and
- - a $1 million gain on the sale of previously-impaired cost investments in
the Telecommunications segment that were sold in the third quarter.
The current restructuring reserve continues to be evaluated as plans are being
executed. As a result, there may be additional charges or reversals in future
periods. In addition, since the restructuring program is an aggregation of many
individual plans currently being executed, actual costs have differed from
estimated amounts.
Almost one-quarter of the remaining $214 million restructuring reserve is
expected to be paid by December 31, 2003. Cash payments for employee-related
costs will be substantially completed by mid-2004, while payments for exit
activities will be substantially completed by 2005.
The following table illustrates the headcount reduction amongst U.S. hourly,
U.S. salaried and non-U.S. positions related to the 2003 plans:
- --------------------------------------------------------------------------------
Headcount reduction
- --------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
- --------------------------------------------------------------------------------
Headcount reduction 950 700 150 1,800
==================================================
- --------------------------------------------------------------------------------
As of September 30, 2003, approximately 6,700 of the 7,100 employees had been
separated under the 2002 plans and approximately 1,350 of the 1,800 employees
had been separated under the 2003 plans. We expect the remainder of employees
affected by the 2002 actions to be separated by December 31, 2003 and those
impacted by the 2003 actions to be separated by June 30, 2004.
See Note 2 to the Consolidated Financial Statements.
Operating loss
We incurred an operating loss of $1 million in the third quarter of 2003,
compared to an operating loss of $277 million in the prior year quarter. The
decrease in the operating loss was primarily due to lower restructuring and
impairment charges, improvements in gross margin and lower SG&A and RD&E
expenses. For the nine months ended September 30, 2003, our operating loss
decreased $842 million over the prior year period primarily due to lower
restructuring and impairment charges, improvements in gross margin and lower
SG&A and RD&E expenses.
Asbestos settlement
On March 28, 2003, we announced that we had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future non-premises asbestos claims against us and PCC, which might arise from
PCC products or operations.
The agreement is expected to be incorporated into a settlement fund as part of a
reorganization plan for PCC. The plan will be submitted to the federal
bankruptcy court in Pittsburgh for approval, and is subject to a number of
contingencies, including a favorable vote by 75 percent of the asbestos
claimants voting on the PCC reorganization plan. We will make contributions to
the settlement trust under the agreement after the plan is approved, becomes
effective and no longer subject to appeal. The approval process could take one
year or longer.
Our settlement will require the contribution, when the plan becomes effective,
of our equity interest in PCC, our one-half equity interest in Pittsburgh
Corning Europe N.V. (PCE), a Belgian corporation, and 25 million shares of our
common stock. The common stock will be marked-to-market each quarter until it is
contributed to the settlement trust, thus resulting in adjustments to income and
the settlement liability as appropriate. We will also make cash payments with a
current value of $134 million over six years beginning in June 2005. In
addition, we will assign insurance policy proceeds from our primary insurance
and a portion of the excess insurance as part of the settlement. We recorded a
charge of $298 million ($192 million after-tax) in the first quarter of 2003. In
the third quarter, we recorded an additional $51 million charge ($31 million
after-tax) to mark-to-market the value of our common stock. We have recorded
total charges of $388 million ($247 million after-tax) to reflect the settlement
and to mark-to-market the value of our common stock for the nine months ended
September 30, 2003. The carrying value of our stock in PCE and the fair value as
of September 30, 2003, of 25 million shares of our common stock have been
reflected in current liabilities. The remaining $134 million, representing the
net present value of the cash payments, discounted at 5.5%, is recorded in
noncurrent liabilities. See Part II-Other Information, Item 1. Legal Proceedings
for a history of this matter.
Gain on repurchases of debt, net
During the course of the year we repurchased and retired a significant portion
of our zero coupon convertible debentures through a combination of open market
purchases, debt for equity exchanges and a modified Dutch tender offer. The
following table summarizes the activity related to our zero coupon convertible
debentures (dollars in millions):
- -----------------------------------------------------------------------------------------------------------------------
For the three months For the nine months
ended September 30, ended September 30,
---------------------------- ---------------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Bonds repurchased 288,500 75,500 1,476,000 362,687
Book value $ 226 $ 58 $ 1,152 $ 278
Fair value $ 219 $ 35 $ 1,069 $ 183
Pre-tax gain (a) $ 3 $ 22 $ 20 $ 90
After-tax gain (a) $ 2 $ 13 $ 13 $ 55
- -----------------------------------------------------------------------------------------------------------------------
(a) Net of the write-off of unamortized issuance and deals costs.
In the first quarter of 2003, we issued 6.5 million shares of common stock from
treasury in exchange for 55,000 debentures with an accreted value of $43
million. In accordance with SFAS No. 84, "Induced Conversions of Convertible
Debt," we recognized a charge of $34 million reflecting the fair value of the
incremental shares issued beyond those required by the terms of the debentures.
The increase in equity due to the issuance of shares from treasury stock was $77
million. This transaction is reflected in the table above.
Additionally in the third quarter of 2003, we repurchased and retired 60,000
euro notes with a book value of 60 million euros for cash of 63 million euros
(including accrued interest), or $70 million. We recorded a loss of $1 million
($1 million after-tax) on the transaction in the third quarter.
Income taxes
Our benefit for income taxes and the related effective tax benefit rates for
continuing operations were as follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
For the three months For the nine months
ended September 30, ended September 30,
---------------------------- ---------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit for income taxes $ (30) $ (91) $ (208) $ (325)
Effective tax benefit rate 40.5% 31.4% 31.1% 30.1%
- ------------------------------------------------------------------------------------------------------------------------------------
The effective tax benefit rate for the three months ended September 30, 2003,
was higher than the U.S. statutory income tax rate of 35% due to the reversal of
restructuring charges on which a tax benefit was not accrued. The effective tax
benefit rate for the nine months ended September 30, 2003, was lower than the
U.S. statutory income tax rate of 35% due to the impact of restructuring,
impairment and other charges, asbestos settlement, debt transactions and state
and local tax benefits. In the third quarter, our valuation allowance decreased
approximately $36 million from the second quarter, primarily due to the sale of
optical component assets to Avanex. We recorded $21 million to increase our
foreign deferred tax valuation allowance in the second quarter as we do not
expect to realize a portion of our deferred tax assets in Italy as a result of
our exit from the photonic technologies business. The effective tax benefit rate
without consideration of these items was 33% for the three and nine months ended
September 30, 2003.
The effective tax benefit rate for the three and nine months ended September 30,
2002, was lower than the U.S. statutory income tax rate of 35% due to the impact
of unusable tax credits and nondeductible expenses and losses. The tax benefit
rate in the third quarter of 2002 was impacted by specific tax benefit
calculations for restructuring, impairment and other charges and the gain on
repurchases of debt. The effective tax benefit rate without consideration of
these items was 33% and 28% for the three and nine months ended September 30,
2002, respectively.
Equity earnings, net of impairments
Equity earnings increased 79%, or $33 million, in the third quarter of 2003,
compared to the prior year quarter, primarily due to the recognition of $22
million of equity earnings from Dow Corning in 2003 and a strong performance at
Samsung Corning Precision Glass Company Ltd. ("Samsung Corning Precision"), a
Korean manufacturer of liquid crystal display glass. These results were
partially offset by a 29% decrease in equity earnings from Samsung Corning
Company Ltd. ("Samsung Corning"), a 50 percent owned manufacturer of cathode ray
tube (CRT) glass panels and funnels based in South Korea. We began recognizing
equity earnings from Dow Corning in the first quarter of 2003 since we concluded
that the emergence of Dow Corning from bankruptcy protection is probable based
on the Bankruptcy Court's findings on December 11, 2002. See Part II-Other
Information, Item 1. Legal Proceedings for a history of this matter.
Equity earnings doubled to $194 million for the nine months ended September 30,
2003, compared to the prior year period, primarily due to the recognition of $64
million of equity earnings from Dow Corning and strong results at Samsung
Corning Precision, partially offset by an approximate 10% decrease in equity
earnings from Samsung Corning. Equity earnings also included a second quarter
charge of $7 million related to the impairment of several equity investments in
the Telecommunications segment related to the exit of the photonic technologies
business.
Income (loss) from continuing operations
As a result of the above, the income (loss) from continuing operations and per
share data were as follows (in millions, except per share amounts):
- ------------------------------------------------------------------------------------------------------------------------------------
For the three months For the nine months
ended September 30, ended September 30,
------------------- -------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 33 $ (152) $ (194) $ (641)
Basic earnings (loss) per common share from
continuing operations $ 0.03 $ (0.27) $ (0.15) $ (0.79)
Diluted earnings (loss) per common share from
continuing operations $ 0.02 $ (0.27) $ (0.15) $ (0.79)
Shares used in computing basic per share amounts 1,314 1,036 1,253 977
Shares used in computing diluted per share amounts 1,390 1,036 1,253 977
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING SEGMENTS
Our reportable operating segments consist of Telecommunications and
Technologies. We include the earnings of equity affiliates that are closely
associated with our operating segments in segment results.
We prepared the financial results for the operating segments on a basis that is
consistent with the manner in which we internally disaggregate financial
information to assist in making internal operating decisions. We have allocated
certain common expenses among segments differently than we would for stand-alone
financial information prepared in accordance with accounting principles
generally accepted in the U.S. These expenses include interest, taxes and
corporate functions. This method of preparation may not be consistent with
methods used by other companies. The accounting policies of our operating
segments are the same as those applied in the consolidated financial statements.
Telecom- Non-segment/ Consolidated
munications Technologies Other items Total
----------- ------------ ------------ ------------
For the three months ended September 30, 2003
Net sales $ 370 $ 396 $ 6 $ 772
Research, development and engineering expenses (1) $ 25 $ 55 $ $ 80
Restructuring, impairment and other charges and credits (2) $ (2) $ (11) $ 3 $ (10)
Interest expense (3) $ 16 $ 20 $ 36
(Benefit) provision for income taxes $ (16) $ 5 $ (19) $ (30)
(Loss) income before minority interests and equity (losses)
earnings (4)(5) $ (28) $ 14 $ (30) $ (44)
Minority interests 2 2
Equity in earnings of associated companies 1 53 21 75
-------- -------- ------- --------
Net (loss) income $ (27) $ 69 $ (9) $ 33
======== ======== ======= ========
For the three months ended September 30, 2002
Net sales $ 366 $ 392 $ 4 $ 762
Research, development and engineering expenses (1) $ 71 $ 42 $ 113
Restructuring, impairment and other charges and credits (2) $ 90 $ 6 $ 29 $ 125
Interest expense (3) $ 27 $ 19 $ (2) $ 44
(Benefit) provision for income taxes $ (91) $ 1 $ (1) $ (91)
Loss before minority interests and equity
(losses) earnings (4)(5) $ (193) $ (5) $ (1) $ (199)
Minority interests 5 5
Equity in (losses) earnings of associated companies (5) 43 4 42
Income from discontinued operations 19 19
-------- -------- ------- --------
Net (loss) income $ (198) $ 43 $ 22 $ (133)
======== ======== ======= ========
Telecom- Non-segment/ Consolidated
munications Technologies Other items Total
----------- ------------ ------------ ------------
For the nine months ended September 30, 2003
Net sales $ 1,069 $ 1,184 $ 17 $ 2,270
Research, development and engineering expenses (1) $ 95 $ 165 $ (2) $ 258
Restructuring, impairment and other charges and credits (2) $ (30) $ 107 $ 13 $ 90
Interest expense (3) $ 59 $ 59 $ 118
Benefit for income taxes (6) $ (46) $ (10) $ (152) $ (208)
Loss before minority interests and equity (losses)
earnings (4)(5) $ (141) $ (84) $ (235) $ (460)
Minority interests (7) 72 72
Equity in (losses) earnings of associated companies (8) (10) 140 64 194
-------- -------- ------- --------
Net (loss) income $ (151) $ 128 $ (171) $ (194)
======== ======== ======= ========
For the nine months ended September 30, 2002
Net sales $ 1,268 $ 1,146 $ 14 $ 2,428
Research, development and engineering expenses (1) $ 243 $ 127 $ 370
Restructuring, impairment and other charges and credits (2) $ 459 $ 9 $ 151 $ 619
Interest expense (3) $ 84 $ 52 $ $ 136
(Benefit) provision for income taxes $ (346) $ 5 $ 16 $ (325)
Loss before minority interests and equity
(losses) earnings (4)(5) $ (715) $ (13) $ (27) $ (755)
Minority interests 16 1 17
Equity in (losses) earnings of associated companies (8) (26) 117 6 97
Income from discontinued operations 48 48
-------- -------- ------- --------
Net (loss) income $ (741) $ 120 $ 28 $ (593)
======== ======== ======= ========
(1) Non-direct research, development and engineering expenses are allocated
based upon direct project spending for each segment.
(2) Related tax benefit (expense):
Three months ended September 30, 2003: $2, $(2), $0 and $0.
Three months ended September 30, 2002: $28, $2, $9 and $39.
Nine months ended September 30, 2003: $0, $22, $4 and $26.
Nine months ended September 30, 2002: $153, $3, $49 and $205.
(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) 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.
(6) Benefit for income taxes related to the Telecommunications segment in 2003
includes an increase to the deferred tax asset valuation allowance of
approximately $21 million for the nine months of 2003.
(7) Includes $59 million for the nine months of 2003 related to impairments of
CAV.
(8) Includes $7 million for the nine months of 2003 to impair equity
investments in Telecommunications. Includes $14 million for the nine months
of 2002 to impair equity investments in Telecommunications.
Non-segment/other items net (loss) income is detailed below:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- -------- --------- ---------
Non-segment (loss) income and other (1) $ (4) $ (5) $ (29) $ 16
Non-segment restructuring, impairment and other charges (3) (29) (13) (151)
Interest income 7 10 24 34
Asbestos settlement (51) (388)
Gain on repurchases of debt, net 2 22 19 90
Benefit (provision) for income taxes 19 1 152 (16)
Minority interests 1
Equity in earnings of associated companies (2) 21 4 64 6
Income from discontinued operations 19 48
--------- -------- --------- ---------
Net (loss) income $ (9) $ 22 $ (171) $ 28
========= ======== ========= =========
(1) Includes non-segment operations and other corporate activities.
(2) Includes amounts derived from corporate investments and activities,
primarily Dow Corning Corporation in 2003.
Telecommunications
The Telecommunications segment produces optical fiber and cable, optical
hardware and equipment, photonic modules and components for the worldwide
telecommunications industry. In July 2003, we exited the photonic technologies
business. The following table provides net sales and other data for the
Telecommunications segment:
- ------------------------------------------------------------------------------------------------------------------------------------
Telecommunications Three months ended September 30, Nine months ended September 30,
(In millions) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 209 $ 195 $ 580 $ 662
Hardware and equipment 134 136 392 424
Photonic technologies 10 17 43 92
Controls and connectors 17 18 54 90
--------- -------- --------- ---------
Total net sales $ 370 $ 366 $ 1,069 $ 1,268
========= ======== ========= =========
Segment loss before minority interests and
equity earnings as a percentage of segment sales (7.6)% (52.7)% (13.2)% (56.4)%
Segment net loss as a percentage of segment sales (7.3)% (54.1)% (14.1)% (58.4)%
- ------------------------------------------------------------------------------------------------------------------------------------
Sales in the segment increased 1%, or $4 million, from the third quarter of 2002
as an increase in the optical fiber and cable business was almost offset by
sales declines in all remaining businesses. For the nine months ended September
30, 2003, sales in the segment declined 16%, or $199 million, compared to the
prior year period. All businesses in the segment incurred a decline with the
largest in the optical fiber and cable business of $82 million. The segment
incurred a loss of $27 million in the third quarter of 2003, compared to a net
loss of $198 million in the prior year quarter. The third quarter 2003 loss was
primarily due to significant price declines in optical fiber and a decrease in
sales volume in most businesses which was partially offset by cost reductions
from prior restructuring actions and a net credit of $2 million for
restructuring, impairment and other charges and credits. The credit included $17
million of reversals related to prior years' restructuring and impairment
charges and a $1 million gain on the disposition of a previously impaired cost
investment, partially offset by a $13 million loss on the sale of optical
component assets to Avanex and $3 million for restructuring charges. Each
business also reported a loss in the third quarter of 2003, however the losses
were lower than those incurred in the prior year quarter. The decrease in the
loss over the prior year quarter was primarily due to cost savings resulting
from restructuring actions and much lower restructuring and impairment charges,
primarily in the fiber and cable and hardware and equipment businesses, than
those incurred in the prior year quarter. For the nine months ended September
30, 2003, the segment incurred a net loss of $151 million, compared to a net
loss of $741 million in the prior year period, primarily due to lower
restructuring and impairment charges and cost improvements.
Telecommunications Businesses
The following discussion of businesses in the Telecommunications segment
excludes the restructuring and impairment charges and credits to provide clarity
on the underlying business trends.
Sales in the optical fiber and cable business increased 7%, or $14 million, for
the third quarter of 2003, compared to the prior year quarter. The increase was
primarily due to a 30% increase in volume for fiber and cable products which was
partially offset by double digit price declines. For the nine months ended
September 30, 2003, sales in the optical fiber and cable business declined 12%,
or $82 million, compared to the prior year period. The decrease was primarily
due to pricing pressure, but was partially offset by strong demand in Japan and
China, particularly in the first quarter. Sales volume increased over 20% for
the first nine months of 2003, compared to the prior year period. The optical
fiber and cable business incurred a loss in the third quarter of 2003, however
the loss decreased over 55%, compared to the prior year period, as price
declines were more than offset by the cost reductions from 2002 restructuring
actions. The business also incurred a loss for the nine months ended September
30, 2003, but the loss decreased over 45%, compared to the prior year period,
primarily due to cost savings from restructuring actions in 2002.
Sales in the hardware and equipment business decreased 1%, or $2 million, for
the third quarter of 2003, compared to the prior year quarter. For the nine
months ended September 30, 2003, sales in this business decreased 8%, or $32
million, compared to the prior year period. The sales decreases for both periods
were primarily due to the overall lack of capital spending impacting the entire
telecommunications industry. The business incurred a loss for the third quarter
of 2003 driven by pricing pressure and lower volumes, however the loss decreased
95% over the loss incurred in the prior year quarter due to cost reductions
achieved from the 2002 restructuring actions. For the nine months ended
September 30, 2003, the business incurred a loss due to pricing pressure and
lower volumes, however the loss decreased 60% over the prior year period due to
cost savings from restructuring actions.
Sales in the photonic technologies business declined 41%, or $7 million, for the
third quarter of 2003, compared to the prior year quarter. For the nine months
ended September 30, 2003, sales decreased 53%, or $49 million, compared to the
prior year period. The sales declines in both periods were primarily due to
lower sales volume and the sale to Avanex. The business incurred a loss for the
third quarter and first nine months of 2003, primarily due to dramatically lower
sales volumes. However, the 2003 quarter and year-to-date loss decreased more
than 80%, compared to the losses incurred in the prior year periods. The results
for the third quarter and nine months of 2003 reflect cost savings resulting
from restructuring actions taken in 2002. In addition, the business settled an
open matter with a customer in the third quarter resulting in the reversal of a
warranty reserve of $6 million.
On July 31, 2003, we completed the sale of a significant portion of the photonic
technologies business to Avanex in exchange for common stock valued at
approximately $53 million at closing. See Restructuring, Impairment and Other
Charges and Credits and Note 2 to the Consolidated Financial Statements.
Sales in the controls and connectors business decreased 6%, or $1 million, for
the third quarter of 2003, compared to the prior year quarter. For the nine
months ended September 30, 2003, sales decreased 40%, or $36 million, compared
to the prior year period. The sales decline for the quarter was primarily due to
the lack of capital spending in the telecommunications industry. The sales
decline for the nine month period was primarily due to the sale of the appliance
controls group in May 2002 and the lack of capital spending in the
telecommunications industry. The business incurred a small loss for the third
quarter of 2003, however the loss decreased over 70% compared to the prior year
quarter. For the nine months ended September 30, 2003, the business incurred a
loss, however the loss decreased over 85%, compared to the prior year period,
primarily due to cost savings from restructuring actions taken 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, high-purity fused silica and other advanced
materials used for the manufacture of integrated circuits and glass panels and
funnels for televisions and cathode ray tubes. In April 2003, we announced our
planned exit of the conventional video components business and closed operations
on June 30, 2003. As a result, we will no longer manufacture glass panels and
funnels.
The following table provides net sales and other data for the Technologies
segment:
- ------------------------------------------------------------------------------------------------------------------------------------
Technologies Three months ended September 30, Nine months ended September 30,
(In millions) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Display technologies $ 144 $ 106 $ 396 $ 301
Environmental technologies 121 102 353 298
Life sciences 70 71 215 215
Conventional video components 14 47 63 131
Other technologies businesses 47 66 157 201
--------- -------- --------- ---------
Total net sales $ 396 $ 392 $ 1,184 $ 1,146
========= ======== ========= =========
Segment income (loss) before minority interest and
equity earnings as a percentage of segment sales 3.5% (1.3)% (7.1)% (1.1)%
Segment net income as a percentage of segment sales 17.4% 11.0% 10.8% 10.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Sales in the Technologies segment increased 1%, or $4 million, for the third
quarter of 2003, compared to the prior year quarter. For the nine months ended
September 30, 2003, sales increased 3%, or $38 million, compared to the prior
year period. Increased sales in display technologies and environmental
technologies were partially offset by much lower sales in the conventional video
components business that we are exiting, decreased demand for semiconductor
materials, the impact of our exit of the lighting products line in late 2002 and
a flat performance in life sciences. Segment earnings for the third quarter of
2003 increased 60%, or $26 million, compared to the prior year quarter. For the
nine months ended September 30, 2003, segment earnings increased 7%, or $8
million, compared to the prior year period. Improved operating performance in
the third quarter for display technologies and environmental technologies and
stronger equity earnings were partially offset by the shutdown of the
conventional video components business and decreased earnings in the
semiconductor materials business. The decrease in earnings for the nine months
ended September 30, 2003, was primarily due to restructuring and impairment
charges of $116 million ($34 million after-tax and minority interest) for CAV
and higher spending on RD&E. See Restructuring, Impairment and Other Charges and
Credits and Note 2 to the Consolidated Financial Statements.
Technologies Businesses
The following discussion of businesses in the Technologies segment excludes the
restructuring and impairment charges and credits to provide clarity on the
underlying business trends.
Sales in the display technologies business increased 36%, or $38 million, for
the third quarter of 2003, compared to the prior year quarter. For the nine
months ended September 30, 2003, sales increased 32%, or $95 million, compared
to the prior year period. The increase for both periods was primarily due to
higher sales volume as penetration in the desktop market for liquid crystal
display panels increased. Volume gains of 45% and 35% for the quarter and nine
months, respectively, and favorable yen exchange rates for both periods were
partially offset by price declines of 5% each for the quarter and nine months.
Earnings in the business doubled for the quarter and nine-month period ended
September 30, 2003, compared to the prior year periods. The increased earnings
were primarily due to volume gains and significant improvements in equity
earnings from Samsung Corning Precision for the quarter and year-to-date periods
over the prior year. The previously announced expansions of manufacturing
capacity in Taiwan and Korea are expected to begin production in 2004.
In July 2003, we announced another expansion of our liquid crystal display
manufacturing facility in Taiwan for $180 million. The three-phased project is
expected to be completed by the end of 2004 with production to begin in the
second quarter of 2004.
Sales in the environmental technologies business increased 19%, or $19 million,
for the third quarter of 2003, compared to the prior year quarter. For the nine
months ended September 30, 2003, sales increased 18%, or $55 million, compared
to the prior year period. The increased sales for both periods were primarily
due to increased U.S. auto production driven by financing incentives, favorable
mix of premiums, favorable exchange rates and higher sales for diesel products.
Earnings in this business decreased more than 35% and 25% for the third quarter
and nine months of 2003, respectively, compared to the prior year periods. The
decreases for both periods were primarily due to a decrease in equity earnings
from Cormetech, a U.S. designer and manufacturer of industrial catalysts, and
higher development spending for the diesel product line which more than offset
increased sales volume, favorable mix, and manufacturing efficiency gains.
Sales in the life sciences business were flat for the third quarter and nine
months ended September 30, 2003, compared to the prior year periods, primarily
due to weak sales in Europe. Earnings in the business decreased more than 20%,
compared to the prior year quarter, and were flat for the nine months ended
September 30, 2003, compared to the prior year period, primarily due to improved
manufacturing efficiencies and a gain on the disposition of a minor product
line, that was more than offset in the third quarter by higher development
spending.
Sales in the conventional video components business decreased 70%, or $33
million, for the third quarter of 2003, compared to the prior year quarter. For
the nine months ended September 30, 2003, sales decreased 52%, or $68 million,
compared to the prior year period. The sales declines are due to loss of volume,
price declines and our decision to exit the business. As discussed earlier, we
ceased operations in this business in the second quarter of 2003. See
Restructuring, Impairment and Other Charges and Credits and Note 2 to the
Consolidated Financial Statements. Excluding the asset impairment charges, the
loss increased approximately 8% for the third quarter of 2003, compared to the
prior year period, primarily due to decreased sales volume, continued
competitive pricing pressures and lower equity earnings. For the nine months
ended September 30, 2003, the loss was flat compared to the prior year period.
Samsung Corning reported an approximate 29% decrease in equity earnings for the
third quarter of 2003, compared to the prior year quarter, primarily due to
price reductions. The market for CRT glass experienced a modest recovery in the
third quarter from the second quarter of 2003 and Samsung Corning was successful
in increasing its market share among major industry competitors. However, there
continues to be an overcapacity of glass in the world market that is resulting
in ongoing downward price pressure. Given the maturity of the industry, this
situation is expected to continue for the foreseeable future. Samsung Corning is
taking action to address its current cost structure and will continue to monitor
the market situation. Although this business is profitable and generates cash we
expect that our equity earnings and dividends from this venture will be lower
than historical levels going forward. Further, it is also possible that future
equity results may include operating losses or significant restructuring or
fixed asset impairment charges recorded by this business. For the nine months
ended September 30, 2003, equity earnings were down over 10%, compared to the
prior year period. Our investment in Samsung Corning was $383 million at
September 30, 2003.
Sales in our other technologies businesses decreased 29%, or $19 million, for
the third quarter of 2003, compared to the prior year quarter. For the nine
months ended September 30, 2003, sales decreased 22%, or $44 million, compared
to the prior year period. The decrease for both periods was primarily due to
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 and the exit of the lighting business in
September 2002. The losses in these businesses more than doubled, compared to
the prior year quarter and more than tripled, compared to the prior year nine
months. The losses were primarily due to significantly lower sales volume and
increased spending in development and engineering for calcium fluoride products.
Due to the losses in the semiconductor business we are evaluating the situation.
It is possible this evaluation may result in future restructuring and impairment
charges.
LIQUIDITY AND CAPITAL RESOURCES
Financing Structure
Over the first nine months of 2003, we completed two equity offerings of our
common stock as follows:
.. 45 million shares in July for net proceeds of $363 million, and
.. 50 million shares in May for net proceeds of $267 million.
We used the net proceeds of the May offering and $356 million of existing cash
to reduce debt through a modified Dutch tender offer conducted in June. We will
use the net proceeds of the July offering to reduce debt through open market
repurchases, public tender offers or other methods, and for general corporate
purposes. See Note 10 to the Consolidated Financial Statements.
We repurchased and retired approximately 1.5 million zero coupon convertible
debentures over the nine month period ended September 30, 2003, for
approximately $1.1 billion in cash and 6.5 million shares of treasury common
stock. These activities included a modified Dutch tender offer in June. See Note
4 to the Consolidated Financial Statements and Results of Operations for further
detail. As a result of our debt repurchase program, we reduced the balance of
zero coupon convertible debentures as follows:
- --------------------------------------------------------------------------------
September 30, 2003 December 31, 2002
- --------------------------------------------------------------------------------
Zero coupon convertibles $ 470 $ 1,606
- --------------------------------------------------------------------------------
The remaining zero coupon convertible debentures may be put back to us on
November 8, 2005, at $819.54 per debenture and on November 8, 2010, at $905.29
per debenture. We have the option of settling this obligation in cash, common
stock, or a combination of both. From time to time, we may repurchase for cash
or equity certain additional debt securities in open-market, privately
negotiated or publicly tendered transactions.
Due to our sub-investment grade rating, we continue to be precluded from
accessing the short-term commercial paper market and our access to the debt
markets has been and will likely continue to be constrained. The terms that we
could receive on new long-term debt issues would likely be consistent with those
generally available to high yield issuers.
As an additional source of funds, we currently have full unrestricted access to
a $2 billion revolving credit facility with 17 banks, expiring on August 17,
2005. As of September 30, 2003, 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 September
30, 2003 and December 31, 2002, this ratio was 35% and 47%, respectively.
In March 2001, we filed a universal shelf registration statement with the SEC
that became effective in the first quarter of 2001. The shelf permits the
issuance of up to $5.0 billion of various debt and equity securities. As of
October 28, 2003, our remaining capacity under the shelf registration was
approximately $2.9 billion.
Capital Spending
Capital spending totaled $204 million and $279 million in the nine months ended
September 30, 2003 and 2002, respectively. Our 2003 capital spending program is
expected to be limited to $350 million to $400 million. We have committed to
capital expenditures of $248 million as of September 30, 2003. Capital spending
activity in 2003 primarily includes expansion in the liquid crystal display and
environmental businesses.
Restructuring
During the nine months ended September 30, 2003, we made payments of $170
million related to employee severance and termination costs and $31 million in
other exit costs resulting from restructuring actions. We expect additional
payments for actions taken in 2001, 2002 and 2003 to approximate $50 million in
the fourth quarter and $100 million in 2004 with the remainder paid beyond 2005.
Cash payments for employee-related costs will be substantially completed by
mid-2004, while payments for exit activities will be substantially completed by
2005.
Key Balance Sheet Data
At September 30, 2003, cash and short-term investments totaled $1.4 billion,
compared with $2.1 billion at December 31, 2002. The decrease from December 31,
2002, was primarily due to long-term debt repayments, restructuring payments,
capital expenditures and the use for working capital. These items were partially
offset by the proceeds from the May and July equity offerings and the receipt of
our U.S. Federal tax refund of $191 million.
Balance sheet and working capital measures are provided in the following table
(dollars in millions):
- --------------------------------------------------------------------------------
As of September 30, As of December 31,
2003 2002
- --------------------------------------------------------------------------------
Working capital $1,520 $2,145
Working capital, excluding cash
and short-term investments $103 $55
Current ratio 2.0:1 2.3:1
Trade accounts receivable,
net of allowances $498 $470
Days sales outstanding 58 56
Inventories $491 $559
Inventory turns 4.2 4.4
Days payable outstanding 51 46
Long-term debt $2,819 $3,963
Total debt to total capital 35% 47%
- --------------------------------------------------------------------------------
Credit Ratings
Our credit ratings remain unchanged from those disclosed in the 2002 Form 10-K
as follows:
- --------------------------------------------------------------------------------
RATING AGENCY Rating Rating Outlook
Last Update Long-Term Debt Commercial Paper Last Update
- --------------------------------------------------------------------------------
Standard & Poor's BB+ B Negative
July 29, 2002 July 29, 2002
Moody's Ba2 Not Prime Negative
July 29, 2002 July 29, 2002
Fitch BB B Stable
July 24, 2002 July 24, 2003
- --------------------------------------------------------------------------------
Our earnings for the first nine months of 2003 were not adequate to cover our
fixed charges (principally interest and related charges on debt), primarily as a
result of the asbestos settlement charge, losses incurred in the
Telecommunications segment and restructuring and impairment charges. It is
likely our full year 2003 earnings will not be sufficient to cover our fixed
charges.
Management Assessment of Liquidity
Our major source of funding for the remainder of 2003 and beyond will be our
existing balance of cash and short-term investments. We believe we have
sufficient liquidity for the next several years to fund operations,
restructuring, research and development, capital expenditures and to make
scheduled debt repayments. We also believe we have adequate liquidity to fund
our debt reduction objectives.
Deferred Taxes
In the third quarter our valuation allowance decreased approximately $36 million
from the second quarter, primarily due to the sale of optical component assets
to Avanex. In the second quarter, we increased our valuation allowance by $21
million as a result of our exit from the photonic technologies business as we
believe it is more likely than not that we would be unable to recognize certain
deferred tax assets related to this business in Italy. At September 30, 2003, we
have recorded gross deferred tax assets of approximately $1.9 billion with a
valuation allowance of approximately $396 million. The valuation allowance is
primarily attributable to the uncertainty regarding the realization of certain
foreign tax benefits, net operating losses and tax credits. The net deferred tax
assets of approximately $1.5 billion consist of a combination of domestic (U.S.
Federal and State & Local) and foreign tax benefits for: (a) items which have
been recognized for financial reporting purposes, but which will be reported on
tax returns to be filed in the future, and (b) loss and tax credit
carryforwards. Realization of the domestic portion of the net deferred tax asset
is dependent upon profitable operations in the United States during carryforward
periods of approximately 20 years. Although realization is not assured, we have
performed the required assessment of positive and negative evidence regarding
the realization of the net deferred tax assets, in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes," and concluded that it
is more likely than not that such assets will be realized. Should we experience
a significant negative deviation from our current performance expectations,
including significant future unannounced restructuring or impairment charges, it
is possible we could be required to record a valuation allowance on a portion or
all of the deferred tax assets.
U.S. Pension Plans
We sponsor defined benefit pension plans covering certain hourly and salaried
employees in the United States. At December 31, 2002, the projected benefit
obligation exceeded the market value of plan assets by $227 million. We are not
required by employee benefit and tax laws to make contributions to our pension
plans prior to 2004, however, we contributed $30 million in the first half of
2003 and an additional $70 million in the third quarter of 2003 to our U.S.
pension plans.
Off Balance Sheet Arrangements
We have leased equipment from three unconsolidated special purpose entities
(SPE) for which the sole purpose is the leasing of equipment to us. 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 issued Interpretation 46,
Consolidation of Variable Interest Entities in January 2003. Interpretation 46
requires the consolidation of variable interest entities (VIE's) by the primary
beneficiary. We assessed the impact of this interpretation and determined that
we are the primary beneficiary of one existing VIE and therefore began to
consolidate this entity beginning on July 1, 2003. The assets and debt of this
entity at September 30, 2003, approximated $32 million and $34 million,
respectively. We also evaluated the impact of this interpretation on two other
entities and determined that we are not the primary beneficiary for both
entities. The assets and debt of these entities total $12 million. In addition,
our maximum loss exposure as a result of our involvement with these VIE's is
approximately $52 million. This amount represents payments that would be due to
the VIE in the event of a total loss of the equipment. We carry insurance
coverage for this risk. The adoption of this interpretation did not have a
material effect on our results of operations or financial position.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are prepared in conformity with GAAP,
which requires the use of estimates, judgments and assumptions that affect the
reported amount of assets and liabilities at the date of financial statements
and the reported amounts of revenues and expenses during the period presented.
We have identified a number of critical accounting estimates. An accounting
estimate is considered critical if: the estimate requires management to develop
assumptions regarding issues that were highly uncertain at the time the estimate
was developed; different estimates reasonably could have been made; or if
changes in the estimate that would have a material effect on our financial
condition or results of operations are reasonably likely to occur from period to
period.
Our critical accounting estimates relate to the following areas:
.. impairment of goodwill in the telecommunications reporting unit,
.. impairment of assets held for use,
.. restructuring charges and impairments resulting from restructuring assets,
.. valuation allowances for deferred income taxes,
.. probability of litigation outcomes, and
.. pension assumptions.
These critical accounting estimates that required management's most difficult,
subjective or complex judgments are described in our 2002 Form 10-K and remain
unchanged through the third quarter of 2003.
ENVIRONMENT
We have been named by the Environmental Protection Agency under the Superfund
Act, or by state governments under similar state laws, as a potentially
responsible party for 12 active hazardous waste sites. Under the Superfund Act,
all parties who may have contributed any waste to a hazardous waste site,
identified by such Agency, are jointly and severally liable for the cost of
cleanup unless the Agency agrees otherwise. It is our policy to accrue for the
estimated liability related to Superfund sites and other environmental
liabilities related to property owned and operated by us based on expert
analysis and continual monitoring by both internal and external consultants. We
have accrued approximately $20 million for the estimated liability for
environmental cleanup and related litigation at September 30, 2003. Based upon
the information developed to date, we believe that the accrued amount is a
reasonable estimate of our estimated liability and that the risk of an
additional loss in an amount materially higher than that accrued is remote.
On August 27, 2003 , the New York State Attorney General's Office filed a
complaint in the New York State Supreme Court, Steuben County, claiming damages
of approximately $9 million and alleging that Corning and eight other corporate
defendants are liable for remediation and administrative costs the State
incurred to address hazardous constituents identified at the landfill site in
Steuben County. The State alleges that Corning and the other defendants used the
landfill for the disposal of industrial wastes and other hazardous substances
from 1978 to 1988. Based upon information developed to date, management believes
there are statute of limitation defenses barring recovery under many of the
claims. Management believes that the risk of a materially adverse verdict is
remote.
FORWARD-LOOKING STATEMENTS
The statements in this Quarterly Report on Form 10-Q, in reports subsequently
filed by Corning with the SEC on Forms 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;
.. tariffs, import duties and currency fluctuations;
.. product demand and industry capacity;
.. competitive products and pricing;
.. sufficiency of manufacturing capacity and efficiencies;
.. cost reductions;
.. availability and costs of critical components and materials;
.. new product development and commercialization;
.. order activity and demand from major customers;
.. fluctuations in capital spending by customers in the liquid crystal display
industry and other business segments;
.. changes in the mix of sales between premium and non-premium products;
.. possible disruption in commercial activities due to terrorist activity,
armed conflict, political instability or major health concerns;
.. facility expansions and new plant start-up costs;
.. effect of regulatory and legal developments;
.. capital resource and cash flow activities;
.. ability to pace capital spending to anticipated levels of customer demand,
which may fluctuate;
.. equity company activities;
.. interest costs;
.. credit rating and ability to obtain financing and capital on commercially
reasonable terms;
.. adequacy and availability of insurance;
.. financial risk management;
.. acquisition and divestiture activities;
.. rate of technology change;
.. level of excess or obsolete inventory;
.. ability to enforce patents;
.. adverse litigation;
.. attracting and maintaining key personnel;
.. product and components performance issues; and
.. stock price fluctuations.
Additional discussion of these and certain other risks is contained in our
Quarterly Report on Form 10-Q for the second quarter of 2003, in our 2002 Annual
Report on Form 10-K and other documents we file with the SEC, including sections
on "Forward-Looking Statements," "Risk Factors" and "Risks Relating to our
Business."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
There have been no material changes to our market risk exposure during the first
nine months of 2003 with an exception described below. For a discussion of our
exposure to market risk, refer to Item 7A, Quantitative and Qualitative
Disclosures About Market Risks, contained in our 2002 Annual Report on Form
10-K.
Interest Rate Risk
In March and April of 2002, we entered into three interest rate swaps that are
fair value hedges and economically exchanged a notional amount of $275 million
of fixed rate long-term debt to floating rate debt. Under the terms of the swap
agreements, we 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.
In September 2003, we terminated two of the interest rate swap agreements
described above totaling $150 million. The termination of these swaps resulted
in a $15 million gain which we will amortize to earnings as a reduction of
interest expense over the remaining life of the debt. We recognized an
insignificant amount of the gain in the third quarter and included the remaining
deferred gain on our consolidated balance sheet under "Long-term debt." The
proceeds from the termination of the swap agreement totaled $17 million and are
classified in the financing section of our consolidated cash flow statement. As
of September 30, 2003, we have one remaining swap agreement in effect with a
notional amount of $125 million.
It is our policy to conservatively manage our exposure to changes in interest
rates. Our policy is that total floating and variable rate debt will not exceed
35% of the total debt portfolio at anytime. At September 30, 2003, our
consolidated debt portfolio contained approximately 5% of variable rate
instruments.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The company carried out an evaluation, under the supervision and with the
participation of Corning management, including Corning's chief executive
officer and its chief financial officer, of the effectiveness of the design
and operation of Corning's disclosure controls and procedures (as defined
in Rule 13a-15(e) under the Securities and Exchange Act of 1934 (the
"Exchange Act")) as of quarter ended September 30, 2003, the end of the
period covered by this report. Based upon that evaluation, the chief
executive officer and chief financial officer concluded that as of the
evaluation date, the company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by Corning in
reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
(b) Changes in internal controls.
During the quarter ended September 30, 2003, there has been no change in
our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) that has materially affected or is reasonably
likely to materially affect, our internal control over financial reporting.
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
Environmental Litigation. Corning has been named by the Environmental Protection
Agency under the Superfund Act, or by state governments under similar state
laws, as a potentially responsible party at 12 active hazardous waste sites.
Under the Superfund Act, all parties who may have contributed any waste to a
hazardous waste site, identified by such Agency, are jointly and severally
liable for the cost of cleanup unless the Agency agrees otherwise. It is
Corning's policy to accrue for its estimated liability related to Superfund
sites and other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued approximately $20 million for its estimated
liability for environmental cleanup and litigation at September 30, 2003. 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.
Old Bath Landfill Lawsuit. On August 27, 2003 , the New York State Attorney
General's Office filed a complaint in the New York State Supreme Court, Steuben
County, claiming damages of approximately $9 million and alleging that Corning
and eight other corporate defendants are liable for remediation and
administrative costs the State incurred to address hazardous constituents
identified at the landfill site in Steuben County. The State alleges that
Corning and the other defendants used the landfill for the disposal of
industrial wastes and other hazardous substances from 1978 to 1988. Based upon
information developed to date, management believes there are statute of
limitation defenses barring recovery under many of the claims. Management
believes that the risk of a materially adverse verdict 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 2002,
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 have settled the lien claims of the U.S. government for $9.8
million to be paid from the Settlement Fund under the Plan. On December 11,
2002, the District Court entered further findings and conclusions supporting the
non-debtor releases. Certain tort claimants filed appeals to the U.S. Court of
Appeals for the Sixth Circuit from the District Court's order. One group of
foreign claimants has settled and dismissed their appeal, leaving a grouping of
plaintiffs from Nevada as the remaining appellants. Management expects the
appellate process may take another 12 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 at
issue is approximately $100 million pre-tax.
In 1995, Corning fully reserved its investment in Dow Corning upon its filing
for bankruptcy and did not recognize equity earnings from the second quarter of
1995 through the end of 2002. In the first quarter of 2003, management assessed
the December 11, 2002, findings by Judge Hood and concluded that emergence of
Dow Corning Corporation from bankruptcy protection is probable. Management has
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 was $270 million at September
30, 2003.
Corning resumed 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 (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.
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. In June 2003, Corning renewed its
motion for summary judgment upon papers incorporating additional discovery
materials. 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 misleading 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. On August 2, 2002, the U.S. District Court of the
Western District of New York entered an order consolidating these actions for
all purposes, designating lead plaintiffs and lead counsel, and directing
service of a consolidated complaint. In February 2003, defendants filed a motion
to dismiss the complaint for failure to allege the requisite elements of the
claims with particularity. Plaintiffs responded with opposing papers on April 7,
2003. The Court heard arguments on May 29 and June 9, 2003, and reserved
decision. The Court's scheduling order further 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 was argued
on April 10, 2003. The Court reserved decision on the motion for leave to amend.
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). Over a period
of more than two decades, PCC and several other defendants have been named in
numerous lawsuits involving claims alleging personal injury from exposure to
asbestos. On April 16, 2000, PCC filed for Chapter 11 reorganization in the
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 had
insufficient remaining insurance and assets to deal with its alleged current and
future liabilities. More than 100,000 additional claims have been filed with PCC
after its bankruptcy filing. At the time PCC filed for bankruptcy protection,
there were approximately 12,400 claims pending against Corning in state court
lawsuits alleging various theories of liability based on exposure to PCC's
asbestos products. Corning has defended those claims on the basis of the
separate corporate status of PCC and the absence of any facts supporting claims
of direct liability arising from PCC's asbestos products. Corning is also
currently named in approximately 10,900 other cases (approximately 40,100
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 past trends in resolving these claims may not be
indicators of future outcomes.
In the bankruptcy court, PCC in April 2000 obtained a preliminary injunction
against the prosecution of asbestos actions arising from PCC's products against
its two shareholders to afford the parties a period of time (the Injunction
Period) in which to negotiate a plan of reorganization for PCC (PCC Plan). The
Injunction Period was extended as to Corning on several occasions through
September 30, 2002, and later for a period from December 23, 2002, through
January 23, 2003, and was reinstated as of April 22, 2003, and will now
continue, pending developments with respect to the PCC Plan as described below.
On May 14, 2002, PPG announced that it had agreed with certain of its insurance
carriers and representatives of current and future asbestos claimants on the
terms of a settlement arrangement applicable to claims arising from PCC's
products. The announced arrangement would permit PPG and certain of its insurers
to make contributions of cash over a period of years, PPG's shares in PCC and
Pittsburgh Corning Europe N.V. (PCE), a Belgian corporation, and an agreed
number of shares of PPG's common stock in return for a release and injunction
channeling claims against PPG into a settlement trust under the PCC Plan.
On March 28, 2003, Corning announced that it had also reached agreement with
representatives of current and future asbestos claimants on a settlement
arrangement that will be incorporated into the PCC Plan. This settlement is
subject to a number of contingencies, including a favorable vote by 75% of the
asbestos claimants voting on the PCC Plan, and approval by the bankruptcy court.
Corning's settlement will require the contribution, when the Plan becomes
effective, of Corning's equity interest in PCC, its one-half equity interest in
PCE, and 25 million shares of Corning common stock. Corning also will be making
cash payments of $134 million (net present value as of September 30, 2003 in six
installments beginning in June 2005 assuming the Plan is effective. In addition,
Corning will assign policy rights or proceeds under its primary insurance from
1962 through 1984, as well as rights or proceeds under certain excess insurance,
most of which falls within the period from 1962 through 1973. In return for
these contributions, Corning expects to receive a release and an injunction
channeling asbestos claims against it into a settlement trust under the PCC
Plan.
Corning has recorded a charge in the amount of $298 million ($192 million
after-tax) in its results for the period ending March 31, 2003. The amount of
the charge for this settlement will require adjustment each quarter based upon
movement in Corning's common stock price prior to contribution of the shares to
the trust. In the third quarter of 2003, Corning recorded an additional charge
of $51 million ($31 million after-tax) to reflect the value of the common stock.
Corning has recorded total charges of $388 million ($247 million after-tax) to
reflect the settlement and to mark-to-market the value of Corning common stock
for the nine months ended September 30, 2003.
Two of Corning's primary insurers and several of its excess insurers have
commenced litigation against the Company for a declaration of the rights and
obligations of the parties under insurance policies, including rights that may
be affected by the settlement arrangement described above. Corning is vigorously
contesting these cases. Management is unable to predict the outcome of this
insurance litigation.
The PCC Plan, a disclosure statement and various supplement Plan documents were
filed with the Court in the second quarter of 2003. Additional supplemental plan
documents were filed in mid August 2003. Management expects the court to hold
hearings in October 2003 to review the disclosure documents before sending these
materials to creditors for a vote. The process of confirmation is expected to
take six to 12 months from the time the disclosure statement is approved by the
Court. Although the confirmation of the PCC Plan is subject to a number of
contingencies, management believes that the asbestos claims against the Company
will be resolved without additional material impact on the Company's financial
statements.
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. 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 intentional fraud
claims were dismissed against all non-settling defendants on February 25, 2003.
On March 19, 2003, Astrium appealed all of the Court's Rulings regarding the
various summary judgment motions to the Ninth Circuit Court of Appeals. The
Circuit Court has stayed the appeal pending a decision in a case being appealed
to the California Supreme Court involving similar issues of law. 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. This action is in the United States District Court of the
Central District of California. 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 more than
12 million dollars spent for defense costs to date. 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. As a result of
Corning's motion to dismiss, AIMCO amended its complaint and Corning filed an
answer. Discovery in the case has begun. The parties have agreed that the case
should be voluntarily dismissed without prejudice against refilling by the
plaintiffs at a future date. 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 and believes it will
be resolved without material impact on Corning's financial statements.
Optel Arbitration. On June 28, 2002, Madeco S.A. and Madeco Brasil Ltda. filed a
notice of arbitration and statement of claim against Corning International
Corporation (CIC) with the American Arbitration Association in New York, New
York, alleging breaches of its contractual duties and partnership obligations.
Madeco asserts that it has the right, under a "Put Option," to sell shares of
another company, Optel Ltda., to CIC for approximately $18 million plus
interest. Arbitration hearings were completed in late May 2003, and post-hearing
written submissions were filed in June 2003. A final decision is expected by
December 31, 2003. Although management believes the presentation of CIC's
position was favorable, it is not able to predict whether the arbitration panel
will reject Madeco's claim.
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 claims for unjust enrichment and 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. The arbitration panel
has denied motions by Tellium and Astarte seeking to be dismissed from the
arbitration. Tellium has asked the United States District Court for the Southern
District of New York to reverse the panel's decision continuing Tellium as a
party in the arbitration period. That application is scheduled to be heard on
November 18, 2003. The arbitration hearings are scheduled in January 2004. While
the outcome of arbitration and court proceedings concerning complex contracts
involving intellectual property matters cannot be predicted with certainty,
based upon the information discovered to date, management believes that the
disputes in arbitration will be resolved without material 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 Corning Cable Systems
International Corporation (CCS) 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 (approximately $50 million) and an injunction against further sales in
Japan of these fiber ribbon units. CCS has denied the allegation of
infringement, asserted that the patent is invalid, and is defending vigorously
against this lawsuit. While recognizing that litigation is inherently uncertain,
based upon the information developed to date, management believes that the
claims against CCS will not have a material impact on the Company's financial
statements.
Fitel USA Corp. and OFS Fitel LLC. On February 3, 2003, Corning filed an action
in federal district court for the District of Delaware against Fitel USA Corp.
(Fitel) and OFS Fitel LLC (OFS) asking the court to declare a Fitel patent
invalid, unenforceable, and not infringed by Corning. The patent generally
relates to low water content fiber used in coarse wavelength division
multiplexing. Fitel and OFS have counterclaimed that Corning induced
infringement of the patent. Corning has denied the allegations of infringement.
Based upon the information developed to date, management believes this
counterclaim against Corning will not have a material impact on its financial
statements.
Chinese Anti-Dumping Investigation. On July 1, 2003, the Chinese Ministry of
Commerce announced an anti-dumping investigation against manufacturers of
optical fiber based in the U.S, Korea and Japan, alleging that standard
single-mode optical fiber was sold in China at lower prices than in the
respective home country. The investigation is underway, with a preliminary
determination anticipated by April 2004 and a final determination possible by
July 1, 2004. Corning is defending vigorously and does not believe it engaged in
dumping. Corning management is not able to estimate the impact of this
proceeding upon its export business to China pending a final determination nor
to express assurances regarding that final determination. Based upon the
information developed to date and recognizing that the outcome is uncertain,
management believes that the investigation will be resolved without a material
impact on Corning's financial statements.
PicVue Electronics Ltd., PicVue OptoElectronics International, Inc. and
Eglasstrek Gmbh. In June 2002, Corning brought an action seeking to restrain the
use of its trade secrets and for copyright infringement relating to certain
aspects of the fusion draw machine used for liquid crystal display glass
melting. This action is pending in the United States District Court for the
Western District of New York against these three named defendants. The District
Court in July 2003 denied the PicVue motion to dismiss and granted a preliminary
injunction in favor of Corning, subject to posting a bond in an amount to be
determined. PicVue, a Taiwanese company, responded in July 2003 with a
counterclaim alleging violations of the antitrust laws and claiming damages of
more than $120 million as well as requesting trebled damages. PicVue has
appealed the District Court's ruling and the District Court has deferred ruling
on the bond amount until the completion of such appeal. Recognizing that the
outcome of litigation is uncertain, management believes that the PicVue
counterclaim is without merit and that the likelihood of a materially adverse
verdict against Corning is remote.
Tyco Electronics Corporation and Tyco Technology Resources, Inc. On August 13,
2003, CCS Holdings Inc. (CCS), a Corning subsidiary, filed an action in the U.S.
District Court for the Middle District of North Carolina against Tyco
Electronics Corporation and Tyco Technology Resources, Inc. (Tyco), asking the
court to declare a Tyco patent invalid and not infringed by CCS. The patent
generally relates to a type of connector for optical fiber cables. Prior to the
lawsuit, Tyco had asserted that CCS infringed this patent, which CCS denied.
Tyco continued to threaten to sue CCS and CCS took action to resolve the
dispute. Recognizing that the outcome of litigation is uncertain, management
believes this suit will not have a material impact on Corning's financial
statements.
Grand Jury Investigation of Conventional Cathode Ray Television Glass Business.
In August 2003, Corning Asahi Video Products Company ("CAV") was served with a
federal grand jury document subpoena related to pricing, bidding and customer
practices involving conventional cathode ray television glass picture tube
components. Two employees each received a related subpoena. CAV is a general
partnership, 51% owned by Corning and 49% owned by Asahi Glass America, Inc.
CAV's only manufacturing facility in State College, Pennsylvania recently closed
due to declining sales. CAV is cooperating with the government investigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
Exhibit Number Exhibit Name
-------------- ------------
12 Computation of Ratio of Earnings to
Combined Fixed Charges
and Preferred Dividends
31.1 Certification Pursuant to Rule 13a-15(e)
and 15d-15(e), As Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Rule 13a-15(e)
and 15d-15(e), As Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Reports on Form 8-K were filed July 21, 2003 (Amended by Form
8-K/A on July 22, 2003) and September 4, 2003, during the quarter
ended September 30, 2003, reporting matters under Item 5, Other
Events and furnishing material under Item 9 or Item 12*.
* Information furnished under Item 9 or Item 12 of Form 8-K is
not incorporated by reference, is not deemed filed, and is
not subject to liability under Section 18 of the Securities
Exchange Act of 1934, as amended.
Other items under Part II are not applicable.
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNING INCORPORATED
(Registrant)
October 30, 2003 /s/ JAMES B. FLAWS
- ------------------------------ -----------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
October 30, 2003 /s/ KATHERINE A. ASBECK
- ------------------------------ ------------------------------------------
Date Katherine A. Asbeck
Senior Vice President and Controller
(Principal Accounting Officer)
EXHIBIT INDEX
-------------
Exhibit Number Exhibit Name
- ------------- ------------
12 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends
31.1 Certification Pursuant to Rule 13a-15(e) and 15d-15(e),
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification Pursuant to Rule 13a-15(e) and 15d-15(e),
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 12
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
(In millions, except ratios)
For the nine months ended
September 30, 2003
-------------------------
Loss from continuing operations before taxes on income $ (668)
Adjustments:
Distributed income of equity investees 110
Amortization of capitalized interest 5
Fixed charges net of capitalized interest 135
-----------
Loss before taxes and fixed charges as adjusted (418)
===========
Fixed charges:
Interest incurred 121
Portion of rent expense which represents an appropriate interest factor 17
Amortization of debt costs 4
-----------
Total fixed charges 142
Capitalized interest (7)
-----------
Total fixed charges net of capitalized interest 135
===========
Preferred dividends:
Preferred dividend requirement
Ratio of pre-tax income to income before minority interest
and equity earnings 1.0
-----------
Pre-tax preferred dividend requirement
Total fixed charges 142
-----------
Fixed charges and pre-tax preferred dividend requirement 142
===========
Ratio of earnings to fixed charges *
===========
Ratio of earnings to combined fixed charges and preferred dividends *
===========
* Loss before taxes and fixed charges as adjusted were inadequate to cover
total fixed charges and inadequate to cover fixed charges and pre-tax
dividend requirement by approximately $560 million at September 30, 2003.
Exhibit 31.1
CERTIFICATION
-------------
I, James R. Houghton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Corning Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
October 30, 2003 /s/ JAMES R. HOUGHTON
- ------------------------------ -----------------------------------------
Date James R. Houghton
Chairman and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
-------------
I, James B. Flaws, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Corning Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
October 30, 2003 /s/ JAMES B. FLAWS
- ------------------------------ -----------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
Exhibit 32.1
CORNING INCORPORATED
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Corning Incorporated (the "Company")
on Form 10-Q for the period ended September 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), we, James
R. Houghton and James B. Flaws, Chairman and Chief Executive Officer and Vice
Chairman and Chief Financial Officer, respectively, of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
October 30, 2003 /s/ JAMES R. HOUGHTON
- ------------------------------ -----------------------------------------
Date James R. Houghton
Chairman and Chief Executive Officer
October 30, 2003 /s/ JAMES B. FLAWS
- ------------------------------ -----------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to Corning Incorporated and will be retained by Corning Incorporated
and furnished to the Securities and Exchange Commission or its staff upon
request.