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United States
Securities and
Exchange Commission
Washington, D.C. 20549
Form 10-K
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year ended December 31, 2003
Commission file number 1-3247
Corning Incorporated
One Riverfront Plaza, Corning, NY 14831
607-974-9000
New York
(State of incorporation)
16-0393470
(I.R.S. employer identification no.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.50 par value, New York Stock Exchange
with attached Preferred Share SWX Swiss Exchange
Purchase Right
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Exchange Act Rule 12b-2). Yes X No
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As of June 30, 2003, shares held by non-affiliates of Corning Incorporated had
an aggregate market value of approximately $9.3 billion. Shares of Corning's
common stock outstanding as of February 4, 2004, were 1,347,878,949.
Documents Incorporated by Reference
Portions of the Registrant's definitive Proxy Statement dated March 1, 2004, and
filed for the Registrant's 2004 Annual Meeting of Shareholders are incorporated
into Part III, as specifically set forth in Part III.
PART I
Corning Incorporated and its consolidated subsidiaries are hereinafter sometimes
referred to as the "the Company," "the Registrant," "Corning," or "we."
This report contains forward-looking statements that involve a number of risks
and uncertainties. These statements relate to our future plans, objectives,
expectations and estimates and may contain words such as "believes," "expects,"
"anticipates," "estimates," "forecasts," or similar expressions. Our actual
results could differ materially from what is expressed or forecasted in our
forward-looking statements. Some of the factors that could contribute to these
differences include those discussed under "Forward-Looking Statements," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere in this report.
Item 1. Business
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General
Corning traces its origins to a glass business established in 1851. The present
corporation was incorporated in the State of New York in December 1936, and its
name was changed from Corning Glass Works to Corning Incorporated on April 28,
1989.
Corning is a global, technology-based corporation that operates in two
reportable business segments: Telecommunications and Technologies.
Telecommunications Segment
The Telecommunications segment produces optical fiber and cable and hardware and
equipment products for the worldwide telecommunications industry. Corning
invented the first low-loss optical fiber products more than 30 years ago and
offers a range of optical fiber technology products and enhancements for a
variety of applications, including premises, access, metropolitan, long-haul and
submarine networks. Corning makes and sells InfiniCor(R) fibers for local area
networks, data centers and central offices; SMF-28e(R) single mode optical fiber
products providing additional transmission wavelengths in metropolitan and
access networks; MetroCor(R) fiber products for metropolitan networks; LEAF(R)
optical fiber products for long-haul, regional and metropolitan networks; and
Vascade(R) submarine optical fibers for use in undersea networks. Corning has
two large optical fiber manufacturing facilities in North Carolina, as well as a
controlling interest in Shanghai Fiber Optics Co., Ltd. in China. As a result of
lowered demand for optical fiber products, in 2002 Corning mothballed its
optical fiber manufacturing facility in Concord, North Carolina and transferred
certain capabilities to its Wilmington, North Carolina facility. Corning
believes that the Concord facility can be returned to productive capacity within
six to nine months of a decision to reopen.
A significant portion of Corning's optical fiber is sold to subsidiaries such as
CCS (Corning Cable Systems), Corning Cable Systems Verwaltungs GmbH, and
Norddeutsche Seekabelwerke GmbH & Co., KG (NSW) or equity ventures such as
Aberdare Fiber Optic Cables (Pty.) Ltd. in South Africa, Advanced Cable Systems
Corporation in Japan, and Chengdu CCS Optical Fiber Cable Co. in China. The
optical fiber is cabled prior to being sold in cable form. The remaining fiber
production is sold directly to end users or third party cablers around the
world. Corning's cabling operations include large facilities in North Carolina
and Germany and smaller regional locations or equity affiliates, including those
listed above.
Corning's hardware and equipment products include cable assemblies, fiber optic
hardware, fiber optic connectors, optical components and couplers, splice
equipment, test equipment and accessories for optical connectivity. For
broadband access, Corning's products include closures, subscriber demarcation,
connection and protection devices, xDSL passive solutions, outside plant
enclosures, and plastic pedestals. Each of the product lines may be combined in
Corning's fiber-to-the-premises solutions. Corning has manufacturing operations
for hardware and equipment products in North Carolina and Texas, as well as
Europe, Mexico, China, and the Caribbean. Corning Gilbert Inc. offers products
for the cable television industry, including coaxial connectors and associated
tools. Corning Gilbert has manufacturing operations for coaxial connectors and
associated assembly tools in Arizona and Denmark.
On July 31, 2003, Corning completed the sale of a significant portion of
photonic technologies assets and $22 million in cash to Avanex Corporation
("Avanex") in exchange for 21 million shares of Avanex common stock. Corning's
photonic technologies products had included erbium doped fiber amplifiers
("EDFAs"), Raman amplifier modules and pumps, semiconductor optical amplifiers
for long-haul, metropolitan and access markets, and dispersion compensation
devices for long-haul and metropolitan networks. These photonic technologies
products maintain and control light signals in optical fiber telecommunications
systems. These products were made primarily by Corning in New York and
Massachusetts. As of December 31, 2003, we had discontinued production of these
products.
Corning's controls and connectors products include high performance oscillators
and crystals for use in various telecommunication applications. Corning
manufactures these products in Pennsylvania, Canada, China and Germany.
The Telecommunications segment represented approximately 46% of Corning's sales
for 2003.
Technologies Segment
The Technologies segment manufactures specialized products with unique
properties for customer applications utilizing glass, glass ceramic and polymer
technologies. Businesses within this segment include liquid crystal display
glass for flat panel displays, environmental products, life science products,
specialty materials products, and glass panels and funnels for televisions.
Corning's display technologies business manufactures glass substrates products
primarily for active matrix liquid crystal displays, which are used primarily in
notebook computers, flat panel desktop monitors, and flat panel color
televisions. Corning's facilities in Kentucky, Japan and Taiwan and its 50%
interest in Samsung Corning Precision Glass Co., Ltd. ("Samsung Corning
Precision") in South Korea develop, manufacture and supply high quality glass
substrates products using a proprietary fusion forming technology and know-how.
Samsung affiliates own the remaining 50% interest in Samsung Corning Precision.
These glass substrates products are sold primarily in Japan, Korea and Taiwan to
manufacturers of liquid crystal display panels.
Corning's environmental products include ceramic technologies and solutions for
emissions and pollution control in mobile and stationary applications around the
world, including gasoline and diesel substrate and filter products. As
regulations and laws on emission controls standards have tightened over time and
additional countries have instituted requirements related to clean air, Corning
has continued to develop more efficient emission-control catalytic converter
substrates products with higher density and greater surface area for improved
emissions controls. Corning manufactures these products in New York, Virginia,
China, Germany and South Africa. Cormetech Inc., an equity venture with
Mitsubishi Heavy Industries Ltd. of Japan, manufactures ceramic environmental
substrate products at its North Carolina and Tennessee facilities for use in
power plants. Corning is investing in new ceramic substrate and filter
technologies for diesel emission control device products, with a new production
facility in New York to produce such products for diesel vehicles worldwide.
Life sciences laboratory products include microplate products, coated slides,
filter plates for genomics sample preparation, plastic cell culture dishes,
flasks, cryogenic vials, roller bottles, mass cell culture products, liquid
handling instruments, Pyrex(R) glass beakers, pipettors, serological pipettes,
centrifuge tubes and laboratory filtration products. Corning sells products
under 3 brands: Corning, Costar and Pyrex. Corning manufactures these products
in Maine, New York, England and Mexico and markets them worldwide primarily
through large distributors to government entities, pharmaceutical and
biotechnology companies, hospitals, universities and other laboratories.
Corning's conventional glass television business includes a 51% partnership
interest in Corning Asahi Video ("CAV"), a producer of glass panels and funnels
for cathode ray television tubes in Pennsylvania. CAV ceased production in the
second quarter of 2003. Corning also owns a 50% interest in Samsung Corning
Company, Ltd. ("Samsung Corning"), a producer of glass panels and funnels for
cathode ray tubes for televisions and computer monitors, with manufacturing
facilities in Korea, Germany and Malaysia. Samsung Electronics Company, Ltd.
owns the remaining 50% interest in Samsung Corning.
Other specialty materials products made by Corning include semiconductor
materials, ophthalmic glass and plastic products, technical products, such as
polarizing glass, glass for high temperature applications and machinable glass
ceramic products for high temperature applications. Semiconductor materials
manufactured by Corning include high-performance optical material products,
optical-based metrology instruments and technical solutions products for
applications in the global semiconductor industry. Corning's high purity fused
silica (HPFS(R)) materials applications include projection and illuminator lens
blanks products used in microlithography, spacecraft windows and optics products
used in high-energy laser fusion systems. Corning's ultra low expansion glass
(ULE(R)) is used in manufacturing mirror blanks for use in space and
ground-based systems. Corning also makes fluoride crystals products and
fabricates optical components, including calcium fluoride products, for
customers who make projection and illuminator lens systems used in scanner and
stepper systems. Corning Tropel Corporation (a wholly owned operation) designs
and manufactures precision optical components, modules and systems for
semiconductor wafer and mask inspection, high energy laser beam delivery and
shaping, and components for precision inspection and optical management systems.
Corning's semiconductor materials products are manufactured in New York. During
2003, we announced the closure of manufacturing facilities in South Carolina and
Massachusetts. Other specialty glass products include glass lens and window
components and assemblies. Other specialty materials products are made in New
York, Virginia, England and France. Corning's Eurokera and Keraglass equity
ventures with Saint Gobain Vitrage S.A. of France manufacture smooth cooktop
glass/ceramic products in France and in South Carolina.
The Technologies segment represented approximately 53% of Corning's sales for
2003.
We manufacture and process products at more than 60 plants and 22 countries.
Additional explanation regarding Corning and our two segments is presented in
Management's Discussion and Analysis of Financial Condition under Operating
Review and Results of Operations and Note 21 (Operating Segments) to the
Consolidated Financial Statements.
Corporate Investments
Corning and The Dow Chemical Company ("Dow Chemical") each own half of Dow
Corning Corporation ("Dow Corning"), an equity company in Michigan that
manufactures silicone products worldwide. Dow Corning is expected to emerge from
its Chapter 11 bankruptcy proceedings during 2004. Additional discussion about
this company appears in the Legal Proceedings section.
Corning and PPG Industries, Inc. each own half of Pittsburgh Corning Corporation
("PCC"), an equity company in Pennsylvania that manufactures glass products for
architectural and industrial uses. PCC filed for Chapter 11 bankruptcy
reorganization in April 2000. Additional discussion about PCC appears in the
Legal Proceedings section. Corning also owns half of Pittsburgh Corning Europe
N.V., a Belgian corporation, that manufactures glass products for industrial
uses primarily in Europe.
Competition
Corning competes across all of its product lines with many large and varied
manufacturers, both domestic and foreign. Some of these competitors are larger
than Corning, and some have broader product lines.
Telecommunications Segment
Competition within the telecommunications industry is intense among several
significant companies. Corning is a leading competitor in the segment's
principal product lines. Price and new product innovations are significant
competitive factors. The continued downturn in the telecommunications industry,
particularly in Europe and North America, has changed the competitive landscape
by increasing competition based upon pricing. These competitive conditions are
likely to persist.
Corning is the largest producer of optical fiber and cable products, but faces
significant competition due to continued excess capacity in the market place,
price pressure and new product innovations. Corning obtained the first
significant optical fiber patents and believes its large scale manufacturing
experience, fiber process, technology leadership and intellectual property
assets yield cost advantages relative to several of its competitors. The primary
competing producers of optical fiber products are Furukawa, OFS, Fujikura,
Sumitomo, Alcatel, Pirelli and Draka. Furukawa (including OFS) is Corning's
largest competitor. For optical fiber cable products, Corning's primary
competitors are Furukawa, OFS, Pirelli, Alcatel, Alcoa Fujikura and Sumitomo.
For hardware and equipment products, significant competitors are 3M Company
("3M"), Tyco Electronics, OFS, CommScope Connectivity Systems, ADC
Communications and Marconi.
Technologies Segment
Corning's principal products face competition from a variety of materials
manufacturers, some of which manufacture similar products made from materials
other than glass and ceramics. Among other things, innovation, product quality,
performance and service are key competitive elements.
Corning is the largest worldwide producer of advanced liquid crystal display
glass substrate products and that market position remained relatively stable
over the past year. Corning believes it has competitive advantages in liquid
crystal display glass substrate products by investing in new technologies,
offering a consistent source of reliable supply, using its proprietary fusion
manufacturing process at facilities in Kentucky, Japan and Taiwan and delivering
thinner, lighter weight and larger size products. Asahi Glass, Nippon Electric
Glass and NH Techno are Corning's principal competitors in display glass
substrates products. In addition, new entrants are seeking to expand their
presence in this business.
For worldwide automotive ceramic substrate products, Corning has a leading
market position that has remained relatively stable over the past year. Corning
believes its competitive advantage in automotive ceramic substrate products for
catalytic converters is based upon global presence, customer service,
engineering design services and product innovation. Corning has a leading market
position in ceramic substrates for heavy duty diesel applications. The light
duty diesel vehicle market opportunity is still emerging. Corning's
environmental technologies products face principal competition from NGK, Denso,
Ibiden and Emitec.
Corning is a leading supplier of glass and plastic science laboratory products,
with a growing plastics products market presence in North America and Europe,
and a relatively stable laboratory glass products market presence during 2003.
Corning seeks to maintain competitive advantages relative to its competitors by
emphasizing product quality, product availability, supply chain efficiency, a
wide product line and superior product attributes. For laboratory products,
Schott Glaswerke, Kimble, Greiner and Becton Dickinson are the principal
worldwide competitors.
CAV was a producer of conventional television glass products in North America.
In 2003, its market position declined due to competition from Asian television
glass suppliers and as the market shifted from conventional cathode ray tubes to
flat panel cathode ray tubes and other technologies. CAV ceased production in
June 2003. Samsung Corning is the third largest worldwide producer of cathode
ray tube glass products for conventional televisions. Its relative competitive
position has remained stable over the past year. Samsung Corning seeks to
maintain their competitive advantage through customer support, logistics
expertise and a lower cost manufacturing structure. Nippon Electric Glass,
Asahi, and various other Asian manufacturers compete with Samsung Corning.
Corning is a leading supplier of materials and products for lithography optics
in the semiconductor industry and that market position remained relatively
stable during the past year. Corning seeks to compete by providing superior
optical quality, leading optical designs and a local Corning presence supporting
its customers. For Corning's semiconductor optical material products, general
specialty glass/glass ceramic products and ophthalmic products, Schott
Glaswerke, Shin-Etsu Quartz Products, Hoya and Hereaus are the main competitors.
Corning strives to maintain its position through technology and product
innovation. For the future, Corning believes its competitive advantage lies in
its commitment to research and development, its financial resources and its
commitment to quality. There is no assurance that Corning will be able to
maintain its market position or competitive advantage.
Raw Materials
Corning's production of specialty glasses and related materials requires
significant quantities of energy and batch materials.
Although energy shortages have not been a problem recently, Corning has achieved
flexibility through important engineering changes to take advantage of the
lowest-cost energy source in most significant processes. Specifically, many of
Corning's principal manufacturing processes can now be operated with natural
gas, propane, oil or electricity, or a combination of these energy sources.
As to resources (ores, minerals, and processed chemicals) required in
manufacturing operations, availability appears to be adequate. Corning's
suppliers from time to time may experience capacity limitations in their own
operations, or may eliminate certain product lines; nevertheless, Corning
believes it has adequate programs to ensure a reliable supply of batch chemicals
and raw materials. For many products, Corning has alternative glass compositions
that would allow operations to continue without interruption in the event of
specific materials shortages.
Certain key optical components used in the manufacturing of products within
Corning's Telecommunications segment are currently sole sourced or available
only from a limited number of sources. Any future difficulty in obtaining
sufficient and timely delivery of components could result in delays or
reductions in product shipments, or reduce Corning's gross margins.
Patents and Trademarks
Inventions by members of Corning's research and engineering staff have been, and
continue to be, important to the Company's growth. Patents have been granted on
many of these inventions in the United States ("U.S.") and other countries. Some
of these patents have been licensed to other manufacturers, including companies
in which Corning has equity investments. Many of the earlier patents have now
expired, but Corning continues to seek and obtain patents protecting its newer
innovations. In 2003, Corning was granted over 300 patents in the U.S. and over
400 patents in countries outside the U.S.
Each business segment possesses its own patent portfolio that provides a
competitive advantage in protecting Corning's innovations. Corning has
historically enforced, and will continue to enforce, its intellectual property
rights. At the end of 2003, Corning and its subsidiaries owned over 6,000
unexpired patents in various countries of which over 3,000 were U.S. patents.
Between 2004 and 2006, approximately 4% of these patents will expire, while at
the same time Corning intends to seek patents protecting its newer innovations.
Worldwide, Corning has over 3,000 patent applications in process, with over 850
in process in the U.S. As a result, Corning believes that its patent portfolio
will continue to provide a competitive advantage in protecting Corning's
innovation, although Corning's competitors in each of its businesses are
actively seeking patent protection as well.
The Telecommunications segment has over 3,600 patents in various countries of
which over 2,000 were U.S. patents. Although no one patent is considered
material to this business segment, and new patents are frequently granted to
Corning, some of the important issued U.S. patents in this segment include: (i)
patents relating to optical fiber products including dispersion compensating
fiber, low loss optical fiber and high data rate optical fiber and processes and
equipment for manufacturing optical fiber including methods for making optical
fiber preforms and methods for drawing, cooling and winding optical fiber; (ii)
patents relating to packaging of lasers and designs for optical switch products;
(iii) patents relating to optical fiber ribbons and methods for making such
ribbon, fiber optic cable designs and methods for installing optical fiber
cable; and (iv) patents relating to optical fiber connectors and associated
methods of manufacture. While a particular U.S. patent related to one type of
low loss optical fiber will expire in 2004, there is no group of important
Telecommunications segment patents set to expire between 2004 and 2006.
The Technologies segment has over 2,400 patents in various countries of which
over 1,000 were U.S. patents. Although no one patent is considered material to
this business segment, and new patents are frequently granted to Corning, some
of the important issued U.S. patents in this segment include: (i) patents
relating to cellular ceramic honeycomb products, together with ceramic batch and
binder system compositions, honeycomb extrusion and firing processes, and
honeycomb extrusion dies and equipment for the high-volume, low-cost manufacture
of such products; (ii) patents relating to glass compositions and methods for
the use and manufacture of flat panel glass for display applications; (iii)
patents relating to UV-absorbing copper halide glasses, polymer lens matrix
material for use as ophthalmic lens and dyes for use in polymer ophthalmic
lenses; (iv) patents relating to glasses and glass-based products including
fused silica and calcium fluoride glass for use in optical lithography/stepper
lens and photomask blanks, collimating and tapered lensed fiber, and gradient
index/grin lenses; and (v) patents relating to methods and apparatus for the
manufacture and use of scientific laboratory equipment including nucleic acid
arrays, multiwell plates, and cell culture products. While a particular U.S.
patent related to the process of mixing and extruding certain ceramic materials
will expire in 2004, there is no group of important Technologies segment patents
set to expire between 2004 and 2006.
Many of these patents are used in Corning's operations or are licensed for use
by others, and Corning is licensed to use patents owned by others. Corning has
entered into cross licensing arrangements with some major competitors, but the
scope of such licenses has been limited to specific product areas or
technologies.
Most of Corning's products are marketed under the following trademarks: Corning,
Celcor, Eagle 2000, Eagle APT, HPFS, LEAF, Pyrex, SMF-28e, Steuben, Lanscape and
Vycor.
Protection of the Environment
Corning has a program to ensure that its facilities are in compliance with
state, federal and foreign pollution-control regulations. This program resulted
in capital and operating expenditures during the past several years. In order to
maintain compliance with such regulations, capital expenditures for pollution
control in continuing operations were approximately $7 million in 2003 and are
estimated to be $14 million in 2004.
Corning's 2003 operating results from continuing operations were charged with
approximately $28 million for depreciation, maintenance, waste disposal and
other operating expenses associated with pollution control. Corning believes
that its compliance program will not place it at a competitive disadvantage.
Risk factors
Set forth below and elsewhere in this Annual Report on Form 10-K and in other
documents we file with the Securities and Exchange Commission ("SEC") are some
of the principal risks and uncertainties that could cause our actual business
results to differ materially from any forward-looking statements or other
projections contained in this Annual Report on Form 10-K. In addition, future
results could be materially affected by general industry and market conditions,
changes in laws or accounting rules, general U.S. and non-U.S. economic and
political conditions, including a global economic slowdown, fluctuation of
interest rates or currency exchange rates, terrorism, political unrest or
international conflicts, political instability or major health concerns, natural
disasters or other disruptions of expected economic and business conditions.
These risk factors should be considered in addition to our cautionary comments
concerning forward-looking statements in this Annual Report on Form 10-K,
including statements related to markets for our products and trends in our
business that involve a number of risks and uncertainties. Our separate
statement labeled Forward-Looking Statements should be considered in addition to
the statements below.
Our sales could be negatively impacted if one or more of our key customers
substantially reduce orders for our products
Our customer base is relatively concentrated with less than 10
significant customers accounting for a high percentage (greater than 50%) of
net sales in most of our businesses, including those purchasing liquid crystal
display glass. However, no individual customer accounts for more than 10% of
consolidated sales.
In our Technologies segment, several of our businesses also have a
concentrated customer base. These businesses include Corning's display
technologies, environmental products and semiconductor materials. If we lose a
significant customer in any of these businesses, our sales could be negatively
impacted.
Although the sale of display glass has increased from quarter to
quarter in 2003, there can be no assurance that this upward trend will continue.
Our customers are panel makers, and as they switch to larger size glass, the
pace of their orders may be uneven while they adjust their manufacturing
processes and facilities. There is a risk that our customers may not be able to
access sufficient capital to fund ongoing expansions.
Over recent years, most of our major customers in the
Telecommunications segment have reduced their purchases of our products and have
expressed uncertainty as to their future requirements. As a result, our sales
have declined to their current low levels, and it is difficult to predict future
sales accurately. The conditions contributing to this difficulty include:
. the prolonged downturn in the telecommunications industry;
. uncertainty regarding the capital spending plans of the major
telecommunications carriers;
. potential changes in governmental regulations;
. the telecommunications carriers' current limited access to the
capital required for expansion; and
. general market and economic uncertainty.
While we have responded to the depressed telecommunications market by
reducing excess capacity and cutting costs, we cannot assure you that our plans
will be successful in mitigating the adverse effects of a prolonged downturn.
The continuing downturn in the telecommunications industry may be more severe
and prolonged than expected. If our net sales continue to decline, our ability
to meet financial expectations for future periods may be impaired, and we may
need to impair goodwill or record additional reserves against deferred tax
assets.
If we do not successfully adjust our manufacturing volumes and fixed cost
structure, or achieve manufacturing yields or sufficient product reliability,
our operating results could suffer, and we may not achieve profitability as
anticipated
In the economic and industry downturn for our Telecommunications
segment, we have responded to the softer market by cutting costs, including the
reduction of our manufacturing volumes. We continued to execute our
restructuring plans in 2003. We have closed two fiber facilities and mothballed
another and closed several factories that made photonics, cabling or hardware
and equipment. In 2003, we reduced our workforce by 1,975 positions, and we have
reduced more than 21,000 positions since 2001. We cannot assure you that our
plans will be successful in mitigating the adverse effects of a softer market,
nor can we assure you that additional adjustments and charges will not be
necessary to respond to further market changes.
We plan to spend $425 million to $475 million in 2004 to expand our
liquid crystal display glass facilities in response to increased customer
demand. Although we expect to complete these expansion projects, we may not
achieve the manufacturing efficiencies, product improvements or level of sales
that we anticipate.
In addition, our restructuring programs and current business plans are
designed to restore profitability and improve cash flow, but we cannot be
certain that this will occur or that we will return to positive cash flow at the
levels and in the time period we are targeting.
The manufacturing of our products involves highly complex and precise
processes, requiring production in highly controlled and clean environments. Any
changes in our manufacturing processes or those of our suppliers could
significantly reduce our manufacturing yields and product reliability. In some
cases, existing manufacturing may be insufficient to achieve the volume or cost
targets of our customers. We will need to develop new manufacturing processes
and techniques to achieve targeted volume and cost levels. While we continue to
fund projects to improve our manufacturing techniques and processes, we may not
achieve cost levels in our manufacturing activities that will fully satisfy our
customers.
We have incurred, and may in the future incur, restructuring and other charges,
the amounts of which are difficult to predict accurately
The telecommunications industry was severely hampered from 2001 to 2003
by continued excess manufacturing capacity, increased intensity of competition,
and growing pressure on price and profits. These negative trends are expected to
continue in 2004. In 2001 through 2003, we recorded charges for restructuring,
impairment of assets, and the write-off of cost and equity based investments.
Our ability to forecast our customers' needs for our products in the
current economic and industry environment is limited. Our results in 2003 and
2002 included significant charges for impairment of long-lived assets, primarily
in the Telecommunications segment and the conventional television glass and
specialty materials businesses of our Technologies segment.
We may record additional charges for restructuring or other asset
impairments if additional actions become necessary to respond to align costs to
a reduced level of demand.
In the event we incur continued operating losses, we may be unable to recognize
future deferred tax assets and may be required to reassess our ability to
realize the deferred tax assets already recorded.
At December 31, 2003, we had recorded gross deferred tax assets of
approximately $2.1 billion with a valuation allowance of $469 million, and
offset by deferred tax liabilities of $201 million. Net domestic deferred tax
assets were approximately $1.3 billion. Although management expects the domestic
deferred tax assets to be realized from future earnings, currently, we are
generating domestic losses. Our forecast of domestic income is based on
assumptions about and current trends in our operating segments, and we can not
assure you that such results will be achieved. As a result, we may record
additional material deferred tax valuation reserves that would reduce our net
income and shareholders equity. If we record such a valuation allowance, we
will also cease to recognize additional tax benefits on any losses in the U.S.
If the markets for our products do not develop and expand as we anticipate,
demand for our products may decline further, which would negatively impact our
results of operations and financial performance
The markets for our products are characterized by rapidly changing
technologies, evolving industry government standards and frequent new product
introductions. Our success is expected to depend, in substantial part, on the
timely and successful introduction of new products, upgrades of current products
to comply with emerging industry government standards, our ability to acquire
technologies needed to remain competitive and our ability to address competing
technologies and products. In addition, the following factors related to our
products and the markets for them, if not achieved, could have an adverse impact
on our results of operations and financial performance:
. our ability to introduce leading products such as glass for flat
panel displays, optical fiber and environmental substrate products
that can command competitive prices in the marketplace;
. our ability to maintain or achieve a favorable mix of sales
between premium and non-premium fiber and new generations and
larger sizes of display glass products;
. our ability to continue to develop new product lines to address
our customers' diverse needs within the several market segments
that we participate in, which requires a high level of innovation,
as well as the accurate anticipation of technological and market
trends;
. our ability to develop new products in response to favorable
government regulations and laws driving customer demand,
particularly environmental substrate diesel filter products and
Telecommunications segment products associated with fiber to the
premises; or
. our ability to create the infrastructure required to support
anticipated growth in certain businesses.
We face pricing pressures in each of our leading businesses that could adversely
affect our results of operations and financial performance
We periodically face pricing pressures in each of our leading
businesses as a result of intense competition, emerging new technologies, or
over-capacity. While we will work toward reducing our costs to respond to the
pricing pressures that may continue, we may not be able to achieve proportionate
reductions in costs. As a result of overcapacity and the current economic and
industry downturn in the Telecommunications segment, pricing pressures continued
in 2003, particularly in our optical fiber and cable products. Pricing pressure
has also continued in our display glass business as the manufacturers of desktop
displays strive to reduce their costs.
We have incurred, and may in the future incur, goodwill and other intangible
asset impairment charges
Acquisitions recorded as purchases for accounting purposes have
resulted in the recognition of significant amounts of goodwill and other
purchased intangibles. At December 31, 2003, the Telecommunications and
Technologies operating segment goodwill balances were $1.6 billion and $159
million, respectively. The potential impairment of these assets could reduce our
net income and shareholders' equity.
Effective January 1, 2002, we adopted Financial Accounting Standards
Board Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets," pursuant to which goodwill is no longer amortized
but is subject to impairment tests at least annually. The goodwill impairment
accounting rules are intricate and require that we make certain difficult,
subjective and complex judgments involving a number of matters, including
assumptions and estimates used to determine the fair value of our reporting
units. Under SFAS No. 142, goodwill is tested for impairment at a reporting
unit level. The criteria for establishing a reporting unit is dependent upon
how a company determines its operating segments under SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
Specifically, SFAS No. 142 permits a company to define a reporting unit as
either an operating segment, a component of an operating segment or an
aggregation of two or more components of an operating segment. The reporting
unit for the Telecommunications segment goodwill is the Telecommunications
operating segment. The reporting units for the Technologies segment are
components of the Technologies segment.
During 2002, we completed our annual goodwill impairment test,
determined the Telecommunications goodwill balance was impaired, and recorded a
related impairment charge of $400 million. Our 2002 testing results also
determined that the Technologies segment goodwill was not impaired. In the
fourth quarter of 2003, we completed our annual goodwill impairment tests and
determined that the goodwill balances were not impaired. While we believe the
estimates and judgments about future cash flows used in the goodwill impairment
tests are reasonable, we cannot provide assurance that future impairment charges
will not be required if the expected cash flow estimates as projected by
management do not occur.
We are currently in discussion with the staff of the SEC on the
determination of our operating segments. We believe that our determination of
our operating segments under SFAS No. 131 is appropriate. However, it is
possible that the outcome of this discussion could be a revision of how we
define and disclose our operating segments. A change in how we define our
Telecommunications operating segment could impact our goodwill impairment tests
under SFAS No. 142. Specifically, we could be required to record a net
additional goodwill impairment charge of up to $600 million (pre tax) in 2002.
Although this potential charge would increase our 2002 net loss, it would not
impact our 2002 operating cash flows because goodwill impairments are noncash
charges. Our debt to capital ratio ranged from 44% to 47% throughout 2002.
This potential charge would have increased our debt to capital ratio to no
higher than 51%, which would still be below the 60% financial covenant limit
relating to our $2.0 billion revolving credit facility. The potential 2002
goodwill impairment charge would have no impact on operating results or
operating cash flows for the year ended December 31, 2003.
We may be limited in our ability to obtain additional capital on commercially
reasonable terms
Although we believe existing cash, short-term investments and borrowing
capacity, collectively, provide adequate resources to fund ongoing operating
requirements, we may be required to seek additional financing to compete
effectively in our markets. Our public debt ratings affect our ability to raise
capital and the cost of such capital. In July 2002, Fitch downgraded our senior
unsecured long-term debt rating from BBB- to BB; Standard & Poor's downgraded
our senior unsecured long-term debt rating from BBB- to BB+ and short-term debt
credit rating from A-3 to B; and Moody's reduced our senior unsecured long-term
debt rating from Baa3 to Ba2 and short-term debt credit rating from Prime-3 to
Not Prime. These and any further downgrades may increase our borrowing costs and
affect our ability to access the debt capital markets.
As a result of our lower debt ratings, we may face difficulties in our
business. For example, we may face increasing requirements to post cash
collateral for performance bonds and some customers may seek alternative
suppliers.
We are subject under our revolving credit facility to a covenant that
requires us to maintain a ratio of total debt to capital, as defined under the
credit facility, of not greater than 60%. Our total debt to capital ratio was
34% at December 31, 2003. This covenant may limit our ability to borrow funds.
Further declines or failure to recover in our Telecommunications segment could
cause impairments of goodwill, deferred tax assets, tangible or intangible
assets or restructuring charges related to our overall business. Additional
impairments or charges could materially increase our total debt to capital ratio
which may reduce the amounts we are able to borrow under the revolving credit
facility.
If our products or components purchased from our suppliers experience
performance issues, our business will suffer
Our business depends on the production of excellent products of
consistently high quality. To this end, our products, including components
purchased from our suppliers, are tested for quality both by us and our
customers. Nevertheless, our products are highly complex, and our customers'
testing procedures are limited to evaluating our products under likely and
foreseeable failure scenarios. For various reasons (including, among others, the
occurrence of performance problems unforeseeable in testing), our products and
components purchased from our suppliers may fail to perform as expected.
Performance issues could result from faulty design or problems in manufacturing
or testing. We have experienced such performance issues in the past and remain
exposed to such performance issues. In some cases, product redesigns or
additional capital equipment may be required to correct a defect. In addition,
any significant or systemic product failure could result in customer relations
problems and harm the future sales of our products.
Interruptions of supplies from our key suppliers may affect our results of
operations and financial performance
Interruptions of supplies from our key suppliers could disrupt
production or impact our ability to increase production and sales. We do not
have long-term or volume purchase agreements with every supplier, and may have
limited options for alternative supply if these suppliers fail, for any reason,
including their business failure or financial difficulties, to continue the
supply of components.
We face intense competition in most of our businesses
We expect that we will face additional competition from existing
competitors and from a number of companies that may enter our markets. Because
some of the markets in which we compete have been historically characterized by
rapid growth and are characterized by rapid technology changes, smaller niche
and start-up companies may become our principal competitors in the future. We
must invest in research and development, expand our engineering, manufacturing
and marketing capabilities, and continue to improve customer service and support
in order to remain competitive. While we expect to undertake the investment and
effort in each of these areas, we cannot assure you that we will be able to
maintain or improve our competitive position.
We may experience difficulties in enforcing our intellectual property rights and
we may be subject to claims of infringement of the intellectual property rights
of others
We may encounter difficulties in protecting our intellectual property
rights or obtaining rights to additional intellectual property necessary to
permit us to continue or expand our businesses. We cannot assure you that the
patents that we hold or may obtain will provide meaningful protection against
our competitors or competitive technologies. Litigation may be necessary to
enforce our intellectual property rights, to protect our trade secrets and to
determine the validity and scope of our proprietary rights. Litigation is
inherently uncertain and the outcome is often unpredictable. Other companies
hold patents on technologies used in our industries and are aggressively seeking
to expand, enforce and license their patent portfolios.
The intellectual property rights of others could inhibit our ability to
introduce new products. We are, and may in the future be, subject to claims of
intellectual property infringement or misappropriation and we cannot assure you
as to the outcome of such claims. Litigation or claims against us could force us
to cease selling or using any of our products that incorporate the intellectual
property that is the subject of such claims, obtain a license from a third
party, or redesign or rename our products. These actions, if possible, could
result in substantial costs or loss of revenue.
Current or future litigation may harm our financial condition or results of
operations
Pending, threatened or future litigation is subject to inherent
uncertainties. Our financial condition or results of operations may be adversely
affected by unfavorable outcomes, expenses and costs exceeding amounts estimated
or insured. In particular, we have been named as a defendant in numerous
lawsuits against PCC and several other defendants involving claims alleging
personal injury from exposure to asbestos. As described in Legal Proceedings,
our negotiations with the representatives of asbestos claimants have produced a
tentative settlement, but certain cases may still be litigated. Final approval
of a global settlement through the PCC bankruptcy process may impact the results
of operations for the period in which such costs, if any, are recognized. Total
charges of $413 million ($263 million after-tax) have been incurred through
December 31, 2003; however, the final settlement value will be dependent on the
price of our common stock at the time it is contributed to the settlement trust.
Management cannot provide assurances that the ultimate outcome of a settlement
will not be materially different from the amount recorded to date.
We face risks related to our international operations and sales
We have customers and significant operations, including manufacturing
and sales, located outside the U.S. We have large manufacturing operations for
liquid crystal display glass substrates in the Asia-Pacific region, including
equity investments in companies operating in China and South Korea that make
liquid crystal display glass and telecommunications products, and several
significant customers are located in this region. As a result of these and other
international operations, we face a number of risks, including:
. major health concerns such as SARS;
. difficulty of effectively managing our diverse global operations;
. change in regulatory requirements;
. tariffs, duties and other trade barriers;
. undeveloped legal systems; and
. political and economic instability in foreign markets.
Our equity investments in companies that we do not control generated substantial
equity earnings
Dow Corning (which makes silicone products) and Samsung Corning
Precision (which makes liquid crystal display glass) are two companies in which
we have a 50% ownership interest. During 2003, we recognized $226 million in
equity earnings from these two companies. Dow Corning remains in Chapter 11
bankruptcy proceedings. Samsung Corning Precision is located in the Asia-Pacific
region and, as such, is subject to those geographic risks referred to above. We
have equity investments in other companies within and outside the U.S., and
many of these have been successful operations over the years. With 50% or lower
ownership, we do not control such equity companies nor their management and
operations. Performance of our equity investments may not continue at the same
levels in the future.
We face risks due to foreign currency fluctuations
Because we have significant customers and operations outside the U.S.,
fluctuations in foreign currencies affect our sales and profit levels. Foreign
exchange rates may make our products less competitive in countries where local
currencies decline in value relative to the dollar.
If the financial condition of our customers declines, our credit risks could
increase
In 2002 and 2003, certain of our customers experienced financial
difficulties, and some filed with the courts seeking protection under bankruptcy
or reorganization laws. We have experienced, and in the future may experience,
losses as a result of our inability to collect our accounts receivable, as well
as the loss of such customer's ongoing business. If our customers fail to meet
their payment obligations to us, we could experience reduced cash flows and
losses in excess of amounts reserved. As of December 31, 2003, reserves for
trade receivables totaled approximately $38 million.
We may not have adequate insurance coverage for claims against us
We face the risk of loss resulting from, and adverse publicity
associated with, product liability, securities, fiduciary liability,
intellectual property, antitrust, contractual, warranty, fraud and other
lawsuits, whether or not such claims are valid. In addition, our product
liability, fiduciary, directors and officers, property and comprehensive general
liability insurance may not be adequate to cover such claims or may not be
available to the extent we expect. Our insurance costs have increased
substantially and may increase further. We may not be able to get adequate
insurance coverage in the future at acceptable costs. A successful claim that
exceeds or is not covered by our policy limits could require us to pay
substantial sums. Some of the carriers in our historic excess insurance program
are not rated, or may have lower ratings, and may not be able to respond if we
should have claims reaching into excess layers. In addition, we may not be able
to insure against certain risks or obtain some types of insurance, such as
terrorism insurance.
Other
Additional information in response to Item 1 is found in Note 21 (Operating
Segments) to the Consolidated Financial Statements and Selected Financial Data.
Internet Available Information
Copies of Corning's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
available free of charge through Corning's website (www.corning.com) as soon as
reasonably practicable after Corning electronically files the material with, or
furnishes it to, the Securities and Exchange Commission.
Our corporate governance guidelines and the charters of each of our board
committees are available on our website at
www.corning.com/inside_corning/corporate_governance/downloads.aspx. We will also
provide a copy of any of these documents to shareholders upon request.
Item 2. Properties
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We operate approximately 60 manufacturing plants and processing facilities, of
which approximately one third are located in the U.S. We own substantially all
of our executive and corporate buildings, which are located in Corning, New
York. We also own substantially all of our manufacturing and research and
development facilities and more than half of our sales and administrative
facilities.
During the last five years, we have invested $4.7 billion in property,
construction, expansion and modernization for continuing operations. Of the $391
million spent in 2003, $213 million was spent on facilities outside the U.S. Due
to the downturn in the telecommunications industry, many of the facilities and
expansions were not completed, have been abandoned or were written-off. See Note
5 (Restructuring Actions) to the Consolidated Financial Statements.
Manufacturing, sales and administrative, and research and development facilities
at consolidated locations have an aggregate floor space of approximately 22
million square feet. Distribution of this total area follows:
- -------------------------------------------------------------------------------
(million square feet) Total Domestic Foreign
- -------------------------------------------------------------------------------
Manufacturing 18 11 7
Sales and administrative 2 2
Research and development 2 2
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22 13 9
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Total assets and capital expenditures by operating segment are included in Note
21 (Operating Segments) to the Consolidated Financial Statements. Information
concerning lease commitments is included in Note 16 (Commitments, Contingencies,
Guarantees and Hedging Activities) to the Consolidated Financial Statements.
During 2003, we continued the restructuring program that closed several
manufacturing facilities and consolidated certain smaller facilities. Throughout
2004 we expect to have excess capacity and will not utilize a portion of space
in the facilities listed above. The largest unused portion is our optical fiber
manufacturing facility in Concord, North Carolina that has been mothballed until
fiber demand rebounds. We believe that the Concord facility can be returned to
productive capacity within six to nine months of a decision to do so and
construction in progress at the Concord facility can be completed efficiently.
Item 3. Legal Proceedings
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Environmental Litigation. Corning has been named by the Environmental Protection
Agency under the Superfund Act, or by state governments under similar state
laws, as a potentially responsible party at 12 active hazardous waste sites.
Under the Superfund Act, all parties who may have contributed any waste to a
hazardous waste site, identified by such Agency, are jointly and severally
liable for the cost of cleanup unless the Agency agrees otherwise. It is
Corning's policy to accrue for its estimated liability related to Superfund
sites and other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued approximately $21 million for its estimated
liability for environmental cleanup and litigation at December 31, 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.
Schwinger and Stevens Toxins Lawsuits. In April 2002, Corning was named as a
defendant in two actions, Schwinger and Stevens, filed in the U.S. 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 likelihood of a materially adverse impact to Corning's financial
statements is remote.
Dow Corning Bankruptcy. Corning and Dow Chemical each own 50% of the common
stock of Dow Corning, which has been in reorganization proceedings under Chapter
11 of the U.S. Bankruptcy Code since May 1995. Dow Corning filed for bankruptcy
protection to address pending and claimed liabilities arising from many thousand
breast-implant product lawsuits each of which typically sought damages in excess
of one million dollars. 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, restored 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
approximately 50 plaintiffs from Nevada as the remaining appellants. The
appellate process may take another 6 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 us 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 risk of material impact on Corning's financial statements is remote.
Under the terms of the Joint Plan, Dow Corning will 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 in these claims against Dow Corning is approximately $100 million pre tax.
In 1995, Corning fully impaired its investment in Dow Corning upon its entry
into bankruptcy proceedings and did not recognize equity earnings from the
second quarter of 1995 through the end of 2002. Corning began recognizing equity
earnings in the first quarter of 2003 when management concluded that its
emergence from bankruptcy protection was probable based upon the Bankruptcy
Court's findings on December 11, 2002. 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% share of Dow Corning's equity to be permanent. This difference is $270
million.
Corning received no dividends from Dow Corning in 2003 and does not expect to
receive any in 2004.
Implant Tort Lawsuits. Corning and Dow Chemical, the shareholders of Dow
Corning, 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 U.S. 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
U.S. 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 likelihood of a materially adverse impact to Corning's
financial statements is remote.
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 U.S. 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
impact to Corning's financial statements 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. The consolidated amended complaint requests
"substantial" damages in an unspecified amount to be provided at trial. 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
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 responded with a motion to dismiss the lawsuit, which
was granted by the District Court in a judgment entered on December 12, 2002. 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 and
denied in a decision and order entered on January 14, 2004. An appeal is
possible. Management is prepared to defend these lawsuits vigorously.
Recognizing that the outcome of litigation is uncertain, management believes
that the likelihood of a materially adverse impact to Corning's financial
statements, net of applicable insurance, is remote.
Pittsburgh Corning Corporation. Corning and PPG Industries, Inc. ("PPG") each
own 50% of the capital stock of PCC. Over a period of more than two decades,
PCC and several other defendants have been named in numerous lawsuits involving
claims alleging personal injury from exposure to asbestos. On April 16, 2000,
PCC filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the
Western District of Pennsylvania. As of the bankruptcy filing, PCC had in excess
of 140,000 open claims and had insufficient remaining insurance and assets to
deal with its alleged current and future liabilities. More than 100,000
additional claims have been filed with PCC after its bankruptcy filing. At the
time PCC filed for bankruptcy protection, there were approximately 12,400 claims
pending against Corning in state court lawsuits alleging various theories of
liability based on exposure to PCC's asbestos products and typically requesting
monetary damages in excess of one million dollars per claim. Corning has
defended those claims on the basis of the separate corporate status of PCC and
the absence of any facts supporting claims of direct liability arising from
PCC's asbestos products. Corning is also currently named in approximately 11,200
other cases (approximately 40,700 claims) alleging injuries from asbestos and
similar amounts of monetary damages per claim. Those cases have been covered by
insurance without material impact to Corning to date. Asbestos litigation is
inherently difficult, and past trends in resolving these claims may not be
indicators of future outcomes.
In the bankruptcy court, 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 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 its 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 $136 million (net present value as of December 31, 2003) in six
installments beginning in June 2005 assuming the Plan is effective. In addition,
Corning will assign policy rights or proceeds under primary insurance from 1962
through 1984, as well as rights to sell 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 recorded an initial charge of $298 million ($192 million after-tax) in
the period ending March 31, 2003 to reflect the settlement terms. However, the
amount of the charge for this settlement requires adjustment each quarter based
upon movement in Corning's common stock price prior to contribution of the
shares to the trust. Corning recorded total charges of $413 million ($263
million after-tax) to reflect the settlement and to mark-to-market the value of
Corning common stock for the year ended December 31, 2003.
Two of Corning's primary insurers and several excess insurers have commenced
litigation for a declaration of the rights and obligations of the parties under
insurance policies, including rights that may be affected by the settlement
arrangement described above. Corning is vigorously contesting these cases.
Management is unable to predict the outcome of this insurance litigation.
The PCC Plan, 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. In October 2003, the Court held a
hearing to review the disclosure documents. The Court has announced a schedule
projecting that the Plan and disclosure documents will be mailed to creditors
for voting expected to be completed in March 2004, to be followed by
confirmation hearings in May 2004. Although the confirmation of the PCC Plan is
subject to a number of contingencies, apart from the quarterly adjustment in
the value of 25 million shares of Corning common stock, management believes that
the likelihood of a material adverse impact to Corning's financial statements is
remote.
Astrium. In December of 2000, Astrium, SAS and Astrium, Ltd. filed a complaint
for negligence in the U.S. 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 that 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. Recognizing
that the outcome of litigation is uncertain, management believes that the
likelihood of a materially adverse impact to Corning's financial statements
is remote.
In November 2002, American Motorists Insurance Company and Lumbermens Mutual
Casualty Company (collectively AMICO) filed a declaratory judgment action
against Corning, as well as Corning NetOptix, Inc., OFC Corporation and Optical
Filter Corporation. This action is in the U.S. 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 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. The case
has been voluntarily dismissed without prejudice against refiling by the
plaintiffs at a future date.
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 asserted that it had the right, under a "Put Option," to sell shares of
another company, Optel Ltda., to CIC for approximately $18 million plus
interest. On November 9, 2003, the arbitration panel issued a final decision
denying each of Madeco's claims and ruling in CIC's favor.
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. In January 2004, upon application by Tellium, the U.S. District
Court for the Southern District of New York granted a preliminary injunction
preventing the arbitration from proceeding against Tellium. The arbitration
hearings were scheduled to proceed February 2004, but the scheduling is now
uncertain. A range of outcomes is reasonably possible. This range is within the
limits of Corning's claim for approximately $38 million and AFN's counterclaim
of up to $50 million.
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 $56 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. Management believes that the likelihood of a materially
adverse impact to Corning's financial statements is remote.
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. This matter does not present a claim for damages, but
the Ministry may impose an additional prospective duty on important fiber
products. The Ministry's preliminary determination is anticipated by April 2004
and a final determination is possible by July 1, 2004. Corning is defending
vigorously. 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 the likelihood that an additional duty may be
imposed.
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 U.S. 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
impact to Corning's financial statements 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. Tyco has
responded with a motion to dismiss the action for lack of jurisdiction. That
motion has been fully briefed by the parties, and Tyco has requested a hearing.
Management has not estimated the range of monetary damages that may be claimed
if CCS does not prevail on its claim that the Tyco patent is invalid or not
infringed. Recognizing that the outcome of litigation is uncertain, management
believes that the risk of a material impact on Corning's financial statements is
remote.
Grand Jury Investigation of Conventional Cathode Ray Television Glass Business.
In August 2003, 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. Six employees or former
employees have 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 closed in the first half
of 2003 due to declining sales. CAV is cooperating with the government
investigation. Management is not able to estimate the likelihood that any
charges will be filed as a result of the investigation.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
- -------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
- -------------------------------------
(a) Market Information
Corning Incorporated common stock is listed on the New York Stock Exchange and
the SWX Swiss Exchange. In addition, it is traded on the Boston, Midwest,
Pacific and Philadelphia stock exchanges. Common stock options are traded on the
Chicago Board Options Exchange. The abbreviated ticker symbol for Corning
Incorporated is "GLW."
The following table sets forth the high and low sales price of Corning's common
stock as reported on the Composite Tape.
- -------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
2003
- -------------------------------------------------------------------------------
Price range
High $ 6.25 $ 8.02 $ 10.00 $ 12.01
Low $ 3.75 $ 5.42 $ 7.26 $ 9.35
- -------------------------------------------------------------------------------
2002
- -------------------------------------------------------------------------------
Price range
High $ 10.70 $ 7.78 $ 4.12 $ 4.99
Low $ 6.25 $ 3.15 $ 1.46 $ 1.10
- -------------------------------------------------------------------------------
(b) Holders
As of December 31, 2003, the approximate number of record holders of common
stock was 24,000 and approximately 700,000 beneficial shareholders.
(c) Dividends
On July 9, 2001, we announced the discontinuation of the payments of dividends
on our common stock. Dividends paid to common shareholders in 2001 totaled $112
million.
(d) Securities Authorized for Issuance under Equity Compensation Plans
The section entitled "Equity Compensation Plan Information" in our definitive
Proxy Statement for our 2004 annual meeting of shareholders to be held on April
29, 2004, is incorporated by reference in this Annual Report on Form 10-K.
Item 6. Selected Financial Data (Unaudited)
- --------------------------------------------
(In millions, except per share amounts and number of employees)
- -----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Results of Operations
Net sales $ 3,090 $ 3,164 $ 6,047 $ 6,920 $ 4,586
Research, development and engineering expenses $ 344 $ 483 $ 622 $ 531 $ 372
Equity in earnings of associated companies, net of
impairments $ 209 $ 116 $ 148 $ 149 $ 112
(Loss) income from continuing operations $ (223) $ (1,780) $ (5,532) $ 363 $ 482
Income from discontinued operations,
net of income taxes 478 34 59 34
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (223) $ (1,302) $ (5,498) $ 422 $ 516
- -----------------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per common share from: (1)
Continuing operations $ (0.18) $ (1.85) $ (5.93) $ 0.42 $ 0.63
Discontinued operations 0.46 0.04 0.07 0.04
- -----------------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per common share $ (0.18) $ (1.39) $ (5.89) $ 0.49 $ 0.67
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted (loss) earnings per common share from: (1)
Continuing operations $ (0.18) $ (1.85) $ (5.93) $ 0.41 $ 0.61
Discontinued operations 0.46 0.04 0.07 0.05
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted (loss) earnings per common share $ (0.18) $ (1.39) $ (5.89) $ 0.48 $ 0.66
- -----------------------------------------------------------------------------------------------------------------------------------
Common dividends declared $ 0.12 $ 0.24 $ 0.24
Shares used in computing per share amounts: (1)
Basic earnings per common share 1,274 1,030 933 858 765
Diluted earnings per common share 1,274 1,030 933 879 795
- -----------------------------------------------------------------------------------------------------------------------------------
Financial Position
Working capital $ 1,141 $ 2,145 $ 2,113 $ 2,685 $ 430
Total assets $ 10,752 $ 11,406 $ 12,793 $ 17,526 $ 6,526
Long-term debt $ 2,668 $ 3,963 $ 4,463 $ 3,966 $ 1,490
Shareholders' equity $ 5,464 $ 4,691 $ 5,414 $ 10,633 $ 2,463
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Data for SFAS No. 142
Adjusted net (loss) income excluding
amortization of goodwill $ (223) $ (1,302) $ (5,153) $ 625 $ 534
Basic (loss) earnings per common share from: (1)
Continuing operations $ (0.18) $ (1.85) $ (5.56) $ 0.66 $ 0.65
Discontinued operations 0.46 0.04 0.07 0.05
- -----------------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per common share $ (0.18) $ (1.39) $ (5.52) $ 0.73 $ 0.70
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted (loss) earnings per common share from: (1)
Continuing operations $ (0.18) $ (1.85) $ (5.56) $ 0.64 $ 0.64
Discontinued operations 0.46 0.04 0.07 0.04
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted (loss) earnings per common share $ (0.18) $ (1.39) $ (5.52) $ 0.71 $ 0.68
- -----------------------------------------------------------------------------------------------------------------------------------
Selected Data
Capital expenditures $ 366 $ 357 $ 1,741 $ 1,485 $ 748
Depreciation and amortization $ 517 $ 661 $ 1,060 $ 747 $ 391
Number of employees (2) 20,600 23,200 30,300 40,400 20,400
- -----------------------------------------------------------------------------------------------------------------------------------
Reference should be made to the Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
(1) Adjusted to reflect the three-for-one stock split of Corning common stock,
in the form of a 200% stock dividend, paid on October 3, 2000.
(2) Amounts do not include employees of discontinued operations.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Overview
Corning had three significant priorities in 2003: to protect our financial
health, to restore profitability, and to invest in our future. We have made
significant progress towards all three in 2003.
Financial Health
We have improved our balance sheet in 2003 by substantially decreasing our debt
from $4.2 billion at the beginning of the year to $2.8 billion. We reduced debt
by using cash on hand and by completing equity offerings of 45 million shares of
our common stock for proceeds of $363 million in the third quarter and 50
million shares of our common stock for proceeds of $267 million in the second
quarter. These actions improved our debt to capital ratio from 47% at the end of
2002 to 34% at the end of 2003.
We have $1.3 billion in cash and cash equivalents and short-term investments,
access to a $2 billion revolving credit facility and access to the capital
markets. Our major source of funding for 2004 and beyond will be our existing
balance of cash and short-term investments. From time to time, we may also issue
debt or equity securities to raise additional cash to fund a portion of our
capital expenditures related to our growth businesses. We believe we have
sufficient liquidity for the next several years to fund operations,
restructuring liabilities, the asbestos settlement, research and development
expenditures, capital expenditures and scheduled debt repayments.
Profitability
On an overall basis, we believe that our 2003 results reflect positive
developments including significant growth in our display technologies business,
stabilization in our Telecommunications segment, and exiting our photonics and
conventional video components product lines. We incurred a net loss of $223
million, or $0.18 per share in 2003 compared to a net loss of $1.3 billion, or
$1.39 per share, in 2002, and a net loss of $5.5 billion, or $5.89 per share, in
2001. The improvements were driven primarily by a reduction in restructuring,
impairment and other charges and credits to $111 million ($26 million after-tax
and minority interest) in 2003 compared to $2.1 billion ($1.5 billion after-tax)
in 2002 and $5.7 billion ($5.3 billion after-tax) in 2001.
Our $223 million net loss in 2003 included the following:
.. a charge of $413 million ($263 million after-tax) related to the pending
asbestos settlement of current and future tort claims in connection with a
proposed reorganization plan for our PCC equity affiliate,
.. a net gain on repurchases of debt of $19 million ($12 million after-tax), and
.. an after-tax charge in equity earnings of $66 million related to an asset
impairment charge recorded by Samsung Corning, a 50% owned equity venture
which manufactures glass funnels and panels for conventional television.
Sales in the Telecommunications segment have stabilized, remaining relatively
flat from the third quarter of 2002 to the fourth quarter 2003. We have been
able to reduce the loss in the Telecommunications segment in 2003 by closing
plants and reducing costs. Demand for many of our products, particularly in
photonics, remained soft. In July 2003, we completed the sale of certain
photonics assets to Avanex, and in December 2003, our final shipment of pump
lasers for sale to Avanex was completed.
Sales and earnings in our Technologies segment improved primarily due to the
results of our display technologies business. Sales of this business grew from
$93 million in the first quarter of 2002 to $199 million in the fourth quarter
of 2003. Offsetting the improvement in the display technologies business, the
market for conventional televisions declined. As a result, we agreed with our
partner to shutdown CAV, a 51% consolidated venture that manufactured
conventional video components products. In addition, demand for high purity
fused silica and calcium fluoride products was lower than we had anticipated.
Therefore, we decided to consolidate the operations of our semiconductor
materials products in the fourth quarter of 2003 to make our infrastructure more
flexible for the cyclical nature of this market.
Investing in our future
We remain committed to investing in innovation, and we are investing in a wide
variety of technologies including liquid crystal displays, diesel filters and
substrates, and the optical fiber, cable, and hardware and equipment that will
enable fiber-to-the-premises. Although our spending in research, development and
engineering has declined, as a percentage of sales it remains above historic
levels.
We have also continued to invest in capital spending in the Technologies
segment. Capital spending in 2003 and 2002 approximated $370 million and $360
million, respectively, the majority of which was to expand capacity for liquid
crystal display glass and for new capacity for diesel substrates and filters. As
a result of market expansion, in 2004 we expect our consolidated capital
spending to approximate $600 million to $650 million, of which $425 million to
$475 million will be to expand capacity for liquid crystal display glass
production.
RESULTS OF CONTINUING OPERATIONS
Selected highlights from our continuing operations follow (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 3,090 $ 3,164 $ 6,047
Gross margin $ 849 $ 602 $ 1,820
(gross margin %) 27% 19% 30%
Selling, general and administrative expenses $ 599 $ 716 $ 1,090
(as a % of revenues) 19% 23% 18%
Research, development and engineering expenses $ 344 $ 483 $ 622
(as a % of revenues) 11% 15% 10%
Restructuring, impairment and other charges and credits $ 111 $ 2,080 $ 5,717
(as a % of revenues) 4% 66% 95%
Asbestos settlement $ 413
(as a % of revenues) 13%
Operating loss $ (655) $ (2,720) $ (6,048)
(as a % of revenues) (21)% (86)% (100)%
Gain on repurchases and retirement of debt, net $ 19 $ 176
(as a % of revenues) 1% 6%
Benefit for income taxes $ (254) $ (726) $ (468)
(as a % of revenues) (8)% (23)% (8)%
Equity in earnings of associated companies, net of impairments $ 209 $ 116 $ 148
(as a % of revenues) 7% 4% 2%
Loss from continuing operations $ (223) $ (1,780) $ (5,532)
(as a % of revenues) (7)% (56)% (91)%
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales
Consolidated net sales for 2003 were $3.1 billion, a decrease of 2%, or $74
million, compared to 2002. Approximately $158 million of the sales decline
occurred in the photonic technologies and the conventional television glass
products that we exited during 2003. Based on the exchange rates at the
beginning of 2003, our sales were favorably impacted by the weakening U.S.
dollar against the Yen and the Euro by approximately $85 million. Consolidated
net sales for 2002 were $3.2 billion, a decrease of 48%, or $2.9 billion, from
2001 sales of $6.0 billion. The sales decline was most pronounced in the
Telecommunications segment where significantly lower demand and price declines
for our optical fiber and cable and photonic technologies products caused sales
to decrease in this segment by 63%, or $2.8 billion year to year. Sales in the
Technologies segment for 2002 decreased 4%, or $55 million, compared to 2001.
Gross margin
As a percentage of net sales, gross margin improved eight points in 2003
compared to 2002. The improvement was driven by lower depreciation and other
fixed costs resulting from the 2002 restructuring actions, primarily in the
Telecommunications segment. Gross margin improved in both segments; however, the
gains achieved in the Technologies segment were partially offset by a $13
million write-down of inventory related to the exit of CAV. As a percentage of
net sales, gross margin decreased from 30% to 19% in 2002 compared to 2001.
Gross margin was impacted by lower sales volumes in the Telecommunications
segment which were insufficient to cover fixed manufacturing costs. Downward
pricing pressure also negatively impacted gross margins, primarily in the
optical fiber and cable products. These negative trends were offset by
significant fixed cost reductions as manufacturing capacity was shutdown. Gross
margin in the Technologies segment decreased approximately two points from 2001.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses decreased 16%, or $117
million, in 2003 compared to 2002 and as a percentage of sales improved four
points in the same period. The improvement reflects cost savings primarily from
the 2002 and 2003 restructuring actions. SG&A expenses decreased 34% to $716
million in 2002 while SG&A increased five points as a percentage of net sales to
23% over 2001. The decrease in SG&A for 2002 reflects cost savings from the
restructuring actions which began in 2001, while the increase as a percentage of
net sales was caused by the more significant decline in revenues.
Research, development and engineering expenses
Research, development and engineering ("RD&E") expenses decreased 29%, or $139
million in 2003 compared to 2002 and as a percentage of sales improved four
points in the same period. The improvement reflects the cost savings which
resulted from the 2002 restructuring actions. RD&E expenses declined 22%, or
$139 million in 2002 compared to 2001. As a percentage of net sales, RD&E
increased five points from 2001. The decrease in expense for 2002 reflects the
impact of the restructuring actions, while the increase as a percentage of net
sales was caused by the more significant decline in revenues.
Restructuring, impairment and other charges and credits
Corning recorded significant net charges in 2003, 2002 and 2001. These charges
are summarized in the following table (in millions):
- -------------------------------------------------------------------------------
For the years ended December 31,
-------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
Impairment of goodwill $ 400 $ 4,648
Restructuring actions $ 49 1,271 953
Impairment of long-lived assets other than
goodwill:
Photonic technologies 269 116
Conventional video components 62 140
----------------------------
Total restructuring, impairment and other charges $ 111 $ 2,080 $ 5,717
- -------------------------------------------------------------------------------
Impairment of Goodwill
2003 Annual Assessment
Due to market conditions in the telecommunications and semiconductor
industries, we performed goodwill impairment tests for our
Telecommunications and specialty materials reporting units in the fourth
quarter of 2003. The results of our impairment tests indicated that the
fair value of each reporting unit exceeded its book value. Although an
impairment charge was not required in 2003, it is possible that future
impairment charges may be required if our expected future cash flow
estimates are not realized. Management must exercise judgment in assessing
the recoverability of goodwill. See Critical Accounting Estimates for
related discussion.
We believe the telecommunication industry is currently depressed but will
ultimately recover. We do not expect growth in this segment in the
short-term, but believe that growth will return to this segment by 2005.
Our view that the industry will recover is based on the fact that bandwidth
demand continues to grow, and the belief that a combination of public
policy changes, consolidation and recovery of industry players, and the
advancement of profitable broadband business models will drive recovery in
the future.
We believe the specialty materials reporting unit decrease in sales in 2003
was primarily due to the cyclical nature of the semiconductor market. We
expect increased volume growth beginning in 2004.
2002 Charge
In the fourth quarter of 2002, we conducted our annual impairment tests and
concluded that an impairment charge of $400 million ($294 million
after-tax) was necessary to reduce the carrying value of goodwill in the
Telecommunications reporting unit to its estimated fair value of $1.6
billion. The decrease in fair value at the end of 2002 from that measured
in the initial benchmark assessment on January 1, 2002 primarily reflected
the following:
. a delay in the timing of the expected recovery from late 2002, or early
2003 to 2005,
. a reduction in the short-term cash flow expectations of the fiber and
cable business and a lower base from which the expected recovery will
occur, and
. a reduction in the short and long-term cash flow expectations of the
photonic technologies product line.
We retained valuation specialists to assist in the valuation of our
tangible and identifiable intangible assets for the purpose of determining
the implied fair value of goodwill at December 31, 2002.
2001 Charge
During the first half of 2001, we experienced a significant decrease in the
rate of growth of our Telecommunications segment, primarily in the
photonics technologies product line due to a dramatic decline in
infrastructure spending in the telecommunications industry, and determined
that there were events of impairment within photonics. We determined that
our goodwill related to photonics was not recoverable under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of," which was the governing accounting principles
generally accepted in the U.S. ("GAAP") guidance at that time. As a result,
we recorded a charge of $4.6 billion to impair a significant portion of
goodwill, of which $3.0 billion related to the Pirelli transaction and $1.6
billion related to goodwill resulting from the acquisition of NetOptix
Corporation.
Restructuring Actions
2003 Restructuring Actions
Corning recorded net charges of $49 million ($14 million credit after tax
and minority interest) in 2003. Major actions approved and initiated in
2003 included the following:
. the shutdown of CAV, which was a manufacturer of glass panel and funnels
for use in conventional tube televisions within the Technologies
segment,
. the sale and exit of our photonics products within the
Telecommunications segment, and
. the shutdown of two of our specialty materials manufacturing facilities,
which are within the Technologies segment.
Restructuring Charges
---------------------
The 2003 restructuring charges of $41 million included $90 million of
employee separation costs (including special termination and curtailment
losses related to pension and postretirement health care plans) and $37
million in other exit costs (principally lease termination and contract
cancellation payments), offset by an $86 million credit related to previous
restructuring actions. These credits were primarily the result of revised
cost estimates of existing restructuring plans and a decision to not exit
two small cabling sites. The charge entailed the elimination of
approximately 1,975 hourly and salaried positions including involuntary
separation, early retirement and social programs. In addition, we recorded
a $20 million foreign deferred tax benefit adjustment related to
restructuring charges recorded in 2002. This credit is reflected in the
consolidated statement of operations under, "Benefit for income taxes."
Impairment of Plant and Equipment to be Shutdown or Disposed
------------------------------------------------------------
Corning recorded a net credit of $21 million in 2003. This included $40
million of charges to impair plant and equipment related to facilities to
be shutdown or disposed, which comprised $11 million for the North
Brookfield semiconductor materials plant closure, $14 million related to a
cabling plant, $10 million related to the final exit of photonics, and $5
million of other various costs. The impairment charges were determined
based on the amount by which the carrying value exceeded the fair market
value of the asset. The charge was more than offset by $61 million in
credits related to previous restructuring actions. These credits were
primarily the result of our decision not to exit two of the previous
cabling sites marked for shutdown in 2002 as well as proceeds on asset
disposals exceeding assumed salvage values.
Impairment of Cost Investments
------------------------------
In the first quarter, we recorded a $5 million charge for other than
temporary declines in certain cost investments in the Telecommunications
segment. In the third quarter, we sold these investments for $4 million in
cash, which was $1 million more than previously expected. We reported this
gain as a credit to restructuring actions.
Loss on Sale of Photonics
-------------------------
We recorded a loss of $13 million in the third quarter when we completed
the sale of certain photonic technologies assets to Avanex. In exchange for
our photonics assets and $22 million in cash, we received 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. Approximately 400 employees of the photonic technologies
products became employees of Avanex in the third quarter. The loss on sale
included a $21 million reduction of our goodwill. See Notes 5
(Restructuring Actions) and 10 (Investments) of the Consolidated Financial
Statements for further detail.
In addition to these restructuring action costs, we also incurred the
following charges in our consolidated statement of operations related to
the exit of photonics:
. an increase to the deferred tax valuation allowance by $21 million as
we do not expect to realize certain deferred tax assets in Italy, which
is reflected in the consolidated statement of operations under,
"Benefit for income taxes," and
. a $7 million impairment charge for equity investments that were
abandoned as part of the exit from photonics, which is reflected in the
consolidated statement of operations under, "Equity in earnings of
associated companies, net of impairments."
Accelerated Depreciation
------------------------
We recorded $12 million of accelerated depreciation as a result of our
decision to shutdown our semiconductor materials manufacturing facility in
Charleston, South Carolina by March 31, 2004. We will record an additional
$36 million in the first quarter of 2004 while the plant continues
operating.
The following table summarizes the charges, credits and balances of the restructuring reserves as of and for the year ended
December 31, 2003 (in millions):
------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003
--------------------------------- Remaining
Reversals Net Non-cash Cash reserve at
January 1, to existing charges/ uses payments Dec. 31,
2003 Charges plans (reversals) in 2003 in 2003 2003
------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 273 $ 90 $ (63) $ 27 $ (27) $ (195) $ 78
Exit costs 132 37 (23) 14 (38) 108
------------------------------------------------------------------------------
Total restructuring charges $ 405 $ 127 $ (86) $ 41 $ (27) $ (233) $ 186
------------------------------------------------------------------------------
Impairment:
Assets to be disposed of by sale
or abandonment $ 40 $ (61) $ (21)
Cost investments 5 (1) 4
--------------------------------
Total impairment charges $ 45 $ (62) $ (17)
--------------------------------
Other:
Loss on Avanex transaction $ 13 $ 13
Accelerated depreciation 12 12
--------------------------------
Total other charges $ 25 $ 25
--------------------------------
Total restructuring, impairment and
other charges and credits $ 197 $ (148) $ 49
Tax (benefit) expense and minority
interest (83) 20 (63)
--------------------------------
Restructuring, impairment and other
charges and credits, net $ 114 $ (128) $ (14)
------------------------------------------------------------------------------------------------------------------------------
Cash payments for employee-related costs will be substantially completed by
the end of 2004, while payments for exit activities will be substantially
completed by the end of 2005. We expect approximately one-half of the 2003
restructuring charges to be paid in cash.
The following table summarizes the net charge (reversals) for 2003 restructuring actions by operating segment (in millions):
------------------------------------------------------------------------------------------------------------------------------
Corporate
Functions
Telecom- Including
munications Technologies Research Total
------------------------------------------------------------------------------------------------------------------------------
Net charges (reversals) for restructuring actions $ (36) $ 72 $ 13 $ 49
------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the headcount reduction related to the 2003 plans:
------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 975 750 250 1,975
------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2003, approximately 1,600 of the 1,975 employees had
been separated under the 2003 plans. We expect the remaining to be
separated by December 31, 2004, with the majority to be separated by the
end of the first quarter of 2004.
2002 Restructuring Actions
The continued decline in demand in the Telecommunications segment during
2002 required additional restructuring beyond that taken in 2001 to bring
manufacturing capacity in line with revenue projections. We recorded total
charges of $1.3 billion ($929 million after-tax and minority interest) over
the second, third and fourth quarters. Actions approved and initiated in
2002 included the following:
. permanent closing of our optical fiber manufacturing facilities in
Noble Park, Victoria, Australia, and Neustadt bei Coburg, Germany.
We also mothballed our optical fiber manufacturing facility in Concord,
North Carolina and transferred certain capabilities to our Wilmington,
North Carolina facility,
. reductions in capacity and employment in our cabling and hardware and
equipment locations worldwide to reduce costs,
. permanent closure of our photonic technologies thin film filter
manufacturing facility in Marlborough, Massachusetts,
. permanent abandonment of certain construction projects that had
been stopped in 2001 in the fiber and cable business within
the Telecommunications segment,
. closure of minor manufacturing facilities, primarily in the
Telecommunications segment,
. closure and consolidation of research facilities,
. elimination of positions worldwide through voluntary and involuntary
programs, and
. divestiture of a portion of the controls and connectors product line
in the Telecommunications segment.
In addition, we impaired cost based investments in a number of private
telecommunications companies based upon a decision in the fourth quarter of
2002 to divest the portfolio.
The following table summarizes the charges, credits and balances of the restructuring reserves as of December 31, 2002
(in millions):
------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
--------------------------------- Remaining
Reversals Net Non-cash Cash reserve at
January 1, to existing charges/ uses payments Dec. 31,
2002 Charges plans (reversals) in 2002 in 2002 2002
------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 198 $ 376 $ (5) $ 371 $ (40) $ (256) $ 273
Exit costs 78 85 (9) 76 (22) 132
------------------------------------------------------------------------------
Total restructuring charges $ 276 $ 461 $ (14) $ 447 $ (40) $ (278) $ 405
------------------------------------------------------------------------------
Impairment:
Assets to be disposed of by sale
or abandonment $ 712 $ (11) $ 701
Cost investments 107 107
---------------------------------
Total impairment charges $ 819 $ (11) $ 808
---------------------------------
Other:
Loss on divestiture $ 16 $ 16
Total restructuring, impairment and
other charges and credits $ 1,296 $ (25) $ 1,271
Tax (benefit) expense and minority
interest (352) 10 (342)
----------------------------------
Restructuring, impairment and other
charges and credits, net $ 944 $ (15) $ 929
------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the net charges (reversals) for 2002 restructuring actions by operating segment (in millions):
------------------------------------------------------------------------------------------------------------------------------
Corporate
Functions
Telecom- Including
munications Technologies Research Total
------------------------------------------------------------------------------------------------------------------------------
Net charges for restructuring actions $ 1,053 $ 10 $ 208 $ 1,271
------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the headcount reduction related to the 2002 plans:
------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 1,650 2,950 2,500 7,100
------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2003, all of the 7,100 employees from the 2002 plan had
been separated.
2001 Restructuring Actions
In July and October of 2001, we announced a series of restructuring actions
in response to significant deteriorating business conditions which began
initially in our Telecommunications segment, but eventually spread to our
other businesses as the year progressed. The following actions were
approved and undertaken in 2001:
. closure of seven major manufacturing facilities and the consolidation of
several smaller facilities in the Telecommunications and Technologies
segments,
. discontinuation of our initiative in Corning Microarray Technology
products, part of our life sciences products, and
. elimination of approximately 12,000 positions affecting all operating
segments, but especially impacting the photonic technologies, hardware
and equipment and the optical fiber and cable products. This action
included a selective voluntary early retirement program for certain
employees along with involuntary separations.
These actions resulted in a pre-tax charge totaling $953 million ($585
million after-tax) for the year ended December 31, 2001. Approximately one
third of the total charge was expected to be paid in cash.
The following table summarizes the charges, credits and balances of the restructuring reserves as of December 31, 2001
(in millions):
------------------------------------------------------------------------------------------------------------------------------
Non-cash Cash Remaining
Total uses payments reserve at
charges in 2001 in 2001 Dec. 31, 2001
------------------------------------------------------------------------------------------------------------------------------
Restructuring charges:
Employee related costs $ 324 $ (66) $ (60) $ 198
Exit costs 95 (17) 78
-------------------------------------------------------------
Total restructuring charges $ 419 $ (66) $ (77) $ 276
-------------------------------------------------------------
Impairment:
Assets held for use $ 46
Assets to be disposed of by sale or abandonment 496
---------
Total impairment charges $ 542
---------
Total restructuring and impairment charges $ 961
Discontinued operations (8)
---------
Restructuring and impairment charges
from continuing operations 953
Tax benefit and minority interest 368
---------
Restructuring and impairment charges, net $ 585
------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the charge for 2001 restructuring actions by operating segment (in millions):
------------------------------------------------------------------------------------------------------------------------------
Corporate
Functions
Telecom- Including
munications Technologies Research Total
------------------------------------------------------------------------------------------------------------------------------
Charges for restructuring actions $ 640 $ 122 $ 191 $ 953
------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the headcount reduction related to the 2001 plans:
------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 6,000 3,100 2,900 12,000
------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2002, all of the 12,000 employees had been separated
under the plans.
Impairment Of Long-Lived Assets Other Than Goodwill
Given our restructuring actions and the market conditions facing our
businesses, at various times throughout 2001 to 2003, we performed
evaluations of the recoverability of our long-lived assets. In each case
that an impairment evaluation was required, we developed operating cash
flow projections for each strategic alternative and made assessments as to
the probability of each outcome. If our projections indicated that our long
lived assets were not recoverable through future cash flows, we were then
required to estimate the fair value of the long-lived assets, which were
limited to property, plant and equipment, using the expected cash flow
approach as a measure of fair value.
2003 Impairment Charge
In April 2003, we announced that we had agreed with our partner to shutdown
CAV and wrote down its assets to their estimated salvage values. This
resulted in an impairment charge of $62 million ($19 million after-tax and
minority interest).
Subsequent to our decision to exit, CAV signed a definitive agreement to
sell tangible assets to Henan Anyang CPT Glass Bulb Group, Electronic Glass
Co., Ltd. (Henan Anyang), located in China, for amounts exceeding estimated
salvage values. Upon the receipt of $10 million in cash, we recognized a $5
million credit in restructuring. We expect the sale to be completed in the
first half of 2004 at which time we anticipate recognizing an additional
gain of approximately $40 million ($13 million after-tax and minority
interest).
2002 Impairment Charges
Photonic technologies
---------------------
In 2002, the telecommunications market underwent a dramatic decline in
demand for its products as major buyers of network equipment in this
industry reduced their capital spending. This negative trend was expected
to continue into the foreseeable future. As a result of our impairment
evaluation, the photonics assets were written down to estimated salvage
value, as this amount was our best estimate of fair value. This resulted in
a $269 million ($195 million after-tax) write down of the long-lived assets
including $90 million related to patents.
Conventional video components
-----------------------------
In 2002, the market was impacted by a decline in demand for conventional
television glass and a dramatic increase in the importation of television
glass, tubes and sets from Asia. These trends were expected to continue
into the foreseeable future. As a result of our impairment evaluation,
CAV's assets were written down to their estimated fair values. This
resulted in a $140 million ($44 million after-tax and minority interest)
write-down of the assets.
2001 Impairment Charges
Photonic technologies
---------------------
In 2001, the telecommunications market's dramatic decline began. We
performed an asset impairment evaluation of our photonics product line and
incurred a charge of $116 million to write down intangible assets to their
estimated fair values.
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% 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 is no longer subject to appeal. We expect the approval process to
be complete in 2004.
When the plan becomes effective, our settlement will require the contribution of
our equity interest in PCC, our one-half equity interest in PCE, 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 $136 million over six years beginning
in June 2005 which we will accelerate, as needed, to maximize the related tax
benefits. 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 an initial charge of $298 million in the first quarter of 2003 to
reflect the terms of the settlement and additional charges of $115 million to
reflect the mark to market of our common stock through December 31, 2003. Total
charges of $413 million ($263 million after-tax) were incurred for the twelve
months ended December 31, 2003. This charge was previously reported as a
nonoperating charge in our 2003 Quarterly Reports on Form 10-Q. Effective with
this Annual Report on Form 10-K, we have reclassified this charge to operating
expenses in the consolidated statements of operations. The carrying value of our
investment in PCE and the fair value of 25 million shares of our common stock,
totaling $282 million, have been reflected in current liabilities. The remaining
$136 million, representing the net present value of the cash payments,
discounted at 5.5%, is recorded in noncurrent liabilities. See Legal Proceedings
for a history of this matter.
Operating loss
We incurred an operating loss of $655 million in 2003 which was significantly
lower than the 2002 loss of $2.7 billion and the 2001 operating loss of $6.0
billion. Our loss in 2003 included the asbestos settlement charges. Losses in
all three years included restructuring, impairment and other charges and credits
as described above. Our results for 2001 were also impacted by an operating
charge of $333 million to write-down excess and obsolete inventory, a $90
million charge related to the release of restrictions on shares of Corning
common stock and a $28 million charge to write-down an investment in
intellectual property.
Gain on repurchases and retirement of debt, net
During the years ended December 31, 2003 and 2002, we repurchased and retired a
significant portion of our zero coupon convertible debentures due November 8,
2015. In 2003, we repurchased and retired 1,531,000 debentures with an accreted
value of $1.2 billion for cash of approximately $1.1 billion through open market
purchases and a public tender offer and recorded a net gain of $55 million. We
also issued 6.5 million shares of common stock from treasury in exchange for
55,000 debentures with an accreted value of $43 million, and recognized a charge
of $35 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.
The following table summarizes the activity related to our zero coupon
convertible debentures (dollars in millions):
- -------------------------------------------------------------------------------
For the years ended
December 31,
----------------------------
2003 2002
- -------------------------------------------------------------------------------
Bonds repurchased or exchanged for equity 1,586,000 638,987
Book value $ 1,239 $ 493
Fair value $ 1,154 $ 308
Pre-tax gain (1) $ 20 $ 176
After-tax gain (1) $ 13 $ 108
- -------------------------------------------------------------------------------
(1) Net of the write-off of unamortized issuance and deal costs.
In addition to our zero coupon debentures, we repurchased and retired 60,000
euro notes due 2005 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 on the transaction.
Benefit for income taxes
Our provision (benefit) for income taxes and the related effective benefit rates
for continuing operations were as follows (in millions):
- -------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
Provision (benefit) for income taxes $ (254) $ (726) $ (468)
Effective benefit rate (33.4)% (26.7)% (7.6)%
- -------------------------------------------------------------------------------
Our effective tax rate was impacted by our restructuring, impairment and other
charges and credits and our gains on repurchases and retirements of debt.
Excluding these items, our rate was (33)% in 2003, (30)% in 2002 and (13)% in
2001.
SFAS No.109, "Accounting for Income Taxes ("SFAS No. 109")," requires that a
valuation allowance be established when it is more likely than not that all or a
portion of a deferred tax asset will not be realized. A review of all available
positive and negative evidence needs to be considered, including a company's
current, past and future predicted performance, the market environment of the
industries in which the company operates, the utilization of past tax credits,
length of carryback and carryforward periods, and existing contracts or sales
backlog that will result in future profits.
At December 31, 2003, we have recorded gross deferred tax assets of
approximately $2.1 billion with a valuation allowance of $469 million, and
offset by deferred tax liabilities of $201 million. The valuation allowance is
primarily attributable to the uncertainty regarding the realization of specific
foreign and state 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, state and 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. As explained further below, we have performed the required
assessment of positive and negative evidence regarding the realization of the
net deferred tax assets in accordance with SFAS No. 109. This assessment
included the evaluation of scheduled reversals of deferred tax liabilities,
estimates of projected future taxable income and tax-planning strategies.
Although realization is not assured, based on our assessment, we have concluded
that it is more likely than not that such assets, net of the existing valuation
allowance, will be realized.
Net domestic deferred tax assets are approximately $1.3 billion at December 31,
2003. Approximately $460 million of these net deferred tax assets relate to loss
and tax credit carryforwards that expire through 2023. The remaining net
deferred tax assets comprise the following deductible temporary differences:
1. other postretirement benefits of $244 million, which will reverse over the
next 40 to 50 years;
2. restructuring and other liabilities of $155 million, which will reverse over
the next 10 years;
3. research and development expenditures of $252 million, which will reverse
over the next 10 years; and
4. other miscellaneous items of $178 million, which will reverse, on average,
over the next 10 years.
Approximately 10% of our net domestic deferred tax assets will be realized
through net operating loss carryback claims to be filed over the next three to
five years, which will generate cash refunds during such period. We expect the
remaining net domestic deferred tax assets to be realized from future earnings.
However, in the event future earnings are insufficient, approximately 40% of our
net domestic deferred tax assets could be realized through a tax-planning
strategy involving the sale of a non-strategic appreciated asset. Realization of
the remaining 50% of our net domestic deferred tax assets is solely dependent on
our ability to generate sufficient future taxable income during carryforward
periods of approximately 20 years.
The minimum amount of domestic future income that would have to be generated to
realize this portion of our deferred tax assets is $1.7 billion over at least 20
years. Currently, we are generating domestic losses. However, our forecast of
domestic income indicates it is more likely than not that the future results of
operations in the U.S. will generate sufficient taxable income to realize this
portion of our deferred tax assets. Specifically, we expect to incur
significantly lower domestic losses in 2004 and to return to profitability in
the U.S. in 2005. Key assumptions embedded in these near-term forecasts follow:
1. Our 2004 U.S. losses will decrease as a result of the 2003 exit of the
photonics technologies business and CAV.
2. We expect to see improved earnings trends in our Telecommunications segment
which is primarily in the U.S. This includes a lower loss in 2004 and a
return to profitability in 2005. This trend is partially being driven by the
realization of lower operating costs as a result of prior years'
restructuring actions. In addition, we are forecasting revenue to be flat or
down slightly in 2004 but significantly higher in 2005 due to an expected
recovery in the telecommunications industry in 2005.
3. Our specialty materials semiconductor business will generate higher
earnings in 2004 as a result of a recovery in the semiconductor equipment
industry and lower operating costs as a result of the fourth quarter 2003
restructuring actions, which will be completed by the end of the first
quarter of 2004.
4. Our display business will continue its rapid growth. Although this business
is largely based in Asia, domestic earnings of this business have increased
in 2003 and are expected to continue to increase over the next several
years, in part due to an increase in U.S. royalty income.
5. We will continue to sustain modest growth in our remaining domestic
businesses and, except for the restructuring actions announced prior to
December 31, 2003, we do not expect to incur any significant additional
restructuring or impairment charges.
Our forecast of domestic income is based on assumptions about and current trends
in our operating segments, and there can be no assurance that such results will
be achieved. We review such forecasts in comparison with actual results and
expected trends quarterly for purpose of our recoverability assessment. As a
result of this review, if we determine that we will not return to profitability
in the U.S. in 2005 or if sufficient future taxable income may not be generated
to fully realize the net deferred tax assets, we will increase the valuation
allowance by a charge to income tax expense in an amount equal to the portion of
the deferred tax assets that are realizable solely through projected future
taxable income. If we record such a valuation allowance, we will also cease to
recognize additional tax benefits on any losses in the U.S.
Equity in earnings of associated companies, net of impairments
Equity earnings nearly doubled to $209 million in 2003. The increase was due to
the following:
.. The resumption of the recognition of equity earnings from Dow Corning in
2003 added $82 million to equity earnings in 2003. In 1995, we fully
impaired our investment in Dow Corning upon its entry into bankruptcy
proceedings and did not recognize equity earnings from the second quarter
of 1995 through the end of 2002. We began recognizing equity earnings in
the first quarter of 2003 when we concluded that Dow Corning's emergence
from bankruptcy protection was probable based on the Bankruptcy Court's
findings on December 11, 2002. See Legal Proceedings for a history of this
matter.
.. Our 50% owned Samsung Corning Precision, a South Korean manufacturer of
liquid crystal display glass, increased its net income by 82% compared to
2002, resulting in equity earnings $64 million higher than 2002. Earnings
in 2003 were $144 million.
.. These positive results were negatively impacted by Samsung Corning, which
recorded a significant asset impairment charge in the fourth quarter of
2003. Our portion of that charge was $66 million (after-tax), which
resulted in a net equity loss of $39 million.
Equity earnings in 2002 were $116 million, a decline of 22% from 2001, primarily
due to the impairment of an equity investment in the second quarter of 2002 for
$14 million and a $20 million reduction in equity earnings in the fourth
quarter, caused by restructuring and impairment charges recorded by Samsung
Corning Micro Optics, a 50% owned manufacturer of photonics components.
Excluding these items, equity earnings approximated those in 2001.
Loss from continuing operations
As a result of the above, the loss from continuing operations and per share data were as follows
(in millions, except per share amounts):
- -----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations $ (223) $ (1,780) $ (5,532)
Basic and diluted loss per common share from continuing operations $ (0.18) $ (1.85) $ (5.93)
Shares used in computing basic and diluted per share amounts 1,274 1,030 933
- -----------------------------------------------------------------------------------------------------------------------------------
RESULTS OF DISCONTINUED OPERATIONS
On December 13, 2002, we completed the sale of our precision lens business to 3M
for cash proceeds up to $850 million, of which $50 million was deposited in an
escrow account. During 2002, we received approximately $800 million in cash and
recorded a gain on the sale of $415 million, net of tax, in income from
discontinued operations in the consolidated statements of operations. 3M has
notified Corning that 3M believes it has certain claims arising out of the
representations and warranties made by Corning in connection with the sale of
the precision lens business to 3M. The parties are attempting to resolve such
claims. In 2003, $1 million of the escrow balance was used to pay state income
taxes. At December 31, 2003, approximately $49 million remains in the escrow
account, and no other gain on the sale of the precision lens business will be
recognized until such claims are resolved.
The precision lens business operating results and cash flows have been removed
from our results of continuing operations for all periods presented, and have
been excluded from the operating segments data. There were no results from
discontinued operations in 2003.
Summarized selected financial information for the discontinued operations
related to the precision lens business follows (in millions):
- -------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------
2002 2001
- -------------------------------------------------------------------------------
Net sales $ 268 $ 225
============================
Income before taxes $ 100 $ 50
Gain on sale before taxes 652
Provision for income taxes (274) (16)
----------------------------
Net income $ 478 $ 34
- -------------------------------------------------------------------------------
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 the respective segment's net income.
Segment amounts exclude revenues, expenses and equity earnings not specifically
identifiable to segments.
We prepared the financial results for our 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 GAAP. These expenses include
interest, taxes and corporate functions. Segment net income may not be
consistent with measures used by other companies. The accounting policies of our
operating segments are the same as those applied in the consolidated financial
statements.
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Segments Telecom- Non-segment/ Consolidated
(In millions) munications Technologies Other items Total
- -----------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2003
Net sales $ 1,426 $ 1,641 $ 23 $ 3,090
Research, development and engineering expenses (1) $ 120 $ 227 $ (3) $ 344
Restructuring, impairment and other charges and (credits) (2) $ (36) $ 134 $ 13 $ 111
Interest expense (3) $ 75 $ 79 $ 154
Benefit for income taxes $ (78) $ (6) $ (170) $ (254)
Loss before minority interests and equity (losses) earnings (4) (5) $ (158) $ (98) $ (249) $ (505)
Minority interests (6) 73 73
Equity in (losses) earnings of associated companies, net of impairments (11) 137 83 209
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (169) $ 112 $ (166) $ (223)
- -----------------------------------------------------------------------------------------------------------------------------------
Segment loss before minority interests and equity
(losses) earnings as a percentage of segment sales (11.1)% (6.0)% (16.3)%
Segment net (loss) income as a percentage of segment sales (11.8)% 6.8% (7.2)%
- -----------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2002
Net sales $ 1,631 $ 1,513 $ 20 $ 3,164
Research, development and engineering expenses (1) $ 308 $ 177 $ (2) $ 483
Restructuring, impairment and other charges and credits (2) $ 1,722 $ 150 $ 208 $ 2,080
Interest expense (3) $ 99 $ 71 $ 9 $ 179
(Benefit) provision for income taxes $ (722) $ (28) $ 24 $ (726)
Loss before minority interests and equity (losses) earnings (4) (5) $ (1,838) $ (145) $ (11) $ (1,994)
Minority interests (6) 1 96 1 98
Equity in (losses) earnings of associated companies, net of impairments (60) 168 8 116
Income from discontinued operations 478 478
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (1,897) $ 119 $ 476 $ (1,302)
- -----------------------------------------------------------------------------------------------------------------------------------
Segment loss before minority interests and equity
(losses) earnings as a percentage of segment sales (112.7)% (9.6)% (63.0)%
Segment net (loss) income as a percentage of segment sales (116.3)% 7.9% (41.2)%
- -----------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2001
Net sales $ 4,458 $ 1,568 $ 21 $ 6,047
Research, development and engineering expenses (1) $ 474 $ 151 $ (3) $ 622
Restructuring, impairment and other charges and credits (2) $ 5,404 $ 122 $ 191 $ 5,717
Interest expense (3) $ 104 $ 48 $ 1 $ 153
Benefit for income taxes $ (336) $ (38) $ (94) $ (468)
Loss before minority interests and equity earnings (4) (5) $ (5,215) $ (53) $ (425) $ (5,693)
Minority interests 13 13
Equity in earnings of associated companies 12 132 4 148
Income from discontinued operations 34 34
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (5,203) $ 92 $ (387) $ (5,498)
- -----------------------------------------------------------------------------------------------------------------------------------
Segment loss before minority interests and equity
earnings as a percentage of segment sales (117.0)% (3.4)% (94.1)%
Segment net (loss) income as a percentage of segment sales (116.7)% 5.9% (90.9)%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Non-direct research, development and engineering expenses are allocated
based upon direct project spending for each segment.
(2) Related tax benefit:
Year ended December 31, 2003: $17, $28, $4 and $49.
Year ended December 31, 2002: $452, $30, $66 and $548.
Year ended December 31, 2001: $282, $48, $69 and $399.
(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 not
specifically indentifiable to a segment. Related depreciable assets are not
allocated to segment assets.
(6) Includes $30 million and $68 million in 2003 and 2002, respectively,
related to impairment of long-lived assets of CAV which is in the
Technologies segment.
Non-segment net (loss) income is detailed below (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
-------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Non-segment (loss) income and other (1) $ (44) $ 4 $ (33)
Amortization of goodwill (2) (363)
Non-segment restructuring, impairment and other charges and credits (13) (208) (191)
Asbestos settlement (413)
Interest income (3) 32 41 68
Gain on repurchases of debt, net 19 176
Benefit (provision) for income taxes (4) 170 (24) 94
Minority interests 1
Equity in earnings of associated companies, net of impairments (5) 83 8 4
Income from discontinued operations 478 34
- -----------------------------------------------------------------------------------------------------------------------------------
Non-segment net (loss) income $ (166) $ 476 $ (387)
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes non-segment operations and other corporate activities.
(2) Amortization of goodwill relates primarily to the Telecommunications
segment.
(3) Corporate interest income is not allocated to reportable segments.
(4) Includes tax associated with non-segment restructuring, impairment and
other charges and amortization of goodwill.
(5) Includes amounts derived from corporate investments and activities,
primarily Dow Corning in 2003.
Telecommunications
The Telecommunications segment produces optical fiber and cable, and optical
hardware and equipment for the worldwide telecommunications industry. In July
2003, we exited the photonic technologies product line.
The following table provides net sales and other data for the Telecommunications
segment (in millions):
- -------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 760 $ 859 $ 2,889
Hardware and equipment 535 552 817
Photonic technologies 54 111 547
Controls and connectors 77 109 205
-------- --------- --------
Total net sales $ 1,426 $ 1,631 $ 4,458
======== ========= ========
Net loss $ (169) $ (1,897) $ (5,203)
- -------------------------------------------------------------------------------
2003 vs. 2002
Sales in the segment declined 13%, or $205 million, compared to 2002. All
products in the segment incurred a decline in sales. A portion of the decline
was in photonic technologies which we exited in July 2003. The remaining decline
in sales was due to price decreases for optical fiber and cable which were
partially offset by volume increases. The segment incurred a loss of $169
million in 2003, compared to a net loss of $1.9 billion in the prior year.
Restructuring and impairment charges included a $13 million loss on the sale of
photonics technologies assets to Avanex and $88 million for restructuring
charges offset by credits of $137 million, resulting in net credits of $36
million. All of the Telecommunications products reported a loss in 2003;
however, the losses were significantly lower than those incurred in the prior
year. The decrease in the loss over the prior year was primarily due to much
lower restructuring and impairment charges and cost savings resulting from these
actions.
The following discussion of products in the Telecommunications segment excludes
the restructuring and impairment charges and credits to provide clarity on the
underlying business trends.
Optical fiber and cable
- -----------------------
Sales declined 12%, or $99 million compared to 2002. The decrease was primarily
due to pricing pressure, particularly in fiber, but was partially offset by
strong demand in Japan and China, primarily in the first quarter. Sales volume
increased almost 20% in 2003 compared to 2002 due primarily to having the full
year results of the Chinese fiber and cable entities acquired from Lucent in the
fourth quarter of 2002. Volumes for our other fiber and cable facilities were up
slightly in 2003 compared to 2002. The loss for 2003 was significantly less than
2002 due to significant cost reduction.
Hardware and equipment
- ----------------------
Sales were relatively flat compared to 2002, decreasing 3%, or $17 million. The
sales decrease was primarily due to the overall lack of capital spending by our
customers impacting the entire telecommunications industry. The loss for 2003
significantly decreased from the prior year due to cost reductions achieved from
the 2002 restructuring actions and other cost reduction initiatives.
Photonic technologies
- ---------------------
On July 31, 2003, we completed the sale of a significant portion of the photonic
technologies assets to Avanex. See Restructuring, Impairment and Other Charges
and Credits and Note 5 (Restructuring Actions) to the Consolidated Financial
Statements. Sales declined 51%, or $57 million, compared to 2002 due to lower
sales volume in the early part of the year as well as our exit of photonics
technologies in 2003. The loss in 2003 was more than 85% less than the prior
year loss due to cost savings resulting from restructuring actions taken in
2002 as well as the exit of this business in 2003.
Controls and connectors
- -----------------------
Sales decreased 29%, or $32 million in 2003, compared to the prior year. The
sales decline for the year 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 controls and connectors product line incurred a
small loss in 2003; however, the loss decreased significantly, compared to the
prior year, primarily due to cost savings from restructuring actions taken in
2002.
2002 vs. 2001
This segment incurred significant restructuring and impairment charges in 2002
and 2001. The 2002 and 2001 charges are described in detail in Restructuring,
Impairment and Other Charges and Credits. The restructuring activities were
undertaken to reduce the operating cost structure due to continued market
declines. More than half of the 2002 charge related to the impairment of fixed
assets, primarily in the fiber and cable business. A significant portion of the
asset impairments in this business represented the closure of two fiber plants
and permanent abandonment of certain construction projects. The balance of the
charge represented impairments of cost based investments, primarily in the
photonic technologies business, and severance and benefits for retirees and
separated personnel in all businesses. In addition, the segment incurred a $400
million charge for the impairment of goodwill and a $269 million charge for
long-lived asset impairments in photonic technologies. The impairment charge
incurred in the second quarter of 2001 relates to goodwill and certain acquired
intangible assets from acquisitions in the photonic technologies business. These
charges are described in Notes 4 (Impairment of Goodwill) and 6 (Impairment of
Other Long-Lived Assets) to the Consolidated Financial Statements.
Sales in the segment declined 63%, or $2,827 million, compared to 2001 as each
product in the segment experienced a significant decline in volume with the
largest declines in optical fiber and cable and photonic technologies. The
segment incurred losses of $1.9 billion in 2002, compared to a net loss of $5.2
billion in 2001. The 2002 loss was primarily due to the significant decrease in
sales volume and restructuring and impairment charges. Each product line
reported a loss in 2002. The trend between years reflected lower restructuring
and impairment charges. Excluding these restructuring and impairment charges,
the segment net loss was $592 million compared to a loss of $81 million in 2001.
The increase in the loss in 2002 reflected reduced sales volumes and lower
prices in each product line offset by cost reductions resulting from
restructuring actions.
The following discussion of products in the Telecommunications segment excludes
the restructuring and impairment charges and credits to provide clarity on the
underlying business trends.
Optical fiber and cable
- -----------------------
Sales declined 70%, or $2,030 million compared to 2001. The decrease was
primarily due to a sales volume decline of more than 50% for the year as well as
double digit price declines. Excluding restructuring and impairment charges, the
optical fiber and cable product line incurred a significant loss in 2002,
compared to profits in the prior year, primarily due to significantly lower
sales volume, declining prices and unfavorable product mix.
As discussed in Restructuring Actions, the optical fiber and cable product line
undertook significant restructuring actions in the fourth quarter of 2002. These
actions included permanent closure of two international fiber manufacturing
plants and the mothballing of the Concord, North Carolina facility. We believe
that the Concord facility can be returned to productive capacity within six to
nine months of a decision to do so and construction in progress at the Concord
facility can be completed efficiently. We believe the Concord and Wilmington
plants will provide sufficient capacity for the foreseeable future.
Hardware and equipment
- ----------------------
Sales decreased 32%, or $265 million, compared to 2001. The sales decreases were
primarily due to the overall lack of spending impacting the entire
telecommunications industry. Excluding restructuring charges, the product line
incurred a loss driven by lower volumes and pricing pressure in 2002, compared
to a near breakeven performance in 2001.
Photonic technologies
- ---------------------
Sales declined 80%, or $436 million, compared to 2001, primarily due to lower
sales volume as network buildouts in the telecommunications industry declined
resulting in much lower demand for photonic products. The business incurred a
significant loss for 2002 primarily due to dramatically lower sales volumes.
However, the 2002 losses decreased more than 50%, compared to the losses
incurred in 2001, which included inventory writedowns of $333 million. The
results in 2002 reflected cost reductions resulting from restructuring actions
taken in 2001 and 2002.
During the second quarter of 2002, we favorably resolved an open issue from the
second quarter of 2001 with a major customer, resulting in the recognition of
revenue of $14 million and pre-tax income of $3 million. This revenue was
recognized in part on shipment of inventory previously reserved. In addition, we
settled an open matter with a significant vendor in 2002 resulting in the
reversal of a vendor reserve of $20 million that was recorded as part of the
charge in the second quarter of 2001.
Controls and connectors
- -----------------------
Sales decreased 47%, or $96 million, compared to 2001, due to the sale of the
appliance controls group in May 2002 and reduced capital spending in the
telecommunications industry. Due to lower sales volumes, a loss was incurred for
the year compared to earnings in 2001.
Outlook:
The global telecommunications market downturn that began in 2001 continued into
2003; however, we believe that conditions have begun to stabilize. We ultimately
expect a recovery in 2005, and we believe 2004 will be comparable to 2003. We
expect 2004 sales to be flat to down slightly compared to 2003. Although we
expect to see volumes in our hardware and equipment and fiber and cable
businesses to increase, we will continue to experience pricing pressure, but at
a lower level than in 2003. We expect a loss in 2004; however, we believe it
will be significantly less than 2003, primarily due to the exit of the photonic
technologies product line and lower operating expenses reflecting cost savings
from restructuring actions taken in 2003 and 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 that
we had reached agreement with our partner to shutdown CAV. CAV manufactured
conventional video components in North America and ceased operations on June 30,
2003. We remain in this market through our equity investment in Samsung Corning.
The following table provides net sales and other data for the Technologies
segment (in millions):
- -------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
Net sales:
Display technologies $ 595 $ 405 $ 323
Environmental technologies 476 394 379
Life sciences 281 280 267
Conventional video components 65 166 252
Other technologies products 224 268 347
-------- --------- --------
Total net sales $ 1,641 $ 1,513 $ 1,568
======== ========= ========
Net income $ 112 $ 119 $ 92
- -------------------------------------------------------------------------------
2003 vs. 2002
Sales in the Technologies segment increased 8%, or $128 million, compared to
2002. Increased sales in display technologies and environmental technologies
were partially offset by much lower sales in conventional video components that
we exited and lower sales in other technologies products. Segment earnings for
2003 were down 6% compared to the prior year. Improved operating performance
from display technologies and environmental technologies were partially offset
by the shutdown of CAV and decreased earnings in the semiconductor materials
product line. Segment net income for 2003 included net restructuring, impairment
and accelerated depreciation charges of $134 million primarily for the exit of
CAV and the consolidation of our semiconductor manufacturing sites, and a $66
million charge to equity earnings of Samsung Corning resulting from an asset
impairment charge compared to net restructuring, impairment and other charges of
$150 million in 2002. See Restructuring, Impairment and Other Charges and
Credits and Note 5 (Restructuring Actions) to the Consolidated Financial
Statements.
The following discussion of products in the Technologies segment excludes the
restructuring and impairment charges and credits to provide clarity on the
underlying business trends.
Display technologies
- --------------------
Sales increased 47%, or $190 million, compared to 2002. The increase was
primarily due to volume gains of approximately 43%, as penetration of liquid
crystal display panels in the desktop market increased, and favorable exchange
rates. Earnings doubled in 2003 compared to the prior year due to the increase
in volume and significant gains in equity earnings from Samsung Corning
Precision over the prior year.
In July 2003, we announced an $180 million expansion of our liquid crystal
display glass manufacturing facility in Taiwan. The three-phased project is
expected to be completed by the end of 2004 with production to begin in the
second quarter of 2004. In February 2004, we announced a $600 million expansion
of our liquid crystal display glass manufacturing facility in Japan and Taiwan.
This expansion will occur over 2004 and 2005.
Environmental technologies
- --------------------------
Sales increased 21%, or $82 million, compared to 2002. The increased sales were
primarily due to increased U.S. auto production driven by financing incentives,
favorable mix of premium products, favorable exchange rates and higher sales for
diesel products. Earnings decreased more than 38% compared to the prior year 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.
Life sciences
- -------------
Sales were flat in 2003, compared to 2002, primarily due to weak sales in Europe
and a general softness in the market. Earnings were flat compared to the prior
year, primarily due to improved manufacturing efficiencies and a gain on the
disposition of a minor product line that was more than offset by higher
development spending.
Conventional video components
- -----------------------------
Sales decreased 61%, or $101 million, compared to 2002. The sales declines are
due to loss of volume, price declines and our decision to exit CAV. As discussed
earlier, we ceased operations in the second quarter of 2003. See Restructuring,
Impairment and Other Charges and Credits and Note 5 (Restructuring Actions) to
the Consolidated Financial Statements. The loss increased compared to the prior
year, primarily due to decreased sales volume, continued competitive pricing
pressures and equity losses from Samsung Corning. Although Samsung Corning
generates cash, we expect that our equity earnings from this venture will be
lower than historical levels going forward. Further, it is possible that future
equity results may include operating losses or significant restructuring or
fixed asset impairment charges recorded by Samsung Corning. Our investment in
Samsung Corning was $320 million at December 31, 2003.
Other technologies products
- ---------------------------
Sales in our other technologies businesses, including semiconductor materials
and ophthalmic products, decreased 16%, or $44 million, compared to 2002. The
decrease was primarily due to lower sales volume of high-purity fused silica
products, as capital spending in the semiconductor equipment industry remained
at relatively low levels, and the exit of the lighting product line in September
2002. The losses from other technologies products more than tripled, compared to
the prior year. The losses were primarily due to significantly lower sales
volume and increased spending in development and engineering for calcium
fluoride products. Due to the cyclicality of the semiconductor equipment market,
we are consolidating the semiconductor materials manufacturing facilities to
attain greater flexibility than we have in our current cost structure. As a
result, we recorded impairment and restructuring charges and accelerated
depreciation as discussed in Restructuring Actions and Note 5 (Restructuring
Actions) to the Consolidated Financial Statements.
2002 vs. 2001
Sales in the Technologies segment during 2002 decreased 4%, or $55 million,
compared to 2001, as increased sales in display technologies, environmental
technologies and life sciences were offset by much lower sales in the mature
conventional video components product line, decreased demand for semiconductor
materials and the impact of Corning's exit of its lighting products line in
2002. Segment earnings increased 29%, or $27 million, compared to 2001, as
improved operating performance in display technologies and life sciences and
stronger equity earnings were partially offset by restructuring and impairment
charges and decreased earnings in the semiconductor materials and conventional
video components products. The 2002 restructuring costs recorded in this segment
consisted entirely of severance and benefits for retired and separated employees
in several businesses. The impairment charges related to assets held for use.
See Impairment of Long-Lived Assets Other than Goodwill.
The following discussion of products in the Technologies segment excludes the
restructuring and impairment charges and credits to provide clarity on the
underlying business trends.
Display technologies
- --------------------
Sales increased 25%, or $82 million, compared to 2001. The increase was
primarily due to higher sales volume as penetration in the desktop market
increased. The prior year's sales were negatively impacted by an inventory
correction in the industry in the first quarter of 2001. Volume gains of over
46% for 2002 were partially offset by price declines of 10% on a constant
currency basis. Earnings increased over 30% in 2002, compared to 2001, primarily
due to volume gains and a more than 30% improvement in equity earnings from
Samsung Corning Precision.
Environmental technologies
- --------------------------
Sales increased 4%, or $15 million, compared to 2001, primarily due to increased
U.S. auto production driven by financing incentives and strong growth in Europe
and Japan. Earnings improved 8%, compared to 2001, as a significant increase in
equity earnings from Cormetech, a U.S. designer and manufacturer of industrial
catalysts, was partially offset by price declines and increased manufacturing
and development costs related to new products.
Life sciences
- -------------
Sales increased 5%, or $13 million, compared to 2001, primarily due to strong
growth in most product lines. Earnings more than doubled over 2001, primarily
due to cost savings from the discontinuation of our investment in microarray
technology products in the third quarter of 2001, as well as improved
manufacturing efficiencies and higher sales.
Conventional video components
- -----------------------------
Sales decreased 34%, or $86 million, compared to 2001. Pricing pressure was
strong in this market due to increased competition. A significant portion of
CAV's business was concentrated with few customers, two of which merged. The
loss increased almost 50% for the year, compared to 2001, primarily due to
decreased sales volume and continued competitive pricing pressures. Samsung
Corning also experienced pricing pressure resulting in an approximate 10%
decline in equity earnings for 2002, compared to the prior year.
Other technologies products
- ---------------------------
Sales decreased 23%, or $79 million, compared to 2001. The decrease was led by
the exit of the lighting product line and lower sales volume of high purity
fused silica products as capital spending in the semiconductor equipment
industry remained at relatively low levels. Other technologies products incurred
a loss for the year compared to break-even results in 2001. The losses were
primarily due to significantly lower sales volume and increased spending in
development and engineering for calcium fluoride products.
Outlook:
We expect sales in the Technologies segment to increase in 2004, primarily due
to continued growth in our display technologies product line and increased sales
of diesel products. All products in this segment expect improved revenue in
2004. We also expect profitability in the segment to improve significantly in
2004 due to the strong volume growth in display technologies and increased
equity earnings from Samsung Corning Precision.
NON-SEGMENT RESULTS
Our non-segment results include the operations of Steuben, a crystal glass
manufacturer, and equity earnings from nonstrategic investments that are not
aligned with our two operating segments. In addition, the results of operating
segments do not include amortization of goodwill, gain on repurchases and
retirement of debt, charges related to the asbestos litigation and restructuring
and impairment charges related to the corporate research and development or
staff organizations.
LIQUIDITY AND CAPITAL RESOURCES
Financing Structure
In 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 public tender offer conducted in June. We used the net
proceeds of the July offering to reduce debt through open market repurchases.
See Note 17 (Shareholders' Equity) to the Consolidated Financial Statements.
We repurchased and retired approximately 1.6 million zero coupon convertible
debentures in 2003 for approximately $1.1 billion in cash and 6.5 million shares
of treasury common stock. See Note 14 (Long-Term Debt and Loans Payable) to the
Consolidated Financial Statements for further detail.
As a result of our debt repurchase program, we reduced the balance of zero
coupon convertible debentures as follows:
- --------------------------------------------------------------------------------
December 31, 2003 December 31, 2002 December 31, 2001
- --------------------------------------------------------------------------------
Zero coupon convertibles $ 385 $ 1,606 $ 2,059
- --------------------------------------------------------------------------------
The remaining zero coupon convertible debentures will likely 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 retire
additional debt securities for cash or equity.
Due to our debt ratings, we continue to be precluded from accessing the
short-term commercial paper market. The terms that we could receive on any 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 December 31, 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 December
31, 2003 and December 31, 2002, this ratio was 34% 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 billion of various debt and equity securities. As of
March 1, 2004, our remaining capacity under the shelf registration statement
was approximately $2.9 billion.
Subsequent Event
Through March 1, 2004, we repurchased and retired 25 thousand zero coupon
convertible debentures for approximately $19 million in cash resulting in a net
decrease of $20 million to the zero coupon convertible debenture book value. In
addition, we issued 22 million shares of Corning common stock and $24 million in
cash in exchange for 3.5% convertible debentures with a book value of $213
million at an effective conversion price of $9.675 per share. As a result of
these transactions, we will record a $23 million pre-tax loss on repurchases and
retirement of debt during the first quarter of 2004.
Capital Spending
Capital spending totaled $366 million, $357 million and $1.7 billion in 2003,
2002 and 2001, respectively. Our 2004 capital spending program is expected to be
in the range of $600 million to $650 million, of which $425 million to $475
million will be to expand the capacity for liquid crystal display glass. Capital
spending activity in 2002 and 2003 primarily included expansion of liquid
crystal display capacity and new capacity for diesel substrates. Capital
spending in 2001 related primarily to the Telecommunications segment.
Restructuring
During 2003, 2002 and 2001, we made payments of $233 million, $278 million and
$77 million, respectively, related to employee severance and other exit costs
resulting from restructuring actions. Cash payments for employee-related costs
and other exit costs will be substantially completed by the end of 2004, while
payments for exit activities will be substantially completed by the end of 2005.
Key Balance Sheet Data
At December 31, 2003, cash, cash equivalents and short-term investments totaled
$1.3 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 a 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 December 31,
-------------------
2003 2002
- -------------------------------------------------------------------------------
Working capital $1,141 $2,145
Working capital, excluding cash and short-term investments $(125) $ 55
Current ratio 1.7:1 2.3:1
Trade accounts receivable, net of allowances $ 525 $ 470
Days sales outstanding 58 56
Inventories $ 467 $ 559
Inventory turns 4.8 4.4
Days payable outstanding 52 46
Long-term debt $2,668 $3,963
Total debt to total capital 34% 47%
- -------------------------------------------------------------------------------
Credit Ratings
As of March 1, 2004, our credit ratings were as follows:
- -------------------------------------------------------------------------------
RATING AGENCY Rating Rating Outlook
Last Update Long-Term Debt Commercial Paper Last Update
- -------------------------------------------------------------------------------
Standard & Poor's BB+ B Stable
July 29, 2002 January 16, 2004
Moody's Ba2 Not Prime Stable
July 29, 2002 November 19, 2003
Fitch BB B Stable
July 24, 2002 July 24, 2003
- -------------------------------------------------------------------------------
Our 2003 earnings 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. We expect our full year 2004 earnings will
be sufficient to cover our fixed charges.
Management Assessment of Liquidity
Our major source of funding for 2004 and beyond will be our existing balance of
cash, cash equivalents and short-term investments. From time to time we may also
issue debt or equity securities to raise additional cash to fund a portion of
our capital expenditures related to our growth businesses. We believe we have
sufficient liquidity for the next several years to fund operations,
restructuring, the asbestos settlement, research and development, capital
expenditures and scheduled debt repayments. We may accelerate some or all of the
funding of the cash payments to the asbestos settlement trust, as needed, to
maximize the tax benefits we can realize in connection with the related
settlement charges.
Off Balance Sheet Arrangements
We have two variable interest entities ("VIEs") that are not consolidated as we
are not the primarily beneficiary. The assets and debt of these entities total
$12 million. Our maximum loss exposure as a result of our involvement with these
VIEs is approximately $18 million. This amount represents payments that would be
due to the lessor in the event of a total loss of the assets. We carry insurance
coverage for this risk.
Contractual Obligations
- -----------------------------------------------------------------------------------------------------------------------------------
Amount of commitment and contingency expiration per period
------------------------------------------------------------
Less than 1 to 2 2 to 3 3 to 4 5 years and
(In millions) Total 1 year years years years thereafter
- -----------------------------------------------------------------------------------------------------------------------------------
Performance bonds and guarantees $ 170 $ 31 $ 2 $ 1 $ 136
Contingent purchase price for acquisitions 36 36
Dow Corning credit facility 150 150
Stand-by letters of credit 16 6 10
Loan guarantees 25 4 21
Purchase obligations (1) 48 15 14 11 $ 8
Capital expenditure obligations (2) 59 59
Total debt (3) 2,827 146 590 46 113 1,932
Minimum rental commitments 300 44 33 29 39 155
- -----------------------------------------------------------------------------------------------------------------------------------
Total other commercial commitments
and contingencies $ 3,631 $ 337 $ 643 $ 87 $ 160 $ 2,404
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Balance primarily represents obligations associated with a take or pay
contract related to our hardware and equipment operations.
(2) Capital expenditure obligations primarily related to our display
technologies product line expansions, which are included on our balance
sheet.
(3) At December 31, 2003, $2,814 million of the $2,827 million was included on
our balance sheet. Amounts above are stated at their maturity value.
We have provided other financial guarantees and have contingent liabilities in
the form of purchase price adjustments for acquisitions, stand-by letters of
credit and performance bonds, some of which do not have fixed or scheduled
expiration dates. We have agreed to provide a credit facility related to Dow
Corning as discussed in Note 10 (Investments) to the Consolidated Financial
Statements. The funding of the Dow Corning credit facility is subject to events
connected to the Bankruptcy Plan. We believe the significant majority of these
guarantees and contingent liabilities will expire without being funded.
In January 2003, the SEC released FR-67, "Disclosure in Management's Discussion
and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations". In response to this guidance, we have assessed our off-balance
sheet and contractual obligations and have determined that in addition to
previously disclosed items, purchase obligations would be added. Given the
nature of purchase obligations, we limited our assessment to individual items
outstanding at December 31, 2003 greater than $1 million.
Pensions
We have a number of defined benefit pension plans covering certain domestic and
international employees. Our largest single pension plan is Corning's U.S.
qualified plan. At December 31, 2003, this plan accounted for 82% of our
consolidated defined benefit pension plans' projected benefit obligation and 89%
of the related plans' assets. In 2002, global capital market developments
resulted in negative returns on plan assets and a decline in the discount rate
used to estimate the related pension liability. In 2003, although global
equities had positive returns, interest rates continued to decline. As a result,
at December 31, 2003 and 2002, the accumulated benefit obligation (ABO) for our
domestic qualified and non-qualified plans and several international plans
exceeded the fair value of related plan assets, which required Corning to record
an additional minimum pension liability in accordance with SFAS No. 87,
"Employers' Accounting for Pensions."
Balances of these non-cash adjustments follow (in millions):
- -------------------------------------------------------------------------------
December 31,
--------------------
2003 2002
- -------------------------------------------------------------------------------
Minimum pension liability $ 311 $ 348
Intangible assets 52 68
Other accumulated comprehensive loss, pre-tax 259 280
Other accumulated comprehensive loss, after-tax 159 173
- -------------------------------------------------------------------------------
We have traditionally contributed to the U.S. qualified pension plan on an
annual basis in excess of the IRS minimum requirements, and as a result,
mandatory contributions are not expected to be required for this plan at least
until 2006. We contributed $160 million in 2003 to our U.S. pension plan. For
2004, we anticipate making voluntary contributions of at least $40 million to
this plan.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires us to make estimates and
assumptions that affect amounts reported therein. The estimates that required us
to make difficult, subjective or complex judgments follow.
Impairment of goodwill
SFAS No. 142, "Goodwill and Other Intangible Assets," requires us to make
certain difficult, subjective and complex judgments on a number of matters,
including assumptions and estimates used to determine the fair value of our
reporting units and the definition of our reporting units.
We measure fair value on the basis of discounted expected future cash flows.
Our estimates are based upon our historical experience, our current knowledge
from our commercial relationships, and available external information about
future trends.
The criteria for establishing a reporting unit is dependent upon how a company
determines its operating segments under SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Specifically, SFAS No. 142
permits a company to define a reporting unit as either an operating segment, a
component of an operating segment or an aggregation of two or more components
of an operating segment. The reporting unit for the Telecommunications segment
goodwill is the Telecommunications operating segment. The reporting units for
the Technologies segment are components of the Technologies segment. At
December 31, 2003, the Telecommunications and Technologies operating segment
goodwill balances were $1.6 billion and $159 million, respectively.
During 2002, we completed our annual goodwill impairment test, determined the
Telecommunications goodwill balance was impaired, and recorded a related
impairment charge of $400 million. Our 2002 testing results also determined
that the Technologies segment goodwill was not impaired. In the fourth quarter
of 2003, we completed our annual goodwill impairment tests and determined that
the goodwill balances were not impaired. As discussed in more detail below,
while we believe the estimates and judgments about future cash flows used in
the goodwill impairment tests are reasonable, we cannot provide assurance that
future impairment charges will not be required if the expected cash flow
estimates as projected by management do not occur.
We are currently in discussion with the staff of the SEC on the determination
of our operating segments. We believe that our determination of our operating
segments under SFAS No. 131 is appropriate. However, it is possible that the
outcome of this discussion could be a revision of how we define and disclose
our operating segments. It is also possible that a change in how we define our
Telecommunications operating segment could impact our goodwill impairment tests
under SFAS No. 142. Specifically, we could be required to record a net
additional goodwill impairment charge of up to $600 million (pre tax) in 2002.
Although this potential charge would increase our 2002 net loss, it would not
impact our 2002 operating cash flows because goodwill impairments are noncash
charges. Our debt to capital ratio ranged from 44% to 47% throughout 2002.
This potential charge would have increased our debt to capital ratio to no
higher than 51%, which would still be below the 60% financial covenant limit
relating to our $2.0 billion revolving credit facility. The potential 2002
goodwill impairment charge would have no impact on operating results or
operating cash flows for the year ended December 31, 2003.
Telecommunications
Our expectation is that there will be minimal volume growth in the short term;
volume growth is assumed to accelerate beginning in 2005 commensurate with
overall market recovery. Terminal value of the business assumes a growth in
perpetuity of 3%. These cash flows are also used to value intangible and
tangible assets which determine the implied value of reporting unit goodwill.
The discount rate applied to these cash flows represents a telecommunications
weighted average cost of capital based upon current debt and equity activity of
eleven public companies representing a cross section of worldwide competitors of
the reporting unit. For our 2002 annual test, we used a discount rate of 12% in
our calculation of fair value of the expected future cash flows. An impairment
charge of $400 million was recorded in 2002. Had we used a discount rate of
11.5%, the fair value of the reporting unit would have exceeded its carrying
value, and there would not have been impairment. Had we used a discount rate of
12.5%, the pre-tax impairment charge would have been approximately $225 million
higher. In 2003, we also used a 12% discount rate for our annual impairment
test. The results of our test indicated that goodwill was not impaired. The
results would not have changed had we used a discount rate of 11.5% or 12.5%.
Technologies
Due to market conditions, we determined that a detailed impairment test of the
specialty materials reporting unit was required in the fourth quarter of 2003.
While there was a significant decrease in sales in 2003 in this reporting unit
due to the cyclicality of the semiconductor industry, we expect increased volume
growth beginning in 2004. Our discounted cash flow test for this reporting unit
assumes a perpetuity growth rate of 3%. The discount rate applied to the
forecasted cash flows represents weighted average cost of capital based upon
current debt and equity activity of eight public companies representing a cross
section of worldwide competitors of the reporting unit. We used a discount rate
of 12% in our calculation of fair value of the expected future cash flows. The
results of our test indicated that goodwill was not impaired. The results would
not have changed had we used a discount rate of 11.5% or 12.5%.
Impairment of assets held for use
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
requires us to assess the recoverability of the carrying value of long-lived
assets when an event of impairment has occurred. We must exercise judgment in
assessing whether an event of impairment has occurred. For purposes of
recognition and measurement of an impairment loss, a long-lived asset or assets
is grouped with other assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other
assets and liabilities. We must exercise judgment in assessing the lowest level
for which identifiable cash flows are largely independent of the cash flows of
other assets and liabilities. We concluded events of impairment had occurred in
our semiconductor materials product line, which is part of the specialty
materials business, in the fourth quarter of 2003, and performed an impairment
test. The results of our test indicated that our long-lived assets held for use
were not impaired.
In 2002, we recorded pre-tax charges totaling $409 million primarily related to
the photonics and conventional television product lines. In each circumstance,
behavior of external parties, including customers and competitors, were
considered in the determination of whether an impairment was required. We also
exercised judgment in the determination of expected future cash flows against
which to compare the carrying value of the asset group being evaluated. For the
impairment in 2002, we exercised judgment in determining the fair value of the
assets from which the impairment charge was measured. For our photonic
technologies products, we based the fair value of our long-lived assets on the
actual results of recent asset auctions of similar equipment. For the assets
related to our conventional television product line, we exercised judgment about
alternative volume and sales price scenarios, computed discounted cash flows,
and assigned our best estimate of probability to each alternative. We reduced
the useful lives of the fixed assets of CAV as a result of this assessment.
Restructuring charges and impairments resulting from restructuring actions
During 2003 and 2002, we recorded write-downs of property, plant and equipment
as a result of decisions to exit facilities, primarily in the Telecommunications
segment. Assets impaired were primarily equipment, construction in progress and
buildings, which were sold or abandoned. We used information available from
recent auctions of telecommunications equipment to estimate salvage value when
measuring impairment. The estimated salvage values were very low, primarily due
to the depressed market for telecommunications related equipment. The salvage
values of property impaired were also estimated to be minimal as certain
facilities will be abandoned and not sold. We have had significant reversals in
2003, and it is possible that actual results will differ from assumptions and
require adjustments to reserves.
Valuation allowances for deferred income taxes
SFAS No. 109, "Accounting for Income Taxes," requires us to exercise judgment
about our future results in assessing the realizability of our deferred tax
assets. At December 31, 2003, Corning had gross deferred tax assets of $2.1
billion. We determined that the likelihood of realization of certain deferred
tax assets is less than 50% and recorded valuation allowances of $469 million.
If future taxable income differs from our estimate, adjustments to these
allowances will be required and will impact future net income. See Income Taxes
and Note 9 (Income Taxes) to the Consolidated Financial Statements for further
detail.
Probability of litigation outcomes
SFAS No. 5, "Accounting for Contingencies," requires us to make judgments about
future events that are inherently uncertain. In making determinations of likely
outcomes of litigation matters, we consider the evaluation of outside counsel
knowledgeable about each matter, as well as known outcomes in case law. See
Legal Proceedings for a detailed discussion of the key litigation matters we
face. The most significant matter involving judgment is the PCC asbestos
liability. There are a number of factors bearing upon our potential liability,
including the inherent complexity of a Chapter 11 filing, our history of success
in defending ourself against asbestos claims, our assessment of the strength of
our corporate veil defenses, our continuing dialogue with our insurance carriers
and the claimants' representatives, and other factors. We have reached a
tentative settlement on PCC as disclosed in Legal Proceedings and Note 10
(Investments) to the Consolidated Financial Statements. The 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.
Pension assumptions
In 2002, we made a change in assumption that impacted pension expense in future
periods. Specifically, we lowered our expected long-term rate of return on
pension assets from 9% to 8.5%. We did not alter the nature of the pension trust
investments. Asset performance in 2002 had been below the 9% assumption. As
such, we lowered our long-term rate of return assumption. In 2003, this
increased our pension expense as measured in accordance with SFAS No. 87,
"Employers' Accounting for Pension," compared to amounts recorded in 2002. The
increase was approximately $8 million in 2003. In 2003, our actual return on
plan assets approximated 20%; however, we will continue to hold our expected
long-term rate of return at 8.5%.
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 twelve 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 its
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 $21 million for our estimated liability for
environmental cleanup and related litigation at December 31, 2003. Based upon
the information developed to date, we believe that the accrued amount is a
reasonable estimate of our liability and that the risk of an additional loss in
an amount materially higher than that accrued is remote.
NEW ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board ("FASB") issued a
revised SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." The revised standard requires incremental pension and
other postretirement benefit plan disclosures to financial statements and is
designed to improve disclosure transparency. The adoption of this accounting
standard did not have any effect on our results of operations or financial
position.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51," ("FIN 46") which requires all VIEs to be consolidated by the primary
beneficiary. The primary beneficiary is the entity that holds the majority of
the beneficial interests in the VIE. In addition, the interpretation expands
disclosure requirements for both VIEs that are consolidated as well as VIEs from
which the entity is the holder of a significant, but not the majority amount of
the beneficial interests. We have leased equipment from three 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 of
these existing VIEs, and therefore, began to consolidate this entity beginning
on July 1, 2003. At December 31, 2003, the assets and debt of this entity were
$31 million and $34 million, respectively. We also evaluated the impact of this
interpretation on the two other entities and determined that we are not the
primary beneficiary for either entity. The assets and debt of these entities
total $12 million. The adoption of this interpretation did not have a material
effect on our results of operations or financial position.
In addition, we adopted the following new standards in 2003, which did not have
a material impact on our consolidated financial position or results of
operations:
.. SFAS No. 143, "Accounting for Asset Retirement Obligations,"
.. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities,"
.. FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45"),
.. 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."
FORWARD-LOOKING STATEMENTS
The statements in this Annual Report on Form 10-K, in reports subsequently filed
by Corning with the SEC on Forms 10-Q and 8-K, and related comments by
management which are not historical facts or information and contain words such
as "believes," "expects," "anticipates," "estimates," "forecasts," and similar
expressions are forward-looking statements. These forward-looking statements
involve risks and uncertainties that may cause the actual outcome to be
materially different. Such risks and uncertainties include, but are not limited
to:
- - global economic and political conditions;
- - 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;
- - product and components performance issues; and
- - stock price fluctuations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
- ---------------------------------------------------------------------
We operate and conduct business in many foreign countries and as a result are
exposed to movements in foreign currency exchange rates. Our exposure to
exchange rate effects includes:
.. exchange rate movements on financial instruments and transactions
denominated in foreign currencies which impact earnings, and
.. exchange rate movements upon conversion of net assets in foreign subsidiaries
for which the functional currency is not the U.S. dollar, which impact our
net equity.
Our most significant foreign currency exposures relate to Japan, Korea, Taiwan
and western European countries. We selectively enter into foreign exchange
forward and option contracts with durations generally 15 months or less to hedge
our exposure to exchange rate risk on foreign source income and purchases. The
hedges are scheduled to mature coincident with the timing of the underlying
foreign currency commitments and transactions. The objective of these contracts
is to neutralize the impact of exchange rate movements on our operating results.
We also enter into foreign exchange forward contracts when situations arise
where our foreign subsidiaries or Corning enter into lending situations,
generally on an intercompany basis, denominated in currencies other than their
local currency. We do not hold or issue derivative financial instruments for
trading purposes.
Equity in earnings of associated companies has historically contributed a
significant amount of our income from continuing operations. Equity in earnings
of associated companies, net of impairments was $209 million in 2003 with
foreign-based affiliates comprising over 50% of this amount. Samsung Corning and
Samsung Corning Precision totaled $105 million in equity earnings for 2003.
Exchange rate fluctuations and actions taken by management of these entities to
reduce this risk can affect the earnings of these companies.
We use a sensitivity analysis to assess the market risk associated with our
foreign currency exchange risk. Market risk is defined as the potential change
in fair value of assets and liabilities resulting from an adverse movement in
foreign currency exchange rates. At December 31, 2003, we had open forward
contracts, open option contracts, foreign denominated debt with values exposed
to exchange rate movements, all of which were designated as hedges at December
31, 2003. A 10% adverse movement in quoted foreign currency exchange rates could
result in a loss in fair value of these instruments of $116 million.
The nature of our foreign exchange rate risk exposures has not changed
materially from December 31, 2002.
Interest Rate Risk Management
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 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 was 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 with a notional amount of $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. The cash
proceeds from the termination of the swap agreement totaled $17 million and is
included in the financing section of our consolidated cash flow statement. As of
December 31, 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 sets a maximum cap that total variable rate debt will not
exceed 35% of the total debt portfolio at anytime. At December 31, 2003, our
consolidated debt portfolio contained approximately 6% of variable rate
instruments.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
See Item 15 (a) 1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
Item 9A. Controls and Procedures
- ---------------------------------
(a) Evaluation of disclosure controls and procedures.
We carried out an evaluation, under the supervision and with the
participation of our management, including our chief executive officer
and our chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities and Exchange Act of 1934 (the "Exchange
Act")) as of the year ended December 31, 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, our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms.
(b) Changes in internal controls.
During the quarter ended December 31, 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 III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Directors of the Registrant
- ---------------------------
The sections entitled "Nominees for Election as Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in our Definitive Proxy Statement
relating to our annual meeting of shareholders to be held on April 29, 2004, are
incorporated by reference in this Annual Report on Form 10-K.
Audit Committee and Audit Committee Financial Expert
- ----------------------------------------------------
Corning has an Audit Committee and has identified at least one member of the
Audit Committee as the Audit Committee Financial Expert. See sections entitled
"Matters Relating to Directors - Board Committees" and "Corporate Governance
Matters" in our definitive Proxy Statement relating to our annual meeting of
shareholders to be held on April 29, 2004, which are incorporated by reference
in this Annual Report on Form 10-K.
Executive Officers of the Registrant
James R. Houghton Chairman and Chief Executive Officer
Mr. Houghton joined Corning in 1962. He was elected a vice president of Corning
and general manager of the Consumer Products Division in 1968, vice chairman in
1971, chairman of the executive committee and chief strategic officer in 1980
and chairman and chief executive officer in April 1983, retiring in April 1996.
Mr. Houghton was the non-executive Chairman of the Board of Corning from June
2001 to April 2002. Mr. Houghton came out of retirement in April 2002 when he
was elected to his current position. Mr. Houghton is a director of Metropolitan
Life Insurance Company and Exxon Mobil Corporation. He is a trustee of the
Metropolitan Museum of Art, the Pierpont Morgan Library and the Corning Museum
of Glass and a member of the Harvard Corporation. Mr. Houghton has been a member
of Corning's Board of Directors since 1969. Age 68.
James B. Flaws Vice Chairman and Chief Financial Officer
Mr. Flaws joined Corning in 1973 and served in a variety of controller and
business management positions. Mr. Flaws was elected assistant treasurer of
Corning in 1993, vice president and controller in 1997 and vice president of
finance and treasurer in May 1997, senior vice president and chief financial
officer in December 1997, executive vice president and chief financial officer
in 1999 and to his current position in 2002. Mr. Flaws is a director of Dow
Corning Corporation. Mr. Flaws has been a member of Corning's Board of Directors
since 2000. Age 55.
Wendell P. Weeks President and Chief Operating Officer
Mr. Weeks joined Corning in 1983 and has served in various accounting, business
development, and business manager positions. He was named a vice president and
deputy general manager of the Opto-Electronics Components Business in 1995, vice
president and general manager of Telecommunications Products in 1996, senior
vice president in 1997, senior vice president of Opto-Electronics in 1998,
executive vice president of Optical Communications in 1999, president of Corning
Optical Technologies in 2001 and to his current position in 2002. Mr. Weeks is a
director of Merck & Co., Inc. Mr. Weeks has been a member of Corning's Board of
Directors since 2000. Age 44.
Peter F. Volanakis President, Corning Technologies
Mr. Volanakis joined Corning in 1982 and subsequently held various marketing,
development and commercial positions in several divisions. He was named managing
director Corning GmbH in 1992, executive vice president of CCS Holding, Inc.,
formerly known as Siecor Corporation, in 1995, senior vice president of Advanced
Display Products in 1997, executive vice president of Display Technologies and
Life Sciences in 1999 and to his current position in 2001. Mr. Volanakis is a
director of Dow Corning Corporation, Samsung Corning Co., Ltd., and Samsung
Corning Precision Glass Co., Ltd. Mr. Volanakis has been a member of Corning's
Board of Directors since 2000. Age 48.
Kirk P. Gregg Executive Vice President and Chief Administrative Officer
Mr. Gregg joined Corning in 1993 as director of Executive Compensation. He was
named vice president of Executive Resources and Employee Benefits in 1994,
senior vice president, administration in December 1997 and to his current
position in 2002. Prior to joining Corning, Mr. Gregg was with General Dynamics
Corporation as corporate director, Key Management Programs, and was responsible
for executive compensation and benefits, executive development and recruiting.
Age 44.
Joseph A. Miller Executive Vice President and Chief Technology Officer
Dr. Miller joined Corning in 2001 as senior vice president and chief technology
officer. He was appointed to his current position in 2002. Prior to joining
Corning, Dr. Miller was with E.I. DuPont de Nemours, Inc., where he served as
chief technology officer and senior vice president for research and development
since 1994. Mr. Miller is a director of Avanex Corporation, Wilson Greatbatch
Technologies and Dow Corning Corporation. He began his career with DuPont in
1966. Age 62.
Katherine A. Asbeck Senior Vice President and Controller
Ms. Asbeck joined Corning in 1991 as director of accounting. She was appointed
assistant controller in 1993, designated chief accounting officer in 1994,
elected vice president and controller in 1997 and to her current position in
2001. Age 47.
William D. Eggers Senior Vice President and General Counsel
Mr. Eggers joined Corning in 1997 as vice president and deputy general counsel.
He was elected senior vice president and general counsel in February 1998. Mr.
Eggers was a Partner with the Rochester firm of Nixon, Hargrave, Devans & Doyle,
LLP, before joining Corning. Mr. Eggers is a director of Chemung Financial Corp.
Age 59.
Mark S. Rogus Senior Vice President and Treasurer
Mr. Rogus joined Corning in 1996 as manager of corporate finance. He was
appointed assistant treasurer in 1999, Vice President and Treasurer in 2000 and
to his current position in 2004. Prior to joining Corning, Mr. Rogus held
various business development positions at Wachovia Bank. Age 44.
Pamela C. Schneider Senior Vice President and Operations Chief of Staff
Ms. Schneider joined Corning in 1986 as senior financial analyst in the
Controllers Division. In 1988 she became manager of internal audit. In 1990 she
was named controller and in 1991 chief financial officer of Corning Asahi Video
Products Company. In January 1993, she was appointed vice president and chief
financial officer and in 1995 vice president for Corning Consumer Products
Company. In 1997, she was named vice president and in 1999 senior vice
president, Human Resources and Diversity Officer for Corning. Ms. Schneider was
appointed to her present position in April 2002. Age 49.
Larry Aiello Jr. President and Chief Executive Officer - Corning Cable Systems
Mr. Aiello joined Corning in 1973 and served in several positions in
manufacturing from 1975 to 1981. He was named manager-Domestic Accounting in
1981, controller-Telecommunications Products Division in 1984, director-Control
and Analysis in 1987 and assistant controller and director in 1989. He was named
division vice president and director-Business Development and Planning,
Opto-Electronics Group in 1990, general manager-Component Products Group in
1992, vice president and controller, Corning Incorporated in 1993, senior vice
president-International and President-Corning International Corporation in 1997,
senior vice president and chief of staff-Corning Optical Communications in 2000
and to his current position in 2002. Age 54.
Robert B. Brown Senior Vice President and General Manager
Mr. Brown joined Corning in 1972 and served in a variety of manufacturing and
engineering positions. He was appointed division vice president-manufacturing
and engineering, Telecommunications Products Division in 1995, vice president
manufacturing and engineering, Opto-Electronics in 1999, president-Corning
Lasertron in February 2000, vice president and general manager-Amplification
Products in December 2000, Vice President and General Manager - Optical Fiber in
April 2002 and to his current position in 2003. Age 53.
Robert L. Ecklin Executive Vice President, Environmental Technologies and
Strategic Growth
Mr. Ecklin joined Corning in 1961 and served in a variety of U.S. and
international manufacturing and engineering managerial positions. He was named
vice president of Corning Engineering in 1982, president of Corning Engineering
in 1983, vice president of Business Development in 1986, general manager of the
Industrial Products Division in 1989 and senior vice president of the Industrial
Products Division in 1990. He was appointed executive vice president of the
Environmental Products Division in 1999, executive vice president, Optical
Communications in 2001 and to his current position in 2002. Mr. Ecklin is a
director of Macdermid Incorporated. Age 65.
Donald B. McNaughton Senior Vice President - Display
Mr. McNaughton joined Corning in 1989 and served in a variety of managerial
positions. He was named general manager, Display Technologies and president,
Display Technologies in Asia in 2000, Vice President, Display in 2002 and to his
current position in 2003. Age 44.
Gerald J. Fine Senior Vice President
Dr. Fine joined Corning in 1985 as a research scientist in a variety of research
and managerial positions. He was named deputy general manager-Advanced Display
Products in 1995, vice president and general manager-Photonic Technologies
Division in 1997, Senior Vice President and General Manager Photonic
Technologies in 2002 and to his current position in 2003. He is currently on a
sabbatical leave. Age 46.
Code of Ethics
- --------------
Our Board of Directors adopted the Code of Ethics for the Chief Executive
Officer and Financial Executives and the Code of Conduct for Directors and
Executive Officers which supplements the Code of Conduct governing all employees
and directors that has been in existence for more than ten years. A copy of the
Code of Ethics is available on our website at
www.corning.com/inside_corning/corporate_governance/information_center/. We will
also provide a copy of the Code of Ethics to shareholders upon request. We will
disclose future amendments to, or waivers from, the Code of Ethics on our
website within five business days following the date of such amendment or
waiver.
Item 11. Executive Compensation
- --------------------------------
The sections entitled "Executive Compensation," "Option SAR Grants in Last
Fiscal Year," "Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal
Year-End Option/SAR Values" and "Pension Plan" in our definitive Proxy Statement
relating to the annual meeting of shareholders to be held on April 29, 2004, are
incorporated by reference in this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
- ----------------------------------------------------------------------------
Related Stockholder Matters
- ---------------------------
The sections entitled "Security Ownership of Certain Beneficial Owners" and
"Equity Compensation Plan Information," in our definitive Proxy Statement
relating to the annual meeting of shareholders to be held on April 29, 2004, are
incorporated by reference in this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The section entitled "Other Matters - Certain Business Relationships" in our
definitive Proxy Statement relating to the annual meeting of shareholders to be
held on April 29, 2004, is incorporated by reference in this Annual Report on
Form 10-K.
Item 14. Principal Accountant Fees and Services
- ------------------------------------------------
The section entitled "Independent Auditors" in our definitive Proxy Statement
relating to the annual meeting of shareholders to be held on April 29, 2004, is
incorporated by reference in this Annual Report on Form 10-K.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) Documents filed as part of this report:
Page
----
1. Financial statements...............................................56
2. Financial Statement Schedules:
(i) Valuation Accounts and Reserves...........................99
(ii) Quarterly Operating Results..............................100
(iii) Financial Statements of Dow Corning Corporation
for the years ended December 31, 2003, 2002 and 2001.....101
(iv) Financial Statements of Samsung Corning Precision
Glass Co., Ltd. for the years ended December 31,
2003, 2002 and 2001......................................146
See separate index to financial statements and financial
statement schedules
3. Exhibits filed as part of this report: see (c) below.
(b) Reports on Form 8-K filed during the last quarter of fiscal 2003:
One report on Form 8-K was filed October 22, 2003, during the quarter
ended December 31, 2003, furnishing material pursuant to Item 12 under
Item 9.*
*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 and Exchange Act of 1934,
as amended.
(c) Exhibits filed as part of this report:
3(i) 1 Restated Certificate of Incorporation dated December 6, 2000,
filed with the Secretary of State of the State of New York on
January 22, 2001 (Incorporated by reference to Exhibit 3(i) of
Corning's Annual Report on Form 10-K for the year ended
December 31, 2000)
3(i) 2 Certificate of Amendment to Restated Certificate of Incorporation
filed with the Secretary of State of the State of New York on
August 5, 2002 (Incorporated by reference to Exhibit 99.1 to
Corning's Form 8-K filed on August 7, 2002)
3(ii) 1 Bylaws of Corning effective as of December 6, 2000 (Incorporated
by reference to Exhibit 3(ii) of Corning's Annual Report on
Form 10-K for the year ended December 31, 2000)
3(ii) 2 Amendment to Article III, Section 9, of Bylaws of Corning
effective as of February 5, 2003 (Incorporated by reference to
Exhibit 3(ii)2 of Corning's Annual Report on Form 10-K for the
year ended December 31, 2003).
4 Rights Agreement of Corning dated as of June 5, 1996
(Incorporated by reference to Exhibit 1 to Corning's Form 8-K
filed on July 10, 1996)
12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Dividends
14 Corning Incorporated Code of Ethics for Chief Executive Officer
and Senior Financial Officer (Incorporated by reference to
Appendix H-3 of Corning's 2004 definitive Proxy Statement)
21 Subsidiaries of the Registrant at December 31, 2003
23 Consent of Independent Auditors
24 Powers of Attorney
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 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Signatures
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Corning Incorporated
Principal Executive Officer
By /s/ James R. Houghton
---------------------------------------- Chairman and March 1, 2004
(James R. Houghton) Chief Executive Officer
Principal Financial Officer
By /s/ James B. Flaws
---------------------------------------- Vice Chairman and March 1, 2004
(James B. Flaws) Chief Financial Officer
Principal Accounting Officer
By /s/ Katherine A. Asbeck
---------------------------------------- Senior Vice President and Controller March 1, 2004
(Katherine A. Asbeck)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
on the date indicated.
Capacity Date
*
- ----------------------------------------------- Chairman of the Board of Directors March 1, 2004
(James R. Houghton)
*
- ----------------------------------------------- Director March 1, 2004
(John Seely Brown)
*
- ----------------------------------------------- Director March 1, 2004
(James B. Flaws)
*
- ----------------------------------------------- Director March 1, 2004
(Gordon Gund)
*
- ----------------------------------------------- Director March 1, 2004
(John M. Hennessy)
*
- ----------------------------------------------- Director March 1, 2004
(Jeremy R. Knowles)
*
- ----------------------------------------------- Director March 1, 2004
(James J. O'Connor)
*
- ----------------------------------------------- Director March 1, 2004
(Deborah D. Rieman)
*
- ----------------------------------------------- Director March 1, 2004
(H. Onno Ruding)
*
- ----------------------------------------------- Director March 1, 2004
(William D. Smithburg)
*
- ----------------------------------------------- Director March 1, 2004
(Hansel E. Tookes II)
*
- ----------------------------------------------- Director March 1, 2004
(Peter F. Volanakis)
*
- ----------------------------------------------- Director March 1, 2004
(Wendell P. Weeks)
/s/ William D. Eggers
*By -----------------------------------------
(William D. Eggers, Attorney-in-fact)
Corning Incorporated
2003 Annual Report
Index to Financial Statements and Financial Statement Schedules
Page
Statement of Management Responsibility for Financial Statements...................................54
Report of Independent Auditors....................................................................55
Consolidated Statements of Operations.............................................................56
Consolidated Balance Sheets.......................................................................57
Consolidated Statements of Cash Flows.............................................................58
Consolidated Statements of Changes in Shareholders' Equity........................................59
Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Policies......................................60
2. Discontinued Operations.........................................................65
3. Inventory Write-down............................................................65
4. Impairment of Goodwill..........................................................65
5. Restructuring Actions...........................................................66
6. Impairment of Long-Lived Assets Other Than Goodwill.............................70
7. Short-Term Investments..........................................................71
8. Inventories.....................................................................72
9. Income Taxes....................................................................72
10. Investments.....................................................................75
11. Property, Net...................................................................81
12. Goodwill and Other Intangible Assets............................................81
13. Other Accrued Liabilities.......................................................82
14. Long-Term Debt and Loans Payable................................................82
15. Employee Retirement Plans.......................................................84
16. Commitments, Contingencies, Guarantees and Hedging Activities...................88
17. Shareholders' Equity............................................................90
18. Loss Per Common Share...........................................................92
19. Stock Compensation Plans........................................................92
20. Business Combinations and Divestitures..........................................94
21. Operating Segments..............................................................95
22. Subsequent Event................................................................98
Financial Statement Schedules:
II. Valuation Accounts and Reserves.................................................99
Quarterly Operating Results....................................................100
Financial Statements of Dow Corning Corporation for the years ended
December 31, 2003, 2002 and 2001...............................................101
Financial Statements of Samsung Corning Precision Glass Co., Ltd. for the
years ended December 31, 2003, 2002 and 2001...................................146
STATEMENT OF MANAGEMENT RESPONSIBILITY
FOR FINANCIAL STATEMENTS
The management of Corning Incorporated is responsible for the preparation,
presentation and integrity of the consolidated financial statements and other
information included in this annual report. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America and include certain amounts based on
management's best estimates and judgments.
In meeting its responsibility for the reliability of these consolidated
financial statements, Corning maintains comprehensive systems of internal
accounting control. These systems are designed to provide reasonable assurance
at reasonable cost that corporate assets are protected against loss or
unauthorized use and that transactions and events are properly recorded. Such
systems are reinforced by written policies, selection and training of competent
financial personnel, appropriate division of responsibilities and a program of
internal audits.
The consolidated financial statements have been audited by our independent
auditors, PricewaterhouseCoopers LLP. Their responsibility is to express an
independent, professional opinion with respect to the consolidated financial
statements on the basis of an audit conducted in accordance with auditing
standards generally accepted in the United States of America.
The Audit Committee of the Board of Directors is responsible for reviewing and
monitoring Corning's financial reporting and accounting practices and the annual
appointment of the independent auditors. The Committee, comprised of independent
directors, meets periodically with management, the internal auditors and the
independent auditors to review and assess the activities of each. Both the
independent auditors and the internal auditors meet with the Committee, without
management present, to review the results of their audits and their assessment
of the adequacy of the systems of internal accounting control and the quality of
financial reporting.
James R. Houghton James B. Flaws
Chairman and Chief Executive Officer Vice Chairman and Chief Financial Officer
Katherine A. Asbeck
Senior Vice President and Controller
REPORT OF INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
To the Board of Directors and Shareholders of Corning Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Corning Incorporated and its subsidiaries at December 31,
2003 and 2002, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2)(i) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Notes 1, 2 and 4 of the consolidated financial statements, as of
January 1, 2002, the Company ceased amortization of goodwill and changed its
method of accounting for discontinued operations to conform with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", respectively.
/s/ PricewaterhouseCoopers LLP
New York, New York
January 22, 2004, except for Note 22, as to which the date is March 1, 2004
Consolidated Statements of Operations Corning Incorporated and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 3,090 $ 3,164 $ 6,047
Cost of sales (Note 3) 2,241 2,562 4,227
---------------------------------------------
Gross margin 849 602 1,820
Operating expenses:
Selling, general and administrative expenses 599 716 1,090
Research, development and engineering expenses 344 483 622
Amortization of purchased intangibles (Note 12) 37 43 76
Amortization of goodwill (Note 1) 363
Restructuring, impairment and other charges and credits (Notes 4, 5 and 6) 111 2,080 5,717
Asbestos settlement (Note 10) 413
---------------------------------------------
Operating loss (655) (2,720) (6,048)
Interest income 32 41 68
Interest expense (Note 14) (154) (179) (153)
Gain on repurchases and retirement of debt, net (Note 14) 19 176
Other expense, net (1) (38) (28)
---------------------------------------------
Loss from continuing operations before income taxes (759) (2,720) (6,161)
Benefit for income taxes (Note 9) (254) (726) (468)
---------------------------------------------
Loss from continuing operations before minority interests
and equity earnings (505) (1,994) (5,693)
Minority interests 73 98 13
Equity in earnings of associated companies, net of impairments (Note 10) 209 116 148
---------------------------------------------
Loss from continuing operations (223) (1,780) (5,532)
Income from discontinued operations, net of income taxes (Note 2) 478 34
---------------------------------------------
Net loss (223) (1,302) (5,498)
Dividend requirements of preferred stock (Note 17) (128) (1)
---------------------------------------------
Loss attributable to common shareholders $ (223) $(1,430) $ (5,499)
=============================================
Basic and diluted (loss) earnings per common share from (Note 18):
Continuing operations $ (0.18) $ (1.85) $ (5.93)
Discontinued operations (Note 2) 0.46 0.04
---------------------------------------------
Basic and diluted loss per common share $ (0.18) $ (1.39) $ (5.89)
=============================================
The accompanying notes are an integral part of these statements.
Consolidated Balance Sheets Corning Incorporated and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions, except share and per share amounts) 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (Note 1) $ 833 $ 1,426
Short-term investments, at fair value (Note 7) 433 664
----------------------------------
Total cash, cash equivalents and short-term investments 1,266 2,090
Trade accounts receivable, net of doubtful accounts and allowances - $38 and $59 525 470
Inventories (Note 8) 467 559
Deferred income taxes (Note 9) 242 296
Other accounts receivable 117 358
Prepaid expenses and other current assets 77 52
----------------------------------
Total current assets 2,694 3,825
----------------------------------
Restricted cash and investments (Note 1) 66 82
Investments (Note 10) 1,045 769
Property, net (Note 11) 3,620 3,705
Goodwill (Note 12) 1,735 1,715
Other intangible assets, net (Note 12) 166 213
Deferred income taxes (Note 9) 1,225 887
Other assets 201 210
----------------------------------
Total Assets $ 10,752 $ 11,406
==================================
Liabilities and Shareholders' Equity
Current liabilities:
Loans payable (Note 14) $ 146 $ 204
Accounts payable 333 339
Other accrued liabilities (Note 13) 1,074 1,137
----------------------------------
Total current liabilities 1,553 1,680
----------------------------------
Long-term debt (Note 14) 2,668 3,963
Postretirement benefits other than pensions (Note 15) 619 617
Other liabilities (Notes 10, 13, 15) 412 396
Commitments and contingencies (Note 16)
Minority interests 36 59
Shareholders' equity (Note 17):
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: 854 thousand and 1.55 million 85 155
Common stock - Par value $0.50 per share; Shares authorized:
3.8 billion; Shares issued: 1,401 million and 1,267 million 701 634
Additional paid-in capital 10,298 9,695
Accumulated deficit (5,144) (4,921)
Treasury stock, at cost; Shares held: 58 million and 70 million (574) (702)
Accumulated other comprehensive income (loss) 98 (170)
----------------------------------
Total shareholders' equity 5,464 4,691
----------------------------------
Total Liabilities and Shareholders' Equity $ 10,752 $ 11,406
==================================
The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows Corning Incorporated and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Loss from continuing operations $ (223) $(1,780) $ (5,532)
Adjustments to reconcile loss from continuing operations
to net cash provided by (used in) operating activities:
Amortization of purchased intangibles 37 43 76
Amortization of goodwill 363
Depreciation 480 618 621
Asbestos settlement 413
Restructuring, impairment and other charges and credits 111 2,080 5,717
Gain on repurchases of debt, net of inducements (19) (176)
Inventory write-down 333
Stock compensation charges 1 3 130
Undistributed earnings of associated companies (97) (33) (75)
Minority interests, net of dividends paid (77) (98) (22)
Deferred income tax benefit (263) (432) (528)
Interest expense on convertible debentures 18 38 41
Tax benefit on stock options 2 27
Restructuring payments (233) (278) (77)
Increases in restricted cash (3) (53)
Income tax refund 191
Employee benefits payments in excess of expense (142) (55) (23)
Changes in certain working capital items (Note 1) (62) (233) 240
Other, net (1) 32 91
------------------------------------
Net cash provided by (used in) operating activities 133 (324) 1,382
------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (366) (357) (1,741)
Acquisitions of businesses, net of cash acquired (6) (56) (66)
Proceeds from sale of precision lens business 9 787
Net proceeds from sale or disposal of assets 46 92 67
Increase in long-term investments and other long-term assets (10) (31) (113)
Short-term investments - acquisitions (1,584) (2,222) (1,320)
Short-term investments - liquidations 1,814 2,742 853
Restricted investments - acquisitions (117)
Restricted investments - liquidations 19 88
Other, net (2) 4
------------------------------------
Net cash (used in) provided by investing activities (78) 924 (2,316)
------------------------------------
Cash Flows from Financing Activities:
Net (repayments of) proceeds from loans payable (162) (490) 181
Proceeds from issuance of long-term debt 11 735
Repayments of long-term debt (1,193) (325) (104)
Proceeds from issuance of Series C preferred stock, net 557
Proceeds from issuance of common stock, net 667 52 247
Repurchases of common stock for treasury (23)
Cash dividends paid to preferred and common shareholders (19) (88) (113)
Other, net (1) (8) (42)
------------------------------------
Net cash (used in) provided by financing activities (708) (314) 904
------------------------------------
Effect of exchange rates on cash 60 43 (7)
Cash (used in) provided by continuing operations (593) 329 (37)
Cash provided by (used in) discontinued operations (Note 2) 60 (5)
------------------------------------
Net (decrease) increase in cash and cash equivalents (593) 389 (42)
Cash and cash equivalents at beginning of year 1,426 1,037 1,079
------------------------------------
Cash and cash equivalents at end of year $ 833 $ 1,426 $ 1,037
====================================
The accompanying notes are an integral part of these statements.
Consolidated Statements of Changes in Shareholders' Equity Corning Incorporated and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions)
Retained Accumulated
Series C Capital in earnings other Total
Preferred Common excess of Unearned (accumulated Treasury comprehensive shareholders'
stock stock par value compensation deficit) stock income (loss) equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 501 $ 9,315 $ (304) $ 2,001 $ (753) $ (127) $ 10,633
Net loss (5,498) (5,498)
Foreign currency translation
adjustment (31) (31)
Net unrealized loss on
investments, net of tax (45) (45)
Other comprehensive income 10 10
-----------
Total comprehensive loss (5,564)
-----------
Shares issued in acquisitions 2 163 165
Shares issued in equity offerings 7 218 225
Shares issued to benefit plans (166) 239 (33) 40
Dividends on stock ($0.12
per share) (113) (113)
Other, net 2 7 60 (41) 28
-------------------------------------------------------------------------------------------------
Balance, December 31, 2001 512 9,537 (5) (3,610) (827) (193) 5,414
Net loss (1,302) (1,302)
Foreign currency translation
adjustment 208 208
Minimum pension liability
adjustment (173) (173)
Net unrealized gain on
investments, net of tax 6 6
Other comprehensive loss (18) (18)
-----------
Total comprehensive loss (1,279)
-----------
Issuance of Series C preferred
stock, net $ 575 (18) 557
Series C preferred stock
conversions (420) 107 313
Shares issued in acquisitions 15 34 49
Shares issued to benefit plans (97) 148 51
Purchase of common stock
for treasury (23) (23)
Dividends on preferred stock (118) (118)
Other, net 46 3 (9) 40
-------------------------------------------------------------------------------------------------
Balance, December 31, 2002 155 634 9,697 (2) (4,921) (702) (170) 4,691
Net loss (223) (223)
Foreign currency translation
adjustment 239 239
Minimum pension liability
adjustment 26 26
Net unrealized gain on
investments, net of tax 1 1
Other comprehensive income 2 2
-----------
Total comprehensive income 45
-----------
Series C preferred stock
conversions (70) 18 52
Shares issued in equity offerings 47 583 630
Shares issued to benefit plans (37) 65 28
Other, net 2 22 (17) 63 70
-------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 85 $ 701 $ 10,317 $ (19) $(5,144) $ (574) $ 98 $ 5,464
=================================================================================================
The accompanying notes are an integral part of these statements.
Notes to Consolidated Corning Incorporated and Subsidiary Companies
Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of all entities
controlled by Corning and our majority-owned domestic and foreign subsidiaries,
after elimination of all material intercompany accounts, transactions and
profits.
The equity method of accounting is used for investments in associated companies
which are not controlled by Corning and in which our interest is generally
between 20% and 50%. Our share of earnings or losses of associated companies, in
which at least 20% of the voting securities is owned, is included in the
consolidated operating results.
We consolidate one variable interest entity in which we are the primary
beneficiary.
On December 13, 2002, we completed the sale of the precision lens business to 3M
Company ("3M"). Our consolidated statements of operations and cash flows and
related notes present the precision lens business as a discontinued operation.
Certain amounts for 2002 and 2001 have been reclassified to conform with the
2003 classifications.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect amounts reported therein.
Significant estimates and assumptions in these Consolidated Financial Statements
include restructuring and other charges and credits, allowances for doubtful
accounts receivable, estimates of future cash flows and other assumptions
associated with goodwill and long-lived asset impairment tests, estimates of the
fair value of assets held for disposal, environmental and legal liabilities,
income taxes and deferred tax valuation allowances, and the determination of
discount and other rate assumptions for pension and postretirement employee
benefit expenses. Due to the inherent uncertainty involved in making estimates,
actual results reported in future periods may be different from these estimates.
Revenue Recognition
We recognize revenue when it is realized or realizable and has been earned.
Product revenue is recognized when persuasive evidence of an arrangement exists,
the product has been delivered and legal title and all risks of ownership have
been transferred, customer acceptance has occurred, and payment is reasonably
assured. We reduce revenue for estimated product returns, allowances and price
discounts based on past experience.
Foreign Currencies
Balance sheet accounts of foreign subsidiaries are translated at current
exchange rates and statements of operations accounts are translated at average
exchange rates for the year. Translation gains and losses are reported as a
separate component of accumulated other comprehensive income (loss). Foreign
currency transaction gains and losses are included in current earnings.
Stock-Based Compensation
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation ("SFAS No. 123")," we apply the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees," to our stock
options and other stock-based compensation plans. These plans are more fully
described in Note 19 (Stock Compensation Plans).
In accordance with APB No. 25, compensation expense for stock options is
recognized in income based on the excess, if any, of the quoted market price of
the stock at the grant date of the award or other measurement date over the
amount an employee must pay to acquire the stock. Generally, the exercise price
for stock options granted to employees equals or exceeds the fair market value
of our common stock at the date of grant.
1. Summary of Significant Accounting Policies (continued)
The following table illustrates the effect on loss from continuing operations
and loss per share if we had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation. The estimated fair value of
each Corning option is calculated using the Black-Scholes option-pricing model.
(In millions, except per share amounts):
- -----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations - as reported $ (223) $ (1,780) $ (5,532)
Less: Dividend requirements of preferred stock (128) (1)
- -----------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations attributable to common
shareholders - as reported (223) (1,908) (5,533)
Add: Stock-based employee compensation expense
determined under APB No. 25, included in reported
loss from continuing operations, net of tax 1 1 79
Less: Stock-based employee compensation expense
determined under fair value based method, net of tax (162) (278) (446)
- -----------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations attributable to common
shareholders - pro forma $ (384) $ (2,185) $ (5,900)
- -----------------------------------------------------------------------------------------------------------------------------------
Loss per common share from continuing operations:
Basic - as reported $ (0.18) $ (1.85) $ (5.93)
Basic - pro forma $ (0.30) $ (2.12) $ (6.32)
Diluted - as reported $ (0.18) $ (1.85) $ (5.93)
Diluted - pro forma $ (0.30) $ (2.12) $ (6.32)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents
All short-term, highly liquid investments with original maturities of 90 days or
less, are considered cash equivalents.
Supplemental disclosure of cash flow information follows (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Changes in certain working capital items:
Trade accounts receivable $ 153 $ 666
Inventories $ 108 135 (47)
Other current assets 49 (363) 92
Accounts payable and other current liabilities, net of
restructuring payments (219) (158) (471)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ (62) $ (233) $ 240
- -----------------------------------------------------------------------------------------------------------------------------------
Cash paid (received) for interest and income taxes:
Interest expense $ 124 $ 112 $ 111
Income taxes, net of refunds received $ (145) $ 60 $ 99
- -----------------------------------------------------------------------------------------------------------------------------------
Short-Term Investments
Our short-term investments consist of debt securities classified as
available-for-sale, which are stated at estimated fair value. These debt
securities include U.S. treasury notes, state and municipal bonds, asset-backed
securities, corporate bonds, commercial paper and certificates of deposit. These
investments are on deposit with a major financial institution. Unrealized gains
and losses, net of tax, are computed on the first-in first-out basis and are
reported as a separate component of accumulated other comprehensive income
(loss) in shareholders' equity until realized.
1. Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
Restricted Cash and Investments
Restricted cash and investments represent cash and investments that we are
temporarily unable to access or funds set aside for other legally restricted
purposes. Restricted cash consists primarily of cash provided as collateral for
performance bonds and self-insured workers' compensation liabilities. Restricted
investments also include U.S. treasury securities pledged as collateral to
secure the payments on a promissory note. The note was issued in connection with
a one-time dividend that was declared upon the issuance of the Series C
convertible preferred stock.
Other Investments
Other investments include equity securities for which Corning does not have the
ability to exercise significant influence. These investments are accounted for
under the cost method of accounting. Equity securities that we are restricted
from selling beyond one year are carried at cost. Unrestricted shares are
adjusted to market value at the end of each accounting period. Unrealized gains
and losses are reported in a separate component of shareholders' equity under
the caption accumulated other comprehensive income (loss). A decline in the
value of other investments below cost that is deemed to be other than temporary
is charged to earnings, resulting in a new cost basis for that investment.
Property and Depreciation
Land, buildings and equipment are recorded at cost. Depreciation is based on
estimated useful lives of properties using the straight-line method. Except as
described in Note 5 (Restructuring Actions) related to accelerated depreciation
arising from restructuring programs, the estimated useful lives range from 20
to 40 years for buildings and 3 to 20 years for the majority of our equipment.
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142 ("SFAS No. 142"), "Goodwill
and Other Intangible Assets." Among other provisions, goodwill is no longer
amortized but is subject to impairment tests at least annually. We selected
the fourth quarter to perform the annual impairment test for goodwill. We
adopted SFAS No. 142 on January 1, 2002. We completed our initial impairment
review during the first quarter of 2002 and concluded a transitional impairment
charge from the adoption of the standard was not required. As described in
Note 4 (Impairment of Goodwill), during the fourth quarter of 2002, we recorded
a goodwill impairment charge in accordance with SFAS No. 142.
The following table presents a reconciliation of reported net loss and loss per
share to adjusted net loss and loss per share, as if SFAS No. 142 had been in
effect as of January 1, 2001 (in millions, except per share amounts):
- --------------------------------------------------------------------------------
Years ended December 31,
---------------------------------
2003 2002 2001
- ------------------------------------------------------------------------------
Reported net loss $ (223) $(1,302) $(5,498)
Goodwill amortization, net of income taxes 345
---------------------------------
Adjusted net loss $ (223) $(1,302) $(5,153)
=================================
Reported net loss per share - basic $(0.18) $ (1.39) $ (5.89)
Goodwill amortization, net of income taxes 0.37
---------------------------------
Adjusted net loss per share - basic $(0.18) $ (1.39) $ (5.52)
=================================
Reported net loss per share - diluted $(0.18) $ (1.39) $ (5.89)
Goodwill amortization, net of income taxes 0.37
---------------------------------
Adjusted net loss per share - diluted $(0.18) $ (1.39) $ (5.52)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
Goodwill is allocated to our reporting units, which are the Telecommunications
operating segment and the display technologies and specialty materials
products of the Technologies operating segment. SFAS No. 142 defines a
reporting unit as an operating segment or one level below an operating segment.
SFAS No. 142 requires us to compare the fair value of the reporting unit to its
carrying amount on an annual basis to determine if there is potential
impairment. We perform interim impairment tests when events or changes in
circumstances occur that would more likely than not reduce the fair value of a
reporting unit below its carrying value. If the fair value of the reporting unit
is less than its carrying value, an impairment loss is recorded to the extent
that the fair value of the goodwill within the reporting unit is less than its
carrying value. The fair value of the reporting unit is determined based on
discounted cash flows, market multiples or appraised values as appropriate.
Other intangible assets are recorded at cost and amortized over periods
generally ranging from 5 to 20 years.
Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets, such as plant and
equipment, intangible assets and investments, when events or changes in
circumstances occur that indicate that the carrying value of the asset or asset
group may not be recoverable. The assessment of possible impairment is based on
our ability to recover the carrying value of the asset or asset group from the
expected future pre-tax cash flows (undiscounted and without interest charges)
of the related operations. We assess the recoverability of the carrying value of
long-lived assets at the lowest level for which identifiable cash flows are
largely independent of the cash flows of other assets and liabilities. If these
cash flows are less than the carrying value of such asset or asset group, an
impairment loss is measured based on the difference between estimated fair value
and carrying value. Assets to be disposed are written-down to the greater of
their fair value or salvage value. Fair values are based on assumptions
concerning the amount and timing of estimated future cash flows and assumed
discount rates, reflecting varying degrees of perceived risk.
Treasury Stock
Shares of common stock repurchased by us are recorded at cost as treasury stock
and result in a reduction of shareholders' equity in the consolidated balance
sheets. From time to time, treasury shares may be reissued as contributions to
our employee benefit plans. When shares are reissued, we use an average cost
method for determining cost. The difference between the cost of the shares and
the reissuance price is added or deducted from additional paid-in capital.
Income Taxes
We use the asset and liability approach to account for income taxes. Under this
method, deferred tax assets and liabilities are recognized for the expected
future tax consequences of differences between the carrying amounts of assets
and liabilities and their respective tax base using enacted tax rates in effect
for the year in which the differences are expected to reverse. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period when the change is enacted. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
Derivative Instruments
We participate in a variety of foreign exchange forward contracts, foreign
exchange option contracts and interest rate swaps entered into in connection
with the management of our exposure to fluctuations in foreign exchange and
interest rates. These financial exposures are managed in accordance with
corporate policies and procedures.
All derivatives are recorded at fair value on the balance sheet. Changes in the
fair value of derivatives designated as cash flow hedges and hedges of net
investments in foreign operations are recorded in accumulated other
comprehensive income (loss). Amounts are reclassified from accumulated other
comprehensive income (loss) when the underlying hedged item impacts earnings.
Changes in the fair value of derivatives designated as fair value hedges are
recorded currently in earnings offset to the extent the derivative was
effective, by the changes in the fair value of the hedged item. Changes in the
fair value of derivatives not designated as hedging instruments are recorded
currently in earnings.
Effective January 1, 2001, Corning adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and
SFAS No. 138. The adoption of SFAS No. 133 as of January 1, 2001, resulted in a
cumulative after-tax credit to comprehensive income of $3 million. For the years
ended December 31, 2003 and 2001, respectively, an after-tax loss of $3 million
and $4 million was recorded in "other expense, net" for the ineffective portion
of cash flow hedges.
1. Summary of Significant Accounting Policies (concluded)
We have issued foreign currency denominated debt that has been designated as a
hedge of the net investment in a foreign operation. The effective portion of the
changes in fair value of the debt is reflected as a component of other
comprehensive income (loss) as part of the foreign currency translation
adjustment. During 2001, the after-tax amount included in other comprehensive
income (loss) as a result of a net investment hedge was $6 million.
Product Warranties
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. Reserves for warranty
items are included in other current liabilities.
New Standards Adopted
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The revised standard requires
incremental pension and other postretirement benefit plan disclosures to
financial statements and is designed to improve disclosure transparency. The
adoption of this accounting standard did not have any effect on our results of
operations or financial position.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51," ("FIN 46") 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 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 of these existing VIEs, and
therefore, began to consolidate this entity beginning on July 1, 2003. At
December 31, 2003, the assets and debt of this entity were $31 million and $34
million, respectively. We also evaluated the impact of this interpretation on
the two other entities and determined that we are not the primary beneficiary
for either entity. The assets and debt of these entities total $12 million. The
adoption of this interpretation did not have a material effect on our results of
operations or financial position.
In addition, we adopted the following new standards in 2003, which did not have
a material impact on our consolidated financial position or results of
operations:
.. SFAS No. 143, "Accounting for Asset Retirement Obligations,"
.. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities,"
.. FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45"),
.. 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."
2. Discontinued Operations
On December 13, 2002, we completed the sale of our precision lens business to 3M
for cash proceeds up to $850 million, of which $50 million was deposited in an
escrow account. During 2002, we received approximately $800 million in cash and
recorded a gain on the sale of $415 million, net of tax, in income from
discontinued operations in the consolidated statements of operations. 3M has
notified Corning that 3M believes it has certain claims arising out of the
representations and warranties made by Corning in connection with the sale of
the precision lens business to 3M. The parties are attempting to resolve such
claims. In 2003, $1 million of the escrow balance was used to pay state income
taxes. At December 31, 2003, approximately $49 million remains in the escrow
account, and no other gain on the sale of the precision lens business will be
recognized until such claims are resolved.
The precision lens business operating results and cash flows have been removed
from our results of continuing operations for all periods presented and have
been excluded from the operating segments data. There were no results from
discontinued operations in 2003.
Summarized selected financial information for the discontinued operations
related to the precision lens business follows (in millions):
- -------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------
2002 2001
- -------------------------------------------------------------------------------
Net sales $ 268 $ 225
==========================
Income before taxes $ 100 $ 50
Gain on sale before taxes 652
Provision for income taxes (274) (16)
--------------------------
Net income $ 478 $ 34
- -------------------------------------------------------------------------------
3. Inventory Write-down
During the second quarter of 2001, major customers in the photonic technologies
product line reduced their order forecasts and canceled orders already placed.
As a result, we determined that certain products were not likely to be sold
during their product life cycle. We recorded a charge to write-down excess and
obsolete inventory, including estimated purchase commitments, of $273 million
($184 million after-tax), which is included in cost of sales in the consolidated
statement of operations. In the fourth quarter of 2001, we recorded an
additional charge of $60 million ($37 million after-tax) for excess and obsolete
inventory primarily in the photonic technologies product line in response to
continued weak demand. This charge was also included in cost of sales.
During the second quarter of 2002, we favorably resolved an open issue from the
second quarter of 2001 with a major photonic technologies' customer, which
resulted in the recognition of revenue of $14 million and pre-tax income of $3
million. This revenue was recognized in part on shipment of inventory previously
reserved. In addition, the business settled an open matter with a significant
vendor, which resulted in the reversal of a vendor reserve of $20 million that
was included in the second quarter 2001 charge. In total, the impact of these
settlements in the second quarter of 2002 was pre-tax income of $23 million.
4. Impairment of Goodwill
2003 Annual Assessment
Due to market conditions in the telecommunications and semiconductor industries,
we performed goodwill impairment tests for our Telecommunications and specialty
materials reporting units in the fourth quarter of 2003. The results of our
impairment tests indicated that the fair value of each reporting unit exceeded
its book value.
4. Impairment of Goodwill (concluded)
2002 Charge
In the fourth quarter of 2002, we conducted our annual impairment tests and
concluded that an impairment charge of $400 million ($294 million after-tax) was
necessary to reduce the carrying value of goodwill in the Telecommunications
reporting unit to its estimated fair value of $1.6 billion. The decrease in fair
value at the end of 2002 from that measured in the initial benchmark assessment
on January 1, 2002 primarily reflected the following:
.. a delay in the timing of the expected recovery from late 2002, or early 2003
to 2005,
.. a reduction in the short-term cash flow expectations of the fiber and cable
business and a lower base from which the expected recovery will occur, and
.. a reduction in the short and long-term cash flow expectations of the photonic
technologies product line.
We retained valuation specialists to assist in the valuation of our tangible and
identifiable intangible assets for the purpose of determining the implied fair
value of goodwill at December 31, 2002.
2001 Charge
During the first half of 2001, we experienced a significant decrease in the rate
of growth of our Telecommunications segment, primarily in the photonic
technologies product line due to a dramatic decline in infrastructure spending
in the telecommunications industry, and determined that there were events of
impairment within photonics. We determined that our goodwill related to
photonics was not recoverable under SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," which was the
governing GAAP guidance at that time. As a result, we recorded a charge of $4.6
billion to impair a significant portion of goodwill, of which $3.0 billion
related to the Pirelli transaction and $1.6 billion related to goodwill
resulting from the acquisition of NetOptix Corporation.
5. Restructuring Actions
Corning recorded net charges of $49 million ($14 million credit after tax and
minority interest) in 2003. Major actions approved and initiated in 2003
included the following:
.. the shutdown of our 51% owned venture Corning Asahi Video Products Company
("CAV"), which was a manufacturer of glass panel and funnels for use in
conventional tube televisions within the Technologies segment,
.. the sale and exit of our photonics products within the Telecommunications
segment, and
.. the shutdown of two of our specialty materials manufacturing facilities,
which are within the Technologies segment.
Restructuring Charges
- ---------------------
The 2003 restructuring charges of $41 million included $90 million of employee
separation costs (including special termination and curtailment losses related
to pension and postretirement health care plans) and $37 million in other exit
costs (principally lease termination and contract cancellation payments), offset
by an $86 million credit related to previous restructuring actions. These
credits were primarily the result of revised cost estimates of existing
restructuring plans and a decision to not exit two small cabling sites. The
charge entailed the elimination of approximately 1,975 hourly and salaried
positions including involuntary separation, early retirement and social
programs. In addition, we recorded a $20 million foreign deferred tax benefit
adjustment related to restructuring charges recorded in 2002. This credit is
reflected in the consolidated statement of operations under, "Benefit for income
taxes."
Impairment of Plant and Equipment to be Shutdown or Disposed
- ------------------------------------------------------------
Corning recorded a net credit of $21 million in 2003. This included $40 million
of charges to impair plant and equipment related to facilities to be shutdown or
disposed, which comprised $11 million for the North Brookfield semiconductor
materials plant closure, $14 million related to a cabling plant, $10 million
related to the final exit of photonics, and $5 million of other various costs.
The impairment charges were determined based on the amount by which the carrying
value exceeded the fair market value of the asset. The charge was more than
offset by $61 million in credits related to previous restructuring actions.
These credits were primarily the result of our decision not to exit two of the
previous cabling sites marked for shutdown in 2002 as well as proceeds on asset
disposals exceeding assumed salvage values.
Impairment of Cost Investments
- ------------------------------
In the first quarter, we recorded a $5 million charge for other than temporary
declines in certain cost investments in the Telecommunications segment. In the
third quarter, we sold these investments for $4 million in cash, which was $1
million more than previously expected. We reported this gain as a credit to
restructuring actions.
5. Restructuring Actions (continued)
Loss on Sale of Photonics
- -------------------------
We recorded a loss of $13 million in the third quarter when we completed the
sale of certain photonic technologies assets to Avanex Corporation ("Avanex").
In exchange for our photonics assets and $22 million in cash, we received 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. Approximately 400 employees of the photonic technologies products became
employees of Avanex in the third quarter. The loss on sale included a $21
million reduction of our goodwill. See Note 10 (Investments) for further detail.
In addition to these restructuring action costs, we also incurred the following
charges in our consolidated statement of operations related to the exit of
photonics:
.. an increase to the deferred tax valuation allowance by $21 million as we do
not expect to realize certain deferred tax assets in Italy, which is
reflected in the consolidated statement of operations under, "Benefit for
income taxes," and
.. a $7 million impairment charge for equity investments that were abandoned as
part of the exit from photonics, which is reflected in the consolidated
statement of operations under, "Equity in earnings of associated companies,
net of impairments."
Accelerated Depreciation
- ------------------------
We recorded $12 million of accelerated depreciation as a result of our decision
to shutdown our semiconductor materials manufacturing facility in Charleston,
South Carolina by March 31, 2004. We will record an additional $36 million in
the first quarter of 2004 while the plant continues operating.
The following table summarizes the charges, credits and balances of the restructuring reserves as of and for the year ended
December 31, 2003 (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003
-------------------------------------- Remaining
Reversals Net Non-cash Cash reserve at
January 1, to existing charges/ uses payments Dec. 31,
2003 Charges plans (reversals) in 2003 in 2003 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 273 $ 90 $ (63) $ 27 $ (27) $ (195) $ 78
Exit costs 132 37 (23) 14 (38) 108
----------------------------------------------------------------------------------------
Total restructuring charges $ 405 $ 127 $ (86) $ 41 $ (27) $ (233) $ 186
----------------------------------------------------------------------------------------
Impairment:
Assets to be disposed of by sale
or abandonment $ 40 $ (61) $ (21)
Cost investments 5 (1) 4
------------------------------------
Total impairment charges $ 45 $ (62) $ (17)
------------------------------------
Other:
Loss on Avanex transaction $ 13 $ 13
Accelerated depreciation 12 12
------------------------------------
Total other charges $ 25 $ 25
------------------------------------
Total restructuring, impairment and
other charges and credits $ 197 $ (148) $ 49
Tax (benefit) expense and minority
interest (83) 20 (63)
------------------------------------
Restructuring, impairment and other
charges and credits, net $ 114 $ (128) $ (14)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash payments for employee-related costs will be substantially completed by the
end of 2004, while payments for exit activities will be substantially completed
by the end of 2005. We expect approximately one-half of the 2003 restructuring
charges to be paid in cash.
5. Restructuring Actions (continued)
The following table summarizes the net charge (reversals) for 2003 restructuring actions by operating segment (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate
Functions
Telecom- Including
munications Technologies Research Total
- -----------------------------------------------------------------------------------------------------------------------------------
Net charges (reversals) for restructuring actions $ (36) $ 72 $ 13 $ 49
- -----------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the headcount reduction related to the 2003 plans:
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S.Salaried Non-U.S. Total
- -----------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 975 750 250 1,975
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2003, approximately 1,600 of the 1,975 employees had been
separated under the 2003 plans. We expect the remaining to be separated by
December 31, 2004, with the majority to be separated by the end of the first
quarter of 2004.
2002 Restructuring Actions
The continued decline in demand in the Telecommunications segment during 2002
required additional restructuring beyond that taken in 2001 to bring
manufacturing capacity in line with revenue projections. We recorded total
charges of $1.3 billion ($929 million after-tax and minority interest) over the
second, third and fourth quarters. Actions approved and initiated in 2002
included the following:
.. permanent closing of our optical fiber manufacturing facilities in Noble
Park, Victoria, Australia, and Neustadt bei Coburg, Germany. We also
mothballed our optical fiber manufacturing facility in Concord, North
Carolina and transferred certain capabilities to our Wilmington, North
Carolina facility,
.. reductions in capacity and employment in our cabling and hardware and
equipment locations worldwide to reduce costs,
.. permanent closure of our photonic technologies thin film filter manufacturing
facility in Marlborough, Massachusetts,
.. permanent abandonment of certain construction projects that had been stopped
in 2001 in the fiber and cable business within the Telecommunications
segment,
.. closure of minor manufacturing facilities, primarily in the
Telecommunications segment,
.. closure and consolidation of research facilities,
.. elimination of positions worldwide through voluntary and involuntary
programs, and
.. divestiture of a portion of the controls and connectors product line in the
Telecommunications segment.
In addition, we impaired cost based investments in a number of private
telecommunications companies based upon a decision in the fourth quarter of 2002
to divest the portfolio.
5. Restructuring Actions (continued)
The following table summarizes the charges, credits and balances of the restructuring reserves as of December 31, 2002
(in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
-------------------------------------- Remaining
Reversals Net Non-cash Cash reserve at
January 1, to existing charges/ uses payments Dec. 31,
2002 Charges plans (reversals) in 2002 in 2002 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 198 $ 376 $ (5) $ 371 $ (40) $ (256) $ 273
Exit costs 78 85 (9) 76 (22) 132
----------------------------------------------------------------------------------------
Total restructuring charges $ 276 $ 461 $ (14) $ 447 $ (40) $ (278) $ 405
----------------------------------------------------------------------------------------
Impairment:
Assets to be disposed of by sale
or abandonment $ 712 $ (11) $ 701
Cost investments 107 107
-------------------------------------
Total impairment charges $ 819 $ (11) $ 808
-------------------------------------
Other:
Loss on divestiture $ 16 $ 16
Total restructuring, impairment and
other charges and credits $ 1,296 $ (25) $ 1,271
Tax (benefit) expense and minority
interest (352) 10 (342)
-------------------------------------
Restructuring, impairment and other
charges and credits, net $ 944 $ (15) $ 929
- -----------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the net charges (reversals) for 2002 restructuring actions by operating segment (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate
Functions
Telecom- Including
munications Technologies Research Total
- -----------------------------------------------------------------------------------------------------------------------------------
Net charges for restructuring actions $ 1,053 $ 10 $ 208 $ 1,271
- -----------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the headcount reduction related to the 2002 plans:
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
- -----------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 1,650 2,950 2,500 7,100
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2003, all of the 7,100 employees from the 2002 plan had been
separated.
2001 Restructuring Actions
In July and October of 2001, we announced a series of restructuring actions in
response to significant deteriorating business conditions which began initially
in our Telecommunications segment, but eventually spread to our other businesses
as the year progressed. The following actions were approved and undertaken in
2001:
.. closure of seven major manufacturing facilities and the consolidation of
several smaller facilities in the Telecommunications and Technologies
segments,
.. discontinuation of our initiative in Corning Microarray Technology products,
part of our life sciences products, and
.. elimination of approximately 12,000 positions affecting all operating
segments, but especially impacting the photonic technologies, hardware and
equipment and the optical fiber and cable products. This action included a
selective voluntary early retirement program for certain employees along
with involuntary separations.
These actions resulted in a pre-tax charge totaling $953 million ($585 million
after-tax) for the year ended December 31, 2001. Approximately one third of the
total charge was expected to be paid in cash.
5. Restructuring Actions (concluded)
The following table summarizes the charges and balances of the restructuring reserves as of December 31, 2001 (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
Non-cash Cash Remaining
Total uses payments reserve at
charges in 2001 in 2001 Dec. 31, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 324 $ (66) $ (60) $ 198
Exit costs 95 (17) 78
------------------------------------------------------------
Total restructuring charges $ 419 $ (66) $ (77) $ 276
------------------------------------------------------------
Impairment:
Assets held for use $ 46
Assets to be disposed of by sale or abandonment 496
---------
Total impairment charges $ 542
---------
Total restructuring and impairment charges $ 961
Discontinued operations (8)
---------
Restructuring and impairment charges
from continuing operations 953
Tax benefit and minority interest 368
---------
Restructuring and impairment charges, net $ 585
- -----------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the charge for 2001 restructuring actions by operating segment (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate
Functions
Telecom- Including
munications Technologies Research Total
- -----------------------------------------------------------------------------------------------------------------------------------
Charges for restructuring actions $ 640 $ 122 $ 191 $ 953
- -----------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the headcount reduction related to the 2001
plans:
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
- -----------------------------------------------------------------------------------------------------------------------------------
Headcount reduction 6,000 3,100 2,900 12,000
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2002, all of the 12,000 employees had been separated under
the plans.
6. Impairment of Long-Lived Assets Other Than Goodwill
Given our restructuring actions and the market conditions facing our businesses,
at various times throughout 2001 to 2003, we performed evaluations of the
recoverability of our long-lived assets. In each case that an impairment
evaluation was required, we developed operating cash flow projections for each
strategic alternative and made assessments as to the probability of each
outcome. If our projections indicated that our long lived assets were not
recoverable through future cash flows, we were then required to estimate the
fair value of the long-lived assets, which were limited to property, plant and
equipment, using the expected cash flow approach as a measure of fair value.
2003 Impairment Charges
In April 2003, we announced that we had agreed with our partner to shutdown CAV
and wrote down its assets to their estimated salvage values. This resulted in an
impairment charge of $62 million ($19 million after-tax and minority interest).
6. Impairment of Long-Lived Assets Other Than Goodwill (concluded)
Subsequent to our decision to exit, CAV signed a definitive agreement to sell
tangible assets to Henan Anyang CPT Glass Bulb Group, Electronic Glass Co., Ltd.
(Henan Anyang), located in China, for amounts exceeding estimated salvage
values. Upon the receipt of $10 million in cash, we recognized a $5 million
credit in restructuring. We expect the sale to be completed in the first half of
2004 at which time we anticipate recognizing an additional gain of approximately
$40 million ($13 million after-tax and minority interest).
2002 Impairment Charges
Photonic technologies
- ---------------------
In 2002, the telecommunications market underwent a dramatic decline in demand
for its products as major buyers of network equipment in this industry reduced
their capital spending. This negative trend was expected to continue into the
foreseeable future. As a result of our impairment evaluation, the photonics
assets were written down to estimated salvage value, as this amount was our best
estimate of fair value. This resulted in a $269 million ($195 million after-tax)
write-down of the long-lived assets including $90 million related to patents.
Conventional video components
- -----------------------------
In 2002, the market was impacted by a decline in demand for conventional
television glass and a dramatic increase in the importation of television glass,
tubes and sets from Asia. These trends were expected to continue into the
foreseeable future. As a result of our impairment evaluation, the CAV's assets
were written down to their estimated fair values. This resulted in a $140
million ($44 million after-tax and minority interest) write down of the assets.
2001 Impairment Charges
Photonic technologies
- ---------------------
In 2001, the telecommunications market's dramatic decline began. We performed an
asset impairment evaluation of our photonics product line and incurred a charge
of $116 million to write-down intangible assets to their estimated fair values.
7. Short-Term Investments
We invest in publicly traded, highly liquid debt securities with credit ratings
of A or better (A-2 and P-2 or better for short-term ratings).
The following is a summary of the fair value of available-for-sale securities
(in millions):
- -------------------------------------------------------------------------------
December 31,
-----------------------
2003 2002
- -------------------------------------------------------------------------------
Bonds, notes and other securities
United States government and agencies $ 88 $ 315
States and municipalities 93 168
Asset-backed securities 93 58
Commercial paper 25 10
Other debt securities 134 113
- -------------------------------------------------------------------------------
Total short-term investments $ 433 $ 664
- -------------------------------------------------------------------------------
Gross unrealized gains and losses were insignificant at December 31, 2003 and
2002.
The following table summarizes the contractual maturities of debt securities at
December 31, 2003 (in millions):
- -------------------------------------------------------------------------------
Less than one year $ 137
Due in 1-2 years 123
Due in 2-5 years 89
Due after 5 years 84
- -------------------------------------------------------------------------------
Total $ 433
- -------------------------------------------------------------------------------
Proceeds from sales of short-term investments totaled $1.4 billion and $2.2
billion in 2003 and 2002, respectively. The gross realized gains related to
sales of short-term investments were $2 million in 2003 and $10 million in 2002.
The gross realized losses related to sales of short-term investments were
insignificant in 2003 and $8 million in 2002.
8. Inventories
Inventories consist of the following (in millions):
- -------------------------------------------------------------------------------
December 31,
---------------------------
2003 2002
- -------------------------------------------------------------------------------
Finished goods $ 141 $ 212
Work in process 113 115
Raw materials and accessories 138 135
Supplies and packing materials 75 97
- -------------------------------------------------------------------------------
Total inventories $ 467 $ 559
- -------------------------------------------------------------------------------
9. Income Taxes
- ---------------------------------------------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------------
(In millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations before income taxes:
U.S. companies $ (927) $ (2,045) $ (2,995)
Non-U.S. companies 168 (675) (3,166)
- ---------------------------------------------------------------------------------------------------------------------
Loss from continuing operations before income taxes $ (759) $ (2,720) $ (6,161)
- ---------------------------------------------------------------------------------------------------------------------
Current and deferred (benefit) provision for income taxes:
Current:
Federal $ (11) $ (330) $ (22)
State and municipal (3) (7) 9
Foreign 23 43 73
Deferred:
Federal (258) (263) (420)
State and municipal (24) (70) (72)
Foreign 19 (99) (36)
- ---------------------------------------------------------------------------------------------------------------------
Benefit for income taxes $ (254) $ (726) $ (468)
- ---------------------------------------------------------------------------------------------------------------------
Effective tax rate reconciliation:
Statutory U.S. benefit rate (35.0)% (35.0)% (35.0)%
State income benefit, net of federal benefit (5.3)% (2.7) (0.8)
Nondeductible goodwill and other expenses 0.6 1.1 28.4
Foreign and other tax credits (0.1) (0.3)
Lower (higher) taxes on subsidiary earnings 0.8 (0.1) (0.3)
Valuation allowances 4.9 10.2 0.5
Other items, net 0.7 (0.2) (0.1)
- ---------------------------------------------------------------------------------------------------------------------
Effective income tax (benefit) rate (33.4)% (26.7)% (7.6)%
- ---------------------------------------------------------------------------------------------------------------------
9. Income Taxes (continued)
The tax effects of temporary differences and carryforwards that gave rise to
significant portions of the deferred tax assets and liabilities follow (in
millions):
- -------------------------------------------------------------------------------
December 31,
--------------------------
2003 2002
- -------------------------------------------------------------------------------
Loss and tax credit carryforwards $ 1,045 $ 435
Capitalized research and development 252 182
Restructuring reserves 146 532
Postretirement medical and life benefits 244 240
Inventory 55 93
Intangible and other assets 125 111
Other accrued liabilities 177 121
Other employee benefits 14 45
Other 79 68
- -------------------------------------------------------------------------------
Gross deferred tax assets 2,137 1,827
Valuation allowance (469) (417)
- -------------------------------------------------------------------------------
Deferred tax assets 1,668 1,410
- -------------------------------------------------------------------------------
Fixed assets (201) (224)
Other (3)
- -------------------------------------------------------------------------------
Deferred tax liabilities (201) (227)
- -------------------------------------------------------------------------------
Net deferred tax assets $ 1,467 $ 1,183
- -------------------------------------------------------------------------------
At December 31, 2003, we have recorded gross deferred tax assets of
approximately $2.1 billion with a valuation allowance of $469 million, and
offset by deferred tax liabilities of $201 million. The valuation allowance is
primarily attributable to the uncertainty regarding the realization of specific
foreign and state 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, state and 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. As explained further below, we have performed the required
assessment of positive and negative evidence regarding the realization of the
net deferred tax assets in accordance with SFAS No. 109, "Accounting for Income
Taxes." This assessment included the evaluation of scheduled reversals of
deferred tax liabilities, estimates of projected future taxable income and
tax-planning strategies. Although realization is not assured, based on our
assessment, we have concluded that it is more likely than not that such assets,
net of the existing valuation allowance, will be realized.
Net domestic deferred tax assets are approximately $1.3 billion at December 31,
2003. Approximately $460 million of these net deferred tax assets relate to loss
and tax credit carryforwards that expire through 2023. The remaining net
deferred tax assets comprise the following deductible temporary differences:
1. other postretirement benefits of $244 million, which will reverse over the
next 40 to 50 years;
2. restructuring and other liabilities of $155 million, which will reverse over
the next 10 years;
3. research and development expenditures of $252 million, which will reverse
over the next 10 years; and
4. other miscellaneous items of $178 million, which will reverse, on average,
over the next 10 years.
Approximately 10% of our net domestic deferred tax assets will be realized
through net operating loss carrybacks claims to be filed over the next three to
five years, which will generate cash refunds during such period. We expect the
remaining net domestic deferred tax assets to be realized from future earnings.
However, in the event future earnings are insufficient, approximately 40% of our
net domestic deferred tax assets could be realized through a tax-planning
strategy involving the sale of a non-strategic appreciated asset. Realization of
the remaining 50% of our net domestic deferred tax assets is solely dependent on
our ability to generate sufficient future taxable income during carryforward
periods of approximately 20 years.
The minimum amount of domestic future taxable income that would have to be
generated to realize this portion of our deferred tax assets is $1.7 billion
over at least 20 years. Currently, we are generating domestic losses. However,
our forecast of domestic taxable income indicates it is more likely than not
that the future results of operations in the U.S. will generate sufficient
taxable income to realize this portion of our deferred tax assets. Specifically,
we expect to incur significantly lower domestic losses in 2004 and to return to
profitability in the U.S. in 2005. Key assumptions embedded in these near-term
forecasts follow:
9. Income Taxes (concluded)
1. Our 2004 U.S. losses will decrease as a result of the 2003 exit of the
photonics technologies business and CAV.
2. We expect to see improved earnings trends in our Telecommunications segment
which is primarily in the U.S. This includes a significantly lower loss in
2004 and a return to profitability in 2005. This trend is partially being
driven by the realization of lower operating costs as a result of prior
years' restructuring actions. In addition, we are forecasting revenue to be
flat or down slightly in 2004 but significantly higher in 2005 due to an
expected recovery in the telecommunications industry in 2005.
3. Our specialty materials semiconductor business will generate higher
earnings in 2004 as a result of a recovery in the semiconductor equipment
industry and lower operating costs as a result of the fourth quarter 2003
restructuring actions, which will be completed by the end of the first
quarter of 2004.
4. Our display business will continue its rapid growth. Although this business
is largely based in Asia, domestic earnings relating to this business have
increased in 2003 and are expected to continue to increase over the next
several years, in part due to an increase in U.S. royalty income.
5. We will continue to sustain modest growth in our remaining domestic
businesses and, except for the restructuring actions announced prior to
December 31, 2003, we do not expect to incur any significant additional
restructuring or impairment charges.
Our forecast of domestic income is based on assumptions about and current trends
in Corning's operating segments, and there can be no assurance that such results
will be achieved. We review such forecasts in comparison with actual results and
expected trends quarterly for purpose of our recoverability assessment. As a
result of this review, if we determine that we will not return to profitability
in the U.S. in 2005 or if sufficient future taxable income may not be generated
to fully realize the net deferred tax assets, we will increase the valuation
allowance by a charge to income tax expense by an amount equal to the portion of
the deferred tax assets to be realized through projected future taxable income.
If we record such a valuation allowance, we will also cease to recognize
additional tax benefits on losses in the U.S.
The change in the total valuation allowance for the year ended December 31, 2003
was an increase of $52 million. The increase in the 2003 valuation allowance was
primarily due to the uncertainty regarding the realization of certain foreign
tax benefits, foreign net operating losses and foreign tax credits.
We currently provide income taxes on the earnings of foreign subsidiaries and
associated companies to the extent these earnings are currently taxable or
expected to be remitted. Taxes have not been provided on approximately $1.2
billion of accumulated foreign unremitted earnings which are expected to remain
invested indefinitely.
We do not provide income taxes on the post-1992 earnings of domestic
subsidiaries that we expect to recover tax-free without significant cost. Income
taxes have been provided for post-1992 unremitted earnings of domestic corporate
joint ventures that we do not expect to recover tax-free. Unremitted earnings of
domestic subsidiaries and corporate joint ventures that arose in fiscal years
beginning on or before December 31, 1992 have been indefinitely reinvested.
In 2001, tax legislation was enacted in the U.S. that temporarily extended the
net operating loss carryback period from two to five years. Due to this
legislative change, we were able to carryback the 2002 U.S. federal net
operating loss and claim a refund that would not have otherwise been available.
Corning received a $191 million refund in the first quarter of 2003.
10. Investments
Associated Companies at Equity
At December 31, 2003 and 2002, our total investments accounted for by the equity
method were $978 million and $746 million, respectively.
The financial position and results of operations of these investments follows (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
-------------------------------------------------
2003 (1) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 4,971 $ 1,846 $ 1,892
Gross profit $ 1,649 $ 648 $ 631
Net income $ 505 $ 317 $ 340
Corning's equity in earnings of affiliated companies (2)(3) $ 209 $ 116 $ 148
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 3,531 $ 854
Long-lived assets $ 5,028 $ 1,557
Current portion of long-term debt $ 120 $ 108
Other current liabilities $ 1,716 $ 322
Long-term debt $ 219 $ 181
Long-term liabilities $ 315 $ 184
Liabilities subject to compromise (1) $ 3,615
Minority interest $ 147 $ 59
- -----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends received from affiliated companies $ 112 $ 83 $ 73
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Corning resumed recognition of equity earnings in Dow Corning in 2003. See
Dow Corning discussion below.
(2) Equity in earnings shown above and in the consolidated statements of
operations is net of amounts recorded for income tax.
(3) Includes $7 million and $34 million of charges to impair investments in
equity affiliates in 2003 and 2002, respectively, and $66 million related
to Samsung Corning's 2003 asset impairment charge.
At December 31, 2003, approximately $789 million of equity in undistributed
earnings of equity companies was included in our accumulated deficit.
We have contractual agreements with several of our equity investees which
include sales, purchasing, licensing and technology agreements. Except for
Samsung Corning Precision Glass Co., Ltd., as noted below, transactions with and
balances due to and from these related companies were not material to the
consolidated financial statements taken as a whole.
A discussion and summarized results of Corning's significant investees at
December 31, 2003 are as follows:
10. Investments (continued)
Samsung Corning Precision Glass Co., Ltd. ("Samsung Corning Precision")
- -----------------------------------------------------------------------
Samsung Corning Precision, a 50%-owned South Korea-based manufacturer of liquid
crystal display glass, represented $299 million and $187 million of our
investments accounted for by the equity method at December 31, 2003 and 2002,
respectively.
The financial position and results of operations of Samsung Corning Precision follow (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 590 $ 335 $ 237
Gross profit $ 424 $ 217 $ 160
Net income $ 295 $ 162 $ 119
Corning's equity in earnings of affiliated companies $ 144 $ 80 $ 60
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 162 $ 137
Long-lived assets $ 720 $ 393
Current portion of long-term debt $ 24 $ 6
Other current liabilities $ 218 $ 100
Long-term debt $ 24 $ 43
Long-term liabilities $ 17 $ 8
- -----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends received from affiliated companies $ 33 $ 23 $ 17
- -----------------------------------------------------------------------------------------------------------------------------------
Sales to Samsung Corning Precision totaled $68 million, $39 million and $18
million for the years ended December 31, 2003, 2002 and 2001, respectively.
Purchases from Samsung Corning Precision totaled $26 million, $10 million and
$12 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Balances due to and from Samsung Corning Precision were immaterial at December
31, 2003 and 2002.
10. Investments (continued)
Samsung Corning Co. Ltd. ("Samsung Corning")
- --------------------------------------------
Samsung Corning, a 50%-owned South Korea-based manufacturer of glass panels and
funnels for television and display monitors, represented $320 million and $381
million of our investments accounted for by the equity method at December 31,
2003 and 2002, respectively. In 2003, Samsung Corning recorded a significant
asset impairment charge, our portion of which was $66 million after tax.
The financial position and results of operations of Samsung Corning follow (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 895 $ 854 $ 886
Gross profit $ 199 $ 225 $ 227
Net (loss) income $ (74) $ 99 $ 107
Corning's equity in (losses) earnings of affiliated companies $ (39) $ 44 $ 51
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 467 $ 347
Long-lived assets $ 572 $ 859
Current portion of long-term debt $ 72 $ 63
Other current liabilities $ 116 $ 115
Long-term debt $ 87 $ 90
Long-term liabilities $ 68 $ 119
Minority interest $ 55 $ 59
- -----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends received from affiliated companies $ 29 $ 17 $ 22
- -----------------------------------------------------------------------------------------------------------------------------------
10. Investments (continued)
Dow Corning Corporation ("Dow Corning")
- ---------------------------------------
Dow Corning, a 50%-owned U.S. based manufacturer of silicone products
represented $185 million of our investments accounted for by the equity method
at December 31, 2003. In 1995, Corning fully impaired its investment of Dow
Corning upon its entry into bankruptcy proceedings and did not recognize equity
earnings from the second quarter of 1995 through the end of 2002. Corning began
recognizing equity earnings in the first quarter of 2003 when management
concluded that its emergence from bankruptcy protection was probable based on
the Bankruptcy Court's findings on December 11, 2002. See discussion below for
additional information for a history of this matter. 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% share of Dow Corning's equity to be permanent. This difference is $270
million.
The financial position and results of operations of Dow Corning follow (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
-------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 2,873 $ 2,610 $ 2,439
Gross profit $ 820 $ 728 $ 542
Net income (loss) $ 177 $ 59 $ (28)
Corning's equity in earnings of affiliated companies $ 82
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 2,558 $ 2,162
Long-lived assets $ 3,450 $ 3,465
Current portion of long-term debt $ 9 $ 13
Other current liabilities $ 1,185 $ 1,159
Long-term debt $ 52 $ 50
Long-term liabilities $ 212 $ 108
Liabilities subject to compromise (1) $ 3,615 $ 3,667
Minority interest $ 92 $ 90
- -----------------------------------------------------------------------------------------------------------------------------------0
(1) Dow Corning's financial statements for 2003, 2002 and 2001 have been
prepared in conformity with the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" (SOP 90-7). SOP 90-7 requires a
segregation of liabilities subject to compromise by the Bankruptcy Court as
of the filing date (May 15, 1995) and identification of all transactions
and events that are directly associated with the reorganization.
10. Investments (continued)
Dow Corning filed for bankruptcy protection to address pending and claimed
liabilities arising from many thousand breast-implant product lawsuits each of
which typically sought damages in excess of one million dollars. 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 The Dow Chemical Company ("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, restored 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
approximately 50 plaintiffs from Nevada as the remaining appellants. The
appellate process may take another 6 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
Corning (and any new claims) on the same grounds that led to a series of orders
and judgments dismissing all claims against us 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 risk of material impact on Corning's financial statements is
remote.
Under the terms of the Joint Plan, Dow Corning will 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 in these claims against Dow Corning is approximately $100 million pre-tax.
Pittsburgh Corning Corporation ("PCC")
- --------------------------------------
Corning and PPG Industries, Inc. ("PPG") each own 50% of the capital stock of
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 and typically requesting monetary damages in
excess of one million dollars per claim. Corning has defended those claims on
the basis of the separate corporate status of PCC and the absence of any facts
supporting claims of direct liability arising from PCC's asbestos products.
Corning is also currently named in approximately 11,200 other cases
(approximately 40,700 claims) alleging injuries from asbestos and similar
amounts of monetary damages per claim. Those cases have been covered by
insurance without material impact to Corning to date. Asbestos litigation is
inherently difficult, and past trends in resolving these claims may not be
indicators of future outcomes.
In the bankruptcy court, 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 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.
10. Investments (concluded)
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 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 its 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 $136 million (net present value as of December 31, 2003) in six
installments beginning in June 2005 assuming the Plan is effective. Corning will
accelerate the cash funding, if necessary, to maximize the realization of tax
benefits. In addition, Corning will assign policy rights or proceeds under
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 recorded an initial charge of $298 million ($192 million after-tax) in
the period ending March 31, 2003 to reflect the settlement terms. However, the
amount of the charge for this settlement requires adjustment each quarter based
upon movement in Corning's common stock price prior to contribution of the
shares to the trust. Corning recorded total charges of $413 million ($263
million after-tax) to reflect the settlement and to mark-to-market the value of
Corning common stock for the year ended December 31, 2003. This charge was
previously reported as a nonoperating charge in our 2003 Quarterly Reports on
Form 10-Q. Effective with this Annual Report on Form 10-K, we have reclassified
this charge to operating expenses in the consolidated statements of operations.
Two of Corning's primary insurers and several excess insurers have commenced
litigation for a declaration of the rights and obligations of the parties under
insurance policies, including rights that may be affected by the settlement
arrangement described above. Corning is vigorously contesting these cases.
Management is unable to predict the outcome of this insurance litigation.
The PCC Plan, 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. In October 2003, the Court held a
hearing to review the disclosure documents. The Court has announced a schedule
projecting that the Plan and disclosure documents will be mailed to creditors
for voting expected to be completed in March 2004, to be followed by
confirmation hearings in May 2004. Although the confirmation of the PCC Plan is
subject to a number of contingencies, management believes that the asbestos
claims against Corning will be resolved without additional material impact on
the company's financial statements and (apart from the quarterly adjustment in
the value of 25 million shares of Corning common stock) believes the risk of
additional loss is remote.
Other Investments
At December 31, 2003, other investments primarily represent our current holdings
of 19 million shares of Avanex common stock. These shares were received as
proceeds from the sale of certain photonic assets to Avanex. Approximately 17
million shares or 88% of these shares are contractually restricted from sale for
more than one year. As such, these restricted shares have been accounted for at
cost. Shares of Avanex stock that are saleable within one year have been
adjusted to market value at December 31, 2003 and are accounted for as
available-for-sale securities.
At December 31, 2003, the fair value and cost of our equity securities was $67
million and $62 million, respectively. The difference between fair value and
cost is due to gross unrealized gains of $5 million primarily on Avanex stock.
At December 31, 2002, the fair value and cost of our equity securities was $23
million.
Proceeds from sales of other investments were $4 million and $1 million in 2003
and 2002, respectively, and related net realized losses included in income were
$8 million and $1 million, respectively.
In 2002, we decided to divest our portfolio of cost based investments related to
start-up companies with emerging technologies in the telecommunications
industry. As a result, we impaired the portfolio to estimated fair market value.
See Note 5 (Restructuring Actions) for further detail.
11. Property, Net
Property, net follows (in millions):
- -------------------------------------------------------------------------------
December 31,
------------------------------------
2003 2002
- -------------------------------------------------------------------------------
Land $ 80 $ 93
Buildings 1,946 1,828
Equipment 4,264 4,620
Construction in progress 745 539
- -------------------------------------------------------------------------------
7,035 7,080
Accumulated depreciation (3,415) (3,375)
- -------------------------------------------------------------------------------
Property, net $ 3,620 $ 3,705
- -------------------------------------------------------------------------------
Approximately $9 million, $13 million and $49 million of interest costs were
capitalized as part of property, net in 2003, 2002 and 2001, respectively.
12. Goodwill and Other Intangible Assets
The change in the carrying amount of goodwill for the year ended December 31 by segment follows (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
2003 2002
------------------------------------------ ------------------------------------------
Telecom- Telecom-
munications Technologies Total munications Technologies Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1 $ 1,556 $ 159 $ 1,715 $ 1,772 $ 165 $ 1,937
Foreign currency translation 36 36 90 90
Impairment (400) (400)
Divestitures (21) (21) (16) (6) (22)
Acquisitions 5 5 110 110
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 1,576 $ 159 $ 1,735 $ 1,556 $ 159 $ 1,715
- -----------------------------------------------------------------------------------------------------------------------------------
Other intangible assets follow (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
- -----------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Patents and trademarks $ 145 $ 57 $ 88 $ 138 $ 40 $ 98
Non-competition agreements 113 89 24 106 62 44
Other 4 1 3 5 2 3
-------------------------------------------------------------------------------
Total amortized intangible assets 262 147 115 249 104 145
-------------------------------------------------------------------------------
Unamortized intangible assets:
Intangible pension assets 51 51 68 68
-------------------------------------------------------------------------------
Total $ 313 $ 147 $ 166 $ 317 $ 104 $ 213
- -----------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets are primarily related to the Telecommunications
segment.
Amortization expense related to these intangible assets is expected to be
approximately $36 million in 2004, $16 million in 2005, $11 million in 2006,
$11 million in 2007, and insignificant thereafter.
13. Other Accrued Liabilities
Other accrued liabilities follow (in millions):
- -------------------------------------------------------------------------------
December 31,
-----------------------------------
2003 2002
- -------------------------------------------------------------------------------
Restructuring reserves $ 186 $ 405
Wages and employee benefits 238 224
Income taxes 88 153
Asbestos settlement (1) 282
Other 280 355
- -------------------------------------------------------------------------------
Other accrued liabilities $ 1,074 $ 1,137
- -------------------------------------------------------------------------------
(1) The $282 Asbestos settlement represents the fair value of Corning's 25
million shares at December 31, 2003 and Corning's investment balance of PCE
to be contributed to the trust as part of the settlement. The remainder of
Corning's reserve for this settlement is reflected in other long-term
liabilities. See Note 10 (Investments) for further information related to
the Asbestos settlement.
Our product warranty liability (included in "Other" in the table above) relates
primarily to the Telecommunications segment.
A reconciliation of the changes in the product warranty liability for the year
ended December 31 follows (in millions):
- -------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------
Balance at January 1 $ 64 $ 60
Provision based on current year sales 7 15
Adjustments to liability existing on January 1 (1) (22) (4)
Foreign currency translation 3 4
Settlements made during the current year (11) (11)
- -------------------------------------------------------------------------------
Balance at December 31 $ 41 $ 64
- -------------------------------------------------------------------------------
(1) The 2003 adjustment primarily relates to the photonics technologies product
line.
14. Long-Term Debt and Loans Payable
Long-term debt and loans payable follow (in millions):
- -------------------------------------------------------------------------------
December 31,
-----------------------
2003 2002
- -------------------------------------------------------------------------------
Loans Payable
Current portion of long-term debt $ 120 $ 191
Other short-term borrowings 26 13
- -------------------------------------------------------------------------------
Total loans payable $ 146 $ 204
- -------------------------------------------------------------------------------
Long-Term Debt
Debentures, 6%, due 2003 $ 100
Euro notes, 5.625%, due 2005 $ 173 206
Debentures, 7%, due 2007, net of unamortized
discount of $20 million in 2003 and $25
million in 2002 80 75
Convertible notes, 4.875%, due 2008 96 96
Convertible debentures, 3.5%, due 2008 665 665
Notes, 6.3%, due 2009 150 150
Euro notes, 6.25%, due 2010 374 310
Debentures, 6.75%, due 2013 100 100
Zero coupon convertible debentures, 2%,
due 2015, redeemable
and callable in 2005 385 1,606
Debentures, 8.875%, due 2016 82 86
Debentures, 8.875%, due 2021 83 88
Debentures, 7.625%, putable in 2004, due 2024 100 100
Medium-term notes, average rate 8.1%, due
through 2025 178 242
Debentures, 6.85%, due 2029 150 150
Other, average rate 2.9%, due through 2015 172 180
- -------------------------------------------------------------------------------
Total long-term debt 2,788 4,154
Less current portion of long-term debt 120 191
- -------------------------------------------------------------------------------
Long-term debt $ 2,668 $ 3,963
- -------------------------------------------------------------------------------
14. Long-Term Debt and Loans Payable (continued)
At December 31, 2003 and 2002, the weighted-average interest rate on short-term
borrowings was 5.7% and 5.5%, respectively.
Based on borrowing rates currently available to us for loans with similar terms
and maturities, the fair value of long-term debt was $3.0 billion at December
31, 2003.
The following table shows the maturities by year of total long-term debt and
loans payable obligations at December 31, 2003 (in millions):
- -------------------------------------------------------------------------------
2004 2005 2006 2007 2008-2030
- -------------------------------------------------------------------------------
$146 $590 $46 $113 $1,932
- -------------------------------------------------------------------------------
The 7.625% debentures and the zero coupon convertible debentures are presented
in the above table as due in 2004 and 2005, respectively, which is the earliest
possible redemption date.
We have convertible debt of $665 million due November 1, 2008 that is
convertible into approximately 69 million shares of common stock at an effective
conversion price of $9.675 per share. The debentures are available for
conversion into 103.3592 shares of Corning common stock if certain conditions
are met. Each $1,000 debenture was issued at par and pays interest of 3.5%
semi-annually on May 1 and November 1 of each year. We may repurchase securities
at certain redemption prices beginning on November 8, 2004.
We have $385 million of zero coupon convertible debentures outstanding. The
initial price of the debentures was $741.92 with a 2% annual yield. Interest is
compounded semi-annually with a 25% conversion factor. The remaining debentures
mature on November 8, 2015, and are convertible into approximately 17 million
shares of Corning common stock at the rate of 8.3304 per $1,000 debenture. We
may call the debentures at any time on or after November 8, 2005. The debentures
may be put to us for $819.54 on November 8, 2005 and $905.29 on November 8,
2010. The holder can convert the debenture into Corning common stock at any time
prior to maturity or redemption. We have the option of settling this obligation
in cash, common stock, or a combination of both.
During the years ended December 31, 2003 and 2002, we repurchased and retired a
significant portion of our zero coupon convertible debentures due November 8,
2015. In 2003, we repurchased and retired 1,531,000 debentures with an accreted
value of $1.2 billion for cash of approximately $1.1 billion through open market
purchases and a public tender offer and recorded a net gain of $55 million. We
also issued 6.5 million shares of common stock from treasury in exchange for
55,000 debentures with an accreted value of $43 million, and we recognized a
charge of $35 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. We recorded the
net gain of $20 million on these repurchases as a component of income from
continuing operations.
The following table summarizes the activity related to our zero coupon
convertible debentures (dollars in millions):
- -------------------------------------------------------------------------------
For the years
ended December 31,
-----------------------------
2003 2002
- -------------------------------------------------------------------------------
Bonds repurchased or exchanged for equity 1,586,000 638,987
Book value $ 1,239 $ 493
Fair value $ 1,154 $ 308
Pre-tax gain (1) $ 20 $ 176
After-tax gain (1) $ 13 $ 108
- -------------------------------------------------------------------------------
(1) Net of the write-off of unamortized issuance and deal costs.
In addition to our zero coupon debentures, we repurchased and retired 60,000
euro notes due 2005 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 on the transaction.
We also have $100 million of convertible subordinated notes bearing interest at
4.875%, due in 2008. The notes are convertible into 6 million shares of Corning
common stock at a conversion price of approximately $16 per share.
14. Long-Term Debt and Loans Payable (concluded)
We have full access to a $2.0 billion revolving line of credit with a syndicate
of banks. The line of credit expires in August 2005. There were no borrowings
under the agreement at December 31, 2003. The revolving credit agreements
provide for borrowing of U.S. dollars and Eurocurrency at various rates and
supports our commercial paper program when available. The facility includes a
covenant requiring us to maintain a total debt to total capital ratio, as
defined, not greater than 60%. At December 31, 2003, this ratio was 34%.
15. Employee Retirement Plans
Defined Benefit Plans
We have defined benefit pension plans covering certain domestic and
international employees. Our funding policy has been to contribute, as
necessary, an amount in excess of the minimum requirements determined jointly by
us and our consulting actuaries to achieve the company's long-term funding
targets. In 2003, we made a voluntary incremental contribution of $160 million
to the pension trust.
In 2000, we amended our U.S. pension plan to include a cash balance pension
feature. All salaried and non-union hourly employees hired before July 1, 2000
were given the choice of staying in the existing plan or participating in the
cash balance plan beginning January 1, 2001. Salaried employees hired after July
1, 2000 automatically became participants in the new cash balance plan. Under
the cash balance plan, employee accounts are credited monthly with a percentage
of eligible pay based on age and years of service. Benefits are 100% vested
after five years of service.
Corning and certain of its domestic subsidiaries also offer postretirement plans
that provide health care and life insurance benefits for retirees and eligible
dependents. Certain employees may become eligible for such postretirement
benefits upon reaching retirement age. Prior to January 1, 2003, our principal
retiree medical plans required retiree contributions each year equal to the
excess of medical cost increases over general inflation rates. In response to
rising health care costs, effective January 1, 2003, we changed our cost-sharing
approach for retiree medical coverage. For current retirees (including surviving
spouses) and active employees eligible for the salaried retiree medical program,
we are placing a "cap" on the amount we will contribute toward retiree medical
coverage in the future. The cap will equal 150% of our 2001 contributions toward
retiree medical benefits. Once our contributions toward retiree medical costs
reach this cap, impacted retirees will have to pay the excess amount, in
addition to their regular contributions for coverage.
We use a December 31 measurement date for the majority of our plans.
15. Employee Retirement Plans (continued)
Obligations and Funded Status
- -----------------------------
The change in benefit obligation and funded status of our employee retirement plans follow (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
------------------------ -------------------------
December 31, 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 1,890 $ 1,742 $ 718 $ 631
Service cost 33 37 9 11
Interest cost 126 125 48 52
Plan participants' contributions 2 3 4 4
Amendments (1) 22 (17) (80)
Curtailment gain (9) (15) (12) (9)
Special termination benefits 15 21 10 11
Actuarial losses 168 82 124 151
Benefits paid (158) (147) (55) (53)
Foreign currency translation 29 20
- -----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 2,095 1,890 829 718
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at beginning of year 1,517 1,628
Actual gain (loss) on plan assets 292 (76)
Employer contributions 170 96
Plan participants' contributions 2 3
Benefits paid (158) (147)
Foreign currency translation 16 13
- -----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 1,839 1,517
- -----------------------------------------------------------------------------------------------------------------------------------
Unfunded status (256) (373) (829) (718)
Unrecognized transition asset (1) (1)
Unrecognized prior service cost (credit) 53 70 (78) (71)
Unrecognized actuarial loss 409 402 235 127
- -----------------------------------------------------------------------------------------------------------------------------------
Recognized asset (liability) $ 205 $ 98 $ (672) $ (662)
- -----------------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the consolidated balance sheets
consist of:
Prepaid benefit cost $ 338 $ 205
Accrued benefit liability (133) (107) $ (672) $ (662)
Additional minimum liability (311) (348)
Intangible asset 52 68
Accumulated other comprehensive loss 259 280
- -----------------------------------------------------------------------------------------------------------------------------------
Recognized asset (liability) $ 205 $ 98 $ (672) $ (662)
- -----------------------------------------------------------------------------------------------------------------------------------
The accumulated benefit obligation for all defined benefit pension plans was
$2.0 billion and $1.8 billion at December 31, 2003 and 2002, respectively.
Information for pension plans with an accumulated benefit obligation in excess
of plan assets follows (in millions):
- -------------------------------------------------------------------------------
December 31,
----------------------
2003 2002
- -------------------------------------------------------------------------------
Projected benefit obligation $ 1,902 $ 1,724
Accumulated benefit obligation 1,808 1,644
Fair value of plan assets 1,641 1,351
- -------------------------------------------------------------------------------
15. Employee Retirement Plans (continued)
Information for pension plans with a projected benefit obligation in excess of
plan assets follows (in millions):
- -------------------------------------------------------------------------------
December 31,
----------------------
2003 2002
- -------------------------------------------------------------------------------
Projected benefit obligation $ 2,060 $ 1,786
Accumulated benefit obligation 1,958 1,691
Fair value of plan assets 1,794 1,408
- -------------------------------------------------------------------------------
The components of net periodic benefit expense for our employee retirement plans follow (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
-------------------------------- ---------------------------------
Years ended December 31, 2003 2002 2001 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Service cost $ 33 $ 37 $ 38 $ 9 $ 11 $ 14
Interest cost 126 125 118 48 52 43
Expected return on plan assets (146) (159) (161)
Amortization of transition asset (1)
Amortization of net loss (gain) 9 2 (6) 5 2
Amortization of prior service cost (credit) 9 11 14 (6) (1) (1)
- -----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit expense 31 16 2 56 64 56
- -----------------------------------------------------------------------------------------------------------------------------------
Discontinued operations 9 2 (7) 1
Curtailment loss (gain) 9 10 44 (5) (2) (13)
Special termination benefits 15 21 18 10 11 17
- -----------------------------------------------------------------------------------------------------------------------------------
Total expense $ 55 $ 56 $ 66 $ 61 $ 66 $ 61
- -----------------------------------------------------------------------------------------------------------------------------------
Additional information on our pension plan follows (in millions):
- -------------------------------------------------------------------------------
Pension Benefits
--------------------
2003 2002
------ ------
(Decrease) increase in minimum liability
included in other comprehensive income
(loss), after tax $(26) (1) $173
- -------------------------------------------------------------------------------
(1) Includes $12 million after-tax decrease in minimum liability included in
other comprehensive income related to an investment accounted for under the
equity method.
Measurement of postretirement benefit expense is based on assumptions used to
value the postretirement benefit obligation at the beginning of the year.
The weighted-average assumptions for our domestic employee retirement plans follow (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions Pension Benefits Postretirement Benefits
used to determine benefit --------------------------------- ---------------------------------
obligations at December 31 2003 2002 2001 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Discount rate 6.25% 6.75% 7.25% 6.25% 6.75% 7.25%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
- -----------------------------------------------------------------------------------------------------------------------------------
15. Employee Retirement Plans (continued)
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions Pension Benefits Other Benefits
used to determine net cost for -------------------------------- ---------------------------------
years ended December 31 2003 2002 2001 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Discount rate 6.75% 7.25% 7.75% 6.75% 7.25% 7.75%
Expected return on plan assets 8.50% 9.00% 9.00%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
- -----------------------------------------------------------------------------------------------------------------------------------
The expected rate of return on assets was based on the current interest rate
environment and historical market premiums of equity and other asset classes
relative to fixed income rates.
- -------------------------------------------------------------------------------
Assumed Health Care Trend Rates at December 31 2003 2002
- -------------------------------------------------------------------------------
Health care cost trend rate assumed for next year 10% 9%
Rate that the cost trend rate gradually declines to 5% 5%
Year that the rate reaches the ultimate trend rate 2009 2007
- -------------------------------------------------------------------------------
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans.
A one-percentage-point change in assumed health care cost trend rates would have the following effects (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
One-Percentage-Point One-Percentage-Point
Increase Decrease
- -----------------------------------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost $ 4.1 $ (3.4)
Effect on postretirement benefit obligation $ 52.9 $ (44.7)
- -----------------------------------------------------------------------------------------------------------------------------------
Medicare Prescription Drug, Improvement and Modernization Act of 2003
- ---------------------------------------------------------------------
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) was passed which expands Medicare to include an outpatient
prescription drug benefit beginning in 2006. In January 2004, the FASB issued
Staff Position No. FAS 106-1, "Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("FSP
No. 106-1")," which provides preliminary accounting guidance on how to account
for the effects of the Act on postretirement benefit plans. As permitted by FSP
No. 106-1, we have elected to defer accounting for the impact of the Act until
the FASB issues final accounting guidance later in 2004. Such guidance from the
FASB is pending and that guidance, when issued, could require us to change
previously reported information. We are currently evaluating the impact of the
Act on our postretirement benefit plans.
Plan Assets (domestic plans only)
- ---------------------------------
Corning's pension plan weighted average asset allocation for domestic pension
plans at December 31, 2003 and December 31, 2002, by asset category is as
follows:
- -------------------------------------------------------------------------------
Plan Assets
At December 31,
-------------------------
2003 2002
- -------------------------------------------------------------------------------
Equity Securities 50% 44%
Fixed Income Securities 34% 37%
Real Estate 8% 11%
Other 8% 8%
------ -------
Total 100% 100%
- -------------------------------------------------------------------------------
The total fair value of domestic plan assets at December 31, 2003 is $1,672
million and the expected long-term rate of return on these assets is 8.5%.
15. Employee Retirement Plans (concluded)
We have an investment policy for domestic pension plans with a primary objective
to adequately provide for both the growth and liquidity needed to support all
current and future benefit payment obligations. The investment strategy is to
invest in a diversified portfolio of assets which are expected to satisfy the
above objective and produce both absolute and risk adjusted returns competitive
with a benchmark that is 60% Russell 3000 Index and 40% Lehman Long
Government/Credit Index. The strategy includes the following target asset
allocation:
Equity Securities 50%
Fixed Income Securities 32%
Real Estate 8%
Other 10%
-----
Total 100%
A tactical allocation mandate, which is part of the overall investment strategy,
allows the actual allocation in equity securities to be reduced by maximum of
10% relative to the total based on market valuations.
Equity securities include Corning common stock in the amount of $5.7 million
(0.3% of total plan assets) and $1.8 million (0.1% of total plan assets) at
December 31, 2003 and 2002, respectively.
Cash Flows Data (domestic plans only)
- -------------------------------------
We expect to contribute $40 million to its domestic pension plans in 2004.
The following benefit payments, which reflect expected future service, are
expected to be paid for the domestic plans (in millions):
- -------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
- -------------------------------------------------------------------------------
2004 $ 138 $ 68
2005 137 72
2006 136 75
2007 135 77
2008 134 79
Years 2009-2013 663 408
- -------------------------------------------------------------------------------
Other Benefit Plans
We offer defined contribution plans covering employees meeting certain
eligibility requirements. On January 1, 2003, we reduced our matching
contributions to the domestic Corning Incorporated Investment Plan by 2.5% of
pay for all salaried employees. This reduction was temporary, and we increased
our contributions to prior levels on January 1, 2004. Total consolidated defined
contribution plan expense was $24 million, $44 million and $56 million for the
years ended December 31, 2003, 2002 and 2001, respectively.
16. Commitments, Contingencies, Guarantees and Hedging Activities
Commitments, Contingencies and Guarantees
In 2003, we adopted the initial recognition and measurement provisions of 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 consolidated
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.
16. Commitments, Contingencies, Guarantees and Hedging Activities (continued)
Minimum rental commitments under leases outstanding at December 31, 2003 follow
(in millions):
- -------------------------------------------------------------------------------
2004 2005 2006 2007 2008 2009 and thereafter
- -------------------------------------------------------------------------------
$44 $33 $29 $39 $42 $113
- -------------------------------------------------------------------------------
Total rental expense was $66 million for 2003, $85 million for 2002 and $89
million for 2001.
Corning and PPG each own 50% of the capital stock of PCC. PCC and several other
defendants have been named in numerous lawsuits involving claims alleging
personal injury from exposure to asbestos. See Note 10 (Investments) for a more
complete discussion.
The ability of certain subsidiaries and associated companies to transfer funds
is limited by provisions of certain loan agreements and foreign government
regulations. At December 31, 2003, the amount of equity subject to such
restrictions for consolidated subsidiaries totaled $43 million. While this
amount is legally restricted, it does not result in operational difficulties
since we have generally permitted subsidiaries to retain a majority of equity to
support their growth programs. In addition, we have provided other financial
guarantees and contingent liabilities in the form of purchase price adjustments
related to attainment of milestones, stand-by letters of credit and performance
bonds. We have agreed to provide a credit facility related to Dow Corning as
discussed in Note 10 (Investments). The funding of the Dow Corning credit
facility is subject to events connected to the Bankruptcy Plan. The purchase
obligations primarily represent take or pay contracts associated with our
hardware and equipment operations. We believe a significant majority of these
guarantees and contingent liabilities will expire without being funded.
The amounts of our obligations follow (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
Amount of commitment and contingency expiration per period
------------------------------------------------------------
Less than 1 to 2 2 to 3 3 to 4 5 years and
Total 1 year years years years thereafter
- -----------------------------------------------------------------------------------------------------------------------------------
Performance bonds and guarantees $ 170 $ 31 $ 2 $ 1 $ 136
Contingent purchase price for acquisitions 36 36
Dow Corning credit facility 150 150
Purchase obligations 48 15 14 11 $ 8
Stand-by letters of credit 16 6 10
Loan guarantees 25 4 21
- -----------------------------------------------------------------------------------------------------------------------------------
Total other commercial commitments
and contingencies $ 445 $ 88 $ 20 $ 12 $ 8 $ 317
- -----------------------------------------------------------------------------------------------------------------------------------
We have two VIEs that are not consolidated as we are not the primary
beneficiary. The assets and debt of these entities total $12 million. Our
maximum loss exposure as a result of our involvement with these unconsolidated
VIEs is approximately $18 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.
Hedging Activities
We operate and conduct business in many foreign countries. As a result, there is
exposure to potentially adverse movement in foreign currency exchange rates. We
enter into foreign exchange forward and option contracts with durations
generally 15 months or less to reduce our exposure to exchange rate risk on
foreign source income and purchases. The objective of these contracts is to
neutralize the impact of foreign currency exchange rate movements on our
operating results.
We engage in foreign currency hedging activities to reduce the risk that changes
in exchange rates will adversely affect the eventual net cash flows resulting
from the sale of products to foreign customers and purchases from foreign
suppliers. The hedge contracts reduce the exposure to fluctuations in exchange
rate movements because the gains and losses associated with foreign currency
balances and transactions are generally offset with gains and losses of the
hedge contracts. Because the impact of movements in foreign exchange rates on
hedge contracts offsets the related impact on the underlying items being hedged,
these financial instruments help alleviate the risk that might otherwise result
from currency exchange rate fluctuations.
16. Commitments, Contingencies, Guarantees and Hedging Activities (concluded)
The following table (in millions) summarizes the notional amounts and respective
fair values of the derivative financial instruments at December 31, 2003. These
contracts are held by Corning and its subsidiaries and mature at varying dates:
- -------------------------------------------------------------------------------
Notional Amount Fair Value
- -------------------------------------------------------------------------------
Foreign exchange forward contracts $ 182 $ 3
Foreign exchange option contracts $ 379 $ (10)
- -------------------------------------------------------------------------------
The forward and option contracts we use in managing our foreign currency
exposures contain an element of risk in that the counterparties may be unable to
meet the terms of the agreements. However, we minimize this risk by limiting the
counterparties to a diverse group of highly-rated major domestic and
international financial institutions with which we have other financial
relationships. We are exposed to potential losses in the event of
non-performance by these counterparties; however, we do not expect to record any
losses as a result of counterparty default. We do not require and are not
required to place collateral for these financial instruments.
17. Shareholders' Equity
Preferred Stock
We have 10 million authorized shares of Preferred Stock, par value $100 per
share.
Series A Junior Participating Preferred Stock
- ---------------------------------------------
Of the authorized shares, we have designated 2.4 million shares as Series A
Junior Participating Preferred Stock for which no shares have been issued.
In June 1996, the Board of Directors approved the renewal of the Preferred Share
Purchase Right Plan, which entitles shareholders to purchase 0.01 of a share of
Series A Junior Participating Preferred Stock upon the occurrence of certain
events. In addition, the rights entitle shareholders to purchase shares of
common stock at a 50% discount in the event a person or group acquires 20% or
more of our outstanding common stock. The preferred share purchase rights became
effective July 15, 1996 and expire July 15, 2006.
Series C Mandatory Convertible Preferred Stock
- ----------------------------------------------
In July and August 2002, we issued 5.75 million shares of 7% Series C mandatory
convertible preferred stock having a liquidation preference of $100 per share,
plus accrued and unpaid dividends, and resulting in gross proceeds of $557
million. The mandatory convertible stock has an annual dividend rate of 7%,
payable quarterly in cash. The first dividend payment date was November 16,
2002. The dividends are also payable immediately upon conversion to Corning
common stock. At the time we issued the Series C convertible stock, a one-time
dividend was declared for all dividends that will be payable from issuance
through the mandatory conversion date of August 16, 2005. We secured the payment
of the dividends through the issuance of a promissory note and used a portion of
the proceeds from the sale of the Series C preferred stock to purchase $117
million of U.S. treasury securities that were pledged as collateral to secure
the payments on the promissory note. As a result, net proceeds of the offering
were $440 million.
The Series C preferred stock will automatically convert on the mandatory
conversion date of August 16, 2005, into between 50.813 and 62.5 shares of
Corning common stock, depending on the then current market price. At any time
prior to the mandatory conversion date, holders may elect to convert in whole or
part of their shares of Series C preferred stock into 50.813 shares of common
stock plus an amount of cash equal to the market value at that time of the pro
rata share of the collateral portfolio that secures the promissory note. At
December 31, 2003, approximately 4.9 million shares of the Series C preferred
stock had been converted into 248.8 million common shares.
As the closing price of Corning common stock was $1.60 on July 31, 2002, the
holder could immediately convert the Series C preferred stock and obtain a value
of $101.72 (50.813 shares valued at $1.60 plus $20.42 in future dividends)
indicating that the preferred stock contains a beneficial conversion feature of
$1.72 per preferred share. The beneficial conversion totaled approximately $10
million and was charged to additional paid in capital. The beneficial conversion
was also deducted from earnings attributable to common shareholders in the 2002
earnings per share calculations.
Common Stock
In July 2003, we completed an equity offering of 45 million shares of common
stock generating net proceeds of approximately $363 million. This offering's net
proceeds were used 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.
17. Shareholders' Equity (concluded)
In May 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 14 (Long-Term Debt and Loans Payable).
On July 9, 2001, we announced the discontinuation of the payment of dividends on
our common stock. Dividends paid to common shareholders in 2001 totaled $112
million.
Treasury Stock
We did not repurchase any of our common stock in 2003. On July 22, 2002, we
repurchased 5.5 million shares of our common stock for $23 million in a
privately negotiated transaction.
Accumulated Other Comprehensive Income (Loss)
Components of other comprehensive income (loss), accumulated in shareholders' equity, are reported net of income taxes, follow
(in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
Net
Net unrealized
Foreign Minimum unrealized gains Accumulated
currency pension gains (losses) on other
translation liability (losses) on cash flow comprehensive
adjustment adjustment investments hedges (loss) income
- --------------------------------------------------------------------------------------------------------------------------------0
December 31, 2000 $ (168) $ 41 $ (127)
Foreign currency translation adjustment (31) (31)
Unrealized loss on investments (net of tax of $17 million) (27) (27)
Realized gains on securities (net of tax of $12 million) (18) (18)
Cumulative effect of adoption of SFAS No. 133 $ 3 3
Unrealized derivative gain on cash flow hedges
(net of tax of $7 million) 11 11
Reclassification adjustments on cash flow hedges
(net of tax of $2 million) (4) (4)
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 (199) (4) 10 (193)
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment 208 208
Minimum pension liability adjustment $ (173) (173)
Unrealized gain on investments (net of tax of $1 million) 1 1
Realized loss on securities (net of tax of $3 million) 5 5
Unrealized derivative loss on cash flow hedges
(net of tax of $17 million) (27) (27)
Reclassification adjustments on cash flow hedges
(net of tax of $6 million) 9 9
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 2002 9 (173) 2 (8) (170)
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment 239 239
Minimum pension liability adjustment (1) 26 26
Unrealized gain on investments (net of tax of $2 million) 4 4
Realized gain on securities (net of tax of $2 million) (3) (3)
Unrealized derivative loss on cash flow hedges
(net of tax of $4 million) (30) (30)
Reclassification adjustments on cash flow hedges
(net of tax of $4 million) 32 32
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 2003 $ 248 $ (147) $ 3 $ (6) $ 98
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes adjustments from Dow Corning.
18. Loss Per Common Share
Basic loss per common share is computed by dividing loss attributable to common
shareholders by the weighted-average number of common shares outstanding for the
period. The net loss attributable to common shareholders for 2002 is further
increased by the Series C mandatory convertible preferred stock dividend
requirement.
Diluted loss per common share is computed by dividing net loss attributable to
common shareholders, adjusted for the preferred dividend requirements in 2002,
by the weighted average shares outstanding. Since we reported a loss from
continuing operations in 2003, 2002 and 2001, the diluted loss per share is the
same as basic, as any potentially dilutive securities would reduce the loss per
share from continuing operations.
A reconciliation of the basic and diluted loss per common share from continuing operations computations for 2003, 2002 and 2001
follows (in millions, except per share amounts):
- -----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------- ------------------------------- ----------------------------
Weighted- Per Weighted- Per Weighted- Per
Average Share Average Share Average Share
Loss Shares Amount Loss Shares Amount Loss Shares Amount
----------------------------- ------------------------------- ----------------------------
Loss from
continuing operations $ (223) $ (1,780) $ (5,532)
Less: Preferred stock
dividend requirements 128 1
- -----------------------------------------------------------------------------------------------------------------------------------
Loss income from continuing
operations attributable to
common shareholders (223) (1,908) (5,533)
- -----------------------------------------------------------------------------------------------------------------------------------
Basic and Diluted Loss
Per Common Share $ (223) 1,274 $(0.18) $ (1,908) 1,030 $(1.85) $ (5,533) 933 $(5.93)
- -----------------------------------------------------------------------------------------------------------------------------------
The potential common shares excluded from the calculation of diluted loss per share because their effect would be anti-dilutive and
the amount of stock options excluded from the calculation of diluted loss per share because their exercise price was greater than
the average market price of the common shares of the periods presented follow (in millions):
- ----------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Potential common shares excluded from the calculation
of diluted loss per share:
Stock options 19 1 6
7% mandatory convertible preferred stock 65 31
Convertible preferred stock 1
4.875% convertible notes 6 6 6
3.5% convertible debentures 69 69 9
Zero coupon convertible debentures 10 21 23
--------------------------------------------
Total 169 128 45
============================================
Stock options excluded from the calculation of diluted
loss per share because the exercise price was greater
than the average market price of the common shares 76 84 48
- ----------------------------------------------------------------------------------------------------------------
19. Stock Compensation Plans
At December 31, 2003, our stock compensation programs are in accordance with the
2000 Employee Equity Participation Program and 2000 Equity Plan for Non-Employee
Directors Program. For calendar years beginning January 1, 2001, 3.5% of our
common stock outstanding at the beginning of the year and any ungranted shares
from prior years will be available for grant in the current year. At December
31, 2003, 76.9 million shares will be available under these programs for 2004.
Any remaining shares available for grant, but not yet granted will be carried
over and used in the following year.
19. Stock Compensation Plans (continued)
Stock Option Plans
Our stock option plans provide non-qualified and incentive stock options to
purchase unissued or treasury shares at the market price on the grant date and
generally become exercisable in installments from one to five years from the
grant date. The maximum term of non-qualified and incentive stock options is 10
years from the grant date.
Changes in the status of outstanding options were as follows:
- -------------------------------------------------------------------------------
Number Weighted-
of Shares Average
(in thousands) Exercise Price
- -------------------------------------------------------------------------------
Options outstanding January 1, 2001 45,003 $ 42.27
- -------------------------------------------------------------------------------
Options granted under plans 29,784 $ 21.02
Options exercised (1,258) $ 9.40
Options terminated (1,138) $ 37.53
- -------------------------------------------------------------------------------
Options outstanding December 31, 2001 72,391 $ 34.21
- -------------------------------------------------------------------------------
Options granted under plans 26,852 $ 4.55
Options exercised (56) $ 1.86
Options terminated (1,860) $ 23.20
- -------------------------------------------------------------------------------
Options outstanding December 31, 2002 97,327 $ 26.47
- -------------------------------------------------------------------------------
Options granted under plans 40,953 $ 5.85
Options exercised (1,547) $ 6.75
Options terminated (1,381) $ 16.26
- -------------------------------------------------------------------------------
Options outstanding December 31, 2003 135,352 $ 20.58
Options exercisable at December 31, 2003 72,867 $ 27.47
- -------------------------------------------------------------------------------
Options exercisable at December 31, 2002 42,428 $ 28.96
Options exercisable at December 31, 2001 20,882 $ 26.33
- -------------------------------------------------------------------------------
The weighted-average fair value of options granted was $3.82 in 2003, $3.64 in
2002 and $13.83 in 2001.
The following table summarizes information about our stock option plans at December 31, 2003:
- -----------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------------------
Number Weighted-Average Number
Outstanding at Remaining Weighted- Exercisable at Weighted-
Range of December 31, 2003 Contractual Life Average December 31, 2003 Average
Exercise Prices (in thousands) in Years Exercise Price (in thousands) Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
$ 0.47 to 3.80 15,551 8.9 $ 3.15 1,444 $ 1.60
$ 4.06 to 6.93 23,606 8.9 $ 4.76 2,987 $ 4.79
$ 7.08 to 9.95 39,014 7.6 $ 8.41 22,128 $ 8.64
$ 10.04 to 15.95 13,271 7.2 $ 14.07 10,133 $ 14.77
$ 16.08 to 29.58 13,198 7.1 $ 19.82 12,410 $ 19.62
$ 30.01 to 59.50 13,348 6.7 $ 47.28 11,273 $ 46.98
$ 60.24 to 70.75 9,791 6.7 $ 67.02 9,033 $ 67.45
$71.04 to 111.00 7,573 6.5 $ 73.95 3,459 $ 75.74
- -----------------------------------------------------------------------------------------------------------------------------------
135,352 7.7 $ 20.58 72,867 $ 27.47
- -----------------------------------------------------------------------------------------------------------------------------------
19. Stock Compensation Plans (concluded)
Incentive Stock Plans
The Corning Incentive Stock Plan permits stock grants, either determined by
specific performance goals or issued directly, in most instances, subject to the
possibility of forfeiture and without cash consideration.
In 2003, 2002 and 2001, grants of 1,842,000 shares, 88,500 shares and 1,028,000
shares, respectively, were made under this plan. The weighted-average price of
the grants was $10.61 in 2003, $7.15 in 2002 and $36.89 in 2001, respectively. A
total of 2.2 million shares issued remain subject to forfeiture at December 31,
2003.
We apply APB No. 25 accounting for our stock-based compensation plans.
Compensation expense is recorded for awards of shares or share rights over the
period earned. Compensation expense of $1 million, $1 million and $79 million
after-tax was recorded in 2003, 2002 and 2001, respectively.
SFAS No. 123 requires that reload options be treated as separate grants from the
related original option grants. Under our reload program, upon exercise of an
option, employees may tender unrestricted shares owned at the time of exercise
to pay the exercise price and related tax withholding, and receive a reload
option covering the same number of shares tendered for such purposes at the
market price on the date of exercise. The reload options vest in one year and
are only granted in certain circumstances according to the original terms of the
option being exercised. The existence of the reload feature results in a greater
number of options being measured.
For purposes of SFAS No. 123 disclosure, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model.
The following are weighted-average assumptions used for grants under our stock
plans in 2003, 2002 and 2001, respectively:
- -------------------------------------------------------------------------------
For Options Granted During 2003 2002 2001
- -------------------------------------------------------------------------------
Expected life in years 5 5 6
Risk free interest rate 2.9% 4.0% 4.8%
Dividend yield 0.46%
Expected volatility 79% 80% 75%
- -------------------------------------------------------------------------------
We discontinued payment of dividends on our common stock in July 2001. The
dividend yield assumption applies to grants prior to July 2001.
Worldwide Employee Share Purchase Plan
In addition to the Stock Option Plan and Incentive Stock Plans, we have a
Worldwide Employee Share Purchase Plan ("WESPP"). Under the WESPP, substantially
all employees can elect to have up to 10% of their annual wages withheld to
purchase our common stock. The purchase price of the stock is 85% of the lower
of the beginning-of-quarter or end-of-quarter market price.
20. Business Combinations and Divestitures
Purchases
The transactions listed on the following table were all accounted for under the
purchase method of accounting. We are responsible for estimating the fair value
of the assets and liabilities acquired. We have made estimates and assumptions
that affect the reported amounts of assets, liabilities and expenses resulting
from such acquisitions. From time to time we use our common stock as
consideration for business combinations. The value of the common stock is based
upon the average closing price of Corning common stock for a range of days
surrounding the agreement or announcement and adjusted for a discount
commensurate with restrictions on the shares, if applicable.
20. Business Combinations and Divestitures (concluded)
We had no acquisitions in 2003. The following table presents information related to our acquisitions for the years ended
December 31, 2002 and 2001 (in millions):
- --------------------------------------------------------------------------------------------------------------------------
Initial Goodwill &
Acquisition Date Price Form Intangibles
- --------------------------------------------------------------------------------------------------------------------------
Lucent Technologies Joint Ventures (1) 9/02 $ 198 Cash/Stock $ 110
- --------------------------------------------------------------------------------------------------------------------------
Tropel Corporation (2) 3/01 $ 160 Cash/Stock $ 155
- --------------------------------------------------------------------------------------------------------------------------
(1) Acquisition of 56% interest in Lucent Technologies Shanghai Fiber Optic
Co., Ltd. and a 68% interest in Lucent Technologies Beijing Fiber Optic
Cable Co., Ltd. from Lucent Technologies. The Shanghai-based company
manufactures optical fiber and the Beijing-based company manufactures fiber
cable. Purchase price included 30 million shares of Corning common stock
valued at $48 million. These entities are included in the
Telecommunications segment.
(2) Manufacturer of precision optics and metrology instruments for the
semiconductor and other industries. Purchase price included 1.95 million
shares of Corning common stock valued at $94 million.
Divestitures
Photonic Technologies
- ---------------------
In July 2003, we completed the sale of certain optical component products to
Avanex. See Note 5 (Restructuring Actions) for a description of the transaction.
Appliance Controls Group
- ------------------------
In May 2002, we completed the sale of our appliance controls group, which was
included in the controls and connectors products within the Telecommunications
segment. During 2002, we received proceeds of $30 million and realized a loss on
the sale of approximately $16 million ($10 million after-tax). This loss is
included in restructuring, impairment and other charges in the consolidated
statements of operations.
21. Operating Segments
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," set standards for reporting information regarding operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. Our
chief operating decision-making group is comprised of the Chairman and Chief
Executive Officer, Vice Chairman and Chief Financial Officer, President and
Chief Operating Officer, President-Corning Technologies, Executive Vice
President-Chief Administrative Officer and Executive Vice President-Chief
Technology Officer.
We are a world-leading provider of optical fiber and cable and hardware and
equipment products for the telecommunications industry; high-performance glass
for computer monitors, and other information display applications; 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.
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 that respective segment's net income.
Segment amounts exclude revenues, expenses and equity earnings not specifically
identifiable to segments.
We prepared the financial results for our 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 GAAP. These expenses include
interest, taxes and corporate functions. Segment net income may not be
consistent with measures used by other companies. The accounting policies of our
operating segments are the same as those applied in the consolidated financial
statements. Revenue attributed to geographic areas is based on the location of
the customer.
21. Operating Segments (continued)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Segments Telecom- Non-segment/ Consolidated
(In millions) munications Technologies Other items Total
- -----------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2003
Net sales $ 1,426 $ 1,641 $ 23 $ 3,090
Depreciation (1) $ 246 $ 232 $ 2 $ 480
Amortization of purchased intangibles $ 37 $ 37
Research, development and engineering expenses (2) $ 120 $ 227 $ (3) $ 344
Restructuring, impairment and other charges and credits (3) $ (36) $ 134 $ 13 $ 111
Interest expense (4) $ 75 $ 79 $ 154
Benefit for income taxes $ (78) $ (6) $ (170) $ (254)
Loss before minority interests and equity (losses) earnings (5) $ (158) $ (98) $ (249) $ (505)
Minority interests (6) 73 73
Equity in (losses) earnings of associated companies, net of impairments (11) 137 83 209
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (169) $ 112 $ (166) $ (223)
- -----------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 59 $ 713 $ 206 $ 978
Segment assets (7) $ 1,901 $ 2,576 $ 6,275 $ 10,752
Capital expenditures $ 15 $ 349 $ 27 $ 391
- -----------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2002
Net sales $ 1,631 $ 1,513 $ 20 $ 3,164
Depreciation (1) $ 379 $ 245 $ (6) $ 618
Amortization of purchased intangibles $ 41 $ 2 $ 43
Research, development and engineering expenses (2) $ 308 $ 177 $ (2) $ 483
Restructuring, impairment and other charges and credits (3) $ 1,722 $ 150 $ 208 $ 2,080
Interest expense (4) $ 99 $ 71 $ 9 $ 179
(Benefit) provision for income taxes $ (722) $ (28) $ 24 $ (726)
Loss before minority interests and equity (losses) earnings (5) $ (1,838) $ (145) $ (11) $ (1,994)
Minority interests (6) 1 96 1 98
Equity in (losses) earnings of associated companies, net of impairments (60) 168 8 116
Income from discontinued operations 478 478
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (1,897) $ 119 $ 476 $ (1,302)
- -----------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 72 $ 655 $ 19 $ 746
Segment assets (7) $ 2,243 $ 2,382 $ 6,781 $ 11,406
Capital expenditures $ 49 $ 183 $ 84 $ 316
- -----------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2001
Net sales $ 4,458 $ 1,568 $ 21 $ 6,047
Depreciation (1) $ 401 $ 215 $ 5 $ 621
Amortization of purchased intangibles $ 76 $ 76
Research, development and engineering expenses (2) $ 474 $ 151 $ (3) $ 622
Restructuring, impairment and other charges and credits (3) $ 5,404 $ 122 $ 191 $ 5,717
Interest expense (4) $ 104 $ 48 $ 1 $ 153
Benefit for income taxes $ (336) $ (38) $ (94) $ (468)
Loss before minority interests and equity earnings (5) $ (5,215) $ (53) $ (425) $ (5,693)
Minority interests 13 13
Equity in earnings of associated companies 12 132 4 148
Income from discontinued operations 34 34
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (5,203) $ 92 $ (387) $ (5,498)
- -----------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 101 $ 511 $ 24 $ 636
Segment assets (7) $ 3,972 $ 2,571 $ 6,250 $ 12,793
Capital expenditures $ 941 $ 403 $ 273 $ 1,617
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Depreciation expense for Telecommunications and Technologies includes an
allocation of depreciation of corporate property not specifically
identifiable to a segment. Related depreciable assets are not allocated to
segment assets.
(2) Non-direct research, development and engineering expenses are allocated to
segments based upon direct project spending for each segment.
(3) Related tax benefit:
Year ended December 31, 2003: $17, $28, $4 and $49.
Year ended December 31, 2002: $452, $30, $66 and $548.
Year ended December 31, 2001: $282, $48, $69 and $399.
(4) 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.
(5) 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.
(6) Includes $30 million and $68 million in 2003 and 2002, respectively,
related to impairment of long-lived assets of CAV, within the Technologies
segment
(7) Includes inventory, accounts receivable, property and investments in
associated equity companies.
21. Operating Segments (continued)
Non-segment (loss) income is detailed below (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
-------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Non-segment (loss) income and other (1) $ (44) $ 4 $ (33)
Amortization of goodwill (2) (363)
Non-segment restructuring, impairment and other charges and credits (13) (208) (191)
Asbestos settlement (413)
Interest income (3) 32 41 68
Gain on repurchases of debt, net 19 176
Benefit (provision) for income taxes (4) 170 (24) 94
Minority interests 1
Equity in earnings of associated companies, net of impairments (5) 83 8 4
Income from discontinued operations 478 34
- -----------------------------------------------------------------------------------------------------------------------------------
Non-segment net (loss) income $ (166) $ 476 $ (387)
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes non-segment operations and other corporate activities.
(2) Amortization of goodwill relates primarily to the Telecommunications
segment.
(3) Corporate interest income is not allocated to reportable segments.
(4) Includes tax associated with non-segment restructuring, impairment and
other charges and amortization of goodwill.
(5) Includes amounts derived from corporate investments and activities,
primarily Dow Corning in 2003.
The following table provides net sales and other data for the Telecommunications
segment (in millions):
- -------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 760 $ 859 $ 2,889
Hardware and equipment 535 552 817
Photonic technologies 54 111 547
Controls and connectors 77 109 205
-------- --------- --------
Total net sales $ 1,426 $ 1,631 $ 4,458
- -------------------------------------------------------------------------------
The following table provides net sales and other data for the Technologies
segment (in millions):
- -------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
Net sales:
Display technologies $ 595 $ 405 $ 323
Environmental technologies 476 394 379
Life sciences 281 280 267
Conventional video components 65 166 252
Other technologies products 224 268 347
-------- --------- --------
Total net sales $ 1,641 $ 1,513 $ 1,568
- -------------------------------------------------------------------------------
21. Operating Segments (concluded)
Non-segment assets are detailed below (in millions):
- -------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
Property, net (1) $ 973 $ 903 $ 636
Investments (2) 211 25 80
Other non-current assets (3) 3,393 3,107 2,811
Current assets (4) 1,698 2,746 2,723
- -------------------------------------------------------------------------------
Total non-segment assets $ 6,275 $ 6,781 $ 6,250
- -------------------------------------------------------------------------------
(1) Represents corporate property not specifically identifiable to a segment.
(2) Represents corporate investments in associated companies, at both cost and
equity.
(3) Includes non-current corporate assets, pension assets and deferred taxes.
(4) Includes current corporate assets, primarily cash, short-term investments
and deferred taxes.
Information concerning principal geographic areas was as follows (in millions):
- -----------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Net Long-lived Net Long-lived Net Long-lived
Sales Assets (1) Sales Assets (1) Sales Assets (1)
- -----------------------------------------------------------------------------------------------------------------------------------
North America
United States $ 1,222 $ 4,435 $ 1,446 $ 4,588 $ 2,665 $ 6,249
Canada 88 70 122 66 238 54
Mexico 65 72 56 73 85 3
- -----------------------------------------------------------------------------------------------------------------------------------
Total North America 1,375 4,577 1,624 4,727 2,988 6,306
- -----------------------------------------------------------------------------------------------------------------------------------
Asia Pacific
Japan 382 349 372 292 518 264
China 134 191 102 189 511 170
Korea 55 620 57 574 50 454
Other, including Taiwan 472 253 331 129 373 79
- -----------------------------------------------------------------------------------------------------------------------------------
Total Asia Pacific 1,043 1,413 862 1,184 1,452 967
- -----------------------------------------------------------------------------------------------------------------------------------
Europe
Germany 198 295 210 236 443 484
France 42 133 46 121 141 123
United Kingdom 74 67 82 83 223 97
Italy 36 268 47 265 114 319
Other 194 77 183 39 479 37
- -----------------------------------------------------------------------------------------------------------------------------------
Total Europe 544 840 568 744 1,400 1,060
- -----------------------------------------------------------------------------------------------------------------------------------
Latin America
Brazil 17 2 15 2 59 7
Other 11 1 6 1 39 3
- -----------------------------------------------------------------------------------------------------------------------------------
Total Latin America 28 3 21 3 98 10
- -----------------------------------------------------------------------------------------------------------------------------------
All Other 100 89 36 109 30
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 3,090 $ 6,833 $ 3,164 $ 6,694 $ 6,047 $ 8,373
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Long-lived assets primarily include investments, plant and equipment,
goodwill and other intangible assets.
22. Subsequent Event
Through March 1, 2004, we repurchased and retired 25 thousand zero coupon
convertible debentures for approximately $19 million in cash resulting in a net
decrease of $20 million to the zero coupon convertible debenture book value. In
addition, we issued 22 million shares of Corning common stock and $24 million in
cash in exchange for 3.5% convertible debentures with a book value of $213
million at an effective conversion price of $9.675 per share. As a result of
these transactions, we will record a $23 million pre-tax loss on repurchases and
retirement of debt during the first quarter of 2004.
Corning Incorporated and Subsidiary Companies
Schedule II - Valuation Accounts and Reserves
(In millions)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year ended December 31, 2003 Beginning of Period Additions and Other End of Period
- ----------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 59 $ 5 $ 26 $ 38
Deferred tax assets valuation allowance $ 417 $ 52 $ 469
Accumulated amortization of
purchased intangible assets $ 104 $ 43 $ 147
Reserves for accrued costs of
business restructuring $ 405 $ 127 $ 346 $ 186
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year ended December 31, 2002 Beginning of Period Additions and Other End of Period
- ----------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 60 $ 15 $ 16 $ 59
Deferred tax assets valuation allowance $ 189 $ 228 $ 417
Accumulated amortization of
purchased intangible assets $ 90 $ 43 $ 29 $ 104
Reserves for accrued costs of
business restructuring $ 276 $ 461 $ 332 $ 405
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year ended December 31, 2001 Beginning of Period Additions and Other End of Period
- ----------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 47 $ 32 $ 19 $ 60
Deferred tax assets valuation allowance $ 72 $ 117 $ 189
Accumulated amortization of goodwill $ 303 $ 363 $ 5 $ 661
Accumulated amortization of purchased
intangible assets $ 52 $ 76 $ 38 $ 90
Reserves for accrued costs of
business restructuring $ 419 $ 143 $ 276
- ----------------------------------------------------------------------------------------------------------------------------------
QUARTERLY OPERATING RESULTS
(unaudited)
(In millions, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Total
2003 Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 746 $ 752 $ 772 $ 820 $ 3,090
Gross margin $ 200 $ 181 $ 226 $ 242 $ 849
Restructuring, impairment and other charges and (credits) $ 51 $ 49 $ (10) $ 21 $ 111
Asbestos settlement $ 298 $ 39 $ 51 $ 25 $ 413
Loss from continuing operations before income
taxes, minority interests and equity earnings $ (445) $ (149) $ (74) $ (91) $ (759)
Benefit for income taxes (144) (34) (30) (46) (254)
Minority interests 37 33 2 1 73
Equity in earnings of associated companies, net
of impairments 59 60 75 15 209
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (205) $ (22) $ 33 $ (29) $ (223)
- -----------------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per common share $ (0.17) $ (0.02) $ 0.03 $ (0.02) $ (0.18)
Diluted (loss) earnings per common share $ (0.17) $ (0.02) $ 0.02 $ (0.02) $ (0.18)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Total
2002 Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 839 $ 827 $ 762 $ 736 $ 3,164
Gross margin $ 184 $ 184 $ 129 $ 105 $ 602
Restructuring, impairment and other charges $ 494 $ 125 $ 1,461 $ 2,080
Loss from continuing operations before income
taxes, minority interests and equity earnings $ (184) $ (606) $ (290) $ (1,640) $ (2,720)
Benefit for income taxes (50) (184) (91) (401) (726)
Minority interests 6 6 5 81 98
Equity in earnings of associated companies, net
of impairments 30 25 42 19 116
- -----------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (98) (391) (152) (1,139) (1,780)
Income from discontinued operations, net of income tax (1) 8 21 19 430 478
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss $ (90) $ (370) $ (133) $ (709) $ (1,302)
- -----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted (loss) earnings per common share from:
Continuing operations $ (0.10) $ (0.41) $ (0.27) $ (0.96) $ (1.85)
Discontinued operations (1) 0.02 0.02 0.36 0.46
- -----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per common share $ (0.10) $ (0.39) $ (0.25) $ (0.60) $ (1.39)
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Discontinued operations are described in Note 2 (Discontinued Operations) to
the Consolidated Financial Statements.
DOW CORNING CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
Report of independent accountants 102
Consolidated balance sheets at December 31, 2003 and 2002 103
Consolidated statements of operations and retained earnings
for the years ended December 31, 2003, 2002 and 2001 105
Consolidated statements of cash flows for the years ended
December 31, 2003, 2002 and 2001 106
Consolidated statements of stockholders' equity for the
years ended December 31, 2003, 2002 and 2001 107
Consolidated statements of comprehensive income (loss)
for the years ended December 31, 2003, 2002 and 2001 108
Notes to consolidated financial statements 109
Supplementary data for the years ended December 31, 2003
and 2002: Quarterly financial information 145
PricewaterhouseCoopers LLP
Report of Independent Accountants
To the Stockholders and
Board of Directors of
Dow Corning Corporation
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations and retained earnings, of comprehensive
income and of cash flows present fairly, in all material respects, the financial
position of Dow Corning Corporation and its subsidiaries at December 31, 2003
and December 31, 2002, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
upon our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 1 and
14 to the consolidated financial statements, on May 15, 1995, Dow Corning
Corporation voluntarily filed for protection under Chapter 11 of the United
States Bankruptcy Code. This action, which was taken primarily as a result of
breast implant litigation as discussed in Note 13 to the financial statements,
raises substantial doubt about the Company's ability to continue as a going
concern in its present form. Management's plans in regard to these matters are
also described in Notes 13 and 14. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
January 19, 2004
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(in millions of U.S. dollars)
ASSETS
------
December 31, 2003 December 31, 2002
----------------- -----------------
Current Assets:
Cash and cash equivalents $ 462.0 $ 763.3
Marketable securities 973.4 353.4
Accounts receivable (less allowance for doubtful
accounts of $12.1 in 2003, and $10.6 in 2002) 445.8 409.4
Anticipated implant insurance receivable 2.8 20.6
Notes and other receivables 95.9 84.6
Inventories 369.8 326.0
Deferred income taxes 188.5 169.8
Other current assets 20.1 35.0
------------- -------------
Total current assets 2,558.3 2,162.1
------------- -------------
Property, Plant and Equipment:
Land and land improvements 220.6 205.7
Buildings 757.4 712.8
Machinery and equipment 3,604.0 3,380.8
Construction-in-progress 40.0 30.8
------------- -------------
Total property, plant and equipment 4,622.0 4,330.1
Less - accumulated depreciation (3,156.3) (2,845.9)
------------- -------------
Net property, plant and equipment 1,465.7 1,484.2
------------- -------------
Other Assets:
Marketable securities 254.1 296.9
Anticipated implant insurance receivable 433.5 445.1
Restricted insurance proceeds 207.4 181.3
Deferred income taxes 784.9 825.8
Intangible assets, net 102.4 85.7
Restricted cash collateral 70.1 50.8
Other 131.8 95.4
------------- -------------
Total other assets 1,984.2 1,981.0
------------- -------------
Total Assets $ 6,008.2 $ 5,627.3
============= =============
(See accompanying Notes to Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(in millions of U.S. dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
December 31, 2003 December 31, 2002
----------------- -----------------
Current Liabilities:
Short-term borrowings and current maturities of
long-term debt $ 16.7 $ 15.9
Accounts payable 227.5 209.6
Accrued payrolls and employee benefits 94.6 158.0
Accrued taxes 92.5 110.2
Accrued interest 650.9 550.1
Other current liabilities 112.4 128.3
------------- -------------
Total current liabilities 1,194.6 1,172.1
Long-Term Debt 52.2 50.4
------------- -------------
Other Long-Term Liabilities 211.9 107.8
------------- -------------
Liabilities Subject to Compromise (Notes 13 & 14):
Trade accounts payable 67.7 67.3
Accrued employee benefits 493.0 528.7
Accrued taxes 3.6 3.6
Implant reserve 2,249.9 2,255.6
Notes payable 375.0 375.0
Long-term debt 273.7 273.7
Co-insurance payable 79.7 84.9
Other 72.5 77.9
------------- -------------
Total liabilities subject to compromise 3,615.1 3,666.7
Minority Interest in Consolidated Subsidiaries 91.9 89.5
------------- -------------
Commitments and Contingencies (Notes 13, 14 & 15)
Stockholders' Equity:
Common stock, $5.00 par value -
2,500,000 shares authorized and outstanding 12.5 12.5
Retained earnings 860.0 683.4
Cumulative translation adjustment 110.1 (39.6)
Minimum pension liability (143.8) (117.9)
Other equity adjustments 3.7 2.4
------------- -------------
Stockholders' equity 842.5 540.8
------------- -------------
Liabilities and Stockholders' Equity $ 6,008.2 $ 5,627.3
============= =============
(See accompanying Notes to Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
-----------------------------------------------------------
(in millions of U.S. dollars except share data)
Year Ended December 31,
2003 2002 2001
------------- ------------- -------------
Net Sales $ 2,872.5 $ 2,610.1 $ 2,438.5
Operating Costs and Expenses
Cost of sales 2,052.7 1,882.6 1,896.9
Marketing and administrative expenses 479.0 453.4 449.8
Implant costs (income) (0.2)
Variable compensation program change 68.8
Restructuring costs 62.8 43.1
----------- ----------- -----------
Total operating costs and expenses 2,531.7 2,467.6 2,389.6
Operating Income 340.8 142.5 48.9
Interest income 31.8 39.1 65.8
Interest expense (93.6) (91.0) (147.2)
Other nonoperating income, net 3.7 19.2 7.8
----------- ----------- -----------
Income (Loss) before Reorganization Costs
and Income Taxes 282.7 109.8 (24.7)
Reorganization costs 5.4 6.9 10.5
----------- ----------- -----------
Income (Loss) before Income Taxes 277.3 102.9 (35.2)
Income tax provision (benefit) 94.3 39.2 (4.3)
Minority interests' share in income (loss) 6.4 5.0 (3.4)
----------- ----------- -----------
Net Income (Loss) (2003 - $70.64 per share,
2002 - $23.48 per share, 2001 - $(11.00) per share) 176.6 58.7 (27.5)
Retained Earnings at Beginning of Period 683.4 624.7 652.2
----------- ----------- -----------
Retained Earnings at End of Period $ 860.0 $ 683.4 $ 624.7
=========== =========== ===========
(See accompanying Notes to Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(in millions of U.S. dollars)
Year Ended December 31,
2003 2002 2001
------------- ------------- -------------
Cash Flows from Operating Activities:
Net income (loss) $ 176.6 $ 58.7 $ (27.5)
Depreciation and amortization 243.9 266.6 284.6
Deferred income taxes 35.7 1.3 35.3
Reorganization costs 5.4 6.9 10.5
Other, net (77.5) 58.5 13.3
Changes in operating assets and liabilities:
Accounts and notes receivable 4.9 (115.8) 98.5
Inventories (13.4) 48.2 40.1
Accounts payable (4.9) 51.6 (27.4)
Accrued taxes (18.7) 52.4 (75.5)
Accrued interest 95.2 89.7 56.1
Accrued payroll and employee benefits (69.8) 109.3 19.9
Other, net 0.7 (14.6) (18.1)
Change in implant deposit 275.0
Implant payments (6.4) (5.9) (950.2)
Restricted insurance proceeds (29.4) (94.2) 810.8
Co-insurance payable (5.3) (20.1) (204.1)
Implant insurance reimbursement 29.4 111.8 100.1
----------- ----------- -----------
Cash provided by operating activities 366.4 604.4 441.4
----------- ----------- -----------
Cash Flows from Investing Activities:
Capital expenditures (77.4) (78.3) (223.7)
Business acquisitions (42.6) (62.8) (10.0)
Proceeds from sales of marketable securities 3,243.2 2,158.4 2,038.4
Purchases of marketable securities (3,815.7) (2,404.6) (2,067.0)
Other, net 6.7 0.2 64.7
----------- ----------- -----------
Cash used for investing activities (685.8) (387.1) (197.6)
----------- ----------- -----------
Cash Flows from Financing Activities:
Long-term borrowings 2.8 27.1 53.8
Payments on long-term debt (16.9) (48.9) (89.8)
Net change in short-term borrowings 4.2 0.4 (9.5)
----------- ----------- -----------
Cash used for financing activities (9.9) (21.4) (45.5)
----------- ----------- -----------
Cash Flows Used for Reorganization Costs (5.4) (6.9) (10.5)
----------- ----------- -----------
Effect of Exchange Rate Changes on Cash 33.4 (8.8) (8.8)
----------- ----------- -----------
Changes in Cash and Cash Equivalents:
Net increase (decrease) in cash and cash
equivalents (301.3) 180.2 179.0
Cash and cash equivalents at beginning of year 763.3 583.1 404.1
----------- ----------- -----------
Cash and cash equivalents at end of year $ 462.0 $ 763.3 $ 583.1
=========== =========== ===========
(See accompanying Notes to Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
(in millions of U.S. dollars)
Year Ended December 31,
2003 2002 2001
------------- ------------- --------------
Common stock, $5.00 par value - 2,500,000 shares
authorized and outstanding
Balance at beginning and end of year $ 12.5 $ 12.5 $ 12.5
----------- ----------- -----------
Retained earnings
Balance at beginning of year 683.4 624.7 652.2
Net income (loss) 176.6 58.7 (27.5)
----------- ----------- -----------
Balance at end of year 860.0 683.4 624.7
----------- ----------- -----------
Accumulated Other Comprehensive Income (Loss)
Cumulative translation adjustment balance at beginning of year (39.6) (143.8) (90.6)
Translation adjustments 161.5 115.3 (57.9)
Income tax benefit (provision) (11.8) (11.1) 4.7
----------- ----------- -----------
Balance at end of year 110.1 (39.6) (143.8)
----------- ----------- -----------
Additional minimum pension liability balance at beginning of year (117.9) (15.8) (7.3)
(Increase) decrease in minimum pension liability (33.5) (158.1) (11.1)
Income tax benefit (provision) 7.6 56.0 2.6
----------- ----------- -----------
Balance at end of year (143.8) (117.9) (15.8)
----------- ----------- -----------
Other equity adjustments: balance at beginning of year 2.4 1.1 (6.7)
Change in unrealized gain (loss) on cash flow hedges 0.8 0.7 (0.1)
Change in unrealized gain (loss) on available-for-sale securities 1.4 1.1 12.0
Income tax benefit (provision) (0.9) (0.5) (4.1)
----------- ----------- -----------
Balance at end of year 3.7 2.4 1.1
----------- ----------- -----------
Stockholders' Equity $ 842.5 $ 540.8 $ 478.7
=========== =========== ===========
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(in millions of U.S. dollars)
Year Ended December 31,
2003 2002 2001
------------- ------------- --------------
Net Income (Loss) $ 176.6 $ 58.7 $ (27.5)
Other Comprehensive Income (Loss)
Foreign currency translation adjustments 161.5 115.3 (57.9)
Unrealized net gain (loss) on available-for-securities 1.4 1.1 12.0
Net gain (loss) on cash flow hedges 0.8 0.7 (0.1)
(Increase) decrease in minimum pension liability (33.5) (158.1) (11.1)
----------- ----------- -----------
Other comprehensive income, before tax 130.2 (41.0) (57.1)
Income Tax Benefit (Provision) (5.1) 44.4 3.2
----------- ----------- -----------
Other comprehensive income (loss), net of tax 125.1 3.4 (53.9)
----------- ----------- -----------
Comprehensive Income (Loss) $ 301.7 $ 62.1 $ (81.4)
=========== =========== ===========
(See accompanying Notes to Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(in millions of U.S. dollars except where noted)
NOTE 1 - Business and Basis of Presentation
- -------------------------------------------
Business
- --------
Dow Corning Corporation ("Dow Corning") was incorporated in 1943 by
Corning Glass Works, now Corning Incorporated ("Corning"), and The Dow Chemical
Company ("Dow Chemical") for the purpose of developing and producing polymers
and other materials based on silicon chemistry. Dow Corning operates in various
countries around the world through numerous wholly owned or majority owned
subsidiary corporations (hereinafter, the consolidated operations of Dow Corning
and its subsidiaries will be referred to as the "Company".)
Dow Corning built its business based on silicon chemistry. Silicon is one
of the most abundant elements in the world. Most of Dow Corning's products are
based on polymers known as silicones, which have a silicon-oxygen-silicon
backbone. Through various chemical processes, Dow Corning manufactures silicones
that have an extremely wide variety of characteristics, in forms ranging from
fluids, gels, greases and elastomeric materials to resins and other rigid
materials. Silicones combine the temperature and chemical resistance of glass
with the versatility of plastics, regardless of form or application, generally
possess such qualities as electrical resistance, resistance to extreme
temperatures, resistance to deterioration from aging, water repellency,
lubricating characteristics, relative chemical and physiological inertness and
resistance to ultraviolet radiation.
The Company engages primarily in the discovery, development,
manufacturing, marketing and distribution of silicon-based materials and
provides related services. Since its inception, Dow Corning has been engaged in
a continuous program of basic and applied research on silicon-based materials to
develop new products and processes, to improve and refine existing products and
processes and to develop new applications for existing products. The Company
manufactures over 7,000 products and serves approximately 25,000 customers
worldwide, with no single customer accounting for more than three percent of the
Company's sales in any of the past three years. Principal United States
manufacturing plants are located in Kentucky and Michigan. Principal foreign
manufacturing plants are located in Belgium, China, France, Germany, Japan,
South Korea and the United Kingdom. The Company operates research and
development facilities in the United States, Belgium, China, Germany, Ireland,
Japan, South Korea and the United Kingdom. The Company also operates technical
service centers in the United States, Belgium, Brazil, China, Germany, Japan,
South Korea, Taiwan and the United Kingdom. Dow Corning's average employment for
2003 was approximately 8,200 persons.
On May 15, 1995, Dow Corning, excluding its subsidiaries (the "Debtor
Company"), voluntarily filed for protection under Chapter 11 of the U.S.
Bankruptcy Code (the "Bankruptcy Code") with the U.S. Bankruptcy Court for the
Eastern District of Michigan (the "Bankruptcy Court"). The Debtor Company
consists of a majority of the Company's United States operations and certain
foreign branches. The Debtor Company's Chapter 11 proceeding (the "Chapter 11
Proceeding") does not include any subsidiaries of the Debtor Company. See Note
14 below for further discussion of this matter.
The consolidated financial statements of the Company have been prepared
on a "going-concern" basis, which contemplates the realization of assets and the
liquidation of liabilities in the ordinary course of business. However, as a
result of the Chapter 11 Proceeding of the Debtor Company, such realization of
assets and liquidation of liabilities is subject to significant uncertainties,
including the affirmation by the U.S. Court of Appeals for the Sixth Circuit of
the Bankruptcy Court's confirmation of the Debtor Company's plan of
reorganization. Also, the ability of the Company to continue as a going concern
(including its ability to meet post-petition obligations of the Debtor Company
and to meet obligations of the subsidiaries of the Debtor Company) is dependent
primarily on (a) the ability of the Company to maintain adequate cash on hand,
the ability of the Company to generate cash from operations and the ability of
the subsidiaries of the Debtor Company to obtain necessary financing and (b) if
required, the availability of a debtor-in-possession credit facility. Management
believes that condition (a) will be satisfied and condition (b) will not be
required. This belief is based on its experience in operating the Company and
obtaining financing from third parties. The Company has consistently generated
positive operating cash flows, including throughout the pendency of the Chapter
11 Proceeding. The Company expects that it will continue to generate positive
operating cash flows, as well as net income. In addition, if required,
management believes significant financing would be available to the Company and
its subsidiaries as a result of their historical and anticipated results of
operations and financial condition. While management holds these beliefs and
expectations, there can be no assurance that these conditions will be met, and
if these conditions are not met, it would have a material adverse effect on the
Company.
NOTE 1 - Business and Basis of Presentation (continued)
- -------------------------------------------
The Company's financial statements as of December 31, 2003, have been
presented in conformity with the American Institute of Certified Public
Accountants' Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," issued November 19, 1990.
SOP 90-7 requires a segregation of liabilities subject to compromise by the
Bankruptcy Court as of the bankruptcy filing date (May 15, 1995) and
identification of all transactions and events that are directly associated with
the reorganization of the Debtor Company. (See Note 14 for more information on
the Chapter 11 proceeding.)
Raw Materials
- -------------
The principal raw material used in the production of the Company's
products is silicon. The Company purchases chemical grade silicon metal from
producers who manufacture the silicon metal from quartz that has been reacted
with carbon at high temperatures. The majority of the Company's anticipated
annual requirements are satisfied by its silicon metal supply contracts. The
Company maintains silicon metal supply contracts with several producers of
silicon metal, primarily in Norway and South Africa. One of these contracts
represents approximately one-third of the Company's annual silicon metal
requirements. In addition, the Company produces approximately one-third of its
own annual silicon metal requirements at its facilities in Alabama, which the
Company acquired in June 2003, and in Brazil. The Company's internal capacity is
sufficient to produce approximately one-half of its expected silicon metal
needs. As a result, management believes it is less dependent on third party
producers to meet its silicon metal needs and is less subject to market price
fluctuations for silicon metal than its competitors. The Company also acquires
silicon metal via spot purchases and short-term commitments. Further, management
believes that it has adequate sources of supply of silicon and that adequate
supplies of quartz are available to the producers of silicon. The Company
considers the worldwide production capacity of silicon to be adequate to meet
expected demand and do not expect shortages.
The Company also purchases substantial quantities, and management
believes that the Company has adequate sources of supply, of methanol, methyl
chloride and other raw materials required for its manufacturing operations. The
raw materials that the Company uses are equally accessible to all of the
Company's competitors. Although from time to time temporary shortages of
particular raw materials may occur, management believes that adequate sources of
raw materials required to maintain the Company's operations exist. Price
increases with regard to raw materials should not have a material impact on the
Company's long-term competitiveness because any increases are likely to affect
all producers of silicon-based products similarly. However, a substantial
increase in raw material prices may negatively impact the Company's ability to
compete with its extensive non-silicon-based product competitors. Additionally,
although price increases may adversely impact results of operations during the
period in which the increases occur, generally these price increases should not
have a significant long-term impact on results of operations, as the Company is
generally able to pass the price increases on to its customers over the
long-term. Although product sales prices declined during the past several years,
the Company was able to largely offset price increases for raw materials through
technology and productivity improvements, improvements in raw material usage and
efficiency and substitution of lower-cost raw materials. Management believes
that these improvements, along with recently acquired internal capacity to
produce silicon metal, will allow the Company to continue to offset raw material
price increases in the future. Generally, the Company maintains inventory levels
of raw materials in quantities sufficient to meet its short-term production
requirements.
Competition
- -----------
Dow Corning is a leader among the various companies that produce
silicon-based products throughout the world. The Company faces substantial
competition for its products from other manufacturers of silicon-based products
both in the United States and abroad. In addition, many of its products compete
with non-silicon-based products, including organic products, in specific
applications. The risk of product substitution is common to all of the Company's
products, whether from silicon-based products or non-silicon-based products. The
principal competitive elements in the sale of the Company's products are cost
effectiveness, product quality and performance, application expertise,
responsive customer service and new product development.
Some of the Company's products compete primarily on technological
differentiation, while other products compete primarily on price, quality and
customer service. The Company's products are often approved for use in, and
frequently are specified for, high performance products and processes by
customers, particularly in applications where minor differences between
competing materials can be significant. This level of specificity provides some
protection against substitution of many of the Company's products, particularly
where the product has been tailored to meet the needs of a specific application
or where certification by the customer involves a lengthy process.
NOTE 1 - Business and Basis of Presentation (continued)
- -------------------------------------------
Each of the Company's significant competitors possesses substantial
resources. Management believes that the Company has several competitive
advantages that enable it to retain its position as a global leader in the
development and sale of silicon-based products. Management believes that the
Company's broad global manufacturing and research base, and its ability to
produce the basic silicone intermediates necessary for most of its products at
more than one manufacturing facility, enhance price competitiveness and
flexibility. The Company also operates sales, business and information offices
and research and development centers throughout the world. In addition, the Dow
Corning name and the brand names of many of the Company's products are
recognized in specific geographies around the world. Management believes that
the Company's global presence also makes it less susceptible to the potential
adverse consequences of market fluctuations or other factors particular to any
specific region, facility or industry and provides it with the flexibility to
shift production among facilities when appropriate. Generally, management
believes that there are significant barriers to entry for new basic silicone
intermediates entrants in many of the geographies that contribute to the
Company's worldwide leadership position. Management believes these barriers to
entry include the fact that basic silicone intermediates manufacturing requires
large capital investments, specialized silicon chemistry knowledge and
technology, and sophisticated manufacturing processes. However, management
believes that barriers to entry for the manufacture of many of the Company's
non-basic silicone intermediate type products and non-silicon-based products,
including organic products, are less significant.
Management believes that the Company is one of only a few organizations
worldwide that can meet both the large-scale and highly specialized needs of
customers for silicon-based products because of the capital investment,
technology and know-how required to make silicon-based products on a large
scale. The Company competes with different companies in each of its American,
European and Asian geographies. In the United States, the Company's largest
competitor is the General Electric Company. In Europe, the Company faces
substantial competition from, among others, GE Bayer/Toshiba Silicones and
Wacker-Chemie GmbH. In Asia, Shin-Etsu Chemical Co. Ltd. is a significant
competitor. In addition, the Company could in the future face competition from
developing producers in China and South Korea.
There can be no assurance that any of the Company's existing or future
competitors with respect to any of its products will not have the benefit of
greater capital, other resources or other competitive advantages which may
negatively impact it in any one or more of its geographies.
Intellectual Property, Patents and Licenses
- -------------------------------------------
The Company's ability to compete with other companies depends, in part,
on its ability to maintain the proprietary nature of its technology. The Company
focuses on developing new products to satisfy customer needs. The Company has
over 4,600 active patents worldwide, including over 1,400 active domestic
patents. The Company has applied for and received approximately 100 patents in
the United States annually for the past several years. Its patents expire over a
period of more than 15 years, with approximately 20% expiring prior to 2009, 30%
expiring between 2009 and 2013, 40% expiring between 2014 and 2018 and 10%
expiring after 2018. The Company does not expect that the expiration of any of
the patents would have a material adverse effect on its results of operations or
financial condition. The Company also is a licensor, as well as a licensee,
under a number of patent licenses and technology agreements.
Although the Company considers its patents and licenses to be valuable
assets, it does not regard its business as being dependent on any single patent
or license or any group of related patents or licenses. There can be no
assurance as to the degree of protection afforded by these patents, or the
likelihood that pending patent applications will be issued. Furthermore, there
can be no assurance that others will not independently develop the same or
similar technology, develop alternative technology in substitution for the
patented aspects of any of the Company's products or proposed products or
otherwise obtain access to its proprietary technology.
In addition to seeking U.S. and international patent protection, the
Company relies on unpatented proprietary technology and information to maintain
its competitive position. While the Company generally requires its employees to
enter into confidentiality agreements to protect the Company's rights in this
technology and information, there can be no assurance that these agreements will
provide meaningful protection for the Company's trade secrets, know-how or other
proprietary information. If the Company is unable to maintain the proprietary
nature of its significant technology and other intellectual property, its
business could be adversely affected.
NOTE 2 - Acquisitions and Strategic Alliances
- ---------------------------------------------
On August 24, 2001, the Company entered into a Memorandum of
Understanding with Genencor International, Inc. ("Genencor"), under which the
Company and Genencor agreed to form a strategic alliance in the fields of
biotechnology and silicon chemistry. Pursuant to this agreement, on October 10,
2001, the Company provided $12.0 to the alliance to fund initial research and
development expenditures, which was reported in "Cost of sales" in the
consolidated statements of operations and retained earnings.
NOTE 2 - Acquisitions and Strategic Alliances (continued)
- ---------------------------------------------
On October 23, 2001, the Company, through a wholly owned subsidiary,
purchased 4,800,769 shares of Series B convertible preferred stock ("Preferred
Stock") of Aprilis Inc. of Cambridge, Massachusetts ("Aprilis"). This
acquisition resulted in the Company's ownership of approximately 87% of the
Series B Preferred Stock, 46% of all Preferred Stock and approximately 35% of
the total outstanding shares of stock of Aprilis. The purchase price was $10.0.
On March 28, 2002, the Company offered to purchase up to 100% of the
preferred and common shares of Paturle, S.A. ("Paturle"), a French
thermoplastics manufacturer serving the automotive, appliance and packaging
industries. The acquisition was finalized on April 30, 2002 when Dow Corning
France S.A.S., a wholly owned subsidiary of the Company, purchased 99.9 percent
of Paturle's preferred and common shares and Dow Corning Enterprises, Inc., a
wholly owned subsidiary of the Company, purchased the minority interest in
Multibase, Inc., a subsidiary of Paturle. The transaction resulted in an
aggregate purchase price of $57.9 of which $44.6 was goodwill. This acquisition
included the indirect acquisition of Paturle's subsidiaries, including Multibase
S.A.S. in France, Multibase, Inc. in the United States, and 76.8 percent of the
stock of Synergy Multibase, Limited in India.
On December 4, 2002, the Company, through Dow Corning Enterprises, Inc.,
a wholly owned subsidiary ("DCEI"), purchased substantially all of the assets of
GAN Semiconductor, Inc., of Sunnyvale, California for a purchase price of $4.9.
Included in the purchase was $2.9 of in-process research and development, which
was charged to "Other" expense. The transaction resulted in goodwill of $0.3.
On January 23, 2003, the Company, through DCEI, purchased substantially
all of the assets of Sterling Semiconductor, Inc. ("Sterling"), a wholly owned
subsidiary of Uniroyal Technology Corporation ("Uniroyal"), for a purchase price
of $11.5. Dow Corning has consolidated the assets acquired in the GAN
Semiconductor, Inc. and Sterling Semiconductor, Inc. in Midland, Michigan,
forming Dow Corning Compound Semiconductor Solutions, LLC.
On February 27, 2003, the Company purchased substantially all of the
assets of Tyco Electronics, Inc., a wholly owned subsidiary of Tyco
International Inc. for a purchase price of $9.4. Tyco Electronics, Inc.'s
primary facility is located in Menlo Park, California. The transaction resulted
in goodwill of $0.6.
On June 16, 2003, the Company purchased all of the outstanding stock of
Simcala, Inc., a silicon metal manufacturer located near Montgomery, Alabama.
The consideration paid for the stock was approximately $15.5 million. In
addition, immediately prior to the transaction closing, Simcala, Inc. redeemed
the stock of its executive management for consideration of approximately $1.5
million. In addition, Dow Corning provided inter-company loans of approximately
$13.25 million to Simcala, $7.1 million of which was for the purpose of retiring
Simcala's outstanding debt and $6.15 million of which was for the purpose of
securing Simcala's obligations under outstanding industrial development revenue
bonds. As of December 31, 2003, the transaction was subject to further purchase
accounting review.
On July 1, 2003, DCEI purchased 20% of the outstanding stock of DC
Dongjue Silicone Group Company Ltd. ("DCDSG"), bringing DCEI's total ownership
of DCDSG to 60%. Previously, in November, 2001, DCEI and New Energy Chemicals
Group Ltd. formed DCDSG as a corporate joint venture. At that time, DCEI was the
minority interest shareholder, owning 25% of the outstanding stock and the joint
venture was accounted for on an equity basis. In January, 2003, DCEI increased
its ownership to 40%. The July 1, 2003 purchase resulted in an aggregate
purchase price of $6.4 million, of which $4.6 million was recognized as
goodwill. As of July 1, 2003, the Company has consolidated the results of DCDSG
in the consolidated financial statements.
NOTE 3 - Global Restructuring
- -----------------------------
Beginning in 1998, the Company announced a series of restructurings of
its global operations designed to improve operating efficiencies and to enable
the Company to better meet customers' expectations. Principal actions included
closure of certain manufacturing, marketing and research facilities and the
consolidation of activities formerly carried on at the closed facilities, as
well as a reduction in the number of employees due to either (1) position
elimination or (2) deficiencies in specific employee skills required to meet
current or anticipated Company needs. As a result of the programs committed to,
announced and implemented in 1998 through 2001, approximately 1,350 employees
left the Company. During 2002, the Company announced a further reduction of 470
employees. In 2002, the non-cash activity included $18.0 for special termination
benefits as a result of the programs in effect. The Company does not expect any
further expenses related to these announcements. In the first quarter of 2003,
the Company completed the restructuring program.
NOTE 3 - Global Restructuring (continued)
- -----------------------------
The restructuring activity for the years ended December 31, 2003, 2002
and 2001 are as follows:
Beginning of Activity End of
Year Reserve Expenses Payments Non-Cash Year Reserve
------------ -------- -------- -------- ------------
2001 $ 27.8 $ 43.1 $ (39.7) $ (9.2) $ 22.0
2002 $ 22.0 $ 62.8 $ (52.2) $ (22.9) $ 9.7
2003 $ 9.7 $ (2.1) $ (7.6)
NOTE 4 - Management Variable Compensation
- -----------------------------------------
Dow Corning maintains a number of variable compensation plans designed to
reward employees for outstanding individual and Company performance. "Operating
Income" reflects compensation expenses for all such plans as and when earned by
participants. All such plans are annual in nature, with the exception of the
Phantom Stock Appreciation Rights Plan ("The StARs Plan") and the Performance
Excellence Plan ("PEP").
The StARs Plan was designed to provide a long-term compensation component
for key employees in order to create a sense of ownership and to promote
long-term Company success. The value of a StARs Unit was based on a metric of
Company financial performance. The current intrinsic value of a StARs Unit was
equal to the current value of a StARs Unit less its value at the time it was
granted to the participant. The Plan had a three-year vesting period, during
which time the awarded StARs Units could not be exercised. After the StARs Units
were vested, the Plan had a seven-year period in which the StARs Units must be
exercised or forfeited.
In December, 2002, the Company decided to modify the StARs Plan in order
to limit the future liabilities of the Company in the event that StARs Unit
values increased at rates not originally intended when the StARs Plan was
structured. As a result, pursuant to agreements with participants, the StARs
Plans for years 1992 through 2002 were modified to reflect a fixed net value to
participants for each outstanding StARs Unit in each such StARs Plan year. The
vesting schedule for unvested shares remained unchanged, but the dates of future
cash payments to participants were fixed. Management believes that despite these
modifications, the StARs Plan continues to retain its intended purpose of
rewarding and retaining key employees.
Based on these changes to the StARs Plan, the Company reported expenses
of $68.8 in the three-month period ending December 31, 2002 within the caption
"Variable compensation program change", such amount being equal to the $77.0
liability of the StARs Plan after modifications less the $8.2 liability before
modifications. As of December 31, 2003, the liability for the StARs Plan was
$52.3.
The PEP Plan was initiated in 2003 as a replacement for the StARs Plan.
The December 31, 2003 liability for the PEP Plan was $7.9.
NOTE 5 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts
of Dow Corning and all of its wholly owned and majority owned domestic and
foreign subsidiaries. The Company's interests in 20% to 50% owned subsidiaries
are carried on the equity basis and are included under the caption "Other Assets
- - Other" in the consolidated balance sheets. Intercompany transactions and
balances have been eliminated in consolidation.
Cash and Cash Equivalents
- -------------------------
Cash equivalents include all highly liquid investments with an average
maturity of ninety days or less. The carrying amounts for cash equivalents
approximate their fair market values.
Inventories
- -----------
The value of inventories is determined using lower of cost or market as
the basis and a first-in, first-out (FIFO) method. See Note 6 for further
details.
NOTE 5 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------
Property and Depreciation
- -------------------------
Property, plant and equipment is carried at cost less any impairment and
is depreciated principally using accelerated methods over estimated useful lives
ranging from 10 to 20 years for land improvements, 10 to 45 years for buildings
and 3 to 20 years for machinery and equipment. Upon retirement or other
disposal, the asset cost and related accumulated depreciation are removed from
the accounts and the net amount, less any proceeds, is charged or credited to
income. If an asset is determined to be impaired, either based on value or a
shortened life, the carrying amount of the asset is reduced to its fair value
and the difference is charged to income in the period incurred.
Expenditures for maintenance and repairs are charged against income as
incurred. Expenditures that significantly increase asset value, extend useful
asset lives or adapt property to a new or different use are capitalized.
The Company follows the policy of capitalizing interest as a component of
the cost of capital assets constructed for its own use. The amount of interest
that was capitalized for the years ended December 31, 2003, 2002 and 2001, in
conformity with Statement of Financial Accounting Standards No. ("SFAS") 34, was
$6.6 ($4.2 after tax), $3.2 ($2.0 after tax) and $9.5 ($6.0 after tax),
respectively.
Investments
- -----------
The Company accounts for investments in debt and equity securities in
conformity with SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities." SFAS 115 requires the use of fair value accounting for trading or
available-for-sale securities, while retaining the use of the amortized cost
method for investments in debt securities that the Company has the positive
intent and ability to hold to maturity. Investments in debt and equity
securities are included in the captions "Marketable securities", "Restricted
insurance proceeds" and "Restricted cash collateral" in the consolidated balance
sheets. All such investments are considered to be available for sale. If the
decline in fair value of an investment in debt or equity securities is
determined to be other than temporary, the carrying amount of the asset is
reduced to its fair value and the difference is charged to income in the period
incurred. See Note 8 for further discussion.
Credit Risk
- -----------
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash, investments,
derivative financial instruments and trade receivables. By policy, for cash and
investments, the Company limits the amount of credit exposure to any one
counterparty. The Company places its investments and transacts its derivative
instruments with counterparties that are major financial institutions with high
credit ratings. The Company minimizes credit risk in its receivables from
customers through its sale of products to a wide variety of customers and
markets in locations throughout the world. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company maintains reserves for potential credit losses and such losses have been
within expectations. Management believes the risk of incurring losses related to
credit risk is remote, and any losses would be immaterial to consolidated
financial results.
Intangibles
- -----------
Other assets include $102.4, and $85.7 of intangible assets, net of
accumulated amortization, at December 31, 2003 and 2002, respectively. Goodwill,
representing the excess of cost over net assets of businesses acquired, is
included in the above amounts and is tested for impairment in accordance with
SFAS 142, "Goodwill and Other Intangible Assets". Other intangible assets with
finite lives are amortized on a straight-line basis over their estimated useful
lives.
Revenue
- -------
Sales are recognized when revenue is realized or realizable and has been
earned. Revenue is recognized as risk and title to the product transfers to the
customer. Amounts billed to a customer in a sale transaction related to shipping
costs are classified as revenue. The Company reduces revenue for product
returns, allowances and price discounts.
Shipping Costs
- --------------
The Company records shipping costs incurred as Cost of sales in the
Consolidated Statements of Operations and Retained Earnings. Shipping costs are
primarily comprised of payments to third party shippers and totaled $76.6,
$61.6, and $74.1 for the years ended December 31, 2003, 2002 and 2001,
respectively.
Research and Development Costs
- ------------------------------
Research and development costs are charged to operations when incurred
and are included in Cost of sales. These costs totaled $162.5 in 2003, $154.5 in
2002 and $173.3 in 2001.
NOTE 5 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------
Income Taxes
- ------------
The Company accounts for income taxes in conformity with the provisions
of SFAS 109, "Accounting for Income Taxes." SFAS 109 requires a company to
recognize deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in a company's financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse. The Company records a valuation allowance on deferred tax assets when
appropriate to reflect the expected future tax benefits to be realized. In
determining the appropriate valuation allowance, certain judgments are made
relating to recoverability of deferred tax assets, use of tax loss
carryforwards, level of expected future taxable income and available tax
planning strategies. These judgments are routinely reviewed by management. At
December 31, 2003, the Company had a net deferred tax asset balance of $947.8
million, after valuation allowances of $2.0 million. For additional information,
see Note 7.
Currency Translation
- --------------------
The value of the U.S. dollar rises and falls day to day on foreign
currency exchanges. Since the Company does business in many countries, these
fluctuations affect the Company's financial position and results of operations.
The Company accounts for these fluctuations in accordance with SFAS 52, "Foreign
Currency Translation".
Subsidiaries in Europe and Japan translate their assets and liabilities,
stated in their functional currency, into U.S. dollars at current exchange
rates, that is, the rates in effect at the end of the period. The gains or
losses that result from this process affect "Cumulative translation adjustment"
in the stockholders' equity section of the consolidated balance sheets. Changes
in the functional currency value of monetary assets and liabilities denominated
in foreign currencies are recognized in the caption, "Other" in the consolidated
statements of operations and retained earnings. The revenues and expenses of
these non-U.S. subsidiaries are translated into U.S. dollars at the average
exchange rates that prevailed during the period. Therefore, the U.S. dollar
value of these items on the income statement fluctuates from period to period,
depending on the value of the dollar against foreign currencies.
For non-U.S. subsidiaries outside of Europe and Japan, where the U.S.
dollar is the functional currency, inventories, property, plant and equipment
and other non-monetary assets, together with their related elements of expense,
are translated at historical rates of exchange. All other assets and liabilities
are translated at current exchange rates. All other revenues and expenses are
translated at average exchange rates. Translation gains and losses for these
subsidiaries are recognized in the caption, "Other" in the consolidated
statements of operations and retained earnings.
Derivative Financial Instruments
- --------------------------------
The Company uses derivative financial instruments to reduce the impact of
changes in foreign exchange rates on its earnings, cash flows and fair values of
assets and liabilities. In addition, the Company uses derivative financial
instruments to reduce the impact of changes in natural gas prices on its
earnings and cash flows. The Company enters into derivative financial contracts
based on analysis of specific and known economic exposures. The Company's policy
prohibits holding or issuing derivative financial instruments for trading or
speculative purposes. The types of instruments typically used are forward
contracts, but may also include option combinations and purchased option
contracts.
The Company adopted SFAS 133,"Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS 133"
and SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities", and as interpreted by the Financial Accounting Standards Board
("FASB") and the Derivatives Implementation Group through "Statement 133
Implementation Issues." These Statements establish accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. They require
recognition of all derivatives as either assets or liabilities on the balance
sheet and measurement of those instruments at fair value. SFAS 133 requires the
transition adjustment resulting from adopting these Statements to be reported in
net income or other comprehensive income, as appropriate.
NOTE 5 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------
In accordance with the provisions of SFAS 133, as amended, the Company
recognizes all derivatives on the balance sheet at fair value. On the date the
derivative instrument is entered into, if the Company is designating the
instrument as a hedge, the Company designates the derivative as either (1) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment (fair value hedge), (2) a hedge of
the exposure to variability in cash flows of a forecasted transaction (cash flow
hedge), or (3) a hedge of the foreign currency exposure of a net investment in a
foreign operation. Changes in the fair value of a derivative that is designated
as and meets all the required criteria for a fair value hedge, along with the
gain or loss on the hedged asset or liability that is attributable to the hedged
risk, are recorded in current period earnings. Changes in the fair value of a
derivative that is designated as and meets all the required criteria for a cash
flow hedge are recorded in other comprehensive income and reclassified into
earnings as the underlying hedged item affects earnings. Changes in the fair
value of a derivative or non-derivative that is designated as and meets all the
required criteria for a hedge of a net investment are recorded in other
comprehensive income. Changes in the fair value of a derivative that is not
designated as a hedge are recorded immediately in earnings.
The majority of currency derivative instruments entered into by the
Company are not designated as hedging instruments. Contracts used to hedge the
exposure to foreign currency fluctuations associated with certain monetary
assets and liabilities are not designated as hedging instruments, and changes in
the fair value of these items are recorded in earnings to offset the foreign
exchange gains and losses of the monetary assets and liabilities. Net foreign
currency losses recognized in income amounted to $(12.0) in 2003, $(5.4) in 2002
and $(11.1) in 2001. The net foreign currency gains (losses) recognized in
income for 2003, 2002 and 2001 includes $(6.3), $(1.8) and $0.2, respectively,
in net foreign currency gains (losses) which are included as part of the income
tax provision in the consolidated statement of operations and retained earnings.
Where an instrument is designated as a hedge, the Company formally
documents all relationships between the hedging instruments and hedged items, as
well as its risk-management objective and strategy for undertaking various hedge
transactions. This process includes relating all derivatives that are designated
as fair value or cash flow hedges to specific assets and liabilities on the
balance sheet or to specific firm commitments or forecasted transactions. The
Company also formally assesses, both at the inception of the hedge and on an
ongoing basis, whether each derivative is highly effective in offsetting changes
in fair values or cash flows of the hedged item. If it is determined that a
derivative is not highly effective as a hedge, or if a derivative ceases to be a
highly effective hedge, the Company will discontinue hedge accounting with
respect to that derivative prospectively.
As of January 1, 2001, the Company recorded the fair value of all outstanding
derivative instruments as assets or liabilities on the balance
sheet. The transition adjustment was not material to earnings or to accumulated
other comprehensive income. Due to the immateriality of the transition amount to
earnings, this amount was included in the caption "Other" in the consolidated
statements of operations and retained earnings.
Litigation
- ----------
The Company is subject to legal proceedings and claims arising out of the
normal course of business. The Company routinely assesses the likelihood of any
adverse judgments or outcomes to these matters, as well as ranges of probable
losses. A determination of the amount of the reserves required, if any, for
these contingencies is made after analysis of each known issue and an analysis
of historical claims experience for incurred but not reported matters. The
Company expenses these legal costs, including those expected to be incurred in
connection with a loss contingency, as incurred. The Company has an active risk
management program consisting of numerous insurance policies secured from many
carriers. These policies provide coverage that is utilized to mitigate the
impact, if any, of the legal proceedings. The required reserves may change in
the future due to new developments in each matter.
Environmental Matters
- ---------------------
The Company determines the costs of environmental remediation for its
facilities, facilities formerly owned by the Company and third party waste
disposal facilities based on evaluations of current law and existing
technologies. Inherent uncertainties exist in these evaluations primarily due to
unknown conditions, changing governmental regulations and legal standards
regarding liability, and evolving technologies. The Company records a charge to
earnings for environmental matters when it is probable that a liability has been
incurred and the Company's costs can be reasonably estimated. The recorded
liabilities are adjusted periodically as remediation efforts progress or as
additional technical or legal information becomes available. The Company had
accrued obligations of $3.3 and $1.8 at December 31, 2003 and 2002, respectively
for environmental remediation and restoration costs, ongoing operations and
maintenance for required monitoring at the facilities. Management believes that
any costs incurred in excess of those accrued will not have a material adverse
impact on the Company's consolidated financial position or results of
operations.
NOTE 5 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------
New Accounting Standards
- ------------------------
In June 2001, The Financial Accounting Standards Board issued SFAS 143,
"Accounting for Asset Retirement Obligations," which requires an entity to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred and a corresponding increase in the related
long-lived asset. The liability is adjusted to its present value each period and
the asset is depreciated over its useful life. A gain or loss may be incurred
upon settlement of the liability. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. Adoption of this Statement does not have a
material impact on the consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain issued guarantees. Under the
provisions of FIN 45, at the time a guarantee is issued, the Company will
recognize a liability for the fair value or market value of the obligation it
assumes. The initial measurement and recognition provisions of this
interpretation are applicable on a prospective basis for guarantees issued or
modified after December 31, 2002, and the disclosure requirements of this
Interpretation are effective for interim or annual financial statements issued
after December 15, 2002. The Company implemented FIN 45 as required. The
Statement does not have a material impact on the consolidated financial
statements. See Note 15 for discussion related to this Interpretation.
In December 2003, the FASB revised Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). Interpretation No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or in which equity investors
do not bear the residual economic risks. The provisions of this Interpretation
are applicable to non-public companies immediately for all interests created
after December 31, 2003 and by the beginning of the first interim or annual
period after December 15, 2004 for interests created prior to December 31, 2003.
Management does not believe this Interpretation will have a material impact on
the consolidated financial statements.
In December 2003, the FASB revised SFAS 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits". This Statement retains the
existing disclosure requirements for pensions and other postretirement benefits
and requires additional information on changes in the benefit obligations and
fair values of plan assets. The additional disclosures include information
describing the types of plan assets, investment strategy, measurement date(s),
plan obligations, cash flows, and components of net periodic benefit cost
recognized during interim periods. For non-public companies, this statement is
effective for financial statements with fiscal years ending after June 15, 2004.
The Company has complied with this statement in these financial statements for
domestic plan disclosures.
In November 2003, the EITF of the FASB reached a consensus on one issue
with respect to EITF No. 03-1, "The Meaning of Other-Than-Temporary Impairment
and its Application to Certain Investments," which requires certain qualitative
and quantitative disclosures for securities accounted for under SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities," that are
impaired at the balance sheet date, but for which an other-than-temporary
impairment has not been recognized. See Note 8 for the Company's disclosures
relative to this requirement.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
reported amounts of revenues and expenses during the reporting period and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
Reclassifications
- -----------------
Certain reclassifications of prior year amounts have been made to conform
to the presentation adopted in 2003.
NOTE 6 - Inventories
- --------------------
The value of inventories is determined using lower of cost or market as
the basis and a first-in, first-out (FIFO) method. The following table provides
a breakdown of inventories at December 31, 2003 and 2002.
2003 2002
----------- -----------
Produced goods $ 294.7 $ 256.9
Purchased materials 42.8 35.4
Maintenance and supplies 32.3 33.7
----------- ----------
Total Inventory $ 369.8 $ 326.0
=========== ==========
Due to the nature of operations, it is impractical to classify inventory
as raw materials, work-in-process, and finished goods as the classifications can
be interchangeable with certain inventoriable items.
In the first quarter of 2002, the Company changed its method of
accounting for inventory from the last-in, first-out method to the first-in,
first-out (FIFO) method. As a result of declining costs and prices for such
inventories, management believes that the use of the FIFO method results in more
current inventory valuation at period end dates. The accounting change had no
effect in 2002, but had been applied to prior periods by retroactively restating
the financial statements resulting in the following changes to previously
reported amounts.
Year ending
December 31, 2001
-----------------
Income/(loss)
Cost of sales (6.8)
Income tax provision 2.0
Net Income (loss) (4.8)
NOTE 7 - Income Taxes
- ---------------------
The components of income (loss) before income taxes as of December 31,
2003, 2002 and 2001 are as follows:
2003 2002 2001
-------- -------- ---------
Income (Loss) Before Income Taxes:
Domestic $ 148.1 $ 60.8 $ (20.6)
Foreign 129.2 42.1 (14.6)
-------- -------- --------
Total Income (Loss) Before Income Taxes $ 277.3 $ 102.9 $ (35.2)
======== ======== ========
The components of the income tax provision (benefit) as of December 31,
2003, 2002 and 2001 are as follows:
2003 2002 2001
--------- --------- ---------
Current:
Domestic $ 25.7 $ 14.2 $ (63.1)
Foreign 45.3 31.0 12.1
-------- -------- --------
Total Current 71.0 45.2 (51.0)
Deferred:
Domestic 24.9 9.2 50.0
Foreign (1.6) (15.2) (3.3)
-------- -------- --------
Total Deferred 23.3 (6.0) 46.7
-------- -------- --------
Total Income Tax Provision (Benefit) $ 94.3 $ 39.2 $ (4.3)
======== ======== ========
NOTE 7 - Income Taxes (continued)
- ---------------------
The tax effects of the principal temporary differences as of December 31,
2003 and 2002 giving rise to deferred tax assets and liabilities were as
follows:
2003 2002
--------- ---------
Deferred Tax Assets:
Implant costs $ 630.9 $ 638.0
Accruals deductible for tax purposes when paid 94.3 101.1
Post employment benefits 176.0 186.5
Basis in inventories 14.9 20.1
Tax credit and net operating loss carry forwards 183.9 179.8
Long term debt 14.6 14.6
Other 39.4 42.4
-------- --------
Total Deferred Tax Assets 1,154.0 1,182.5
Deferred Tax Liabilities:
Property, plant and equipment (204.2) (187.7)
-------- --------
Net Deferred Tax Asset Prior to Valuation Allowance 949.8 994.8
Less: Valuation Allowance (2.0) (2.7)
-------- --------
Net Deferred Tax Asset $ 947.8 $ 992.1
======== ========
Management believes that it is more likely than not that the net deferred
tax asset will be realized. This belief is based on criteria established in SFAS
109, "Accounting for Income Taxes." The criteria that management considered in
making this determination were historical and projected operating results, the
ability to utilize tax planning strategies and the period of time over which the
tax benefits can be utilized. Substantially all of the deferred tax asset
relating to tax credits and net operating loss carry forwards relates to
cumulative losses generated by the company's subsidiary in the United Kingdom.
There is an unlimited carry forward of net operating losses in that
jurisdiction. The valuation allowance is attributable to the inability to
utilize net operating loss carry forwards in other foreign jurisdictions.
At December 31, 2003, income and remittance taxes have not been recorded
on $270.4 of undistributed earnings of foreign subsidiaries, either because any
taxes on dividends would be offset substantially by foreign tax credits or
because the Company intends to indefinitely reinvest those earnings. Cash paid
(received) during the year for income taxes, net of refunds received, was $66.5
in 2003, ($58.7) in 2002, and $39.3 in 2001.
The income tax provision at the effective rate differs from the income
tax provision at the U.S. federal statutory tax rate in effect during December
31, 2003, 2002 and 2001 for the reasons illustrated in the following table:
2003 2002 2001
-------------- ------------- --------------
Income Tax Provision (Benefit) at Statutory Rate $ 97.0 $ 36.0 $ (12.3)
Foreign taxes, net (0.4) 1.1 6.8
Extra territorial income (4.7) (4.5) (5.1)
State income taxes 3.2 1.6 0.9
Accrued expenses 3.8 2.1 2.5
Tax exempt interest income (2.2) (1.2) (9.4)
Currency 0.1 (2.1) 1.8
Other, net (2.5) 6.2 10.5
-------- --------- --------
Income Tax Provision (Benefit) at Effective Rate $ 94.3 $ 39.2 $ (4.3)
======== ========= ========
NOTE 8 - Unrestricted Investments
- ---------------------------------
The carrying amounts of unrestricted investments reflected in the
captions "Marketable securities" in the current and noncurrent sections of the
consolidated balance sheets at December 31, 2003 and 2002, were $1,227.5 and
$650.3, respectively. These unrestricted investments consist principally of
obligations backed by the U. S. Government or one of its agencies and corporate
and municipal issue bonds; and have been classified as "available for sale" in
conformity with SFAS 115. The Company does not invest in securities that are
below investment grade. Fair values are determined based on quoted market prices
or, if quoted market prices are not available, on market prices of comparable
instruments. For purposes of computing realized gain or loss on the disposition
of unrestricted investments, the specific identification method is used.
The Company and external investment managers review all of the Company's
marketable securities to determine if the decline in value is other than
temporary. The analysis includes a review of the amount and duration of the
decline in value of a security and a comparison between the amount and duration
of the decline in value of the security and that of similar securities in the
same market sector. The Company has reviewed the investments that have a gross
unrealized loss as of December 31, 2003 and has concluded that the decline in
value is not other than temporary. The fair value of these investments is $156.2
and all such investments have a loss duration of less than 12 months.
The amortized cost, gross unrealized gains, gross unrealized losses, and
market value of the unrestricted investments consisted of the following as of
December 31, 2003 and 2002:
December 31, 2003
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
----------- ----------- ------------ ------------
Debt Securities:
U.S. government obligations $ 49.7 $ (0.1) $ 49.6
U.S. government agency obligations 209.1 $ 0.2 (0.6) 208.7
Mortgage and asset backed securities 64.6 0.1 64.7
Corporate bonds 120.6 0.3 (0.3) 120.6
Municipal bonds 761.9 761.9
Certificates of deposit and commercial paper 20.0 20.0
----------- ----------- ----------- -----------
Total Debt Securities $ 1,225.9 $ 0.6 $ (1.0) $ 1,225.5
----------- ----------- ----------- -----------
Equity Securities:
Domestic 0.1 0.1
Foreign 1.8 0.1 1.9
----------- ----------- ----------- -----------
Total Equity Securities 1.9 0.1 2.0
----------- ----------- ----------- -----------
Total Marketable Securities $ 1,227.8 $ 0.7 $ (1.0) $ 1,227.5
=========== =========== =========== ===========
NOTE 8 - Unrestricted Investments (continued)
- ---------------------------------
December 31, 2002
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
----------- ----------- ------------ ------------
Debt Securities:
U.S. government obligations $ 106.2 $ 0.7 $ (0.1) $ 106.8
U.S. government agency obligations 89.5 0.1 (0.1) 89.5
Mortgage and asset backed securities 127.0 0.7 127.7
Corporate bonds 169.4 0.7 (0.1) 170.0
Municipal bonds 120.4 120.4
Foreign bonds 1.6 (0.3) 1.3
Foreign commercial paper and bank deposits 3.7 3.7
Certificates of deposit and commercial paper 30.8 30.8
----------- ----------- ----------- -----------
Total Debt Securities $ 648.6 $ 2.2 $ (0.6) $ 650.2
----------- ----------- ----------- -----------
Domestic Equity Securities 0.1 0.1
----------- ----------- ----------- -----------
Total Marketable Securities $ 648.7 $ 2.2 $ (0.6) $ 650.3
=========== =========== =========== ===========
The contractual maturities of the debt securities included in
unrestricted investments consisted of the following at December 31, 2003 and
2002:
2003 2002
--------- --------
Mature in one year or less $ 986.6 $ 353.3
Mature after one year through five years 236.7 294.3
Mature after five years 2.2 2.6
--------- --------
Total debt securities $ 1,225.5 $ 650.2
========= ========
NOTE 9 - Restricted Assets
- --------------------------
Collateralized Letters of Credit
- --------------------------------
The Company has Letters of Credit outstanding of $46.1 and $26.8 at
December 31, 2003 and 2002, respectively for which the Company has legally
restricted funds to serve as collateral for the purpose of reducing the
effective cost of those letters of credit. As of December 31, 2003 and 2002, the
Company had $46.7 and $27.3 respectively, of funds restricted to support these
obligations.
Environmental Trusts
- --------------------
In order to comply with certain environmental regulations, as of December
31, 2003 and 2002, the Company maintained $23.4 and $23.0, respectively in
certain trusts in order to provide financial assurance for the potential payment
of aggregate estimated closure, post-closure, corrective action and potential
liability costs associated with the operation of hazardous waste storage
facilities at certain plant sites (see Note 13 for further discussion). Those
amounts are included in the caption "Restricted cash collateral" in the
consolidated balance sheets.
Restricted Insurance Assets
- ---------------------------
In the second half of 2001, $939.0 of cash proceeds from settlements with
insurers and related interest was applied toward the Debtor Company's payments
under the Funding Payment Agreement, the Interim Funding Agreement, and the
Insurance Allocation Agreement, as amended (see Note 14). As of December 31,
2003 and 2002, $207.4 and $181.3, respectively, of cash proceeds from
settlements with insurers (received since the commencement of the Chapter 11
Proceeding), including investment income earned thereon, is restricted as to its
use pursuant to orders of the Bankruptcy Court. These balances are included in
the caption "Restricted insurance proceeds" in the consolidated balance sheets
and are invested in investment categories approved by the Bankruptcy Court.
NOTE 9 - Restricted Assets (continued)
- --------------------------
A majority of the "Restricted insurance proceeds" and the "Anticipated
implant insurance receivable" recorded in the consolidated balance sheets relate
to the Shared Insurance Assets. The term "Shared Insurance Assets" is defined in
Note 14. The Company and/or Dow Chemical will have rights to petition the
Bankruptcy Court for distribution of the "Restricted insurance proceeds"
primarily for the purpose of making specified indemnity payments or reimbursing
specified expense payments under conditions prescribed by the Bankruptcy Court.
The Company anticipates that, during the Chapter 11 Proceeding, future
settlements of policies which name the Company as a co-insured will be subject
to the approval of the Bankruptcy Court and restricted in a manner similar to
that described above.
Management believes that it is probable that it will have access to the
Shared Insurance Assets and other insurance proceeds in an amount sufficient to
ultimately realize "Anticipated implant insurance receivable" recorded in the
accompanying consolidated balance sheets (see Note 13 for further discussion of
insurance matters).
The aggregate fair market value of the marketable securities classified
as restricted investments approximates the carrying value. At December 31, 2003
and 2002, the carrying values of the restricted investments were $277.5 and
$232.1, respectively. These restricted investments consist principally of
obligations backed by the U. S. Government or one of its agencies and corporate
and municipal issue bonds; and have been classified as "available for sale" in
conformity with SFAS 115. Fair values are determined based on quoted market
prices or, if quoted market prices are not available, on market prices of
comparable instruments. For purposes of computing realized gain or loss on the
disposition of restricted investments, the specific identification method is
used. Restricted investments are included in the captions "Restricted insurance
proceeds" and "Restricted cash collateral" in the "Other Assets" section of the
consolidated balance sheet. The composition of restricted investments as of
December 31, 2003 and 2002 as follows:
2003 2002
----------- -----------
Restricted Securities:
U.S. government obligations $ 4.9 $ 6.9
U.S. government agency obligations 13.4 10.3
Mortgage-backed & asset backed securities 3.1 1.0
Corporate bonds 17.6 8.4
Municipal securities 48.9 35.1
Foreign bonds 0.5
Money market funds 189.1 170.4
----------- ----------
Total Restricted Securities $ 277.5 $ 232.1
=========== ==========
The contractual maturities of restricted investments were the following
at December 31, 2003 and 2002:
2003 2002
----------- ----------
Mature in one year or less $ 241.8 $ 205.9
Mature after one year through five years 16.1 10.3
Mature after five years 19.6 15.9
----------- ----------
Total restricted securities $ 277.5 $ 232.1
=========== ==========
NOTE 10 - Notes Payable and Credit Facilities
- ---------------------------------------------
Notes payable at December 31, 2003 and 2002 consisted of the following:
2003 2002
-------- --------
Current Liabilities:
Bank Borrowings $ 7.5 $ 2.8
======== ========
Liabilities Subject to Compromise:
Revolving Credit Agreement $ 375.0 $ 375.0
======== ========
NOTE 10 - Notes Payable and Credit Facilities (continued)
- ---------------------------------------------
During 1993, the Debtor Company entered into a revolving credit agreement
with sixteen domestic and foreign banks which provided for borrowings on a
revolving credit basis until November, 1997, of up to $400.0. Under the
provisions of the revolving credit agreement, the Debtor Company is subject to
certain debt restrictions and provisions. Due to the Debtor Company's status as
a debtor-in-possession under Chapter 11 of the Bankruptcy Code, the Debtor
Company has not made payment under its debt agreements, including the revolving
credit agreement, since May 15, 1995. At that time, the interest rate on amounts
outstanding under the revolving credit agreement was 7.13%. While operating in
the Chapter 11 Proceeding, the Debtor Company is prohibited from paying interest
on unsecured pre-petition debts including the debt incurred under the revolving
credit agreement. The Company is unable to estimate the fair value of the debt
incurred under the revolving credit agreement due to the uncertainty associated
with the Debtor Company's filing for protection under Chapter 11 of the
Bankruptcy Code. See Note 14 for additional information regarding interest on
pre-petition debt.
Amounts outstanding under short-term lines of credit are liabilities of
the subsidiaries of the Debtor Company and are described as "Bank borrowings" in
the table above. The carrying amounts of these short-term borrowings
approximated their fair value.
Dow Corning Toray Silicone Company Ltd. ("DCTS"), a majority owned
subsidiary, maintains an accounts receivable securitization facility with its
primary bank. The discount rate under this facility is TIBOR plus 0.25%.
Pursuant to this facility, DCTS has sold accounts receivable in the amount of
$171.2 to such bank in exchange for $171.1 during 2003, and $156.7 was sold to
such bank in exchange for $156.6 in 2002. Under the facility, DCTS retains no
interest in the accounts receivable. However, it maintains insurance to protect
95% of the receivables liquidated under the program; premiums for such insurance
of $0.2 were paid in each of the years 2003 and 2002. As of December 31, 2003
and 2002, $26.1 and $23.5, respectively, remained outstanding under the
facility.
The Company had unused and committed credit facilities for use by foreign
subsidiaries at December 31, 2003 and 2002 with various U.S. and foreign banks
totaling $110.0 and $107.2, respectively. These credit facilities require the
payment of commitment fees. The Company intends to renew these facilities at
their respective maturities. These facilities are available in support of
working capital requirements.
NOTE 11 - Long-Term Debt
- ------------------------
Long-term debt at December 31, 2003 and 2002 consisted of the following:
2003 2002
-------- --------
Long-Term Debt
Fixed rate note due 2003 $ 5.3
Fixed rate notes due 2004
3.95-5.84% at December 31, 2003 $ 2.0 1.1
Fixed rate note due 2005
6.5% at December 31, 2003 5.0 6.2
Fixed rate note due 2006
4.7% at December 31, 2003 8.1 8.2
Variable rate notes due 2007
2.646% at December 31, 2003 2.7 2.6
Fixed rate notes due 2007
4.35-5.85% at December 31, 2003 11.3 10.9
Fixed rate note due 2015
6.36% at December 31, 2003 11.0 9.7
Other obligations and capital leases
5.6%-6.24% at December 31, 2003 21.3 19.5
-------- -------
Total Long-Term Debt 61.4 63.5
Less - payments due within one year 9.2 13.1
-------- -------
Total Long-Term Debt Due after one year $ 52.2 $ 50.4
======== =======
Liabilities Subject to Compromise - Long-Term Debt:
9.375% debentures due 2008 $ 75.0 $ 75.0
8.15% debentures due 2029 50.0 50.0
8.125%-9.5% medium-term notes due 1995-2001,
8.71% average rate 34.5 34.5
Variable rate notes due 1995-1998, 6.688%-7.234% 84.8 84.8
Japanese yen notes due 1998, 5.55% 29.4 29.4
-------- -------
Total Liabilities Subject to Compromise - Long-term Debt $ 273.7 $ 273.7
======== =======
Due to the Debtor Company's filing for protection under Chapter 11 of the
Bankruptcy Code (see Note 14), long-term debt of the Debtor Company has been
reclassified to the caption "Liabilities Subject to Compromise" in the table
above and in the accompanying consolidated balance sheets. At December 31, 2003,
the amount shown under the caption "Long-Term Debt" in the table above
represents long-term debt of the subsidiaries of the Debtor Company.
At December 31, 2003, the fair value of the long-term debt, including the
portion due within one year, of the subsidiaries of the Debtor Company
approximated the book value of $61.4. The Company is unable to estimate the fair
value of the long-term debt of the Debtor Company at December 31, 2003, due to
the uncertainty associated with the Debtor Company's filing for protection under
Chapter 11 of the Bankruptcy Code.
Due to the Debtor Company's status as a debtor-in-possession under
Chapter 11 of the Bankruptcy Code, the Debtor Company has not made payment under
its debt agreements since May 15, 1995.
Annual aggregate maturities of the long-term debt of the subsidiaries of
the Debtor Company are: $9.2 in 2004, $7.5 in 2005, $12.7 in 2006, $5.1 in 2007,
$1.5 in 2008 and $25.4 thereafter.
While operating in the Chapter 11 Proceeding, the Debtor Company is
generally prohibited from paying interest on unsecured pre-petition debts of the
Debtor Company. See Note 14 for additional information regarding interest on
pre-petition debt. Cash paid during the year for interest was $5.4 in 2003, $5.0
in 2002 and $6.9 in 2001.
NOTE 12 - Post Employment Benefits
- ----------------------------------
The Company maintains defined benefit employee retirement plans covering
most domestic and certain non-U.S. employees. The Company also has various
defined contribution and savings plans covering certain employees. The
components of pension expense for the Company's domestic and foreign plans are
set forth below for the years ended December 31, 2003, 2002 and 2001:
2003 2002 2001
-------------- ------------- --------------
Defined Benefit Plans:
Service cost (benefits earned during the period) $ 34.0 $ 30.4 $ 30.1
Interest cost on projected benefit obligations 77.6 72.6 71.4
Expected return on plan assets (74.3) (70.9) (71.9)
Net amortization 12.5 5.2 5.6
Curtailment and special termination benefits 7.6 2.5
-------- --------- --------
Total Defined Benefit Plan 49.8 44.9 37.7
Defined Contribution and Savings Plans 28.9 19.1 18.3
-------- --------- --------
Total Pension Expense $ 78.7 $ 64.0 $ 56.0
======== ========= ========
The majority of the Company's defined benefit employee retirement plans
have a measurement date of December 31 of the applicable year. The following
table presents reconciliations of defined benefit plans' funded status with
amounts recognized in the Company's consolidated balance sheets at December 31,
2003 and 2002, respectively as part of other assets, other long-term
liabilities, and liabilities subject to compromise:
2003 2002
------------- --------------
Net Accrued Pension Liability:
Projected benefit obligation in excess of plan assets $ (508.2) $ (558.7)
Unrecognized net loss 376.7 404.2
Unrecognized prior service costs 16.0 18.2
Unrecognized net transition obligation 1.1 1.4
Minimum pension liability (225.0) (174.3)
Intangible asset 14.8 16.1
--------- --------
Net Accrued Pension Liability $ (324.6) $ (293.1)
========= ========
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for defined benefit plans with accumulated benefit
obligations in excess of plan assets were $1,343.0, $1,176.7 and $826.8 as of
December 31, 2003 and $1,199.7, $1,067.7 and $681.4 as of December 31, 2002,
respectively.
The following table provides a reconciliation of beginning and ending
balances of the projected benefit obligation as of December 31, 2003 and 2002:
2003 2002
------------- --------------
Projected Benefit Obligation:
Projected benefit obligation, beginning of year $ 1,234.8 $ 1,080.3
Service cost 34.0 30.4
Interest cost 77.6 72.6
Actuarial losses 76.9 119.7
Foreign currency exchange rate changes 19.6 17.1
Benefits paid (76.5) (88.0)
Curtailment and special termination benefits 2.8
Other 7.6 (0.1)
----------- ----------
Projected benefit obligation, end of year $ 1,374.0 $ 1,234.8
=========== ==========
NOTE 12 - Post Employment Benefits (continued)
- ----------------------------------
The following table provides a reconciliation of the beginning and ending
balances of the fair value of plan assets as of December 31, 2003 and 2002:
2003 2002
--------- ---------
Fair Value of Plan Assets
Fair value of plan assets, beginning of year $ 680.1 $ 744.4
Actual return on plan assets 183.0 54.9)
Foreign currency exchange rate changes 17.5 7.6
Contributions by the employer 60.4 68.9
Contributions by plan participants 1.7 1.6
Benefits paid (76.5) (88.0)
Other (0.4) 0.5
-------- --------
Fair Value of Plan Assets, End of Year $ 865.8 $ 680.1
======== ========
For the United States defined benefit plan, as of December 31, 2003 and
2002, the fair value of plan assets included 69% and 72% of equity securities
and 31% and 28% of debt securities, respectively. The plan targets an asset
allocation of 55%-75% equity securities and 25%-45% debt securities. The Company
expects to contribute $30.0 of funds to plan assets during the measurement year
ending December 31, 2004.
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation for defined benefit plans was
5.9% as of December 31, 2003 and 6.3% as of December 31, 2002. The weighted
average rate of increase in future compensation levels was determined using an
age specific salary scale and was 4.2% as of December 31, 2003 and 5.0% as of
December 31, 2002. The weighted average expected long-term rate of return on
plan assets was 8.6% and 8.5% for pension expenses reported in 2003 and 2002,
respectively. The long-term rate of return on plan assets assumption is
determined considering historical returns and expected future asset allocation
and returns.
In addition to providing pension benefits, the Company, primarily in the
United States, provides certain health care and life insurance benefits for most
retired employees. The cost of providing these benefits to retirees outside the
United States is not significant. Net periodic postretirement benefit cost
includes the following components as of December 31, 2003, 2002 and 2001:
2003 2002 2001
------ ------ ------
Net Periodic Postretirement Benefit Cost:
Service cost $ 3.9 $ 4.2 $ 5.5
Interest cost 18.2 16.5 17.2
Amortization of prior service cost 0.4 (0.8) (0.9)
------ ------ ------
Total Net Periodic Postretirement Benefit Cost $ 22.5 $ 19.9 $ 21.8
====== ====== ======
NOTE 12 - Post Employment Benefits (continued)
- ----------------------------------
The following table presents a reconciliation of the beginning and ending
balances as of December 31, 2003 and 2002 of the accumulated postretirement
benefit obligation, as well as the accrued postretirement benefit cost
recognized in the Company's consolidated balance sheets as part of "Liabilities
Subject to Compromise".
2003 2002
--------- --------
Accrued Postretirement Benefit Obligation:
Accrued postretirement benefit obligation
at beginning of year $ 276.5 $ 225.5
Service cost 3.9 4.2
Interest cost 18.2 16.5
Actuarial loss 16.3 41.3
Curtailment and special termination benefits 7.0
Plan change (33.4)
Benefits paid (14.2) (18.0)
--------- --------
Accrued Postretirement Benefit Obligation
at End of Year 267.3 276.5
Unrecognized prior service cost 40.0 7.4
Unrecognized net loss (67.0) (52.5)
--------- --------
Total Accrued Postretirement Benefit Obligation $ 240.3 $ 231.4
========= ========
In 1992, the Company amended its retiree health care benefit plan to
require that, beginning in 1994, employees must have a certain number of years
of service to be eligible for any retiree health care benefit. This amendment
resulted in the Company recording an unrecognized negative prior service cost,
which is being amortized in the consolidated statement of operations and
retained earnings. The retiree health care plan provides for certain cost
sharing changes that limit the Company's share of retiree health care costs. The
Company continues to fund benefit costs on a pay-as-you-go basis with the
retiree paying a portion of the costs. In 2003, the Company amended its retiree
health care benefit plan to discontinue certain previously offered healthcare
options and replace such options with more cost effective alternatives and also
changed its methodology for coordination with Medicare. This had the effect of
reducing the accrued postretirement benefit obligation by $33.4 in 2003.
The health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9.29% in 2003 and was assumed to decrease
gradually to 5.00% in 2010 and remain at that level thereafter. For retirees
under age 65, plan features limit the health care cost trend rate assumption to
a maximum of 8.0% for years 1994 and later. The health care cost trend rate
assumption has a significant effect on the amounts reported. Increasing the
assumed health care cost trend rate by one percentage point in each year would
increase the accumulated postretirement benefit obligation by 6.05% and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 2003 by 8.36%. Decreasing the assumed health
care cost trend rates by one percentage point in each year would decrease the
accumulated postretirement benefit obligation by 5.28% and the aggregate of the
service and interest cost components of net periodic postretirement benefit cost
for 2003 by 5.95%.
The discount rate used in determining the accumulated postretirement
benefit obligation was 6.25% at December 31, 2003 and 6.75% at December 31,
2002.
NOTE 13 - Contingencies
- -----------------------
Breast Implant Litigation and Claims - Background
- -------------------------------------------------
Prior to 1992, the Company was engaged in the manufacture and sale of
silicone gel breast implants and the raw material components of those products.
In January 1992, the Company ceased production of these products following a
request by the United States Food and Drug Administration ("FDA") that breast
implant producers voluntarily halt the sale of silicone gel breast implants.
Between 1991 and 1995, the Company experienced a substantial increase in
the number of lawsuits against the Company relating to breast implants. By May
15, 1995, the date that the Debtor Company commenced its Chapter 11 Proceeding,
the Debtor Company was named in approximately 19,000 separate breast implant
products liability and 46 class action lawsuits filed in the United States by,
or on behalf of, individuals who claim to have, or have had, breast implants.
Other breast implant manufacturers which purchased silicone raw materials from
the Debtor Company, and other defendants in breast implant litigation, have
filed claims for indemnity and contribution against the Debtor Company in its
Chapter 11 Proceeding (see Note 14 for further discussion).
NOTE 13 - Contingencies (continued)
- ----------------------
The Debtor Company's filing for protection under Chapter 11 of the
Bankruptcy Code has resulted in a stay of this litigation in the United States.
However, claims prosecuted against the Debtor Company in non-U.S. jurisdictions
and against subsidiaries of the Debtor Company are not stayed by the Chapter 11
Proceeding, except to the extent recognized by each non-U.S. jurisdiction. In
addition to the litigation referred to above, several thousand plaintiffs filed
claims in non-U.S. jurisdictions, primarily in Australia and Canada. Of these
claims, approximately 30 have been served and are actively being prosecuted
under the legal systems of their relevant jurisdictions. "Served" means that a
lawsuit that is filed against a defendant is presented to the defendant to allow
the defendant to formally respond, after which the prosecution of the lawsuit
can proceed. In the context of the Company's disclosures, many lawsuits that
were filed in non-U.S. jurisdictions against the Company were not presented to
the Company for a formal response and were therefore not able to be prosecuted
against the Company. Management believes that many of the non-U.S. lawsuit
claims are duplicative of proofs of claim filed by such non-U.S. claimants in
the Debtor Company's Chapter 11 Proceeding and that a substantial majority of
these claims will be resolved through the settlements of Canadian and Australian
breast implant lawsuits described below. Approximately 5,700 non-U.S. plaintiffs
filed lawsuits in the United States. In addition, six class action lawsuits are
pending in non-U.S. jurisdictions.
In 1999, the Bankruptcy Court approved settlements of three Canadian
class actions that had previously been filed against the Debtor Company in the
provinces of Ontario, Quebec and British Columbia, Canada, resolving
approximately 14,100 claims filed in the Debtor Company's Chapter 11 Proceeding.
The amounts of these settlements are approximately $18.0, $37.0 and $25.1,
respectively. Each of these settlements have been approved by the appropriate
Provincial Court. Some Canadian claimants in provinces other than Ontario,
Quebec, or British Columbia have also chosen to resolve their claims via the
British Columbia settlement. All three Canadian class action settlements will be
administered pursuant to the Debtor Company's ultimate plan of reorganization.
In 1999, the Bankruptcy Court approved a settlement of approximately
$23.0 that will resolve approximately 3,300 claims filed in the Debtor Company's
Chapter 11 Proceeding originating in Australia (the "Initial Australian
Settlement"). Payments under the Initial Australian Settlement were administered
and made in Australia and were sourced from the Debtor Company's insurance
assets. See Note 14 for definitions and discussions regarding the Debtor
Company's Chapter 11 Proceeding.
In July, 2003, the U.S. District Court in Michigan approved a settlement
to resolve certain issues presented by approximately 1,750 other creditors with
claims originating in Australia (the "Subsequent Australian Settlement"). Under
the Subsequent Australian Settlement, these claims will be processed in
Australia under the settlement program for non-U.S. claimants provided by the
Joint Plan of Reorganization. The U.S. District Court in Michigan's approval of
the Subsequent Australian Settlement has been appealed by certain creditors with
claims originating in Korea. The Debtor Company is uncertain as to when this
appeal will be resolved. The Australian Claimants affected by the Subsequent
Australian Settlement previously filed an appeal of the U.S. District Court in
Michigan's December, 2002 Memorandum Opinion and Order with the U.S. Court of
Appeals. This appeal contested the Bankruptcy Court's confirmation of the Joint
Plan of Reorganization. Following the approval by the U.S. District Court in
Michigan of the Subsequent Australian Settlement, this appeal was withdrawn by
the Australian claimants affected by the Subsequent Australian Settlement. See
Note 14 for discussion of the U.S. District Court in Michigan's December, 2002
Memorandum Opinion and Order.
Breast Implant Litigation and Claims - Settlement Agreement
- -----------------------------------------------------------
In 1994, the Company, along with other defendants and representatives of
breast implant litigation plaintiffs, entered into a settlement agreement (the
"Settlement Agreement") under the supervision of the U.S. District Court for the
Northern District of Alabama (the "Court"). Under the Settlement Agreement, the
Company agreed to contribute up to $2.02 billion to resolve pending and future
breast implant litigation. The Company made a preliminary payment of $42.5
pursuant to the Settlement Agreement to cover the Company's portion of expenses
for administration of the Settlement Agreement ("Administrative Payment") (see
Note 14 for further information.) Approximately 7,000 U.S. and non-U.S.
potential claimants elected not to participate in the Settlement Agreement. In
1995, the Court concluded the total amount of claims likely to be approved for
payment would result in substantially lower payments to claimants than
anticipated under the Settlement Agreement, and the Court requested that the
parties negotiate possible modifications to the Settlement Agreement. The
Company did not actively participate in the subsequent negotiations and is not a
party to the resulting revisions to the Settlement Agreement (the "Revised
Settlement Agreement"). The Company considers its participation in the
Settlement Agreement to have been discontinued and anticipates that breast
implant litigation and claims pending against it will be resolved in the Debtor
Company's Chapter 11 Proceeding (see Note 14 below for further discussion).
NOTE 13 - Contingencies (continued)
- -----------------------
Breast Implant Litigation and Claims - Insurance Matters
- --------------------------------------------------------
The Debtor Company had a substantial amount of unexhausted products
liability insurance coverage with respect to breast implant lawsuits and claims.
A substantial number of the Debtor Company's insurers reserved the right to deny
coverage, in whole or in part, due to differing legal theories. In 1993, the
Company commenced litigation against certain of its insurance companies
("Litigating Insurers") to seek enforcement of the obligations of the Litigating
Insurers to the Debtor Company. This litigation was ultimately conducted in the
Wayne County, Michigan Circuit Court (the "Michigan Court"). A majority of the
Litigating Insurers have been dismissed from this litigation pursuant to
settlements reached with the Company.
As a result of this litigation, the Michigan Court (a) ruled that certain
of the Company's primary Litigating Insurers have a duty to defend the Company
with respect to breast implant products liability lawsuits, (b) directed these
insurers to reimburse the Company for certain defense costs previously incurred,
(c) ruled in favor of the Company on allocation of defense costs, (d) ordered
that each primary Litigating Insurer is obligated to pay the defense costs for
all cases alleging a date of implant either before or during the insurers'
policy periods and for all cases involving unknown implant dates (once implant
dates become known, the appropriate insurer becomes responsible for relevant
defense costs), (e) ruled that relevant insurance contracts afford coverage for
punitive damages except where specific policy provisions expressly exclude
coverage for such damages and (f) ruled that the Company is entitled to recover
substantially all defense, settlement and judgment costs previously incurred. In
addition, a jury in the Michigan Court found the remaining Litigating Insurers
liable for coverage including costs of defense and settlement of the Company's
breast implant lawsuits in the United States and in other countries. Certain of
the Litigating Insurers appealed the results of this litigation to the Michigan
Court of Appeals (the "Court of Appeals"). In October, 1999, the Court of
Appeals substantially affirmed the findings of the Michigan Court. The Michigan
Supreme Court declined to hear an appeal of this decision.
The Company is continuing settlement negotiations with the remaining
Litigating Insurers as well as other insurers that are not involved in the
litigation. The Company is also pursuing (a) resolution of a significant portion
of currently unresolved insurance coverage provided by other solvent insurers
through arbitration proceedings and (b) recovery from insolvent insurance
carriers via settlement discussions. As of December 31, 2003, the amount of
unexhausted coverage attributable to insolvent insurance carriers is $374.8. Of
this amount, the Company has recorded a receivable as of December 31, 2003, of
$24.5 related to insolvent insurance carriers, which is included under the
caption "Anticipated implant insurance receivable" in the accompanying
consolidated balance sheets. Of the total "Anticipated implant insurance
receivable" of $436.3 as of December 31, 2003, $103.7 relates to insurance that
continues to be contested by certain of the Company's insurance carriers and
$332.6 represents amounts to be received by the Company pursuant to settlements
with other of the Company's insurance carriers.
Based on the status of the litigation, arbitration proceedings and
settlement discussions detailed above, management continues to believe it is
probable the Company will recover from its insurers a substantial amount of
breast implant-related payments, which have been or may be made by the Company.
This belief is further supported by the fact that the Company received insurance
recoveries of $1,139.6 from September 1, 1994, through December 31, 2003, and
entered into settlements with certain insurers for future reimbursement.
Breast Implant Litigation and Other Claims - Financial Provisions
- -----------------------------------------------------------------
The Debtor Company has taken steps in the past to reflect the anticipated
financial consequences of the breast implant situation. Prior to May 15, 1995,
the Company recorded aggregate pre-tax charges of $2.8 billion and related
insurance receivables of $1.4 billion to reflect the Company's best estimate, at
the time, of its potential liability under the Settlement Agreement and all
associated costs to resolve breast implant litigation. Since May 15, 1995, the
Company's implant reserve has been reduced as a result of payments made by the
Debtor Company for application to the Debtor Company's obligation to make the
Initial Payment and the Initial Payment Supplement (see Note 14) and for certain
legal, administrative, and research costs related to the breast implant
controversy that were taken into consideration when the reserve was originally
recorded.
In 1998, the Company recognized a pretax charge of $1,272.5 ($801.7 after
tax) representing its best estimate of anticipated financial consequences to the
Company to resolve all claims arising from the Debtor Company's Chapter 11
Proceeding and from the breast implant controversy. This charge was taken
because management had concluded that implementation of the Joint Plan of
Reorganization is probable. The term "Joint Plan of Reorganization" is defined
and discussed in Note 14 below.
NOTE 13 - Contingencies (continued)
- -----------------------
As reported under "Confirmation Procedures" in Note 14 below, the
Bankruptcy Court's Confirmation Order provides that interest payable on the
allowed claims of creditors of the Debtor Company represented by the Committee
of Unsecured Creditors should be calculated using relevant contract rates of
interest where contracts specified a rate and the Federal Judgment Rate of 6.28%
for claims without contractually specified rates of interest. On April 19, 2001,
the Bankruptcy Court issued an opinion, which indicated that interest on claims
held by creditors represented by the Committee of Unsecured Creditors should be
compounded on an annual basis. The Debtor Company revised its estimate of
interest payable to these creditors in the second quarter of 2001 to reflect the
impact of annual compounding pursuant to the Bankruptcy Court's opinion. As a
result, the Debtor Company's results for the second quarter of 2001 include a
pretax charge of $58.3 ($36.7 after tax) (see Note 14 for additional
information). Accordingly, the Company's results for the twelve months ended
December 31, 2003, 2002 and 2001, included $94.5 ($59.5 after tax), $88.4 ($55.7
after tax) and $125.3 ($79.0 after tax), respectively, for the amount of
interest payable to such creditors. The actual amount of interest that will
ultimately be paid to these creditors is uncertain. This is because, among other
things, the Debtor Company is engaged in litigation with certain of the Debtor
Company's commercial creditors regarding the amount of interest to be paid by
the Debtor Company from May 15, 1995 until the Effective Date. The terms
"Committee of Unsecured Creditors" and "Joint Plan of Reorganization" are
defined and discussed in Note 14 below.
Under the Funding Payment Agreement and the Interim Funding Agreement,
the Debtor Company made the Initial Payment and the Initial Payment Supplement
totaling $1,067.0 in 2001, including $939.0 of cash proceeds from settlements
with insurers and related interest (See Note 14). The terms "Funding Payment
Agreement" and "Interim Funding Agreement" are defined and discussed in Note 14
below.
The ultimate cost to resolve implant litigation and claims and related
issues was estimated for purposes of determining the feasibility of the Joint
Plan of Reorganization during the Debtor Company's Chapter 11 Proceeding (see
Note 14 below). The Bankruptcy Court concluded that the Debtor Companies funding
commitments under the Joint Plan of Reorganization were sufficient to cover
these costs. Notwithstanding the inherent uncertainties associated with
estimating the ultimate cost of resolving implant litigation and claims and
related issues, management believes it has accrued amounts required under
generally accepted accounting principles.
The "Anticipated implant insurance receivable" recorded in the
consolidated balance sheets is the result of the provisions described above; a
substantial portion of this "Anticipated implant insurance receivable" relates
to amounts expected to be recovered from the Litigating Insurers. The principal
uncertainties that exist with respect to the realization of this asset include
the ultimate cost of resolving implant litigation and claims, the results of
litigation against and arbitration proceedings and settlement negotiations with
insurers, and the extent to which insurers may become insolvent in the future.
Management believes that, while uncertainties regarding the "Anticipated implant
insurance receivable" continue to exist, these uncertainties are not reasonably
likely to result in a material adverse change to the Company's financial
position, and that it is probable that the "Anticipated implant insurance
receivable" recorded in the consolidated balance sheet as of December 31, 2003
will ultimately be realized.
While the Company does not anticipate a need to further revise amounts
recorded in its financial statements for implant reserves and related insurance
receivables, other than those required to reflect the results of insurance
settlements received and payments made by the Debtor Company to the Settlement
Facility (see Note 14), it is possible that future developments could require a
revision of the amounts recorded. These uncertainties will continue to exist
until the Joint Plan of Reorganization has been implemented and all substantive
issues relating to the Company's insurers have been resolved. As additional
facts and circumstances develop, it is at least reasonably possible that amounts
recorded in the Company's consolidated financial statements may be revised to
reflect any material developments relating to the resolution of implant
litigation and claims and related issues. Future revisions, if required, could
have a material effect on the Company's financial position or results of
operations in the period or periods in which such revisions are recorded. Since
any specific future developments, and the impact such developments might have on
amounts recorded in the Company's financial statements, are unknown at this
time, an estimate of possible future adjustments cannot be made.
Securities Laws Class Action Lawsuits
- -------------------------------------
As previously reported, in 1992 the Company and certain of its former and
present directors and officers were named, as defendants with others, in two
securities laws class action lawsuits filed by purchasers of stock of Corning
and Dow Chemical. These cases were originally filed as several separate cases in
the Federal District Court for the Southern District of New York; they were
subsequently consolidated so that there is one case involving claims on behalf
of purchasers of stock of Corning and one case involving claims on behalf of
purchasers of stock of Dow Chemical. The plaintiffs in these cases allege, among
other things, misrepresentations and omissions of material facts and breach of
duty with respect to purchasers of stock of Corning and Dow Chemical relative to
the breast implant issue. The relief sought in these cases is monetary damages
in unspecified amounts.
NOTE 13 - Contingencies (continued)
- -----------------------
The Debtor Company's filing for protection under Chapter 11 of the
Bankruptcy Code has resulted in a stay of this litigation with respect to the
Debtor Company. These cases have been dismissed without prejudice with respect
to directors, officers and other individuals originally named as defendants. Dow
Chemical has been dismissed from this litigation. Corning continues as a
defendant in this litigation. Management believes that the chance of a material
loss related to the securities laws class action lawsuits is remote, based on
management's assessment that there is no substantive basis for the securities
laws class action lawsuits against the Company. In addition, management believes
that this litigation will be discharged as part of the Chapter 11 Proceeding.
Tax Matters
- -----------
In May, 1999, the Company received a Statutory Notice (a "Notice") of
Deficiency from the United States Internal Revenue Service ("IRS"). This Notice
asserts tax deficiencies totaling approximately $65.3 relating to the Company's
consolidated federal income tax returns for the 1995 and 1996 calendar years.
Management believes that the deficiencies asserted by the IRS are excessive and
is vigorously contesting the IRS' claims. Management anticipates that this
matter will be resolved either in the Debtor Company's Chapter 11 Proceeding or
through procedures provided by the Internal Revenue Code, and believes that such
resolution will not have a material adverse impact on the Company's consolidated
financial position or results of operations. The Company has been engaged in
discussions with the IRS in an effort to resolve this matter, and several of the
relevant issues are currently pending before the U.S. District Court in
Michigan.
Environmental Matters
- ---------------------
The Company has been advised by the United States Environmental
Protection Agency ("EPA") or by similar state and non-U.S. national regulatory
agencies that the Company, together with others, is a Potentially Responsible
Party ("PRP") with respect to a portion of the cleanup costs and other related
matters involving a number of abandoned hazardous waste disposal sites.
Management believes that there are 14 sites at which the Company may have some
liability, although management expects to settle the Company's liability for
seven of these sites for de minimis amounts. Based upon preliminary estimates by
the EPA or the PRP groups formed with respect to these sites, the aggregate
liabilities for all PRP's at those sites at which management believes the
Company may have more than a de minimis liability is $5.8. Management cannot
estimate the aggregate liability for all PRP's at all those sites at which
management expects the Company has a de minimis liability.
The Company records, on an undiscounted basis, accruals for environmental
matters when it is probable that a liability has been incurred and the Company's
costs can be reasonably estimated. The amount accrued for environmental matters
as of December 31, 2003 and 2002, was $3.3 and $1.8, respectively. In addition,
receivables of $0.1 for probable third-party recoveries have been recorded
related to these environmental matters.
As additional facts and circumstances develop, it is at least reasonably
possible that either the accrued liability or the recorded receivable related to
environmental matters may be revised in the near term. While there are a number
of uncertainties with respect to the Company's estimate of its ultimate
liability for cleanup costs at these hazardous waste disposal sites, management
believes that any costs incurred in excess of those accrued will not have a
material adverse impact on the Company's consolidated financial position or
results of operations. This opinion is based upon the number of identified PRP's
at each site, the number of such PRP's that are believed by management to be
financially capable of paying their share of the ultimate liability, and the
portion of waste sent to the sites for which management believes the Company
might be held responsible based on available records.
As a result of financial provisions recorded with respect to breast
implant liabilities, the Company has been unable to meet certain federal and
state environmental statutory financial ratio tests. Consequently, in order for
the Debtor Company to continue to operate hazardous waste storage facilities at
certain plant sites, the states involved have required the Debtor Company to
establish trusts to provide for aggregate estimated closure, post-closure,
corrective action and potential liability costs. These trusts aggregated $23.4
and are fully funded as of December 31, 2003. Interest on the funds held in
trust will be available to the Debtor Company under certain circumstances, and
the amount required to be held in trust may vary annually. At such time as the
Company satisfies the above referenced financial ratio tests, or the Debtor
Company no longer needs or closes the permitted facilities, the funds then
remaining in these trusts will revert to the Debtor Company. The establishment
and funding of these trusts is subject to the continuing jurisdiction of the
Bankruptcy Court. In the second quarter of 2002, the Debtor Company received
notice from a relevant state environmental authority that approximately $2.0 of
the amounts held in trust could be released to the Debtor Company due to the
completion of certain corrective actions taken by the Company with respect to
one of its locations. On July 10, 2002, the Company received these released
funds.
NOTE 13 - Contingencies (continued)
- -----------------------
Other Litigation
- ----------------
The Company has been named in numerous products liability lawsuits
pertaining to materials previously used in connection with temporomandibular
joint implant applications and raw materials supplied by the Company to
manufacturers of the NORPLANT(R) Implant contraceptive device (NORPLANT(R) is a
registered trademark of the Population Council for Subdermal Levonorgestrel
Implants). Management believes that any damages resulting from NORPLANT(R)
lawsuits will be covered by certain indemnity arrangements. This belief is
supported in part by the fact that the indemnitors under these arrangements have
been honoring their indemnity commitments. Under the Joint Plan of
Reorganization, products liability claims relating to long-term contraceptive
implants would be channeled to the Litigation Facility (see Note 14) and
resolved by indemnification from and/or litigation against the ultimate
manufacturers of these implants. The Company is currently unable to estimate its
potential liability for these lawsuits; however, management believes that any
damages resulting from these products liability lawsuits and claims will not
have a material adverse effect on the Company's consolidated results of
operations or financial condition. Management anticipates that the cost to
resolve a substantial portion of these lawsuits and claims will be covered under
the Joint Plan of Reorganization.
The prosecution of certain lawsuits and claims against the Debtor Company
has been stayed in the United States as a result of the Debtor Company's filing
for protection under Chapter 11 of the Bankruptcy Code. However, lawsuits
prosecuted against the Debtor Company in non-U.S. jurisdictions and against
subsidiaries of the Debtor Company are not stayed by the Chapter 11 Proceeding.
NOTE 14 - Proceeding Under Chapter 11
- -------------------------------------
Filing for Chapter 11 Protection
- --------------------------------
On May 15, 1995, the Debtor Company voluntarily filed for protection
under Chapter 11 of the Bankruptcy Code. This action was taken to resolve the
Debtor Company's breast implant liabilities and related matters. Subject to
certain exceptions under the Bankruptcy Code, the Debtor Company's Chapter 11
filing automatically stayed the continuation of any judicial or administrative
proceedings against the Debtor Company.
The U.S. Trustee appointed a "Committee of Unsecured Creditors," a
"Committee of Tort Claimants" and an "Official Physicians Committee"
(collectively, the "Creditor Committees") in the Chapter 11 Proceeding. The
Creditor Committees have been appointed to represent the diversity of interests
of the entire constituency that each committee is designated to serve, and the
Creditor Committees have the right to be heard with respect to transactions
outside the ordinary course of business and other matters arising in the Chapter
11 Proceeding.
Creditors' Claims
- -----------------
The Bankruptcy Court established November 30, 1999 as the date for
creditors to file claims against the Debtor Company. Creditors who were required
to file claims but failed to meet these deadlines generally will be prohibited
from receiving distributions under the Joint Plan of Reorganization (as defined
below). As of December 31, 2003, approximately 918,000 proofs of claim have been
filed by creditors of the Debtor Company with the Bankruptcy Court. Of these
proofs of claim, approximately 656,000 are Implant Primary Claims (claims by
implant recipients), approximately 208,000 are Implant Supplemental Claims
(claims by persons related to implant recipients) and approximately 54,000 are
General Claims (claims by lenders, holders of public debt securities, vendors
and other miscellaneous parties, including claims for contribution and
indemnity). Because the cataloging of filed proofs of claim is ongoing, the
ultimate number of claims is not precisely determinable at this time.
The Bankruptcy Court and the Debtor Company continue to assess the
validity and accuracy of the information contained in or submitted with the
filed proofs of claim. On June 22, 2000, the Bankruptcy Court disallowed certain
claims of the U.S. Government seeking to recover medical care costs allegedly
incurred by four government agencies. In addition, management believes that a
significant number of the filed proofs of claim are duplicative. As of December
31, 2003 the Bankruptcy Court had disallowed approximately 218,000 of these
duplicate claims. The process of identifying possible duplicate claims is
ongoing. Management anticipates that all duplicate claims will ultimately be
disallowed. In addition, a number of these proofs of claim were received
subsequent to the relevant deadlines and may be disallowed on that basis. Other
than as described above, there has been no determination of allowability of the
filed proofs of claim by either the Bankruptcy Court or the Debtor Company.
In addition, other parties have filed proofs of claim against the Debtor
Company with the Bankruptcy Court on behalf of certain claimants who had not
previously filed with the Bankruptcy Court their own individual proofs of claim
against the Debtor Company. The purpose of these filings was to ensure that all
claims arising out of the Debtor Company's breast implant products are resolved
consistently and efficiently where such other parties are, or could be,
additional defendants with respect to those claims.
NOTE 14 - Proceeding Under Chapter 11 (continued)
- -------------------------------------
In 1997, the Debtor Company filed an objection with the Bankruptcy Court
challenging all claims alleging that silicone breast implants caused disease and
a motion for summary judgment requesting that the Bankruptcy Court dismiss all
such claims on the basis that there is no scientifically valid evidence
sufficient to support such claims. The Bankruptcy Court recommended that the
U.S. District Court for the Eastern District of Michigan (the "U.S. District
Court in Michigan") should take responsibility for ruling on these issues. The
U.S. District Court in Michigan accepted that responsibility but indicated that
it would not rule on these issues until after the Joint Plan of Reorganization
becomes effective and that it would do so in the context of the Common Issues
Procedures discussed below. The U.S. District Court in Michigan also indicated
that the 1998 report of the National Science Panel, established by the U.S.
District Court for the Northern District of Alabama, may be used in connection
with resolving the issue of whether silicone gel implants cause the diseases
claimed by those who assert such claims. The report concluded that the weight of
scientific evidence does not indicate a link between silicone breast implants
and systemic diseases, such as connective tissue diseases, related signs and
symptoms and immune system dysfunction.
Plans of Reorganization and Disclosure Statements
- -------------------------------------------------
In 1999, the Debtor Company, with the Committee of Tort Claimants, filed
a final joint plan of reorganization (the "Joint Plan of Reorganization") and a
related disclosure statement. The Joint Plan of Reorganization would provide
breast implant claimants with a range of settlement options. Under certain
circumstances, breast implant claimants would be able to qualify for more than
one settlement option. The Joint Plan of Reorganization would also provide a
mechanism for the resolution of products liability claims other than breast
implant claims. Qualified claims would be processed under the supervision of an
independent claims administrator.
The Joint Plan of Reorganization would provide up to $4.5 billion to
satisfy claims of the Debtor Company's creditors. Specifically, under the Joint
Plan of Reorganization, the Debtor Company would commit up to $3.2 billion to
resolve products liability claims through several settlement options or through
litigation. Products liability claims to be resolved by settlement would be
administered by a settlement facility (the "Settlement Facility"), and products
liability claims to be resolved by litigation would be defended by a litigation
facility (the "Litigation Facility"). Under the Joint Plan of Reorganization,
the present value of the total amount of payments by the Debtor Company
committed to resolve products liability claims would not exceed $2.35 billion as
of the Effective Date. Of this amount, no more than $400.0 million would be used
to fund the Litigation Facility. Payments made by the Debtor Company would be
placed in a trust and withdrawn by the Settlement Facility to pay eligible
settling claimants and to cover the Settlement Facility's operating expenses.
Amounts would also be withdrawn from the trust as necessary to fund the
resolution of claims via the Litigation Facility. In addition, the Joint Plan of
Reorganization would provide approximately $1.3 billion to satisfy commercial
creditor claims, including accrued interest. The actual amount of interest that
will ultimately be paid to these commercial creditors is uncertain because,
among other things, the Debtor Company is engaged in litigation with certain of
the Debtor Company's commercial creditors regarding the amount of interest to be
paid by the Debtor Company from May 15, 1995 until the Effective Date. The Joint
Plan of Reorganization provides that each of the Debtor Company's commercial
creditors would receive the sum of (a) a cash payment equal to the lesser of 24%
of each such commercial creditor's claim(s) or such commercial creditor's pro
rata share of $315.6 and (b) ten-year senior notes of the Debtor Company in an
aggregate principal amount equal to the balance of such commercial creditor's
claim(s).
Under the Joint Plan of Reorganization, the Settlement Facility would
allow breast implant claimants who choose to settle their claims against the
Debtor Company and who meet certain documentation and eligibility criteria to
combine up to three settlement options, which would result in Base Payments
ranging from $2 thousand to more than $250 thousand. The settlement options
available under the Joint Plan of Reorganization are: (a) an expedited payment
option which would pay $2 thousand to qualifying breast implant claimants who
want to settle their claims immediately and do not intend to file a disease
claim (the "Expedited Release Payment Option"), (b) a rupture settlement option
which would pay $20 thousand to qualifying breast implant claimants who have
undergone or will have undergone surgery to remove a ruptured breast implant
manufactured by the Debtor Company (the "Rupture Payment Option"), (c) an
explantation payment option which would pay $5 thousand for removal of breast
implants manufactured by the Debtor Company (the "Explantation Payment Option"),
and (d) a disease payment option which would pay between $10 thousand and $250
thousand to breast implant claimants if they have or have had certain specified
symptoms or medical conditions which are adequately documented and evaluated
(the "Disease Payment Option").
Claimants qualifying for either the Expedited Release Payment Option or
the Disease Payment Option may also qualify for the Rupture Payment Option and
the Explantation Payment Option. Claimants qualifying for the Disease Payment
Option may be eligible for a premium payment of up to 20% of the Disease Payment
Option amounts specified above if sufficient funds are ultimately available.
Claimants qualifying for the Rupture Payment Option may be eligible for a
premium payment of $5 thousand if sufficient funds are ultimately available. The
Joint Plan of Reorganization also would provide that claimants who are eligible
for payments under the Disease Payment Option may qualify for additional
compensation if their medical condition changes.
NOTE 14 - Proceeding Under Chapter 11 (continued)
- -------------------------------------
Settlement payments to non-U.S. breast implant claimants under the Joint
Plan of Reorganization would be equal to either 35% or 60% of similar payments
made to U.S. breast implant claimants, depending on the country of residence of
the non-U.S. breast implant claimant receiving settlement payments. These
reduced amounts are designed to account for differing local economic and legal
system factors. Furthermore, the Joint Plan of Reorganization incorporates the
terms and conditions of three Canadian class action settlements in the provinces
of Ontario, Quebec, and British Columbia, Canada and a settlement of Australia
breast implant litigation (see Note 13 for further discussion).
Under the Joint Plan of Reorganization, certain non-breast implant
products liability claimants who choose to settle their claims through the
Settlement Facility mechanism would be able to choose (a) the Expedited Release
Payment Option under which such claimants would be paid $6 hundred, or (b) the
Disease Payment Option under which such claimants would receive settlement
payments of between $2.5 thousand and $7.5 thousand depending on the type of
product used and the severity of the particular claimants' injuries.
Under the Joint Plan of Reorganization, products liability claimants
choosing to litigate their claims would be required to pursue their claims
through litigation against the Litigation Facility, including a mandated
pre-trial mediation program. The Debtor Company contemplates that this process
would include certain common issues procedures (the "Common Issues Procedures")
to resolve the issue of whether silicone implants cause the diseases alleged by
the products liability claimants (see Note 13 for further discussion). The U.S.
District Court in Michigan would ultimately determine whether the Common Issues
Procedures will be implemented. The result of implementing the Common Issues
Procedures would not affect those claimants who choose to resolve their claims
through the Settlement Facility.
If use of the Common Issues Procedures would result in a conclusion that
silicone implants do not cause disease, some or all disease claims against the
Litigation Facility may be disallowed and some or all products liability
claimants choosing to resolve their disease claims by litigation may not receive
any distribution from the Litigation Facility. If use of the Common Issues
Procedures would result in a conclusion that silicone implants do cause disease,
individual claims that remain against the Litigation Facility would be resolved
through further litigation or settlement. In any event, non-disease claims could
continue to proceed against the Litigation Facility. The Joint Plan of
Reorganization also contemplates that other Common Issues Procedures may be
requested by the Litigation Facility. Claimants who choose to pursue their
claim(s) against the Debtor Company through the Litigation Facility would forego
any right to receive benefits under the various settlement options provided
through the Settlement Facility.
The Debtor Company would fund the Settlement Facility and the Litigation
Facility (collectively, the "Facilities") pursuant to a funding payment
agreement (the "Funding Payment Agreement"). The Debtor Company would fund the
Facilities over a 16-year period. The Debtor Company anticipates that it would
be able to meet its payment obligations to the Facilities utilizing cash flow
from operations, insurance proceeds and/or prospective borrowings. Under certain
circumstances, the Debtor Company would also have access to a ten-year unsecured
revolving credit commitment, established by Dow Chemical and Corning, to assist
in the timely funding of the Facilities. During the first five years of this
revolving credit commitment, the maximum aggregate amount available to the
Debtor Company would be $300.0 thereafter decreasing by $50.0 per year.
Borrowings under this revolving credit commitment will only be permitted in the
event that the Debtor Company fails to meet its payment obligations under the
Funding Payment Agreement.
Pursuant to the Funding Payment Agreement, funds would be paid by the
Debtor Company (a) to the Settlement Facility with respect to products liability
claims, as such claims are processed and allowed by the Settlement Facility, and
(b) via the Settlement Facility with respect to products liability claims
allowed through the Litigation Facility, as such claims are resolved. The amount
of funds to be paid by the Debtor Company are subject to annual and aggregate
funding limits provided in the Funding Payment Agreement.
During 2001, the Debtor Company made preliminary payments of $1,067.0
pursuant to the Funding Payment Agreement and a related interim funding
agreement (the "Interim Funding Agreement"). This amount consisted of (a) $30.0
of the remaining Administrative Payment (as defined in Note 13), (b) the Implant
deposit of $275.0 and accumulated interest of approximately $26.6 and (c)
collected insurance proceeds and related interest. These payments resulted in
substantial satisfaction of the Debtor Company's obligation to make its initial
payments to the Settlement Facility. A portion of the payments made pursuant to
the Interim Funding Agreement reduced the assets reported under "Restricted
insurance proceeds" in the Company's future consolidated balance sheets.
NOTE 14 - Proceeding Under Chapter 11 (continued)
- -------------------------------------
During the five years after the Effective Date of the Joint Plan of
Reorganization, the maximum annual amounts to be paid by the Debtor Company
under the Funding Payment Agreement are $47.0 in the first year, $103.0 in the
second year, $374.0 in the third year, $204.0 in the fourth year and $205.0 in
the fifth year. Thereafter, the maximum aggregate amount to be paid by the
Debtor Company would be $1,254.0 during the ensuing eleven-year period. The
timing of the actual amounts payable by the Debtor Company under the Funding
Payment Agreement would be affected by the rate at which claims are resolved by
the Facilities and the rate at which insurance proceeds are received by the
Debtor Company from its insurers (see Note 13 for additional information
relating to insurance matters).
The Joint Plan of Reorganization provides that punitive damage claims
will not be allowed.
Discharge of the Debtor Company and Releases of Other Parties
- -------------------------------------------------------------
Under the Joint Plan of Reorganization, personal injury claims, and
certain related claims, would be transferred to the Settlement Facility and the
Litigation Facility for handling and payment. In addition, all of such claims
against (a) the Debtor Company, its subsidiaries and affiliates, (b) Dow
Chemical, Corning and their respective subsidiaries and affiliates, (c) certain
of the Debtor Company's insurers who have settled coverage issues with the
Debtor Company relating to products liability claims and (d) all of the
officers, directors, employees and representatives of these parties would be
discharged (as to the Debtor Company) and be released (as to all other parties),
and any prosecution or enforcement of those claims would be permanently barred
subject only to the limits of the enforceability of orders of the Bankruptcy
Court outside the United States.
With respect to products liability claimants choosing to resolve their
claims via the Settlement Facility, all such claims relating to products of the
Debtor Company against such claimants' physicians and other health care
providers associated with such claims who agree to settle their claims against
the Debtor Company ("Settling Physicians and Health Care Providers") would also
be released, and any prosecution or enforcement of those claims would be
permanently barred subject only to the limits of the enforceability of orders of
the Bankruptcy Court outside the United States.
With respect to products liability claimants choosing to resolve their
claims via the Litigation Facility, all such claims relating to products of the
Debtor Company against those Settling Physicians and Health Care Providers who
have had the claims against them transferred to the Debtor Company's bankruptcy
proceedings as claims "related to" such proceedings would have such claims
resolved in tandem with the related claim against the Litigation Facility. To
the extent that funds would be available for this purpose at the time of claim
allowance, the claims for which the Litigation Facility and the Settling
Physician and Health Care Providers would be jointly liable would be paid by the
Litigation Facility. If, due to funding deficiencies at the time of claim
allowance, the Settling Physician and Health Care Providers would make payment
of the allowed personal injury claim for which the Litigation Facility would be
jointly liable, the Settling Physician and Health Care Providers paying the
claim would have a reimbursement claim against the Litigation Facility. The
reimbursement claim would be paid by the Litigation Facility to the Settling
Physician and Health Care Providers when funds subsequently became available.
Insurance Allocation Agreement between Debtor Company and Dow Chemical
- ----------------------------------------------------------------------
A number of the products liability insurance policies relevant to claims
against the Debtor Company name the Company and Dow Chemical as co-insureds (the
"Shared Insurance Assets"). A portion of the Shared Insurance Assets may, under
certain conditions, become payable by the Debtor Company to Dow Chemical under
an insurance allocation agreement between the Debtor Company and Dow Chemical
(the "Insurance Allocation Agreement"). The Insurance Allocation Agreement was
reached between Dow Chemical and the Debtor Company in order to resolve issues
related to the amount of the Shared Insurance Assets that would be available to
the Debtor Company for resolution of its products liability claims. Under the
Insurance Allocation Agreement, twenty-five percent of certain of the Shared
Insurance Assets would be paid by the Debtor Company to Dow Chemical subsequent
to the Effective Date of the Joint Plan of Reorganization. However, the amount
of Shared Insurance Assets that would be payable to Dow Chemical by the Debtor
Company under the Insurance Allocation Agreement would not exceed approximately
$320.0. In addition, a portion of any such amounts paid to Dow Chemical, to the
extent not used by Dow Chemical to pay certain products liability claims, would
be paid over to the Debtor Company after the expiration of a 17.5-year period
commencing on the Effective Date of the Joint Plan of Reorganization. As
previously reported, the Company's results for 1998 reflect a pre-tax charge of
$320.0 for an estimate of amounts of insurance proceeds payable or to be paid to
Dow Chemical pursuant to the Insurance Allocation Agreement (the "Co-insurance
payable"). As a result of certain insurance settlements and an amendment to the
Insurance Allocation Agreement between the Debtor Company and Dow Chemical, as
of December 31, 2003, the Co-insurance payable has been reduced to $79.7.
NOTE 14 - Proceeding Under Chapter 11 (continued)
- -------------------------------------
Confirmation of Joint Plan of Reorganization
- --------------------------------------------
In March, 1999, the Debtor Company distributed the Joint Plan of
Reorganization and related disclosure statement to the Debtor Company's
creditors and solicited related acceptances from its creditors. All classes of
claimants represented by the Committee of Tort Claimants (with the exception of
the holders of claims related to long-term contraceptive implants) and the class
of claimants represented by the Official Physicians' Committee have provided the
requisite acceptance of the terms of the Joint Plan of Reorganization. In
addition, the class of claimants represented by the Committee of Unsecured
Creditors and the class of claimants comprised of various governmental entities,
including the United States (the "U.S. Government") have not provided the
requisite acceptance of the terms of the Joint Plan of Reorganization (See
further discussion below under "Uncertainties regarding implementation of the
Joint Plan of Reorganization"). Following the conclusion of a confirmation
hearing in November, 1999, the Bankruptcy Court issued an order confirming the
Joint Plan of Reorganization, (the "Confirmation Order"). In the Confirmation
Order, the Bankruptcy Court ruled that the contract rates of interest where
contracts specified a rate, and the Federal Judgment Rate of 6.28% for claims
without contractually specified rates of interest, relative to allowed claims
held by creditors represented by the Committee of Unsecured Creditors for the
period from May 15, 1995 through the Effective Date of the Joint Plan of
Reorganization should apply. In April, 2001, the Bankruptcy Court issued an
opinion which (a) denied the Committee of Unsecured Creditors request for
default interest and collection costs and (b) indicated that interest on claims
held by creditors represented by the Committee of Unsecured Creditors should be
compounded on an annual basis. The Committee of Unsecured Creditors has appealed
this Bankruptcy Court opinion. This appeal has not yet been decided. The Debtor
Company revised its estimate of interest payable to these creditors in the
second quarter of 2001 to reflect the impact of annual compounding pursuant to
the Bankruptcy Court's opinion. As a result, the Debtor Company's results for
the second quarter of 2001 include a pretax charge of $58.3 ($36.7 after tax)
(see Note 13 for additional information).
Following the issuance of the Confirmation Order, various appeals of the
Confirmation Order were filed with the U.S. District Court in Michigan. The
primary components of the Joint Plan of Reorganization which were the subject of
these appeals were (1) the release of Dow Chemical, Corning and their respective
subsidiaries and affiliates, (2) the limitations on the Debtor Company's funding
obligations with respect to the Settlement Facility and the Litigation Facility
as provided in the Funding Payment Agreement, (3) the inability of claimants who
choose to litigate their claims via the Litigation Facility to receive punitive
damages, and (4) the variance between the amounts payable to U.S. claimants and
non-U.S. claimants. In November, 2000, the U.S. District Court in Michigan
affirmed the Bankruptcy Court's Confirmation Order.
Twelve objectors or groups of objectors, pursued appeals of the U.S.
District Court in Michigan's November, 2000, ruling to the U.S. Court of Appeals
for the Sixth Circuit (the "U.S. Court of Appeals"). In January, 2002, the U.S
Court of Appeals decided those appeals and issued its opinion that releases
provided by the Joint Plan of Reorganization to (a) Dow Chemical, Corning and
their respective subsidiaries and affiliates, (b) the Debtor Company's
subsidiaries and affiliates and (c) certain of the Debtor Company's insurers can
be legally granted in certain specified circumstances. However, the U.S. Court
of Appeals required the U.S. District Court in Michigan to clarify the basis for
the Bankruptcy Court's previous findings that such unusual circumstances exist.
In addition, the U.S Court of Appeals (a) upheld the classification of, and
lower settlement offers to, non-U.S. claimants in the Joint Plan of
Reorganization and (b) ruled that the Joint Plan of Reorganization must
delineate an adequate mechanism by which the United States can prevent the
claims administrator from paying contested claims and must specify the notice
that must be given to the United States prior to payment of such claims.
Subsequently, certain creditors of the Debtor Company filed a petition
for a writ of certiorari with the U.S. Supreme Court seeking review of the U.S.
Court of Appeals' January, 2002 decision that such releases are permissible if
such special circumstances exist. The U.S. Supreme Court denied such petition in
October, 2002. The Debtor Company is uncertain as to whether the U.S. Supreme
Court will reconsider this issue in the future.
The Bankruptcy Court judge who has presided over the Chapter 11
Proceedings recused himself from continuing jurisdiction over the Chapter 11
Proceedings effective in December, 2001. As a result, the Chapter 11 Proceedings
have been withdrawn from the Bankruptcy Court and transferred to the U.S.
District Court in Michigan.
In June, 2002, the U.S. District Court in Michigan announced that the
Debtor Company and the U.S Government had reached a tentative settlement of the
U.S. Government's claims against the Debtor Company and related issues. Final
approval of this settlement has been provided by the U.S. Government and the
U.S. District Court in Michigan.
NOTE 14 - Proceeding Under Chapter 11 (continued)
- -------------------------------------
In December, 2002, the U.S. District Court in Michigan issued a
Memorandum Opinion and Order indicating that, based on its review of facts
underlying the provision of the releases in the Joint Plan of Reorganization
described above, the specified circumstances referred to by the U.S. Court of
Appeals in its January, 2002 opinion exist. Also, the U.S. District Court in
Michigan reaffirmed its November, 2000 opinion referred to above. There have
been two appeals of the U.S District Court in Michigan's December, 2002
Memorandum Opinion and Order to the U.S. Court of Appeals. Following the
approval by the U.S. District Court in Michigan of the Subsequent Australian
Settlement, one of these appeals, which was filed by the Australian claimants
affected by the Subsequent Australian Settlement, was withdrawn. See Note 13 for
discussion of the Subsequent Australian Settlement. The Debtor Company is
uncertain as to when the remaining appeal will be resolved.
Uncertainties regarding implementation of Joint Plan of Reorganization
- ----------------------------------------------------------------------
Even though management believes that the Joint Plan of Reorganization
will ultimately be implemented, uncertainties regarding such implementation
continue to exist, including the favorable resolution of appeals of the U.S.
District Court in Michigan's November, 2000, and December, 2002, rulings
regarding the Bankruptcy Court's Confirmation Order.
Resolution of the appeals could ultimately impact whether the Joint Plan
of Reorganization will be implemented in substantially its current form.
Debtor Company Financial Statements
- -----------------------------------
The condensed financial statements of the Debtor Company are presented as
follows:
NOTE 14 - Proceeding Under Chapter 11 (continued)
- -------------------------------------
DOW CORNING CORPORATION
-----------------------
DEBTOR COMPANY CONDENSED BALANCE SHEETS
---------------------------------------
(in millions of U.S. dollars)
ASSETS
------
December 31, 2003 December 31, 2002
----------------- -----------------
Current Assets:
Cash and cash equivalents $ 201.8 $ 483.4
Marketable securities 850.1 323.4
Accounts and notes receivable, including receivable from
subsidiaries of $859.7 in 2003, and $882.4 in 2002 1,056.5 1,061.3
Anticipated implant insurance receivable 2.8 20.6
Inventories 184.5 151.6
Deferred income taxes 81.9 84.0
Other current assets 20.9 5.6
------------- -------------
Total current assets 2,398.5 2,129.9
------------- -------------
Equity in Unconsolidated Subsidiaries 1,028.8 968.7
------------- -------------
Property, Plant and Equipment, at cost 1,895.3 1,869.4
Less accumulated depreciation (1,419.6) (1,348.2)
------------- -------------
475.7 521.2
------------- -------------
Other Assets:
Marketable securities 232.0 259.9
Anticipated implant insurance receivable 433.5 445.1
Restricted insurance proceeds 207.4 181.3
Deferred income taxes 697.3 701.2
Other assets, including non-current receivable from
subsidiaries of $364.5 in 2003 and $351.5 in 2002 427.0 390.0
------------- -------------
1,997.2 1,977.5
------------- -------------
$ 5,900.2 $ 5,597.3
============= =============
NOTE 14 - Proceeding Under Chapter 11 (continued)
- -------------------------------------
DOW CORNING CORPORATION
-----------------------
DEBTOR COMPANY CONDENSED BALANCE SHEETS
---------------------------------------
(in millions of U.S. dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
December 31, 2003 December 31, 2002
----------------- -----------------
Current Liabilities:
Accounts payable $ 58.9 $ 55.7
Payable to subsidiaries 547.5 540.9
Accrued interest 650.9 555.8
Other current liabilities 131.7 178.6
------------- -------------
Total current liabilities 1,389.0 1,331.0
------------- -------------
Other Long-Term Liabilities 15.9 32.3
------------- -------------
Liabilities Subject to Compromise:
Accounts payable 67.7 67.3
Payable to subsidiaries 37.8 37.8
Accrued employee benefits 493.0 528.7
Accrued taxes 3.6 3.6
Implant reserves 2,249.9 2,249.8
Co-insurance payable 79.7 84.9
Notes payable 375.0 375.0
Long-term debt 273.7 273.7
Other 72.4 72.4
------------- -------------
3,652.8 3,693.2
------------- -------------
Stockholders' Equity
Common stock, $5 par value (2,500,000 shares
authorized and outstanding) 12.5 12.5
Retained earnings 860.0 683.4
Cumulative translation adjustment 110.1 (39.6)
Other equity adjustments (140.1) (115.5)
------------- -------------
Stockholders' equity 842.5 540.8
------------- -------------
$ 5,900.2 $ 5,597.3
============= =============
NOTE 14 - Proceeding Under Chapter 11 (continued)
- -------------------------------------
DOW CORNING CORPORATION
-----------------------
DEBTOR COMPANY CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
-----------------------------------------------------------------------
(in millions of U.S. dollars)
Year Ended December 31,
2003 2002 2001
------------- ------------- -------------
Net Sales (includes sales to subsidiaries $ 2,294.2 $ 1,774.5 $ 1,634.1
of $1,158.4 in 2003, $709.4 in 2002 and
$633.3 in 2001)
Operating Costs and Expenses:
Cost of sales 1,779.0 1,297.8 1,264.8
Marketing and administrative expenses 292.5 329.9 288.1
Implant costs (income) (0.2)
----------- ----------- -----------
2,071.5 1,627.7 1,552.7
Operating Income 222.7 146.8 81.4
Other Income (Expense):
Interest income 35.5 25.9 64.3
Interest expense (94.9) (89.5) (149.7)
Currency and other, net (18.5) 25.8 10.0
Equity in earnings of subsidiaries 98.4 (12.0) (24.0)
----------- ----------- -----------
Income (Loss) before Reorganization
Costs and Income Taxes 243.2 97.0 (18.0)
Reorganization costs 5.4 6.9 10.5
Income tax provision (benefit) 61.2 31.4 (1.0)
----------- ----------- -----------
Net Income (Loss) 176.6 58.7 (27.5)
Retained earnings at beginning of period 683.4 624.7 652.2
----------- ----------- -----------
Retained earnings at end of period $ 860.0 $ 683.4 $ 624.7
=========== =========== ===========
(See accompanying Notes to Consolidated Financial Statements)
NOTE 14 - Proceeding Under Chapter 11 (continued)
- -------------------------------------
DOW CORNING CORPORATION
-----------------------
DEBTOR COMPANY CONDENSED STATEMENTS OF CASH FLOWS
-------------------------------------------------
(in millions of dollars)
Year Ended December 31,
2003 2002 2001
------------- ------------- -------------
Cash Flows from Operating Activities:
Net income (loss) $ 176.6 $ 58.7 $ (27.5)
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 96.7 107.0 114.9
Deferred income taxes 5.3 209.3 (68.6)
Reorganization costs 5.4 6.9 10.5
Other (5.2) (60.4) 86.1
Change in implant deposit 275.0
Implant payments (4.0) (5.9) (950.2)
Implant insurance reimbursement 29.4 111.8 100.1
Co-insurance payable (5.3) (20.1) (204.1)
Change in restricted insurance proceeds (29.4) (94.2) 810.8
Change in assets and liabilities -
Accounts and notes receivable (60.3) (134.1) 56.1
Inventories (27.6) 7.7 23.1
Accounts payable 7.5 97.4 (16.1)
Accrued taxes 5.7 53.1 (67.8)
Accrued interest 95.1 89.8 56.3
Receivables from subsidiaries 9.7 23.1 67.3
Accrued payroll & employee benefits (54.0) 71.1 (23.1)
Other (28.4) (96.2) (3.5)
----------- ----------- -----------
Cash Provided by Operating Activities 217.2 425.0 239.3
----------- ----------- -----------
Cash Flows from Investing Activities:
Capital expenditures (37.1) (35.4) (93.2)
Business Acquisitions (30.5)
Proceeds from sales of marketable securities 2,966.0 1,956.0 1,896.3
Purchases of marketable securities (3,464.8) (2,208.6) (1,918.7)
Dividends from subsidiaries 37.7 1.7
Other 35.3 2.0 20.0
----------- ----------- -----------
Cash Used for Investing Activities: (493.4) (284.3) (95.6)
----------- ----------- -----------
Cash Flows from Financing Activities:
Long-term borrowings 3.2
Net change in other short-term borrowings (9.2)
-----------
Cash Used for Financing Activities (6.0)
-----------
Cash Flows Used for Reorganization Costs (5.4) (6.9) (10.5)
----------- ----------- -----------
Changes in Cash and Cash Equivalents:
Net increase in cash and cash equivalents (281.6) 133.8 127.2
Cash and cash equivalents at beginning of year 483.4 349.6 222.3
----------- ----------- -----------
Cash and cash equivalents at end of year $ 201.8 $ 483.4 $ 349.5
=========== =========== ===========
NOTE 14 - Proceeding Under Chapter 11 (continued)
- -------------------------------------
As required by SOP 90-7, the financial statements presented above reflect
transactions of the Debtor Company including transactions with all subsidiaries
of the Debtor Company. The Debtor Company's condensed statement of operations
and retained earnings includes sales to subsidiaries in the caption "Net Sales"
of $1,158.4, $709.4 and $633.3 for the periods ended December 31, 2003, 2002 and
2001, respectively. These sales are conducted at prices substantially comparable
to those that would prevail in open-market transactions between unrelated
parties. In addition, these financial statements do not include eliminations of
effects of intercompany transactions. Consequently, the financial statements of
the Debtor Company are not necessarily indicative of the contribution of the
Debtor Company, or that of its subsidiaries, to the consolidated results of the
Company as a whole.
The Debtor Company has incurred and will continue to incur significant
costs associated with the Chapter 11 Proceeding. The aggregate amount of these
costs, which are being expensed as incurred, may have a material adverse impact
on the Company's results of operations in future periods. These costs are
recorded under the caption "Reorganization costs" in the accompanying statements
of operations and retained earnings. For the twelve months ended December 31,
2003, 2002 and 2001 the Debtor Company incurred the following reorganization
costs: Legal Expenses of $3.9, $3.0 and $3.4 and Administrative Expenses of
$1.5, $1.1 and $1.4.
Due to the Debtor Company's status as a debtor-in-possession under
Chapter 11 of the Bankruptcy Code, the Debtor Company has not been making
payments pursuant to its debt agreements since May 15, 1995. All outstanding
debt of the Debtor Company as of May 15, 1995, has been presented under the
caption "Liabilities Subject to Compromise" in the accompanying balance sheets.
Interest on Pre-Petition Debt
- -----------------------------
As reported above under "Confirmation of Joint Plan of Reorganization",
in April, 2001, the Bankruptcy Court issued an opinion, which indicated that
interest on claims held by creditors represented by the Committee of Unsecured
Creditors should be compounded on an annual basis. The Debtor Company revised
its estimate of interest payable to these creditors in the second quarter of
2001 to reflect the impact of annual compounding pursuant to the Bankruptcy
Court's opinion. As a result, the Debtor Company's results for the second
quarter of 2001 include a pretax charge of $58.3 ($36.7 after tax). Accordingly,
the Company's results for the twelve months ended December 31, 2003, 2002 and
2001, reflect interest expense of $94.5 ($59.5 after tax), $88.4 ($55.7 after
tax) and $125.3 ($79.0 after tax), respectively, for the amount of interest
payable to creditors of the Debtor Company represented by the Committee of
Unsecured Creditors pursuant to the Joint Plan of Reorganization. These amounts
were calculated using a combination of the floating and fixed rates of interest
specified in the relevant contracts, as ordered by the Bankruptcy Court in
November, 1999. The actual amount of interest that will ultimately be paid to
these creditors is uncertain, and will ultimately be resolved through the
Confirmation Order appeals process.
Restriction on Dividend Payments
- --------------------------------
The Debtor Company is restricted from paying dividends to its
shareholders pursuant to provisions of the U.S. bankruptcy law relevant to the
Debtor Company's Chapter 11 Proceeding. The Debtor Company anticipates that this
dividend restriction will no longer apply after the conclusion of the Debtor
Company's Chapter 11 Proceeding.
NOTE 15 - Commitments
- ---------------------
Leases
- ------
The Company leases certain real and personal property under agreements
that generally require the Company to pay for maintenance, insurance and taxes.
Rental expense was $35.2 in 2003, $37.9 in 2002 and $41.4 in 2001. The minimum
future rental payments required under noncancellable operating leases at
December 31, 2003, in the aggregate, are $138.5 including the following amounts
due in each of the next five years: 2004 - $23.5, 2005 - $19.6, 2006 - $16.4,
2007 - $14.0 and 2008 - $11.0.
Guarantees
- ----------
Guarantees arise during the ordinary course of business from
relationships with customers, employees and nonconsolidated affiliates when the
Company undertakes an obligation to guarantee the performance of others (via
delivery of cash or other assets) if specified triggering events occur.
Non-performance under a contract by the guaranteed party triggers the obligation
of the Company. The maximum amount of future payments the Company may be
obligated to make under all of its guarantees is $8.9, primarily related to
guarantees of housing loan obligations of certain employees of the Company's
subsidiaries in Japan. The Company has not recorded a liability for this
potential obligation.
NOTE 15 - Commitments (continued)
- ---------------------
The Company has guarantees related to its performance under certain
operating lease arrangements and the residual value of leased assets. If certain
operating leases are terminated by the Company, it guarantees a portion of the
residual value loss, if any, incurred by the lessors in disposing of the related
assets. Expiration dates vary, and certain leases contain renewal options.
Management believes that, based on facts and circumstances, including the
expected fair value of the underlying assets, the likelihood of a material
payment pursuant to such guarantees is remote. Accordingly, no liabilities were
recorded with respect to such guarantees.
Indemnifications and Warranties
- -------------------------------
In the normal course of business to facilitate sales of its products, the
Company has issued product warranties, and it has entered into contracts and
purchase orders that often contain standard terms and conditions which typically
include a warranty and indemnification to the buyer that the goods and services
purchased do not infringe on third party intellectual property rights.
In these transactions, the Company has agreed to hold the other parties
harmless against losses arising from the Company's breach of representations or
covenants, from intellectual property infringement or other claims made against
such parties. These agreements may limit the time within which an
indemnification claim can be made and the amount of the claim. In addition, the
Company has entered into indemnification agreements with its officers and
directors.
Under agreements relating to the sales of Company facilities, the Company
has retained various liabilities and has agreed to indemnify the purchasers of
such facilities for any breach of its representations and warranties contained
in the agreements, including the environmental condition of such facilities and
other liabilities retained by it under the agreements, subject to limitations.
To date, the purchasers of such facilities have not made claims for
indemnification, and management believes that the likelihood of its obligation
to indemnify such purchasers for these matters is remote.
Due to the nature of the indemnifications and warranties, it is not
possible to determine the maximum potential amount of liability due to the
unique facts and circumstances involved in each particular agreement.
Historically, payments made by the Company under these agreements have not had a
material impact on the Company's operating results or financial position.
Consequently, the Company has not recorded a liability related to these
indemnifications and warranties.
Take-or-Pay Contracts
- ---------------------
At December 31, 2003, the Company had entered into various take-or-pay
agreements for steam, electrical power, silicon metal and materials used in the
normal course of business for terms extending from one to fifteen years. The
Company's demand for certain of the products or services covered by such
agreements may from time to time fall below the minimum quantity levels
specified in such agreements and/or the prices may fall below market prices.
Consequently, the Company may incur liability to pay for such minimum quantities
without accepting all of such minimum quantities or pay above market prices. In
such circumstances, the Company will make reasonable efforts to mitigate such
potential liability. The fixed and determinable portion of take or pay
agreements as of December 31, 2003 is presented in the following table:
2004 $ 51.7
2005 52.6
2006 52.6
2007 30.5
2008 30.5
2009 through expiration of contracts 120.9
---------
Total $ 338.8
=========
NOTE 16 - Derivative Instruments
- --------------------------------
The Company uses forward exchange contracts to hedge the exposure to
foreign currency fluctuations associated with certain monetary assets and
liabilities. Changes in the fair value of these items are recorded in earnings
to offset the foreign exchange gains and losses of the monetary assets and
liabilities. The notional value of these contracts at December 31, 2003 and 2002
are shown in the following table:
2003 2002
------------- -------------
Sold vs. US Dollars:
Euros $ 84.5 $ 99.3
British Pounds 155.2 145.6
Other currencies 87.4 108.0
Bought vs. US Dollars:
Euros 7.7
Other currencies 12.4 10.5
Bought vs. Euro:
British Pounds 11.1 23.7
The maturities of these contracts do not exceed one year. The carrying
amounts, which represent fair values, of these forward contracts were $(9.9) and
$(9.4) at December 31, 2003 and 2002, respectively. The fair value of the
Company's forward exchange contracts is based principally on quoted market
prices.
Forward exchange contracts are also used to hedge the value of
investments in certain non-U.S. subsidiaries by creating a liability in a
currency in which the Company has a net equity position. At December 31, 2003
and 2002, there were no outstanding derivatives designated as net investment
hedges.
NOTE 17 - Related Party Transactions
- ------------------------------------
The Company has transactions in the normal course of business with Dow
Chemical, Corning Incorporated and affiliates. The Company purchased raw
materials and services totaling $44.9 in 2003, $44.6 in 2002 and $43.9 in 2001
from Dow Chemical and its affiliates. Sales to Corning and its affiliates
totaled $7.5 in 2003, $7.3 in 2002 and $17.8 in 2001. Sales to Dow Chemical and
its affiliates totaled $8.2 in 2003, $8.8 in 2002 and $12.3 in 2001. Management
believes the costs of such purchases and the prices for such sales were
competitive with alternative sources of supply.
DOW CORNING CORPORATION AND SUBSIDIARY COMPANIES
------------------------------------------------
SUPPLEMENTARY DATA - QUARTERLY FINANCIAL INFORMATION
----------------------------------------------------
YEARS ENDED DECEMBER 31, 2003 AND 2002 (Unaudited)
--------------------------------------------------
(in millions of dollars except share data)
Quarter Ended: March 31 June 30 September 30 December 31
------------- ------------- ------------- ------------------
2003
Net sales $ 658.7 $ 712.6 $ 723.2 $ 778.0
Gross profit 185.7 220.7 198.8 214.6
Net income 35.9 54.2 46.8 39.7
Net income per share 14.37 21.69 18.73 15.85
2002
Net sales $ 582.5 $ 649.7 $ 679.7 $ 698.2
Gross profit 146.3 185.0 196.7 199.5
Net income (loss) (8.5) 40.0 45.0 (17.8)
Net income (loss) per share (3.40) 16.00 18.00 (7.12)
The Notes to Consolidated Financial Statements are an integral
part of these financial statements.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Contents
As of December 31, 2003 and 2002
and for the years ended December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
Page(s)
Report of Independent Auditors.............................................147
Financial Statements
Balance Sheets.............................................................148
Statements of Income.......................................................149
Statements of Cash Flows...................................................150
Notes to Financial Statements..........................................151-161
Report of Independent Auditors
To the Board of Directors and Shareholders of
Samsung Corning Precision Glass Co., Ltd.
In our opinion, the accompanying balance sheets and the related statements of
income and cash flows present fairly, in all material respects, the financial
position of Samsung Corning Precision Glass Co., Ltd. (the "Company") at
December 31, 2003 and 2002, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles which, as described in Note 1, are
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
/s/ Samil PricewaterhouseCoopers
Seoul, Korea
January 12, 2004
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Balance Sheets
December 31, 2003 and 2002
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
2003 2002
Assets
Current assets
Cash and cash equivalents $ 66,928 $ 26,982
Trading securities 62,946
Accounts and notes receivable
Customers, net of allowance for doubtful accounts
of $640 and $322 36,481 20,681
Related parties 27,502 10,817
Inventories 14,444 12,197
Prepaid expenses and other current assets 17,003 3,138
----------- -----------
Total current assets 162,358 136,761
Property, plant and equipment, net 705,056 385,616
Other non-current assets 14,565 7,520
----------- -----------
Total assets $ 881,979 $ 529,897
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 24,088 $ 6,289
Short-term borrowings 14,028
Accounts payable
Trade accounts payable 3,333 366
Non-trade accounts payable 30,813 26,712
Related parties 118,999 48,217
Income taxes payable 41,364 14,795
Accrued bonus payable 9,104 7,164
Other current liabilities 751 2,605
----------- -----------
Total current liabilities 242,480 106,148
Long-term debt 23,964 42,970
Accrued severance benefits, net 2,792 1,655
Deferred income tax liabilities 13,858 6,005
----------- -----------
Total liabilities 283,094 156,778
----------- -----------
Commitments and contingencies
Stockholders' equity
Preferred stock: par value $8.51 per share, 153,190 shares authorized,
41,000 shares issued and outstanding 349 349
Common stock: par value $8.35 per share, 3,640,000 shares authorized,
2,400,000 shares issued and outstanding 20,040 20,040
Retained earnings 582,726 352,118
Accumulated other comprehensive (loss) income (4,230) 612
----------- -----------
Total stockholders' equity 598,885 373,119
----------- -----------
Total liabilities and stockholders' equity $ 881,979 $ 529,897
=========== ===========
The accompanying notes are an integral part of these financial statements.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Statements of Income
Years ended December 31, 2003, 2002 and 2001
(in thousands)
- --------------------------------------------------------------------------------
2003 2002 2001
Net sales
Related parties $ 290,958 $ 184,556 $ 155,765
Customers 299,179 150,091 81,078
----------- ----------- -----------
590,137 334,647 236,843
Cost of sales 166,570 117,192 76,404
----------- ----------- -----------
Gross margin 423,567 217,455 160,439
Selling and administrative expenses 36,647 20,650 12,464
Royalty expenses to related parties 27,649 15,413 10,603
----------- ----------- -----------
Operating income 359,271 181,392 137,372
Other income (expense):
Interest income 2,380 2,732 3,090
Interest expense (1,430) (1,404) (2,099)
Foreign exchange (loss) gain, net (3,177) 1,217 2,980
Other (expense) income, net (2,341) 618 112
----------- ----------- -----------
Income before income taxes 354,703 184,555 141,455
Provision for income taxes 59,936 22,919 22,076
----------- ----------- -----------
Net income $ 294,767 $ 161,636 $ 119,379
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Statements of Cash Flows
Years ended December 31, 2003, 2002 and 2001
(in thousands)
- --------------------------------------------------------------------------------
2003 2002 2001
Cash flows from operating activities
Net income $ 294,767 $ 161,636 $ 119,379
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 53,076 22,359 20,793
Foreign exchange loss (gain), net 5,163 (297) (3,008)
Deferred income tax expense 9,948 2,105 1,837
Other, net 1,385 581 378
Changes in operating assets and liabilities:
Trading securities 62,925 (37,166)
Accounts and notes receivable (32,785) (3,723) (3,717)
Inventories (2,252) 3,089 (6,856)
Prepaid expenses and other current assets (12,810) (1,954) 1,071
Accounts payable and other current liabilities (12,321) 9,506 7,896
----------- ----------- -----------
Net cash provided by operating activities 367,096 156,136 137,773
----------- ----------- -----------
Cash flows from investing activities
Purchases of property, plant and equipment (257,703) (115,825) (103,474)
Payment of leasehold deposits (4,796) (1,899) (811)
Proceeds from disposal of short-term
financial instruments 12,931 4,106
Other, net (2,224) 592 (133)
----------- ----------- -----------
Net cash used in investing activities (264,723) (104,201) (100,312)
----------- ----------- -----------
Cash flows from financing activities
Repayment of short-term and long-term debt (18,303) (34,519) (22,267)
Proceeds from issuance of short-term and
long-term debt 25,662 40,674
Payment of cash dividend (64,159) (47,127) (34,918)
----------- ----------- -----------
Net cash used in financing activities (56,800) (40,972) (57,185)
----------- ----------- -----------
Effect of exchange rate changes on cash
and cash equivalents (5,627) (1,095) (2,671)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 39,946 9,868 (22,395)
Cash and cash equivalents
Beginning of year 26,982 17,114 39,509
----------- ----------- -----------
End of year $ 66,928 $ 26,982 $ 17,114
=========== =========== ===========
Supplemental cash flow information
Cash paid for interest $ 750 $ 1,476 $ 2,206
Cash paid for income taxes 25,027 25,907 19,553
The accompanying notes are an integral part of these financial statements.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
December 31, 2003 and 2002
- -------------------------------------------------------------------------------
1. General Information and Summary of Significant Accounting Policies
Samsung Corning Precision Glass Co., Ltd. (the "Company") was incorporated
on April 20, 1995 under the laws of the Republic of Korea in accordance
with a joint venture agreement between Corning Incorporated ("Corning")
located in the U.S.A. and domestic companies in Korea.
As of December 31, 2003, the issued and outstanding common shares of the
Company are 2,400,000 shares, which are owned 50% by Corning, 42.6% by
Samsung Electronics Co., Ltd. ("SEC") and 7.4% by another domestic
shareholder.
Nature of Operations
The Company operates in one business segment, the production and marketing
of precision flat glass substrates. Glass substrates provided by the
Company are used to make TFT-LCD (Thin-Film Transistor Liquid Crystal
Display) Panel for notebook computers, LCD monitors, LCD TVs and other
handheld devices like digital cameras, PDAs and navigators. The Company's
major customers are Korean LCD Panel makers such as SEC, LG Philips LCD
Co., Ltd. and BOE Hydis Technology Co., Ltd. The Company's current market
is primarily limited to companies incorporated in Korea.
Basis of Presentation
The official accounting records of the Company are expressed in Korean Won
and are maintained in accordance with the laws and regulations of the
Republic of Korea. The accompanying financial statements have been prepared
to conform with accounting principles generally accepted in the United
States of America.
Foreign Currencies
The Company operates primarily in the Korean Won, its local and functional
currency. The Company has chosen the U.S. Dollar as its reporting currency.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, Foreign Currency Translation, revenues and expenses have been
translated into U.S. Dollars at average exchange rates prevailing during
the period. Assets and liabilities have been translated at the rates of
exchange on the balance sheet date. Equity accounts have been translated at
historical rates. The resulting translation gain or loss adjustments are
recorded directly as a separate component of stockholders' equity.
Transaction gains or losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency
are included in the income statement as incurred. Assets and liabilities
denominated in currencies other than the functional currency are translated
at the exchange rates at the balance sheet date and the related exchange
gains or losses are recorded in the statement of income.
Revenue Recognition
The Company derives its revenue from the sale of precision flat glass
substrates to its customers, primarily located in Korea. The Company
recognizes revenue when persuasive evidence of an arrangement exists, the
products or the services have been delivered and legal title and all risks
of ownership have been transferred to the customer, the sales price is
fixed or determinable, and collectibility is reasonably assured. This
typically occurs upon delivery of the products to the customers, as the
majority of the customers are large Korean manufacturers of LCD panels, who
enter into general supply agreements with the Company, and then place large
orders of product for delivery on a regular basis. The Company reduces
revenue for estimated price discounts and rebates based on past experience.
The Company periodically offers sales incentives to its customers in the
form of free product, however, the costs related to these products are
included within cost of sales in the statement of income.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect amounts reported
therein. Although these estimates are based on management's best knowledge
of current events and actions that the Company may undertake in the future,
actual results may be different from those estimates.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
December 31, 2003 and 2002
- -------------------------------------------------------------------------------
Financial Instruments
The amounts reported for cash and cash equivalents, short-term financial
instruments, trading securities, accounts receivable, certain other assets,
accounts payable, certain accrued and other liabilities and short-term loan
and long-term debt approximate fair value due to their short maturities or
market interest rates. Obligations due to or receivable from related
parties have no ascertainable fair value as no market exists for such
instruments.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash, demand deposits and short-term investments with an original maturity
of three months or less at the time of acquisition.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined by the weighted-average method, which approximates the first-in,
first-out method.
Trading Securities
Trading securities, purchased and held principally for the purpose of
selling them in the near term, consist of beneficiary certificates. Trading
securities are stated at their fair value, and the valuation gains or
losses are reported in current income.
Property and Depreciation
Property, plant and equipment ("PP&E") are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method based
on the following estimated useful lives:
Buildings From 20 to 40 years
Machinery and equipment From 1.5 to 8 years
Vehicle, tools, furniture and fixtures From 2 to 8 years
Expenditures that enhance the value or materially extend the useful life of
the facilities, are capitalized as additions to property, plant and
equipment. Costs of normal, recurring or periodic repairs and maintenance
activities are charged to expense as incurred.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset or asset group to future
undiscounted cash flows expected to be generated from the asset or asset
group. If the sum of the expected future cash flows is less than the
carrying amount of the asset or asset group, an impairment loss is measured
based on the difference between estimated fair value and carrying value.
Accrued Severance Benefits
Employees and directors with one or more years of service are entitled to
receive a lump-sum payment upon termination of their employment with the
Company, based on their length of service and rate of pay at the time of
termination. Accrued severance benefits represent the amount which would be
payable assuming all eligible employees and directors were to terminate
their employment with the Company as of the balance sheet date.
The Company has made deposits to the Korean National Pension Fund in
accordance with National Pension Funds Law. The use of the deposit is
restricted to the payment of severance benefits. Accordingly, accrued
severance benefits in the accompanying balance sheet are presented net of
this deposit.
Accrued severance benefits are funded at approximately 60% and 61% as of
December 31, 2003 and 2002, respectively, through a group severance
insurance plan and are presented as a deduction from accrued severance
benefits.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
December 31, 2003 and 2002
- -------------------------------------------------------------------------------
Research and Development Costs
Research and development expenditures, which include costs in relation to
new product, development, research, process improvement and product use
technology are expensed as incurred and included in selling and
administrative expenses. Research and development costs were $ 8,120
thousand, $4,383 thousand and $953 thousand for 2003, 2002 and 2001,
respectively.
Income Taxes and Investment Tax Credit
The Company recognizes deferred income taxes for anticipated future tax
consequences resulting from temporary differences between amounts reported
for financial reporting and income tax purposes. Deferred tax assets and
liabilities are computed on such temporary differences by applying enacted
statutory tax rates applicable to the years when such differences are
expected to reverse. Deferred tax assets are recognized when it is more
likely than not that such deferred tax assets will be realized. The total
income tax provision includes the current tax expense under applicable tax
regulations, and the change in the balance of deferred tax assets and
liabilities during the year.
The Company is eligible to use investment tax credits that are temporarily
allowed for the qualified plant and equipment expenditures until December
31, 2003 under Korean tax rules. The investment tax credit is recognized in
financial income as a reduction of tax expense of the year when income
taxes payable are reduced.
Derivative Instruments
The Company participates in foreign exchange forward contracts entered into
in connection with the management of its exposure to fluctuations in
foreign exchange rates. The nature of the risk being hedged is the
fluctuation in future cash flows from the Company's sales attributable to
the changes in exchange rate between the Japanese Yen and Korean Won. The
Company's foreign exchange forward contracts are denominated in Japanese
Yen and are for periods consistent with the terms of the underlying sales
transactions, generally one year or less. As the Company's foreign exchange
forward contracts are entered into to support product sales made in the
normal course of business and, accordingly, are not speculative in nature,
these contracts are designated as cash flow hedging instruments.
All derivative instruments are recorded at fair value. Effective changes in
the fair value of derivative instruments designated as cash flow hedging
instruments are recorded in accumulated other comprehensive income (loss).
Amounts are reclassified from accumulated other comprehensive income (loss)
when the underlying hedged transactions impact earnings. If the transaction
being hedged fails to occur, the gain or loss on the associated financial
instruments are recorded immediately in earnings. As of December 31, 2003
and 2002, there were no outstanding balances of forward foreign exchange
contracts.
Cash flows associated with the derivative instruments are classified
consistent with the cash flows from the transactions being hedged.
Reclassifications
Certain amounts in the 2002 and 2001 financial statements have been
reclassified to conform to 2003 presentation.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, Accounting for Asset Retirement Obligations. This standard
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. The Company adopted SFAS No. 143 on January 1, 2003.
The adoption of SFAS No. 143 did not have a material impact on its
financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This standard nullifies Emerging Issues
Task Force Issue ("EITF") No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This standard
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred rather than the date
of an entity's commitment to an exit plan. The Company adopted SFAS No. 146
on January 1, 2003. The adoption of SFAS No. 146 did not have a material
impact on its financial position or results of operations.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
December 31, 2003 and 2002
- -------------------------------------------------------------------------------
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
the accounting guidance on derivative instruments (including certain
derivative instruments embedded in other contracts) and hedging activities
that fall within the scope of SFAS No. 133. It also amends certain other
existing pronouncements, which will result in more consistent reporting of
contracts that are derivatives in their entirety or that contain embedded
derivatives that warrant separate accounting. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, with certain
exceptions, and for hedging relationships designated after June 30, 2003.
The guidance is to be applied prospectively. The Company adopted SFAS No.
149 in the third quarter of 2003. The adoption of SFAS No. 149 did not have
a material impact on its financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which
changes the accounting for certain financial instruments that, under
previous guidance, could be classified as equity, by now requiring those
instruments to be classified as liabilities (or assets in some
circumstances) in the statement of financial position. Further, SFAS No.
150 requires disclosure regarding the terms of those instruments and
settlement alternatives. The guidance in SFAS No. 150 is generally
effective for all financial instruments entered into or modified after May
31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The Company adopted SFAS No. 150 in
the second quarter of 2003. The adoption of SFAS No. 150 did not have a
material impact on its financial position or results of operations.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Other, which expands
previously issued accounting guidance and disclosure requirements for
certain guarantees. The interpretation requires an entity to recognize an
initial liability for the fair value of an obligation assumed by issuing a
guarantee. The provision for initial recognition and measurement of the
liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The Company adopted FIN No. 45 on January
1, 2003. The adoption of FIN No. 45 did not have a material impact on its
financial position or results of operations.
In January 2003, FIN No. 46, Consolidation of Variable Interest Entities
("VIE"), an Interpretation of ARB No. 5, which requires all VIEs to be
consolidated by the primary beneficiary. The primary beneficiary is the
entity that holds the majority of the beneficial interests in the VIE. In
addition, the interpretation expands disclosure requirements for both VIEs
that are consolidated as well as VIEs from which the entity is the holder
of a significant amount of the beneficial interests, but not the majority.
The disclosure requirements of this interpretation are effective for all
financial statements issued after January 31, 2003. The Company adopted FIN
No. 46 in the first quarter of 2003. The adoption of FIN No. 46 did not
have a material impact on its financial position or results of operations.
2. Inventories
Inventories consist of the following:
(in thousands) 2003 2002
Finished goods $ 4,627 $ 6,454
Semi-finished goods 3,964 3,192
Raw materials 3,137 1,091
Auxiliary materials 2,716 1,460
----------- ----------
$ 14,444 $ 12,197
=========== ==========
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
December 31, 2003 and 2002
- -------------------------------------------------------------------------------
3. Property, Plant and Equipment
Property, plant and equipment comprise the following:
(in thousands) 2003 2002
Building $ 236,117 $ 146,502
Machinery and equipment 313,426 173,595
Vehicle, tools, furniture and fixtures 20,517 13,578
----------- ----------
570,060 333,675
Less: accumulated depreciation (120,816) (68,144)
----------- ----------
449,244 265,531
Land 29,544 26,790
Construction-in-progress 226,268 93,295
----------- ----------
$ 705,056 $ 385,616
=========== ==========
4. Transactions with Related Parties
In the normal course of business, the Company sells its products to SEC,
Corning and Samsung Corning Co., Ltd. ("SSC," a Korean-based company in
which Samsung and Corning each own a 50% interest), purchases semi-finished
goods from Corning and purchases property, plant and equipment from Samsung
affiliates, Corning and SSC. Each of these transactions is made at market
prices equivalent to unrelated parties. In addition, the Company pays a 5%
royalty of net sales amounts of certain products to Corning and Corsam
Glasstec R&D Center, in which Corning and SSC each own a 50% interest. A
summary of these transactions and related receivable and payable balances
as of December 31 follows:
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
December 31, 2003 and 2002
- --------------------------------------------------------------------------------
2003 Sales Purchases Cost &
(in thousands) (1) (2) Expenses Receivables Payables
Samsung affiliates
Samsung Electronics Co., Ltd. $ 260,355 $ 2,763 $ 717 $ 22,384 $ 8,469
Samsung Corporation 14 86,354 123 11 48,154
Samsung Engineering Co., Ltd. 77,940 8 41,660
Others 375 2,887 13,317 128 2,758
----------- ----------- ----------- ----------- -----------
260,744 169,944 14,165 22,523 101,041
Corning 25,934 67,976 22,119 4,759 14,064
Samsung Corning Co., Ltd. 4,280 6,283 6,015 220 644
Corsam Glasstec R&D Center 5,530 3,250
----------- ----------- ----------- ----------- -----------
$ 290,958 $ 244,203 $ 47,829 $ 27,502 $ 118,999
=========== =========== =========== =========== ===========
2002 Sales Purchases Cost &
(in thousands) (1) (2) Expenses Receivables Payables
Samsung affiliates
Samsung Electronics Co., Ltd. $ 171,954 $ 298 $ 215 $ 8,893 $ 8,534
Samsung Corporation 5 29,793 5
Samsung Engineering Co., Ltd. 14,995 698
Others 469 8,565 3,421 643 26,198
----------- ----------- ----------- ----------- -----------
172,428 53,651 3,636 9,536 35,435
Corning 9,653 38,644 12,330 991 9,907
Samsung Corning Co., Ltd. 2,475 41 6,222 290 1,116
Corsam Glasstec R&D Center 3,083 1,759
----------- ----------- ----------- ----------- -----------
$ 184,556 $ 92,336 $ 25,271 $ 10,817 $ 48,217
=========== =========== =========== =========== ===========
2001 Sales Purchases Cost &
(in thousands) (1) (2) Expenses Receivables Payables
Samsung affiliates
Samsung Electronics Co., Ltd. $ 143,485 $ 21,308 $ 785 $ 6,207 $ 7,754
Samsung Corporation 7 14,036 4
Samsung Engineering Co., Ltd. 28,956 48 664
Others 229 4,401 2,236 937 10,913
----------- ----------- ----------- ----------- -----------
143,721 68,701 3,073 7,144 19,331
Corning 12,005 18,442 8,482 1,957 7,283
Samsung Corning Co., Ltd. 39 6,265 38 1,110
Corsam Glasstec R&D Center 2,121 1,064
----------- ----------- ----------- ----------- -----------
$ 155,765 $ 87,143 $ 19,941 $ 9,139 $ 28,788
=========== =========== =========== =========== ===========
(1) Gain and loss on foreign exchange forward contracts were included.
(2) Purchases of property, plant and equipment were included.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
December 31, 2003 and 2002
- --------------------------------------------------------------------------------
5. Short-term Borrowings
Short-term borrowings at December 31, 2003 consist of $14,028 thousand from
Credit Agricole Indosuez with the weighted average interest rate of 0.73%.
6. Long-term Debt
Long-term debt at December 31, 2003 and 2002 consists of the following:
Annual
(in thousands) Creditor interest rate 2003 2002
Foreign currency debt
Facilities finance, Shinhan Bank Libor + 2.5% $ 894
due through 2005 Shinhan Bank Libor + 2.5% $ 1,169 1,754
Woori Bank Libor + 2.0% 124 620
Hana Bank Libor + 2.4% 1,167
Trade finance, due 2003 Shinhan Bank Libor + 2.4% 3,148
Floating Rate Notes issued,
Due through 2005 Hana Bank Libor + 0.77% 46,759 41,676
--------- ---------
48,052 49,259
Less: Current maturities (24,088) (6,289)
--------- ---------
$ 23,964 $ 42,970
========= =========
The schedules of principal payments of long-term debt are as follows:
For the year ending December 31 (in thousands)
2004 $ 24,088
2005 23,964
---------
$ 48,052
=========
In connection with the facility loan from Woori Bank, machinery and
equipment with net book value of $ 271 thousand have been pledged as
collateral as of December 31, 2003.
7. Income Taxes
Income tax expense consists of the following:
(in thousands) 2003 2002 2001
Current $ 49,988 $ 20,814 $ 20,239
Deferred 9,948 2,105 1,837
----------- ----------- -----------
$ 59,936 $ 22,919 $ 22,076
=========== =========== ===========
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
December 31, 2003 and 2002
- --------------------------------------------------------------------------------
The following table reconciles the expected amount of income tax expense
based on statutory rates to the actual amount of taxes recorded by the
Company:
(in thousands) 2003 2002 2001
Income before taxes $ 354,703 $ 184,555 $ 141,455
Statutory tax rate 29.7% 29.7% 30.8%
----------- ----------- -----------
Expected taxes at statutory rate 105,347 54,813 43,568
Permanent differences
- Tax exemption for foreign
investment (1) (34,575) (27,835) (21,305)
- Tax rate changes (2) (792) (143)
- Tax credits, net of surtax effect (9,931) (4,265)
- Others, net (113) 206 (44)
----------- ----------- -----------
Income tax expense $ 59,936 $ 22,919 $ 22,076
=========== =========== ===========
Effective tax rate 16.9% 12.4% 15.6%
=========== =========== ===========
(1) The statutory tax rate is 29.7% but the applicable effective tax rate
is 19.95% and 15.10% for 2003 and 2002, respectively due to tax
exemption benefits for foreign invested company under the Korean Tax
Preference Control Law ("TPCL"). In accordance with the TPCL and upon
the approval of the Korean government, the Company is 100% exempt from
corporate income taxes on taxable income arising from the sales of
manufactured goods in proportion to the percentage of qualified foreign
shareholder's equity for seven years and 50% exempt for the subsequent
three years. The 100% exemption expired in 2003 and the 50% exemption
expires in 2006.
(2) As a result of the revision of the Korean Corporate Tax Law, the
statutory tax rate applicable from beginning of 2002 was decreased to
29.7%. In addition, the statutory tax rate applicable from beginning of
2005 will be decreased to 27.5% according to the revision of the Korean
Corporate Tax Law in December 2003. Therefore, the Company recognized
deferred tax assets and liabilities as of December 31, 2003 and 2001
based on the revised tax rates.
Significant components of deferred income tax assets and liabilities are as
follows:
(in thousands) 2003 2002
Deferred income tax assets
Deferred foreign exchange loss $ 34 $ 69
Inventories 550 78
----------- -----------
584 147
Deferred income tax liabilities
Property, plant and equipment $ (11,640) $ (4,907)
Reserve for technology development (2,802) (1,194)
Other (51)
----------- -----------
(14,442) (6,152)
----------- -----------
Deferred income tax liabilities, net $ (13,858) $ (6,005)
=========== ===========
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
December 31, 2003 and 2002
- --------------------------------------------------------------------------------
8. Stockholders' Equity
The components of and changes in stockholders' equity are as follows:
(in thousands) 2003 2002 2001
Preferred Stock $ 349 $ 349 $ 349
=========== =========== ===========
Common Stock $ 20,040 $ 20,040 $ 20,040
=========== =========== ===========
Retained Earnings:
Balance at the beginning of year $ 352,118 $ 237,609 $ 153,148
Net income 294,767 161,636 119,379
Dividends paid to preferred shareholders (1,081) (795) (453)
Dividends paid to common shareholders (63,078) (46,332) (34,465)
----------- ----------- -----------
Balance at end of year $ 582,726 $ 352,118 $ 237,609
=========== =========== ===========
Accumulated Other Comprehensive
(Income) Loss:
Balance at the beginning of year $ 612 $ (21,506) $ (14,481)
Foreign currency translation adjustment (4,842) 22,118 (7,025)
----------- ----------- -----------
Balance at end of year $ (4,230) $ 612 $ (21,506)
=========== =========== ===========
Total Stockholders' Equity $ 598,885 $ 373,119 $ 236,492
=========== =========== ===========
Total comprehensive income is as follows:
(in thousands) 2003 2002 2001
Net income $ 294,767 $ 161,636 $ 119,379
Foreign currency translation adjustment (4,842) 22,118 (7,025)
----------- ----------- -----------
Total comprehensive income $ 289,925 $ 183,754 $ 112,354
=========== =========== ===========
Preferred Stock
There were 41,000 shares of non-voting preferred stock with a par value of
$8.51 issued and outstanding as of December 31, 2003 and 2002. Each share
of preferred stock is entitled to non-cumulative dividends at the rate of
5% of par value. In addition, in case the dividend ratio of common stock
exceeds that of preferred stock, the additional dividend on preferred stock
may be declared by a resolution of the general shareholders' meeting.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
December 31, 2003 and 2002
- -------------------------------------------------------------------------------
Retained Earnings
Retained earnings as of December 31, 2003 and 2002 comprised of the
following:
(in thousands) 2003 2002
Appropriated
Legal reserve $ 9,734 $ 8,649
Reserve for business development 30,800 30,800
Reserve for technology development 8,239 4,916
Reserve for export loss 215
Voluntary reserve 4,157 4,157
----------- -----------
52,930 48,737
Unappropriated 529,796 303,381
----------- -----------
$ 582,726 $ 352,118
=========== ===========
Legal Reserve
The Commercial Code of the Republic of Korea requires the Company to
appropriate a portion of retained earnings as a legal reserve in an amount
equal to a minimum of 10% of its cash dividends until such reserve equals
50% of its capital stock. The reserve is not available for dividends, but
may be transferred to capital stock or used to reduce accumulated deficit,
if any, through an appropriate resolution by the Company's shareholders.
Reserve for Business Development
Pursuant to the Corporate Income Tax Law of Korea, the Company is allowed
to appropriate retained earnings as a reserve for business development.
This reserve is not available for dividends, but may be transferred to
capital stock or used to reduce accumulated deficit, if any, through an
appropriate resolution by the Company's shareholders.
Reserve for Technology Development and Export Loss
Pursuant to the former Korean Tax Exemption and Reduction Control Law and
the Korean Tax Preference Control Law, the Company appropriates retained
earnings as a reserve for technology development and a reserve for export
loss. These reserves are not available for dividends until used for the
specified purpose or reversed.
Voluntary Reserve
The Company appropriates a certain portion of retained earnings pursuant to
shareholder resolution as a voluntary reserve. This reserve may be reversed
and transferred to unappropriated retained earnings by the resolution of
shareholders and may be distributed as dividends after reversal.
9. Commitments and Contingencies
Lines of Credit
The Company has entered into bank overdraft agreements for borrowings up to
$4,591 thousand and trade financing agreements up to $5,000 thousand with
local banks as of December 31, 2003. As of December 31, 2003, the Company
used trade financing agreements up to $225 thousand.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
December 31, 2003 and 2002
- -------------------------------------------------------------------------------
Business and Credit Risk Concentration
The Company sells its products on a credit basis to customers, including
certain related parties. Management estimates the collectibility of
accounts receivable based on the financial condition of customers and
prevailing economic trends. Based on management's estimates, the Company
established allowances for doubtful accounts receivable which management
feels are adequate. Concentrations of credit risk with respect to accounts
receivable are limited to the credit worthiness of the Company's customers.
Four major customers of the Company are three domestic TFT-LCD makers
incorporated in Korea and one domestic Color-Filter maker incorporated in
Korea. Trade accounts receivables from the four major customers are 92% and
96% of total trade accounts receivable of the Company as of December 31,
2003 and 2002, respectively and revenues from the four major customers are
95%, 96% and 94% of total revenues of the Company for the years ended
December 31, 2003, 2002 and 2001, respectively.
In addition, a substantial portion of the Company's long-term debt is
denominated in foreign currencies, giving rise to financial exposure from
fluctuations in currency exchange rates.
Unstable Economic Environment
In common with other Asian countries, the economic environment in the
Republic of Korea continues to be volatile. In addition, the Korean
government and the private sector continue to implement structural reforms
to historical business practices including corporate governance. The
Company may be either directly or indirectly affected by these volatile
economic conditions and the reform program described above. The
accompanying financial statements reflect management's assessment of the
impact to date of the economic environment on the financial position and
results of operations of the Company. Actual results may differ materially
from management's current assessment.
Item 15(c) Exhibit 12
Corning Incorporated and Subsidiary Companies
Computation of Ratio of (Losses) Earnings to Combined Fixed Charges and
Preferred Dividends:
(In millions, except ratios)
Fiscal Years ended
--------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2003 2002 2001 2000 1999
--------- -------- -------- --------- ---------
(Loss) income from continuing operations before
taxes on income $ (759) $(2,720) $(6,161) $ 621 $ 632
Adjustments:
Distributed income of equity investees 112 83 73 45 51
Amortization of capitalized interest 6 9 10 11 14
Fixed charges net of capitalized interest 176 207 191 135 118
--------- ------- ------- ----- ------
(Loss) earnings before taxes and fixed charges as adjusted $ (465) $(2,421) $(5,887) $ 812 $ 815
========= ======= ======= ===== ======
Fixed charges:
Interest incurred $ 158 $ 186 $ 202 $ 163 $ 135
Portion of rent expense which represents an appropriate
interest factor 22 28 30 25 20
Amortization of debt costs 5 6 8 4 4
--------- ------- ------- ----- ------
Total fixed charges 185 220 240 192 159
Capitalized interest (9) (13) (49) (57) (41)
--------- ------- ------- ----- ------
Total fixed charges net of capitalized interest $ 176 $ 207 $ 191 $ 135 $ 118
========= ======= ======= ===== ======
Preferred dividends:
Preferred dividend requirement $ 128 $ 1 $ 1 $ 3
Ratio of pre-tax income to income before minority interest
and equity earnings 2.6 1.4
------- ------- ----- ------
Pre-tax preferred dividend requirement 128 1 3 4
Total fixed charges $ 185 220 240 192 159
--------- ------- ------- ----- ------
Fixed charges and pre-tax preferred dividend requirement $ 185 $ 348 $ 241 $ 195 $ 163
========= ======= ======= ===== ======
Ratio of earnings to fixed charges * * * 4.2x 5.1x
========= ======= ======= ===== =====
Ratio of earnings to combined fixed charges and preferred
dividends * * * 4.2x 5.0x
========= ======= ======= ===== =====
* Loss before taxes and fixed charges as adjusted were inadequate to cover
total fixed charges by approximately $650 million, $2.6 billion and $6.1
billion and inadequate to cover fixed charges and pre-tax preferred dividend
requirement by approximately $650 million, $2.8 billion and $6.1 billion at
December 31, 2003, 2002 and 2001, respectively.
Item 15(c) Exhibit 21
Corning Incorporated and Subsidiary Companies
Subsidiaries of the Registrant as of December 31, 2003 are listed below:
Beijing CCS Optical Fiber Cable Co., Ltd. China
CCS Holdings, Inc. Delaware
Corning (China) Limited Hong Kong
Corning (Shanghai) Co., Ltd. China
Corning Asahi Video Products Company (Partnership) Delaware
Corning Cable Systems GmbH & Co. KG Germany
Corning Cable Systems Limited United Kingdom
Corning Cable Systems LLC North Carolina
Corning Cable Systems Pty. Ltd. Australia
Corning Display Technologies Taiwan Co., Ltd. Taiwan
Corning Finance B.V. The Netherlands
Corning Gilbert Inc. Delaware
Corning GmbH Germany
Corning Holding GmbH Germany
Corning IntelliSense LLC Delaware
Corning International Corporation Delaware
Corning International KK Japan
Corning Japan KK Japan
Corning Lasertron, Inc. Massachusetts
Corning Limited United Kingdom
Corning Mexicana, S.A. de C.V. Mexico
Corning NetOptix, Inc. Delaware
Corning O.T.I. Srl Italy
Corning Photonic Technologies, Inc. Delaware
Corning Oak Holding Inc. Delaware
Corning Optical Fiber (Partnership) United Kingdom
Corning Products South Africa (Pty) Ltd. South Africa
Corning Property Management Corporation Delaware
Corning S.A.S. France
Corning Science Mexico, S.A. de C.V. Mexico
Corning Tropel Corporation Delaware
Gilbert Engineering France, SA France
Norddeutsche Seekabelwerke GmbH & Co. KG Germany
NSW Submarine Cable Systems, Inc. Delaware
OOO Corning SNG Russia
Shanghai Fiber Optics Co., Ltd. China
Societe D'Appareillages Electroniques (S.A.E.) France
Item 15(c) Exhibit 21
Corning Incorporated and Subsidiary Companies
Companies accounted for under the equity method as of December 31, 2003
are listed below:
Advanced Cable Systems Corporation Japan
Chengdu CCS Optical Fiber Cable Co., Ltd. China
Cormetech, Inc. Delaware
Dow Corning Corporation Michigan
Egytech Telecom Cables & Networks Company S.A.E. Egypt
Eurokera North America, Inc. Delaware
Eurokera S.N.C. France
Fiber Optic Cable & Accessories Limited Vietnam
Keraglass S.N.C. France
Leader Optic Fiber Cable Sdn Bhd Malaysia
Pittsburgh Corning Corporation Pennsylvania
Pittsburgh Corning Europe N.V. Belgium
PT Communication Cable Systems Indonesia Indonesia
Samsung Corning Co., Ltd. Korea
Samsung Corning Precision Glass Co., Ltd. Korea
Summary financial information on Corning's equity basis companies is included in
Note 10 (Investments) to the Consolidated Financial Statements in this Annual
Report on Form 10-K. Certain subsidiaries, which considered in the aggregate as
a single subsidiary, that would not constitute a significant subsidiary, per
Regulation S-X, Article 1, as of December 31, 2003, have been omitted from this
exhibit.
Item 15(c) Exhibit 23
Consent of Independent Accountants
PricewaterhouseCoopers LLP
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-55345, 33-58193, 333-24337, 333-26049,
333-26151, 333-41246, 333-61975, 333-61983, 333-91879, 333-95693, 333-60480,
333-82926, 333-87128, 333-106265, and 333-109405) and Form S-3 (Nos. 333-41244,
333-57082, and 333-100302) of Corning Incorporated of our report dated January
22, 2004, except for Note 22, as to which the date is March 1, 2004, relating
to the financial statements and financial statement schedule, which appears in
this Form 10-K.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 1, 2004
Exhibit 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, James R. Houghton, Chairman and Chief Executive Officer of Corning
Incorporated, certify that:
1. I have reviewed this annual report on Form 10-K of Corning Incorporated
(the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officer(s) 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this annual
report based on such evaluation; and
c) disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) 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
functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
March 1, 2004
/s/ James R. Houghton
------------------------------------------------
James R. Houghton
Chairman and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION
I, James B. Flaws, Vice Chairman and Chief Financial Officer of Corning
Incorporated, certify that:
1. I have reviewed this annual report on Form 10-K of Corning Incorporated
(the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officer(s) 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this annual
report based on such evaluation; and
c) disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) 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
functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
March 1, 2004
/s/ James B. Flaws
------------------------------------------------
James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned James R. Houghton, Chairman and Chief Executive Officer of
Corning Incorporated (the "Company") and James B. Flaws, Vice Chairman and Chief
Financial Officer of the Company, certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K of the Company for the year ended December
31, 2003 (the "Report") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Dated: March 1, 2004
/s/ James R. Houghton
--------------------------------------------
James R. Houghton
Chairman and Chief Executive Officer
/s/ James B. Flaws
--------------------------------------------
James B. Flaws
Vice Chairman and Chief Financial Officer
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Corning Incorporated, a New York corporation (the "Corporation"),
does hereby make, constitute and appoint Katherine A. Asbeck, William D. Eggers
and James B. Flaws and each or any one of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as director and/or officer of the Corporation to (1) a Form 10-K, Annual
Report, pursuant to the Securities Exchange Act of 1934, as amended (the "1934
Act"), for the fiscal year ended December 31, 2003, or other applicable form,
including any and all exhibits, schedules, amendments, supplements and
supporting documents thereto, including, but not limited to, the Form 11-K
Annual Reports of the Corporation's 401(k) Plans and similar plans pursuant to
the 1934 Act, and all amendments, supplementations and corrections thereto, to
be filed by the Corporation with the Securities and Exchange Commission (the
"SEC"), as required in connection with its registration under the 1934 Act; and
(2) one or more Registration Statements, on Form S-8, or other applicable forms,
and all amendments, including post-effective amendments, thereto, to be filed by
the Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended, of securities of the Corporation, and to
file the same, with all exhibits thereto and other supporting documents, with
the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
4th of February, 2004.
/s/ John Seely Brown
------------------------------
John Seely Brown
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Corning Incorporated, a New York corporation (the "Corporation"),
does hereby make, constitute and appoint Katherine A. Asbeck, William D. Eggers
and James B. Flaws and each or any one of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as director and/or officer of the Corporation to (1) a Form 10-K, Annual
Report, pursuant to the Securities Exchange Act of 1934, as amended (the "1934
Act"), for the fiscal year ended December 31, 2003, or other applicable form,
including any and all exhibits, schedules, amendments, supplements and
supporting documents thereto, including, but not limited to, the Form 11-K
Annual Reports of the Corporation's 401(k) Plans and similar plans pursuant to
the 1934 Act, and all amendments, supplementations and corrections thereto, to
be filed by the Corporation with the Securities and Exchange Commission (the
"SEC"), as required in connection with its registration under the 1934 Act; and
(2) one or more Registration Statements, on Form S-8, or other applicable forms,
and all amendments, including post-effective amendments, thereto, to be filed by
the Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended, of securities of the Corporation, and to
file the same, with all exhibits thereto and other supporting documents, with
the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
4th of February, 2004.
/s/ James B. Flaws
------------------------------
James B. Flaws
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Corning Incorporated, a New York corporation (the "Corporation"),
does hereby make, constitute and appoint Katherine A. Asbeck, William D. Eggers
and James B. Flaws and each or any one of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as director and/or officer of the Corporation to (1) a Form 10-K, Annual
Report, pursuant to the Securities Exchange Act of 1934, as amended (the "1934
Act"), for the fiscal year ended December 31, 2003, or other applicable form,
including any and all exhibits, schedules, amendments, supplements and
supporting documents thereto, including, but not limited to, the Form 11-K
Annual Reports of the Corporation's 401(k) Plans and similar plans pursuant to
the 1934 Act, and all amendments, supplementations and corrections thereto, to
be filed by the Corporation with the Securities and Exchange Commission (the
"SEC"), as required in connection with its registration under the 1934 Act; and
(2) one or more Registration Statements, on Form S-8, or other applicable forms,
and all amendments, including post-effective amendments, thereto, to be filed by
the Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended, of securities of the Corporation, and to
file the same, with all exhibits thereto and other supporting documents, with
the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
4th of February, 2004.
/s/ Gordon Gund
------------------------------
Gordon Gund
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Corning Incorporated, a New York corporation (the "Corporation"),
does hereby make, constitute and appoint Katherine A. Asbeck, William D. Eggers
and James B. Flaws and each or any one of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as director and/or officer of the Corporation to (1) a Form 10-K, Annual
Report, pursuant to the Securities Exchange Act of 1934, as amended (the "1934
Act"), for the fiscal year ended December 31, 2003, or other applicable form,
including any and all exhibits, schedules, amendments, supplements and
supporting documents thereto, including, but not limited to, the Form 11-K
Annual Reports of the Corporation's 401(k) Plans and similar plans pursuant to
the 1934 Act, and all amendments, supplementations and corrections thereto, to
be filed by the Corporation with the Securities and Exchange Commission (the
"SEC"), as required in connection with its registration under the 1934 Act; and
(2) one or more Registration Statements, on Form S-8, or other applicable forms,
and all amendments, including post-effective amendments, thereto, to be filed by
the Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended, of securities of the Corporation, and to
file the same, with all exhibits thereto and other supporting documents, with
the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
4th of February, 2004.
/s/ John M. Hennessy
------------------------------
John M. Hennessy
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Corning Incorporated, a New York corporation (the "Corporation"),
does hereby make, constitute and appoint Katherine A. Asbeck, William D. Eggers
and James B. Flaws and each or any one of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as director and/or officer of the Corporation to (1) a Form 10-K, Annual
Report, pursuant to the Securities Exchange Act of 1934, as amended (the "1934
Act"), for the fiscal year ended December 31, 2003, or other applicable form,
including any and all exhibits, schedules, amendments, supplements and
supporting documents thereto, including, but not limited to, the Form 11-K
Annual Reports of the Corporation's 401(k) Plans and similar plans pursuant to
the 1934 Act, and all amendments, supplementations and corrections thereto, to
be filed by the Corporation with the Securities and Exchange Commission (the
"SEC"), as required in connection with its registration under the 1934 Act; and
(2) one or more Registration Statements, on Form S-8, or other applicable forms,
and all amendments, including post-effective amendments, thereto, to be filed by
the Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended, of securities of the Corporation, and to
file the same, with all exhibits thereto and other supporting documents, with
the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
4th of February, 2004.
/s/ James R. Houghton
------------------------------
James R. Houghton
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Corning Incorporated, a New York corporation (the "Corporation"),
does hereby make, constitute and appoint Katherine A. Asbeck, William D. Eggers
and James B. Flaws and each or any one of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as director and/or officer of the Corporation to (1) a Form 10-K, Annual
Report, pursuant to the Securities Exchange Act of 1934, as amended (the "1934
Act"), for the fiscal year ended December 31, 2003, or other applicable form,
including any and all exhibits, schedules, amendments, supplements and
supporting documents thereto, including, but not limited to, the Form 11-K
Annual Reports of the Corporation's 401(k) Plans and similar plans pursuant to
the 1934 Act, and all amendments, supplementations and corrections thereto, to
be filed by the Corporation with the Securities and Exchange Commission (the
"SEC"), as required in connection with its registration under the 1934 Act; and
(2) one or more Registration Statements, on Form S-8, or other applicable forms,
and all amendments, including post-effective amendments, thereto, to be filed by
the Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended, of securities of the Corporation, and to
file the same, with all exhibits thereto and other supporting documents, with
the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
4th of February, 2004.
/s/ James J. O'Connor
------------------------------
James J. O'Connor
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Corning Incorporated, a New York corporation (the "Corporation"),
does hereby make, constitute and appoint Katherine A. Asbeck, William D. Eggers
and James B. Flaws and each or any one of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as director and/or officer of the Corporation to (1) a Form 10-K, Annual
Report, pursuant to the Securities Exchange Act of 1934, as amended (the "1934
Act"), for the fiscal year ended December 31, 2003, or other applicable form,
including any and all exhibits, schedules, amendments, supplements and
supporting documents thereto, including, but not limited to, the Form 11-K
Annual Reports of the Corporation's 401(k) Plans and similar plans pursuant to
the 1934 Act, and all amendments, supplementations and corrections thereto, to
be filed by the Corporation with the Securities and Exchange Commission (the
"SEC"), as required in connection with its registration under the 1934 Act; and
(2) one or more Registration Statements, on Form S-8, or other applicable forms,
and all amendments, including post-effective amendments, thereto, to be filed by
the Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended, of securities of the Corporation, and to
file the same, with all exhibits thereto and other supporting documents, with
the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
4th of February, 2004.
/s/ Jeremy R. Knowles
------------------------------
Jeremy R. Knowles
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Corning Incorporated, a New York corporation (the "Corporation"),
does hereby make, constitute and appoint Katherine A. Asbeck, William D. Eggers
and James B. Flaws and each or any one of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as director and/or officer of the Corporation to (1) a Form 10-K, Annual
Report, pursuant to the Securities Exchange Act of 1934, as amended (the "1934
Act"), for the fiscal year ended December 31, 2003, or other applicable form,
including any and all exhibits, schedules, amendments, supplements and
supporting documents thereto, including, but not limited to, the Form 11-K
Annual Reports of the Corporation's 401(k) Plans and similar plans pursuant to
the 1934 Act, and all amendments, supplementations and corrections thereto, to
be filed by the Corporation with the Securities and Exchange Commission (the
"SEC"), as required in connection with its registration under the 1934 Act; and
(2) one or more Registration Statements, on Form S-8, or other applicable forms,
and all amendments, including post-effective amendments, thereto, to be filed by
the Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended, of securities of the Corporation, and to
file the same, with all exhibits thereto and other supporting documents, with
the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
4th of February, 2004.
/s/ Deborah D. Rieman
------------------------------
Deborah D. Rieman
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Corning Incorporated, a New York corporation (the "Corporation"),
does hereby make, constitute and appoint Katherine A. Asbeck, William D. Eggers
and James B. Flaws and each or any one of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as director and/or officer of the Corporation to (1) a Form 10-K, Annual
Report, pursuant to the Securities Exchange Act of 1934, as amended (the "1934
Act"), for the fiscal year ended December 31, 2003, or other applicable form,
including any and all exhibits, schedules, amendments, supplements and
supporting documents thereto, including, but not limited to, the Form 11-K
Annual Reports of the Corporation's 401(k) Plans and similar plans pursuant to
the 1934 Act, and all amendments, supplementations and corrections thereto, to
be filed by the Corporation with the Securities and Exchange Commission (the
"SEC"), as required in connection with its registration under the 1934 Act; and
(2) one or more Registration Statements, on Form S-8, or other applicable forms,
and all amendments, including post-effective amendments, thereto, to be filed by
the Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended, of securities of the Corporation, and to
file the same, with all exhibits thereto and other supporting documents, with
the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
4th of February, 2004.
/s/ H. Onno Ruding
------------------------------
H. Onno Ruding
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Corning Incorporated, a New York corporation (the "Corporation"),
does hereby make, constitute and appoint Katherine A. Asbeck, William D. Eggers
and James B. Flaws and each or any one of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as director and/or officer of the Corporation to (1) a Form 10-K, Annual
Report, pursuant to the Securities Exchange Act of 1934, as amended (the "1934
Act"), for the fiscal year ended December 31, 2003, or other applicable form,
including any and all exhibits, schedules, amendments, supplements and
supporting documents thereto, including, but not limited to, the Form 11-K
Annual Reports of the Corporation's 401(k) Plans and similar plans pursuant to
the 1934 Act, and all amendments, supplementations and corrections thereto, to
be filed by the Corporation with the Securities and Exchange Commission (the
"SEC"), as required in connection with its registration under the 1934 Act; and
(2) one or more Registration Statements, on Form S-8, or other applicable forms,
and all amendments, including post-effective amendments, thereto, to be filed by
the Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended, of securities of the Corporation, and to
file the same, with all exhibits thereto and other supporting documents, with
the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
4th of February, 2004.
/s/ William D. Smithburg
------------------------------
William D. Smithburg
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Corning Incorporated, a New York corporation (the "Corporation"),
does hereby make, constitute and appoint Katherine A. Asbeck, William D. Eggers
and James B. Flaws and each or any one of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as director and/or officer of the Corporation to (1) a Form 10-K, Annual
Report, pursuant to the Securities Exchange Act of 1934, as amended (the "1934
Act"), for the fiscal year ended December 31, 2003, or other applicable form,
including any and all exhibits, schedules, amendments, supplements and
supporting documents thereto, including, but not limited to, the Form 11-K
Annual Reports of the Corporation's 401(k) Plans and similar plans pursuant to
the 1934 Act, and all amendments, supplementations and corrections thereto, to
be filed by the Corporation with the Securities and Exchange Commission (the
"SEC"), as required in connection with its registration under the 1934 Act; and
(2) one or more Registration Statements, on Form S-8, or other applicable forms,
and all amendments, including post-effective amendments, thereto, to be filed by
the Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended, of securities of the Corporation, and to
file the same, with all exhibits thereto and other supporting documents, with
the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
4th of February, 2004.
/s/ Peter F. Volanakis
------------------------------
Peter F. Volanakis
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Corning Incorporated, a New York corporation (the "Corporation"),
does hereby make, constitute and appoint Katherine A. Asbeck, William D. Eggers
and James B. Flaws and each or any one of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as director and/or officer of the Corporation to (1) a Form 10-K, Annual
Report, pursuant to the Securities Exchange Act of 1934, as amended (the "1934
Act"), for the fiscal year ended December 31, 2003, or other applicable form,
including any and all exhibits, schedules, amendments, supplements and
supporting documents thereto, including, but not limited to, the Form 11-K
Annual Reports of the Corporation's 401(k) Plans and similar plans pursuant to
the 1934 Act, and all amendments, supplementations and corrections thereto, to
be filed by the Corporation with the Securities and Exchange Commission (the
"SEC"), as required in connection with its registration under the 1934 Act; and
(2) one or more Registration Statements, on Form S-8, or other applicable forms,
and all amendments, including post-effective amendments, thereto, to be filed by
the Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended, of securities of the Corporation, and to
file the same, with all exhibits thereto and other supporting documents, with
the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
4th of February, 2004.
/s/ Wendell P. Weeks
------------------------------
Wendell P. Weeks
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Corning Incorporated, a New York corporation (the "Corporation"),
does hereby make, constitute and appoint Katherine A. Asbeck, William D. Eggers
and James B. Flaws and each or any one of them, the undersigned's true and
lawful attorneys-in-fact, with power of substitution, for the undersigned and in
the undersigned's name, place and stead, to sign and affix the undersigned's
name as director and/or officer of the Corporation to (1) a Form 10-K, Annual
Report, pursuant to the Securities Exchange Act of 1934, as amended (the "1934
Act"), for the fiscal year ended December 31, 2003, or other applicable form,
including any and all exhibits, schedules, amendments, supplements and
supporting documents thereto, including, but not limited to, the Form 11-K
Annual Reports of the Corporation's 401(k) Plans and similar plans pursuant to
the 1934 Act, and all amendments, supplementations and corrections thereto, to
be filed by the Corporation with the Securities and Exchange Commission (the
"SEC"), as required in connection with its registration under the 1934 Act; and
(2) one or more Registration Statements, on Form S-8, or other applicable forms,
and all amendments, including post-effective amendments, thereto, to be filed by
the Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended, of securities of the Corporation, and to
file the same, with all exhibits thereto and other supporting documents, with
the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this
4th of February, 2004.
/s/ Hansel E. Tookes II
------------------------------
Hansel E. Tookes II
The following exhibits are included only in copies of the 2003 Annual Report on
Form 10-K filed with Securities and Exchange Commission ("SEC") or are
incorporated by reference herein. Any document incorporated by reference is
identified by a parenthetical reference to the SEC filing which included such
document.
3(i) 1 Restated Certificate of Incorporation dated December 6, 2000, filed
with the Secretary of State of the State of New York on January 22,
2001 (Incorporated by reference to Exhibit 3(i) of Corning's Annual
Report on Form 10-K for the year ended December 31, 2000).
3(i) 2 Certificate of Amendment to Restated Certificate of Incorporation
filed with the Secretary of State of the State of New York on August 5,
2002 (Incorporated by reference to Exhibit 99.1 to Corning's Form 8-K
filed on August 7, 2002).
3(ii) 1 Bylaws of Corning effective as of December 6, 2000 (Incorporated by
reference to Exhibit 3(ii) of Corning's Annual Report on Form 10-K
for the year ended December 31, 2000).
3(ii) 2 Amendment to Article III, Section 9, of Bylaws of Corning effective
as of February 5, 2003 (Incorporated by reference to Exhibit 3(ii)2 of
Corning's Annual Report on Form 10-K for the year ended December 31,
2003).
4 Rights Agreement of Corning dated as of June 5, 1996 (Incorporated by
reference to Exhibit 1 to Corning's Form 8-K filed on July 10, 1996).
14 Corning Incorporated Code of Ethics for Chief Executive Officer and
Senior Financial Officer (Incorporated by reference to Appendix H-3 of
Corning's 2004 definitive Proxy Statement)
24 Powers of Attorney.
Copies of these exhibits may be obtained by writing to Ms. Denise Hauselt,
assistant general counsel and secretary, Corning Incorporated, MP-HQ-E2-10,
Corning, New York 14831.