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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, 2004
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 Purchase Right SWX Swiss Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Exchange Act Rule 12b-2). Yes X No
----- ------
As of June 30, 2004, shares held by non-affiliates of Corning Incorporated had
an aggregate market value of approximately $17.8 billion. Shares of Corning's
common stock outstanding as of February 10, 2005, were 1,409,786,061.
Documents Incorporated by Reference
Portions of the Registrant's definitive Proxy Statement dated March 1, 2005, and
filed for the Registrant's 2005 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 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 four
reportable business segments: Display Technologies, Telecommunications,
Environmental Technologies and Life Sciences.
Display Technologies Segment
Corning's Display Technologies segment manufactures glass substrates for active
matrix liquid crystal displays (LCDs), which are used primarily in notebook
computers, flat panel desktop monitors, and LCD televisions. Corning's
facilities in Kentucky, Japan and Taiwan and those of Samsung Corning Precision
Glass Co., Ltd. (Samsung Corning Precision, which is 50% owned by Corning) in
South Korea develop, manufacture and supply high quality glass substrates using
a proprietary fusion manufacturing process and technology expertise. Affiliates
of Samsung Electronics Co., Ltd. own the remaining 50% interest in Samsung
Corning Precision, which sells glass to LCD panel manufacturers in Korea. Panel
manufacturers in the other leading LCD-producing areas of the world, Japan,
Taiwan, Singapore and China, are supplied by Corning.
Corning has consistently been a leader to market with new large-generation sized
substrates used by our customers in the production of larger LCDs for monitors
and television. The company continues to be one of the first with product
innovations that help our customers produce larger, lighter, thinner and
higher-resolution displays more affordably. Glass substrates are currently
available in sizes up to Generation 6, and Generation 7 was introduced from
Samsung Corning Precision in January 2005. Large generation substrates allow LCD
manufacturers to produce larger and a greater number of panels from each
substrate. This leads to economies of scale for LCD manufacturers and is
expected to help lower display prices for consumers in the future. At the end of
2004, approximately 60% of Corning and Samsung Corning Precision's volume of LCD
glass was Generation 5 and higher.
Corning's proprietary fusion manufacturing process was invented by the company.
It is the cornerstone of Corning's technology leadership in the LCD industry.
The automated process yields high quality glass substrates with excellent
dimensional stability and uniformity - essential attributes for the production
of increasingly larger, high performance active matrix LCDs. Corning's fusion
process is scalable and has proven to be among the most effective processes in
producing large size substrates.
LCD glass manufacturing is a highly capital intensive business. Corning
continues to make significant investments to expand its liquid crystal display
glass facilities in response to anticipated customer demand. The environment is
very competitive and important success attributes include efficient
manufacturing, access to capital, technology know-how, and patents.
Patent protection and proprietary trade secrets are important to the segment's
operations. The segment has a growing portfolio of patents relating to its
products, technologies and manufacturing processes. Reference is made to the
material under the heading "Patents and Trademarks" for information relating to
patents and trademarks.
The Display Technologies segment represented 29% of Corning's sales for 2004.
Telecommunications Segment
The Telecommunications segment produces optical fiber and cable, and hardware
and equipment products for the worldwide telecommunications industry. Corning
invented the world's first low-loss optical fiber more than 30 years ago. It
offers a range of optical fiber technology products and enhancements for a
variety of applications, including premises, fiber-to-the-premises access,
metropolitan, long-haul and submarine networks. Corning makes and sells
InfiniCor(R) fibers for local area networks, data centers and central offices;
NexCor(TM) fiber for converged services networks; SMF-28e(R) single mode optical
fiber that provides additional transmission wavelengths in metropolitan and
access networks; MetroCor(R) fiber products for metropolitan networks; LEAF(R)
optical fiber for long-haul, regional and metropolitan networks; and Vascade(R)
submarine optical fibers for use in undersea networks. Corning has two large
optical fiber manufacturing facilities in North Carolina, as well as a
controlling interest in Shanghai 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 Holdings, Inc. (Corning Cable Systems), Corning Cable Systems Verwaltungs
GmbH, and Norddeutsche Seekabelwerke GmbH & Co., KG (NSW) or to cable equity
ventures such as Chengdu CCS Optical Fiber Cable Co. in China. 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, closures and
pedestals, splice and test equipment and other accessories for optical
connectivity. For copper connectivity, Corning's products include subscriber
demarcation, connection and protection devices, xDSL (different variations of
DSL) passive solutions and outside plant enclosures. 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, Mexico and
Denmark.
Patent protection is important to the segment's operations. The segment has an
extensive portfolio of patents relating to its products, technologies and
manufacturing processes. The segment licenses certain of its patents to third
parties and generates revenue from these licenses, but such royalty revenue is
not currently material to the business. Corning is also licensed to use certain
patents owned by others, and such licenses are also important to the segment's
operations. Reference is made to the material under the heading "Patents and
Trademarks" for information relating to the company's patents and trademarks.
The Telecommunications segment represented 40% of Corning's sales for 2004.
Environmental Technologies Segment
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
substrate products with higher density and greater surface area. Corning
manufactures these products in New York, Virginia, China, Germany and South
Africa. Cormetech Inc., 50% owned by Corning and 50% owned by 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. Corning sells its ceramic
substrate and filter products worldwide to manufacturers of emission control
systems who then sell to automotive and diesel engine manufacturers. Although
our sales are to the emission control systems manufacturers, the use of Corning
substrates and filters is generally required by the specifications of the
automotive and diesel engine manufacturers.
Patent protection is important to the segment's operations. The segment has an
extensive portfolio of patents relating to its products, technologies and
manufacturing processes. The segment is also licensed to use certain patents
owned by others, and such licenses are also important to the segment's
operations. Reference is made to the material under the heading "Patents and
Trademarks" for information relating to the company's patents and trademarks.
The Environmental Technologies segment represented 14% of Corning's sales for
2004.
Life Sciences Segment
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 primary brands: Corning, Costar and Pyrex. Corning manufactures these
products in Maine, New York, England and Mexico and markets them worldwide,
primarily through distributors, to government entities, pharmaceutical and
biotechnology companies, hospitals, universities and other research facilities.
Patent protection is important to the segment's operations, particularly for
some of its emerging products. The segment has a growing portfolio of patents
relating to its products, technologies and manufacturing processes. Brand
recognition, through some well known trademarks is important to the segment.
Reference is made to the material under the heading "Patents and Trademarks" for
information relating to the company's patents and trademarks.
The Life Sciences segment represented approximately 8% of Corning's sales for
2004.
Other Products
Other products made by Corning include semiconductor optics, ophthalmic glass
and plastic products, technical products, such as polarizing glass, glass for
high temperature applications and machinable glass ceramic products.
Semiconductor optics manufactured by Corning include: high-performance optical
material products; optical-based metrology instruments; and optical assemblies
for applications in the global semiconductor industry. Corning's semiconductor
optics products are manufactured in New York. Other specialty glass products
include glass lens and window components and assemblies. Other specialty glass
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.
Corning's conventional glass television business previously included a 51% owned
affiliate, Corning Asahi Video Products Company (CAV), a producer of glass
panels and funnels for cathode ray television tubes in Pennsylvania that ceased
production in the second quarter of 2003. Corning 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, China and Malaysia. Samsung Electronics Company,
Ltd. owns the remaining 50% interest in Samsung Corning.
Other products represented approximately 9% of Corning's sales for 2004.
We manufacture and process products at more than 45 plants and 15 countries.
Additional explanation regarding Corning and our four segments is presented in
Management's Discussion and Analysis of Financial Condition under Operating
Review and Results of Operations and Note 18 (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 emerged from its Chapter 11 bankruptcy
proceedings during 2004. Dow Corning's sales exceeded $3.3 billion in 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. 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, and its commitment to quality. There is no assurance that Corning
will be able to maintain its market position or competitive advantage.
Display Technologies Segment
Corning is the largest worldwide producer of glass substrates for active matrix
LCD displays. That market position remained relatively stable over the past
year. Corning believes it has competitive advantages in LCD glass substrate
products by investing in new technologies, offering a consistent source of
reliable supply and using its proprietary fusion manufacturing process. This
competitive advantage allows us to deliver glass that is larger, thinner and
lighter with exceptional surface quality. Asahi Glass, Nippon Electric Glass and
NH Techno are Corning's principal competitors in display glass substrates. In
addition, new entrants are seeking to expand their presence in this business.
Telecommunications Segment
Competition within the telecommunications equipment 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, Pirelli and Draka Comteq. Furukawa OFS is Corning's largest
competitor. For optical fiber cable products, Corning's primary competitors are
Furukawa OFS, Pirelli, Draka Comteq, Alcoa Fujikura and Sumitomo.
For hardware and equipment products, significant competitors are 3M Company
(3M), Tyco Electronics, Furukawa OFS, CommScope, and ADC Communications.
Environmental Technologies Segment
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. The heavy duty and light
duty diesel vehicle market opportunities are still emerging. Corning's
Environmental Technologies products face principal competition from NGK, Denso,
Ibiden and Emitec.
Life Sciences Segment
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 2004.
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. Corning also faces increasing competition from certain
distributors that have backward integrated or introduced private label products.
Other Products
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.
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, although there has been a shift in the
industry as end-market customers have turned to flat panel displays or
projection technologies. Samsung Corning seeks to maintain its 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.
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, the cost of energy
has increased. 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, polymers, 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 alternate glass compositions
that would allow operations to continue without interruption in the event of
specific materials shortages.
Certain key materials used in the manufacturing of products are currently sole
sourced or available only from a limited number of suppliers. 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 2004, Corning was granted over 300 patents in the U.S. and over
300 patents in countries outside the U.S.
Each business segment possesses its own patent portfolio that provides certain
competitive advantages in protecting Corning's innovations. Corning has
historically enforced, and will continue to enforce, its intellectual property
rights. At the end of 2004, Corning and its subsidiaries owned over 4,900
unexpired patents in various countries of which over 2,400 were U.S. patents.
Between 2005 and 2007, 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 3,300 patent applications in process, with over 825
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 Display Technologies segment has over 200 patents in various countries of
which over 80 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 patents
relating to glass compositions and methods for the use and manufacture of glass
substrates for display applications. There is no group of important Display
Technology segment patents set to expire between 2005 and 2007.
The Telecommunications segment has over 2,100 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 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 and electrical connectors and
associated methods of manufacture. While a particular U.S. patent related to one
type of low loss optical fiber will expire in 2005, there is no group of
important Telecommunications segment patents set to expire between 2005 and
2007.
The Environmental Technologies segment has over 550 patents in various countries
of which over 250 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
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. While a particular U.S. patent related to the
process of mixing and extruding certain ceramic materials will expire in 2005,
there is no group of important Environmental segment patents set to expire
between 2005 and 2007.
The Life Sciences segment has over 180 patents in various countries of which
over 75 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 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. There is no group of important Life Sciences segment patents set to
expire between 2005 and 2007.
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.
Corning's principal trademarks include the following: Corning, Celcor,
Discovering Beyond Imagination, DuraTrap, Eagle2000, Flame of Discovery Design,
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 $16 million in 2004 and are
estimated to be $26 million in 2005.
Corning's 2004 operating results from continuing operations were charged with
approximately $40 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 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 Report. 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 Report,
including statements related to markets for our products and trends in our
business that involve a number of risks and uncertainties. Our separate
statement labeled Forward-Looking Statements should be considered in addition to
the statements below.
Our sales could be negatively impacted if one or more of our key customers
substantially reduce orders for our products
Our customer base is relatively concentrated with less than 10 significant
customers accounting for a high percentage (greater than 50%) of net sales in
most of our businesses, including those purchasing LCD glass. However, no
individual customer accounts for more than 10% of consolidated sales.
Our Display Technologies, Telecommunications, Environmental Technologies,
and Life Sciences segments have concentrated customer bases. If we lose a
significant customer in any of these businesses, or if one or more significant
customers reduce orders, our sales could be negatively impacted. Corning
manufactures and sells glass substrates to a concentrated customer base
comprised of LCD panel makers primarily located in Japan and Taiwan. The most
significant customers in these markets are AU Optronics Corp., Chi Mei
Optoelectronics Corp., Hannstar Display Corp., Quanta Display Inc., Sharp
Corporation, and Toppan CFI (Taiwan) Co., Ltd. For the twelve months ended
December 31, 2004, these six LCD customers accounted for 76% of the Display
Technologies segment sales. In addition, Samsung Corning Precision's sales were
also concentrated, with three LCD panel makers in Korea (Samsung Electronics
Co., Ltd., LG Philips LCD Co., and BOE Hydis Technology Co., Ltd.) accounting
for 88% of sales for the twelve months ended December 31, 2004.
Although the sale of LCD glass substrates increased in 2004, there can be
no assurance that positive trends will continue. Our customers are LCD 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.
Additionally, consumer preferences for panels of differing sizes, or price or
other factors, may lead to pauses in market growth from time to time. There is
further risk that our customers may not be able to maintain profitable
operations or access sufficient capital to fund ongoing expansions.
Our Telecommunications segment customers' purchases of our products are
affected by their capital expansion plans, general market and economic
uncertainty and regulatory changes, including broadband policy. For the twelve
months ended December 31, 2004, one customer accounted for approximately 13% of
our Telecommunications segment sales, and 10 customers accounted for 47% of
total segment sales. Sales growth in the Telecommunications segment is largely
dependent on the continuation of the recent Verizon fiber-to-the-premises
project. Should this deployment not occur at the pace anticipated, our future
sales would be adversely impacted.
In the Environmental Technologies segment, sales of our ceramic substrate
and filter products for automotive and diesel emissions and pollution control
fluctuate with production and sales of automobiles and other vehicles, as well
as changes in governmental laws and regulations for air quality and emission
controls. Sales in our Environmental Technologies segment are primarily to four
manufacturers of emission control systems who then sell to automotive and diesel
engine manufacturers.
Sales in our Life Sciences segment are primarily through two large
distributors to government entities, pharmaceutical and biotechnology companies,
hospitals, universities and other research facilities. One of Life Sciences
primary distributors has recently communicated its intent to change its ongoing
business strategy. Subsequent to December 31, 2004, Corning notified this
distributor that we will not renew its existing distribution agreement, which
will expire in April 2005. We are actively working to transition the sales
through this distributor to our remaining primary distributor and other existing
and developing channels. However, this change will likely adversely impact sales
volumes in the short term.
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 levels
anticipated
We are investing heavily in additional manufacturing capacity of certain
businesses, including $640 million in 2004 to expand our liquid crystal display
glass facilities in response to anticipated increases in customer demand and
$124 million in anticipation of the emerging market for diesel emission control
systems. The speed of constructing the new facilities presents challenges. We
may face technical and process issues in moving to commercial production
capacity. There can be no assurance that Corning will be able to pace its
capacity expansion to the actual demand. While the industry has grown rapidly,
it is possible that glass manufacturing capacity may exceed customer demand
during certain periods.
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
requirements of our customers. We will need to develop new manufacturing
processes and techniques to achieve targeted volume, pricing and cost levels
that will permit profitable operations. While we continue to fund projects to
improve our manufacturing techniques and processes, we may not achieve
satisfactory cost levels in our manufacturing activities that will fully satisfy
our yield and margin targets.
We have incurred, and may in the future incur, restructuring and other charges,
the amounts of which are difficult to predict accurately
As a result of a severe decline in the telecommunications industry
beginning in 2001, we have recorded several charges for restructuring,
impairment of assets, and the write-off of cost and equity based investments,
most recently in the third quarter of 2004. It is possible we may record
additional charges for restructuring or other asset impairments if additional
actions become necessary to align costs to a reduced level of demand, or respond
to increased competition, regulatory actions, or other factors impacting our
businesses.
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 substrates for
liquid crystal displays, optical fiber and environmental substrate
products that can command competitive prices in the marketplace;
. our ability to maintain or achieve a favorable sales mix of large
generation sizes of display glass;
. 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 in the Environmental
Technologies segment and Telecommunications segment products
associated with fiber-to-the-premises;
. continued strong demand for notebook computers;
. the rate of substitution by end-users purchasing LCD monitors to
replace cathode ray tube monitors;
. the rate of growth in purchases of LCD televisions to replace other
technologies;
. fluctuations in inventory levels in the supply chain of LCD-based
consumer electronics;
. the ability to reallocate LCD glass to other customers in response to
canceled orders; or
. the rate of growth of the fiber-to-the-premises build-out in North
America.
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 2004,
particularly in our optical fiber and cable products. We anticipate pricing
pressures will continue into 2005 and beyond. Increased pricing pressure is
likely in our Display Technologies segment as our customers strive to reduce
their costs.
We have incurred, and may in the future incur, goodwill and other intangible
asset impairment charges
At December 31, 2004, Corning had goodwill of $282 million (including $123
million related to the Telecommunications segment). During the third quarter of
2004, we recorded a $1,420 million impairment charge to write-down the
Telecommunications segment goodwill balance to its estimated fair value.
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 or change based on market
conditions.
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. Our ratings as of February 22, 2005 were
BB+ from both Fitch and Standard & Poor's and Ba2 from Moody's. Any downgrades
may increase our borrowing costs and affect our ability to access the debt
capital markets.
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
41% at December 31, 2004. This covenant limits our ability to borrow funds.
Future losses or significant charges could materially increase our total debt to
capital ratio which may reduce the amounts we are able to borrow under our
existing revolving credit facility or adversely affect our ability to negotiate
a new revolving credit facility in 2005. Our revolving credit facility expires
in August 2005 and we are currently negotiating with leading financial
institutions to arrange a new credit facility. We believe that a new credit
facility will be arranged and executed in the first half of 2005 on competitive
terms and conditions. Corning is seeking up to a $1 billion credit facility with
up to a five year term. Among the terms and conditions being negotiated, Corning
believes it will be subject to two financial covenants.
If our products or materials 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 materials
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
materials 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.
We face intense competition in most of our businesses
We expect that we will face additional competition from existing
competitors, low cost manufacturers and new entrants. 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, or companies with lower operating costs 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. We cannot
provide assurance 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 that may result in loss
of revenue or require us to incur substantial costs. We cannot assure you as to
the outcome of such claims.
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 $446 million have been incurred through December 31, 2004; 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 South Korea that make liquid
crystal display glass and in China that make 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 including anti-dumping
duties;
. undeveloped legal systems; and
. political and economic instability in foreign markets.
We face risks through our equity method investments in companies that we do not
control
Corning's net income includes significant equity in earnings of associated
companies. For the year ended December 31, 2004, we have recognized $443 million
of equity earnings, of which $393 million came from our two largest investments;
Dow Corning Corporation (which makes silicone products) and Samsung Corning
Precision Glass Co., Ltd. (which makes liquid crystal display glass). Samsung
Corning Precision is located in the Asia-Pacific region and, as such, is subject
to those geographic risks referred to above. 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. During 2003, we recognized charges associated with Samsung Corning Co.,
Ltd. (our 50% equity method investment that makes glass panels and funnels for
conventional televisions), which recorded significant fixed asset impairment
charges. During 2004, we have recognized charges associated with Dow Corning
Corporation, which recorded charges for restructuring actions and bankruptcy
related settlement activities. It is possible that future earnings could be
negatively impacted by additional charges recorded by our equity method
investments.
We face risks due to foreign currency fluctuations
Because we have significant customers and operations outside the U.S.,
fluctuations in foreign currencies, especially the Japanese Yen and Euro, 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. Sales in our Display Technologies segment are denominated in Japanese
Yen. For 2004, the Display Technologies segment represented 29% of Corning's
sales. Based on the expected sales growth of the Display Technologies segment,
our exposure to currency fluctuations is increasing. Although we hedge
significant transaction risk, we do not currently hedge translation risk.
If the financial condition of our customers declines, our credit risks could
increase
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, including deposits due under long-term purchase and supply
agreements in our Display Technologies segment, we could experience reduced cash
flows and losses in excess of amounts reserved. As of December 31, 2004,
reserves for trade receivables totaled approximately $30 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 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 policies could require us
to pay substantial sums. Some of the carriers in our excess insurance programs
are in liquidation and may not be able to respond if we should have claims
reaching into excess layers. The financial health of other insurers may
deteriorate and these insurers 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 or
war insurance.
Other
Additional information in response to Item 1 is found in Note 18 (Operating
Segments) to the consolidated financial statements and selected financial data.
Item 2. Properties
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We operate approximately 45 manufacturing plants and processing facilities, of
which approximately one half 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.
For the years ended 2004, 2003 and 2002, we invested a total of $1.6 billion,
primarily on facilities outside the U.S. in our Display Technologies segment. Of
the $857 million spent in 2004, $640 million was for facilities outside the U.S.
Manufacturing, sales and administrative, and research and development facilities
at consolidated locations have an aggregate floor space of approximately 19
million square feet. Distribution of this total area follows:
- --------------------------------------------------------------------------------
(million square feet) Total Domestic Foreign
- --------------------------------------------------------------------------------
Manufacturing 14 10 4
Sales and administrative 4 2 2
Research and development 1 1
- --------------------------------------------------------------------------------
Total 19 13 6
- --------------------------------------------------------------------------------
Total assets and capital expenditures by operating segment are included in Note
18 (Operating Segments) to the Consolidated Financial Statements. Information
concerning lease commitments is included in Note 13 (Commitments, Contingencies,
Guarantees and Hedging Activities) to the Consolidated Financial Statements.
During 2004, we continued the restructuring program that closed or consolidated
certain smaller manufacturing facilities. Throughout 2005 we expect to have
excess capacity, primarily in our Telecommunications segment, 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.
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 11 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 $14 million for its estimated
liability for environmental cleanup and litigation at December 31, 2004. Based
upon the information developed to date, management believes that the accrued
reserve is a reasonable estimate of the Company's 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 was in reorganization proceedings under Chapter 11
of the U.S. Bankruptcy Code between May 1995 and June 2004. 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. After review and approvals by the Bankruptcy Court
and the U.S. District Court of the Eastern District of Michigan, and an appeal,
the District Court on April 2, 2004 entered an order establishing June 1, 2004
as the effective date of the Joint Plan.
Under the terms of the Joint Plan, Dow Corning has established and is funding a
Settlement Trust and a Litigation Facility to provide a means for tort claimants
to settle or litigate their claims. Of the approximately $3.2 billion of
required funding, Dow Corning has paid approximately $1.6 billion (inclusive of
insurance) and expects to pay up to an additional $1.6 billion ($710 million
after-tax) over 16 years. 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. As
required by the Joint Plan, Dow Corning has fully satisfied (or reserved for)
the claims of its commercial creditors in accordance with a March 31, 2004
ruling of the District Court determining the amount of pendency interest allowed
on the $810 million in principal owing on such claims. In the second quarter of
2004, Dow Corning recorded a $47 million pre-tax adjustment to its interest
liabilities relating to this matter; Corning recognized $14 million in its
second quarter equity earnings for its after tax share of this adjustment.
Certain commercial creditors have appealed that ruling to the U.S. Court of
Appeals of the Sixth Circuit seeking from Dow Corning an additional sum of
approximately $80 million for interest at default rates and enforcement costs.
Corning believes the risk of loss to Dow Corning (net of sums reserved) is
remote.
In addition, Dow Corning has received a statutory notice of deficiency from the
United States Internal Revenue Service asserting tax deficiencies totaling
approximately $65.3 million relating to its federal income tax returns for the
1995 and 1996 calendar years. This matter is pending before the U.S. District
Court in Michigan. Dow Corning has also received a proposed adjustment from the
IRS (approximately $116.9 million) with respect to its federal income tax
returns for the 1997, 1998 and 1999 calendar years. Dow Corning is vigorously
contesting these deficiencies and proposed adjustments which it believes are
excessive.
In 1995, Corning fully impaired its investment in Dow Corning upon its entry
into bankruptcy proceedings and did not recognize net 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. 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 $249
million. Subject to future rulings by the bankruptcy court and potential changes
in estimated bankruptcy-related liabilities, it is possible that Dow Corning may
record bankruptcy-related charges in the future.
Corning received no dividends from Dow Corning in 2004 or in 2003. Corning
anticipates that Dow Corning will begin to pay dividends in 2005.
The Joint Plan includes releases for Corning and Dow Chemical as shareholders in
exchange for contributions to the Joint Plan. Although claims against the
shareholders were included in several thousand state and federal lawsuits filed
pre-bankruptcy, alleging injuries arising from Dow Corning's implant products,
Corning was awarded summary judgment in federal court and in several state
jurisdictions. The remaining claims against Corning will be channeled by the
Joint Plan into facilities established by the Joint Plan. Management believes
that the likelihood of a materially adverse impact to Corning's financial
statements arising from these remaining claims against shareholders is remote.
Federal Securities Cases. A federal securities class action lawsuit was filed in
1992 in the U.S. District Court for the Southern District of New York against
Corning and certain individual defendants. The action was brought in the name of
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. The nominal class consisted of those purchasers of
Corning stock in the period from June 14, 1989 to January 13, 1992. No amount of
damages was specified in the complaint. In 1997, the Court dismissed the
individual defendants from the case. On December 21, 2004, the Court granted
summary judgment in favor of Corning, dismissing all claims against it.
Plaintiffs may file an appeal to the U.S. Court of Appeals. 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 October 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 proved 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. The Court heard
arguments on May 29 and June 9, 2003 and on April 9, 2004 entered a Decision and
Order dismissing the complaint. Plaintiffs appealed to the U.S. Court of Appeals
of the Second Circuit. Oral argument was held on February 2, 2005, and the Court
reserved decision. 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. As a
result of PCC's bankruptcy filing, Corning recorded an after-tax charge of $36
million in 2001 to fully impair its investment in PCC and discontinued
recognition of equity earnings. 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 11,400 other cases (approximately 43,400
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").
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.
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 was thereafter incorporated into the PCC Plan. This settlement
remains subject to a number of contingencies, including approval by the
bankruptcy court. Corning's settlement will require the contribution, if the
Plan is approved and becomes effective, of its equity interest in PCC, its
one-half equity interest in PCE, and 25 million shares of Corning common stock.
The settlement also requires Corning to make cash payments of $144 million (net
present value as of December 31, 2004) in six installments beginning one year
after 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
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 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.
During 2004, Corning recorded a charge of $33 million to reflect the
mark-to-market of Corning common stock. Beginning with the first quarter of 2003
and through December 31, 2004, Corning recorded total net charges of $446
million to reflect the initial settlement and mark-to-market the value of
Corning common stock.
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 received a favorable vote from creditors in March 2004. Hearings to
consider objections to the Plan were held in the Bankruptcy Court in May 2004.
The parties filed post-hearing briefs and made final oral arguments to the
Bankruptcy Court in November 2004. The Bankruptcy Court has allowed an
additional round of briefing to address current case law developments, with
briefs due on February 28, 2005 and March 10, 2005, leading to a hearing on
March 16, 2005. The timing and outcome are uncertain. If the Bankruptcy Court
does not confirm the PCC Plan in its current form, changes to the settlement
agreement are reasonably possible. Further judicial review is also reasonably
possible. 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
period of briefing the appeal was extended, and oral argument has not been
scheduled. 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.
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 International") 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 International has denied the
allegation of infringement, asserted that the patent is invalid, and is
defending vigorously against this lawsuit. On October 29, 2004, the Tokyo
District Court issued it's ruling in favor of CCS on both non-infringement and
patent invalidity. Furukawa has filed an appeal from this ruling. Management
believes that the likelihood of a materially adverse impact to Corning's
financial statements is remote.
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. The appellate court
affirmed the grant of the preliminary injunction, but remanded the case for the
District Court to clarify the scope of the injunction and to consider what, if
any, bond should be posted. The parties have submitted papers to the District
Court addressing the issues remanded. Additional proceedings in the District
Court are expected in the first half of 2005. 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, but that
motion has been withdrawn. Tyco has filed an answer and counterclaims to CCS's
complaint. Tyco's counterclaims allege patent infringement by CCS and seeks
unspecified monetary damages and an injunction. 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. Seventeen 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
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(a) 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.
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First Second Third Fourth
Quarter Quarter Quarter Quarter
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2004
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Price range
High $ 13.89 $ 13.19 $ 13.03 $ 12.96
Low $ 10.00 $ 10.08 $ 9.29 $ 10.16
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2003
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Price range
High $ 6.40 $ 8.49 $ 10.06 $ 12.34
Low $ 3.34 $ 5.27 $ 7.15 $ 9.23
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As of December 31, 2004, the approximate number of record holders of common
stock was 28,000 and approximately 636,000 beneficial shareholders.
Corning discontinued the payment of dividends on our common stock in 2001.
The section entitled "Equity Compensation Plan Information" in our
definitive Proxy Statement for our 2005 annual meeting of shareholders to
be held on April 28, 2005, is incorporated by reference in this Annual
Report on Form 10-K.
(b) Not applicable.
(c) This table provides information about our purchases of our common stock
during the fiscal fourth quarter of 2004:
Issuer Purchases of Equity Securities*
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Total Average Total Number of Approximate Dollar
Number Price Shares Purchased as Value of Shares that
of Shares Paid per Part of Publicly May Yet Be Purchased
Period Purchased** Share** Announced Plan* Under the Plan*
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October 1-31, 2004 4,533 $11.77 0 $0
November 1-30, 2004 60,544 $12.26 0 $0
December 1-31, 2004 0 $ 0 0 $0
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Total 65,077 $12.22 0 $0
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* During the quarter ended December 31, 2004, we did not have a publicly
announced program for repurchase of shares of our common stock and did not
repurchase our common stock in open-market transactions outside of such a
program.
** This column reflects the following transactions during the fiscal fourth
quarter of 2004: (i) the deemed surrender to us of 60,544 shares of common
stock to pay the exercise price and to satisfy tax withholding obligations
in connection with the exercise of employee stock options, and (ii) the
surrender to us of 4,533 shares of common stock to satisfy tax withholding
obligations in connection with the vesting of restricted stock issued to
employees.
Item 6. Selected Financial Data (Unaudited)
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(In millions, except per share amounts and number of employees)
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Years ended December 31,
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2004 2003 2002 2001 2000
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Results of Operations
Net sales $ 3,854 $ 3,090 $ 3,164 $ 6,047 $ 6,920
Research, development and engineering expenses $ 355 $ 344 $ 483 $ 622 $ 531
Equity in earnings of associated companies, net of
impairments $ 443 $ 209 $ 116 $ 148 $ 149
(Loss) income from continuing operations $ (2,185) $ (223) $ (1,780) $ (5,532) $ 363
Income from discontinued operations 20 478 34 59
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Net (loss) income $ (2,165) $ (223) $ (1,302) $ (5,498) $ 422
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Basic (loss) earnings per common share from: (1)
Continuing operations $ (1.57) $ (0.18) $ (1.85) $ (5.93) $ 0.42
Discontinued operations 0.01 0.46 0.04 0.07
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Basic (loss) earnings per common share $ (1.56) $ (0.18) $ (1.39) $ (5.89) $ 0.49
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Diluted (loss) earnings per common share from: (1)
Continuing operations $ (1.57) $ (0.18) $ (1.85) $ (5.93) $ 0.41
Discontinued operations 0.01 0.46 0.04 0.07
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Diluted (loss) earnings per common share $ (1.56) $ (0.18) $ (1.39) $ (5.89) $ 0.48
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Common dividends declared $ 0.12 $ 0.24
Shares used in computing per share amounts: (1)
Basic (loss) earnings per common share 1,386 1,274 1,030 933 858
Diluted (loss) earnings per common share 1,386 1,274 1,030 933 879
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Financial Position
Working capital $ 945 $ 1,141 $ 2,145 $ 2,113 $ 2,685
Total assets $ 9,710 $ 10,752 $ 11,406 $ 12,793 $ 17,526
Long-term debt $ 2,214 $ 2,668 $ 3,963 $ 4,463 $ 3,966
Shareholders' equity $ 3,816 $ 5,464 $ 4,691 $ 5,414 $ 10,633
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Supplemental Data for SFAS No. 142
Adjusted net (loss) income excluding
amortization of goodwill $ (2,165) $ (223) $ (1,302) $ (5,153) $ 625
Basic (loss) earnings per common share from: (1)
Continuing operations $ (1.57) $ (0.18) $ (1.85) $ (5.56) $ 0.66
Discontinued operations 0.01 0.46 0.04 0.07
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Basic (loss) earnings per common share $ (1.56) $ (0.18) $ (1.39) $ (5.52) $ 0.73
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Diluted (loss) earnings per common share from: (1)
Continuing operations $ (1.57) $ (0.18) $ (1.85) $ (5.56) $ 0.64
Discontinued operations 0.01 0.46 0.04 0.07
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Diluted (loss) earnings per common share $ (1.56) $ (0.18) $ (1.39) $ (5.52) $ 0.71
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Selected Data
Capital expenditures $ 857 $ 366 $ 357 $ 1,741 $ 1,485
Depreciation and amortization $ 523 $ 517 $ 661 $ 1,060 $ 747
Number of employees (2) 24,700 20,600 23,200 30,300 40,400
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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
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of Operations
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Overview
We continued to focus on three significant priorities in 2004: protect our
financial health, improve profitability, and invest in our future. We made
significant progress towards all three in 2004.
Financial Health
During 2004, we continued to strengthen our balance sheet and delivered positive
cash flows for the year. The following are key accomplishments for 2004:
.. As part of a debt reduction program, we retired $487 million of long-term
debt. Additionally, we repaid $115 million of debt, primarily attributable
to certain bondholders exercising their early repayment option.
.. We issued $400 million of long-term debt, the proceeds of which will be
used to repay debt, fund capital expenditures and extend the duration of
our debt portfolio.
.. We reduced our DSOs to 52 days, compared to 58 days as of December 31,
2003. This was accomplished through the negotiation of improved payment
terms with customers, primarily in the Display Technologies segment.
.. Negotiated multi-year supply agreements with customers in the Display
Technologies segment, including the receipt of deposits against orders, to
meet the rapid growth of the liquid crystal display (LCD) market. During
2004, we received deposits totaling $204 million under such agreements.
.. We generated sufficient cash flows from operating activities to cover our
capital expenditures.
We ended 2004 with $1.9 billion in cash, cash equivalents and short-term
investments. This represents an increase of $615 million from December 31, 2003.
We continue to have unrestricted access to a $2 billion revolving credit
facility, and have $2.5 billion of capacity under our existing universal shelf
registration statement. Our revolving credit facility expires in August 2005. We
are currently in negotiations with leading financial institutions to arrange a
credit facility, and believe a new facility will be executed in the first half
of 2005. We believe we have sufficient liquidity for the next several years to
fund operations, capital expenditures and scheduled debt repayments.
Profitability
Although 2004 resulted in a net loss of $2,165 million, this included a number
of charges that are not anticipated to recur in the future, and is therefore not
indicative of our projections for profitability in 2005. The most significant
charges included in our net loss were:
.. Goodwill and asset impairment charges of $1,746 million, primarily in our
Telecommunications segment.
.. An increase in our provision for income taxes of $937 million caused by our
decision to record a valuation allowance against certain deferred tax
assets.
The goodwill and fixed asset impairment charges were triggered from the results
of our annual strategic planning process of the Telecommunications segment.
Specifically, we determined that we needed to lower our estimates and forecasts
for the long-term revenue growth of the Telecommunications segment. Although we
are currently experiencing stronger than expected volume in this segment, the
improved demand comes from a narrow band of customers, and we see few signs of a
broader recovery in overall demand, mix of premium products, and pricing for our
products. The lack of industry consolidation, increased competitive pressures in
the industry, and revised estimates of future customer demand for the types of
products they will deploy have caused us to change our assessment of the future
pace of recovery. The primary estimates and forecasts driving this change in our
outlook are:
.. Revised estimates of future pricing for fiber and cable: Pricing in the
telecommunications industry remains depressed as the industry has failed to
reduce capacity. Our previous projections assumed some rationalization of
capacity that would lead to more stable pricing. We now expect the current
depressed pricing conditions to persist into 2005 and beyond.
.. Revised estimates of demand for premium fiber product: Based on competitive
conditions and projected future customer requirements, we do not expect to
achieve the level of demand for premium fiber products we previously
forecasted. Although we have introduced innovative products to the market,
we have not been able to obtain the historical premium prices for such
products. Additionally, demand for premium fiber has declined as there are
fewer long-haul projects. As a result, we have significantly reduced our
outlook for future revenue and profitability from premium products. We now
do not expect any significant increase in premium fiber mix for the
foreseeable future.
.. Revised estimates for the long-term worldwide market volume growth: As we
project customer demand, we have lowered the rate of volume growth in the
longer range.
As a result of the impairment charges and lower long-term outlook for our
Telecommunication segment, we have also concluded that we must provide a
valuation allowance against certain of our deferred tax assets in accordance
with Financial Accounting Standards Board Statement of Financial Accounting
Standard (SFAS) No. 109, "Accounting for Income Taxes" (SFAS 109). The valuation
allowance relates to our domestic (U.S. federal, state and local) and German
deferred tax assets. We have incurred significant losses in the U.S. and Germany
due primarily to the Telecommunications restructuring and impairment charges and
operating losses over the last four years. Although Corning's profitability has
improved over the last several quarters, a growing portion of our sales and
earnings is outside of the U.S., particularly in Asia. The U.S. portion of our
operations operated at a loss in 2004. This portion not only includes most of
our Telecommunications segment, but also a significant portion of our global
research, development and engineering and corporate infrastructure spending. As
we have taken additional significant impairment charges and lowered our outlook
for our largest U.S. based business during the third quarter, we believe that a
valuation allowance against these tax assets is required until realization is
more assured. We remain committed to return to profitability in the U.S. and
Germany so that we will be able to use these deferred tax assets before they
expire. In general, U.S. tax laws allow 20 years to use operating loss
carryforwards.
The above charges more than offset the significant earnings growth in our
Display Technologies segment and the gross margin improvements resulting from
restructuring actions taken in 2003, most notably the exit of the conventional
television and photonics businesses. We remain confident in our ability to
execute our plans and return to profitability in 2005.
Investing in our future
We remain committed to investing in innovation. We are investing in a wide
variety of technologies with our focus being glass substrates for active matrix
LCDs, diesel filters and substrates in response to tightening emissions control
standards, and the optical fiber and cable, and hardware and equipment that will
enable fiber-to-the-premises.
Our research, development and engineering expenditures have moderately increased
compared to 2003. We believe our spending levels are adequate to support our
growth strategies.
We also remain committed to investing in manufacturing capacity to match
increased demand in our businesses. Our capital expenditures are primarily
focused on expanding manufacturing capacity for LCD glass substrates in the
Display Technologies segment and diesel products in the Environmental
Technologies segment. Total capital expenditures for 2004 were $857 million, of
which $640 million was directed toward our Display Technologies segment and $124
million in anticipation of the emerging market for diesel emission control
systems.
We expect our 2005 capital spending to be in the range of $1.2 billion to $1.4
billion, of which $900 million to $1.1 billion will be directed toward our
Display Technologies segment and approximately $140 million will be directed
toward our Environmental Technologies segment.
RESULTS OF CONTINUING OPERATIONS
Selected highlights from our continuing operations follow (dollars in millions):
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% Change
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2004 2003 2002 04 vs. 03 03 vs. 02
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Net sales $ 3,854 $ 3,090 $ 3,164 25 (2)
Gross margin $ 1,415 $ 849 $ 602 67 41
(gross margin %) 37% 27% 19%
Selling, general and administrative expenses $ 653 $ 599 $ 716 9 (16)
(as a % of revenues) 17% 19% 23%
Research, development and engineering expenses $ 355 $ 344 $ 483 3 (29)
(as a % of revenues) 9% 11% 15%
Restructuring, impairment and other charges and (credits) $ 1,789 $ 111 $ 2,080 1,512 (95)
(as a % of revenues) 46% 4% 66%
Asbestos settlement $ 33 $ 413 (92)
(as a % of revenues) 1% 13%
Loss from continuing operations before income taxes $ (1,580) $ (759) $(2,720) 108 (72)
(as a % of revenues) (41)% (25)% (86)%
(Provision) benefit for income taxes $ (1,031) $ 254 $ 726 (506) (65)
(as a % of revenues) (27)% (8)% (23)%
Equity in earnings of associated companies, net of impairments $ 443 $ 209 $ 116 112 80
(as a % of revenues) 11% 7% 4%
Loss from continuing operations $ (2,185) $ (223) $(1,780) 880 (87)
(as a % of revenues) (57)% (7)% (56)%
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Net Sales
The net sales increase in 2004 was the result of strong demand for glass
substrates in our Display Technologies segment, demand for hardware and
equipment products in our Telecommunications segment, and improvements across
the majority of our other businesses. These improvements were partially offset
by the 2003 exit of our photonic technologies and U.S. conventional television
glass businesses. Movements in foreign exchange rates, primarily the Japanese
Yen and Euro, did not significantly impact the comparison of net sales between
2004 and 2003.
The net sales decline in 2003 was primarily due to the exit of the photonic
technologies and U.S. conventional television glass businesses 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 3%.
Reflecting the growth in our Display Technologies segment, net sales into
international markets are increasing at a faster rate than those into the U.S.
market. For 2004, sales into international markets accounted for 65% of net
sales while sales to the U.S. market accounted for 35%. For 2003, sales to
international markets accounted for 60% of net sales while sales to the U.S.
market for 40%.
Gross Margin
As a percentage of net sales, gross margin improved 10 points in 2004. The
improvement in overall gross margin dollars and as a percentage of net sales was
driven by (a) net sales growth in the Display Technologies segment of 87%, (b)
operating efficiencies in our Telecommunications segment and (c) the 2003 exit
of the conventional television glass business.
For 2003, gross margins improved eight points. This improvement was primarily
the result of lower costs resulting from our 2002 restructuring programs,
primarily in the Telecommunications segment. Gross margin improved in all other
reportable segments; however, the gains achieved were partially offset by a $13
million write-down of inventory related to the exit of the U.S. conventional
television business.
Selling, General and Administrative Expenses
The 2004 increase in selling, general and administrative expenses was primarily
driven by increases in compensation costs. For 2003, the decrease in selling,
general and administrative expenses reflects cost savings primarily from the
2003 and 2002 restructuring actions.
Research, Development and Engineering Expenses
Research, development and engineering expenditures increased modestly in 2004,
but the focus of our spending has shifted from Telecommunications projects to
Display Technologies projects. Expenditures on Environmental Technologies
projects have remained relatively constant and spending on Life Sciences
projects has increased $10 million. The 2003 decrease reflects the cost savings
that resulted from the 2002 restructuring actions, including the closure and
consolidation of research facilities.
Restructuring, Impairment and Other Charges and (Credits)
Corning recorded significant net charges in 2004, 2003 and 2002. These charges
are summarized in the following table (in millions):
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For the years ended December 31,
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2004 2003 2002
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Impairment of goodwill $ 1,420 $ 400
Impairment of long-lived assets other
than goodwill
Assets to be disposed of by
sale or abandonment 302 $ 41 701
Assets to be held and used 24 409
Accelerated Depreciation 37 12
Loss on sale of businesses 12 13 16
Impairment of cost investments 4 107
Restructuring charges and (credits) (6) 41 447
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Total restructuring, impairment
other charges and (credits) $ 1,789 $ 111 $ 2,080
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Impairment of Goodwill
----------------------
2004 Impairment Charge
Pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets," (SFAS
142) goodwill is required to be tested for impairment annually at the
reporting unit level. In addition, goodwill should be tested for impairment
between annual tests if an event occurs or circumstances change that would
more likely than not reduce the fair value of the reporting unit below its
related carrying value. Our annual goodwill recoverability assessment is
completed in the fourth quarter, as it is traditionally based on our annual
strategic planning process that runs from June to October. This process
includes reviewing expectations for the long-term growth of our businesses
and forecasting future cash flows. In the third quarter, we identified
certain factors during this annual strategic planning process that caused
us to lower our estimates and projections for the long-term revenue growth
of the Telecommunications segment, which indicated that it was more likely
than not that the fair value of the Telecommunications segment reporting
unit was less than its carrying value. As such, we performed an interim
impairment test of the Telecommunications segment goodwill in the third
quarter of 2004, the results of which were reviewed with Corning's board of
directors on October 6, 2004.
We estimated the fair value of the Telecommunications segment using a
discounted cash flow model based on our current estimates for the long-term
growth of the Telecommunications segment, and concluded that the fair value
of the Telecommunications segment was below its carrying amount.
Accordingly, we recorded an impairment charge of $1,420 million to reduce
the carrying value of goodwill to its estimated fair value. We updated our
Telecommunications segment goodwill test in the fourth quarter. The result
of the test concluded that the fair value of the reporting unit exceeded
its book value.
2002 Impairment Charge
In the fourth quarter of 2002, we conducted our annual impairment tests and
concluded that an impairment charge of $400 million 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.
Impairment Of Long-Lived Assets Other Than Goodwill
---------------------------------------------------
Given our restructuring actions and the market conditions facing our
businesses, at various times throughout 2002 to 2004, we performed
evaluations of the recoverability of our held for use long-lived assets
other than goodwill. In each case that an impairment evaluation was
required, we developed expected future cash flows against which to compare
the carrying value of the asset group being evaluated. 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.
2004 Impairment Charge
Assets to be disposed of by sale or abandonment
These charges comprise the following:
. Telecommunications segment: In 2004, we recorded a net charge of $344
million to impair plant and equipment related to certain facilities to
be disposed of or shutdown. Approximately $332 million of this net
charge is comprised of the partially completed sections of our
Concord, N.C. optical fiber facility. As a result of our lowered
outlook, we have permanently abandoned this construction in progress
as we no longer believe the demand for optical fiber will warrant the
investment necessary to complete this facility. Corning will continue
to mothball and depreciate the separate previously-operated portion of
the Concord fiber facility.
. Other businesses: We recorded net credits of $42 million, primarily
for gains on the sale of assets of Corning Asahi Video Products
Company (CAV) sold to a third party in China. This represented
proceeds in excess of assumed salvage values for assets previously
impaired. In July 2004, we completed the sale of CAV's assets.
Assets to be held and used
Due to our decision to permanently abandon certain assets and lower our
long-term outlook for the Telecommunications segment during the third
quarter of 2004, we determined that an event of impairment had occurred in
our Telecommunications segment which required us to test the segment's
long-lived assets other than goodwill for impairment. As a result of this
impairment evaluation, we recorded a $24 million impairment charge in the
third quarter of 2004 to write-down certain assets to fair value.
2003 Impairment Charge
Assets to be disposed of by sale or abandonment
These charges comprise the following:
. Telecommunications segment: We recorded charges of $24 million to
impair plant and equipment related to the shutdown of a cabling plant
and the final exit of the photonic technologies business. The charges
were more than offset by a $61 million credit related to previous
restructuring plans, primarily the result of decision not to exit two
of the cable sites previously marked for shutdown in 2002.
. Other businesses: We recorded charges of $78 million, primarily
related to our decision to shutdown CAV, and the closure of our North
Brookfield semiconductor materials plant.
2002 Impairment Charges
Assets to be disposed of by sale or abandonment
In 2002, in connection with the restructuring actions we recorded a net
charge of $701 million related to facilities to be shut down or dispose of,
and the abandonment of certain construction projects. These net charges
were primarily related to the Telecommunications segment and certain
research facilities.
Assets to be held and used
These charges comprise the following:
. Telecommunications segment: 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. 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
write-down of the long-lived assets including $90 million related to
patents.
. Other businesses: 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. As a
result of our impairment evaluation, CAV's assets were written down to
their estimated fair values. This resulted in a $140 million
write-down of the assets.
Accelerated Depreciation
------------------------
2004 Accelerated Depreciation
We recorded $37 million of accelerated depreciation relating to the final
shutdown of our semiconductor materials manufacturing facility in
Charleston, South Carolina, which we announced in the fourth quarter of
2003.
2003 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.
Loss on Sale of Businesses
--------------------------
2004 Loss on Sale of Business
On September 1, 2004 we completed the sale of our frequency controls
business, which was part of the Telecommunications segment, for net cash
proceeds of $80 million. We recorded a loss on the sale of $14 million,
which included an allocation of $30 million of the Telecommunications
segment goodwill. The frequency controls business had 2003 annual sales of
$76 million.
2003 Loss on Sale of Business
In the third quarter of 2003, we recorded a $13 million loss on the sale of
a significant portion of our photonic technologies business, which was part
of our Telecommunications segment.
2002 Loss on Sale of Business
We recorded a loss of $16 million upon the sale of a portion of the
controls and connectors product line, which was part of the
Telecommunications segment.
Impairment of Cost Investments
------------------------------
2003 Impairment Charge
In the first quarter of 2003, we recorded a $5 million charge for other
than temporary declines in certain cost investments in the
Telecommunications segment. In the third quarter of 2003, 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.
2002 Impairment Charge
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. As a result of this decision, we recorded a
charge of $107 million.
Restructuring Actions
---------------------
2004 Restructuring Actions
There were no significant restructuring actions taken during 2004, nor were
there any significant revisions to estimates used in prior year
restructuring plans.
2003 Restructuring Actions
Corning recorded net restructuring charges of $41 million in 2003. Major
actions approved and initiated in 2003 included the following:
. The shutdown of CAV.
. The exit of our photonics products within the Telecommunications
segment.
. Credits to prior year restructuring plans, primarily the result of our
decision not to exit two small cabling sites previously marked for
shutdown in 2002.
. The shutdown of two of our specialty materials manufacturing
facilities in North Brookfield and Charleston, South Carolina.
2002 Restructuring Actions
Corning recorded net restructuring charges of $447 million in 2002. Major
actions approved and initiated in 2002 included the following:
. Permanent closure 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.
Asbestos settlement
On March 28, 2003, we announced that we had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future non-premises asbestos claims against us and Pittsburgh Corning
Corporation (PCC), which might arise from PCC products or operations.
The agreement is expected to be incorporated into a settlement fund as part of a
reorganization plan for PCC. The plan was submitted to the federal bankruptcy
court at the end of 2003, received a favorable vote from creditor classes in the
first quarter of 2004, but remains subject to a number of contingencies. The
Bankruptcy Court has allowed an additional round of briefing to address current
case law developments, with briefs due on February 28, 2005 and March 10, 2005,
leading to a hearing on March 16, 2005. The timing and outcome of these
proceedings are uncertain. If the Bankruptcy Court does not confirm the PCC Plan
in its current form, changes to the settlement agreement are reasonably
possible. Further judicial review is also reasonably possible. Our contributions
to the settlement trust under the agreement are not required unless the plan is
approved, becomes effective and is no longer subject to appeal.
If the plan becomes effective, our settlement will require the contribution of
our equity interest in PCC, our one-half equity interest in Pittsburgh Corning
Europe N.V. (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 $144
million over six years beginning one year after the plan becomes effective. In
addition, we will assign insurance policy proceeds from our primary insurance
and a portion of our excess insurance as part of the settlement.
The following summarizes the charges we have recorded for the asbestos
settlement (in millions):
- --------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------
2004 2003
- --------------------------------------------------------------------------------
Initial settlement charge $ 298
Mark-to-market common stock $ 33 115
------- -------
Asbestos settlement $ 33 $ 413
- --------------------------------------------------------------------------------
See Legal Proceedings for a history of this matter.
Loss From Continuing Operations Before Income Taxes
In addition to the drivers identified under Gross Margin, Restructuring,
Impairment and Other Charges and (Credits) and Asbestos Settlement, we also
retired a significant amount of our outstanding debentures during 2004, 2003 and
2002 that resulted in the following (losses) gains on these transactions for the
respective periods (in millions):
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Book Value of Cash Shares
Debentures Retired Paid Issued Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
2004 activity:
Convertible debentures, 3.5%, due 2008 $ 368 $ 37 38 $ (36)
Zero coupon convertible debentures, 2%, due 2015 119 117
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Total 2004 activity $ 487 $ 154 38 $ (36)
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2003 activity:
Zero coupon convertible debentures, 2%, due 2015 $ 1,239 $ 1,121 6 $ 20
Euro notes, 5.625%, due 2005 67 68 (1)
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Total 2003 activity $ 1,306 $ 1,189 6 $ 19
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2002 activity:
Zero coupon convertible debentures, 2%, due 2015 $ 493 $ 308 $ 175
Euro notes, 5.625%, due 2005 1 1 1
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2002 activity $ 494 $ 309 $ 176
- ------------------------------------------------------------------------------------------------------------------------------------
(Provision) Benefit for Income Taxes
Our (provision) benefit for income taxes and the related effective (income tax)
benefit rates were as follows (in millions):
- --------------------------------------------------------------------------------
For the years ended December 31,
-----------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
(Provision) benefit for income taxes $ (1,031) $ 254 $ 726
Effective (income tax) benefit rate (65.3)% 33.4% 26.7%
- --------------------------------------------------------------------------------
The effective (income tax) benefit rate for 2004, 2003 and 2002 differed from
the U.S. statutory rate of 35% primarily due to increases in the valuation
allowance against certain domestic (U.S. federal, state and local) and foreign
deferred tax assets, and, for 2004 only, the write-off of nondeductible
goodwill.
During 2004, we increased our tax expense by $937 million as a result of our
decision to establish a valuation allowance against a significant portion of our
deferred tax assets, primarily in the U.S. and Germany. We reached this decision
by performing a review of all 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, as well as related key assumptions. SFAS 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. SFAS 109 further requires
that "greater weight be given to previous cumulative losses than the outlook for
future profitability when determining whether deferred tax assets can be used."
We have incurred significant losses in the U.S. and Germany due primarily to the
restructuring and impairment charges and operating losses in our
Telecommunications segment over the last four years. As a result of the third
quarter of 2004 impairment charges and the lowering of our long-term outlook for
the Telecommunications segment, our largest U.S. and German business, we
concluded that a valuation allowance against certain deferred tax assets was
required.
We expect to maintain a valuation allowance on future tax benefits until an
appropriate level of profitability, primarily in the U.S. and Germany, is
sustained or we are able to develop tax planning strategies that enable us to
conclude that it is more likely than not that a larger portion of our deferred
tax assets would be realizable, or if the PCC settlement is finalized earlier
than we anticipate. Until then, our tax provision will include only the net tax
expense attributable to certain foreign operations. Refer to Note 6 (Income
Taxes) to the consolidated financial statements for additional information.
Equity in Earnings of Associated Companies, Net of Impairments
The following provides a summary of equity earnings of associated companies, net
of impairments (in millions):
- --------------------------------------------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Samsung Corning Precision $ 277 $ 144 $ 80
Dow Corning 116 82
All other 50 (17) 36
--------- ---------- ---------
Total equity earnings $ 443 $ 209 $ 116
- --------------------------------------------------------------------------------
The 2004 and 2003 increases in equity earnings of associated companies, net of
impairments, are primarily due to the following:
.. Strong sales and earnings performance at Samsung Precision Glass Co., Ltd.
(Samsung Corning Precision), our 50% owned South Korea-based manufacturer
of LCD glass.
.. The recognition of equity earnings from Dow Corning Corporation (Dow
Corning) in 2003 and strong sales and earnings performance in 2004.
In addition to the above, equity in earnings of associated companies, net of
impairments, included the following restructuring and impairment charges:
.. $35 million, $7 million and $34 million of charges to impair equity method
investments in the Telecommunications segment to their estimated fair value
in 2004, 2003 and 2002, respectively.
.. In 2004, Dow Corning recorded charges related to restructuring actions and
adjustments to interest liabilities recorded on its emergence from
bankruptcy. Our equity earnings included $21 million related to these
charges.
.. In 2003, Samsung Corning Co., Ltd. recorded asset impairment charges. Our
equity earnings included $66 million related to these charges.
.. In 2002, Samsung Corning Micro Optics recorded asset impairment charges.
Our equity earnings included $20 million related to these charges.
Loss From Continuing Operations
As a result of the above, the loss from continuing operations and per share data
was as follows (in millions, except per share amounts):
- --------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations $ (2,185) $ (223) $ (1,780)
Basic and diluted loss per common share from continuing operations $ (1.57) $ (0.18) $ (1.85)
Shares used in computing basic and diluted per share amounts 1,386 1,274 1,030
- --------------------------------------------------------------------------------------------------------------------------
RESULTS OF DISCONTINUED OPERATIONS
On December 13, 2002, we completed the sale of our precision lens business to 3M
Company (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 notified Corning that 3M believed it had certain claims arising
out of the representations and warranties made by Corning in connection with the
sale of the precision lens business to 3M. In the third quarter of 2004, Corning
and 3M reached a final settlement agreement for the funds held in escrow.
Accordingly, we received $20 million in cash and recorded a gain of $20 million.
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. Refer to Note 2 (Discontinued
Operations) to the consolidated financial statements for selected financial
information for the years ended December 31, 2004 and 2002. There were no
results from discontinued operations in 2003.
OPERATING SEGMENTS
Our reportable operating segments included Display Technologies,
Telecommunications, Environmental Technologies, and Life Sciences. The
Environmental Technologies reportable segment is an aggregation of our
Automotive and Diesel operating segments, as these two segments share similar
economic characteristics, products, customer types, production processes and
distribution methods. The following provides a brief description of the products
and markets served by each reportable segment:
.. Display Technologies - manufactures liquid crystal display glass for flat
panel displays;
.. Telecommunications - manufactures optical fiber and cable, and hardware and
equipment components for the worldwide telecommunications industry;
.. Environmental Technologies - manufactures ceramic substrates and filters
for automobile and diesel applications; and
.. Life Sciences - manufactures glass and plastic consumables for scientific
applications.
Our segment presentation reflects how Corning's Chief Operating Decision Making
group (CODM) allocates resources and assesses the performance of its businesses.
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 include the
earnings of equity affiliates that are closely associated with our operating
segments in the respective segment's net income. 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.
Display Technologies
The following table provides net sales and other data for the Display
Technologies segment (dollars in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
% Change
--------------------------
2004 2003 2002 04 vs. 03 03 vs. 02
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,113 $ 595 $ 405 87 47
Income before equity earnings $ 258 $ 91 $ 39 184 133
Equity earnings of associated companies $ 288 $ 144 $ 80 100 80
Net income $ 546 $ 235 $ 119 132 97
- ------------------------------------------------------------------------------------------------------------------------------------
2004 vs. 2003
The 2004 sales increase is largely reflective of the overall LCD-market growth.
During 2004, glass substrate volumes (measured in square feet of glass sold)
increased approximately 65%. Sales also benefited from modest average price
increases, primarily the result of a change in product mix as the market
continues to trend toward large size glass substrates (generation 5 and above)
which carry a higher selling price per square foot. The sales of the Display
Technologies segment are denominated in Japanese Yen and, as such, our revenues
are susceptible to movements in the US dollar - Japanese Yen exchange rates.
Sales benefited by approximately 10% from a weakening of the U.S. dollar
compared to 2003.
For 2004, the key drivers for the increase in income before equity earnings were
the impact of incremental volumes and efficiencies realized through the shift in
production toward large size glass substrates. Movements in exchange rates did
not have a significant impact on income before equity earnings. The increase in
our equity earnings from Samsung Corning Precision were largely driven by the
same factors identified for our wholly-owned business.
The Display Technologies segment manufactures and sells glass substrates to a
concentrated customer base comprised of LCD panel makers primarily located in
Japan and Taiwan. The most significant customers in these markets are
AU Optronics Corp., Chi Mei Optoelectronics Corp., Hannstar Display Corp.,
Quanta Display Inc., Sharp Corporation, and Toppan CFI (Taiwan) Co., Ltd. LCD
panels are used in computer products, such as notebook computers and desktop
monitors, consumer electronics products, such as digital cameras and camcorders
and car navigation systems, and LCD televisions. In 2004, these six LCD
customers accounted for 76% of the Display Technologies segment sales. In
addition, Samsung Corning Precision's sales were also concentrated, with three
LCD panel makers in Korea (Samsung Electronics Co., Ltd., LG Philips LCD Co.,
and BOE Hydis Technology Co., Ltd.) accounting for 88% of sales.
Corning and these customers have typically entered into multi-year supply
agreements for the purchase and sale of glass substrates. These agreements
provide for Corning to supply a percentage of the customers' requirements and
include mechanisms for forecasting and ordering. During 2004, Corning improved
the payment terms under these agreements to improve cash flow and reduce its
working capital requirements.
We expect the LCD market to continue to grow rapidly. We anticipate higher
demand for LCD televisions, for which our LCD customers require larger size
glass substrates. During 2004, Corning held discussions with several of its
customers to discuss how to meet this demand. As part of its discussions,
Corning has sought improved payment terms, including deposits against orders, to
provide a greater degree of assurance that we are effectively building capacity
to meet the needs of a rapidly growing industry. There can be no assurance that
Corning will be able to pace its capacity expansion to the actual demand. While
the industry has grown rapidly, the pace of growth may be less than we
anticipate, and it is possible that glass manufacturing capacity may exceed
demand during certain periods.
In 2004, Corning and a Taiwanese customer entered into a long-term purchase and
supply agreement (as amended) in which the Display Technologies segment will
supply LCD glass to the customer over a five-year period. As part of the
agreement, the customer will make advance cash deposits of $460 million to
Corning through 2006 for a portion of the contracted glass to be purchased.
Corning received a total of $204 million of deposits against orders in 2004 and
expects to receive an additional $171 million in 2005. Refer to Note 1 (Summary
of Significant Accounting Policies) and Note 10 (Other Liabilities) to the
consolidated financial statements for further information.
In the ordinary course of business, Corning will continue to negotiate
multi-year supply agreements with its large customers where feasible.
2003 vs. 2002
The 2003 sales 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 approximately 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 a $180 million expansion of our liquid crystal
display glass manufacturing facility in Taiwan.
Outlook:
We expect to see a continuation of the overall industry growth and the trend
toward large size substrates. We continue to see positive trends in the
penetration rates of LCD's into the end-markets (notebook computers, monitors
and televisions), and increasing demand for the large size substrates. Volume
growth for the LCD market is anticipated to be between 40% and 60% in 2005, and
we anticipate adding sufficient capacity to meet market growth. This market
growth will occur at varying rates in the principal LCD markets of Japan, Taiwan
and Korea. Sales of our wholly-owned business are primarily to panel
manufacturers in Japan and Taiwan with customers in Korea being serviced by
Samsung Corning Precision. The actual growth rates in these markets will impact
our sales and earnings performance. For 2005, we are anticipating price declines
after two years of price stability as competitors bring on additional capacity.
We also anticipate our costs will continue to decline. There can be no assurance
that the end-market rates of growth will continue at the high rates experienced
in recent years or that the rate of cost declines will offset price declines in
any given period. Consumer preferences for panels of differing sizes, or price
or other factors, may lead to pauses in market growth from time to time. For
2005, Corning's rate of sales growth is expected to be higher in the second half
of the year based on anticipated increases in panel manufacturers' capacity to
meet the anticipated market demands for LCD televisions. We expect net income in
the segment to increase significantly in 2005 based on the strong volume growth
in our wholly-owned business and increased equity earnings from Samsung Corning
Precision.
Telecommunications
The following table provides net sales and other data for the Telecommunications
segment (dollars in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
% Change
-----------------------
2004 2003 2002 04 vs. 03 03 vs. 02
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 755 $ 760 $ 859 (1) (12)
Hardware and equipment 784 612 661 28 (7)
Photonic technologies 54 111 -- (51)
-------- --------- --------
Total net sales $ 1,539 $ 1,426 $ 1,631 8 (13)
======== ========= ========
Net loss $ (1,893) $ (169) $ (1,897) (1,020) (91)
- ------------------------------------------------------------------------------------------------------------------------------------
2004 vs. 2003
During 2004 we experienced a stabilization of the telecommunications industry.
Fiber volumes grew at a stronger than anticipated 18%, but pricing declined by
9% from 2003 levels. Although we are encouraged by the volume growth, the demand
comes from a narrow band of customers and we do not view this as the beginning
of a broader recovery in the industry. The primary driver for the 2004 sales
growth was Verizon Communications' fiber-to-the-premises project in North
America, with the most significant benefit realized in our hardware and
equipment products. During 2004, one customer accounted for 13% of total segment
sales, and 10 customers accounted for 47% of total segment sales.
Offsetting this sales performance were the following items:
.. During 2003 we completed the sale and exit of our photonic technologies
business.
.. On September 1, 2004 we completed the sale of our frequency controls
business. This business had 2003 annual sales of $76 million.
.. Sales in Japan were down in 2004, largely due to 2003 projects that were
not repeated in 2004.
Movements in foreign exchange rates, primarily the Japanese Yen and Euro, did
not have a significant impact on 2004 sales compared to 2003.
In June 2004, the Chinese Ministry of Commerce issued an anti-dumping
preliminary determination asserting that Corning had dumped optical fiber into
China during 2002 and 2003 and imposed a 16% duty on Corning's optical fiber
imports. Corning contested this preliminary determination, and in December 2004,
the Ministry of Commerce concluded that Corning had not dumped optical fiber
into China and the 16% duty was removed.
The increased net loss for 2004 is primarily attributable to the goodwill, fixed
asset and equity method investments impairment charges recorded in the third
quarter of 2004. Refer to Results of Continuing Operations for additional
information on these charges.
2003 vs. 2002
The 2003 sales decrease is primarily attributable to the global
telecommunications market downturn that continued into 2003. Overall fiber
volumes increased 11%, and pricing pressures continued with overall declines of
31%. The lack of capital spending by our customers negatively affected all
product lines, and the sale of our appliance controls group further reduced
hardware and equipment sales. Also during 2003, we completed the sale and exit
of our photonic technologies business. Partially offsetting this was strong
demand for optical fiber and cable products in Japan and China. 2003 volumes
benefited from having the full year results of the Chinese fiber and cable
entities acquired from Lucent Technologies in the fourth quarter of 2002.
Outlook:
We expect sales in 2005 to increase over 2004. We expect the worldwide
telecommunications industry market to grow, particularly in North America, but
still do not view this as the beginning of a broad-based industry recovery. We
expect fiber volumes to increase modestly and pricing pressures should again be
moderate. Sales improvement will largely be dependent on the continuation of
Verizon's fiber-to-the-premises project, and should these plans not occur at the
pace anticipated our sales and earnings would be adversely affected. We expect
to realize a loss in 2005, although at significantly lower levels than 2004.
This reduction in anticipated segment loss is largely attributed to the
impairment charges incurred in 2004, as well as the operational efficiencies
from increased volumes in 2005.
Environmental Technologies
The following table provides net sales and other data for the Environmental
Technologies segment (dollars in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
% Change
----------------------
2004 2003 2002 04 vs. 03 03 vs. 02
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Automotive $ 479 $ 430 $ 375 11 15
Diesel 69 46 19 50 142
-------- --------- --------
Total net sales $ 548 $ 476 $ 394 15 21
======== ========= ========
Net income $ 4 $ 9 $ 32 (56) (72)
- ------------------------------------------------------------------------------------------------------------------------------------
2004 vs. 2003
The 2004 increase in net sales is primarily the result of demand for our
automotive and diesel ceramic filters and substrates in response to tightening
emissions control standards around the world. Volumes for our automotive
products were up slightly from 2003 and sales benefited from a higher mix of our
thin-wall and ultra thin-wall substrates, which allow engine manufacturers to
meet their emissions control requirements in a more cost effective manner. Our
diesel products sales growth was primarily driven by demand from retrofit
markets, although we experienced a softening in Asian retrofit markets in the
second half of 2004. A portion of the sales of the Environmental Technologies
segment are susceptible to movements in the U.S. dollar-Euro exchange rates.
Movements in exchange rates did not have a significant impact on sales for 2004
compared to 2003.
The Environmental Technologies segment sells to a concentrated customer base of
manufacturers of emission control systems, who then sell to automotive and
diesel engine manufacturers. Although our sales are to the emission control
systems manufacturers, the use of our substrates and filters are generally
required by the specifications of the automotive and diesel engine
manufacturers. For 2004, four customers accounted for 69% of total segment
sales.
The 2004 decline in net income is primarily the result of increased development
costs and plant start-up costs to support our emerging diesel products. These
costs offset the gross margin benefits of increased volumes and the higher mix
of premium automotive products. Movements in exchange rates did not
significantly impact net income.
2003 vs. 2002
The 2003 increase in net sales was 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. The net income
decrease was primarily due to a decrease in equity earnings from Cormetech, a
U.S. designer and manufacturer of industrial catalysts, and higher development
spending for the diesel product line.
Outlook:
We expect sales to increase in 2005. For automotive products, we expect to see
stable demand based on anticipated worldwide auto production, and a continuation
of a shift to premium products; although at slightly slower rates than 2004.
Although volumes are anticipated to be stable, a slowdown in auto production,
particularly in North America, could adversely impact our growth projections.
Diesel product sales are also expected to grow. Demand for diesel products in
2005 will be largely based on retrofit markets, and we expect a recovery of the
Asian market during the year. In 2005, we must successfully complete the
development of our diesel technology and have our filters designed into the
specifications of engine manufacturers to meet anticipated demand in 2006 and
beyond as diesel engine manufacturers ramp up production for the 2007 model
years. The retrofit market is somewhat volatile, and any unanticipated declines
in demand could adversely impact our expected 2005 sales growth. Net income for
the segment is expected to increase only slightly in 2005 as we continue to
spend heavily on research, development and engineering for diesel products.
Life Sciences
The following table provides net sales and other data for the Life Sciences
segment (dollars in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
% Change
----------------------
2004 2003 2002 04 vs. 03 03 vs. 02
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 304 $ 281 $ 280 8
Net income (loss) $ 12 $ 14 $ 25 (14) (44)
- ------------------------------------------------------------------------------------------------------------------------------------
2004 vs. 2003
The 2004 increase in net sales is primarily due to volume increases across the
majority of our product lines. Demand from research, development and production
end-users remained steady for 2004, which represented an improvement over the
industry-wide softness experienced in 2003. Movements in foreign exchange rates,
primarily the Euro, did not have a significant impact on sales for 2004 compared
to 2003.
The Life Sciences segment sells to a concentrated customer base, primarily
distributors, who in turn sell to end-users such as pharmaceutical and
biotechnology companies, government entities, academic institutions and other
research facilities. For 2004, two distributors accounted for 56% of total
segment sales. One of these distributors communicated its intent to change its
ongoing business strategy in the second half of 2004. Subsequent to December 31,
2004, Corning notified this distributor that we will not renew its existing
distribution agreement, which will expire in April 2005. Approximately 30% of
Life Sciences 2004 sales were made through this distributor. We are actively
working to transition the sales through this distributor to our remaining
primary distributor and other existing and developing channels. However, this
change will likely adversely impact sales volumes in the short term.
The 2004 decrease in net income is largely attributable to gross margin
improvements resulting from the increase in sales volume being substantially
offset by new product development costs. In addition, in 2003 net income
benefited from a gain recognized on the disposition of a minor product line.
Movement in exchange rates did not significantly impact net income.
2003 vs. 2002
Sales were flat in 2003, compared to 2002, primarily due to weak sales in Europe
and a general softness in the market. Earnings were down 44% compared to the
prior year. Improved manufacturing efficiencies, and a gain on the disposition
of a minor product line, were more than offset by higher development spending.
Outlook:
We expect to see a continuation of the research, development and production
spending in the life sciences market. Sales will likely be adversely impacted by
as much as 10% to 20% by the recent changes in the distribution channel
described above; particularly in the U.S. Net income for 2005 is expected to
decline from 2004 levels, largely due to increases in new product development
and commercialization expenditures and the anticipated impact of the changes in
distribution channel.
Unallocated and Other
The following table provides net sales and other data (dollars in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
% Change
----------------------
2004 2003 2002 04 vs. 03 03 vs. 02
- ------------------------------------------------------------------------------------------------------------------------------------
Conventional video components $ 3 $ 65 $ 166 (95) (61)
Other businesses 347 247 288 40 (14)
-------- --------- --------
Total net sales $ 350 $ 312 $ 454 12 (31)
======== ========= ========
Net (loss) income $ (834) $ (312) $ 419 167 (174)
- ------------------------------------------------------------------------------------------------------------------------------------
Unallocated and Other includes all other operating segments that do not meet the
quantitative threshold for separate reporting (e.g. Specialty Materials, and
Conventional Video Components), certain corporate investments (e.g. Dow Corning,
Samsung Corning and Steuben), discontinued operations, and unallocated expenses.
Unallocated expenses include research and other expenses related to new business
development; gains or losses on repurchases and retirement of debt; charges
related to the asbestos litigation; restructuring and impairment charges related
to the corporate research and development or staff organizations; and charges
for increases in our tax valuation allowance. Unallocated and Other also
represents the reconciliation between the totals for the reportable segments and
our consolidated total.
The 2004 increase in net sales is primarily attributable to improvements in our
Specialty Materials segment. Although this segment experienced strong sales
growth in 2004, primarily for semiconductor lens glass, we do not expect the
pace of growth to continue into 2005. The 2004 decrease in Conventional Video
Components sales is due to our 2003 decision, along with our partner, to
shutdown CAV. The 2003 decrease in net sales is primarily due to the shutdown of
CAV and weak demand for semiconductor lens glass due to softness in the
semiconductor market.
Refer to Restructuring, Impairment, and Other Charges and (Credits), Asbestos
settlement, and (Provision) Benefit for Income Taxes for a description of the
key drivers of net (loss) income for 2004 vs. 2003 and 2003 vs. 2002.
LIQUIDITY AND CAPITAL RESOURCES
Financing Structure
During 2004, we engaged in the following significant transactions:
.. Issued $400 million of senior unsecured notes under our existing universal
shelf registration statement. At December 31, 2004, our remaining capacity
under the shelf registration is approximately $2.5 billion.
.. Retired a total of $487 million of our 3.5% convertible debentures and zero
coupon convertible debentures in exchange for $154 million of cash and 38
million shares of common stock.
.. Repaid $115 million of loans payable, the majority of which related to our
7.625% debentures due 2024, as a result of certain bond holders exercising
their early repayment option.
We currently have unrestricted access to a $2 billion revolving credit facility
with 16 banks. At December 31, 2004, 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, 2004, this ratio was 41%. Our revolving credit facility expires in August
2005 and we are currently negotiating with leading financial institutions to
arrange a new credit facility. We believe that a new credit facility will be
arranged and executed in the first half of 2005 on competitive terms and
conditions. Corning is seeking up to a $1.0 billion credit facility with up to a
five year term. Among the terms and conditions being negotiated, Corning
believes it will be subject to two financial covenants.
The remaining zero coupon convertible debentures, totaling $272 million at
December 31, 2004, will likely be put back to us on November 8, 2005, at $819.54
per debenture or 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.
Additionally, effective November 8, 2004, we have the right to redeem some or
all of the outstanding 3.5% convertible debentures at any time prior to maturity
at redemption prices ranging from 102.0% to 100.5% of the principal amount based
on the date we exercise our redemption options. It is possible that during 2005
we may exercise this redemption option, or execute other privately negotiated
transactions, to retire some or all of our $297 million outstanding 3.5%
convertible debentures.
Capital Spending
Capital spending totaled $857 million, $366 million and $357 million in 2004,
2003 and 2002, respectively. Capital spending activity in 2004, 2003 and 2002
primarily included expansion of LCD capacity and new capacity for diesel
substrates. Our 2005 capital spending program is expected to be in the range
of$1.2 billion to $1.4 billion, of which $900 million to $1.1 billion will be to
expand manufacturing capacity for LCD glass substrates in the Display
Technologies segment. These expenditures primarily relate to previously
announced expansion plans for our existing manufacturing facilities in Tainan,
Taiwan and Shizuoka, Japan and for the construction of a new facility in
Taichung, Taiwan. Additionally, approximately $140 million will be directed
toward our Environmental Technologies segment in anticipation of the emerging
diesel emissions control market.
Restructuring
During 2004, 2003 and 2002, we made payments of $85 million, $233 million and
$278 million, respectively, related to employee severance and other exit costs
resulting from restructuring actions. Cash payments for employee-related costs
will be substantially completed by the end of 2005, while payments for exit
activities will be substantially completed by the end of 2007.
Key Balance Sheet Data
At December 31, 2004, cash, cash equivalents and short-term investments totaled
$1.9 billion, compared with $1.3 billion at December 31, 2003. The increase from
December 31, 2003, was primarily due to the issuance of $400 million of
long-term debt and improved operating cash flows, including the receipt of $204
million in customer deposits.
Balance sheet and working capital measures are provided in the following table
(dollars in millions):
- --------------------------------------------------------------------------------
As of December 31,
------------------------
2004 2003
- --------------------------------------------------------------------------------
Working capital $ 945 $ 1,141
Working capital, excluding cash and
short-term investments $ (936) $ (125)
Current ratio 1.4:1 1.7:1
Trade accounts receivable, net of allowances $ 585 $ 525
Days sales outstanding 52 58
Inventories $ 535 $ 467
Inventory turns 4.9 4.8
Days payable outstanding 67 52
Long-term debt $ 2,214 $ 2,668
Total debt to total capital 41% 34%
- --------------------------------------------------------------------------------
Credit Ratings
As of February 22, 2005, our credit ratings were as follows:
- --------------------------------------------------------------------------------
RATING AGENCY Rating Outlook
Last Update Long-Term Debt Last Update
- --------------------------------------------------------------------------------
Fitch BB+ Positive
August 12, 2004 August 12, 2004
Standard & Poor's BB+ Stable
July 29, 2002 January 16, 2004
Moody's Ba2 Positive
July 29, 2002 January 14, 2005
- --------------------------------------------------------------------------------
Our 2004 earnings were not adequate to cover our fixed charges (principally
interest and related charges on debt), primarily as a result of the impairment
charges in the Telecommunications segment and our decision to increase our
valuation allowance against certain deferred tax assets. We expect our full year
2005 earnings will be sufficient to cover our fixed charges.
Management Assessment of Liquidity
Our major source of funding for 2005 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 are currently
negotiating with leading financial institutions for a new credit facility and
believe we will arrange and execute one in the first half of 2005. 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.
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 $ 104 $ 26 $ 2 $ 1 $ 1 $ 74
Credit facilities for equity companies 167 17 150
Stand-by letters of credit (1) 52 42 10
Loan guarantees 12 1 11
Purchase obligations (2) 67 49 16 2
Capital expenditure obligations (3) 388 388
Total debt (4) 2,694 482 16 119 411 1,666
Minimum rental commitments 223 40 32 37 39 75
- ------------------------------------------------------------------------------------------------------------------------------------
Total commitments and contingencies $ 3,707 $ 1,028 $ 66 $ 157 $ 468 $ 1,988
- ------------------------------------------------------------------------------------------------------------------------------------
(1) At December 31, 2004, $34 million of the $52 million was included in other
accrued liabilities on our consolidated balance sheets.
(2) Balance primarily represents obligations associated with the
Telecommunications segment.
(3) Capital expenditure obligations primarily related to our Display
Technologies segment expansions, which are included on our balance sheet.
(4) At December 31, 2004, $2,692 million of the $2,694 million was included on
our balance sheet. Amounts above are stated at their maturity value.
We have provided other financial guarantees and contingent liabilities in the
form of 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 7 (Investments) to the
consolidated financial statements. The funding of the Dow Corning credit
facility will be required only if Dow Corning is not otherwise able to meet its
scheduled funding obligations in its confirmed Bankruptcy Plan. We believe the
significant majority of these guarantees and contingent liabilities will expire
without being funded.
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, 2004, this plan accounted for 82% of our
consolidated defined benefit pension plans' projected benefit obligation and 91%
of the related plans' assets. In 2004 and 2003, although global equities had
positive returns, interest rates continued to decline. As a result, at December
31, 2004 and 2003, 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,
-----------------------
2004 2003
- --------------------------------------------------------------------------------
Minimum pension liability $ 417 $ 310
Intangible assets 42 51
Other accumulated comprehensive loss, pre-tax 375 259
Other accumulated comprehensive loss, after-tax 273 159
- --------------------------------------------------------------------------------
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 until at
least 2008. We contributed $40 million in 2004 to our U.S. pension plan. For
2005, we anticipate making voluntary contributions of at least $100 million in
cash or common stock 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 142 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, which are the same as our segments.
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.
Telecommunications
Pricing in the telecommunications industry remains depressed. Our previous
forecasts assumed some rationalization of capacity that would lead to more
stable pricing. We now expect the current depressed pricing conditions to
persist. Based on competitive conditions and forecasted future customer
requirements, we do not expect the level of demand for premium fiber products we
previously forecasted. As a result, we have significantly reduced our outlook
for future revenue and profitability from premium products. As we forecast
customer demand, we have lowered the rate of volume growth in the longer range.
Further negative developments in the telecommunications industry could cause us
to change our forecasts for fiber volumes, pricing or mix of premium products
which may result in additional goodwill impairment charges of up to $123
million.
Terminal value of the business assumes a growth in perpetuity of 3%. These cash
flows are also used to value intangible and tangible assets which determine the
implied value of reporting unit goodwill. The discount rate applied to these
cash flows represents a telecommunications weighted average cost of capital
based upon current debt and equity activity of 11 public companies representing
a cross section of worldwide competitors of the reporting unit. For our 2004
impairment test, we used a discount rate of 12.5% in our calculation of fair
value of the expected future cash flows. An impairment charge of $1,420 million
was recorded in 2004. Had we used a discount rate of 12%, the impairment charge
would have been approximately $90 million lower. Had we used a discount rate of
13%, the impairment charge would have been approximately $80 million higher. In
2003, we used a 12% discount rate for our annual impairment test. The results of
our 2003 test indicated that goodwill was not impaired. The 2003 results would
not have changed had we used a discount rate of 11.5% or 12.5%.
Specialty Materials
Our discounted cash flow test for this reporting unit assumes a growth in
perpetuity of 3%. The discount rate applied to the forecasted cash flows
represents weighed 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. For the 2004 and 2003 impairment tests we
used a discount rate of 12% in our calculation of the fair value of the expected
future cash flows. The results of our 2004 and 2003 tests 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.
In 2004, based on our decision to permanently abandon certain assets and lower
our outlook for the Telecommunications segment, we determined an event of
impairment had occurred in our Telecommunications segment. We performed an
impairment test on the segment's long-lived assets, and recorded a $24 million
charge to write-down certain assets to their fair value.
In 2003, we concluded events of impairment had occurred in our semiconductor
materials product line, which is part of the specialty materials segment, and
performed an impairment test. The results of our test indicated that our
long-lived assets held for use were not impaired.
Restructuring charges and impairments resulting from restructuring actions
During 2004 and 2003, 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. It is possible that actual results
will differ from assumptions and require adjustments to reserves.
Valuation allowances for deferred income taxes
SFAS 109 requires us to exercise judgment about our future results in assessing
the realizability of our deferred tax assets. At December 31, 2004, Corning had
gross deferred tax assets of approximately $2.3 billion. We determined that the
likelihood of realization of certain deferred tax assets is less than 50% and
recorded additional valuation allowances of $1.2 billion in 2004 to reduce our
net deferred tax assets to $532 million. If we sustain an appropriate level of
profitability, primarily in the U.S. and Germany, or if we are able to develop
additional tax-planning strategies, or if the PCC settlement is finalized
earlier than we anticipate, adjustments to these allowances will be required and
may affect future net income.
In determining the amount of domestic deferred tax assets that we believe are
more likely than not to be realized through a tax planning strategy involving
the sale of a non-strategic asset, we estimated the fair value of the underlying
non-strategic asset based primarily on discounted cash flows and precedent
transactions. Changes in fair value of the non-strategic asset may also affect
future net income.
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 ourselves 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 7
(Investments) to the Consolidated Financial Statements. The settlement is
subject to a number of contingencies, including approval by the bankruptcy court
and resolution of any appeals.
Pension and other postretirement employee benefits (OPEB)
Pension and OPEB costs and obligations are dependent on assumptions used in
calculating such amounts. These assumptions include discount rates, health care
cost trend rates, benefits earned, interest cost, expected return on plan
assets, mortality rates, and other factors. In accordance with GAAP, actual
results that differ from the assumptions are accumulated and amortized over
future periods and, therefore, generally affect recognized expense and the
recorded obligation in future periods. While management believes that the
assumptions used are appropriate, differences in actual experience or changes in
assumptions may affect Corning's pension and other postretirement obligations
and future expense.
The following information illustrates the sensitivity to a change in certain
assumptions for U.S. pension plans (as of December 31, 2004 the Projected
Benefit Obligation (PBO) for U.S. pension plans was $2,056 million and the
minimum pension liability charges to equity with respect to U.S. pension plans
was $279 million net of tax):
- -----------------------------------------------------------------------------------------------------------------
Effect on
Effect on 2005 December 31, 2004
Change in Assumption Pre-Tax Pension Expense PBO
- -----------------------------------------------------------------------------------------------------------------
25 basis point decrease in discount rate +$4 million +$57 million
25 basis point increase in discount rate -$4 million -$55 million
25 basis point decrease in expected return on assets +$4 million
25 basis point increase in expected return on assets -$4 million
- -----------------------------------------------------------------------------------------------------------------
The above sensitivities reflect impact of changing one assumption at a time. It
should be noted that economic factors and conditions often affect multiple
assumptions simultaneously and the effects of changes in key assumptions are not
necessarily linear.
These changes in assumptions would have no effect on Corning's funding
requirements. In addition, at December 31, 2004, a 25 basis point decrease in
the discount rate would decrease stockholders' equity by $55 million before tax;
a 25 basis point increase in the discount rate would increase stockholders'
equity by $53 million. With a 25 basis point decrease in the discount rate,
certain pension plans would become Accumulated Benefit Obligation (ABO)
underfunded resulting in a significantly larger impact on equity compared to a
25 basis point increase in the discount rate. In addition, the impact of greater
than a 25 basis point decrease in discount rate would not be proportional to the
first 25 basis point decrease in the discount rate.
The following table illustrates the sensitivity to a change in the discount rate
assumption related to Corning's U.S. OPEB plans:
- --------------------------------------------------------------------------------
Effect on 2005 Effect on
Pre-Tax OPEB December 31, 2004
Change in Assumption Expense APBO
- --------------------------------------------------------------------------------
25 basis point decrease in discount rate +$1 million +$19 million
25 basis point increase in discount rate -$1 million -$19 million
- --------------------------------------------------------------------------------
The above sensitivities reflect the impact of changing one assumption at a time.
It should be noted that economic factors and conditions often affect multiple
assumptions simultaneously and the effects of changes in key assumptions are not
necessarily linear.
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 11 active hazardous waste sites. Under the Superfund Act,
all parties who may have contributed any waste to a hazardous waste site,
identified by such Agency, are jointly and severally liable for the cost of
cleanup unless the Agency agrees otherwise. It is our policy to accrue for the
estimated liability related to Superfund sites and other environmental
liabilities related to property owned and operated by us based on expert
analysis and continual monitoring by both internal and external consultants. We
have accrued approximately $14 million for the estimated liability for
environmental cleanup and related litigation at December 31, 2004. 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 November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify that abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) should be recognized as
current-period charges. Additionally, SFAS 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. Corning is required to adopt SFAS 151 effective
January 1, 2006. Corning does not expect the adoption of SFAS 151 to have a
material impact on its consolidated results of operations and financial
condition.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements at fair value beginning in Corning's third quarter. Under
SFAS 123R, Corning must determine the appropriate fair value model to be used
for valuing share-based payments, the amortization method for compensation cost,
and the transition method to be used at date of adoption. The standard permits
three transition method adoption alternatives:
.. "Prospective adoption" would require Corning to begin expensing share-based
payments after July 1, 2005. Prior interim and annual periods would not be
restated.
.. "Modified prospective adoption" would require Corning to begin expensing
share-based payments effective January 1, 2005. Prior annual periods would
not be restated.
.. "Modified retrospective adoption" would require Corning to begin expensing
share-based payments effective January 1, 2005. Prior annual periods would
be restated.
We are currently evaluating the impact that SFAS 123R will have on its
consolidated results of operations and financial condition, which in part will
be dependent on the transition and amortization methods used to adopt the new
rules in 2005. Our current estimate is that our 2005 pretax expense will be in
the range of $25 million to $50 million, and that future years expense will
approximate $60 million.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions"
("SFAS 153"). SFAS 153 eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with
an exception for exchanges that do not have commercial substance. SFAS 153
specifies that a nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. Corning is required to adopt SFAS 153 effective January 1, 2006.
Corning does not expect the adoption of SFAS 153 will have a material impact on
its consolidated results of operations and financial condition.
FORWARD-LOOKING STATEMENTS
The statements in this Annual Report on Form 10-K, in reports subsequently filed
by Corning with the Securities and Exchange Commission (SEC) on Forms 10-Q,
Forms 8-K, and related comments by management which are not historical facts or
information and contain words such as "believes," "expects," "anticipates,"
"estimates," "forecasts," and similar expressions are forward-looking
statements. These forward-looking statements involve risks and uncertainties
that may cause the actual outcome to be materially different. Such risks and
uncertainties include, but are not limited to:
- - global economic and political conditions;
- - tariffs, import duties and currency fluctuations;
- - product demand and industry capacity;
- - competitive products and pricing;
- - sufficiency of manufacturing capacity and efficiencies;
- - 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;
- - 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;
- - 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;
- - stock price fluctuations;
- - the rate of substitution by end-users purchasing LCDs for notebook
computers, desktop monitors and televisions;
- - a downturn in demand for LCD glass substrates;
- - ability of our customers, most notably in the Display Technologies segment,
to maintain profitable operations and obtain financing to fund their
manufacturing expansions;
- - fluctuations in inventory levels in the supply chain;
- - equity company activities, principally at Dow Corning Corporation and
Samsung Corning Co., Ltd.; and
- - other risks detailed in Corning's SEC filings.
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 $443 million in 2004 and $209
million in 2003 with foreign-based affiliates comprising over 70% of this
amount. Equity earnings from Samsung Corning and Samsung Corning Precision
totaled $309 million for 2004 and $105 million in 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, 2004, 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, 2004. A 10% adverse movement in quoted foreign currency exchange rates could
result in a loss in fair value of these instruments of $122 million. Specific to
the Japanese Yen, a 10% adverse movement in quoted Yen exchange rates could
result in a loss in fair value of these instruments of $45 million.
The nature of our foreign exchange rate risk exposures has not changed
materially from December 31, 2003.
As we derive more than 60% of our net sales from outside the U.S., our sales and
net income could be affected if the U.S. dollar significantly strengthens or
weakens against foreign currencies, most notably the Japanese yen and Euro. Our
outlooks included in Management's Discussion and Analysis assume no significant
changes in currency exchange rates during 2005. A plus or minus 10 point
movement in the U.S. dollar - Japanese yen exchange rate would result in a
change to net sales of approximately $180 million and net income of
approximately $150 million. A plus or minus 10 point movement in the U.S. dollar
- - Euro exchange rate would result in a change to net sales of approximately $50
million but would have a negligible effect on net income.
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 paid the counterparty a floating rate that is indexed to the
six-month LIBOR rate and received 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.
In 2004 and 2003, we terminated the interest rate swap agreements described
above. The termination of these swaps resulted in gains of $5 million in 2004
and $15 million in 2003 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 swaps totaled $8 million in 2004 and $17 million in 2003 and
are included in the financing section of our consolidated statements of cash
flows.
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, 2004, our
consolidated debt portfolio contained less than 1% 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
- ---------------------------------
Disclosure Controls and Procedures
Our principal executive and principal financial officers, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of the end of
the period covered by this report, have concluded that based on the evaluation
of these controls and procedures required by paragraph (b) of Exchange Act Rules
13a-15 or 15d-15, that our disclosure controls and procedures were effective.
Internal Control Over Financial Reporting
(a) Management's Annual Report on Internal Control Over Financial Reporting
-----------------------------------------------------------------------
Management is responsible for establishing and maintaining adequate
internal control over financial reporting for Corning and for our
assessment of the effectiveness of internal control over financial
reporting. Corning's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally
accepted in the United States of America. Corning's internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of Corning's assets; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that
Corning's receipts and expenditures are being made only in accordance with
authorizations of Corning's management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of Corning's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies and procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the system of
internal control over financial reporting based on the framework in
Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, management concluded that Corning's internal control over
financial reporting was effective as of December 31, 2004. Management's
assessment of the effectiveness of Corning's internal control over
financial reporting has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report
which is included on page 50.
(b) Attestation Report of the Registered Public Accounting Firm
-----------------------------------------------------------
Refer to page 50 of Part IV, Item 15.
(c) Changes in Internal Control Over Financial Reporting
----------------------------------------------------
There were no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of
Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal
quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information
- ---------------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Directors of the Registrant
- ---------------------------
The section entitled "Nominees for Election as Directors" in our Definitive
Proxy Statement relating to our annual meeting of shareholders to be held on
April 28, 2005, is 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 28, 2005, 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 will retire as our chief
executive officer effective April 28, 2005. He will continue as chairman of the
board of Corning. 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 69.
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 56.
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 will
become president and chief executive officer of Corning on April 28, 2005. Mr.
Weeks is a director of Merck & Co., Inc. Mr. Weeks has been a member of
Corning's Board of Directors since 2000. Age 45.
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 will
become chief operating officer of Corning on April 28, 2005. 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 49.
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 45.
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 63.
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 48.
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 60.
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 45.
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 50.
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 55.
Robert B. Brown Senior Vice President and General Manager, Environmental
Technologies
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, to senior vice president and general manager - Telecommunications in
2003 and to his current position on January 1, 2005. Age 54.
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 Pittsburgh Corning Corporation, Cormetech Incorporated and Macdermid
Incorporated. Age 66.
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 Asia in 2000, vice president, Display in 2002 and to his
current position in 2003. Age 45.
Gerald J. Fine was a senior vice president on sabbatical leave from October 1,
2003 until October 1, 2004, when he resigned from Corning.
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
The section entitled "Section 16(a) Beneficial Ownership Reporting Compliance"
in our Definitive Proxy Statement relating to our annual meeting of shareholders
to be held on April 28, 2005, is incorporated by reference in this Annual Report
on Form 10-K.
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. During 2004,
no amendments to or waivers of the provisions of the Code of Ethics were made
with respect to any of our directors or executive officers. A copy of the Code
of Ethics is available on our website at
www.corning.com/inside_corning/corporate_governance/downloads.aspx. 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 28, 2005, 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 28, 2005, 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 28, 2005, 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 28, 2005, is
incorporated by reference in this Annual Report on Form 10-K.
Our independent auditor, PricewaterhouseCoopers LLP ("PwC"), has recently
notified the Audit Committee of our Board of Directors (the "Audit Committee")
that certain non-audit work it performed in China potentially violated the SEC's
Independence Rules on Scope of Service.
PwC performs expatriate tax return preparation services for certain employees of
Corning in China. In conjunction with these services, PwC's affiliated firm in
China took custody of funds intended to satisfy the employees' tax obligations
and remitted payment of those funds to the local taxing authorities on behalf of
the employees. As a result, PwC had custody of funds that may have belonged to
Corning, which is not permitted under SEC auditor independence rules. The
payment aspect of the tax return preparation services was discontinued in
October 2004. The fees paid to PwC for expatriate tax services in China were
$28,550 in 2004, $47,957 in 2003 and $40,278 in 2002, of which the estimated
amounts attributable to the tax payment aspect of services was no more than 5%
in any one year. The amount of disbursements made by PwC-China was $1,168,000 in
2004, $765,000 in 2003 and $559,000 in 2002.
Based upon PwC's disclosure, Corning evaluated PwC's non-audit services provided
to Corning during the relevant time periods and did not identify any additional
non-audit services that may compromise PwC's independence for purposes herein.
Corning and PwC continue to evaluate and review processes relevant to the
maintenance of PwC's independence.
PwC has concluded that its objectivity and impartiality were unaffected by these
services and therefore its independence has not been impaired. This conclusion
is based upon the nature of services, the de minimus fees associated therewith,
the fact that none of its personnel who were involved in providing these tax
services performed any audit or audit-related services for Corning, and that
those professionals who did conduct the audit were unaware of the payment aspect
of the tax services. In January 2005, PwC issued its Independence Standards
Board Standard No. 1 independence letter to the Audit Committee of our Board of
Directors and therein reported that it is independent under applicable standards
in connection with its audit opinion for the financial statements contained in
this report. The Audit Committee has discussed with PwC its independence from
Corning and concurred with PwC that its independence was not impaired by the
provision of these services.
PART IV
Item 15. Exhibits and Financial Statement Schedules
- ----------------------------------------------------
(a) Documents filed as part of this report: Page
----
1. Financial statements..................................................52
2. Financial Statement Schedules:
(i) Valuation Accounts and Reserves...................................94
See separate index to financial statements and financial statement
schedules
(b) 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).
10.1 1994 Employee Equity Participation Program (Incorporated by
reference to Exhibit 1 of Corning Proxy Statement, Definitive 14A
filed March 16, 1994 for April 28, 1994 Annual Meeting of
Shareholders).
10.2 1998 Variable Compensation Plan (Incorporated by reference to
Exhibit 1 of Corning Proxy Statement, Definitive 14A filed March
9, 1998 for April 30, 1998 Annual Meeting of Shareholders).
10.3 1998 Worldwide Employee Share Purchase Plan (Incorporated by
reference to Exhibit 2 of Corning Proxy Statement, Definitive 14A
filed March 9, 1998 for April 30, 1998 Annual Meeting of
Shareholders).
10.4 1998 Employee Equity Participation Program (Incorporated by
reference to Exhibit 3 of Corning Proxy Statement, Definitive 14A
filed March 9, 1998 for April 30, 1998 Annual Meeting of
Shareholders).
10.5 2002 Worldwide Employee Share Purchase Plan (Incorporated by
reference to Exhibit 1 of Corning Proxy Statement, Definitive 14A
filed March 7, 2002 for April 25, 2002 Annual Meeting of
Shareholders).
10.6 2000 Employee Equity Participation Program and 2003 Amendments
(Incorporated by reference to Exhibit 1 of Corning Proxy
Statement, Definitive 14A filed March 10, 2003 for April 24, 2003
Annual Meeting of Shareholders).
10.7 2003 Variable Compensation Plan (Incorporated by reference to
Exhibit 2 of Corning Proxy Statement, Definitive 14A filed March
10, 2003 for April 24, 2003 Annual Meeting of Shareholders).
10.8 2003 Equity Plan for Non-Employee Directors (Incorporated by
reference to Exhibit 3 of Corning Proxy Statement, Definitive 14A
filed March 10, 2003 for April 24, 2003 Annual Meeting of
Shareholders).
10.9 Form of Officer Severance Agreement dated as of February 1, 2004
between Corning Incorporated and each of the following four
individuals: James B. Flaws, James R. Houghton, Peter F.
Volanakis and Wendell P. Weeks (Incorporated by reference to
Exhibit 10.1 of Corning's 10-Q filed May 4, 2004).
10.10 Officer Severance Agreement dated as of February 1, 2004 between
Corning Incorporated and Joseph A. Miller, Jr. (Incorporated by
reference to Exhibit 10.2 of Corning's 10-Q filed May 4, 2004).
10.11 Change In Control Agreement dated as of February 1, 2004 between
Corning Incorporated and James R. Houghton (Incorporated by
reference to Exhibit 10.3 of Corning's 10-Q filed May 4, 2004).
10.12 Form of Amendment dated as of February 1, 2004 to Change In
Control Agreement dated as of October 4, 2000 between Corning
Incorporated and the following two individuals: James B. Flaws
and Peter F. Volanakis (Incorporated by reference to Exhibit 10.4
of Corning's 10-Q filed May 4, 2004).
10.13 Form of Change In Control Amendment dated as of October 4, 2000
between Corning Incorporated and the following two individuals:
James B. Flaws and Peter F. Volanakis (Incorporated by reference
to Exhibit 10.5 of Corning's 10-Q filed May 4, 2004).
10.14 Amendment dated as of February 1, 2004 to Change In Control
Agreement dated as of June 1, 2001 between Corning Incorporated
and Joseph A. Miller, Jr. (Incorporated by reference to Exhibit
10.6 of Corning's 10-Q filed May 4, 2004).
10.15 Change In Control Agreement dated as of June 1, 2001 between
Corning Incorporated and Joseph A. Miller, Jr. (Incorporated by
reference to Exhibit 10.7 of Corning's 10-Q filed May 4, 2004).
10.16 Amendment dated as of February 1, 2004 to Change In Control
Agreement dated as of April 23, 2002 between Corning Incorporated
and Wendell P. Weeks (Incorporated by reference to Exhibit 10.8
of Corning's 10-Q filed May 4, 2004).
10.17 Change In Control Agreement dated as of April 23, 2002 between
Corning Incorporated and Wendell P. Weeks (Incorporated by
reference to Exhibit 10.9 of Corning's 10-Q filed May 4, 2004).
10.18 Form of Corning Incorporated Incentive Stock Plan Agreement for
Restricted Stock Grants (Incorporated by reference to Exhibit
10.1 of Corning's 10-Q filed October 28, 2004).
10.19 Form of Corning Incorporated Incentive Stock Plan Agreement for
Restricted Stock Retention Grants (Incorporated by reference to
Exhibit 10.2 of Corning's 10-Q filed October 28, 2004).
10.20 Form of Corning Incorporated Incentive Stock Option Agreement
(Incorporated by reference to Exhibit 10.3 of Corning's 10-Q
filed October 28, 2004).
10.21 Form of Corning Incorporated Non-Qualified Stock Option Agreement
(Incorporated by reference to Exhibit 10.4 of Corning's 10-Q
filed October 28, 2004).
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 2005 definitive Proxy Statement).
21 Subsidiaries of the Registrant at December 31, 2004.
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.
(c) Financial Statement Schedules
1. Quarterly Operating Results...........................................95
2. Financial Statements of Dow Corning Corporation for the years ended
December 31, 2004, 2003 and 2002......................................96
3. Financial Statements of Samsung Corning Precision Glass Co., Ltd.
for the years ended December 31, 2004, 2003 and 2002.................134
Signatures
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Corning Incorporated
Principal Executive Officer
By /s/ James R. Houghton Chairman and February 22, 2005
---------------------------------- Chief Executive Officer
(James R. Houghton)
Principal Financial Officer
By /s/ James B. Flaws Vice Chairman and February 22, 2005
---------------------------------- Chief Financial Officer
(James B. Flaws)
Principal Accounting Officer
By /s/ Katherine A. Asbeck
---------------------------------- Senior Vice President and Controller February 22, 2005
(Katherine A. Asbeck)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
on the date indicated.
Capacity Date
*
Chairman of the Board of Directors February 22, 2005
- -----------------------------------------------
(James R. Houghton)
*
Director February 22, 2005
- -----------------------------------------------
(John Seely Brown)
*
Director February 22, 2005
- -----------------------------------------------
(James B. Flaws)
*
Director February 22, 2005
- -----------------------------------------------
(Gordon Gund)
*
Director February 22, 2005
- -----------------------------------------------
(John M. Hennessy)
*
Director February 22, 2005
- -----------------------------------------------
(Jeremy R. Knowles)
*
Director February 22, 2005
- -----------------------------------------------
(James J. O'Connor)
*
Director February 22, 2005
- -----------------------------------------------
(Deborah D. Rieman)
*
Director February 22, 2005
- -----------------------------------------------
(H. Onno Ruding)
*
Director February 22, 2005
- -----------------------------------------------
(William D. Smithburg)
*
Director February 22, 2005
- -----------------------------------------------
(Hansel E. Tookes II)
*
Director February 22, 2005
- -----------------------------------------------
(Peter F. Volanakis)
*
Director February 22, 2005
- -----------------------------------------------
(Wendell P. Weeks)
/s/ William D. Eggers
*By
----------------------------------------
(William D. Eggers, Attorney-in-fact)
Corning Incorporated
2004 Annual Report
Index to Financial Statements and Financial Statement Schedules
Page
Report of Independent Registered Public Accounting Firm..................................50
Consolidated Statements of Operations....................................................52
Consolidated Balance Sheets..............................................................53
Consolidated Statements of Cash Flows....................................................54
Consolidated Statements of Changes in Shareholders' Equity...............................55
Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Policies.............................56
2. Discontinued Operation.................................................60
3. Restructuring, Impairment and Other Charges and (Credits)..............61
4. Short-Term Investments.................................................64
5. Inventories............................................................64
6. Income Taxes...........................................................64
7. Investments............................................................67
8. Property, Net of Accumulated Depreciation..............................73
9. Goodwill and Other Intangible Assets...................................74
10. Other Liabilities......................................................75
11. Debt...................................................................77
12. Employee Retirement Plans..............................................78
13. Commitments, Contingencies, Guarantees and Hedging Activities..........82
14. Shareholders' Equity...................................................84
15. Loss Per Common Share..................................................86
16. Stock Compensation Plans...............................................87
17. Business Combinations..................................................89
18. Operating Segments.....................................................90
Financial Statement Schedule
II. Valuation Accounts and Reserves........................................94
Quarterly Operating Results..............................................................95
Financial Statements of Dow Corning Corporation for the years ended
December 31, 2004, 2003 and 2002.........................................................96
Financial Statements of Samsung Corning Precision Glass Co., Ltd. for the
years ended December 31, 2004, 2003 and 2002............................................134
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
To the Board of Directors and Shareholders of Corning Incorporated:
We have completed an integrated audit of Corning Incorporated's 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004, and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedule
- ------------------------------------------------------------------
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Corning Incorporated and its subsidiaries at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004 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 accompanying index 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 the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements 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.
Internal control over financial reporting
- -----------------------------------------
Also, in our opinion, management's assessment, included in "Management's Annual
Report on Internal Control Over Financial Reporting" appearing under Item 9A,
that the Company maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by COSO. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2005
Consolidated Statements of Operations Corning Incorporated and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 3,854 $ 3,090 $ 3,164
Cost of sales 2,439 2,241 2,562
---------------------------------------------
Gross margin 1,415 849 602
Operating expenses:
Selling, general and administrative expenses 653 599 716
Research, development and engineering expenses 355 344 483
Amortization of purchased intangibles 38 37 43
Restructuring, impairment and other charges and (credits) (Note 3) 1,789 111 2,080
Asbestos settlement (Note 7) 33 413
---------------------------------------------
Operating loss (1,453) (655) (2,720)
Interest income 25 32 41
Interest expense (141) (154) (179)
(Loss) gain on repurchases and retirement of debt, net (Note 11) (36) 19 176
Other income (expense), net 25 (1) (38)
---------------------------------------------
Loss before income taxes (1,580) (759) (2,720)
(Provision) benefit for income taxes (Note 6) (1,031) 254 726
---------------------------------------------
Loss before minority interests and equity earnings (2,611) (505) (1,994)
Minority interests (17) 73 98
Equity in earnings of associated companies, net of impairments (Note 7) 443 209 116
---------------------------------------------
Loss from continuing operations (2,185) (223) (1,780)
Income from discontinued operation (Note 2) 20 478
---------------------------------------------
Net loss (2,165) (223) (1,302)
Dividend requirements of preferred stock (128)
---------------------------------------------
Loss attributable to common shareholders $ (2,165) $ (223) $ (1,430)
=============================================
Basic and diluted (loss) earnings per common share from (Note 15):
Continuing operations $ (1.57) $ (0.18) $ (1.85)
Discontinued operation 0.01 0.46
---------------------------------------------
Basic and diluted loss per common share $ (1.56) $ (0.18) $ (1.39)
=============================================
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Balance Sheets Corning Incorporated and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions, except share and per share amounts) 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,009 $ 688
Short-term investments, at fair value 872 578
----------------------------------
Total cash, cash equivalents and short-term investments 1,881 1,266
Trade accounts receivable, net of doubtful accounts and allowances - $30 and $38 585 525
Inventories (Note 5) 535 467
Deferred income taxes (Note 6) 92 242
Other current assets 188 194
----------------------------------
Total current assets 3,281 2,694
Investments (Note 7) 1,484 1,045
Property, net of accumulated depreciation - $3,532 and $3,415 (Note 8) 3,941 3,620
Goodwill and other intangible assets, net (Note 9) 398 1,901
Deferred income taxes (Note 6) 440 1,225
Other assets 166 267
----------------------------------
Total Assets $ 9,710 $ 10,752
==================================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings, including current portion of long-term debt (Note 11) $ 478 $ 146
Accounts payable 682 333
Other accrued liabilities (Note 10) 1,176 1,074
----------------------------------
Total current liabilities 2,336 1,553
Long-term debt (Note 11) 2,214 2,668
Postretirement benefits other than pensions (Note 12) 600 619
Other liabilities (Note 10) 715 412
----------------------------------
Total liabilities 5,865 5,252
----------------------------------
Commitments and contingencies (Note 13)
Minority interests 29 36
----------------------------------
Shareholders' equity (Note 14):
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: 637 thousand and 854 thousand 64 85
Common stock - Par value $0.50 per share; Shares authorized: 3.8 billion
Shares issued: 1,424 million and 1,401 million 712 701
Additional paid-in capital 10,363 10,298
Accumulated deficit (7,309) (5,144)
Treasury stock, at cost; Shares held: 16 million and 58 million (162) (574)
Accumulated other comprehensive income 148 98
----------------------------------
Total shareholders' equity 3,816 5,464
----------------------------------
Total Liabilities and Shareholders' Equity $ 9,710 $ 10,752
==================================
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Cash Flows Corning Incorporated and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Loss from continuing operations $ (2,185) $ (223) $ (1,780)
Adjustments to reconcile loss from continuing operations
to net cash provided by (used in) operating activities:
Depreciation 485 480 618
Amortization of purchased intangibles 38 37 43
Asbestos settlement 33 413
Restructuring, impairment and other charges and (credits) 1,789 111 2,080
Loss (gain) on repurchases and retirement of debt 36 (19) (176)
Undistributed earnings of associated companies (303) (97) (33)
Minority interests, net of dividends paid 17 (77) (98)
Deferred taxes 947 (263) (432)
Interest expense on convertible debentures 4 18 38
Restructuring payments (85) (233) (278)
Income tax refund 191
Customer deposits 204
Employee benefit payments in excess of expense (19) (142) (55)
Changes in certain working capital items:
Trade accounts receivable (40) 153
Inventories (68) 108 135
Other current assets (7) 49 (363)
Accounts payable and other current liabilities, net of restructuring payments 143 (219) (158)
Other, net 20 (1) (18)
-------------------------------------
Net cash provided by (used in) operating activities 1,009 133 (324)
-------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (857) (366) (357)
Acquisitions of businesses, net of cash acquired (6) (56)
Net proceeds from sale of businesses 100 9 787
Net proceeds from sale or disposal of assets 49 46 92
Net decrease (increase) in long-term investments and other long-term assets 5 (10) (31)
Short-term investments - acquisitions (1,685) (2,122) (2,258)
Short-term investments - liquidations 1,389 2,557 2,543
Restricted investments - acquisitions (119)
Restricted investments - liquidations 7 19 88
-------------------------------------
Net cash (used in) provided by investing activities (992) 127 689
-------------------------------------
Cash Flows from Financing Activities:
Net repayments of short-term borrowings and current portion of long-term debt (115) (181) (506)
Proceeds from issuance of long-term debt, net 442 11
Retirements of long-term debt (154) (1,189) (309)
Proceeds from issuance of Series C preferred stock, net 557
Proceeds from issuance of common stock, net 42 657 52
Repurchases of stock (31)
Cash dividends to preferred shareholders (7) (19) (88)
Proceeds from the exercise of stock options 49 9
Other, net 8 15
-------------------------------------
Net cash provided by (used in) financing activities 265 (708) (314)
-------------------------------------
Effect of exchange rates on cash 39 60 43
-------------------------------------
Cash provided by (used in) continuing operations 321 (388) 94
Cash provided by discontinued operations 60
-------------------------------------
Net increase (decrease) in cash and cash equivalents 321 (388) 154
Cash and cash equivalents at beginning of year 688 1,076 922
-------------------------------------
Cash and cash equivalents at end of year $ 1,009 $ 688 $ 1,076
=====================================
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Changes in Shareholders' Equity Corning Incorporated and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions)
Accumulated
Series C Additional other Total
Preferred Common paid-in Accumulated Treasury comprehensive shareholders'
stock stock capital deficit stock income (loss) equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 512 $ 9,532 $(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 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 49 (9) 40
------------------------------------------------------------------------------------
Balance, December 31, 2002 155 634 9,695 (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 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
Shares issued in debt retirements 12 65 77
Other, net 2 (7) (2) (7)
-----------------------------------------------------------------------------------
Balance, December 31, 2003 85 701 10,298 (5,144) (574) 98 5,464
Net loss (2,165) (2,165)
Foreign currency translation adjustment 174 174
Minimum pension liability adjustment (126) (126)
Net unrealized gain on investments 8 8
Other comprehensive loss (6) (6)
----------
Total comprehensive loss (2,115)
----------
Series C preferred stock conversions (21) 5 16
Shares issued to benefit plans 5 36 41
Shares issued in debt retirements (11) 379 368
Other, net 6 55 (3) 58
------------------------------------------------------------------------------------
Balance, December 31, 2004 $ 64 $ 712 $ 10,363 $(7,309) $ (162) $ 148 $ 3,816
=====================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Notes to Consolidated Financial Statements Corning Incorporated and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Organization
Corning Incorporated is a world-leading provider of high-performance glass for
computer monitors and other information display applications; optical fiber and
cable and hardware and equipment products for the telecommunications industry;
ceramic substrates for the automotive and diesel industries; scientific
laboratory products for the scientific community and specialized polymer
products for biotechnology applications; advanced optical materials for the
semiconductor industry and the scientific community; and other technologies. In
these notes, the terms "Corning," "Company," "we," "us," or "our" mean Corning
Incorporated and subsidiary companies.
Basis of Presentation and Principles of Consolidation
Our consolidated financial statements were prepared in conformity with
accounting principles generally accepted in the United States of America (GAAP)
and include the assets, liabilities, revenues and expenses of all majority-owned
subsidiaries over which Corning exercises control and, when applicable, entities
for which Corning has a controlling financial interest. We consolidate one
variable interest entity in which we are the primary beneficiary.
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
consolidated operating results.
We use the cost method to account for our investments in companies that we do
not control and for which we do not have the ability to exercise significant
influence over operating and financial policies. In accordance with the cost
method, these investments are recorded at cost or fair value, as appropriate.
All material intercompany accounts, transactions and profits are eliminated in
consolidation.
On December 13, 2002, we completed the sale of the precision lens business to 3M
Company. Our consolidated statements of operations and cash flows and related
notes present the precision lens business as a discontinued operation.
Certain prior year amounts have been reclassified to conform to the current-year
presentation, including the classification of auction rate securities as
available-for-sale securities, which are reported as short-term investments,
instead of cash equivalents. These reclassifications had no impact on our
results of operations or changes in shareholders' equity.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect amounts reported in the
consolidated financial statements and related notes. Significant estimates and
assumptions in these consolidated financial statements include restructuring and
other charges and credits, allowances for doubtful accounts receivable,
estimates of fair value 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 other
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. Net
sales consist of revenue related to sales of product, which generally comprise
standard products. We recognize product revenue 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.
At the time revenue is recognized, accruals are recorded, with the related
reduction to revenue, for estimated product returns, allowances and price
discounts based upon historical experience and related terms of customer
arrangements. Where we have offered product warranties, we also establish
liabilities for estimated warranty costs based upon historical experience and
specific warranty issues. Warranty liabilities are adjusted when experience
indicates an expected settlement will differ from initial estimates.
1. Summary of Significant Accounting Policies (continued)
Corning periodically enters into long-term supply contracts and receives advance
payments for product to be delivered in future periods. Upon receipt of the cash
deposits made by customers, Corning records a customer deposit liability, which
will be applied in the form of credits against future product purchases over the
life of the contract. As product is shipped to a customer, Corning will
recognize revenue at the selling price and issue a credit memorandum for an
agreed amount of the customer deposit liability. The credit memorandum will be
applied against customer receivables resulting from the sale of product, thus
reducing operating cash flows over the customer contract's life.
Foreign Currency Translation and Transactions
The determination of the functional currency for Corning's foreign subsidiaries
is made based on the appropriate economic and management indicators. For most
foreign operations, the local currencies are generally considered to be the
functional currencies. Prior to 2005, non-U.S. operations which do not use the
local currency as the functional currency use the U.S. dollar. Effective January
1, 2005, our Taiwan subsidiary's functional currency will change from the new
Taiwan dollar (its local currency) to the Japanese yen due to the increased
significance of Japanese yen based transactions of that subsidiary.
For foreign subsidiary functional currency financial statements, balance sheet
accounts 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 recorded as a separate component of accumulated other
comprehensive income (loss) in shareholders' equity. The effects of remeasuring
non-functional currency assets and liabilities into the functional currency are
included in current earnings.
Stock-Based Compensation
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), we apply the recognition
and measurement principles of Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" (APB 25), to our stock options and
other stock-based compensation plans. These plans are more fully described in
Note 16 (Stock Compensation Plans).
In accordance with APB 25, stock option compensation expense is recognized in
earnings 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. 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.
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 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,
---------------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations - as reported $ (2,185) $ (223) $ (1,780)
Less: Dividend requirements of preferred stock (128)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations attributable to common
shareholders - as reported (2,185) (223) (1,908)
Add: Stock-based employee compensation expense
determined under APB 25, included in reported loss from
continuing operations, net of tax 11 1 1
Less: Stock-based employee compensation expense
determined under fair value based method, net of tax (168) (162) (278)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations attributable to common
shareholders - pro forma $ (2,342) $ (384) $ (2,185)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss per common share from continuing operations:
Basic and diluted - as reported $ (1.57) $ (0.18) $ (1.85)
Basic and diluted - pro forma $ (1.69) $ (0.30) $ (2.12)
- ------------------------------------------------------------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
On December 1, 2004, Corning's Compensation Committee of the Board of Directors
considered and adopted a proposal that accelerated the vesting of all unvested
underwater options held by active employees. Unvested underwater options were
defined as options granted prior to December 1, 2004 with a grant price greater
than $12.70. Approximately 7 million stock options or 5 percent of Corning's
outstanding stock options were accelerated. This action was one of a series of
actions taken to manage Corning's anticipated future compensation cost for all
forms of equity incentives within an acceptable range once SFAS 123R is adopted.
Other actions included reducing the use of stock options for all employees,
increasing the use of performance shares in the executive plan, and reviewing
the cost considerations of the global employee share purchase program. As a
result of this action, the 2004 "stock-based employee compensation expense
determined under fair value based method, net of tax" amount above includes $13
million of incremental expense relating to these accelerated options.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments that are readily
convertible into cash. We consider securities with contractual maturities of
three months or less, when purchased, to be cash equivalents. The carrying
amount of these securities approximates fair value because of the short-term
maturity of these instruments.
Supplemental disclosure of cash flow information follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------
2004 2003 2002
---- ---- ----
Non-cash financing transaction:
Retirement of short-term borrowings $ 26
Cash paid (received) for interest and income taxes:
Interest expense $ 129 $ 124 $ 112
Income taxes, net of refunds received $ 64 $ (145) $ 60
- ------------------------------------------------------------------------------------------------------------------------------------
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, auction rate 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.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
Property, Net of Accumulated 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 3 (Restructuring, Impairment and Other Charges and (Credits))
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
Goodwill is the excess of cost of an acquired entity over the amounts assigned
to assets acquired and liabilities assumed in a business combination. Goodwill
is tested for impairment annually in the fourth quarter, and will be tested for
impairment between annual tests if an event occurs or circumstances change that
more likely than not would indicate the carrying amount may be impaired.
Impairment testing for goodwill is done at a reporting unit level. Reporting
units are either one level below the operating segment level or an aggregation
of two or more reporting units within the same operating segment if such
reporting units share similar economic characteristics. Goodwill relates and is
assigned directly to a specific reporting unit. An impairment loss generally
would be recognized when the carrying amount of the reporting unit's net assets
exceeds the estimated fair value of the reporting unit. The estimated fair value
of a reporting unit is determined using a discounted cash flow analysis. Refer
to Notes 3 (Restructuring, Impairment and Other Charges and (Credits)) and 9
(Goodwill and Other Intangible Assets) for additional information.
Other intangible assets include patents, trademarks and other intangible assets
acquired from an independent party. Such intangible assets have a definite life
and are amortized on a straight-line basis with estimated useful lives ranging
from 5 to 20 years.
1. Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets, such as plant and
equipment and intangible assets, 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 and for the retirement or conversion of certain debt
instruments. 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 change 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.
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.
New Accounting Standards
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4" (SFAS 151). SFAS 151 amends ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify that abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) should be recognized as
current-period charges. Additionally, SFAS 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. Corning is required to adopt SFAS 151 effective
January 1, 2006. Corning does not expect the adoption of SFAS 151 to have a
material impact on its consolidated results of operations and financial
condition.
1. Summary of Significant Accounting Policies (concluded)
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS 123R), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123) and supercedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements at fair value beginning in Corning's third quarter of 2005.
Under SFAS 123R, Corning must determine the appropriate fair value model to be
used for valuing share-based payments, the amortization method for compensation
cost, and the transition method to be used at date of adoption. The standard
permits three transition method adoption alternatives:
.. "Prospective adoption" would require Corning to begin expensing share-based
payments after July 1, 2005. Prior interim and annual periods would not be
restated.
.. "Modified prospective adoption" would require Corning to begin expensing
share-based payments effective January 1, 2005. Prior annual periods would
not be restated.
.. "Modified retrospective adoption" would require Corning to begin expensing
share-based payments effective January 1, 2005. Prior annual periods would
be restated.
We are currently evaluating the impact that SFAS 123R will have on its
consolidated results of operations and financial condition, which in part will
be dependent on the transition and amortization methods used to adopt the new
rules in 2005. Our current estimate is that our 2005 pretax expense will be in
the range of $25 million to $50 million, and that future years expense will
approximate $60 million.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions"
(SFAS 153). SFAS 153 is based on the principle that nonmonetary asset exchanges
should be recorded and measured at the fair value of the assets exchanged, with
certain exceptions. This standard requires exchanges of productive assets to be
accounted for at fair value, rather than at carryover basis, unless (1) neither
the asset received nor the asset surrendered has a fair value that is
determinable within reasonable limits or (2) the transactions lack commercial
substance. SFAS 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. Corning is required to adopt SFAS 153
effective January 1, 2006. Corning does not expect the adoption of SFAS 153 will
have a material impact on its consolidated results of operations and financial
condition.
2. Discontinued Operation
On December 13, 2002, we completed the sale of our precision lens business to 3M
Company (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 operation in the consolidated statements of operations.
In 2003, 3M notified Corning that 3M believed it had certain claims arising out
of the representations and warranties made by Corning in connection with the
sale of the precision lens business to 3M. In the third quarter of 2004, Corning
and 3M reached a final settlement agreement for the funds held in escrow.
Accordingly, we received $20 million in cash and recorded a gain of $20 million.
This gain is included in income from discontinued operation in the consolidated
statements of operations.
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 precision lens business
discontinued operation follows (in millions):
- --------------------------------------------------------------------------------
For the year ended For the year ended
December 31, 2004 December 31, 2002
- --------------------------------------------------------------------------------
Net sales $ 268
=========
Income before taxes $ 100
Gain on sale before taxes $ 20 652
Provision for income taxes (274)
--------- ---------
Net income $ 20 $ 478
- --------------------------------------------------------------------------------
3. Restructuring, Impairment and Other Charges and (Credits)
2004 Actions
Corning recorded net charges of $1,789 million in 2004. A summary of the
significant charges and credits follows:
.. We recorded a charge of $1,420 million to impair a significant portion of
our Telecommunications segment goodwill balance. Refer to Note 9 (Goodwill
and Other Intangible Assets) for additional information on this charge.
.. We recorded a $350 million charge to impair certain fixed assets in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS 144). This charge primarily relates to our third
quarter decision to permanently abandon approximately $332 million of
construction in progress at our optical fiber manufacturing facility in
Concord, North Carolina that had been stopped in 2002. As a result of our
lowered outlook for the Telecommunications segment, we have permanently
abandoned this construction in progress as we no longer believe the demand
for optical fiber will warrant the investment necessary to complete this
facility.
.. We recorded an asset held for use impairment charge of $24 million to
impair certain fixed assets and intangible assets other than goodwill in
accordance with SFAS 144. Due to our decision to permanently abandon
certain fixed assets and lower our long-term outlook for the
Telecommunications segment, we determined that an event of impairment, as
defined by SFAS 144, had occurred in our Telecommunications segment which
required us to test the segment's long-lived assets other than goodwill for
impairment. We estimated the fair value of the long-lived assets using the
discounted cash flow approach as a measure of fair value. As a result of
our impairment evaluation, we recorded an impairment charge to write-down
certain assets to their estimated fair values.
.. We recorded a gain of $33 million related to proceeds in excess of assumed
salvage values for assets of Corning Asahi Video Products Company (CAV)
that were previously impaired but later sold to a Henan Anyang CPT Glass
Bulb Group, Electronic Glass Co., Ltd. (Henan Anyang), located in China.
CAV, our 51% owned affiliate that manufactured glass panels and funnels for
use in conventional televisions, was shut down in 2003. This represents the
substantial completion of the sale of CAV's assets.
.. We recorded $37 million of accelerated depreciation relating to the final
shutdown of our semiconductor materials manufacturing facility in
Charleston, South Carolina, which we announced in the fourth quarter of
2003.
.. We recorded a loss of $14 million on the sale of our frequency controls
business for net cash proceeds of $80 million. The frequency controls
business, which was part of our Telecommunications segment, had annual
sales of $76 million.
.. We recorded net credits of $25 million related to adjustments to prior
period restructuring, impairment, and other charges.
The following table summarizes the charges, credits and balances of the
restructuring liabilities as of and for the year ended December 31, 2004 (in
millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2004
-------------------------------------
Reserve at Revisions Net Reserve at
January 1, to existing charges/ Cash Dec. 31,
2004 Charges plans (reversals) payments 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 78 $ (60) $ 18
Exit costs 108 $ 2 $ (8) $ (6) (25) 77
-----------------------------------------------------------------------------
Total restructuring charges $ 186 $ 2 $ (8) $ (6) $ (85) $ 95
-----------------------------------------------------------------------------
Impairment of long-lived assets:
Goodwill $ 1,420 $1,420
Assets to be disposed of by sale
or abandonment 350 $ (48) 302
Asset to be held and used 24 24
------------------------------------
Total impairment charges $ 1,794 $ (48) $1,746
------------------------------------
Other:
Accelerated depreciation $ 37 $ 37
Loss on sale of business 14 $ (2) 12
------------------------------------
Total other charges $ 51 $ (2) $ 49
------------------------------------
Total restructuring, impairment and
other charges and (credits) $ 1,847 $ (58) $1,789
- ------------------------------------------------------------------------------------------------------------------------------------
Cash payments for employee-related costs will be substantially completed by the
end of 2005, while payments for exit activities will be substantially completed
by the end of 2008.
3. Restructuring, Impairment and Other Charges and (Credits) (continued)
The following table summarizes the net charge (reversals) for 2004 restructuring
actions by operating segment (in millions):
- ----------------------------------------------------------------------------------------------------------------
Telecom- Unallocated
munications and Other Total
- ----------------------------------------------------------------------------------------------------------------
Net charges (reversals) for restructuring actions $ 1,798 $ (9) $ 1,789
- ----------------------------------------------------------------------------------------------------------------
2003 Actions
Corning recorded net charges of $111 million in 2003. Major actions approved and
initiated in 2003 included the following:
.. The shutdown of CAV.
.. The exit of our photonic technologies products within the
Telecommunications segment, which included the sale of certain assets to
Avanex Corporation (Avanex).
.. Credits to prior year restructuring plans, primarily the result of our
decision not to exit two cabling sites previously marked for shutdown in
2002.
.. The shutdown of two of our specialty materials manufacturing facilities in
North Brookfield and Charleston, South Carolina.
The following table summarizes the charges, credits and balances of the
restructuring liabilities as of and for the year ended December 31, 2003 (in
millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003
-------------------------------------
Reserve at Reversals Net Reserve at
January 1, to existing charges/ Non-cash Cash Dec. 31,
2003 Charges plans (reversals) uses payments 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 of long-lived assets:
Assets to be disposed of by sale
or abandonment $ 40 $ (61) $ (21)
Assets to be held and used 62 62
Cost investments 5 (1) 4
------------------------------------
Total impairment charges $ 107 $ (62) $ 45
------------------------------------
Other:
Accelerated depreciation $ 12 $ 12
Loss on Avanex transaction 13 13
------------------------------------
Total other charges $ 25 $ 25
------------------------------------
Total restructuring, impairment and
other charges and (credits) $ 259 $ (148) $ 111
- ------------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the net charge (reversals) for 2003 restructuring
actions by operating segment (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Telecom- Unallocated
munications and Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
Net charges (reversals) for restructuring actions $ (36) $ 147 $ 111
- ------------------------------------------------------------------------------------------------------------------------------------
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, 2004, all of the 1,975 employees from the 2003 restructuring
plans had been separated.
3. Restructuring, Impairment and Other Charges and (Credits) (concluded)
2002 Actions
Corning recorded net charges of $2,080 million in 2002. Major actions approved
and initiated in 2002 included the following:
.. Permanent closure 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.
.. Impairment of a significant portion of our Telecommunications segment
goodwill balance.
.. An asset held for use impairment charge to impair certain fixed assets and
intangible assets other than goodwill in the Telecommunications and
conventional video segments in accordance with SFAS 144.
.. Charges for other than temporary declines in certain cost investments in
the Telecommunications segment.
.. Divestiture of a portion of the controls and connectors product line in the
Telecommunications segment. We received proceeds of $30 million and
realized a loss on sale of approximately $16 million ($10 million
after-tax).
The following table summarizes the charges, credits and balances of the
restructuring liabilities as of and for the year ended December 31, 2002 (in
millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
-------------------------------------
Reserve at Reversals Net Reserve at
January 1, to existing charges/ Non-cash Cash Dec. 31,
2002 Charges plans (reversals) uses payments 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 of long-lived assets:
Goodwill $ 400 $ 400
Assets to be disposed of by sale
or abandonment 712 $ (11) 701
Assets to be held and used 409 409
Cost investments 107 107
-------------------------------------
Total impairment charges $ 1,628 $ (11) $ 1,617
-------------------------------------
Other:
Loss on sale of business $ 16 $ 16
------------------------------------
Total restructuring, impairment and
other charges and (credits) $ 2,105 $ (25) $ 2,080
- ------------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the net charges (reversals) for 2002
restructuring actions by operating segment (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Telecom- Environmental Life Unallocated
munications Technologies Sciences and Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
Net charges for restructuring actions $ 1,722 $ 2 $ 1 $ 355 $ 2,080
- ------------------------------------------------------------------------------------------------------------------------------------
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, 2004, all of the 7,100 employees from the 2002 restructuring
plans had been separated.
4. Short-Term Investments
The following is a summary of the fair value of available-for-sale securities
(in millions):
- --------------------------------------------------------------------------------
December 31,
----------------------------
2004 2003
- --------------------------------------------------------------------------------
Bonds, notes and other securities
U.S. government and agencies $ 85 $ 88
States and municipalities 216 226
Asset-backed securities 245 93
Commercial paper 20 25
Other debt securities 306 146
- --------------------------------------------------------------------------------
Total short-term investments $ 872 $ 578
- --------------------------------------------------------------------------------
Gross unrealized gains and losses were insignificant at December 31, 2004 and
2003.
The following table summarizes the contractual maturities of available-for-sale
securities at December 31, 2004 (in millions):
- --------------------------------------------------------------------------------
Less than one year $ 110
Due in 1-2 years 118
Due in 2-5 years 246
Due after 5 years 398
- --------------------------------------------------------------------------------
Total $ 872
- --------------------------------------------------------------------------------
Proceeds from sales and maturities of short-term investments totaled $1.4
billion, $2.6 billion and $2.5 billion in 2004, 2003 and 2002, respectively. The
gross realized gains related to sales of short-term investments were
insignificant in 2004 and 2003 and $10 million in 2002. The gross realized
losses related to sales of short-term investments were insignificant in 2004 and
2003 and $8 million in 2002.
5. Inventories
Inventories consist of the following (in millions):
- --------------------------------------------------------------------------------
December 31,
----------------------------
2004 2003
- --------------------------------------------------------------------------------
Finished goods $ 136 $ 141
Work in process 172 113
Raw materials and accessories 139 138
Supplies and packing materials 88 75
- --------------------------------------------------------------------------------
Total inventories $ 535 $ 467
- --------------------------------------------------------------------------------
6. Income Taxes
Loss from continuing operations before income taxes follows (in millions):
- ---------------------------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------------
2004 2003 2002
- ---------------------------------------------------------------------------------------------------
U.S. companies $ (1,554) $ (927) $ (2,045)
Non-U.S. companies (26) 168 (675)
- ---------------------------------------------------------------------------------------------------
Loss from continuing operations before income taxes $ (1,580) $ (759) $ (2,720)
- ---------------------------------------------------------------------------------------------------
The increase in the loss from continuing operations before income taxes in 2004
compared to 2003 is due primarily to several non-cash charges associated with
goodwill and other long-lived asset impairments. Refer to Note 3 (Restructuring,
Impairments and Other Charges and (Credits)) for additional information.
6. Income Taxes (continued)
The current and deferred amounts of the (provision) benefit for income taxes
follow (in millions):
- --------------------------------------------------------------------------------
Years ended December 31,
----------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Current:
Federal $ 20 $ 11 $ 330
State and municipal 7 3 7
Foreign (111) (23) (43)
Deferred:
Federal (547) 258 263
State and municipal (220) 24 70
Foreign (180) (19) 99
- --------------------------------------------------------------------------------
(Provision) benefit for income taxes $ (1,031) $ 254 $ 726
- --------------------------------------------------------------------------------
Amounts are reflected in the preceding tables based on the location of the
taxing authorities.
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. 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. As of December 31, 2004, taxes have not been provided
on approximately $1.5 billion of accumulated foreign unremitted earnings which
are expected to remain invested indefinitely.
The American Jobs Creation Act of 2004 (the "Act") was signed into law on
October 22, 2004. The Act introduced a special one-time (for 2004 or 2005) 85%
dividends received deduction for certain repatriated foreign earnings. At this
point in time, we do not expect our remittance plans to change as a result of
this provision. Our accumulated foreign unremitted earnings are expected to
remain invested indefinitely.
The Act also provided for the repeal of the extraterritorial income tax regime
(through reduced benefits in 2005 and 2006, with full repeal effective for 2007)
and the allowance of a deduction for qualified domestic production activities
(phased in over the years 2005 to 2009 and fully effective in 2010). Neither of
these changes is expected to have a significant impact on our effective tax rate
or U.S. tax liabilities because of our loss position in the U.S. and the
resulting recording and maintaining of valuation allowances against our U.S.
deferred tax assets.
Reconciliation of the U.S. statutory income tax rate to our effective tax rate
for continuing operations follows:
- --------------------------------------------------------------------------------
Years ended December 31,
---------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Statutory U.S. benefit rate 35.0% 35.0% 35.0%
State income benefit, net of federal benefit 2.4 5.3 2.7
Nondeductible goodwill and other expenses (27.3) (0.6) (1.1)
Valuation allowances (76.2) (4.9) (10.2)
Other items, net 0.9 (1.4) 0.3
- --------------------------------------------------------------------------------
Effective (income tax) benefit rate (65.2)% 33.4% 26.7%
- --------------------------------------------------------------------------------
The component percentages above reflect the increase in loss from continuing
operations before income taxes in 2004 compared to 2003 due primarily to the
impairment charges. In addition, as further described below, our 2004 provision
for income taxes reflects charges to increase our valuation allowance against
certain U.S. and German deferred tax assets.
6. Income Taxes (continued)
The tax effects of temporary differences and carryforwards that gave rise to
significant portions of the deferred tax assets and liabilities follows (in
millions):
- --------------------------------------------------------------------------------
December 31,
-------------------------------
2004 2003
- --------------------------------------------------------------------------------
Loss and tax credit carryforwards $ 1,189 $ 1,045
Capitalized research and development 207 252
Restructuring reserves 237 146
Postretirement medical and life benefits 243 244
Inventory 35 55
Intangible and other assets 98 125
Other accrued liabilities 156 177
Other employee benefits 97 14
Other 86 79
- --------------------------------------------------------------------------------
Gross deferred tax assets 2,348 2,137
Valuation allowance (1,685) (469)
- --------------------------------------------------------------------------------
Deferred tax assets 663 1,668
- --------------------------------------------------------------------------------
Fixed assets (131) (201)
- --------------------------------------------------------------------------------
Deferred tax liabilities (131) (201)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 532 $ 1,467
- --------------------------------------------------------------------------------
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" (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, as well as related
key assumptions. SFAS 109 requires that greater weight be given to previous
cumulative losses than the outlook for future profitability when determining
whether deferred tax assets can be used.
Prior to our 2004 assessment of realizability, we believed that it was more
likely than not that our net U.S. (federal, state and local) and foreign
deferred tax assets would be realized. This assessment was based on the
following:
.. Approximately $140 million of our net U.S. deferred tax assets were
expected to have been realized through net operating loss carryback claims
to be filed over the next three to five years, which would have generated
cash refunds during such period.
.. We expected the remaining net U.S. and foreign deferred tax assets to be
realized from future earnings.
.. In the event future earnings were insufficient, approximately $500 million
of our net U.S. deferred tax assets were expected to have been realized
through a tax-planning strategy involving the sale of a non-strategic
appreciated asset.
The 2004 assessment produced the following conclusions:
.. Due to delays in finalizing the Pittsburgh Corning Corporation settlement,
we no longer believe that it is more likely than not that we will realize a
portion of our net U.S. deferred tax assets through net operating loss
carryback claims.
.. We have incurred significant losses in the U.S. and Germany due primarily
to the Telecommunications restructuring and impairment charges and
operating losses over the last four years. Although Corning's business
environment has improved, a growing portion of our sales and earnings are
outside of the U.S., particularly in Asia. The U.S. portion of our
operations operated at a loss in 2004. This portion not only includes most
of our Telecommunications segment, but also a significant portion of our
global research, development and engineering and corporate infrastructure
spending. As we have taken additional significant impairment charges and
lowered the outlook for our largest U.S. based business during 2004, we
believe that a valuation allowance against these tax assets is required
until realization is more assured. The valuation allowance is primarily
attributable to the uncertainty regarding the realization of specific U.S.
and foreign deductible temporary differences, U.S. net operating losses and
tax credit carryforwards that expire through 2024, and foreign net
operating losses, primarily in Germany, which allows for an indefinite
carryforward period. Refer to Notes 3 (Restructuring, Impairment and Other
Charges and (Credits)) and 9 (Goodwill and Other Intangible Assets) for
additional information.
Based on our 2004 assessment of realizability, we increased our valuation
allowance by $1.2 billion in 2004 to reduce our net deferred tax assets to
approximately $532 million, which are primarily U.S. net deferred tax assets.
This amount is comprised of $937 million recorded in the third quarter to
establish a valuation allowance against deferred tax assets recorded prior to
July 1, 2004 and $279 million recorded in the third and fourth quarters, the
majority of which relates to deferred tax assets recorded in connection with
third quarter fixed asset impairment charges. Refer to Note 3 (Restructuring,
Impairment and Other Charges and (Credits)) for additional information on these
charges. We continue to believe that it is more likely than not that we could
realize these net U.S. deferred tax assets through a tax-planning strategy
involving the sale of a non-strategic appreciated asset.
6. Income Taxes (concluded)
We expect to maintain a valuation allowance on future tax benefits until an
appropriate level of profitability, primarily in the U.S. and Germany, is
sustained or we are able to develop tax planning strategies that enable us to
conclude that it is more likely than not that a larger portion of our deferred
tax assets would be realizable, or if the Pittsburgh Corning Corporation
settlement is finalized earlier than we anticipate. Until then, our tax
provision will include only the net tax expense attributable to certain foreign
operations.
Corning expects to take a worthless stock deduction in its 2004 U.S. Federal
consolidated tax return for the loss on its investment in the photonic
technologies business associated with the Pirelli acquisition. This acquisition
was completed in December 2000 and was substantially impaired in the second
quarter of 2001. The tax benefit of the deduction, before consideration of any
valuation allowance, is approximately $1.54 billion. We have not recorded a
deferred tax asset for this item as the ultimate realization of such deduction
is uncertain, and consistent with the requirements of SFAS No. 5, "Accounting
for Contingencies," recognition of an asset prior to the time management
determines the realization of the asset to be probable is prohibited.
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.
7. Investments
Investments comprise the following (in millions):
- ----------------------------------------------------------------------------------------------------------------------------
December 31,
Ownership -------------------------------
Interest 2004 2003
-------- ---- ----
Associated companies at equity
Samsung Corning Precision Glass Co., Ltd. 50% $ 572 $ 299
Samsung Corning Co., Ltd. 50% 365 320
Dow Corning Corporation 50% 324 185
All other 25%-51% (1) 162 174
-------- --------
1,423 978
Other investments (2) 61 67
-------- --------
Total $ 1,484 $ 1,045
- ----------------------------------------------------------------------------------------------------------------------------
(1) Amounts reflect Corning's direct ownership interests in the respective
associated companies. Corning does not control any of such entities.
(2) Amounts reflect $53 million and $14 million at December 31, 2004 and 2003,
respectively, of available-for-sale securities stated at market value.
7. Investments (continued)
Associated Companies at Equity
The financial position and results of operations of these investments follow (in
millions):
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
-------------------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 6,146 $ 4,971 $ 4,456
Gross profit $ 2,341 $ 1,649 $ 1,375
Net income $ 1,036 $ 505 $ 376
Corning's equity in earnings of
affiliated companies (1)(2)(3) $ 443 $ 209 $ 116
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------
2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 2,779 $ 3,591
Noncurrent assets $ 5,426 $ 4,998
Short-term borrowings, including current portion
of long-term debt $ 75 $ 142
Other current liabilities $ 1,442 $ 1,695
Long-term debt $ 252 $ 219
Other long-term liabilities $ 2,777 $ 285
Liabilities subject to compromise (1) $ 3,615
Minority interest $ 245 $ 207
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends received from affiliated companies $ 140 $ 112 $ 83
Royalty income from affiliated companies $ 47 $ 25 $ 21
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Corning recognized equity earnings in Dow Corning Corporation in 2004 and
2003. See Dow Corning Corporation discussion below.
(2) Equity in earnings shown above and in the consolidated statements of
operations are net of amounts recorded for income tax.
(3) Amounts include the following restructuring and impairment charges:
. $35 million, $7 million and $34 million of charges to impair equity
method investments in the Telecommunications segment to their
estimated fair value in 2004, 2003 and 2002, respectively.
. In 2004, Dow Corning Corporation recorded charges related to
restructuring actions and adjustments to interest liabilities recorded
on its emergence from bankruptcy. Our equity earnings included $21
million related to these charges.
. In 2003, Samsung Corning Co., Ltd. recorded asset impairment charges.
Our equity earnings included $66 million related to these charges.
. In 2002, Samsung Corning Micro-Optics Company Ltd. recorded
restructuring and impairment charges. Our equity earnings included $20
million related to these charges.
At December 31, 2004, approximately $1.2 billion 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 are not material to the
consolidated financial statements taken as a whole.
A discussion and summarized results of Corning's significant investees at
December 31, 2004 follows:
7. Investments (continued)
Samsung Corning Precision Glass Co., Ltd. (Samsung Corning Precision)
- ---------------------------------------------------------------------
Samsung Corning Precision is a South Korea-based manufacturer of liquid crystal
display glass for flat panel displays. Samsung Corning Precision's financial
position and results of operations follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
-------------------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 1,097 $ 590 $ 335
Gross profit $ 820 $ 424 $ 217
Net income $ 561 $ 295 $ 162
Corning's equity in earnings of Samsung Corning Precision $ 277 $ 144 $ 80
Related Party Transactions:
Corning sales to Samsung Corning Precision (1) $ 96 $ 68 $ 39
Corning purchases from Samsung Corning Precision $ 76 $ 26 $ 10
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 200 $ 162
Noncurrent assets $ 1,506 $ 720
Short-term borrowings, including current portion
of long-term debt $ 54 $ 38
Other current liabilities $ 368 $ 204
Long-term debt $ 97 $ 24
Other long-term liabilities $ 45 $ 17
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends received from Samsung Corning Precision $ 71 $ 33 $ 23
Royalty income from Samsung Corning Precision $ 42 $ 22 $ 12
- ------------------------------------------------------------------------------------------------------------------------------------
(1) For 2004, includes $6 million for inventory and $90 million for machinery
and equipment.
Balances due to and from Samsung Corning Precision were immaterial at December
31, 2004 and 2003.
7. Investments (continued)
Samsung Corning Co., Ltd. (Samsung Corning)
- -------------------------------------------
Samsung Corning is a South Korea-based manufacturer of glass panels and funnels
for cathode ray tube (CRT) television and display monitors. In 2003, Samsung
Corning recorded a significant asset impairment charge, our portion of which was
$66 million after tax. It is possible that future equity results may include
operating losses or significant restructuring or fixed asset impairment charges
recorded by Samsung Corning. Samsung Corning's financial position and results of
operations follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
-------------------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 1,019 $ 895 $ 854
Gross profit $ 245 $ 199 $ 225
Net income (loss) $ 94 $ (74) $ 99
Corning's equity in earnings (losses) of Samsung Corning $ 32 $ (39) $ 44
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 425 $ 467
Noncurrent assets $ 652 $ 572
Short-term borrowings, including current portion
of long-term debt $ 72
Other current liabilities $ 163 $ 116
Long-term debt $ 47 $ 87
Other long-term liabilities $ 56 $ 68
Minority interest $ 73 $ 55
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends received from Samsung Corning $ 18 $ 29 $ 17
- ------------------------------------------------------------------------------------------------------------------------------------
7. Investments (continued)
Dow Corning Corporation (Dow Corning)
- -------------------------------------
Dow Corning is a U.S. based manufacturer of silicone products. In 1995, Corning
fully impaired its investment of Dow Corning upon its entry into bankruptcy
proceedings and did not recognize net 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. Dow Corning emerged from bankruptcy in 2004.
See discussion below for additional information for a history of this matter.
With the exception of the possibility of future bankruptcy related charges,
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 $249 million.
Corning received no dividends from Dow Corning in 2004 or 2003.
Dow Corning's financial position and results of operations follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
------------------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 3,373 $ 2,873 $ 2,610
Gross profit $ 1,036 $ 820 $ 727
Net income $ 238 $ 177 $ 59
Corning's equity in earnings of Dow Corning $ 116 $ 82
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 1,828 $ 2,619
Noncurrent assets $ 2,988 $ 3,420
Short-term borrowings, including current portion
of long-term debt $ 14 $ 17
Other current liabilities $ 764 $ 1,178
Long-term debt $ 60 $ 52
Other long-term liabilities $ 2,660 $ 182
Liabilities subject to compromise (1) $ 3,615
Minority interest $ 172 $ 152
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Dow Corning's 2003 financial statements were prepared in conformity with
the American Institute of Certified Public Accountants Statement of
Position No. 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.
7. Investments (continued)
Corning and The Dow Chemical Company (Dow Chemical) each own 50% of the common
stock of Dow Corning, which was in reorganization proceedings under Chapter 11
of the U.S. Bankruptcy Code between May 1995 and May 2004. 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 $1 million. 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. After
review and approvals by the Bankruptcy Court and the U.S. District Court of the
Eastern District of Michigan, and an appeal, the District Court on April 2, 2004
entered an order establishing June 1, 2004 as the effective date of the Joint
Plan.
Under the terms of the Joint Plan, Dow Corning has established and is funding a
Settlement Trust and a Litigation Facility to provide a means for tort claimants
to settle or litigate their claims. Of the approximately $3.2 billion of
required funding, Dow Corning has paid approximately $1.6 billion (inclusive of
insurance) and expects to pay up to an additional $1.6 billion ($710 million
after-tax) over 16 years. 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. As
required by the Joint Plan, Dow Corning has fully satisfied (or reserved for)
the claims of its commercial creditors in accordance with a March 31, 2004
ruling of the District Court determining the amount of pendency interest allowed
on the $810 million in principal owing on such claims. In the second quarter of
2004, Dow Corning recorded a $47 million adjustment to its interest liabilities
relating to this matter, of which Corning recognized $14 million in its second
quarter equity in earnings of associated companies, net of impairments. Certain
commercial creditors have appealed that ruling to the U.S. Court of Appeals of
the Sixth Circuit seeking from Dow Corning an additional sum of approximately
$80 million for interest at default rates and enforcement costs. Corning
believes the risk of loss to Dow Corning (net of sums reserved) is remote.
In addition, Dow Corning has received a statutory notice of deficiency from the
United States Internal Revenue Service asserting tax deficiencies totaling
approximately $65 million relating to its federal income tax returns for the
1995 and 1996 calendar years. This matter is pending before the U.S. District
Court in Michigan. Dow Corning has also received a proposed adjustment from the
IRS (approximately $117 million) with respect to its federal income tax returns
for the 1997, 1998 and 1999 calendar years. Dow Corning is vigorously contesting
these deficiencies and proposed adjustments which it believes are excessive.
The Joint Plan includes releases for Corning and Dow Chemical as shareholders in
exchange for contributions to the Joint Plan. Although claims against the
shareholders were included in several thousand state and federal lawsuits filed
pre-bankruptcy, alleging injuries arising from Dow Corning's implant products,
Corning was awarded summary judgment in federal court and in several state
jurisdictions. The remaining claims against Corning will be channeled by the
Joint Plan into facilities established by the Joint Plan. Management believes
that the likelihood of a materially adverse impact to Corning's financial
statements arising from these remaining shareholder claims is remote.
Pittsburgh Corning Corporation (PCC)
- ------------------------------------
Corning and PPG Industries, Inc. (PPG) each own 50% of the common 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. As a result of PCC's bankruptcy filing, Corning recorded
an after-tax charge of $36 million in 2001 to fully impair its investment in PCC
and discontinued recognition of equity earnings. 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 11,300 other cases
(approximately 42,800 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).
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.
7. Investments (concluded)
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 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
Pittsburgh Corning Europe N.V. (PCE), and 25 million shares of Corning common
stock. The common stock will be marked-to-market each quarter until it is
contributed to the settlement trust. Corning also will be making cash payments
of $144 million (net present value as of December 31, 2004) in six installments
beginning one year after 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 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.
The following summarizes the charges we have recorded for the asbestos
settlement (in millions):
- --------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------
2004 2003
- --------------------------------------------------------------------------------
Initial settlement charge $ 298
Mark-to-market common stock $ 33 115
------- -------
Asbestos settlement $ 33 $ 413
- --------------------------------------------------------------------------------
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 received a favorable vote from creditors in March 2004. Hearings to
consider objections to the Plan were held in the Bankruptcy Court in May 2004.
The parties filed post-hearing briefs and made final oral arguments to the
Bankruptcy Court in November 2004. The Bankruptcy Court has allowed an
additional round of briefing to address current case law developments, with
briefs due on February 28, 2005 and March 10, 2005, leading to a hearing on
March 16, 2005. The timing and outcome are uncertain. If the Bankruptcy Court
does not confirm the PCC Plan in its current form, changes to the settlement
agreement are reasonably possible. Further judicial review is also reasonably
possible. 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.
8. Property, Net of Accumulated Depreciation
Property, net follows (in millions):
- --------------------------------------------------------------------------------
December 31,
------------------------------------
2004 2003
- --------------------------------------------------------------------------------
Land $ 76 $ 80
Buildings 1,943 1,874
Equipment 4,569 4,357
Construction in progress 885 724
- --------------------------------------------------------------------------------
7,473 7,035
Accumulated depreciation (3,532) (3,415)
- --------------------------------------------------------------------------------
Total $ 3,941 $ 3,620
- --------------------------------------------------------------------------------
Approximately $22 million, $9 million and $13 million of interest costs were
capitalized as part of property, net in 2004, 2003 and 2002, respectively.
9. Goodwill and Other Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the year ended December 31 by
segment follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Telecommunications Display Technologies Other (1) Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2003 $1,556 $ 9 $ 150 $ 1,715
Divestitures (21) (21)
Foreign currency translation & other 41 41
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $1,576 $ 9 $ 150 $ 1,735
- ------------------------------------------------------------------------------------------------------------------------------------
Impairment (1,420) (1,420)
Divestitures (30) (30)
Foreign currency translation & other (3) (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 $ 123 $ 9 $ 150 $ 282
- ------------------------------------------------------------------------------------------------------------------------------------
(1) This balance relates to our Specialty Materials operating segment.
2004 Assessment
- ---------------
Our annual goodwill recoverability assessment is completed in the fourth
quarter, as it is traditionally based on our annual strategic planning process
that runs from June to October. This process includes reviewing expectations for
the long-term growth of our businesses and forecasting future cash flows. In the
third quarter, we identified certain factors during this annual strategic
planning process that caused us to lower our estimates and projections for the
long-term revenue growth of the Telecommunications segment, which indicated that
it was more likely than not that the fair value of the Telecommunications
segment reporting unit was less than its carrying value. As such, we performed
an interim impairment test of the Telecommunications segment goodwill in the
third quarter of 2004, the results of which were reviewed with Corning's board
of directors on October 6, 2004.
Although we are currently experiencing stronger than expected volume in this
segment, the improved demand comes from a narrow band of customers, and we see
few signs of a broader recovery in overall demand, mix of premium products, and
pricing for our products. The lack of industry consolidations, increased
competitive pressures in the industry, and revised estimates of future customer
demand for the types of products they will deploy have caused us to change our
assessment of the future pace of recovery. The primary estimates and forecasts
driving this change in our outlook and reducing the fair value of the
Telecommunications segment from that measured in 2003 follow:
.. Revised estimates of future pricing for fiber and cable: Pricing in the
telecommunications industry remains depressed as the industry has failed to
reduce capacity. Our previous projections assumed some rationalization of
capacity that would lead to more stable pricing. We now expect the current
depressed pricing conditions to persist into 2005 and beyond.
.. Revised estimates of demand for premium fiber product: Based on competitive
conditions and projected future customer requirements, we do not expect to
achieve the level of demand for premium fiber products we previously
projected. Although we have introduced innovative products to the market,
we have not been able to obtain the historical premium prices for such
products. Additionally, demand for premium fiber has declined as there are
fewer projects demanding premium fiber. As a result, we have significantly
reduced our outlook for future revenue and profitability from premium
products. We now do not expect any significant increase in premium fiber
mix for the foreseeable future.
.. Revised estimates for the long-term worldwide market volume growth: As we
forecast customer demand, we have lowered the rate of volume growth in the
longer range.
We estimated the fair value of the Telecommunications segment using a discounted
cash flow model based on our current estimates for the long-term growth of the
Telecommunications segment, and concluded that the fair value of the
Telecommunications segment was below its carrying amount. Accordingly, we
recorded an impairment charge of $1,420 million to reduce the carrying value of
goodwill to its implied fair value. The goodwill impairment charge has been
included in restructuring, impairment and other charges and (credits) on the
consolidated statements of operations. We updated our Telecommunications segment
goodwill test in the fourth quarter. The result of the test concluded that the
fair value of the reporting unit exceeded its book value.
We performed a goodwill impairment test for our Specialty Materials reporting
unit in the fourth quarter. The result of this impairment test indicated that
the fair value of our reporting unit exceeded its book value.
9. Goodwill and Other Intangible Assets (concluded)
As discussed in Note 3 (Restructuring, Impairment and Other Charges and
(Credits)), in the third quarter of 2004, we completed the sale of our frequency
controls business, which was part of the Telecommunications segment. As required
by SFAS No. 142, "Goodwill and Other Intangible Assets," we allocated a portion
of the Telecommunications segment goodwill balance to the carrying amount of the
frequency controls business in determining the loss on disposal. The amount of
goodwill to be included in that carrying amount was based on the relative fair
value of the business to be disposed and the portion of the Telecommunications
segment to be retained. The amount of goodwill allocated to the carrying value
of frequency controls business was $30 million.
2003 Assessment
- ---------------
We performed goodwill impairment tests for our Telecommunications and Specialty
Materials segment 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.
In the third quarter we completed the sale of certain photonic technologies
assets, which was part of the Telecommunications segment. We allocated a portion
of the Telecommunications segment goodwill balance to the carrying amount of the
photonic technologies assets in determining the loss on disposal. The amount of
goodwill allocated to the photonic technologies assets was $21 million.
Other Intangible Assets
The carrying amount of other intangible assets follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------------------------------------------------
2004 2003
-------------------------------------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Patents and trademarks $ 148 $ 79 $ 69 $ 145 $ 57 $ 88
Non-competition agreements 118 116 2 113 89 24
Other 4 1 3 4 1 3
-------------------------------------------------------------------------------
Total amortized intangible assets 270 196 74 262 147 115
-------------------------------------------------------------------------------
Unamortized intangible assets:
Intangible pension assets 42 42 51 51
-------------------------------------------------------------------------------
Total $ 312 $ 196 $ 116 $ 313 $ 147 $ 166
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets are primarily related to the Telecommunications
segment.
Amortization expense related to these intangible assets is expected to be
approximately $17 million in 2005, $13 million in 2006, $12 million in 2007, $11
million in 2008, and insignificant thereafter.
10. Other Liabilities
Other accrued liabilities follow (in millions):
- --------------------------------------------------------------------------------
December 31,
-------------------------------------
2004 2003
- --------------------------------------------------------------------------------
Current liabilities:
Wages and employee benefits $ 291 $ 238
Asbestos settlement 315 282
Income taxes 153 88
Other current liabilities 417 466
- --------------------------------------------------------------------------------
Other accrued liabilities $ 1,176 $ 1,074
- --------------------------------------------------------------------------------
Non-current liabilities:
Asbestos settlement $ 144 $ 136
Customer deposits 197
Other non-current liabilities 374 276
- --------------------------------------------------------------------------------
Other liabilities $ 715 $ 412
- --------------------------------------------------------------------------------
10. Other Accrued Liabilities (concluded)
Asbestos Settlement
The current liability represents the cost of our investment in PCE and the fair
value of the 25 million shares of Corning common stock as of December 31, 2004,
which will be contributed to the Plan when it becomes effective. As the timing
of this obligation's settlement is controlled by a third party (not Corning),
this portion of the PCC liability is considered a "due on demand" obligation.
Accordingly, this portion of the obligation has been classified as a current
liability, even though it is possible that the contribution could be made in
2006 or later. The non-current liability represents the net present value of
cash payments as of December 31, 2004, which will be contributed to the Plan in
six installments beginning one year after the Plan is effective. Refer to Note 7
(Investments) for additional information on the asbestos settlement.
Customer Deposits
During 2004, in response to the rapid growth of the liquid crystal display (LCD)
market, Corning held discussions with several of its customers to discuss how to
meet this demand. Corning and these customers have typically entered into
multi-year supply agreements for the purchase and sale of glass substrates.
These agreements provide for Corning to supply a percentage of the customers'
requirements and include mechanisms for forecasting and ordering. As part of its
discussions, Corning has sought improved payment terms, including deposits
against orders, to provide a greater degree of assurance that we are effectively
building capacity to meet the needs of a rapidly growing industry.
In 2004, Corning and a Taiwanese customer entered into a long-term purchase and
supply agreement (as amended) in which the Display Technologies segment will
supply LCD glass to the customer over a five-year period. As part of the
agreement, the customer will make advance cash deposits of $460 million to
Corning through 2006 for a portion of the contracted glass to be purchased.
Corning received a total of $204 million of deposits against orders in 2004 and
expects to receive an additional $171 million in 2005.
In the event the customer does not make all customer deposit installment
payments or elects not to purchase the agreed upon quantities of product,
subject to specific conditions outlined in the agreement, Corning may retain
certain amounts of the customer deposit. Likewise, if Corning does not deliver
agreed upon product quantities, subject to specific conditions outlined in the
agreement, Corning may be required to return certain amounts of the customer
deposit.
11. Debt
(In millions):
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------
2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings, including current portion of long-term debt
Short-term borrowings $ 26
Current portion of long-term debt $ 478 120
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 478 $ 146
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt
Euro notes, 5.625%, due 2005 $ 189 $ 173
Debentures, 7%, due 2007, net of unamortized discount of
$15 million in 2004 and $20 million in 2003 85 80
Convertible notes, 4.875%, due 2008 96 96
Convertible debentures, 3.50%, due 2008 297 665
Notes, 6.3%, due 2009 150 150
Euro notes, 6.25%, due 2010 408 374
Debentures, 6.75%, due 2013 100 100
Debentures, 5.90%, due 2014 200
Zero coupon convertible debentures, 2%, due 2015, redeemable
and callable in 2005 272 385
Debentures, 6.20%, due 2016 200
Debentures, 8.875%, due 2016 81 82
Debentures, 8.875%, due 2021 82 83
Debentures, 7.625%, due 2024 1 100
Medium-term notes, average rate 8.1%, due through 2025 175 178
Debentures, 6.85%, due 2029 150 150
Other, average rate 3.4%, due through 2015 206 172
- ------------------------------------------------------------------------------------------------------------------------------------
Total long-term debt 2,692 2,788
Less current portion of long-term debt 478 120
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 2,214 $ 2,668
- ------------------------------------------------------------------------------------------------------------------------------------
Based on borrowing rates currently available to us for loans with similar terms
and maturities, the fair value of long-term debt was $2.8 billion at December
31, 2004.
The following table shows debt maturities by year at December 31, 2004 (in
millions):
- --------------------------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter
- --------------------------------------------------------------------------------
$478 $16 $104 $411 $166 $1,517
- --------------------------------------------------------------------------------
We have convertible debt of $297 million due November 1, 2008 that is
convertible into approximately 31 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 for each $1,000
debenture. The debentures are issued at par and pay interest of 3.5%
semi-annually on May 1 and November 1 of each year. Effective November 8, 2004,
we may call the debentures at any time, at specified redemption prices. The
holder can convert the debenture into Corning common stock at any time prior to
maturity or redemption.
We have $272 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 debentures mature on
November 8, 2015, and are convertible into approximately 3 million shares of
Corning common stock at the rate of 8.3304 shares 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. We
have the option of settling this obligation in cash, common stock, or a
combination of both. The holder can convert the debenture into Corning common
stock at any time prior to maturity or redemption. The zero coupon convertible
debentures are presented in the above table as due in 2005 which is the earliest
possible redemption date.
We also have $96 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.
11. 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, 2004. The revolving credit agreement
provides for borrowing of U.S. dollars and Euro currency 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, 2004, this ratio was 41%.
Debt Retirements
During the years ended December 31, 2004, 2003 and 2002, we retired a
significant portion of our outstanding debentures as part of a debt reduction
program. The debt was retired through a combination of cash repurchases and
exchanges for Corning common stock. The following table summarizes the
activities related to our debt retirements (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Book Value of Cash Shares
Debentures Retired Paid Issued Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
2004 activity:
Convertible debentures, 3.5%, due 2008 $ 368 $ 37 38 $ (36)
Zero coupon convertible debentures, 2%, due 2015 119 117
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2004 activity $ 487 $ 154 38 $ (36)
- ------------------------------------------------------------------------------------------------------------------------------------
2003 activity:
Zero coupon convertible debentures, 2%, due 2015 $ 1,239 $ 1,121 6 $ 20
Euro notes, 5.625%, due 2005 67 68 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2003 activity $ 1,306 $ 1,189 6 $ 19
- ------------------------------------------------------------------------------------------------------------------------------------
2002 activity:
Zero coupon convertible debentures, 2%, due 2015 $ 493 $ 308 $ 175
Euro notes, 5.625%, due 2005 1 1 1
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2002 activity $ 494 $ 309 $ 176
- ------------------------------------------------------------------------------------------------------------------------------------
In addition to the above repurchases, during 2004 we repaid approximately $99
million of our 7.625% debentures as a result of certain bond holders exercising
their early repayment option. The remaining balance of the bonds that were not
repaid will mature in 2024.
Issuance of Long-Term Debt
In the first quarter of 2004, we issued $400 million of debentures, of which
$200 million aggregate principal amount of 5.90% notes mature on March 15, 2014
and $200 million aggregate principal amount of 6.20% notes mature on March 15,
2016. These debentures were issued under our existing $5 billion universal shelf
registration statement, which became effective in March 2001. We realized net
proceeds of approximately $396 million from the issuance of these debentures,
which was used to fund debt repurchases, capital expenditures and cost of
operations. At December 31, 2004, our remaining capacity under the shelf
registration is approximately $2.5 billion.
In 2004, Corning entered into a 10-year loan agreement with a Japanese bank to
fund certain capital expansion activities in Japan. An initial loan of
approximately $46 million, bearing interest at 2.6%, was received in 2004. A
final loan of approximately $48 million, bearing interest at 2.1%, was received
in January 2005. The loans will amortize equally from July 2006 through
maturity.
12. 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 2004, we made a voluntary incremental contribution of $52 million to
our domestic and international pension plans.
We use a December 31 measurement date for our domestic defined benefit plans.
The measurement dates for our foreign defined benefit pension plans are
September 30 and December 31.
12. Employee Retirement Plans (continued)
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.
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, 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 2,095 $ 1,890 $ 829 $ 718
Service cost 42 33 8 9
Interest cost 132 126 46 48
Plan participants' contributions 2 2 4 4
Amendments (1) (17)
Curtailment gain (4) (9) (12)
Special termination benefits 1 15 10
Actuarial losses (gains) 228 168 (49) 124
Benefits paid (155) (158) (71) (55)
Foreign currency translation 24 29
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 2,365 2,095 767 829
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at beginning of year 1,839 1,517
Actual gain on plan assets 225 292
Employer contributions 52 170
Plan participants' contributions 2 2
Benefits paid (155) (158)
Foreign currency translation 15 16
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 1,978 1,839
- ------------------------------------------------------------------------------------------------------------------------------------
Unfunded status (387) (256) (767) (829)
Unrecognized transition asset (1) (1)
Unrecognized prior service cost (credit) 44 53 (72) (78)
Unrecognized actuarial loss 537 409 176 235
- ------------------------------------------------------------------------------------------------------------------------------------
Recognized asset (liability) $ 193 $ 205 $ (663) $ (672)
- ------------------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the consolidated balance sheets
consist of:
Prepaid benefit cost $ 287 $ 338
Accrued benefit liability (94) (133) $ (663) $ (672)
Additional minimum liability (417) (310)
Intangible asset 42 51
Accumulated other comprehensive loss 375 259
- ------------------------------------------------------------------------------------------------------------------------------------
Recognized asset (liability) $ 193 $ 205 $ (663) $ (672)
- ------------------------------------------------------------------------------------------------------------------------------------
The accumulated benefit obligation for defined benefit pension plans was $2.3
billion and $2.0 billion at December 31, 2004 and 2003, respectively.
12. Employee Retirement Plans (continued)
The following information is for pension plans where the projected benefit
obligation as of December 31, 2004 and 2003 exceeded the fair value of plan
assets as follows (in millions):
- --------------------------------------------------------------------------------
December 31,
----------------------
2004 2003
- --------------------------------------------------------------------------------
Projected benefit obligation $ 2,365 $ 2,060
Fair value of plan assets 1,978 1,794
- --------------------------------------------------------------------------------
The following information is for pension plans where the accumulated benefit
obligation as of December 31, 2004 and 2003 exceeded the fair value of plan
assets as follows (in millions):
- --------------------------------------------------------------------------------
December 31,
----------------------
2004 2003
- --------------------------------------------------------------------------------
Accumulated benefit obligation $ 2,076 $ 1,808
Fair value of plan assets 1,798 1,641
- --------------------------------------------------------------------------------
The components of net periodic benefit expense for our employee retirement plans
follow (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
--------------------------------- ---------------------------------
Years ended December 31, 2004 2003 2002 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 42 $ 33 $ 37 $ 8 $ 9 $ 11
Interest cost 132 126 125 46 48 52
Expected return on plan assets (147) (146) (159)
Amortization of net loss 21 9 2 7 5 2
Amortization of prior service cost (credit) 9 9 11 (6) (6) (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit expense 57 31 16 55 56 64
- ------------------------------------------------------------------------------------------------------------------------------------
Discontinued operation 9 (7)
Curtailment loss (gain) (1) 9 10 (5) (2)
Special termination benefits 1 15 21 10 11
- ------------------------------------------------------------------------------------------------------------------------------------
Total expense $ 57 $ 55 $ 56 $ 55 $ 61 $ 66
- ------------------------------------------------------------------------------------------------------------------------------------
Additional information on our pension plan follows (in millions):
- --------------------------------------------------------------------------------
Pension Benefits
-----------------------
2004 2003
---- ----
(Decrease) increase in minimum liability
included in other comprehensive income
(loss), after tax $126 (1) $(26) (2)
- --------------------------------------------------------------------------------
(1) Includes $12 million after-tax increase in minimum liability included in
other comprehensive income related to an investment accounted for under the
equity method.
(2) 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 used to determine benefit obligations at
December 31 follow:
- ------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
------------------------------------------------------------- -------------------------------
Domestic International Domestic
---------------------------- ---------------------------- ------------------------------
2004 2003 2002 2004 2003 2002 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Discount rate 5.75% 6.25% 6.75% 5.21% 5.29% 5.74% 5.75% 6.25% 6.75%
Rate of compensation increase 4.50% 4.50% 4.50% 3.58% 3.34% 3.78% 4.50% 4.50% 4.50%
- ------------------------------------------------------------------------------------------------------------------------------------
12. Employee Retirement Plans (continued)
The weighted-average assumptions used to determine net periodic benefit cost for
years ended December 31 follow:
- ------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
------------------------------------------------------------- -------------------------------
Domestic International Domestic
---------------------------- ---------------------------- ------------------------------
2004 2003 2002 2004 2003 2002 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Discount rate 6.25% 6.75% 7.25% 5.33% 5.79% 6.07% 6.25% 6.75% 7.25%
Expected return on plan assets 8.50% 8.50% 9.00% 7.41% 7.95% 8.63%
Rate of compensation increase 4.50% 4.50% 4.50% 3.42% 3.89% 4.10% 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 2004 2003
- -------------------------------------------------------------------------------
Health care cost trend rate assumed for next year 9% 10%
Rate that the cost trend rate gradually declines to 5% 5%
Year that the rate reaches the ultimate trend rate 2009 2009
- -------------------------------------------------------------------------------
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 $ 4.8 $ (3.8)
Effect on postretirement benefit obligation $ 54.2 $ (44.3)
- ----------------------------------------------------------------------------------------------------------------
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 May 2004, the FASB issued Staff
Position (FSP) No. FAS 106-2, "Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (FSP
No. 106-1), which provides guidance on how companies should account for the
impact of the Act on its postretirement health care plans. To encourage
employers to retain or provide postretirement drug benefits, beginning in 2006
the federal government will provide non-taxable subsidy payments to employers
that sponsor prescription drug benefits to retirees that are "actuarially
equivalent" to the Medicare benefit. Corning has determined that its
postretirement health care plans' prescription drug benefits are actuarially
equivalent to Medicare Part D benefits to be provided under the Act. Effective
in the third quarter of 2004, Corning prospectively adopted the accounting
guidance of FSP No. 106-2, which reduced our postretirement health care and life
insurance plans' accumulated postretirement benefit obligation by $73 million
and the related annual expense by $10 million. For 2004, our postretirement
benefit expense decreased $5 million reflecting the adoption of this accounting
guidance.
Plan Assets
- -----------
The weighted-average asset allocation for domestic and international pension
plans at December 31, 2004 and December 31, 2003 by asset category follows:
- --------------------------------------------------------------------------------
Plan Assets
At December 31,
-------------------------
2004 2003
- --------------------------------------------------------------------------------
Equity Securities 50% 50%
Fixed Income Securities 35% 36%
Real Estate 7% 7%
Other 8% 7%
------ -------
Total 100% 100%
- --------------------------------------------------------------------------------
The total fair value of domestic plan assets at December 31, 2004 is $1,791
million and the expected long-term rate of return on these assets is 8.5%.
12. Employee Retirement Plans (concluded)
We have an investment policy for domestic and international 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. For domestic
plans, 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 for domestic plans is
60% Russell 3000 Index, 20% Lehman Long Government/Credit Index and 20% Lehman
Long Credit Index. For international plans, the investment strategy is to invest
in a composite of 50% equities and 50% fixed income indexes. The strategy
includes the following target asset allocation:
- --------------------------------------------------------------------------------
Domestic International
- --------------------------------------------------------------------------------
Equity Securities 50% 48%
Fixed Income Securities 32% 50%
Real Estate 8%
Other 10% 2%
- --------------------------------------------------------------------------------
Total 100% 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 $7 million (0.4%
of total plan assets) and $6 million (0.3% of total plan assets) at December 31,
2004 and 2003, respectively.
Cash Flow Data
- --------------
We anticipate making voluntary contributions of at least $100 million in cash or
common stock to our domestic and international pension plans in 2005.
The following reflects the gross benefit payments which are expected to be paid
for the domestic and international plans and the gross amount of annual Medicare
Part D federal subsidy expected to be received (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Expected Benefit Payments
------------------------------------------------- Expected Federal Subsidy Payments
Pension Benefits Postretirement Benefits Post Retirement Benefits
- ------------------------------------------------------------------------------------------------------------------------------------
2005 $ 152 $ 71
2006 $ 149 $ 74 $ 7
2007 $ 150 $ 77 $ 7
2008 $ 150 $ 79 $ 7
2009 $ 154 $ 81 $ 8
Years 2010-2014 $ 785 $ 416 $ 43
- ------------------------------------------------------------------------------------------------------------------------------------
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 $28 million, $24 million and $44 million for the
years ended December 31, 2004, 2003 and 2002, respectively.
13. Commitments, Contingencies, Guarantees and Hedging Activities
Commitments, Contingencies and Guarantees
FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" (FIN 45), requires a company, at the time a guarantee is issued, to
recognize a liability for the fair value or market value of the obligation it
assumes. In the normal course of our business, we do not routinely provide
significant third-party guarantees. Generally, third-party guarantees provided
by Corning are limited to certain financial guarantees, including stand-by
letters of credit and performance bonds, and the incurrence of contingent
liabilities in the form of purchase price adjustments related to attainment of
milestones. These guarantees have various terms, and none of these guarantees
are individually significant.
13. Commitments, Contingencies, Guarantees and Hedging Activities (continued)
Minimum rental commitments under leases outstanding at December 31, 2004 follow
(in millions):
- --------------------------------------------------------------------------------
2005 2006 2007 2008 2009 2010 and thereafter
- --------------------------------------------------------------------------------
$40 $32 $37 $39 $17 $58
- --------------------------------------------------------------------------------
Total rental expense was $54 million for 2004, $66 million for 2003 and $85
million for 2002.
The ability of certain subsidiaries and associated companies to transfer funds
is limited by provisions of foreign government regulations, affiliate agreements
and certain loan agreements. At December 31, 2004, the amount of equity subject
to such restrictions for consolidated subsidiaries totaled $217 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 stand-by letters
of credit and performance bonds. We have agreed to provide a credit facility
related to Dow Corning as discussed in Note 7 (Investments). The funding of the
Dow Corning credit facility will be required only if Dow Corning is not
otherwise able to meet its scheduled funding obligations in its confirmed
Bankruptcy Plan. The purchase obligations primarily represent raw materials take
or pay contracts in our Telecommunications segment. 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 $ 104 $ 26 $ 2 $ 1 $ 1 $ 74
Credit facilities for equity companies 167 17 150
Stand-by letters of credit 18 8 10
Loan guarantees 12 1 11
Purchase obligations 67 49 16 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total other commercial commitments
and contingencies $ 368 $ 84 $ 18 $ 1 $ 18 $ 247
- ------------------------------------------------------------------------------------------------------------------------------------
Corning is a defendant in various lawsuits, including environmental,
product-related suits, the Dow Corning and PCC matters discussed in Note 7
(Investments), and is subject to various claims which arise in the normal course
of business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on Corning's consolidated
financial position, liquidity or results of operations.
Hedging Activities
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 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
the value of 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.
13. Commitments, Contingencies, Guarantees and Hedging Activities (concluded)
The following table summarizes the notional amounts and respective fair values
of Corning's derivative financial instruments, which mature at varying dates, at
December 31, 2004 (in millions):
- --------------------------------------------------------------------------------
Notional Amount Fair Value
- --------------------------------------------------------------------------------
Foreign exchange forward contracts $ 304 $ (3)
Foreign exchange option contracts $ 660 $ (18)
- --------------------------------------------------------------------------------
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.
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 paid the counterparty a floating rate that is indexed to the
six-month LIBOR rate and received 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.
In 2004 and 2003, we terminated the interest rate swap agreements described
above. The termination of these swaps resulted in gains of $5 million in 2004
and $15 million in 2003 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 swaps totaled $8 million in 2004 and $17 million in 2003 and
are included in the financing section of our consolidated statements of cash
flows.
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, 2004, our
consolidated debt portfolio contained less than 1% of variable rate instruments.
14. Shareholders' Equity
The following table presents changes in capital stock for the period from
January 1, 2002 to December 31, 2004 (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Series C Preferred Stock Common Stock Treasury Stock
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Par Value Shares Par Value Shares Cost
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 1,023 $ 512 (79) $ (827)
Shares issued in acquisitions 31 15
Issuance of preferred stock 6 $ 575
Conversion of preferred stock (4) (420) 213 107
Shares issued to benefit plans 14 148
Purchase of common stock
for treasury (5) (23)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 2 $ 155 1,267 $ 634 (70) $ (702)
- ------------------------------------------------------------------------------------------------------------------------------------
Shares issued in equity offerings 95 47
Conversion of preferred stock (1) (70) 35 18
Shares issued to benefit plans 6 65
Shares issued in debt retirement 6 65
Other 4 2 (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 1 $ 85 1,401 $ 701 (58) $ (574)
- ------------------------------------------------------------------------------------------------------------------------------------
Conversion of preferred stock (21) 11 5
Shares issued to benefit plans 4 36
Shares issued in debt retirement 38 379
Other 12 6 (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 1 $ 64 1,424 $ 712 (16) $ (162)
- ------------------------------------------------------------------------------------------------------------------------------------
14. Shareholders' Equity (continued)
Preferred Stock
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.
The Series C mandatory convertible preferred stock has an annual dividend rate
of 7%, payable quarterly in cash. The dividends are also payable immediately
upon conversion to Corning common stock. At the time we issued the Series C
mandatory convertible preferred stock, a one-time dividend was declared for all
dividends that will be payable from issuance through the mandatory conversion
date. 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 U.S. treasury securities that were pledged as
collateral to secure the payments on the promissory note. The Series C mandatory
convertible 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.
The Series C mandatory convertible preferred stock has a liquidation preference
of $100 per share, plus accrued and unpaid dividends.
14. Shareholders' Equity (concluded)
Accumulated Other Comprehensive Income (Loss)
Components of accumulated other comprehensive income (loss) 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
- --------------------------------------------------------------------------------------------------------------------------------
January 1, 2002 $ (199) $ (4) $ 10 $ (193)
Foreign currency translation adjustment (net of
tax of $28 million) 208 208
Minimum pension liability adjustment (net of
tax of $107 million) $ (173) (173)
Net unrealized gain on investments (net of tax
of $2 million) 6 6
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
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 9 (173) 2 (8) (170)
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment (net of
tax of $38 million) 239 239
Minimum pension liability adjustment (net of
tax of $(18) million) (1) 26 26
Net unrealized gain on investments
(net of tax of $3 million) 1 1
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
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 248 $ (147) $ 3 $ (6) $ 98
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment (2) 174 174
Minimum pension liability adjustment (1)(2) (126) (126)
Net unrealized gain on investments (2) 8 8
Unrealized derivative loss on cash flow hedges (2) (19) (19)
Reclassification adjustments on cash flow hedges (2) 13 13
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 $ 422 $ (273) $ 11 $ (12) $ 148
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes adjustments from Dow Corning.
(2) Zero tax effect for 2004. Refer to Note 6 (Income Taxes) for an explanation
of Corning's tax paying position.
15. Loss Per Common Share
Basic loss per common share is computed by dividing loss attributable to common
shareholders, adjusted for the Series C mandatory convertible preferred stock
dividend, by the weighted-average number of common shares outstanding for the
period. Diluted loss per common share assumes the issuance of common shares for
all potentially dilutive securities outstanding. Since we reported a loss from
continuing operations in 2004, 2003 and 2002, the diluted loss per common share
is the same as the basic loss per common share, as any potentially dilutive
securities would reduce the loss per common share from continuing operations.
15. Loss Per Common Share (concluded)
The reconciliation of the amounts used to compute basic and diluted loss per
common share from continuing operations follows (in millions, except per share
amounts):
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------ ------------------------------ ----------------------------
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 $(2,185) $ (223) $(1,780)
Less: Preferred stock
dividend requirements 128
- ------------------------------------------------------------------------------------------------------------------------------------
Loss income from continuing
operations attributable to
common shareholders (2,185) (223) (1,908)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and Diluted Loss
Per Common Share $(2,185) 1,386 $ (1.57) $ (223) 1,274 $(0.18) $(1,908) 1,030 $(1.85
- ------------------------------------------------------------------------------------------------------------------------------------
The following potential common shares were excluded from the calculation of
diluted loss per common share due to their anti-dilutive effect or, in the case
of stock options, because their exercise price was greater than the average
market price for the periods presented (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Potential common shares excluded from the
calculation of diluted loss per share:
Stock options 34 19 1
7% mandatory convertible preferred stock 36 65 31
3.5% convertible debentures 41 69 69
4.875% convertible notes 6 6 6
Zero coupon convertible debentures 3 10 21
--------------------------------------------
Total 120 169 128
============================================
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 59 76 84
- ------------------------------------------------------------------------------------------------------------------------------------
16. Stock Compensation Plans
At December 31, 2004, 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, 2004, 114 million shares are available under these programs for 2005. Any
remaining shares available for grant, but not yet granted, will be carried over
and used in the following year.
Stock Option Plans
Our stock option plans provide non-qualified and incentive stock options to
purchase authorized but 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.
16. Stock Compensation Plans (continued)
Changes in the status of outstanding options follow:
- ---------------------------------------------------------------------------------------------------------------
Number Weighted-
of Shares Average
(in thousands) Exercise Price
- ---------------------------------------------------------------------------------------------------------------
Options outstanding January 1, 2002 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 granted under plans 13,625 $ 11.98
Options exercised (8,401) $ 6.15
Options terminated (1,553) $ 27.49
- ---------------------------------------------------------------------------------------------------------------
Options outstanding December 31, 2004 139,023 $ 20.43
Options exercisable at December 31, 2004 108,126 $ 24.22
- ---------------------------------------------------------------------------------------------------------------
Options exercisable at December 31, 2003 72,867 $ 27.47
Options exercisable at December 31, 2002 42,428 $ 28.96
- ---------------------------------------------------------------------------------------------------------------
The weighted-average fair value of options granted was $4.99 in 2004, $3.82 in
2003 and $3.64 in 2002.
The following table summarizes information about our stock option plans at
December 31, 2004:
- ---------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------------
Number Weighted-Average Number
Outstanding at Remaining Weighted- Exercisable at Weighted-
Range of December 31, 2004 Contractual Life Average December 31, 2004 Average
Exercise Prices (in thousands) in Years Exercise Price (in thousands) Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
$ 1.54 to 3.80 14,352 7.9 $ 3.17 3,546 $ 2.25
$ 4.06 to 6.93 20,621 8.0 $ 4.76 13,763 $ 4.86
$ 7.08 to 9.95 34,858 6.7 $ 8.43 33,685 $ 8.46
$ 10.05 to 15.87 26,337 7.9 $ 13.03 14,277 $ 14.00
$ 16.08 to 29.58 12,940 6.2 $ 19.83 12,940 $ 19.83
$ 30.01 to 59.50 12,743 5.7 $ 47.07 12,743 $ 47.07
$ 60.24 to 74.09 16,524 5.6 $ 69.16 16,524 $ 69.16
$76.03 to 111.00 648 5.7 $ 92.14 648 $ 92.14
- ---------------------------------------------------------------------------------------------------------------------------------
139,023 7.0 $ 20.43 108,126 $ 24.22
- ---------------------------------------------------------------------------------------------------------------------------------
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 2004, 2003 and 2002, grants of 3,051,000 shares, 1,842,000 shares and 88,500
shares, respectively, were made under this plan. The weighted-average price of
the grants was $12.57 in 2004, $10.61 in 2003 and $7.15 in 2002, respectively. A
total of 5.1 million shares issued remained subject to forfeiture at December
31, 2004.
We apply APB 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 $5 million, $1 million and $1 million, net of tax, was
recorded in 2004, 2003 and 2002, respectively.
16. Stock Compensation Plans (concluded)
SFAS 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 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 2004, 2003 and 2002, respectively:
- --------------------------------------------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Expected life in years 4 5 5
Risk free interest rate 3.4% 2.9% 4.0%
Expected volatility 50% 79% 80%
- --------------------------------------------------------------------------------
During 2004, Corning updated its analysis of the historical stock exercise
behavior of its employees, among other relevant factors, and determined that the
best estimate of the stock options' expected term granted in 2004 was 4 years,
compared to our previous expected term estimate of 5 years. Additionally,
Corning used a 10-year mean reversion analysis, as allowed by SFAS 123, to
determine the volatility assumption also used to estimate the fair value of
options granted in 2004. Prior to 2004, Corning used historical trailing
volatility for a period equal to the expected term of our stock options. Corning
believes a mean reversion analysis provides a better estimate of future
volatility expectations.
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.
17. Business Combinations
We had no acquisitions in 2004 or 2003. The following table presents information
related to our acquisitions for the year ended December 31, 2002 (in millions):
- --------------------------------------------------------------------------------------------------------------------
Initial Goodwill &
Acquisition Date Price Form Intangibles
- --------------------------------------------------------------------------------------------------------------------
Lucent Technologies Joint Ventures (1) 9/02 $ 198 Cash/Stock $ 110
- --------------------------------------------------------------------------------------------------------------------
(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.
The transaction listed on the previous table was 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.
18. Operating Segments
Corning conducts its worldwide operations through operating segments, which 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 (CODM)
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, executive vice president-chief technology officer, and senior vice
president and operations chief of staff.
Our reportable operating segments follow:
.. Display Technologies - manufactures liquid crystal display glass for flat
panel displays;
.. Telecommunications - manufactures optical fiber and cable and hardware and
equipment components for the telecommunications industry;
.. Environmental Technologies - manufactures ceramic substrates and filters
for automobile and diesel applications; and
.. Life Sciences - manufactures glass and plastic consumables for scientific
applications.
The Environmental Technologies reportable segment is an aggregation of our
Automotive and Diesel operating segments, as these two segments share similar
economic characteristics, products, customer types, production processes and
distribution methods.
All other operating segments that do not meet the quantitative threshold for
separate reporting (e.g., Specialty Materials, Ophthalmic and Conventional Video
Components), certain corporate investments (e.g. Dow Corning and Steuben),
discontinued operations, and unallocated expenses (including other corporate
items) have been grouped as "Unallocated and Other." Unallocated expenses
include: gains or losses on repurchases and retirement of debt; charges related
to the asbestos litigation; restructuring and impairment charges related to the
corporate research and development or staff organizations; and charges for
increases in our tax valuation allowance. Unallocated and Other also represents
the reconciliation between the totals for the reportable segments and our
consolidated operating results.
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 include the
earnings of equity affiliates that are closely associated with our operating
segments in the respective segment's net income. 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.
18. Operating Segments (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Display Telecom- Environmental Life Unallocated Consolidated
Technologies munications Technologies Sciences and Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2004
Net sales $ 1,113 $ 1,539 $ 548 $ 304 $ 350 $ 3,854
Depreciation (1) $ 131 $ 204 $ 65 $ 22 $ 63 $ 485
Amortization of purchased intangibles $ 37 $ 1 $ 38
Research, development and engineering expenses (2) $ 83 $ 90 $ 87 $ 38 $ 57 $ 355
Restructuring, impairment and other charges and (credits) $ 1,798 $ (9) $ 1,789
Interest expense (3) $ 52 $ 50 $ 22 $ 5 $ 12 $ 141
(Provision) benefit for income taxes $ (146) $ 29 $ (6) $ (908) $ (1,031)
Income (loss) before minority interests and equity
(losses) earnings (4) $ 258 $(1,862) $ 3 $ 12 $ (1,022) $ (2,611)
Minority interests (5) 2 (19) (17)
Equity in earnings of associated companies,
net of impairments (6) 288 (33) 1 187 443
Income from discontinued operations 20 20
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 546 $(1,893) $ 4 $ 12 $ (834) $ (2,165)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 582 $ 23 $ 31 $ 787 $ 1,423
Segment assets (7) $ 2,470 $ 1,341 $ 587 $ 123 $ 5,189 $ 9,710
Capital expenditures $ 640 $ 32 $ 124 $ 11 $ 50 $ 857
- ------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2003
Net sales $ 595 $ 1,426 $ 476 $ 281 $ 312 $ 3,090
Depreciation (1) $ 110 $ 246 $ 80 $ 38 $ 6 $ 480
Amortization of purchased intangibles $ 37 $ 37
Research, development and engineering expenses (2) $ 55 $ 120 $ 87 $ 28 $ 54 $ 344
Restructuring, impairment and other charges and (credits) $ (36) $ 147 $ 111
Interest expense (3) $ 39 $ 75 $ 19 $ 5 $ 16 $ 154
(Provision) benefit for income taxes $ (45) $ 78 $ (5) $ (7) $ 233 $ 254
Income (loss) before minority interests and equity
(losses) earnings (4) $ 91 $ (158) $ 9 $ 14 $ (461) $ (505)
Minority interests (5) 73 73
Equity in earnings of associated companies,
net of impairments (6) 144 (11) 76 209
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 235 $ (169) $ 9 $ 14 $ (312) $ (223)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 299 $ 59 $ 30 $ 590 $ 978
Segment assets (7) $ 1,297 $ 1,848 $ 485 $ 111 $ 7,011 $ 10,752
Capital expenditures $ 251 $ 15 $ 69 $ 7 $ 24 $ 366
- ------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2002
Net sales $ 405 $ 1,631 $ 394 $ 280 $ 454 $ 3,164
Depreciation (1) $ 79 $ 379 $ 50 $ 22 $ 88 $ 618
Amortization of purchased intangibles $ 41 $ 2 $ 43
Research, development and engineering expenses (2) $ 41 $ 308 $ 63 $ 17 $ 54 $ 483
Restructuring, impairment and other charges and (credits) $ 1,722 $ 2 $ 1 $ 355 $ 2,080
Interest expense (3) $ 29 $ 99 $ 16 $ 5 $ 30 $ 179
(Provision) benefit for income taxes $ (20) $ 722 $ (8) $ (13) $ 45 $ 726
Income (loss) before minority interests and equity
(losses) earnings (4) $ 39 $(1,838) $ 16 $ 25 $ (236) $ (1,994)
Minority interests (5) 1 97 98
Equity in earnings of associated companies,
net of impairments (6) 80 (60) 16 80 116
Income from discontinued operations 478 478
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 119 $(1,897) $ 32 $ 25 $ 419 $ (1,302)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 187 $ 72 $ 30 $ 457 $ 746
Segment assets (7) $ 913 $ 2,243 $ 428 $ 126 $ 7,696 $ 11,406
Capital expenditures $ 77 $ 49 $ 74 $ 8 $ 149 $ 357
- ------------------------------------------------------------------------------------------------------------------------------------
18. Operating Segments (continued)
(1) Depreciation expense for Corning's reportable segments 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) 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) Minority interests include the following restructuring, impairment and
other charges and (credits):
. For 2004, gains from the sale of assets of CAV in excess of assumed
salvage value of $17 million, and reversals of CAV severance reserves
of $2 million.
. Impairment charges for long-lived assets of CAV and exit costs of $57
million and $70 million for 2003 and 2002, respectively.
(6) Equity in earnings of associated companies, net of impairments includes the
following restructuring and impairment charges:
. $35 million, $7 million and $34 million of charges to impair equity
method investments in the Telecommunications segment to their
estimated fair value in 2004, 2003 and 2002, respectively.
. In 2004, Dow Corning Corporation recorded charges related to
restructuring actions and adjustments to interest liabilities recorded
on its emergence from bankruptcy. Our equity earnings included $21
million related to these charges.
. In 2003, Samsung Corning Co., Ltd. recorded asset impairment charges.
Our equity earnings included $66 million related to these charges.
. In 2002, Samsung Corning Micro-Optics Company Ltd. recorded
restructuring and impairment charges. Our equity earnings included $20
million related to these charges.
(7) Segment assets include inventory, accounts receivable, property and
associated equity companies and cost investments.
A reconciliation of reportable segment net income (loss) to consolidated net
loss follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income of reportable segments $ (1,331) $ 89 $ (1,721)
Non-reportable operating segments net income (loss) (1) 16 (139) (29)
Unallocated amounts:
Non-segment loss and other (2) (13) (51) (24)
Non-segment restructuring, impairment and
other (charges) and credits 4 (13) (208)
Asbestos settlement (33) (413)
Interest income 25 32 41
(Loss) gain on repurchases of debt (36) 19 176
(Provision) benefit for income taxes (3) (933) 170 (24)
Minority interests 1
Equity in earnings of associated companies, net of impairments (4) 116 83 8
Income from discontinued operations 20 478
-------- --------- --------
Net loss $ (2,165) $ (223) $ (1,302)
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Non-reportable operating segments net (loss) income includes the results of
non-reportable operating segments.
(2) Non-segment loss and other includes the results of non-segment operations
and other corporate activities.
(3) (Provision) benefit for income taxes includes taxes associated with
non-segment restructuring, impairment and other charges and (credits) and
$937 for the impact of establishing a valuation allowance against certain
deferred tax assets in 2004.
(4) Equity in earnings of associated companies, net of impairments includes
amounts derived from corporate investments, primarily Dow Corning
Corporation.
The following table provides net sales for the Telecommunications segment (in
millions):
- --------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 755 $ 760 $ 859
Hardware and equipment 784 612 661
Photonic technologies 54 111
-------- --------- --------
Total net sales $ 1,539 $ 1,426 $ 1,631
- --------------------------------------------------------------------------------
The following table provides net sales for the Environmental Technologies
segment (in millions):
- --------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Net sales:
Automotive $ 479 $ 430 $ 375
Diesel 69 46 19
-------- --------- --------
Total net sales $ 548 $ 476 $ 394
- --------------------------------------------------------------------------------
18. Operating Segments (concluded)
A reconciliation of reportable segment assets to consolidated assets follows (in
millions):
- --------------------------------------------------------------------------------
Years ended December 31,
----------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Total assets of reportable segments $ 4,521 $ 3,732 $ 3,693
Non-reportable operating segments assets 724 682 915
Unallocated amounts:
Current assets (1) 2,169 1,698 2,746
Investments (2) 407 274 42
Property, net (3) 886 973 903
Other non-current assets (4) 1,003 3,393 3,107
-------- --------- --------
Total assets $ 9,710 $ 10,752 $ 11,406
- --------------------------------------------------------------------------------
(1) Includes current corporate assets, primarily cash, short-term investments
and deferred taxes.
(2) Represents corporate investments in associated companies, at both cost and
equity (primarily Dow Corning Corporation).
(3) Represents corporate property not specifically identifiable to an operating
segment.
(4) Includes non-current corporate assets, pension assets and deferred taxes.
Information concerning principal geographic areas was as follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net Long-lived Net Long-lived Net Long-lived
Sales Assets (1) Sales Assets (1) Sales Assets (1)
- ------------------------------------------------------------------------------------------------------------------------------------
North America
United States $ 1,337 $ 2,982 $ 1,222 $ 4,435 $ 1,446 $ 4,588
Canada 120 88 70 122 66
Mexico 43 23 65 72 56 73
- ------------------------------------------------------------------------------------------------------------------------------------
Total North America 1,500 3,005 1,375 4,577 1,624 4,727
- ------------------------------------------------------------------------------------------------------------------------------------
Asia Pacific
Japan 540 511 382 349 372 292
Taiwan 705 985 322 231 181 114
China 101 73 134 191 102 189
Korea 60 938 55 620 57 574
Other 174 8 150 22 150 15
- ------------------------------------------------------------------------------------------------------------------------------------
Total Asia Pacific 1,580 2,515 1,043 1,413 862 1,184
- ------------------------------------------------------------------------------------------------------------------------------------
Europe
Germany 274 212 198 295 210 236
France 40 124 42 133 46 121
United Kingdom 65 80 74 67 82 83
Italy 38 36 268 47 265
Other 236 32 194 77 183 39
- ------------------------------------------------------------------------------------------------------------------------------------
Total Europe 653 448 544 840 568 744
- ------------------------------------------------------------------------------------------------------------------------------------
Latin America
Brazil 19 3 17 2 15 2
Other 12 11 1 6 1
- ------------------------------------------------------------------------------------------------------------------------------------
Total Latin America 31 3 28 3 21 3
- ------------------------------------------------------------------------------------------------------------------------------------
All Other 90 18 100 89 36
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 3,854 $ 5,989 $ 3,090 $ 6,833 $ 3,164 $ 6,694
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Long-lived assets primarily include investments, plant and equipment,
goodwill and other intangible assets.
Corning Incorporated and Subsidiary Companies
Schedule II - Valuation Accounts and Reserves
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year ended December 31, 2004 Beginning of Period Additions and Other End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 38 $ 4 $ 12 $ 30
Deferred tax assets valuation allowance $ 469 $ 1,216 $ 1,685
Accumulated amortization of
purchased intangible assets $ 147 $ 49 $ 196
Reserves for accrued costs of
business restructuring $ 186 $ 2 $ 93 $ 95
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
QUARTERLY OPERATING RESULTS
(unaudited)
(in millions, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Total
2004 Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 844 $ 971 $ 1,006 $ 1,033 $ 3,854
Gross margin $ 300 $ 346 $ 404 $ 365 $ 1,415
Restructuring, impairment and other charges and (credits) $ 34 $ (34) $ 1,794 $ (5) $ 1,789
Asbestos settlement $ 19 $ 47 $ (50) $ 17 $ 33
(Loss) income from continuing operations before income
taxes, minority interests and equity earnings $ (64) $ 36 $ (1,619) $ 67 $ (1,580)
(Provision) benefit for income taxes 12 (24) (985) (34) (1,031)
Minority interests (11) (3) (3) (17)
Equity in earnings of associated companies, net
of impairments 107 107 96 133 443
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations $ 55 $ 108 $ (2,511) $ 163 $ (2,185)
Income from discontinued operations (1) 20 20
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ 55 $ 108 $ (2,491) $ 163 $ (2,165)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per common share from:
Continuing operations $ 0.04 $ 0.08 $ (1.79) $ 0.12 $ (1.57)
Discontinued operations 0.01 0.01
- ------------------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per common share $ 0.04 $ 0.08 $ (1.78) $ 0.12 $ (1.56)
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted (loss) earnings per common share from:
Continuing operations $ 0.04 $ 0.07 $ (1.79) $ 0.11 $ (1.57)
Discontinued operations 0.01 0.01
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted (loss) earnings per common share $ 0.04 $ 0.07 $ (1.78) $ 0.11 $ (1.56)
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Discontinued operations are described in Note 2 (Discontinued Operations)
to the Consolidated Financial Statements.
- ------------------------------------------------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------------------------------------
DOW CORNING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2004
DOW CORNING CORPORATION
AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
Report of Independent Registered Public Accounting Firm 98
Consolidated Statements of Operations for the years ended December 31,
2004, 2003 and 2002 99
Consolidated Balance Sheets at December 31, 2004 and 2003 100
Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002 102
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2004, 2003 and 2002 103
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2004, 2003 and 2002 104
Notes to the Consolidated Financial Statements 106
Supplementary Data for the years ended December 31, 2004 and 2003:
Quarterly Financial Information 133
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
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, comprehensive income, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Dow Corning Corporation and its subsidiaries at December 31, 2004
and December 31, 2003, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2004, 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
the standards of the Public Company Accounting Oversight Board (United States).
Those standards 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.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
January 28, 2005
DOW CORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions of U.S. dollars except share data)
Year ended December 31,
----------------------------------------------
2004 2003 2002
------------- ------------- -------------
Net Sales $ 3,372.6 $ 2,872.5 $ 2,610.1
Operating Costs and Expenses:
Cost of sales 2,336.7 2,052.7 1,882.6
Marketing and administrative expenses 549.7 479.0 522.2
Restructuring costs 44.0 - 62.8
------------- ------------- -------------
Total operating costs and expenses 2,930.4 2,531.7 2,467.6
Operating Income 442.2 340.8 142.5
Interest income 17.4 31.8 39.1
Interest expense (97.8) (93.6) (91.0)
Other nonoperating income, net 27.3 3.7 19.2
------------- ------------- -------------
Income before Reorganization Costs and Income Taxes 389.1 282.7 109.8
Reorganization costs 7.2 5.4 6.9
------------- ------------- -------------
Income before Income Taxes 381.9 277.3 102.9
Income tax provision 125.2 94.3 39.2
Minority interests' share in income 18.4 6.4 5.0
------------- ------------- -------------
Net Income $ 238.3 $ 176.6 $ 58.7
============= ============= =============
Net Income per Share (basic and diluted) $ 95.32 $ 70.64 $ 23.48
============= ============= =============
(See Notes to the Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions of U.S. dollars)
ASSETS
- ------
December 31, 2004 December 31, 2003
----------------- -----------------
Current Assets:
Cash and cash equivalents $ 322.0 $ 462.0
Marketable securities 298.5 973.4
Accounts receivable (net of allowance for doubtful
accounts of $11.7 in 2004 and $12.1 in 2003) 511.3 445.8
Anticipated implant insurance receivable 30.8 2.8
Notes and other receivables 114.5 156.4
Inventories 425.0 369.8
Deferred income taxes 101.2 188.5
Other current assets 25.0 20.1
--------------- ---------------
Total current assets 1,828.3 2,618.8
--------------- ---------------
Property, Plant and Equipment 4,805.6 4,622.0
Less - Accumulated Depreciation (3,382.7) (3,156.3)
--------------- ---------------
Net property, plant and equipment 1,422.9 1,465.7
--------------- ---------------
Other Assets:
Marketable securities 57.3 254.1
Anticipated implant insurance receivable 277.0 433.5
Restricted insurance proceeds - 207.4
Deferred income taxes 929.0 784.9
Intangible assets (net of accumulated amortization
of $20.2 in 2004 and $16.9 in 2003) 157.3 102.4
Restricted investments 55.8 70.1
Other 88.8 101.7
--------------- ---------------
Total other assets 1,565.2 1,954.1
--------------- ---------------
Total Assets $ 4,816.4 $ 6,038.6
=============== ===============
(See Notes to the Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions of U.S. dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
December 31, 2004 December 31, 2003
----------------- -----------------
Current Liabilities:
Short-term borrowings and current maturities of
long-term debt $ 13.9 $ 16.7
Trade accounts payable 278.4 227.5
Accrued payrolls and employee benefits 171.9 94.6
Accrued taxes 102.1 92.5
Accrued interest 63.5 650.9
Other current liabilities 148.2 112.4
------------- -------------
Total current liabilities 778.0 1,194.6
Other Liabilities:
Long-term debt 60.2 52.2
Implant reserve 1,884.9 -
Employee benefits 565.7 82.0
Co-insurance payable 48.9 -
Other noncurrent liabilities 160.7 99.8
------------- -------------
Total other liabilities 2,720.4 234.0
Liabilities Subject to Compromise:
Trade accounts payable - 67.7
Accrued employee benefits - 493.0
Accrued taxes - 3.6
Implant reserve - 2,249.9
Notes payable - 375.0
Long-term debt - 273.7
Co-insurance payable - 79.7
Other - 72.5
------------- -------------
Total liabilities subject to compromise - 3,615.1
Minority Interest in Consolidated Subsidiaries 171.6 152.4
------------- -------------
Stockholders' Equity:
Common stock ($5.00 par value - 2,500,000 shares
authorized, issued and outstanding) 12.5 12.5
Retained earnings 1,098.3 860.0
Cumulative translation adjustment 170.6 110.1
Minimum pension liability (135.8) (143.8)
Other equity adjustments 0.8 3.7
------------- -------------
Total stockholders' equity 1,146.4 842.5
------------- -------------
Total Liabilities and Stockholders' Equity $ 4,816.4 $ 6,038.6
============= =============
(See Notes to the Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars)
Year ended December 31,
------------------------------------------
2004 2003 2002
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 238.3 $ 176.6 $ 58.7
Depreciation and amortization 210.6 243.9 266.6
Reorganization costs 7.2 5.4 6.9
Other, net 51.1 (52.4) 22.3
Changes in operating assets and liabilities:
Changes in accounts and notes receivable 20.7 15.5 (78.3)
Changes in accounts payable (36.7) (13.4) 48.2
Changes in inventory 37.2 (4.9) 51.6
Changes in other operating assets and liabilities 163.7 7.4 236.8
----------- ---------- -----------
Cash provided by operating activities 692.1 378.1 612.8
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (109.4) (77.4) (78.3)
Acquisitions of businesses, net of cash received (92.0) (42.6) (62.8)
Proceeds from sales and maturities of securities 4,529.8 3,243.2 2,158.4
Purchases of securities (3,645.0) (3,815.7) (2,404.6)
Other, net (1.3) 6.7 0.2
----------- ---------- -----------
Cash provided by (used in) investing activities 682.1 (685.8) (387.1)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 12.0 2.8 27.1
Payments on long-term debt (9.3) (16.9) (48.9)
Net change in short-term borrowings (2.1) 4.2 0.4
----------- ---------- -----------
Cash provided by (used in) financing activities 0.6 (9.9) (21.4)
----------- ---------- -----------
CASH FLOWS RELATED TO REORGANIZATION
ACTIVITIES:
Reorganization Costs (7.2) (5.4) (6.9)
Implant reserve and other payments (505.7) (6.4) (5.9)
Release (restriction) of insurance proceeds 207.4 (29.4) (94.2)
Payments under co-insurance arrangement (30.8) (5.3) (20.1)
Implant insurance reimbursements 128.5 29.4 111.8
Payments on long-term debt (273.7) - -
Payments of notes payable (375.0) - -
Payments of interest (673.8) - -
----------- ---------- -----------
Cash used in reorganization activities (1,530.3) (17.1) (15.3)
----------- ---------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 15.5 33.4 (8.8)
----------- ---------- -----------
CHANGES IN CASH AND CASH EQUIVALENTS:
Net decrease in cash and cash equivalents (140.0) (301.3) 180.2
Cash and cash equivalents at beginning of period 462.0 763.3 583.1
----------- ---------- -----------
Cash and cash equivalents at end of period $ 322.0 $ 462.0 $ 763.3
=========== ========== ===========
(See Notes to the Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions of U.S. dollars)
Year ended December 31,
------------------------------------------
2004 2003 2002
---- ---- ----
Common Stock ($5.00 par value - 2,500,000 shares authorized,
issued and outstanding)
Balance at beginning and end of year $ 12.5 $ 12.5 $ 12.5
----------- ---------- -----------
Retained Earnings
Balance at beginning of year 860.0 683.4 624.7
Net income 238.3 176.6 58.7
----------- ---------- -----------
Balance at end of year 1,098.3 860.0 683.4
----------- ---------- -----------
Accumulated Other Comprehensive Income (Loss)
Cumulative translation adjustment balance at
beginning of year 110.1 (39.6) (143.8)
Translation adjustments 60.2 161.5 115.3
Income tax benefit (provision) 0.3 (11.8) (11.1)
----------- ---------- -----------
Balance at end of year 170.6 110.1 (39.6)
----------- ---------- -----------
Additional minimum pension liability balance at
beginning of year (143.8) (117.9) (15.8)
(Increase) decrease in minimum pension liability 8.4 (33.5) (158.1)
Income tax benefit (provision) (0.4) 7.6 56.0
----------- ---------- -----------
Balance at end of year (135.8) (143.8) (117.9)
----------- ---------- -----------
Other equity adjustments: balance at beginning of year 3.7 2.4 1.1
Change in unrealized gain (loss) on cash flow hedges (2.1) 0.8 0.7
Change in unrealized gain (loss) on available-for-sale
securities (2.3) 1.4 1.1
Income tax benefit (provision) 1.5 (0.9) (0.5)
----------- ---------- -----------
Balance at end of year 0.8 3.7 2.4
----------- ---------- -----------
Total Accumulated Other Comprehensive Income (Loss) 35.6 (30.0) (155.1)
----------- ---------- -----------
Stockholders' Equity $ 1,146.4 $ 842.5 $ 540.8
=========== ========== ===========
(See Notes to the Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions of U.S. dollars)
Year ended December 31,
------------------------------------------------
2004 2003 2002
---- ---- ----
Net Income $ 238.3 $ 176.6 $ 58.7
Other Comprehensive Income (Loss):
Foreign currency translation adjustments 60.2 161.5 115.3
Unrealized net gain (loss) on available-for-sale securities (2.3) 1.4 1.1
Net gain (loss) on cash flow hedges (2.1) 0.8 0.7
(Increase) decrease in minimum pension liability 8.4 (33.5) (158.1)
------------- ------------ -------------
Other comprehensive income (loss), before tax 64.2 130.2 (41.0)
Income Tax Benefit (Provision) 1.4 (5.1) 44.4
------------- ------------ -------------
Other comprehensive income, net of tax 65.6 125.1 3.4
------------- ------------ -------------
Comprehensive Income $ 303.9 $ 301.7 $ 62.1
============= ============ =============
(See Notes to the Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
- -----------------
Note Page
---- ----
1 BUSINESS AND BASIS OF PRESENTATION 106
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 107
3 ACQUISITIONS AND DIVESTITURES 111
4 GLOBAL RESTRUCTURING 111
5 UNRESTRICTED INVESTMENTS 112
6 INVENTORIES 114
7 INCOME TAXES 114
8 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES 116
9 PROPERTY, PLANT AND EQUIPMENT 117
10 GOODWILL AND OTHER INTANGIBLE ASSETS 117
11 RESTRICTED ASSETS 118
12 NOTES PAYABLE AND CREDIT FACILITIES 119
13 MANAGEMENT VARIABLE COMPENSATION 120
14 LONG-TERM DEBT 121
15 PENSION AND OTHER POSTRETIREMENT BENEFITS 122
16 COMMITMENTS AND CONTINGENCIES 126
17 PROCEEDING UNDER CHAPTER 11 129
18 RELATED PARTY TRANSACTIONS 132
DOW CORNING CORPORATION AND SUBSIDIARIES
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, silicones
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 the provision of
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
2004 was approximately 8,800 persons.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Certain prior year items have been reclassified to conform
to the 2004 presentation.
Bankruptcy Proceedings
- ----------------------
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 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 1995, the Company was named in thousands of lawsuits filed by, or on
behalf of, individuals who claim to have, or have had, breast implants. As a
result, on May 15, 1995 (the "Filing Date"), the 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, Northern
Division (the "Bankruptcy Court") in order to resolve the Company's breast
implant liabilities and related matters (the "Chapter 11 Proceeding"). The
Company emerged from the Chapter 11 Proceeding on June 1, 2004 (the "Effective
Date") and is currently in the process of implementing its plan of
reorganization. The plan of reorganization provides funding for the resolution
of breast implant and other products liability litigation covered by the Chapter
11 Proceeding through settlement or litigation and for the satisfaction of
commercial creditor claims. See Note 17 for further information on this matter.
The Company's consolidated financial statements for periods during the
pendency of the Company's Chapter 11 Proceeding 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 Company. Upon emergence from the Chapter 11 Proceeding, the Company was not
subject to "fresh start" reporting as defined in SOP 90-7.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Principles of Consolidation
- ---------------------------
The 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 original
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. Produced goods are valued using a first-in, first-out cost flow
methodology, while purchased materials and supplies are valued using an average
cost flow methodology. See Note 6 for further information.
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.
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. See Note 9 for further
information.
Investments
- -----------
The Company accounts for investments in debt and equity securities in
conformity with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 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 investments" 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 Notes 5 and
11 for further information.
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. The Company's policies limit the amount of
credit exposure to any single counterparty for cash and investments. The Company
uses major financial institutions with high credit ratings to engage in
transactions involving investments and derivative instruments. 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 historically 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------
Intangibles
- -----------
Intangible assets of the Company include goodwill, patents and licenses,
and other assets acquired by the Company that are separable and measurable apart
from goodwill. Goodwill, representing the excess of cost over the fair value of
net assets of businesses acquired, is tested for impairment in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets." Other intangible assets
with finite lives are amortized on a straight-line basis over their estimated
useful lives. See Note 10 for further information.
Revenue
- -------
The Company recognizes revenue in accordance with the U.S. Securities and
Exchange Commission's Staff Accounting Bulletin No. 104, "Revenue Recognition in
Financial Statements." The Company recognizes revenue only when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the price to the customer is fixed or determinable and collectibility
is reasonably assured. Generally, revenue is recognized when title and risk of
loss transfer to the customer for products and as work is performed for
professional services. 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
- --------------
Shipping costs are primarily comprised of payments to third party shippers.
The Company records shipping costs incurred as a component of "Cost of sales" in
the consolidated statements of operations. Shipping costs totaled $94.3, $76.6,
and $61.6 for the years ended December 31, 2004, 2003 and 2002, respectively.
Research and Development Costs
- ------------------------------
Research and development costs are charged to operations when incurred and
are included in "Cost of sales" in the consolidated statements of operations.
These costs totaled $181.4 in 2004, $162.5 in 2003 and $154.5 in 2002.
Income Taxes
- ------------
The Company accounts for income taxes in conformity with the provisions of
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 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, 2004 and 2003, the Company had net deferred tax asset balances of
$983.3 and $947.8, respectively, after valuation allowances of $3.1 and $2.0,
respectively. For additional information, see Note 7.
Currency Translation
- --------------------
The value of the U.S. dollar fluctuates against foreign currencies. Since
the Company does business in many countries, these fluctuations affect the
Company's consolidated financial position and results of operations. The Company
accounts for these fluctuations in accordance with SFAS No. 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. 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 reported U.S. dollar results
included in the consolidated statement of operations fluctuate 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------
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 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. Net foreign currency
losses recognized in income, which include changes in the fair value of such
currency derivatives as well as foreign exchange gains and losses on monetary
assets and liabilities of the Company, amounted to $1.7 in 2004, $5.7 in 2003
and $3.6 in 2002. In addition, the income tax provision in the consolidated
statements of operations includes net foreign currency losses from currency
derivatives of $2.7, $6.3 and $1.8 for 2004, 2003 and 2002, respectively, which
when considered together with the related tax benefits and gains from underlying
exposures, had the effect of decreasing (increasing) the income tax provision by
$1.0, ($0.1) and $2.1 in 2004, 2003 and 2002, respectively. See Note 7 for
further information.
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.
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. See Notes 16 and 17 for
further information.
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 $2.9 and $3.3 at December 31, 2004 and 2003,
respectively, for environmental remediation and restoration costs. 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 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------
New Accounting Standards
- ------------------------
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of
Accounting Principles Board ("APB") Opinion No. 29." APB No. 29 requires that
exchanges of nonmonetary assets be measured based on the fair value of the
assets exchanged, with certain exceptions. SFAS No. 153 amends APB No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and includes a general exception for exchanges of nonmonetary assets that do not
have commercial substance. The Statement is effective for fiscal years beginning
after June 15, 2005. The Company plans to adopt SFAS No. 153 on January 1, 2006
and does not expect its adoption to have a material effect on future
consolidated results.
On October 22, 2004, the American Jobs Creation Act of 2004 (the "Jobs
Creation Act") became law in the United States. In December 2004, the FASB
issued FASB Staff Position ("FSP") Nos. FAS 109-1 and FAS 109-2, which provide
guidance on accounting and disclosure of the Jobs Creation Act. FSP No. FAS
109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to
the Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004," requires the qualified production activities
deduction provided for under the Jobs Creation Act to be accounted for as a
special deduction in accordance with SFAS No. 109. FSP No. FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004," provides accounting
and disclosure requirements for the one-time dividends received deduction on the
repatriation of certain foreign earnings under the Jobs Creation Act. See Note 7
for further discussion of the effects of the Jobs Creation Act.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
Amendment of Accounting Research Bulletin ("ARB") No. 43, Chapter 4." SFAS No.
151 amends Chapter 4 of ARB No. 43, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material. The Statement requires such costs to be recorded as
charges in the period incurred, and also requires the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for annual periods
beginning after June 15, 2005. The Company plans to adopt SFAS No. 151 effective
January 1, 2006 and does not expect the adoption of SFAS No. 151 to have a
material effect on future consolidated results.
In January 2004, the FASB issued FSP No. FAS 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003." This FSP was superseded in June 2004 by FSP No.
FAS 106-2 of the same title. These FSP's provide guidance on the accounting for
and disclosure of the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act"). The Act expands Medicare to provide
prescription drug benefits to eligible enrollees and contains provisions that
apply to employers who sponsor postretirement health care plans that provide
prescription drug benefits. Beginning in 2006, sponsors of postretirement plans
that provide a prescription drug benefit that is "actuarially equivalent" to the
benefit provided by Medicare will receive a subsidy from the federal government.
The Company adopted FSP FAS 106-1 effective April 30, 2004 and FSP FAS 106-2
effective July 1, 2004. The Company has determined that the benefits provided
under its postretirement health care plan are "actuarially equivalent" with
those provided under the Act. The adoption of FSP FAS 106-1 and FSP FAS 106-2
did not have a material impact on the Company's consolidated financial
statements. See Note 15 for further information related to the impact of these
FSP's.
In December 2003, the FASB revised FASB Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities." FIN 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 Company adopted the provisions of
FIN No. 46 effective January 1, 2004. The adoption of FIN No. 46 did not have a
material impact on the Company's consolidated financial statements.
In December 2003, the FASB revised SFAS No. 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, fair
values of plan assets, and estimated future benefit payments. The Company
adopted the domestic plan disclosure requirements for the year ended December
31, 2003. The interim disclosure requirements were adopted by the Company
effective January 1, 2004. The additional disclosures required were adopted by
the Company effective with the December 31, 2004 consolidated financial
statements. See Note 15 for required disclosures.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
NOTE 3 - ACQUISITIONS AND DIVESTITURES
- --------------------------------------
On September 30, 2004, the Company, through Dow Corning Toray Silicone Co.,
Ltd. ("DCTS"), a subsidiary owned 65% percent by the Company, purchased the net
assets of the Silicone Division of Nippon Unicar Co., Ltd. ("NUC"). NUC is
located in Tokyo, Japan and is a manufacturer of specialty chemicals and
silicone products. The net assets were purchased by DCTS for cash of
approximately $92.0 and consisted primarily of working capital items, intangible
assets and property, plant and equipment. The Company recorded $3.0 of goodwill
as a result of the transaction. The results of operations for the acquisition
were included in the consolidated statement of operations beginning in the three
month period ended December 31, 2004. Purchase accounting for this acquisition
was finalized during the three month period ended December 31, 2004.
On September 2, 2004, the Company, through its wholly owned subsidiary Dow
Corning Enterprises, Inc. ("DCEI"), sold its 50% ownership interest in SDC
Technologies Inc. ("SDC") for $10.0. The Company recognized a gain of
approximately $7.1 on the sale. SDC is a California-based developer of
proprietary, high-performance coating systems for application to plastics and
glass.
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, of which $4.6 was recognized as goodwill. The Company has
consolidated the results of DCDSG in the consolidated financial statements since
July 1, 2003.
On June 16, 2003, the Company purchased all of the outstanding stock of
Simcala, Inc. ("Simcala"), a silicon metal manufacturer located near Montgomery,
Alabama. The consideration paid for the stock was approximately $15.5. In
addition, immediately prior to the transaction closing, Simcala redeemed the
stock of its executive management for consideration of approximately $1.5. Also,
Dow Corning provided intercompany loans of approximately $13.3 to Simcala, $7.1
of which was for the purpose of retiring Simcala's outstanding debt and $6.2 of
which was for the purpose of securing Simcala's obligations under outstanding
industrial development revenue bonds. Purchase accounting for this acquisition
was finalized during the three month period ended June 30, 2004.
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 January 23, 2003, DCEI purchased substantially all of the assets of
Sterling Semiconductor, Inc., a wholly owned subsidiary of Uniroyal Technology
Corporation, for a purchase price of $11.5. On December 4, 2002, 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. Dow Corning has consolidated the
assets acquired from GAN Semiconductor, Inc. and Sterling Semiconductor, Inc. in
Midland, Michigan, forming Dow Corning Compound Semiconductor Solutions, LLC.
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% of
Paturle's preferred and common shares and DCEI purchased the minority interest
in Multibase, Inc., a subsidiary of Paturle. The aggregate purchase price was
$57.9 and goodwill of $44.6 was recorded as a result of the transaction. 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% of the stock of Synergy Multibase, Limited in India.
NOTE 4 - 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 4 - GLOBAL RESTRUCTURING (Continued)
- -----------------------------
The restructuring activity for the years ended December 31, 2003 and 2002
is illustrated in the following table:
Beginning of End of
Year Reserve Expenses Payments Non-Cash Year Reserve
------------ -------- -------- -------- ------------
2002 $ 22.1 $ 62.8 $ (52.2) $ (22.9) $ 9.7
2003 $ 9.7 $ - $ (2.1) $ (7.6) $ -
The Company implemented a restructuring program in 2004, consisting of
separation of employees and the withdrawal of certain fixed assets from service.
During the year ended December 31, 2004, the Company incurred pre-tax expense of
$34.9 primarily for one-time termination benefits related to the workforce
reduction of approximately 212 employees. Results for the year ended December
31, 2004 also include a pre-tax charge of $2.7 for non-cash restructuring
activity related to curtailment and special termination benefits. See Note 15
for additional information regarding the global workforce reduction effect on
defined benefit pension plans and the U.S. retiree medical plan. Additionally,
the Company recorded charges of $6.4 related to the impairment of its
manufacturing site located in Yamakita, Japan. These restructuring charges have
been reported in the "Restructuring costs" line in the Company's consolidated
statement of operations.
As of December 31, 2004, the Company had a liability of $5.4 related to
restructuring recorded in the caption titled "Accrued payrolls and employee
benefits" in the consolidated balance sheets. The remaining payments to
employees under the restructuring program are expected to be made by the Company
in 2005. As of December 31, 2004, the assets from the Yamakita site have been
classified as long-lived assets to be disposed of by sale and recorded at
estimated fair value less anticipated costs to sell.
The restructuring activity for the year ended December 31, 2004 is
illustrated in the following table:
Beginning of End of
Year Reserve Expenses Payments Non-Cash Year Reserve
------------ -------- -------- -------- ------------
2004 $ - $ 44.0 $ (29.5) $ (9.1) $ 5.4
NOTE 5 - UNRESTRICTED INVESTMENTS
- ---------------------------------
The carrying amounts of unrestricted investments reflected under the
caption "Marketable securities" in the current and noncurrent sections of the
consolidated balance sheets at December 31, 2004 and 2003 totaled $355.8 and
$1,227.5, 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. These investments have been classified as "available
for sale" in conformity with SFAS No. 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 reviews all marketable securities to determine if any 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, 2004 and has concluded that
the decline in value is not other than temporary.
NOTE 5 - UNRESTRICTED INVESTMENTS (Continued)
- ---------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and
market value of the unrestricted investments consisted of the following as of
December 31, 2004 and 2003:
December 31, 2004
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
----------- ----------- ------------ ------------
Debt Securities:
U.S. government agency obligations $ 60.0 $ - $ (0.8) $ 59.2
Corporate bonds 5.0 - (0.2) 4.8
Municipal bonds 288.6 - - 288.6
----------- ----------- ----------- -----------
Total Debt Securities $ 353.6 $ - $ (1.0) $ 352.6
Foreign Equity Securities 1.5 1.7 - 3.2
----------- ----------- ----------- -----------
Total Marketable Securities $ 355.1 $ 1.7 $ (1.0) $ 355.8
=========== =========== =========== ===========
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
=========== =========== =========== ===========
The contractual maturities of the debt securities included in unrestricted
investments consisted of the following at December 31, 2004 and 2003:
2004 2003
---- ----
Mature in one year or less $ 288.5 $ 986.6
Mature after one year through five years 64.1 236.7
Mature after five years - 2.2
----------- -----------
Total debt securities $ 352.6 $ 1,225.5
=========== ===========
NOTE 6 - INVENTORIES
- --------------------
The following table provides a breakdown of inventories at December 31,
2004 and 2003:
2004 2003
---- ----
Produced goods $ 329.5 $ 294.7
Purchased materials 61.8 42.8
Maintenance and supplies 33.7 32.3
----------- -----------
Total inventory $ 425.0 $ 369.8
=========== ===========
Due to the nature of the Company's operations, it is impractical to
classify inventory as raw materials, work-in-process, or finished goods as such
classifications can be interchangeable for certain inventoriable items.
NOTE 7 - INCOME TAXES
- ---------------------
The components of income before income taxes and minority interests as of
December 31, 2004, 2003 and 2002 are as follows:
2004 2003 2002
---- ---- ----
Income Before Income Taxes and Minority Interests:
Domestic $ 215.6 $ 148.1 $ 60.8
Foreign 166.3 129.2 42.1
--------- -------- ---------
Total Income Before Income Taxes and Minority Interests $ 381.9 $ 277.3 $ 102.9
========= ======== =========
The components of the income tax provision as of December 31, 2004, 2003
and 2002 are as follows:
2004
--------------------------------------------
Current Deferred Total
--------- -------- ---------
Provision (Credit) for Income Taxes:
Domestic $ 71.9 $ 15.8 $ 87.7
Foreign 50.5 (13.0) 37.5
--------- -------- ---------
Total Provision (Credit) for Income Taxes $ 122.4 $ 2.8 $ 125.2
========= ======== =========
2003
--------------------------------------------
Current Deferred Total
--------- -------- ---------
Provision (Credit) for Income Taxes:
Domestic $ 25.7 $ 24.9 $ 50.6
Foreign 45.3 (1.6) 43.7
--------- -------- ---------
Total Provision (Credit) for Income Taxes $ 71.0 $ 23.3 $ 94.3
========= ======== =========
2002
--------------------------------------------
Current Deferred Total
--------- -------- ---------
Provision (Credit) for Income Taxes:
Domestic $ 14.2 $ 9.2 $ 23.4
Foreign 31.0 (15.2) 15.8
--------- -------- ---------
Total Provision (Credit) for Income Taxes $ 45.2 $ (6.0) $ 39.2
========= ======== =========
NOTE 7 - INCOME TAXES (Continued)
- ---------------------
The tax effects of the principal temporary differences as of December 31,
2004 and 2003 giving rise to deferred tax assets and liabilities were as
follows:
2004 2003
---- ----
Deferred Tax Assets:
Implant costs $ 619.5 $ 630.9
Other accruals and reserves 131.8 94.3
Postretirement benefit obligations 183.1 176.0
Inventories 28.5 14.9
Long-term debt 22.2 14.6
Tax loss carryforwards 192.8 183.9
Other - net 6.3 39.4
----------- -----------
Total Deferred Tax Assets 1,184.2 1,154.0
Deferred Tax Liabilities:
Property, plant and equipment (197.8) (204.2)
----------- -----------
Net Deferred Tax Asset Prior to Valuation Allowance 986.4 949.8
Less: Valuation Allowance (3.1) (2.0)
----------- -----------
Net Deferred Tax Asset $ 983.3 $ 947.8
=========== ===========
With the exception of the valuation allowances provided for below,
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 No.
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.
Operating loss carryforwards at December 31, 2004 amounted to $192.8
compared to $183.9 at the end of 2003. All of the operating loss carryforwards
are subject to expiration beyond 2009 or have an indefinite carryforward period.
Substantially all of operating loss carryforwards were generated by the
Company's subsidiary in the United Kingdom. There is an unlimited carryforward
of net operating losses in the United Kingdom and management has determined that
no valuation allowance is needed for these net operating losses.
The valuation allowance of $3.1 is attributable to the inability to utilize
net operating loss carry forwards of $2.1 in Australia, and $1.0 in Ireland. The
operating loss carryforward in Australia is subject to expiration in years
beyond 2009. The operating loss carryforward in Ireland has an indefinite
carryforward period.
Cash paid (received) during the year for income taxes, net of refunds
received was $103.7 in 2004, $66.5 in 2003, and ($58.7) in 2002. In 2002, tax
refunds exceeded payments due to the carryback of the net operating loss from
the year ended December 31, 2001 in the United States that generated cash
refunds of $107.0.
NOTE 7 - INCOME TAXES (Continued)
- ---------------------
The income tax provision at the effective rate differs from the income tax
provision at the United States federal statutory tax rate in effect during
December 31, 2004, 2003 and 2002 for the reasons illustrated in the following
table:
2004 2003 2003
---- ---- ----
Income Tax Provision at Statutory Rate $ 133.6 $ 97.0 $ 36.0
Foreign provisions and related items (11.5) (0.4) 1.1
Extra territorial income (7.2) (5.9) (5.7)
Foreign dividends 17.2 - -
State income taxes 1.1 3.2 1.6
Accrued expenses 5.2 3.8 2.1
Tax exempt interest income (1.9) (2.2) (1.2)
Currency (1.0) 0.1 (2.1)
Other, net (10.3) (1.3) 7.4
--------- -------- ---------
Total Income Tax Provision at Effective Rate $ 125.2 $ 94.3 $ 39.2
========= ======== =========
Effective Rate 32.8% 34.0% 38.1%
========= ======== =========
On October 22, 2004, the American Jobs Creation Act was enacted into law in
the United States. This act contains a special one-time dividends received
deduction on the repatriation of certain foreign earning to a United States
taxpayer, provided certain criteria are met. The Company has not completed its
evaluation of this provision with respect to all foreign subsidiaries and is
expected to complete its evaluation by June 30, 2005. As of December 31, 2004,
the Company has determined that it will repatriate approximately $145.0 of
earnings of two foreign subsidiaries under this provision in 2005. The deferred
tax expense associated with this remittance is approximately $17.2 and is
recognized as a deferred tax liability as of December 31, 2004 on the Company's
consolidated balance sheets. The range of income tax effects of repatriating
earnings from other subsidiaries cannot be reasonably estimated at the time of
issuance of these consolidated financial statements.
At December 31, 2004, income and remittance taxes have not been recorded on
$160.4 of undistributed earnings of foreign subsidiaries, except as noted above,
either because any taxes on dividends would be offset substantially by foreign
tax credits or because the Company intends to reinvest those earnings
indefinitely.
NOTE 8 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
- ------------------------------------------------------
The Company uses forward exchange contracts and options 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 maturities of these contracts and options do not exceed one
year. The carrying amounts, which represent fair values, of these forward
contracts and options were net unrealized losses of $19.1 and $9.9 at December
31, 2004 and 2003, respectively. The fair value of the Company's forward
exchange contracts and options is based principally on quoted market prices.
Forward exchange options are also used to hedge specific firm commitments
or forecasted transactions by locking in exchange rates for such anticipated
cash flows. Gains and losses on these instruments are recorded as a component of
other comprehensive income until the forecasted transaction occurs. At December
31, 2004, the carrying amounts of such options, which represent fair values,
were net unrealized losses of $0.1. There were no outstanding instruments at
December 31, 2003 designated as hedges of specific firm commitments or
forecasted transactions.
NOTE 9 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
The following table provides a breakdown of property, plant and equipment
balances at December 31, 2004 and 2003:
Estimated Useful
Life (Years) 2004 2003
------------ ---- ----
Land - $ 100.0 $ 88.6
Land improvements 11-20 140.0 132.0
Buildings 10-33 790.3 757.4
Machinery and equipment 3-25 3,724.8 3,604.0
Construction-in-progress - 50.5 40.0
------------- -------------
Total property, plant and equipment 4,805.6 4,622.0
Accumulated depreciation (3,382.7) (3,156.3)
------------- -------------
Net property, plant and equipment $ 1,422.9 $ 1,465.7
============= =============
The Company recorded depreciation expense of $207.9, $242.5 and $263.5 for
the years ended December 31, 2004, 2003 and 2002, respectively. In the first
quarter of 2004, the Company changed its estimate of the service lives of
certain depreciable assets to increase the useful economic life beyond the
original service life assigned to these assets. The Company made this decision
based on design factors, which were confirmed by actual operating experience.
The change in accounting estimate reduced expenses by approximately $6.4 ($4.0
net of tax) for the year ended December 31, 2004.
The amount of interest capitalized as a component of the cost of capital
assets constructed for the years ended December 31, 2004, 2003 and 2002 was $3.1
($2.0 after tax), $6.6 ($4.2 after tax) and $3.2 ($2.0 after tax), respectively.
NOTE 10 - GOODWILL AND OTHER INTANGIBLE ASSETS
- ----------------------------------------------
As of December 31, 2004 and 2003, the gross and net amounts of intangible
assets, excluding goodwill were:
2004
--------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
--------- ------------ ----------
Patents and licenses $ 11.8 $ (1.8) $ 10.0
Customer/Distributor relationships 17.9 (0.6) 17.3
Completed technology 14.5 (0.3) 14.2
Pension intangible asset 20.5 - 20.5
Other 29.4 (10.0) 19.4
--------- -------- ---------
Total $ 94.1 $ (12.7) $ 81.4
========= ======== =========
2003
--------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
--------- ------------ ----------
Patents and licenses $ 5.4 $ (1.4) $ 4.0
Pension intangible asset 14.8 - 14.8
Other 23.7 (7.9) 15.8
--------- -------- ---------
Total $ 43.9 $ (9.3) $ 34.6
========= ======== =========
NOTE 10 - GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
- ----------------------------------------------
The Company recorded amortization expense related to these intangible
assets of $2.7, $1.4 and $3.1 for the years ended December 31, 2004, 2003 and
2002, respectively. The estimated aggregate amortization expense to be recorded
in each of the next five succeeding years is as follows:
2005 $5.5
2006 $5.3
2007 $5.2
2008 $5.2
2009 $5.1
The changes in the carrying amount of goodwill for the years ended December
31, 2004 and 2003 are as follows:
2004 2003
---- ----
Beginning balance $ 67.8 $ 56.1
Change from acquisitions 3.0 5.2
Translation 5.1 6.5
----------- -----------
Total ending balance $ 75.9 $ 67.8
=========== ===========
The Company tests the carrying value of goodwill for impairment annually,
as required by SFAS No. 142, "Goodwill and Other Intangible Assets." The Company
completed its tests for impairment of goodwill during the three month period
ended September 30, 2004. No impairments were identified as a result of the
tests performed.
In the three month period ended September 30, 2004, the Company acquired
the Silicone Division of NUC (see Note 3). The Company assigned the following
amounts and estimated useful lives to the intangible assets identified in this
transaction:
Weighted-
Amount Average
Assigned Life (Years)
--------- ------------
Customer/Distributor relationships $ 17.9 $ 7.0
Completed technology 14.5 14.0
Patents 5.9 14.0
--------- ---------
Total $ 38.3 $ 10.7
========= =========
None of the intangible assets acquired from NUC have significant residual
value. The amount assigned to the intangible assets will be amortized on a
straight-line basis over the applicable estimated useful lives. No research and
development assets were acquired from NUC as part of this transaction. Goodwill
of $3.0 was recognized by the Company from the NUC acquisition.
NOTE 11 - RESTRICTED ASSETS
- ---------------------------
The composition of restricted investments as of December 31, 2004 and 2003
are as follows:
2004 2003
---- ----
Restricted Securities:
U.S. government obligations $ 3.0 $ 4.9
U.S. government agency obligations 7.2 13.4
Mortgage-backed & asset backed securities 2.8 3.1
Corporate bonds 9.7 17.6
Municipal securities - 48.9
Foreign bonds - 0.5
Foreign bank deposit 1.8 -
Money market funds 31.3 189.1
--------- ---------
Total Restricted Securities $ 55.8 $ 277.5
========= =========
NOTE 11 - RESTRICTED ASSETS (Continued)
- ---------------------------
The contractual maturities of restricted securities at December 31, 2004
and 2003 are as follows:
2004 2003
---- ----
Mature in one year or less $ 37.4 $ 241.8
Mature after on year through five years 9.0 16.1
Mature after five years 9.4 19.6
--------- ---------
Total restricted securities $ 55.8 $ 277.5
========= =========
Restricted assets consist principally of money market funds, but also
include obligations backed by the U.S. Government or one of its agencies and
corporate and municipal issue bonds, which have been classified as "available
for sale" in conformity with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." The aggregate carrying value of the marketable
securities classified as restricted assets approximates the fair market value.
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
assets, the specific identification method is used. Restricted assets are
included in the captions "Restricted insurance proceeds" and "Restricted
investments" in the "Other Assets" section of the consolidated balance sheets.
The Company has Letters of Credit outstanding of $28.7 and $46.1 at
December 31, 2004 and 2003, 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, 2004 and 2003, the
Company had $30.3 and $46.7, respectively, of funds restricted to support these
obligations. In addition, the Company had foreign bank deposits of $1.8 at
December 31, 2004 included in restricted assets.
In order to comply with certain environmental regulations, as of December
31, 2004 and 2003, the Company maintained $23.7 and $23.4, 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 16 for further discussion). Those
amounts are included in the caption "Restricted investments" in the consolidated
balance sheets.
As of December 31, 2003, $207.4 of cash proceeds from breast implant
products liability insurers (the "Insurers"), including investment income earned
thereon, was restricted as to its use pursuant to orders of the Bankruptcy
Court. This balances is included in the caption "Restricted insurance proceeds"
in the consolidated balance sheets and was invested in investment categories
approved by the Bankruptcy Court. Cash proceeds from the Insurers and related
interest have been, and will be, applied toward the Company's payment
obligations under various funding agreements related to implementation of the
Company's Chapter 11 plan of reorganization (see Note 17). 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 17. All
future settlements of policies naming the Company as a co-insured will not be
subject to the approval of the Bankruptcy Court, because the Company has emerged
from the Chapter 11 Proceeding. However, one insurance policy settlement that
was reached prior to the Effective Date continues to be subject to approval of
the Bankruptcy Court. See discussion of "Insurance Allocation Agreement" in Note
17 for related information. As of December 31, 2004 there were no restricted
insurance assets.
NOTE 12 - NOTES PAYABLE AND CREDIT FACILITIES
- ---------------------------------------------
Notes payable include amounts outstanding under short-term lines of credit
and were $5.6 and $7.5 at December 31, 2004 and 2003, respectively. The carrying
amounts of these short-term borrowings approximated their fair value. Notes
payable included under "Liabilities Subject to Compromise" at December 31, 2003
were $375.0, representing amounts outstanding under a revolving credit
agreement. Upon emergence from Chapter 11 in June 2004, the Company repaid the
$375.0 outstanding under this revolving credit agreement.
DCTS 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
$197.7 to such bank in exchange for $197.6 during 2004, and $171.2 was sold to
such bank in exchange for $171.1 in 2003. 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 2004 and 2003. As of December 31, 2004
and 2003, $27.3 and $26.1, respectively, remained outstanding under the
facility.
NOTE 12 - NOTES PAYABLE AND CREDIT FACILITIES (Continued)
- ---------------------------------------------
On December 16, 2004, the Company entered into a $500.0 unsecured revolving
credit agreement with a syndicate of commercial banks, which expires on December
16, 2009. This agreement replaced the $500.0 364-day revolving credit agreement
dated June 1, 2004. The new revolving credit agreement allows for borrowing in
various currencies for general corporate purposes of the Company and its
subsidiaries. These credit facilities require the payment of commitment fees. As
of December 31, 2004, these credit lines were unused.
In addition, the Company had unused and committed credit facilities for use
by foreign subsidiaries at December 31, 2004 and 2003 with various U.S. and
foreign banks totaling $130.3 and $110.0, 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 13 - 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 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 StARS 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 StARS 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 achieve its intended purpose of rewarding and
retaining key employees.
Based on these changes to the StARs Plan, the Company reported expenses of
$68.8 for the year ended December 31, 2002 within the caption "Marketing and
administrative expenses," such amount being equal to the $77.0 liability of the
StARs Plan after modifications less the $8.2 liability before modifications. The
liability recorded for the StARS Plan was $48.1 and $52.3 at December 31, 2004
and 2003, respectively.
The PEP Plan was initiated in 2003 as a replacement for the StARs Plan. The
liability for the PEP Plan was $48.4 at December 31, 2004 and $7.9 at December
31, 2003.
NOTE 14 - LONG-TERM DEBT
- ------------------------
Long-term debt at December 31, 2004 and 2003 consisted of the following:
2004 2003
---- ----
Long-Term Debt
Fixed rate notes due 2004
3.95-5.84% at December 31, 2003 $ - $ 2.0
Fixed rate note due 2005
6.50% at December 31, 2004 $ 2.8 $ 5.0
Fixed rate note due 2006
4.70% at December 31, 2004 $ 8.6 $ 8.1
Variable rate notes due 2007
2.88% at December 31, 2004 $ 2.2 $ 2.7
Fixed rate notes due 2007
4.35-5.85% at December 31, 2004 $ 9.4 $ 11.3
Fixed rate note due 2015
6.36% at December 31, 2004 $ 11.2 $ 11.0
Variable rate bonds due 2019
2.44% at December 31, 2004 $ 5.8 $ -
Other obligations and capital leases
5.39-6.40% at December 31, 2004 $ 28.5 $ 21.3
--------- --------
Total Long-Term Debt 68.5 61.4
Less - payments due within one year 8.3 9.2
--------- --------
Total Long-Term Debt Due after one year $ 60.2 $ 52.2
========= ========
Liabilities subject to Compromise - Long-Term Debt:
9.375% debentures due 2008 $ - $ 75.0
8.15% debentures due 2029 - 50.0
8.125-9.50% medium-term notes due 1995-2001,
8.71% average rate - 34.5
Variable rate notes due 1995-1998, 6.688-7.234% - 84.8
Japanese yen notes due 1998, 5.55% - 29.4
--------- --------
Total Liabilities Subject to Compromise - Long-Term Debt $ - $ 273.7
========= ========
The fair value of the Company's long-term debt, including the portion due
within one year, approximated its book value of $68.5 at December 31, 2004. At
December 31, 2003, the fair value of the long-term debt, including the portion
due within one year, approximated the book value of $61.4. The Company was
unable to estimate the fair value of the long-term debt included under the
caption "Liabilities Subject to Compromise" in the table above and in the
consolidated balance sheets at December 31, 2003, due to the uncertainty
associated with the Company's filing for protection under Chapter 11 of the
Bankruptcy Code.
Annual aggregate maturities of the long-term debt of the Company are: $8.3
in 2005, $14.0 in 2006, $5.8 in 2007, $2.0 in 2008, $2.1 in 2009 and $36.3
thereafter.
Upon emergence from Chapter 11 in June 2004, the Company repaid $273.7 of
long-term debt classified as "Liabilities Subject to Compromise" in the
consolidated balance sheets.
Cash paid during the year for interest was $679.3 in 2004, $5.4 in 2003 and
$5.0 in 2002. Cash paid for interest in 2004 includes the payment of $673.8 in
accrued interest on pre-petition debt, payables, and other liabilities upon the
Company's emergence from Chapter 11 in June 2004.
NOTE 15 - PENSION AND OTHER POSTRETIREMENT 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, 2004, 2003 and 2002:
2004 2003 2002
---- ---- ----
Defined Benefit Plans:
Service cost $ 37.4 $ 34.0 $ 30.4
Interest cost on projected benefit obligations 81.2 77.6 72.6
Expected return on plan assets (74.2) (74.3) (70.9)
Net amortization of losses 21.9 12.5 5.2
Curtailments, settlements, and special termination benefits 7.2 - 7.6
--------- -------- ---------
Total Defined Benefit Plans 73.5 49.8 44.9
Defined Contribution and Savings Plans 17.0 18.9 19.1
--------- -------- ---------
Total Pension Expense $ 90.5 $ 68.7 $ 64.0
========= ======== =========
On April 5, 2004, Dow Corning announced a global workforce reduction, which
was primarily the result of internal restructuring. The Company accounted for
the workforce reduction under the guidelines of SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits." During the year ended December 31, 2004, the Company
recognized pre-tax charges related to its defined benefit plans of $2.7 for
special termination benefits and the effect of curtailment. In addition, the
Company accounted for the effects of the workforce reduction on its U.S. Retiree
Medical Plan by recognizing a pre-tax charge of $0.7 for special termination
benefits and pre-tax income of $0.7 for curtailment.
The Company settled a portion of its obligation under defined benefit plans
during 2004 through lump sum payments to participants and annuity arrangements
with third-party financial institutions. The reduction in these obligations was
accounted for as settlements under SFAS No. 88 and resulted in settlement
expense of $4.5 from early recognition of unrealized actuarial losses.
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 reconciles the defined benefit plans' funded status with amounts
recognized in the Company's consolidated balance sheets at December 31, 2004 and
2003, respectively as part of other assets, other long-term liabilities, and
liabilities subject to compromise:
2004 2003
---- ----
Net Accrued Pension Liability:
Projected benefit obligation in excess of plan assets $ (541.4) $ (532.6)
Unrecognized net loss 406.7 386.1
Unrecognized prior service costs 21.4 16.1
Unrecognized net transition obligation 1.0 1.1
Minimum pension liability (229.3) (224.3)
Intangible asset 20.5 15.4
----------- -----------
Net Accrued Pension Liability $ (321.1) $ (338.2)
=========== ===========
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 for the year ended December 31, 2004 and
2003 are as follows:
2004 2003
---- ----
Projected benefit obligation $ 1,491.6 $ 1,374.8
Accumulated benefit obligation 1,302.4 1,206.1
Fair value of plan assets 959.9 851.1
NOTE 15 - PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
- ---------------------------------------------------
The following table provides a reconciliation of beginning and ending
balances of the projected benefit obligation as of December 31, 2004 and 2003:
2004 2003
---- ----
Projected Benefit Obligation:
Projected benefit obligation, beginning of year $ 1,418.2 $ 1,253.6
Service cost 37.4 34.0
Interest cost 81.2 77.6
Actuarial losses 58.3 74.7
Foreign currency exchange rate changes 36.1 49.6
Benefits paid and settlements (93.9) (78.2)
Curtailments and special termination benefits (2.6) 5.7
Other 10.8 1.5
----------- -----------
Projected benefit obligation, end of year $ 1,545.5 $ 1,418.2
=========== ===========
The following table provides a reconciliation of the beginning and ending
balances of the fair value of plan assets as of December 31, 2004 and 2003:
2004 2003
---- ----
Fair Value of Plan Assets
Fair value of plan assets, beginning of year $ 885.6 $ 693.8
Actual return on plan assets 92.5 177.9
Foreign currency exchange rate changes 23.4 28.6
Contributions by the employer 93.7 61.8
Contributions by plan participants 2.0 1.7
Benefits paid and settlements (93.9) (78.2)
Other 0.7 -
----------- -----------
Fair Value of Plan Assets, End of Year $ 1,004.0 $ 885.6
=========== ===========
For the United States defined benefit plan, as of December 31, 2004 and
2003, the fair value of plan assets included 65% and 69% of equity securities
and 35% and 31% of debt securities, respectively. The plan targets an asset
allocation of 55%-75% equity securities and 25%-45% debt securities.
The Company's funding policy is to contribute to defined benefit plans when
pension laws and economics either require or encourage funding. Of the defined
benefit plans maintained by the Company, the U.S. plans covering the parent
company are the largest plans. Contributions to the U.S. defined benefit plans
for the year ended December 31, 2004 totaled $68.8. Contributions of
approximately $25.0 are planned for the U.S. plans in 2005.
Of the defined contribution and savings plans maintained by the Company,
the U.S. plan covering the parent company is the largest plan. Employer matching
contributions for the U.S. defined contribution plan for the year ended December
31, 2004 totaled $10.4. The Company expects to make contributions of
approximately $10.0 during 2005.
NOTE 15 - PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
- ---------------------------------------------------
The weighted-average assumptions used to determine the benefit obligation
and to determine the net benefit costs are shown in the following table.
Discount rates and rates of increase in future compensation are weighted based
upon the projected benefit obligations of the respective plans. The expected
long-term rate of return on plan assets is weighted based on total plan assets
for each plan at year end. The long-term rate of return on plan assets
assumption is determined considering historical returns and expected future
asset allocation and returns for each plan.
Benefit Obligations Net Periodic Cost for
At December 31 the year ended December 31
-------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Discount rate 5.68% 5.85% 5.85% 6.30%
Rate of increase in future
compensation levels 4.20% 4.19% 4.19% 5.00%
Expected long-term rate of
return on plan assets 8.22% 8.24% 8.24% 8.60%
For the December 31, 2004 measurement date, the Company, upon advice from
its actuaries, employed a new method to determine the discount rate to be used
for the U.S. defined benefit pension plans. In the past, the Company had
determined the applicable discount rate by reference to a bond index. In 2004,
the Company used a bond mapping analysis, which matches cash flows from a
hypothetical portfolio of corporate bonds against the estimated future benefit
payments of the plans, to arrive at an effective discount rate.
The Company expects to pay benefits under its defined benefit plans in
future periods as detailed in the following table. The expected benefits have
been estimated based on the same assumptions used to measure the Company's
benefit obligation as of December 31, 2004 and include benefits attributable to
future employee service.
Estimated Future
Benefit Payments
----------------
2005 $ 80.5
2006 78.3
2007 80.3
2008 80.5
2009 80.7
2010-2014 433.7
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. The Company's health care and life insurance
benefit plan has a measurement date of December 31 of the applicable year. Net
periodic postretirement benefit cost includes the following components as of
December 31, 2004, 2003 and 2002:
2004 2003 2002
---- ---- ----
Net Periodic Postretirement Benefit Cost:
Service cost $ 4.4 $ 3.9 $ 4.2
Interest cost 15.9 18.2 16.5
Amortization of prior service benefits (4.6) (0.8) (0.8)
Amortization of actuarial losses 2.3 1.2 -
--------- -------- ---------
Total Net Periodic Postretirement Benefit Cost $ 18.0 $ 22.5 $ 19.9
========= ======== =========
NOTE 15 - PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
- ---------------------------------------------------
The following table presents a reconciliation of the beginning and ending
balances as of December 31, 2004 and 2003 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 other
long-term liabilities and liabilities subject to compromise.
2004 2003
---- ----
Accumulated Postretirement Benefit Obligation:
Accrued postretirement benefit obligation at
beginning of year $ 267.3 $ 276.5
Service cost 4.4 3.9
Interest cost 15.9 18.2
Actuarial loss 20.6 16.3
Curtailment and special termination benefits 0.4 -
Plan change (7.9) (33.4)
Benefits paid (18.9) (14.2)
----------- -----------
Accumulated Postretirement Benefit Obligation at End of Year 281.8 267.3
Unrecognized prior service benefit 42.5 40.0
Unrecognized net loss (85.1) (67.0)
----------- -----------
Total Accrued Postretirement Benefit Obligation $ 239.2 $ 240.3
=========== ===========
The Company adopted FSP FAS 106-1, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003," effective April 30, 2004. FSP FAS 106-2 of the same title superseded this
FSP in June 2004. The adoption of these FSP's reduced the accumulated post
retirement benefit obligation related to the Company's retiree health care and
life insurance benefit plans by $6.1 at April 30, 2004. In addition, the
adoption of these FSP's reduced the net periodic benefit cost recognized for
these plans by $0.5 during the year ended December 31, 2004.
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. 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 10.00% in 2004 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 5.82% and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 2004 by 6.52%. Decreasing the assumed health
care cost trend rates by one percentage point in each year would decrease the
accumulated postretirement benefit obligation by 5.11% and the aggregate of the
service and interest cost components of net periodic postretirement benefit cost
for 2004 by 5.64%.
The discount rate used in determining the accumulated postretirement
benefit obligation was 6.00% at December 31, 2004 and 6.25% at December 31,
2003.
NOTE 15 - PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
- ---------------------------------------------------
The Company funds most of the cost of the postretirement health care and
life insurance benefits as incurred. Benefit payments to retirees totaled $18.9
for the year ended December 31, 2004. The Company expects to pay future benefits
under its postretirement health care and life insurance benefit plan as detailed
in the following table. The expected payments have been estimated based on the
same assumptions used to measure the Company's postretirement benefit
obligations as of December 31, 2004.
Estimated Future
Postretirement
Benefit Payments
----------------
2005 $ 19.2
2006 19.9
2007 19.7
2008 20.0
2009 19.8
2010-2014 104.5
NOTE 16 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Chapter 11 Related Matters
- --------------------------
Insurance
- ---------
The Company had a substantial amount of unexhausted products liability
insurance coverage with respect to breast implant lawsuits and claims. A
substantial number of the Company's insurers reserved the right to deny
coverage, in whole or in part, due to differing legal theories. Litigation
between the Company and its insurers ("Litigating Insurers") regarding coverage
for products liability was conducted between 1993 and 1999. This litigation
resulted in judicial rulings substantially in favor of the Company's position
regarding its insurance coverage. As a result, a majority of the Litigating
Insurers have reached settlements with the Company. The Company is continuing
settlement negotiations with the remaining Litigating Insurers, previously
settling insurers who claim a reimbursement right with respect to a portion of
previously paid insurance proceeds, and other insurers that were not involved in
the litigation.
Of the total "Anticipated implant insurance receivable" of $307.8 as of
December 31, 2004, $73.5 related to insurance that has not yet been settled with
certain of the Company's insurance carriers and $234.3 represented amounts to be
received by the Company pursuant to settlements with other of the Company's
insurance carriers.
The principal uncertainties that exist with respect to the realization of
the "Anticipated implant insurance receivable" include the ultimate cost of
resolving implant litigation and claims, the results of settlement negotiations
with insurers, and the extent to which insurers may become insolvent in the
future. Management believes that, while uncertainties regarding this asset
continue to exist, these uncertainties are not reasonably likely to result in a
material adverse change to the Company's financial position or results of
operations, and that it is probable that this asset will ultimately be realized.
This belief is further supported by the fact that the Company received insurance
recoveries of $1,268.3 from September 1, 1994 through December 31, 2004, and
entered into settlements with certain insurers for future reimbursement.
Implant Reserve
- ---------------
As of December 31, 2004 and 2003, the Company's "Implant reserve" recorded
in the consolidated balance sheets was $1,884.9 and $2,249.9, respectively, to
reflect the Company's estimated remaining obligation to fund breast implant
claims resolution pursuant to the Company's Chapter 11 plan of reorganization
and other breast implant litigation related matters (see Note 17 for further
discussion).
Accrued Interest
- ----------------
As of December 31, 2004 and 2003, the amount of interest included in the
caption "Accrued interest" recorded in the consolidated balance sheets related
to the Company's potential obligation to pay interest to its commercial
creditors in the Chapter 11 Proceeding was $63.5 and $650.9, respectively. The
actual amount of interest that will be paid to these creditors is uncertain and
will ultimately be resolved through continued proceedings in the U.S. Court of
Appeals for the Sixth Circuit (see Note 17 for further discussion).
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
- ---------------------------------------
Co-Insurance Payable
- --------------------
As of December 31, 2004 and 2003, the amount payable pursuant to the
"Insurance Allocation Agreement" included in the caption "Co-insurance payable"
recorded in the consolidated balance sheets was $48.9 and $79.7, respectively
(see Note 17 for further discussion).
Tax Matters
- -----------
In May 1999, the Company received a Statutory Notice of Deficiency (the
"Notice") from the United States Internal Revenue Service ("IRS"). The 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 by the U.S. District Court for the Eastern District of
Michigan (the "U.S. District Court in Michigan"), which retains jurisdiction
over items that occurred during the Chapter 11 Proceeding 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.
In August 2004, the Company received a Notice of Proposed Adjustment (the
"Adjustment Notice") from the IRS related to the Company's consolidated federal
income tax returns for the 1997, 1998, and 1999 calendar years. If the IRS
prevails with respect to the issues identified in the Adjustment Notice, the
amount of a resulting tax deficiency would total approximately $116.9.
Management believes that the deficiencies asserted by the IRS are excessive and
will vigorously contest the IRS' claims. Management believes that the resolution
of the issues identified in the Adjustment Notice will not have a material
adverse impact on the Company's consolidated financial position or results of
operations.
Risks and Uncertainties
- -----------------------
While the Company does not anticipate a need to further revise amounts
recorded in its consolidated financial statements for these Chapter 11 related
matters, 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. 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 consolidated financial statements, are unknown at this
time, an estimate of possible future adjustments cannot be made.
Environmental Matters
- ---------------------
The Company had 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 11 sites at which the Company may have some liability,
although management expects to settle the Company's liability for four 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 of the 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, 2004 and 2003, was $2.9 and $3.3 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. 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.
NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)
- ---------------------------------------
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
Company to continue to operate hazardous waste storage facilities at certain
plant sites, the states involved have required the Company to establish trusts
to provide for aggregate estimated closure, post-closure, corrective action and
potential liability costs. These trusts aggregated $23.7 and were fully funded
as of December 31, 2004. Interest on the funds held in trust will be available
to the 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 Company no longer needs or closes the
permitted facilities, the funds then remaining in these trusts will revert to
the Company.
Other Regulatory Matters
- ------------------------
Companies that manufacture and sell chemical products may experience risks
under current or future laws and regulations, which may result in significant
costs and liabilities. The Company routinely conducts health, toxicological and
environmental tests of its products. The Company cannot predict what future
legal, regulatory or other actions, if any, may be taken regarding the Company's
products or the consequences of their production and sale. Such actions could
result in significant losses, and there can be no assurance that significant
losses would not be incurred. However, based on currently available information,
the Company's management does not believe that any such actions would have a
material adverse effect on the Company's financial condition or results of
operations.
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 $32.2 in 2004, $35.2 in 2003 and $37.9 in 2002. The minimum
future rental payments required under noncancellable operating leases at
December 31, 2004, in the aggregate, are $153.9 including the following amounts
due in each of the next five years: 2005 - $24.3, 2006 - $18.6, 2007 - $15.5,
2008 - $12.1 and 2009 - $11.1.
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 potential future payments under such guarantees of the
Company was $7.9 and $8.9 at December 31, 2004 and 2003, respectively, primarily
related to guarantees of housing loan obligations of certain employees of the
Company's subsidiaries in Japan. Such guarantees have various expiration dates
and typically span approximately 20 years. The Company's estimated potential
obligation under these guarantees is not material to the consolidated financial
statements and no liability has been recorded on the Company's consolidated
balance sheets for the years ended December 31, 2004 and 2003.
The Company also 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. The
maximum amount of future payments the Company was potentially obligated to make
for guarantees of residual values of leased assets was $5.3 and $2.6 at December
31, 2004 and 2003, respectively. Management believes that, based on facts and
circumstances, the Company's estimated potential obligation under its residual
value lease guarantees is not material to the Company's consolidated financial
statements and as such, no liability has been recorded on the Company's
consolidated balance sheets for the years ended December 31, 2004 and 2003.
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 that typically
include a warranty. The Company's warranty activities do not have a material
impact on the Company's consolidated financial position or results of
operations.
NOTE 17 - PROCEEDING UNDER CHAPTER 11
- -------------------------------------
Plan of Reorganization
- ----------------------
In 1999, the Company, with the Committee of Tort Claimants, a committee
appointed in the Chapter 11 Proceeding to represent products liability
claimants, filed a joint plan of reorganization (the "Joint Plan of
Reorganization") and a related disclosure statement. In November 1999, the
Bankruptcy Court issued an order confirming the Joint Plan of Reorganization,
(the "Confirmation Order"). After various appeals of the Confirmation Order, the
Joint Plan of Reorganization became effective on the Effective Date. The Joint
Plan of Reorganization provides funding for the resolution of breast implant and
other products liability litigation covered by the Chapter 11 Proceeding through
several settlement options or through litigation and for the satisfaction of
commercial creditor claims.
Breast Implant and Other Products Liability Claims
- --------------------------------------------------
Products liability claims to be resolved by settlement will be administered
by a settlement facility (the "Settlement Facility"), and products liability
claims to be resolved by litigation will 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 Company committed to resolve
products liability claims will not exceed $2.35 billion valued as of the
Effective Date. Of this amount, no more than $400.0 will be used to fund the
Litigation Facility. Payments made by the Company will 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 will also be
withdrawn from the trust as necessary to fund the resolution of claims via the
Litigation Facility and the operational expenses of the Litigation Facility.
Under the Joint Plan of Reorganization, the Settlement Facility will allow
breast implant claimants who choose to settle their claims against the Company
and who meet certain documentation and eligibility criteria to combine up to
three settlement options, which will result in Base Payments for U.S. breast
implant claimants ranging from $2 thousand to more than $250 thousand.
Settlement payments to non-U.S. breast implant claimants under the Joint Plan of
Reorganization will 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.
Under the Joint Plan of Reorganization, products liability claimants
choosing to litigate their claims will be required to pursue their claims
through litigation against the Litigation Facility, including a mandated
pre-trial mediation program. The deadline for claimants to elect to file a
notice of intent to litigate has passed. Those claimants who failed to file the
notice of intent to litigate are prohibited from litigating their claims. The
Company contemplates that the litigation process will 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. The U.S. District Court in Michigan will ultimately determine whether
the Common Issues Procedures will be implemented. The result of implementing the
Common Issues Procedures will not affect those claimants who choose to resolve
their claims through the Settlement Facility.
In 1997, the 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 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 above.
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.
If use of the Common Issues Procedures results 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 results 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 Company through the Litigation Facility would forego any
right to receive benefits under the various settlement options provided through
the Settlement Facility.
The Joint Plan of Reorganization provides that punitive damage claims will
not be allowed.
NOTE 17 - PROCEEDING UNDER CHAPTER 11 (Continued)
- -------------------------------------
Funding the Settlement and Litigation Facilities
- ------------------------------------------------
The Company will fund the Settlement Facility and the Litigation Facility
(collectively, the "Facilities") over a 16-year period, commencing at the
Effective Date. The Company anticipates that it will 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 Company
will 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 Company will 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 Company is unable to meet its
payment obligations to fund the Facilities.
Funds will be paid by the 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. Future insurance settlements will be paid by Insurers
directly to the Settlement Facility on behalf of the Company. The amount of
funds to be paid by or on behalf of the Company are subject to annual and
aggregate funding limits. The Company has made payments of $1,383.9 to the
Settlement Facility through December 31, 2004.
Based on funding agreements relating to the amount and timing of the
Company's payment obligations to the Settlement Facility, payments to the
Settlement Facility will be made on a periodic basis until such payment
obligations are met. These funding agreements restrict the application of
payments made by the Company in advance of their due dates (the "Early
Payments"). Under these funding agreements, the Company will receive credit for
the future value equivalent, at the due date of the scheduled payment
obligations, of the Early Payments using a discount rate of 7%. As of December
31, 2004 and 2003, the Company's "Implant reserve" recorded in the consolidated
balance sheets was $1,884.9 and $2,249.9, respectively, to reflect the Company's
expected remaining obligation to fund the Settlement Facility and the Company's
estimate of other breast implant litigation related matters. The actual amounts
payable and the timing of such payments by the Company are uncertain and will be
affected by, among others, the rate at which claims are resolved by the
Facilities, the rate at which insurance proceeds are received by the Company
from its insurers and the degree to which the Company receives credit for the
future value equivalent of Early Payments. During the year ended December 31,
2004, the Company recorded $12.1 in other nonoperating income to reflect a
credit for the future value equivalent credit of Early Payments from restricted
insurance proceeds to the Settlement Facility of $306.0. The ultimate amount of
additional future value equivalent credit is subject to confirmation by the
claims administrator of the Settlement Facility.
Discharge of the Company and Releases of Other Parties
- ------------------------------------------------------
Under the Joint Plan of Reorganization, personal injury claims and certain
related claims will be transferred to the Settlement Facility and the Litigation
Facility for handling and payment. In addition, all of such claims against (a)
the Company, its subsidiaries and affiliates, (b) Dow Chemical, Corning and
their respective subsidiaries and affiliates, (c) certain of the Company's
insurers who have settled coverage issues with the Company relating to products
liability claims and (d) all of the officers, directors, employees and
representatives of these parties have been discharged (as to the Company) and
released (as to all other parties), and any prosecution or enforcement of those
claims are permanently barred, subject only to the limits of the enforceability
of orders of the Bankruptcy Court and the District Court outside the United
States.
Insurance Allocation Agreement between the Company and Dow Chemical
- -------------------------------------------------------------------
A number of the products liability insurance policies relevant to claims
against the 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 Company to Dow Chemical under an
insurance allocation agreement, as amended, between the Company and Dow Chemical
(the "Insurance Allocation Agreement"). The Insurance Allocation Agreement was
reached between Dow Chemical and the Company in order to resolve issues related
to the amount of the Shared Insurance Assets that would be available to the
Company for resolution of its products liability claims. Under the Insurance
Allocation Agreement, 25% of certain of the Shared Insurance Assets will be paid
by the Company to Dow Chemical subsequent to the Effective Date. However, the
amount of Shared Insurance Assets that will be payable to Dow Chemical by the
Company under the Insurance Allocation Agreement will not exceed approximately
$285.0. 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, will
be paid over to the Company after the expiration of a 17.5-year period
commencing on the Effective Date. Furthermore, the Company recognized an
obligation of $35.0 to Dow Chemical related to additional insurance coverage
under which the Company and Dow Chemical are co-insureds. Consequently, 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 (the "Co-insurance payable"). As a result of certain insurance
settlements and an amendment to the Insurance Allocation Agreement between the
Company and Dow Chemical, as of December 31, 2004, the Co-insurance payable has
been reduced to $48.9.
NOTE 17 - PROCEEDING UNDER CHAPTER 11 (Continued)
- -------------------------------------
Commercial Creditor Issues
- --------------------------
The Joint Plan of Reorganization provides funding to satisfy commercial
creditor claims, including accrued interest. The Joint Plan of Reorganization,
as amended pursuant to a May 21, 2004 ruling of the U.S. District Court in
Michigan, provides that each of the Company's commercial creditors would receive
in cash the sum of (a) an amount equal to the principal amount of their claims
and (b) interest on such claims. As of December 31, 2004, the Company has paid
approximately $1.5 billion in principal and the undisputed portion of interest
payable to commercial creditors of the Company. The remaining amount of
principal payable to commercial creditors as of December 31, 2004 and 2003 was
$2.1 and $816.6, respectively. As of December 31, 2004 and 2003, the amount of
interest included in the caption "Accrued interest" recorded in the consolidated
balance sheets related to the Company's potential obligation to pay interest to
its commercial creditors in the Chapter 11 Proceeding was $63.5 and $650.9,
respectively.
The actual amount of interest that will ultimately be paid to these
commercial creditors (the "Commercial Creditors") is uncertain due to pending
litigation in the U.S. Court of Appeals for the Sixth Circuit. The Bankruptcy
Court has issued a number of orders related to the interest rate that should be
applied to claims of the Commercial Creditors from the Filing Date through the
Effective Date ("Pendency Interest"). In 1999, the Bankruptcy Court held that
Commercial Creditors were entitled to Pendency Interest in an amount no less
than the amount that would result from the application of the Federal Judgment
Rate as of the Filing Date, which is 6.28%. Subsequently, the Bankruptcy Court
held that Pendency Interest would be measured by the terms of the Company's
contracts in effect on the Filing Date. In addition, in April 2001, the
Bankruptcy Court issued an opinion which (a) ruled that, where contracts related
to claims specified both a base contract rate and a default rate of interest,
the base contract rate would apply, (b) denied the request of certain Commercial
Creditors for default interest and collection costs and (c) indicated that
interest on claims held by certain Commercial Creditors should be compounded on
an annual basis. The involved Commercial Creditors, joined by the Committee of
Unsecured Creditors, appealed the April 2001 Bankruptcy Court opinion. On March
31, 2004, the U.S. District Court in Michigan affirmed the Bankruptcy Court's
April 2001 opinion.
On May 18, 2004, the U.S. District Court in Michigan ruled that interest on
claims of certain Commercial Creditors would accrue based on contract rates of
interest in effect under relevant loan agreements as of May 15, 1995, but not
less than 6.28%. With respect to loan agreements providing for a floating rate
of interest, the U.S. District Court in Michigan ruled that the floating rate in
effect on May 15, 1995 would be fixed as of that date, but not less than 6.28%.
The Company based its accrual for interest payable on this ruling and based on
the amended Joint Plan of Reorganization requirement that a rate of 5.0% should
be applied to amounts owed by the Company to the Commercial Creditors after June
1, 2004. Consequently, the Company's results for the year ended December 31,
2004, include a pretax charge of $48.3 ($30.4 after tax). The Company's results
for the years ended December 31, 2004 and 2003, reflected interest expense of
$95.5 ($60.2 after tax) and $94.5 ($59.5 after tax), respectively, for the
amount of interest potentially payable to the Commercial Creditors.
The Company, certain Commercial Creditors and the Committee of Unsecured
Creditors have appealed the U.S. District Court in Michigan's March 31, 2004 and
May 18, 2004 rulings regarding applicable interest rates to the U.S. Court of
Appeals for the Sixth Circuit. The Company's position is that non-default rates
of interest for floating rate obligations should be determined in accordance
with the formulas in the relevant contracts, except that the aggregate amount of
interest cannot be less than that resulting from the application of a fixed rate
of 6.28% through June 1, 2004. The undisputed interest portion was calculated by
application of the Company's position as described above. The application of
this position would result in an aggregate amount of interest that is less than
the amount of interest that would result from the U.S. District Court in
Michigan's ruling. As of September 29, 2004, the position of certain Commercial
Creditors, joined by the Committee of Unsecured Creditors is that, in addition
to the aggregate amount of interest resulting from the U.S. District Court in
Michigan's ruling, default interest in excess of $80.0, plus an unquantified
amount of certain fees, costs and expenses should be added to the claims filed
by holders of the fixed and floating rate obligations.
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 in the Federal District Court in the Southern District of New
York. These cases have been dismissed without prejudice with respect to
directors, officers and other individuals originally named as defendants. Dow
Chemical and Corning have been dismissed from this litigation. The claims
asserted against the Company in these cases have been discharged in the Chapter
11 Proceeding as of the Effective Date.
NOTE 17 - PROCEEDING UNDER CHAPTER 11 (Continued)
- -------------------------------------
Reorganization Costs
- --------------------
The Company has incurred and will continue to incur costs associated with
(a) the matters related to the Chapter 11 Proceeding that will be resolved by
the U.S. District Court in Michigan and the U.S. Court of Appeals, and (b) the
implementation of the Joint Plan of Reorganization. The aggregate amount of
these costs, which are being expensed as incurred, are recorded under the
caption "Reorganization costs" in the consolidated statements of operations. For
the years ended December 31, 2004 and 2003 the Company incurred the following
reorganization costs: Legal Expenses of $5.1 and $3.9, respectively, and
Administrative Expenses of $2.1 and $1.5, respectively.
NOTE 18 - RELATED PARTY TRANSACTIONS
- ------------------------------------
The Company has transactions in the normal course of business with its
shareholders, Dow Chemical and Corning, and their affiliates. The following
tables summarize related party transactions and balances with the Company's
shareholders.
Year Ended December 31,
--------------------------------------------
2004 2003 2002
---- ---- ----
Sales to Dow Chemical $ 8.6 $ 8.2 $ 8.8
Sales to Corning 7.4 7.5 7.3
Purchases from Dow Chemical 54.6 44.9 44.6
December 31,
--------------------------
2004 2003
---- ----
Accounts Receivable from Dow Chemical $ 1.2 $ 1.1
Accounts Receivable from Corning 0.8 0.6
Accounts Payable to Dow Chemical 4.2 3.1
In addition, non-wholly owned subsidiaries of the Company have transactions
in the normal course of business with their minority shareholders. The following
tables summarize related party transactions and balances between these
non-wholly owned subsidiaries and their minority owners.
Year Ended December 31,
--------------------------------------------
2004 2003 2002
---- ---- ----
Sales to minority owners $ 80.1 $ 63.1 $ 73.7
Purchases from minority owners 7.3 6.6 10.1
December 31,
--------------------------
2004 2003
---- ----
Accounts receivable from minority owners $ 26.5 $ 26.6
Accounts payable to minority owners 3.0 2.2
Management believes the costs of such purchases and the prices for such
sales were competitive with purchases from other suppliers and sales to other
customers.
In addition, DCTS loans excess funds to its minority shareholder Toray
Industries, Inc. The amount of loans receivable at December 31, 2004 and 2003
was $29.3 and $60.5, respectively. These balances are included in "Notes and
other receivables" in the consolidated balance sheets. Management believes that
interest earned from this loan arrangement is at rates commensurate with market
rates for companies of similar credit standing.
DOW CORNING CORPORATION AND SUBSIDIARES
SUPPLEMENTARY DATA - QUARTERLY FINANCIAL INFORMATION
YEARS ENDED DECEMBER 31, 2004 AND 2003 (Unaudited)
(in millions of dollars except share data)
Quarter Ended: March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2004
Net sales $ 814.3 $ 851.9 $ 829.7 $ 876.7
Gross profit 229.5 278.4 262.5 265.5
Net income 52.2 35.7 79.9 70.5
Net income per share 20.88 14.28 31.96 28.20
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
See Notes to the Consolidated Financial Statements.
SAMSUNG CORNING PRECISION
GLASS CO., LTD.
As of December 31, 2004 and 2003 and for the
years ended December 31, 2004, 2003 and 2002
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Contents
Page(s)
Report of Independent Registered Public Accounting Firm...................136
Financial Statements
Balance Sheets............................................................137
Statements of Income......................................................138
Statements of Cash Flows..................................................139
Notes to Financial Statements.............................................140
Report of Independent Registered Public Accounting Firm
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, 2004 and December 31, 2003, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2004, 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 the
standards of the Public Company Accounting Oversight Board (United States).
Those standards 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.
Samil PricewaterhouseCoopers
Seoul, Korea
January 12, 2005
SAMSUNG CORNING PRECISION GLASS CO., LTD.
BALANCE SHEETS
For the years ended December 31, 2004 and 2003
(in thousands, except share and per share amounts)
2004 2003
---- ----
Assets
Current assets
Cash and cash equivalents $ 45,315 $ 66,928
Accounts and notes receivable
Customers, net of allowance for doubtful accounts
of $1,200 and $640 68,432 36,481
Related parties 50,364 27,502
Inventories 17,518 14,444
Prepaid value added tax 15,517 16,415
Other current assets 2,374 588
----------- -----------
Total current assets 199,520 162,358
Property, plant and equipment, net 1,478,075 705,056
Other non-current assets 27,567 14,565
----------- -----------
Total assets $ 1,705,162 $ 881,979
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 24,844 $ 24,088
Short-term borrowings 28,783 14,028
Accounts payable
Trade accounts payable 3,559 3,333
Non-trade accounts payable 119,939 30,813
Related parties 115,074 118,999
Income taxes payable 108,003 41,364
Accrued bonus payable 18,422 9,104
Other current liabilities 3,771 751
----------- -----------
Total current liabilities 422,395 242,480
Long-term debt 97,040 23,964
Accrued severance benefits, net 5,508 2,792
Deferred income tax liabilities 38,813 13,858
----------- -----------
Total liabilities 563,756 283,094
----------- -----------
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 995,695 582,726
Accumulated other comprehensive income (loss) 125,322 (4,230)
----------- -----------
Total stockholders' equity 1,141,406 598,885
----------- -----------
Total liabilities and stockholders' equity $ 1,705,162 $ 881,979
=========== ===========
The accompanying notes are an integral part of these financial statements.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
STATEMENTS OF INCOME
For the years ended December 31, 2004, 2003 and 2002
(in thousands)
2004 2003 2002
---- ---- ----
Net sales
Related parties $ 525,527 $ 290,958 $ 184,556
Other 571,324 299,179 150,091
----------- ----------- -----------
1,096,851 590,137 334,647
Cost of sales 276,599 166,570 117,192
----------- ----------- -----------
Gross profit 820,252 423,567 217,455
Selling and administrative expenses 38,050 28,527 16,267
Research and development expenses 30,706 8,120 4,383
Royalty expenses to related parties 52,260 27,649 15,413
----------- ----------- -----------
Operating income 699,236 359,271 181,392
Other income (expense):
Interest income 3,006 2,380 2,732
Interest expense (2,365) (1,430) (1,404)
Foreign exchange gain (loss), net 7,498 (3,177) 1,217
Other (expense) income, net (6,023) (2,341) 618
----------- ----------- -----------
Income before income taxes 701,352 354,703 184,555
Provision for income taxes 140,715 59,936 22,919
----------- ----------- -----------
Net income $ 560,637 $ 294,767 $ 161,636
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2004, 2003 and 2002
(in thousands)
2004 2003 2002
---- ---- ----
Cash flows from operating activities
Net income $ 560,637 $ 294,767 $ 161,636
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 111,077 53,076 22,359
Foreign exchange (gain) loss, net (8,373) 5,163 (297)
Deferred income tax expense 20,619 9,948 2,105
Other, net 3,819 1,385 581
Changes in operating assets and liabilities
Trading securities - 62,925 (37,166)
Accounts and notes receivable (41,745) (32,785) (3,723)
Inventories (981) (2,252) 3,089
Prepaid expenses and other current assets 1,614 (12,810) (1,954)
Accounts payable and other current liabilities 63,406 39,812 20,451
----------- ----------- -----------
Net cash provided by operating activities 710,073 419,229 167,081
----------- ----------- -----------
Cash flows from investing activities
Purchases of property, plant and equipment (661,541) (309,836) (126,770)
Payment of leasehold deposits (7,091) (4,796) (1,899)
Other, net (2,219) (2,224) 13,523
----------- ----------- -----------
Net cash used in investing activities (670,851) (316,856) (115,146)
----------- ----------- -----------
Cash flows from financing activities
Net increase in short-term borrowings 14,089 13,064 -
Proceeds from issuance of long-term debt 91,183 - 40,674
Repayment of long-term debt (25,229) (5,705) (34,519)
Payment of cash dividend (147,668) (64,159) (47,127)
----------- ----------- -----------
Net cash used in financing activities (67,625) (56,800) (40,972)
----------- ----------- -----------
Effect of exchange rate changes on cash
and cash equivalents 6,790 (5,627) (1,095)
----------- ----------- -----------
Net (decrease) increase in cash
and cash equivalents (21,613) 39,946 9,868
Cash and cash equivalents
Beginning of year 66,928 26,982 17,114
----------- ----------- -----------
End of year $ 45,315 $ 66,928 $ 26,982
=========== =========== ===========
Supplemental cash flow information
Cash paid for interest $ 2,275 $ 750 $ 1,476
Cash paid for income taxes 65,325 25,027 25,907
The accompanying notes are an integral part of these financial statements.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Nature of Operations
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, 2004, the issued and outstanding number of common shares of
the Company is 2,400,000, 50% of which are owned by Corning, 42.6% by Samsung
Electronics Co., Ltd. and 7.4% by another domestic shareholder.
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) panels for
notebook computers, LCD monitors, LCD TVs and other handheld devices such as
digital cameras, PDAs and navigators. The Company's major customers are Korean
LCD panel makers such as Samsung Electronics Co., Ltd., LG Philips LCD Co., Ltd.
and BOE Hydis Technology Co., Ltd. The Company's current market is primarily
limited to companies incorporated in Korea.
2. Summary of Significant Accounting Policies
The accompanying financial statements are presented in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP"). Significant accounting policies followed by the Company in the
preparation of the accompanying financial statements are summarized below.
Basis of Presentation
The 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.
Foreign Currencies
The Company operates primarily in Korean Won, its local and functional currency.
The Company has chosen the U.S. Dollar as its reporting currency. In accordance
with the 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 exchange rates 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 its 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 place large orders of products for delivery on a regular basis. The
Company reduces revenue for estimated price discounts and rebates based on past
experience.
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect amounts
reported in the accompanying financial statements and disclosures. The most
significant estimates and assumptions relate to the useful life of property,
plant and equipment, allowance for uncollectible accounts receivable, contingent
liabilities, inventory valuation, impairment of long-lived assets and allocated
expenses. 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.
Financial Instruments
The amounts for cash and cash equivalents, short-term financial instruments,
accounts receivable, certain other assets, accounts payable, certain accrued and
other liabilities, short-term loan and long-term debt are reported at their fair
value due to their short maturities or market interest rates. Obligations due to
or receivables from related parties have no ascertainable fair value as no
market exists for such instruments.
2. Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
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, with cost being
determined by the weighted-average method, which approximates the first-in,
first-out method.
Property and Depreciation
Property, plant and equipment 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
comparing the carrying amount of an asset or asset group against 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 equates the difference between the
estimated fair value and the carrying value.
Accrued Severance Benefits
Employees and directors with at least one year 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 employees and directors were to terminate their employment
with the Company as of the balance sheet date.
The Company has funds deposited at 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.
In addition, accrued severance benefits are funded at approximately 57% and 60%
as of December 31, 2004 and 2003, respectively, through a group severance
insurance plan and are presented as a deduction from accrued severance benefits.
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 operating expenses.
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 the said temporary differences by applying the 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 they
will be realized. The total income tax provision includes the current tax
expense under the 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 qualified plant and equipment expenditures. The investment tax
credit is recognized as a reduction of tax expense in the year in which the
qualified plant and equipment expenditure is incurred.
2. Summary of Significant Accounting Policies (Continued)
Derivative Instruments
The Company has entered into foreign exchange forward contracts to manage its
exposure to the fluctuations in foreign exchange rates. The risk being hedged is
the fluctuation in future cash flows from the Company's sales as a result of 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 for
periods consistent with the terms of the underlying sales transactions,
generally one year or less. Since the Company's foreign exchange forward
contracts are made in the normal course of business and not speculative in
nature, they are designated as cash flow hedging instruments.
All derivative instruments are recorded at fair value. Effective changes in the
fair value of the derivative instruments designated as cash flow hedging
instruments are recorded in accumulated other comprehensive income (or loss).
Amounts are reclassified from accumulated other comprehensive income (or 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, 2004 and
2003, 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 2003 and 2002 financial statements have been reclassified
to conform to 2004 presentation.
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, which amends
the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). This standard requires items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs to be
recognized as current-period charges. In addition, this standard requires
allocation of fixed production overheads to the costs of conversion to be based
on the normal capacity of the production facilities. The provisions of this
standard are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not expect the adoption of SFAS
No. 151 to have a material impact on its financial position or results of
operations.
3. Inventories
Inventories consist of the following:
(in thousands) 2004 2003
---- ----
Finished goods $ 6,570 $ 4,627
Semi-finished goods 4,009 3,964
Raw materials 2,920 3,137
Auxiliary materials 4,019 2,716
----------- ----------
$ 17,518 $ 14,444
=========== ==========
4. Property, Plant and Equipment
Property, plant and equipment comprise the following:
(in thousands) 2004 2003
---- ----
Building $ 413,274 $ 236,117
Machinery and equipment 590,778 313,426
Vehicle, tools, furniture and fixtures 56,501 20,517
----------- ----------
1,060,553 570,060
Less: accumulated depreciation (212,129) (120,816)
----------- ----------
848,424 449,244
Land 49,501 29,544
Construction-in-progress 580,150 226,268
----------- ----------
$ 1,478,075 $ 705,056
=========== ==========
5. Transactions with Related Parties
In the normal course of business, the Company sells its products to Samsung
Electronics Co., Ltd., Corning and Samsung Corning Co., Ltd. (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 and Corning. In addition, the Company pays a 5% royalty
on 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 is as
follows:
2004 Cost &
(in thousands) Sales 1 Purchases 2 Expenses Receivables Payables
------- ----------- -------- ----------- --------
Samsung affiliates
Samsung Electronics Co., Ltd. $ 441,146 $ 25,652 $ 5,970 $ 37,800 $ 25,384
Samsung Corporation 18 97,466 34 4 33,624
Samsung Engineering Co., Ltd. - 118,962 - - 44,656
Others 394 11,638 26,581 158 5,336
----------- ----------- ----------- ----------- -----------
441,558 253,718 32,585 37,962 109,000
Corning 76,327 95,811 41,808 11,533 4,256
Samsung Corning Co., Ltd. 7,642 114 6,360 869 754
Corsam Glasstec R&D Center - - 10,452 - 1,064
----------- ----------- ----------- ----------- -----------
$ 525,527 $ 349,643 $ 91,205 $ 50,364 $ 115,074
=========== =========== =========== =========== ===========
2003 Cost &
(in thousands) Sales 1 Purchases 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 Cost &
(in thousands) Sales 1 Purchases 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
=========== =========== =========== =========== ===========
1 Gain and loss on foreign exchange forward contracts are included.
2 Purchases of property, plant and equipment are included.
6. Short-term borrowings
Short-term borrowings at December 31, 2004 consist of $28,783 thousand from a
Korean bank with a weighted average interest rate of 3.47%.
7. Long-term Debt
Long-term debt at December 31, 2004 and 2003 consists of the following:
Annual
(in thousands) interest rate 2004 2003
------------- ---- ----
Foreign currency debt
Facilities finance, due through 2005 Libor + 2.5% $ 584 $ 1,169
Libor + 2.0% - 124
Floating Rate Notes issued,
due through 2005 Libor + 0.77% 24,260 46,759
due through 2007 Libor + 0.60% 97,040 -
--------- ---------
121,884 48,052
Less: Current maturities (24,844) (24,088)
--------- ---------
$ 97,040 $ 23,964
========= =========
The schedules of principal payments of long-term debt are as follows:
For the year ending December 31 (in thousands)
2005 $ 24,844
2006 65,017
2007 32,023
-----------
$ 121,884
===========
The Floating Rate Notes issued in 2004 includes a covenant requiring the Company
to maintain its total liabilities to not exceed 170% of its tangible net worth
as defined in the related agreement. Another covenant requires Samsung
affiliates to directly maintain at least 30% of the aggregate issued and
outstanding common shares of the Company and management control of the Company.
8. Income Taxes
Income tax expense consists of the following:
(in thousands) 2004 2003 2002
---- ---- ----
Current $ 120,096 $ 49,988 $ 20,814
Deferred 20,619 9,948 2,105
----------- ----------- -----------
$ 140,715 $ 59,936 $ 22,919
=========== =========== ===========
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) 2004 2003 2002
---- ---- ----
Income before taxes $ 701,352 $ 354,703 $ 184,555
Statutory tax rate 29.7% 29.7% 29.7%
----------- ----------- -----------
Expected taxes at statutory rate 208,302 105,347 54,813
Permanent differences
- - Tax exemption for foreign
investment (51,199) (34,575) (27,835)
- - Tax rate changes 5,640 (792) -
- - Tax credits, net of surtax effect (21,495) (9,931) (4,265)
- - Others, net (533) (113) 206
----------- ----------- -----------
Income tax expense $ 140,715 $ 59,936 $ 22,919
=========== =========== ===========
Effective tax rate 20.1% 16.9% 12.4%
=========== =========== ===========
The statutory tax rate is 29.7% but the applicable effective tax rate is 22.40%,
19.95% and 15.10% for 2004, 2003 and 2002, respectively, due to tax exemption
benefits for a foreign invested company under the Korean Tax Preference Control
Law ("TPCL"). In accordance with the TPCL and the approval of the Korean
government, the Company is exempted fully from the corporate income taxes on the
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%
exemption for the subsequent three years. The 100% exemption expired in 2003 and
the 50% exemption will expire in 2006.
8. Income Taxes (Continued)
As a result of the revision of the Korean Corporate Tax Law, the statutory tax
rate applicable from the beginning of 2002 was reduced to 29.7%. In addition,
the statutory tax rate applicable from the beginning of 2005 will be decreased
to 27.5% according to the revision of the Korean Corporate Tax Law in December
2003. The Company recognized its deferred tax assets and liabilities as of
December 31, 2004 and 2003 based on the revised tax rates and the expiry
schedule of tax exemption for foreign investment.
Significant components of deferred income tax assets and liabilities are as
follows:
(in thousands) 2004 2003
---- ----
Deferred income tax assets
Inventories $ 446 $ 550
Other 278 34
----------- -----------
724 584
----------- -----------
Deferred income tax liabilities
Property, plant and equipment $ (35,187) $ (11,640)
Reserve for technology development (4,218) (2,802)
Other (11) -
----------- -----------
(39,416) (14,442)
----------- -----------
Deferred income tax liabilities, net $ (38,692) $ (13,858)
=========== ===========
9. Stockholders' Equity
The components of and changes in stockholders' equity are as follows:
(in thousands) 2004 2003 2002
---- ---- ----
Preferred Stock $ 349 $ 349 $ 349
=========== =========== ===========
Common Stock $ 20,040 $ 20,040 $ 20,040
=========== =========== ===========
Retained Earnings:
Balance at the beginning of year $ 582,726 $ 352,118 $ 237,609
Net income 560,637 294,767 161,636
Dividends paid to preferred shareholders (2,488) (1,081) (795)
Dividends paid to common shareholders (145,180) (63,078) (46,332)
----------- ----------- -----------
Balance at end of year $ 995,695 $ 582,726 $ 352,118
=========== =========== ===========
Accumulated Other Comprehensive
(Income) Loss:
Balance at the beginning of year $ (4,230) $ 612 $ (21,506)
Foreign currency translation adjustment 129,552 (4,842) 22,118
----------- ----------- -----------
Balance at end of year $ 125,322 $ (4,230) $ 612
=========== =========== ===========
Total Stockholders' Equity $ 1,141,406 $ 598,885 $ 373,119
=========== =========== ===========
Total comprehensive income is as follows:
(in thousands) 2004 2003 2002
---- ---- ----
Net income $ 560,637 $ 294,767 $ 161,636
Foreign currency translation adjustment 129,552 (4,842) 22,118
----------- ----------- -----------
Total comprehensive income $ 690,189 $ 289,925 $ 183,754
=========== =========== ===========
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, 2004 and 2003. Each share is entitled
to non-cumulative dividends at the rate of 5% on par value. In addition, if 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.
9. Stockholders' Equity (Continued)
Retained Earnings
Retained earnings as of December 31, 2004 and 2003 comprised of the following:
(in thousands) 2004 2003
---- ----
Appropriated
Legal reserve $ 9,733 $ 9,733
Reserve for business development 30,800 30,800
Reserve for research and manpower development 11,600 8,240
Voluntary reserve 4,157 4,157
---------- ----------
56,290 52,930
Unappropriated 939,405 529,796
---------- ----------
$ 995,695 $ 582,726
========== ==========
Legal Reserve
The Commercial Code of the Republic of Korea requires the Company to appropriate
a portion of the retained earnings as a legal reserve 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 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 a portion of the 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
resolution by the Company's shareholders.
Reserve for Research and Manpower Development
Pursuant to the former Korean Tax Exemption and Reduction Control Law and the
Korean Tax Preference Control Law, the Company appropriates a portion of the
retained earnings as a reserve for research and manpower development. This
reserve is not available for dividends until it is 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.
10. Commitments and Contingencies
Credit Facilities
The Company has overdraft facilities up to $5,277 thousand and trade financing
facility up to $5,000 thousand with local banks as of December 31, 2004. As of
December 31, 2004, there are no outstandings under credit facilities.
Business and Credit Risk Concentration
The Company sells its products on a credit basis to its customers including
certain related parties. Management estimates the collectibility of accounts
receivable based on the financial condition of the customers and prevailing
economic trends. Based on management's estimates, the Company established
allowances for doubtful accounts receivable which management believes are
adequate. Concentrations of credit risk with respect to accounts receivable are
limited to the credit worthiness of the Company's customers. Three of the four
major customers of the Company are domestic TFT-LCD makers incorporated in Korea
and another is a domestic Color-Filter maker incorporated in Korea. Trade
accounts receivables from these four major customers are 90% and 92% of total
trade accounts receivable of the Company as of December 31, 2004 and 2003,
respectively, and revenues from these four major customers constitute 90%, 95%
and 96% of total revenues of the Company for the years ended December 31, 2004,
2003 and 2002, respectively.
In addition, a substantial portion of the Company's long-term debt is
denominated in foreign currencies, giving rise to financial exposure to
fluctuations in currency exchange rates.
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,
2004 2003 2002 2001 2000
--------- -------- -------- --------- ---------
(Loss) income from continuing operations before
taxes on income $ (1,580) $ (759) $ (2,720) $ (6,161) $ 621
Adjustments:
Distributed income of equity investees 139 112 83 73 45
Amortization of capitalized interest 5 6 9 10 11
Fixed charges net of capitalized interest 159 176 207 191 135
--------- ------- -------- --------- --------
(Loss) earnings before taxes and fixed charges as adjusted $ (1,277) $ (465) $ (2,421) $ (5,887) $ 812
========= ======= ======== ========= ========
Fixed charges:
Interest incurred $ 159 $ 158 $ 186 $ 202 $ 163
Portion of rent expense which represents an appropriate
interest factor 18 22 28 30 25
Amortization of debt costs 4 5 6 8 4
--------- ------- -------- --------- --------
Total fixed charges 181 185 220 240 192
Capitalized interest (22) (9) (13) (49) (57)
--------- ------- -------- --------- --------
Total fixed charges net of capitalized interest $ 159 $ 176 $ 207 $ 191 $ 135
========= ======= ======== ========= ========
Preferred dividends:
Preferred dividend requirement $ 128 $ 1 $ 1
Ratio of pre-tax income to income before minority interest
and equity earnings 2.6
-------- --------- --------
Pre-tax preferred dividend requirement 128 1 3
Total fixed charges $ 181 $ 185 220 240 192
--------- ------- -------- --------- --------
Fixed charges and pre-tax preferred dividend requirement $ 181 $ 185 $ 348 $ 241 $ 195
========= ======= ======== ========= ========
Ratio of earnings to fixed charges * * * * 4.2x
========= ======= ======== ========= ========
Ratio of earnings to combined fixed charges and preferred
dividends * * * * 4.2x
========= ======= ======== ========= ========
* Loss before taxes and fixed charges as adjusted were inadequate to cover
total fixed charges by approximately $1,458 million, $650 million and $2.6
billion and inadequate to cover fixed charges and pre-tax preferred
dividend requirement by approximately $1,458 million, $650 million and $2.8
billion at December 31, 2004, 2003 and 2002, respectively.
Item 15(c) Exhibit 21
Corning Incorporated and Subsidiary Companies
Subsidiaries of the Registrant as of December 31, 2004 are listed below:
Beijing CCS Optical Fiber Cable Co., Ltd. China
CCS Holdings, Inc. Delaware
CCS Technology, 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 International Ltd. Cayman Islands
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 Oak Holding Inc. Delaware
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
Norddeutsche Seekabelwerke GmbH & Co. KG Germany
NSW Submarine Cable Systems, Inc. Delaware
OOO Corning SNG Russia
Shanghai Fiber Optics Co., Ltd. China
Companies accounted for under the equity method as of December 31, 2004 are
listed below:
Advanced Cable Systems Corporation Japan
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
Keraglass S.N.C. France
Pittsburgh Corning Corporation Pennsylvania
Pittsburgh Corning Europe N.V. Belgium
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 7 (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, 2004, have been omitted from this
exhibit.
Item 15(c) Exhibit 23
Consent of Independent Registered public Accounting Firm
PricewaterhouseCoopers LLP
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-3 (Nos. 333-41244, 333-57082, and 333-100302) and Forms
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) of Corning Incorporated of our report dated February
22, 2005 relating to the financial statements, financial statement schedule,
management's assessment of the effectiveness of internal control over financial
reporting and the effectiveness of internal control over financial reporting,
which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2005
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f))for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying 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.
February 22, 2005
/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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f))for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying 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.
February 22, 2005
/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, 2004 (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: February 22, 2005
/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 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, 2004, 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 2nd
of February, 2005.
/s/ John Seely Brown
-----------------------------------
John Seely Brown
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL 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, 2004, 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 2nd
of February, 2005.
/s/ James B. Flaws
-----------------------------------
James B. Flaws
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL 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, 2004, 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 2nd
of February, 2005.
/s/ Gordon Gund
-----------------------------------
Gordon Gund
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL 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, 2004, 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 2nd
of February, 2005.
/s/ John M. Hennessy
-----------------------------------
John M. Hennessy
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL 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, 2004, 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 2nd
of February, 2005.
/s/ James R. Houghton
-----------------------------------
James R. Houghton
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL 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, 2004, 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 2nd
of February, 2005.
/s/ James J. O'Connor
-----------------------------------
James J. O'Connor
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL 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, 2004, 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 2nd
of February, 2005.
/s/ Jeremy R. Knowles
-----------------------------------
Jeremy R. Knowles
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL 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, 2004, 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 2nd
of February, 2005.
/s/ Deborah D. Rieman
-----------------------------------
Deborah D. Rieman
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL 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, 2004, 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 2nd
of February, 2005.
/s/ H. Onno Ruding
-----------------------------------
H. Onno Ruding
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL 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, 2004, 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 9th
day of February, 2005.
/s/ Eugene C. Sit
-----------------------------------
Eugene C. Sit
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL 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, 2004, 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 2nd
of February, 2005.
/s/ William D. Smithburg
-----------------------------------
William D. Smithburg
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL 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, 2004, 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 2nd
of February, 2005.
/s/ Peter F. Volanakis
-----------------------------------
Peter F. Volanakis
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL 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, 2004, 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 2nd
of February, 2005.
/s/ Wendell P. Weeks
-----------------------------------
Wendell P. Weeks
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL 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, 2004, 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 2nd
of February, 2005.
/s/ Hansel E. Tookes II
-----------------------------------
Hansel E. Tookes II
The following exhibits are included only in copies of the 2004 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).
10.1 1994 Employee Equity Participation Program (Incorporated by reference
to Exhibit 1 of Corning Proxy Statement, Definitive 14A filed March
16, 1994 for April 28, 1994 Annual Meeting of Shareholders).
10.2 1998 Variable Compensation Plan (Incorporated by reference to Exhibit
1 of Corning Proxy Statement, Definitive 14A filed March 9, 1998 for
April 30, 1998 Annual Meeting of Shareholders).
10.3 1998 Worldwide Employee Share Purchase Plan (Incorporated by reference
to Exhibit 2 of Corning Proxy Statement, Definitive 14A filed March 9,
1998 for April 30, 1998 Annual Meeting of Shareholders).
10.4 1998 Employee Equity Participation Program (Incorporated by reference
to Exhibit 3 of Corning Proxy Statement, Definitive 14A filed March 9,
1998 for April 30, 1998 Annual Meeting of Shareholders).
10.5 2002 Worldwide Employee Share Purchase Plan (Incorporated by reference
to Exhibit 1 of Corning Proxy Statement, Definitive 14A filed March 7,
2002 for April 25, 2002 Annual Meeting of Shareholders).
10.6 2000 Employee Equity Participation Program and 2003 Amendments
(Incorporated by reference to Exhibit 1 of Corning Proxy Statement,
Definitive 14A filed March 10, 2003 for April 24, 2003 Annual Meeting
of Shareholders).
10.7 2003 Variable Compensation Plan (Incorporated by reference to Exhibit
2 of Corning Proxy Statement, Definitive 14A filed March 10, 2003 for
April 24, 2003 Annual Meeting of Shareholders).
10.8 2003 Equity Plan for Non-Employee Directors (Incorporated by reference
to Exhibit 3 of Corning Proxy Statement, Definitive 14A filed March
10, 2003 for April 24, 2003 Annual Meeting of Shareholders).
10.9 Form of Officer Severance Agreement dated as of February 1, 2004
between Corning Incorporated and each of the following four
individuals: James B. Flaws, James R. Houghton, Peter F. Volanakis and
Wendell P. Weeks (Incorporated by reference to Exhibit 10.1 of
Corning's 10-Q filed May 4, 2004).
10.10 Officer Severance Agreement dated as of February 1, 2004 between
Corning Incorporated and Joseph A. Miller, Jr. (Incorporated by
reference to Exhibit 10.2 of Corning's 10-Q filed May 4, 2004).
10.11 Change In Control Agreement dated as of February 1, 2004 between
Corning Incorporated and James R. Houghton (Incorporated by reference
to Exhibit 10.3 of Corning's 10-Q filed May 4, 2004).
10.12 Form of Amendment dated as of February 1, 2004 to Change In Control
Agreement dated as of October 4, 2000 between Corning Incorporated and
the following two individuals: James B. Flaws and Peter F. Volanakis
(Incorporated by reference to Exhibit 10.4 of Corning's 10-Q filed May
4, 2004).
10.13 Form of Change In Control Amendment dated as of October 4, 2000
between Corning Incorporated and the following two individuals: James
B. Flaws and Peter F. Volanakis (Incorporated by reference to Exhibit
10.5 of Corning's 10-Q filed May 4, 2004).
10.14 Amendment dated as of February 1, 2004 to Change In Control Agreement
dated as of June 1, 2001 between Corning Incorporated and Joseph A.
Miller, Jr. (Incorporated by reference to Exhibit 10.6 of Corning's
10-Q filed May 4, 2004).
10.15 Change In Control Agreement dated as of June 1, 2001 between Corning
Incorporated and Joseph A. Miller, Jr. (Incorporated by reference to
Exhibit 10.7 of Corning's 10-Q filed May 4, 2004).
10.16 Amendment dated as of February 1, 2004 to Change In Control Agreement
dated as of April 23, 2002 between Corning Incorporated and Wendell P.
Weeks (Incorporated by reference to Exhibit 10.8 of Corning's 10-Q
filed May 4, 2004).
10.17 Change In Control Agreement dated as of April 23, 2002 between Corning
Incorporated and Wendell P. Weeks (Incorporated by reference to
Exhibit 10.9 of Corning's 10-Q filed May 4, 2004).
10.18 Form of Corning Incorporated Incentive Stock Plan Agreement for
Restricted Stock Grants (Incorporated by reference to Exhibit 10.1 of
Corning's 10-Q filed October 28, 2004).
10.19 Form of Corning Incorporated Incentive Stock Plan Agreement for
Restricted Stock Retention Grants (Incorporated by reference to
Exhibit 10.2 of Corning's 10-Q filed October 28, 2004).
10.20 Form of Corning Incorporated Incentive Stock Option Agreement
(Incorporated by reference to Exhibit 10.3 of Corning's 10-Q filed
October 28, 2004).
10.21 Form of Corning Incorporated Non-Qualified Stock Option Agreement
(Incorporated by reference to Exhibit 10.4 of Corning's 10-Q filed
October 28, 2004).
14 Corning Incorporated Code of Ethics for Chief Executive Officer and
Senior Financial Officer (Incorporated by reference to Appendix H-3 of
Corning's 2005 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.