FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
--------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________to____________
Commission file number 1-3247
CORNING INCORPORATED
--------------------
(Registrant)
New York 16-0393470
---------------------------------------- --------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
One Riverfront Plaza, Corning, New York 14831
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-974-9000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
at least the past 90 days.
Yes X No ____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
950,195,288 shares of Corning's Common Stock, $0.50 Par Value, were outstanding
as of April 30, 2002.
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
----------------------------
Index to Consolidated Financial Statements of Corning Incorporated and
Subsidiary Companies filed as part of this report:
Page
----
Consolidated Statements of Income (Unaudited) for the three
months ended March 31, 2002, and 2001 3
Consolidated Balance Sheets at March 31, 2002 (Unaudited),
December 31, 2001, and March 31, 2001 (Unaudited) 4
Consolidated Statements of Cash Flows (Unaudited) for the
three months ended March 31, 2002, and 2001 5
Notes to Consolidated Financial Statements (Unaudited) 6
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in millions, except per share amounts)
For the three months ended
March 31,
----------------------------
2002 2001
---------- ----------
Net sales $ 898 $ 1,921
Cost of sales 694 1,105
--------- ---------
Gross margin 204 816
Operating expenses:
Selling, general and administrative expenses 190 270
Research, development and engineering expenses 128 160
Amortization of purchased intangibles 11 13
Amortization of goodwill 143
--------- ---------
Operating (loss) income (125) 230
Interest income 14 24
Interest expense (48) (34)
Other expense, net (9) (9)
--------- ---------
(Loss) income before income taxes (168) 211
(Benefit) provision for income taxes (42) 108
--------- ---------
(Loss) income before minority interest and equity earnings (126) 103
Minority interest in losses (earnings) of subsidiaries 6 (5)
Equity in earnings of associated companies 30 34
--------- ---------
Net (loss) income $ (90) $ 132
========= =========
Basic and diluted (loss) earnings per share $ (0.10) $ 0.14
========= =========
Net (loss) income adjusted for the impact of SFAS No. 142 in 2001 $ (90) $ 268
========= =========
Basic and diluted (loss) earnings per share adjusted for the
impact of SFAS No. 142 in 2001 $ (0.10) $ 0.29
========= =========
Dividends declared per common share $ $ 0.06
========= =========
Shares used in computing per share amounts:
Basic 945 923
========= =========
Diluted 945 937
========= =========
Diluted - adjusted for SFAS No. 142 in 2001 945 943
========= =========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
Unaudited Unaudited
March 31, 2002 December 31, 2001 March 31, 2001
-------------- ----------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 958 $ 1,037 $ 564
Short-term investments, at fair value 867 1,182 585
--------- --------- ---------
Total cash and short-term investments 1,825 2,219 1,149
Trade accounts receivable, net of doubtful accounts and
allowances - $54, $60 and $47 616 593 1,245
Inventories 717 725 1,215
Deferred income taxes 329 347 232
Other current assets 209 223 233
--------- --------- ---------
Total current assets 3,696 4,107 4,074
Investments:
Associated companies, at equity 616 636 474
Others, at cost or fair value 134 142 137
--------- --------- ---------
Total investments 750 778 611
Property, plant and equipment, at cost, net of accumulated
depreciation - $3,222, $3,067 and $2,785 4,967 5,097 4,939
Goodwill, net of accumulated amortization - $661, $661 and $445 1,941 1,937 6,720
Other intangible assets, net of accumulated amortization
- $99, $90 and $62 329 352 566
Other assets 605 522 263
--------- --------- ---------
Total Assets $ 12,288 $ 12,793 $ 17,173
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable $ 385 $ 477 $ 197
Accounts payable 338 441 614
Other accrued liabilities 910 1,076 827
--------- --------- ---------
Total current liabilities 1,633 1,994 1,638
Long-term debt 4,418 4,461 3,838
Postretirement benefits other than pensions 613 608 594
Other liabilities 189 190 204
Minority interest in subsidiary companies 113 119 140
Convertible preferred stock 7 7 8
Common shareholders' equity:
Common stock, including excess over par value and other capital -
par value $0.50 per share; Shares authorized: 3.8 billion;
Shares issued: 1.0 billion 10,039 10,044 9,685
(Accumulated deficit) retained earnings (3,700) (3,610) 2,077
Less: cost of 77 million, 79 million and 76 million
shares of common stock in treasury (806) (827) (777)
Accumulated other comprehensive loss (218) (193) (234)
--------- --------- ---------
Total common shareholders' equity 5,315 5,414 10,751
--------- --------- ---------
Total Liabilities and Shareholders' Equity $ 12,288 $ 12,793 $ 17,173
========= ========= =========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
For the three months ended
March 31,
------------------------
2002 2001
-------- ---------
Cash flows from operating activities:
Net (loss) income $ (90) $ 132
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Amortization of purchased intangibles 11 13
Amortization of goodwill 143
Depreciation 163 155
Stock compensation charges 1 12
Equity in earnings of associated companies less than
(in excess of) dividends received 23 (36)
Minority interest, net of dividends paid (6) 1
Deferred tax benefit (70) (11)
Tax benefit on stock options 24
Interest expense on convertible debentures 10 10
Restructuring payments (58)
Changes in certain working capital items (145) (271)
Other, net (10) 4
------- --------
Net cash (used in) provided by operating activities (171) 176
------- --------
Cash flows from investing activities:
Capital expenditures (102) (576)
Acquisitions of businesses, net of cash acquired (66)
Net proceeds from sale or disposal of assets 5 6
Net decrease (increase) in long-term investments and other
long-term assets 1 (47)
Short-term investments - acquisitions (603) (77)
Short-term investments - liquidations 919 207
Other, net (1)
------- --------
Net cash provided by (used in) investing activities 219 (553)
------- --------
Cash flows from financing activities:
Net repayments of short-term debt (143) (12)
Proceeds from issuance of long-term debt 11 38
Repayments of long-term debt (4) (85)
Proceeds from issuance of common stock 15 7
Redemption of common stock for income tax withholding (19)
Dividends paid (56)
------- --------
Net cash used in financing activities (121) (127)
------- --------
Effect of exchange rates on cash (6) (2)
------- --------
Cash used in continuing operations (79) (506)
------- --------
Cash used in discontinued operations (9)
------- --------
Net decrease in cash and cash equivalents (79) (515)
Cash and cash equivalents at beginning of year 1,037 1,079
------- --------
Cash and cash equivalents at end of period $ 958 $ 564
======= ========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The unaudited Consolidated Financial Statements reflect all adjustments which,
in the opinion of management, are necessary for a fair statement of the results
of operations, financial position and cash flows for the interim periods
presented. All such adjustments are of a normal recurring nature. The
Consolidated Financial Statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and in accordance with
accounting principles generally accepted in the United States of America (GAAP)
for interim financial information. The results for interim periods are not
necessarily indicative results which may be expected for any other interim
period, or for the full year. These interim Consolidated Financial Statements
should be read in conjunction with Corning's Annual Report on Form 10-K/A for
the year ended December 31, 2001.
Certain amounts for 2001 were reclassified to conform with 2002 classifications.
Accounting Changes
------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." Among other provisions, goodwill is no longer amortized but is subject
to impairment tests at least annually. Corning adopted SFAS No. 142 on January
1, 2002.
Corning completed its initial impairment review during the first quarter and
concluded a transitional impairment charge from the adoption of the standard
would not be required. On a prospective basis, Corning has selected the fourth
quarter to conduct annual impairment tests. The outcome of the impairment test
is primarily dependent upon the fair value of the reporting units. The current
business conditions in the telecommunications industry are depressed. Should
these conditions be prolonged or deteriorate, the fair value within this
industry could be lower in future periods. As such, management cannot provide
assurance that future impairment tests will not result in a charge to earnings.
The following table presents a reconciliation of reported net income and
earnings per share to adjusted net income and earnings per share, as if SFAS No.
142 had been in effect as follows:
For the three months ended
(In millions, except per share amounts) March 31, 2001
---------------------------------------------------------------------------------------------------
Reported net income $ 132
Addback: Amortization of goodwill, net of income taxes 136
---------
Adjusted net income $ 268
=========
Reported earnings per share - basic $ 0.14
Addback: Amortization of goodwill, net of income taxes 0.15
---------
Adjusted earnings per share - basic $ 0.29
=========
Reported earnings per share - diluted $ 0.14
Addback: Amortization of goodwill, net of income taxes 0.15
---------
Adjusted earnings per share - diluted $ 0.29
=========
The changes in the carrying amount of goodwill for the quarter ended March 31,
2002, per segment was as follows (in millions):
Telecom- Advanced Information
munications Materials Display Corporate (a) Total
----------- --------- ------- --------- -----
Balance at January 1, 2002 $ 1,768 $ 150 $ 15 $ 4 $ 1,937
Foreign currency translation 5 5
Reclassification (1) (1)
-------- -------- ------- ------ ---------
Balance at March 31, 2002 $ 1,772 $ 150 $ 15 $ 4 $ 1,941
======== ======== ======= ====== =========
(a) Included in non-segment assets in SFAS No. 131 reconciliation in Corning's
2001 Form 10-K/A.
Intangible assets totaled $329 million, net of accumulated amortization of $99
million at March 31, 2002. Of this amount $61 million related to deferred
financing costs. The remaining identified intangible assets are primarily
related to the Telecommunications Segment and were comprised of the following
(in millions):
Accumulated
Gross Amortization
--------- ------------
Amortized intangible assets:
Patents and trademarks $ 261 $ 52
Non competition agreements 100 44
Other 6 3
--------- ---------
Total $ 367 $ 99
========= =========
Amortization expense related to these intangible assets is expected to be in the
range of approximately $40 million to $45 million annually from 2002 to 2006.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This standard supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The standard retains the previously existing accounting
requirements related to the recognition and measurement of the impairment of
long-lived assets to be held and used while expanding the measurement
requirements of long-lived assets to be disposed of by sale to include
discontinued operations. It also expands on the previously existing reporting
requirements for discontinued operations to include a component of an entity
that either has been disposed of or is classified as held for sale. Corning
adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not
have a material impact on its consolidated financial position or results of
operations.
New Accounting Standards
------------------------
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This standard addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Corning is required to implement SFAS No. 143
on January 1, 2003. Corning does not expect this standard to have a material
impact on its consolidated financial position or results of operations.
2. Operating Segments
Corning's reportable operating segments consist of Telecommunications, Advanced
Materials and Information Display. Information about the performance of
Corning's three operating segments for the first quarter of 2002 and 2001 is
presented below. These amounts exclude revenues, expenses and equity earnings
not specifically identifiable to segments. Corning prepared the financial
results for its three operating segments on a basis that is consistent with the
manner in which Corning management internally disaggregates financial
information to assist in making internal operating decisions. Corning has
allocated some common expenses among segments differently than it would for
stand alone financial information prepared in accordance with GAAP. Segment net
income may not be consistent with measures used by other companies.
Three months ended
(In millions) March 31,
----------------------------------------------------------------------------------------------------------
2002 2001
-------- ---------
Telecommunications
Net sales $ 465 $ 1,433
Research, development and engineering expenses $ 86 $ 122
Interest expense $ 32 $ 25
Segment (loss) earnings before equity (losses) earnings $ (138) $ 177
Equity in (losses) earnings of associated companies (4) 3
-------- ---------
Segment net (loss) income $ (142) $ 180
======== =========
Advanced Materials
Net sales $ 233 $ 282
Research, development and engineering expenses $ 31 $ 28
Interest expense $ 8 $ 5
Segment earnings before equity earnings $ 1 $ 26
Equity in earnings of associated companies 8 6
-------- ---------
Segment net income $ 9 $ 32
======== =========
Information Display
Net sales $ 195 $ 201
Research, development and engineering expenses $ 11 $ 10
Interest expense $ 8 $ 4
Segment earnings before minority interest and equity earnings $ 3 $ 21
Minority interest in losses (earnings) of subsidiaries 6 (5)
Equity in earnings of associated companies 25 25
-------- ---------
Segment net income $ 34 $ 41
======== =========
Total segments
Net sales $ 893 $ 1,916
Research, development and engineering expenses $ 128 $ 160
Interest expense $ 48 $ 34
Segment (loss) earnings before minority interest
and equity earnings $ (134) $ 224
Minority interest in losses (earnings) of subsidiaries 6 (5)
Equity in earnings of associated companies 29 34
-------- ---------
Segment net (loss) income $ (99) $ 253
======== =========
A reconciliation of the totals reported for the operating segments to the
applicable line items in the Consolidated Financial Statements is as follows (in
millions):
Three months ended
March 31,
-----------------------------
2002 2001
-------- ---------
Net sales:
Total segment net sales $ 893 $ 1,916
Non-segment net sales (a) 5 5
-------- ---------
Total net sales $ 898 $ 1,921
======== =========
Net income:
Total segment net (loss) income $ (99) $ 253
Unallocated items:
Non-segment loss and other (a) (1) (1)
Amortization of goodwill (b) (143)
Interest income (c) 14 24
Income tax (d) (5) (1)
Equity in earnings of associated companies (a) 1
-------- ---------
Net (loss) income $ (90) $ 132
======== =========
(a) Includes amounts derived from corporate investments.
(b) Amortization of goodwill relates primarily to the Telecommunications
Segment.
(c) Corporate interest income is not allocated to reportable segments.
(d) Includes tax associated with unallocated items.
3. 2001 Restructuring Actions
In July and October of 2001, Corning announced a series of restructuring actions
in response to significant deteriorating business conditions which began
initially in its Telecommunications Segment, but eventually spread to its other
businesses as the year progressed. The following actions were approved and
undertaken in 2001:
.. closure of seven major manufacturing facilities and the consolidation of
several smaller facilities, primarily in the Telecommunications and
Advanced Materials Segments,
.. discontinuation of its initiative in Corning Microarray Technology
products, part of Corning's life sciences business, and
.. elimination of approximately 12,000 positions affecting all operating
segments, but especially impacting the photonic technologies, hardware and
equipment and the optical fiber and cable businesses. This action included
a selective voluntary early retirement program for certain employees along
with involuntary separations.
These actions resulted in a pre-tax charge totaling $961 million ($590 million
after-tax and minority interest) for the year ended December 31, 2001. The
charge includes restructuring costs of $419 million and $542 million for the
impairment of plant and equipment. Approximately one third of the total charge
is expected to be paid in cash. As of March 31, 2002, approximately 10,800 of
the 12,000 employees had been separated under the plans. Corning expects the
remaining 1,200 employees to be separated by September 30, 2002. Certain
obligations of the plans will be paid in 2003 and beyond.
The following table illustrates the activity and balances of the 2001
restructuring reserve as of March 31, 2002:
(In millions)
----------------------------------------------------------------------------------------------------------------------------------
Cash
December 31, payments March 31,
2001 in 2002 2002
----------------------------------------------------------------------------------------------------------------------------------
Restructuring reserve:
Employee related costs $ 198 $ 53 $ 145
Other charges 78 5 73
----------------------------------------------------
Total restructuring reserve $ 276 $ 58 $ 218
----------------------------------------------------
4. Inventories
Inventories shown on the accompanying balance sheets were comprised of the
following (in millions):
March 31, December 31, March 31,
2002 2001 2001
--------- ------------ ---------
Finished goods $ 274 $ 251 $ 418
Work in process 144 153 290
Raw materials and accessories 196 210 402
Supplies and packing materials 103 111 105
-------- -------- --------
Total inventories $ 717 $ 725 $ 1,215
======== ======== ========
5. Income Taxes
Corning's effective income tax benefit rate for the three months ended March 31,
2002, was 25%. The benefit rate in the quarter is lower than the U.S. statutory
income tax rate of 35% due to the impact of unusable tax credits and
nondeductible expenses and losses. The effective tax rate for the first quarter
ended March 31, 2001, was 51.1%. This expense rate is higher than the U.S.
statutory income tax rate due primarily to non-tax deductible amortization of
acquired intangibles and goodwill.
6. Investments
Pittsburgh Corning Corporation
------------------------------
Corning and PPG Industries, Inc. each own 50% of the capital stock of Pittsburgh
Corning Corporation (PCC). PCC and several other defendants have been named in
numerous lawsuits involving claims alleging personal injury from exposure to
asbestos. On April 16, 2000, PCC filed for Chapter 11 reorganization in the
United States Bankruptcy Court for the Western District of Pennsylvania. As of
the bankruptcy filing, PCC had in excess of 140,000 open claims and now has in
excess of 240,000 open claims. In the bankruptcy court, PCC obtained a
preliminary injunction against the prosecution of asbestos actions against its
two shareholders to afford the parties a period of time (the Injunction Period)
in which to negotiate a plan of reorganization for PCC. The Injunction Period
has been extended until May 15, 2002. Under the terms of the Bankruptcy Court's
Order, PCC, PPG Industries and Corning will have 90 days following expiration of
the Injunction Period to seek removal and transfer of stayed cases that have not
been resolved through a plan of reorganization. As a result of PCC's bankruptcy
filing, Corning recorded an after-tax charge of $36 million in the first quarter
of 2000 to impair its entire investment in PCC and discontinued recognition of
equity earnings. At the time PCC filed for bankruptcy protection, there were
approximately 12,400 claims pending against Corning alleging various theories of
liability based on exposure to PCC's asbestos products. Although the outcome of
litigation and the bankruptcy case is uncertain, management believes that the
separate corporate status of PCC will continue to be upheld. Management is
continuing to investigate Corning's options for defending claims against it,
which might include vigorously defending itself on all fronts, or exploring a
global settlement through the bankruptcy process. It is probable that there will
be intensive negotiations in the second quarter of 2002 concerning the terms of
PCC's plan of reorganization, including whether or not Corning and its insurers
may participate by making a contribution in exchange for a release. Management
cannot estimate the probability that Corning will be able to secure such a
release upon terms and conditions satisfactory to Corning and its insurers. The
exposure for this asbestos litigation (net of insurance) cannot be estimated at
this time. Corning is named in approximately 14,000 other cases alleging
injuries from asbestos and those cases have been covered by insurance without
material impact to Corning to date. Asbestos litigation is inherently difficult,
and the outcome of litigation is uncertain. However, management believes these
matters will be resolved without material impact on Corning's overall financial
position. If Corning and its insurers agree to a global settlement through the
bankruptcy process, the outcome may be material to the results of operations for
the period in which such costs, if any, are recognized.
7. Supplementary Statement of Cash Flows Data
Supplemental disclosure of cash flow information is as follows (in millions):
For the three months ended March 31,
------------------------------------
2002 2001
----------- -----------
Changes in certain working capital items:
Trade accounts receivable $ (33) $ 35
Inventories 5 (178)
Other current assets 34 135
Accounts payable and other current liabilities,
net of restructuring payments (151) (263)
------- -------
Total $ (145) $ (271)
======= =======
8. Comprehensive (Loss) Income
Comprehensive (loss) income, net of tax, for the first quarter of 2002 and 2001
is as follows (in millions):
For the three months ended March 31,
------------------------------------
2002 2001
-------- --------
Net (loss) income $ (90) $ 132
Other comprehensive loss (25) (107)
------- -------
Total comprehensive (loss) income $ (115) $ 25
======= =======
9. (Loss) Earnings Per Common Share
A reconciliation of the basic and diluted (loss) earnings per share computations
for the first quarter of 2002 and 2001 are as follows (in millions, except per
share amounts):
For the three months ended March 31,
-------------------------------------------------------------------------------
2002 2001
------------------------------------- ------------------------------------
Weighted Per Weighted Per
Average Share Average Share
Loss Shares Amount Income Shares Amount
-------- ------ ------ ------ ------ ------
Basic (loss) earnings per share $ (90) 945 $(0.10) $ 132 923 $ 0.14
====== ======
Effect of dilutive securities:
Options 13
Convertible preferred stock 1
------- ------- ------- -------
Diluted (loss) earnings per share $ (90) 945 $(0.10) $ 132 937 $ 0.14
======= ======= ====== ======= ======= ======
At March 31, 2002, potential convertible shares of 100 million related to
options, preferred stock, subordinated notes, 2% zero coupon convertible
debentures and 3.5% convertible debentures were not included in the calculation
of diluted loss per share due to the anti-dilutive effect they would have had if
converted. Also, the March 31, 2002, computation of diluted loss per share
excluded 71 million options since their effect would have been anti-dilutive and
the option exercise price was greater than the average market price of the
common shares for the period.
At March 31, 2001, potential convertible shares of 29 million related to
subordinated notes and 2% zero coupon convertible debentures were not included
in the calculation of diluted earnings per share due to the anti-dilutive effect
they would have had on earnings per share if converted. Also, the March 31,
2001, computation of diluted earnings per share excluded 36 million options
since their effect would have been anti-dilutive and the option exercise price
was greater than the average market price of the common shares for the period.
Common dividends of $56 million, or $0.06 per share were declared in the first
quarter of 2001.
10. Subsequent Event
On April 15, 2002, Corning announced it expects to undertake actions in 2002
which will result in restructuring and impairment charges to earnings. The total
pre-tax charges at this time are estimated in the range of $600 million and may
result in the elimination of approximately 4,000 positions. The charges will be
incurred over the second and third quarter of 2002.
ITEM 2.
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Overview
Corning incurred a net loss in the first quarter of 2002, driven by continued
weak performance in the telecommunications businesses. Recent announcements by
telecommunications carriers indicate their capital spending will be lower than
expected. As a result, Corning now expects no meaningful recovery in the
Telecommunications Segment in 2002.
Corning announced on April 15, 2002, that it expects to take actions to reduce
costs and could record total restructuring and impairment charges in the range
of $600 million over the second and third quarters. Actions being considered
include:
.. companywide workforce reductions and organizational consolidations,
.. plant and research facility closures, and
.. divestitures.
Management believes these actions are necessary for Corning to return to
profitability in 2003.
The charges associated with these actions will include costs of employee
severance and retirements and facility exit costs. They are also expected to
include some impairments of fixed assets and cost and/or equity investments. In
addition, it is possible that future strategic decisions could cause either a
write-off or impairment of intangible assets related to the Telecommunications
Segment. Such charges would be incremental to the $600 million estimate.
Results of Operations
Net sales totaled $898 million for the first quarter of 2002, a decrease of 53%
compared with sales of $1.9 billion in the prior year quarter. The sales decline
in the first quarter was most pronounced in the Telecommunications Segment,
where the impact of significantly lower demand for Corning's fiber and cable and
photonic technologies products drove a sales decline of 68% compared to the
prior year quarter.
Corning's net loss totaled $90 million, or $0.10 per share, in the first quarter
of 2002, compared to net income of $132 million or, $0.14 per share, in the
first quarter of 2001. First quarter 2001 net income and diluted earnings per
share, after adjusting for the impact of Statement of Financial Accounting
Standards (SFAS) No. 142, was $268 million, or $0.29 per share. The loss for the
first quarter of 2002 was primarily due to significantly lower volumes in the
fiber and cable and photonic technologies businesses as capital spending in the
telecommunications industry continued at low levels. Although results of the
Advanced Materials and Information Display Segments were lower in the first
quarter of 2002 compared to 2001, performance for several of these businesses
improved from the fourth quarter of 2001.
Selling, general and administrative expenses decreased 30% from the first
quarter of 2001. This decrease reflects cost cutting actions that were
implemented in 2001. Research, development and engineering expenses decreased
20% from the same period in 2001. The decrease was entirely related to the
Telecommunications Segment.
Corning's results for the first quarter of 2002 and 2001 did not include any
material nonrecurring, or special items.
Accounting Changes - Amortization of Goodwill
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." Among other provisions, goodwill is no
longer amortized but is subject to impairment tests at least annually. Corning
adopted SFAS No. 142 on January 1, 2002. See Note 1 to Consolidated Financial
Statements.
Corning completed its initial impairment review during the first quarter and
concluded a transitional impairment charge from adoption of the standard would
not be required. On a prospective basis, Corning has selected the fourth quarter
to conduct annual impairment tests. The outcome of the impairment test is
primarily dependent upon the fair value of the reporting units. The current
business conditions in the telecommunications industry are depressed. Should
these conditions be prolonged or deteriorate, the fair value within this
industry could be lower in future periods. As such, management cannot provide
assurance that future impairment tests will not result in a charge to earnings.
Outlook
Management does not expect any meaningful recovery in the Telecommunications
Segment in 2002. As a result, management expects sales for 2002 to be
significantly below 2001 levels and anticipates Corning will continue to incur
losses in the short-term. Corning expects to realize cost savings from
restructuring actions taken in 2001 and 2002; however, these improvements will
be partially offset by pricing pressures in several key businesses. Corning
expects second quarter net sales to be in the range of $900 to $925 million and
also anticipates a loss comparable to the first quarter, excluding restructuring
and impairment charges.
Management continues to believe Corning has ample liquidity to meet its funding
needs for 2002. Corning finished the first quarter with $1.8 billion in cash and
short-term investments and an unused revolving credit facility of $2.0 billion.
Operating Segments
Corning groups its products into three operating segments: Telecommunications,
Advanced Materials and Information Display. Corning includes the earnings of
equity affiliates that are closely associated with Corning's operating segments
in segment net income. Information about the performance of Corning's three
operating segments for the first quarter of 2002 and 2001 is presented below.
These amounts do not include revenues, expenses and equity earnings not
specifically identifiable to segments. Note 2 to the Consolidated Financial
Statements includes a reconciliation of segment results to Corning's net income.
Corning prepared the financial results for its three operating segments on a
basis that is consistent with the manner in which Corning management internally
disaggregates financial information to assist in making internal operating
decisions. Corning has allocated some common expenses among segments differently
than it would for stand alone financial information prepared in accordance with
accounting principles generally accepted in the U.S. (GAAP). Segment net income
may not be consistent with measures used by other companies.
----------------------------------------------------------------------------------------------------------------------------------
Telecommunications Three Months Ended
(In millions) March 31,
2002 2001
----------------------------------------------------------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 255 $ 875
Hardware and equipment 135 248
Photonic technologies 34 236
Controls and connectors 39 60
Optical networking devices 2 14
--------- ---------
Total net sales $ 465 $ 1,433
========= =========
Research, development and engineering expenses $ 86 $ 122
Interest expense $ 32 $ 25
Segment (loss) earnings before equity (losses) earnings $ (138) $ 177
Equity in (losses) earnings of associated companies (4) 3
--------- ---------
Segment net (loss) income $ (142) $ 180
========= =========
Segment (loss) earnings before equity (losses) earnings
as a percentage of segment sales (29.7%) 12.4%
Segment net (loss) income as a percentage of segment sales (30.5%) 12.6%
----------------------------------------------------------------------------------------------------------------------------------
The Telecommunications Segment produces optical fiber and cable, optical
hardware and equipment, photonic modules and components and optical networking
devices for the worldwide telecommunications industry. Sales of each business in
the segment are provided in the table above.
Sales and earnings declined significantly from the first quarter of 2001 for
each business in the segment. Each business reported a loss in 2002. The decline
from 2001 is caused by significantly reduced volumes in all businesses.
The optical fiber and cable business remains the largest in the segment. The
volume of fiber and cable products, including Corning's LEAF(R) and MetroCor(TM)
optical fiber, decreased more than 50% over the prior year quarter. The overall
weighted average price for Corning's optical fiber and cable products decreased
over 15% compared to the first quarter of 2001 as the mix of premium fiber
declined significantly.
The decrease in research and development and engineering expense in 2002
compared to 2001 is primarily in the photonic technologies business.
The dynamics of the marketplace began to change dramatically in 2001 after the
first quarter, beginning with reductions in growth rates at photonic
technologies, later spreading to declines in premium fiber mix, and finally,
after a strong first half, negatively affecting demand for optical fiber and
cable. As such, management believes the operating trends of the businesses in
this segment are best understood by comparison to the prior quarter.
First quarter 2002 segment sales declined 14% from the fourth quarter of 2001
while the loss in the first quarter was only half of that in the prior quarter;
an improvement of almost $140 million. The improved quarterly performance was
led by the photonic technologies business. The fourth quarter 2001 results for
this business included an inventory write-off of $60 million ($37 million
after-tax). The business also reduced costs from the fourth quarter.
The optical fiber and cable business also reduced its quarterly operating loss
in the first quarter of 2002. This improvement reflects cost reductions achieved
from the restructuring actions undertaken in 2001 and the resumption of
production at certain plants which were idled through much of the fourth quarter
of 2001.
Corning expects to undertake 2002 restructuring actions beginning in the second
quarter that will reduce the cost structure of each business in this segment.
----------------------------------------------------------------------------------------------------------------------------------
Advanced Materials Three Months Ended
(In millions) March 31,
2002 2001
----------------------------------------------------------------------------------------------------------------------------------
Net sales:
Environmental technologies $ 94 $ 108
Life sciences 70 70
Other advanced materials 69 104
--------- ---------
Total net sales $ 233 $ 282
========= =========
Research, development and engineering expenses $ 31 $ 28
Interest expense $ 8 $ 5
Segment earnings before equity earnings $ 1 $ 26
Equity in earnings of associated companies 8 6
--------- ---------
Segment net income $ 9 $ 32
========= =========
Segment earnings before equity earnings as a percentage of segment sales 0.4% 9.2%
Segment net income as a percentage of segment sales 3.9% 11.3%
----------------------------------------------------------------------------------------------------------------------------------
The Advanced Materials Segment manufactures specialized products with unique
applications utilizing glass, glass ceramic and polymer technologies. The
largest businesses in this segment are environmental technologies and life
sciences. Sales of these businesses are provided in the table above.
Sales in the Advanced Materials Segment decreased 17% in the first quarter of
2002 compared to the first quarter of 2001 as demand for semiconductor materials
fell sharply. Segment net income declined 72% in the first quarter of 2002
compared to the prior year quarter, as improved operating performance in the
life sciences business was more than offset by decreased earnings in the
environmental technologies and semiconductor materials businesses.
Sales in the environmental technologies business decreased 13% for the first
quarter of 2002 due to lower sales volume and pricing pressure as the business
experienced sales declines worldwide, but mostly in North America. Earnings in
this business for the first quarter of 2002 were down over 50% due to lower
sales volumes, price declines and manufacturing inefficiencies related to thin
wall products.
Sales and volume in the life sciences business were flat compared to unusually
strong first quarter 2001 sales. Earnings in the business increased
significantly over 2001 primarily due to cost savings achieved through the
discontinuation of Corning's investment in microarray technology products in the
third quarter of 2001 and manufacturing efficiencies.
Sales in Corning's other Advanced Materials businesses decreased 34% from the
first quarter of 2001 and earnings decreased significantly over 2001. These
decreases were led by lower sales volume of high purity fused silica products in
the semiconductor materials business due to soft demand in the semiconductor
equipment industry.
Many of the businesses in this segment are exposed to the general condition of
the U.S economy. As a result, these businesses incurred declines in performance
as the economy weakened at the end of the third quarter of 2001. A comparison of
current results to the prior quarter is useful as the economic conditions of
these two periods are more comparable.
While sales and earnings for this segment decreased from the prior year first
quarter, sales and earnings for the first quarter of 2002 improved compared to
the fourth quarter of 2001, as sales rose 3% and earnings increased $21 million.
The sequential sales increase was primarily due to 11% sales increases at
environmental technologies and life sciences, partially offset by a 12% decline
in other Advanced Materials businesses due to continued softness in the
semiconductor equipment industry. All businesses in this segment reported first
quarter earnings improvement over the fourth quarter of 2002.
----------------------------------------------------------------------------------------------------------------------------------
Information Display Three Months Ended
(In millions) March 31,
2002 2001
----------------------------------------------------------------------------------------------------------------------------------
Net sales:
Display technologies $ 93 $ 62
Precision lens 59 53
Conventional video components 43 86
---------- ---------
Total net sales $ 195 $ 201
========== =========
Research, development and engineering expenses $ 11 $ 10
Interest expense $ 8 $ 4
Segment earnings before minority interest and equity earnings $ 3 $ 21
Minority interest in losses (earnings) of subsidiaries 6 (5)
Equity in earnings of associated companies 25 25
---------- ---------
Segment net income $ 34 $ 41
========== =========
Segment earnings before minority interest and equity earnings
as a percentage of segment sales 1.5% 10.4%
Segment net income as a percentage of segment sales 17.4% 20.4%
----------------------------------------------------------------------------------------------------------------------------------
The Information Display Segment manufactures glass panels and funnels for
televisions and CRTs (conventional video components), liquid crystal display
glass for flat panel display (display technologies) and precision lens
assemblies for projection video systems. Sales of each business are provided in
the table above.
Sales in the Information Display Segment decreased 3% in the first quarter of
2002 compared to the first quarter of 2001 due to extremely weak sales in the
conventional video components business partially offset by strong growth in the
display technologies and precision lens businesses. Segment net income in the
first quarter of 2002 declined 17% as significantly lower earnings at
conventional video components and precision lens businesses were only partially
offset by strong gains in the display technologies business.
Sales in the display technologies business increased 50% in the first quarter of
2002 compared to 2001 due to significantly higher sales volume as penetration in
the desktop market increased. The prior year's first quarter sales were
unusually weak due to an inventory correction in the industry. Volume gains of
95% were partially offset by price declines and the continued deterioration of
the yen. Earnings in the business increased almost 50% compared to the prior
year quarter primarily due to volume gains, manufacturing efficiencies and
improved equity earnings from Samsung Corning Precision, a Korean manufacturer
of liquid crystal display glass. Sales were flat compared to the fourth quarter
of 2001 as volume gains were offset by price declines and unfavorable foreign
exchange effects while earnings improved over 20% sequentially due to cost
reductions and an increase in equity earnings.
Sales in the precision lens business increased 11% in the first quarter of 2002
as a result of continued strong volume growth for digital projection
televisions, particularly in Asia, driven by demand for larger size televisions
in the entertainment market sector. Earnings in this business for the quarter
decreased more than 30% compared to the prior year quarter as volume gains were
more than offset by price declines, unfavorable product mix and higher fixed
costs due to 2001 capacity expansions.
Sales in the conventional video components business decreased 50% in the first
quarter of 2002 compared to the first quarter of 2001, but were flat compared
with the fourth quarter of 2001 as the weak U.S. economy continued to impact the
large screen television market and depress volumes. Earnings in this business
declined almost 85% from the first quarter of 2001 due to decreased sales volume
and a continued increase in competitive pricing pressure at both Corning and
Samsung Corning, a 50% owned manufacturer of glass panels based in South Korea.
Taxes on Income
Corning's effective income tax benefit rate for the three months ended March 31,
2002, was 25%. The effective tax benefit rate in the quarter is lower than the
U.S. statutory income tax rate of 35% due to the impact of unusable tax credits
and nondeductible expenses and losses. The effective tax rate for the first
quarter ended March 31, 2001, was 51.1%. This expense rate is higher than the
U.S. statutory income tax rate due primarily to non-tax deductible amortization
of acquired intangibles and goodwill.
Liquidity and Capital Resources
At March 31, 2002, Corning had $1.8 billion in cash and short-term investments
and an unused revolving credit facility of $2.0 billion. Cash and cash
equivalents decreased $79 million from December 31, 2001, while short-term
investments decreased $315 million for the quarter. The total decrease in cash
and short-term investments of $400 million includes $136 million of net debt
repayments and $58 million of restructuring payments. Cash and short-term
investments increased $676 million from March 31, 2001, primarily due to the
issuance of convertible debt for $665 million in November 2001.
During the first quarter of 2002, Corning made payments of $53 million related
to employee costs and $5 million in other exit costs related to the 2001
restructuring actions. Corning expects additional payments to approximate $65
million in the second quarter, $50 million in the third quarter and $15 million
in the fourth quarter with the remainder paid beyond 2002. Of the estimated $600
million pre-tax charge for 2002 restructuring actions, approximately 40% is
expected to be paid in cash.
Corning expects to complete the previously announced purchase of two Chinese
joint ventures - Lucent Technologies Shanghai Fiber Optic Co., Ltd. and Lucent
Technologies Beijing Fiber Optic Cable Co., Ltd. from Lucent Technologies for
$225 million in the second quarter of 2002.
Cash requirements for working capital, acquisitions, capital expenditures, debt
repayments, and restructuring liabilities are expected to be funded from cash
and short-term investments on hand.
Cash Flows
For the quarter ended March 31, 2002, cash used in operations was $171 million,
primarily due to lower accounts payable and other current liabilities and $58
million of cash payments for restructuring charges. Operations provided cash of
$176 million in the first quarter of 2001. The trend between years is primarily
due to the 2002 net loss.
Cash provided by investing activities was $219 million reflecting net cash of
$315 million from short-term investments partially offset by $102 million of
capital expenditures. This compares to a use of cash totaling $553 million in
the same period of 2001. The trend between years is primarily due to decreased
capital spending and acquisition activity.
Cash used in financing activities for the first quarter of 2002 was $121 million
and reflects $143 million of repayments of short-term debt, including commercial
paper. In total, cash used in financing activities is comparable between years.
The 2001 activity included dividend payments of $56 million.
Working Capital
Balance sheet and working capital measures are provided in the following table:
As of or for the three months ended
--------------------------------------------------------
March 31, 2002 December 31, 2001 March 31, 2001
-------------- ----------------- --------------
Working capital $2.1 billion $2.1 billion $2.4 billion
Working capital, excluding cash and short-term investments $238 million $(106) million $1.3 billion
Current assets to current liabilities 2.3:1 2.1:1 2.5:1
Trade accounts receivable, net of allowances $616 million $593 million $1.2 billion
Days sales outstanding 62 55 63
Inventories $717 million $725 million $1.2 billion
Inventory turns 3.8 4.5 4.9
The increase in working capital, excluding cash and short-term investments,
reflects lower short-term borrowings and accounts payable compared to December
31, 2001. The decrease in working capital, excluding cash and short-term
investments, compared to March 31, 2001, was primarily due to large decreases in
trade accounts receivable and inventories. The increase in trade accounts
receivable and days sales outstanding, compared to December 31, 2001, resulted
from lower December sales due to the scheduled facility shutdowns at year-end.
The large decrease in trade accounts receivable and inventories, compared to
March 31, 2001, was due to the significant decline in revenues and demand for
telecommunication products.
Financing Matters and Credit Ratings
Commercial paper borrowings outstanding at March 31, 2002, totaled $329 million
with a weighted-average maturity of 11 days. Corning's commercial paper program
is supported by the $2.0 billion revolving credit facility with 18 banks,
expiring on August 17, 2005. As of March 31, 2002, there were no borrowings
under the credit facility. The facility includes a covenant requiring Corning to
maintain a total debt to capital ratio, as defined, not greater than 60%. At
March 31, 2002, and December 31, 2001, this ratio was 47% compared with 27% at
March 31, 2001. The ratio increase was due to the 2001 net loss and the issuance
of convertible debt in November 2001. As of March 31, 2002, Corning had not
provided vendor financing to any of its customers.
Corning's credit ratings as of May 6, 2002, were as follows:
RATING AGENCY Rating Rating
Last Update Long-Term Debt Commercial Paper
----------- -------------- ----------------
Standard & Poor's BBB- A-3
April 25, 2002
Moody's (a) Baa1 P-2
November 7, 2001
Fitch BBB- F-3
February 4, 2002
(a) Maintains a negative outlook which means a rating may be lowered.
In April 2002, Corning's credit rating was downgraded by Standard & Poor's. As a
result, this downgrade in the short-term rating may limit Corning's access to
the commercial paper market, ultimately causing Corning to satisfy the
outstanding commercial paper borrowings as they become due. Although the
downgrade limits Corning's access to the commercial paper market, Corning's
overall financial flexibility continues to be more than adequate as a result of
its strong cash position, short-term investment holdings and committed revolving
credit facilities.
Obligations, Commitments and Contingencies
The only material change to Corning's cash obligations, commercial commitments
and contingencies from those disclosed in Corning's Form 10-K/A filed March 7,
2002, was a decrease of approximately $100 million for contingencies related to
acquisitions.
New Accounting Standards
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This standard addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Corning is required to implement SFAS No. 143
on January 1, 2003. Corning does not expect this standard to have a material
impact on its consolidated financial position or results of operations.
Forward-Looking Statements
The statements in this Quarterly Report on Form 10-Q, in reports subsequently
filed by Corning with the SEC on Form 8-K and related comments by management
which are not historical facts or information and contain words such as
"believes," "expects," "anticipates," "estimates," "forecasts," and similar
expressions are forward-looking statements. These forward-looking statements
involve risks and uncertainties that may cause the actual outcome to be
materially different. Such risks and uncertainties include, but are not limited
to:
- global economic conditions,
- currency fluctuations,
- product demand and industry capacity,
- competitive products and pricing,
- sufficiency of manufacturing capacity and efficiencies,
- cost reductions,
- availability and costs of critical materials,
- new product development and commercialization,
- attracting and retaining key personnel,
- order activity and demand from major customers,
- fluctuations in capital spending by customers in the telecommunications
industry and other business segments,
- changes in the mix of sales between premium and non-premium products,
- facility expansions and new plant start-up costs,
- adverse litigation or regulatory developments,
- capital resource and cash flow activities,
- capital spending,
- equity company activities,
- interest costs,
- acquisition and divestiture activity,
- the rate of technology change,
- the ability to enforce patents,
- product performance issues,
- stock price fluctuations, and
- other risks detailed in Corning's SEC filings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
There have been no material changes to Corning's market risk exposure since
December 31, 2001, except for the following change described below.
Interest Rate Risk Management
In March and April of 2002, Corning entered into interest rate swaps that are
fair value hedges and economically exchanged $275 million of fixed rate
long-term debt to floating rate debt. Under the terms of the swap agreements,
Corning will pay the counterparty a floating rate that is indexed to the
six-month LIBOR rate and receive the fixed rates of 8.3% to 8.875%, which are
the stated interest rates on the long-term debt instruments. As a result of
these transactions, Corning is exposed to the impact of interest rate changes.
The interest rate on these instruments is reset every six months and they expire
in 14 to 23 years. It is Corning's policy to conservatively manage its exposure
to changes in interest rates. Corning's policy is that total floating and
variable rate debt will not exceed 35% of the total debt portfolio at anytime.
Subsequent to the transactions described above, Corning's consolidated debt
portfolio contained approximately 6% of variable rate instruments.
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
Environmental Litigation. Corning has been named by the Environmental Protection
Agency under the Superfund Act, or by state governments under similar state
laws, as a potentially responsible party at 12 active hazardous waste sites.
Under the Superfund Act, all parties who may have contributed any waste to a
hazardous waste site, identified by such Agency, are jointly and severally
liable for the cost of cleanup unless the Agency agrees otherwise. It is
Corning's policy to accrue for its estimated liability related to Superfund
sites and other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued approximately $23 million for its estimated
liability for environmental cleanup and litigation at March 31, 2002. Based upon
the information developed to date, management believes that the accrued reserve
is a reasonable estimate of the Company's estimated liability and that the risk
of an additional loss in an amount materially higher than that accrued is
remote.
Schwinger Toxins Lawsuit. In April 2002, Corning was served with a complaint by
44 plaintiffs alleging past and current injuries allegedly arising from release
of hazardous and toxic substances from a Sylvania nuclear materials processing
facility near Hicksville, New York. The complaint names more than 20 other
corporate defendants and is pending in the United States District Court for the
Eastern District of New York and seeks damages in excess of $1.6 billion.
Corning just received the complaint on April 26th, has not yet responded and is
still reviewing the factual background and applicable defenses.
Dow Corning Bankruptcy. Corning and The Dow Chemical Company each own 50% of the
common stock of Dow Corning Corporation. On May 15, 1995, Dow Corning sought
protection under the reorganization provisions of Chapter 11 of the United
States Bankruptcy Code and thereby obtained a stay of approximately 19,000
breast-implant product liability lawsuits. On November 8, 1998, Dow Corning and
the Tort Claimants Committee jointly filed a revised Plan of Reorganization
(Joint Plan) which was confirmed by the Bankruptcy Court on November 30, 1999.
On December 21, 1999, the Bankruptcy Court issued an opinion that approved the
principal elements of the Joint Plan with respect to tort claimants, but
construed the Joint Plan as providing releases for third parties (including
Corning and Dow Chemical as shareholders) only with respect to tort claimants
who voted in favor of the Joint Plan. On November 13, 2000, the District Court
entered an Order reversing the Bankruptcy Court's December 21, 1999, Opinion on
the release and injunction provisions and confirmed the Joint Plan. On October
23, 2001, the U.S. Court of Appeals for the Sixth Circuit heard oral arguments
on appeals taken by foreign claimants, the U.S. government and certain tort
claimants from various portions of the District Court's order. On January 29,
2002, the Sixth Circuit affirmed the determinations made in the District Court
with respect to the foreign claimants, but remanded to the District Court for
further proceedings with respect to the claims of the U.S. government for
recovery of medical expenses paid on behalf of tort claimants and with respect
to the findings supporting the non-debtor releases in favor of Dow Corning's
shareholders, foreign subsidiaries and insurers. The U.S. Government filed a
petition with the Sixth Circuit for reconsideration of its arguments. On May 3,
2002, the Sixth Circuit issued a ruling denying the U.S. Government's petition
for rehearing en banc. In the District Court, the Plan proponents and opponents
have filed briefs on the open issues, which include the issues surrounding the
non-debtor releases. The District Court has not yet scheduled a hearing for
argument on the remanded issues. The Sixth Circuit's ruling adds some
uncertainty with respect to the ultimate confirmation of the Joint Plan. If the
Joint Plan is upheld but the shareholder releases are not given their full
effect, Corning would expect to defend any remaining claims against it (and any
new claims) on the same grounds that led to a series of orders and judgments
dismissing all claims against Corning in the federal courts and in many state
courts as described under the heading Implant Tort Lawsuits immediately
hereafter. Management believes that the claims against Corning lack merit and
that the breast implant litigation against Corning will be resolved without
material impact on Corning's financial statements.
Under the terms of the Joint Plan, Dow Corning would be required to establish a
Settlement Trust and a Litigation Facility to provide a means for tort claimants
to settle or litigate their claims. Dow Corning would have the obligation to
fund the Trust and the Facility, over a period of up to 16 years, in an amount
up to approximately $3.3 billion, subject to the limitations, terms and
conditions stated in the Joint Plan. Corning and Dow Chemical have each agreed
to provide a credit facility to Dow Corning of up to $150 million ($300 million
in the aggregate), subject to the terms and conditions stated in the Joint Plan.
The Joint Plan also provides for Dow Corning to make full payment, through cash
and the issuance of senior notes, to its commercial creditors. The commercial
creditors have contested the Bankruptcy Court's disallowance of their claims for
post-petition interest at default rates of interest, and have appealed to the
District Court. While the amounts at issue on this appeal are subject to a
variety of contingencies, it is possible that the aggregate claim against Dow
Corning exceeds $100 million on a pre-tax basis. The District Court held oral
argument on May 2, 2002 to consider the merits of the commercial creditors
appeal, which Dow Corning has vigorously contested, and has not yet ruled. If
and when Dow Corning emerges from bankruptcy, Corning expects to resume the
recognition of equity earnings from Dow Corning. Corning does not expect to
receive dividends from Dow Corning in the foreseeable future.
Implant Tort Lawsuits. Corning and Dow Chemical, the shareholders of Dow Corning
Corporation, were named in a number of state and federal tort lawsuits alleging
injuries arising from Dow Corning's implant products. The claims against the
shareholders alleged a variety of direct or indirect theories of liability. In
1992, the federal breast implants cases were coordinated for pretrial purposes
in the United States District Court, Northern District of Alabama (Judge Sam C.
Pointer, Jr.). In April 1995, Corning obtained a summary judgment dismissing it
from over 4,000 federal court cases. On March 12, 1996, the U.S. Court of
Appeals for the Eleventh Circuit dismissed the plaintiffs' appeal from that
judgment. In state court legislation, Corning was awarded summary judgment in
California, Connecticut, Illinois, Indiana, Michigan, Mississippi, New Jersey,
New York, Pennsylvania, Tennessee, and Dallas, Harris and Travis Counties in
Texas, thereby dismissing approximately 7,000 state cases. In Louisiana, Corning
was awarded summary judgment dismissing all claims by plaintiffs and a
cross-claim by Dow Chemical on February 21, 1997. On February 11, 1998, the
intermediate appeals court in Louisiana vacated this judgment as premature. The
Louisiana cases were transferred to the United States District Court for the
Eastern District of Michigan, Southern Division (Michigan Federal Court) to
which substantially all breast implant cases were transferred in 1997. In the
Michigan Federal Court, Corning is named as a defendant in approximately 70
pending cases (including some cases with multiple claimants), in addition to the
transferred Louisiana cases. The Michigan Federal Court heard Corning's motion
for summary judgment on February 27, 1998, but has not ruled. Based upon the
information developed to date and recognizing that the outcome of complex
litigation is uncertain, management believes that the risk of a materially
adverse result in the implant litigation against Corning is remote and believes
the implant litigation against Corning will be resolved without material impact
on Corning's financial statements.
Federal Securities Cases. A federal securities class action lawsuit was filed in
1992 against Corning and certain individual defendants by a class of purchasers
of Corning stock who allege misrepresentations and omissions of material facts
relative to the silicone gel breast implant business conducted by Dow Corning.
This action is pending in the United States District Court for the Southern
District of New York. The class consists of those purchasers of Corning stock in
the period from June 14, 1989, to January 13, 1992, who allegedly purchased at
inflated prices due to the non-disclosure or concealment of material information
and were damaged when Corning's stock price declined in January 1992 after the
Food and Drug Administration (FDA) requested a moratorium on Dow Corning's sale
of silicone gel implants. No amount of damages is specified in the complaint. In
1997, the Court dismissed the individual defendants from the case. In December
1998, Corning filed a motion for summary judgment requesting that all claims
against it be dismissed. Plaintiffs requested the opportunity to take
depositions before responding to the motion for summary judgment. The discovery
process is continuing and the Court has set no schedule to address the still
pending summary judgment motion. Corning intends to continue to defend this
action vigorously. Based upon the information developed to date and recognizing
that the outcome of litigation is uncertain, management believes that the
likelihood of a materially adverse verdict is remote.
From December 2001 through April 2002, Corning and three of its officers and
directors were named defendants and served in four different lawsuits alleging
violations of the U.S. securities laws in connection with Corning's November
2000 offering of $2.7 billion zero coupon convertible debenture, due November
2015 and 30 million shares of common stock. These lawsuits are pending in the
United States District Court for the Western District of New York and seek class
action status. In addition, the Company and the same three officers and
directors were named and served in 10 lawsuits alleging selective disclosures
and non-disclosures that allegedly inflated the price of Corning's Common Stock
in the period from September 2000 through June 2001. The plaintiffs in these
actions seek to represent classes of purchasers of Corning's stock in all or
part of the period indicated. Another lawsuit has been filed by a participant in
the Company's Investment Plan for Salaried Employees, purportedly as a class
action on behalf of participants in the Plan who purchased or held Corning stock
in a Plan account. Corning has not yet answered these lawsuits and there has
been no determination if they will proceed as a class action or who will be lead
counsel for plaintiffs. Management is prepared to defend these lawsuits
vigorously and, recognizing that the outcome of litigation is uncertain,
believes it has strong defenses to the claims alleged in the complaints.
Shin Etsu Quartz Products Company. In July 1999 and February 2000, Shin Etsu
Quartz Products Company filed two patent suits in Japan against Corning for
alleged patent infringement of two patents relating to the properties of fused
silica materials used in the optical components of stepper machines. The suits
requested damages and an injunction preventing sales of infringing products in
Japan. Corning has denied infringement, has argued that the patents are invalid
or unenforceable, and has filed a separate action to invalidate the second of
the two patents. During the first quarter of 2002, the parties amicably resolved
the disputes and the suits have been dismissed.
Hereaus Quarzglass GmbH. In July 2001, Hereaus Quarzglass GmbH filed a patent
infringement suit in Germany against Corning for alleged patent infringement of
a European patent relating to certain properties of fused silica glass used in
the optical components of stepper machines. The suit requested damages and for
Corning to refrain from importing or selling infringing products in Germany.
Corning filed an action in December 2001 in U.S. federal court seeking a ruling
that the U.S. counterpart to the Hereaus patent (jointly owned with Shin Etsu in
the U.S.) be declared invalid and not infringed. During the first quarter of
2002, the parties amicably resolved the disputes and the suits have been
dismissed.
Pittsburgh Corning Corporation. Corning and PPG Industries, Inc. each own 50% of
the capital stock of Pittsburgh Corning Corporation (PCC). PCC and several other
defendants have been named in numerous lawsuits involving claims alleging
personal injury from exposure to asbestos. On April 16, 2000, PCC filed for
Chapter 11 reorganization in the United States Bankruptcy Court for the Western
District of Pennsylvania. As of the bankruptcy filing, PCC had in excess of
140,000 open claims and now has in excess of 240,000 open claims. In the
bankruptcy court, PCC obtained a preliminary injunction against the prosecution
of asbestos actions against its two shareholders to afford the parties a period
of time (the Injunction Period) in which to negotiate a plan of reorganization
for PCC. The Injunction Period has been extended until May 15, 2002. Under the
terms of the Bankruptcy Court's Order, PCC, PPG Industries and Corning will have
90 days following expiration of the Injunction Period to seek removal and
transfer of stayed cases that have not been resolved through a plan of
reorganization. As a result of PCC's bankruptcy filing, Corning recorded an
after-tax charge of $36 million in the first quarter of 2000 to impair its
entire investment in PCC and discontinued recognition of equity earnings. At the
time PCC filed for bankruptcy protection, there were approximately 12,400 claims
pending against Corning alleging various theories of liability based on exposure
to PCC's asbestos products. Although the outcome of litigation and the
bankruptcy case is uncertain, management believes that the separate corporate
status of PCC will continue to be upheld. Management is continuing to
investigate Corning's options for defending claims against it, which might
include vigorously defending itself on all fronts, or exploring a global
settlement through the bankruptcy process. It is probable that there will be
intensive negotiations in the second quarter of 2002 concerning the terms of
PCC's plan of reorganization, including whether or not Corning and its insurers
may participate by making a contribution in exchange for a release. Management
cannot estimate the probability that Corning will be able to secure such a
release upon terms and conditions satisfactory to Corning and its insurers. The
exposure for this asbestos litigation (net of insurance) cannot be estimated at
this time. Corning is named in approximately 14,000 other cases alleging
injuries from asbestos and those cases have been covered by insurance without
material impact to Corning to date. Asbestos litigation is inherently difficult,
and the outcome of litigation is uncertain. However, management believes these
matters will be resolved without material impact on Corning's overall financial
position. If Corning and its insurers agree to a global settlement through the
bankruptcy process, the outcome may be material to the results of operations for
the period in which such costs, if any, are recognized.
Astrium. In December of 2000, Astrium, SAS and Astrium, Ltd. filed a complaint
for negligence in the United States District Court for the Central District of
California against TRW, Inc., Pilkington Optronics Inc., Corning NetOptix, Inc.,
OFC Corporation and Optical Filter Corporation claiming damages in excess of
$150 million. The complaint alleges that certain cover glasses for solar arrays
used to generate electricity from solar energy on satellites sold by Astrium's
corporate successor were negligently coated by NetOptix or its subsidiaries
(prior to Corning's acquisition of NetOptix) in such a way that the amount of
electricity the satellite can produce and their effective life were materially
reduced. Corning has denied that the coatings produced by NetOptix or its
subsidiaries caused the damage alleged in the complaint, or that it is legally
liable for any damages which Astrium may have experienced. Formal discovery has
begun, depositions have been taken, and in April 2002 the Court granted motions
for summary judgment by Corning and other defendants to dismiss the negligence
claims. The Court has permitted plaintiffs to add fraud and negligent
misrepresentation claims against all defendants and a breach of warranty claim
against Corning NetOptix, Inc., OFC Corporation and Optical Filter Corporation.
Based upon the information developed to date and recognizing that the outcome of
litigation is uncertain, management believes that there are strong defenses to
these claims and believes they will be resolved without material impact on
Corning's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. An annual meeting of our shareholders (the "Annual Meeting") was held on
April 25, 2002. Proxies for the Annual Meeting were solicited pursuant to
Regulation 14 under the Securities and Exchange Act of 1934, as amended. There
was no solicitation in opposition to the management's nominees for director as
listed in the proxy statement, and all such nominees were elected.
b. At the Annual Meeting, John Seely Brown, Gordon Gund, John M. Hennessy,
John W. Loose and H. Onno Ruding were elected as directors for terms expiring at
the annual meeting of our shareholders in 2005. The following table shows the
vote totals with respect to the election of these directors:
Name Votes For Votes Withheld
John Seely Brown 792,577,470 48,144,443
Gordon Gund 808,928,626 34,793,286
John M. Hennessy 806,413,885 34,308,027
John W. Loose 802,035,780 38,686,132
H. Onno Ruding 792,847,195 47,874,717
Mr. Loose, one of the nominees, resigned from the Board effective April 25,
2002, in conjunction with his retirement as President and Chief Executive
Officer of Corning. Roger Ackerman, whose term expired at the Annual Meeting,
did not stand for re-election. Catherine A. Rein, William D. Smithburg, Hansel
E. Tookes II and Wendell P. Weeks continued as directors for terms expiring at
the annual meeting of shareholders in 2004, and James B. Flaws, Peter F.
Volanakis, James R. Houghton, James J. O'Connor and Deborah D. Rieman continued
as directors for terms expiring at the annual meeting of shareholders in 2003.
c. At the Annual Meeting, the shareholders also approved the adoption of
our 2002 Worldwide Employee Share Purchase Plan. The following table shows the
vote totals with respect to the adoption of our 2002 Worldwide Employee Share
Purchase Plan:
Votes For Votes Against Abstain
761,818,711 73,115,930 5,787,271
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
None.
(b) Reports on Form 8-K
A report on Form 8-K dated January 14, 2002, was filed in connection
with the adoption of Statement of Financial Accounting Standards No.
142, "Business Combinations."
A report on Form 8-K dated January 23, 2002, was filed in connection
with the registrant's 2001 results.
Other items under Part II are not applicable.
SIGNATURES
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Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNING INCORPORATED
(Registrant)
May 7, 2002 /s/ JAMES B. FLAWS
------------------------- -----------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
May 7, 2002 /s/ KATHERINE A. ASBECK
------------------------- -----------------------------------------
Date Katherine A. Asbeck
Senior Vice President and Controller
(Principal Accounting Officer)