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 June 30, 2003
--------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________to____________
Commission file number 1-3247
CORNING INCORPORATED
--------------------
(Registrant)
New York 16-0393470
---------------------------------------- ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
One Riverfront Plaza, Corning, New York 14831
---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-974-9000
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
at least the past 90 days.
Yes X No ____
-----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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:
1,262,319,619 shares of Corning's Common Stock, $0.50 Par Value, were
outstanding as of June 30, 2003.
INDEX
-----
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
Page
----
Consolidated Statements of Operations (Unaudited) for
the three and six months ended June 30, 2003 and 2002 3
Consolidated Balance Sheets at June 30, 2003 (Unaudited)
and December 31, 2002 4
Consolidated Statements of Cash Flows (Unaudited) for the
six months ended June 30, 2003 and 2002 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 45
Item 4. Controls and Procedures 45
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 46
Item 5. Other Information 52
Item 6. Exhibits and Reports on Form 8-K 53
Signatures 54
Exhibit Index 55
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share amounts)
For the three months ended For the six months ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- -------- ---------
Net sales $ 752 $ 827 $ 1,498 $ 1,666
Cost of sales 571 643 1,117 1,298
--------- --------- -------- ---------
Gross margin 181 184 381 368
Operating expenses:
Selling, general and administrative expenses 148 188 300 376
Research, development and engineering expenses 85 131 178 257
Amortization of purchased intangibles 9 11 18 22
Restructuring, impairment and other charges and
credits (Note 2) 49 494 100 494
--------- --------- -------- ---------
Operating loss (110) (640) (215) (781)
Interest income 9 10 17 24
Interest expense (42) (44) (82) (92)
Asbestos settlement (Note 3) (39) (337)
Gain on repurchases of debt, net (Note 4) 13 68 17 68
Other income (expense), net 20 6 (9)
--------- --------- -------- ---------
Loss from continuing operations before income taxes (149) (606) (594) (790)
Benefit for income taxes (34) (184) (178) (234)
--------- --------- -------- ---------
Loss from continuing operations before minority interests
and equity earnings (115) (422) (416) (556)
Minority interests 33 6 70 12
Equity in earnings of associated companies, net of impairments 60 25 119 55
--------- --------- -------- ---------
Loss from continuing operations (22) (391) (227) (489)
Income from discontinued operations, net of income
taxes (Note 5) 21 29
--------- --------- -------- ---------
Net loss $ (22) $ (370) $ (227) $ (460)
========= ========= ======== =========
Basic and diluted (loss) earnings per common share from (Note 12):
Continuing operations $ (0.02) $ (0.41) $ (0.19) $ (0.52)
Discontinued operations (Note 5) 0.02 0.03
--------- --------- -------- ---------
Loss per common share $ (0.02) $ (0.39) $ (0.19) $ (0.49)
========= ========= ======== =========
Shares used in computing per share amounts for basic
and diluted (loss) earnings per common share 1,244 948 1,222 947
========= ========= ======== =========
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
June 30, December 31,
2003 2002
----------- -------------
Assets
Current assets:
Cash and cash equivalents $ 747 $ 1,426
Short-term investments, at fair value 766 664
--------- ---------
Total cash and short-term investments 1,513 2,090
Trade accounts receivable, net of doubtful accounts and allowances - $46; $59 482 470
Inventories (Note 6) 538 559
Deferred income taxes 379 296
Other accounts receivable 155 358
Prepaid expenses and other current assets 70 52
--------- ---------
Total current assets 3,137 3,825
Restricted cash and investments 97 82
Investments 842 769
Property, net of accumulated depreciation - $3,542; $3,375 3,542 3,705
Goodwill (Note 7) 1,750 1,715
Other intangible assets, net (Note 7) 185 213
Deferred income taxes 1,081 887
Other assets 235 210
--------- ---------
Total assets $ 10,869 $ 11,406
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Loans payable $ 156 $ 204
Accounts payable 294 339
Other accrued liabilities (Note 8) 1,169 1,137
--------- ---------
Total current liabilities 1,619 1,680
Long-term debt 3,095 3,963
Postretirement benefits other than pensions 616 617
Other liabilities 668 396
Commitments and contingencies (Note 9)
Minority interests 40 59
Shareholders' equity:
Preferred stock - Par value $100.00 per share; Shares authorized: 10 million
Series C mandatory convertible preferred stock - Shares issued: 5.75 million;
Shares outstanding: 1.47 million and 1.55 million 147 155
Common stock - Par value $0.50 per share; Shares authorized: 3.8 billion;
Shares issued: 1,322 million and 1,267 million 661 634
Additional paid-in capital 9,905 9,695
Accumulated deficit (5,148) (4,921)
Treasury stock, at cost; Shares held: 60 million and 70 million (592) (702)
Accumulated other comprehensive loss (142) (170)
--------- ---------
Total shareholders' equity 4,831 4,691
--------- ---------
Total liabilities and shareholders' equity $ 10,869 $ 11,406
========= =========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
For the six months ended
June 30,
-------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Loss from continuing operations $ (227) $ (489)
Adjustments to reconcile loss from continuing operations
to net cash provided by (used in) operating activities:
Amortization of purchased intangibles 18 22
Depreciation 250 317
Asbestos settlement 337
Restructuring, impairment and other charges and credits 100 494
Gain on repurchases of debt, net (17) (68)
Undistributed earnings of associated companies (24) 28
Minority interests, net of dividends paid (70) (12)
Deferred tax benefit (234) (125)
Interest expense on convertible debentures 13 21
Restructuring payments (143) (116)
Increases in restricted cash (21)
Income tax refund 191
Changes in certain working capital items:
Trade accounts receivable 17 26
Inventories 34 24
Other current assets (4) (56)
Accounts payable and other current liabilities,
net of restructuring payments (173) (181)
Other, net 1 (77)
-------- -------
Net cash provided by (used in) operating activities 48 (192)
-------- -------
Cash flows from investing activities:
Capital expenditures (110) (210)
Net proceeds from sale of precision lens business 9
Net proceeds from sale or disposal of assets 43 36
Net increase in long-term investments and other
long-term assets (4) (9)
Short-term investments - acquisitions (1,061) (847)
Short-term investments - liquidations 956 1,648
Restricted investments - liquidations 6
Other, net 1 (2)
-------- -------
Net cash (used in) provided by investing activities (160) 616
-------- -------
Cash flows from financing activities:
Net repayments of loans payable (54) (474)
Proceeds from issuance of long-term debt 11
Repayments of long-term debt (823) (155)
Proceeds from issuance of common stock, net 281 33
Cash dividends paid to preferred shareholders (6)
-------- -------
Net cash used in financing activities (602) (585)
-------- -------
Effect of exchange rates on cash 35 23
-------- -------
Cash used in continuing operations (679) (138)
Cash provided by discontinued operations (Note 5) 41
-------- -------
Net decrease in cash and cash equivalents (679) (97)
Cash and cash equivalents at beginning of period 1,426 1,037
-------- -------
Cash and cash equivalents at end of period $ 747 $ 940
======== =======
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
General
Corning Incorporated and its consolidated subsidiaries is hereinafter sometimes
referred to as the "the Company," "the Registrant," "Corning," "we," "our," or
"us."
Corning Incorporated is a world-leading provider of optical fiber, cable, and
hardware and equipment products for the telecommunications industry;
high-performance glass for computer monitors and television screens; advanced
optical materials for the semiconductor industry and the scientific community;
scientific laboratory products for the scientific community; ceramic substrates
for the automotive industry; specialized polymer products for biotechnology
applications; and other technologies.
The unaudited consolidated financial statements reflect all adjustments which,
in the opinion of management, are necessary for a fair statement of the results
of operations, financial position and cash flows for the interim periods
presented. All such adjustments are of a normal recurring nature. The
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and in accordance with
accounting principles generally accepted in the United States of America (GAAP)
for interim financial information.
GAAP requires management to make certain estimates and judgments that are
reflected in the reported amounts of assets, liabilities, revenues and expenses
and also in the disclosure of contingent liabilities. The actual results may
differ from the estimates. Management exercises judgment and makes estimates for
allowance for bad debts, inventory obsolescence, product warranty, in-process
research and development, restructuring charges, asset and goodwill impairments,
depreciation, pension and postretirement benefits, income taxes, litigation and
other contingencies. Management reviews these estimates on a systematic basis
and, if necessary, any material adjustments are reflected in the consolidated
financial statements in the period that they are deemed necessary.
The results for interim periods are not necessarily indicative of results which
may be expected for any other interim period, or for the full year. These
interim consolidated financial statements should be read in conjunction with
Corning's Annual Report on Form 10-K for the year ended December 31, 2002.
Corning began recognizing equity earnings from Dow Corning Corporation ("Dow
Corning") in the first quarter of 2003 since it concluded that the emergence of
Dow Corning from bankruptcy protection is probable based on the Bankruptcy
Court's findings on December 11, 2002. See Part II-Other Information, Item 1,
Legal Proceedings for a history of this matter.
Certain amounts for 2002 were reclassified to conform with 2003 classifications.
Stock-Based Compensation
Corning applies Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees," for its stock-based compensation
plans. The following table illustrates the effect on loss from continuing
operations and loss per share if Corning had applied the fair value recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation.
The estimated fair value of each Corning option is calculated using the
Black-Scholes option-pricing model.
(In millions, except per share amounts):
------------------------------------------------------------------------------------------------------------------------------------
For the three months For the six months
ended June 30, ended June 30,
------------------------- -------------------------
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations - as reported $ (22) $ (391) $ (227) $ (489)
Add: Stock-based employee compensation expense
determined under APB No. 25, included in reported
loss from continuing operations, net of tax 1 1 2
Less: Stock-based employee compensation expense
determined under fair value based method, net of tax (34) (69) (69) (137)
------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations - pro forma $ (56) $ (459) $ (295) $ (624)
Loss per common share from continuing operations:
Basic and diluted - as reported $ (0.02) $ (0.41) $ (0.19) $ (0.52)
Basic and diluted - pro forma $ (0.05) $ (0.48) $ (0.24) $ (0.66)
------------------------------------------------------------------------------------------------------------------------------------
For purposes of SFAS No. 123 the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model. The following
are weighted-average assumptions used for grants under Corning stock plans in
2003 and 2002, respectively:
------------------------------------------------------------------------------------------------------------------------------------
For Options For the three months ended June 30, For the six months ended June 30,
----------------------------------- ---------------------------------
Granted During 2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Expected life in years 5 6 5 6
Risk free interest rate 2.8% 4.5% 2.9% 4.4%
Expected volatility 79.6% 77.3% 78.4% 77.2%
------------------------------------------------------------------------------------------------------------------------------------
Changes in the status of outstanding options were as follows:
------------------------------------------------------------------------------------------------------------------------------------
Number of Options Weighted-Average
(in thousands) Exercise Price
----------------- ----------------
Options outstanding December 31, 2002 97,327 $ 26.47
Options granted under plans 32,418 $ 4.99
Options exercised (68) $ 2.38
Options terminated (381) $ 13.47
---------
Options outstanding June 30, 2003 129,296 $ 21.13
========= ========
Options exercisable June 30, 2003 61,900 $ 27.67
========= ========
------------------------------------------------------------------------------------------------------------------------------------
New Accounting Standards
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51," which requires all
variable interest entities (VIEs) to be consolidated by the primary beneficiary.
The primary beneficiary is the entity that holds the majority of the beneficial
interests in the VIE. In addition, the interpretation expands disclosure
requirements for both variable interest entities that are consolidated as well
as VIEs from which the entity is the holder of a significant amount of the
beneficial interests, but not the majority. The disclosure requirements of this
interpretation are effective for all financial statements issued after January
31, 2003. The consolidation requirements of this interpretation are effective
for all periods beginning after June 15, 2003. Corning has leased equipment from
three unconsolidated special purpose entities whose sole purpose is the leasing
of equipment to Corning. Management has assessed the impact of this
interpretation and determined that Corning will be considered the primary
beneficiary of one existing special purpose entity and therefore would need to
consolidate this entity beginning on July 1, 2003. The assets and debt of this
entity at June 30, 2003, approximates $32 million and $34 million, respectively.
Corning has also evaluated the impacts of this interpretation on two other
entities and determined that Corning is not the primary beneficiary for both
entities. The assets and debt of these entities total $12 million. The adoption
of this accounting standard will not have a material effect on Corning's results
of operations or financial position.
The FASB also recently issued the following pronouncements:
SFAS No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and
Hedging Activities"
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity"
The adoption of these accounting standards will not have a material effect on
Corning's results of operations or financial position.
2. Restructuring, Impairment and Other Charges and Credits
First Quarter
-------------
In the first quarter of 2003, Corning recorded charges for the shut-down of the
conventional video components business and the optical switching product line
which were announced on April 15, 2003 and February 13, 2003, respectively.
Corning also recorded credits related to prior years' restructuring and
impairment charges discussed below.
Conventional video components business
Corning Asahi Video Products Company (conventional video components business, or
CAV), a 51% owned consolidated subsidiary, is a manufacturer of glass panels and
funnels for use in conventional tube televisions and is reported in the
Technologies segment. In the fourth quarter of 2002, Corning impaired certain
assets of this business and indicated that it could be required to record
additional impairment charges, or that it could choose to exit the business if
performance differed from expectations. During the first quarter, operating
results and cash flows were less than expected and certain customers
significantly reduced forecasted orders for the year.
On April 15, 2003, Corning announced that it had agreed with its partner to
cease production. Corning impaired the long-lived assets of this business to
estimated salvage value and recorded a charge of $62 million ($19 million
after-tax and minority interest). In connection with the cessation of
operations, the partners have reached agreement on the shared funding of CAV's
obligations. Corning expects the restructuring costs to require $45 million to
$60 million in cash spending. As the business winds down, Corning will assess
whether the disposal of this business qualifies for discontinued operations
treatment under SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
Optical Switching
Corning recorded a charge of $17 million ($11 million after-tax) associated with
the discontinuance of the optical switching product line in the photonic
technologies business due to the downturn in the telecommunications industry.
The charge included $13 million for employee separation costs and $4 million for
asset impairments related to equipment.
Impairment of Cost Investments
In the first quarter, Corning recorded a $5 million ($3 million after-tax)
charge for other than temporary declines in certain cost investments in the
Telecommunications segment.
Credits
The current restructuring reserve continues to be evaluated as plans are being
executed. In addition, since the restructuring program is an aggregation of many
individual plans currently being executed, actual costs have differed from
estimated amounts. As a result, there may be additional charges or reversals.
During the first quarter, Corning reversed $33 million ($21 million after-tax)
related to revised cost estimates of existing restructuring plans of which $24
million related to employee separation and exit costs which were less than
estimated, while $9 million related to proceeds in excess of assumed salvage
values for assets that were previously impaired.
Second Quarter
--------------
In the second quarter of 2003, Corning recorded restructuring, impairment and
other charges of $125 million ($62 million after-tax and minority interest),
offset by credits related to prior years' restructuring charges of $76 million
($59 million after-tax) resulting in a net pre-tax charge of $49 million ($3
million after-tax and minority interest). These charges primarily relate to the
exit of the conventional video components business and the photonic technologies
business. The charges also reflect certain restructuring actions taken during
the second quarter of 2003 relating to Corning's other businesses. A summary of
these charges and credits follow:
Conventional Video Components
In the second quarter of 2003, Corning recorded a restructuring charge of $54
million ($15 million after-tax and minority interest). The charge included $18
million for employee separation costs, $19 million for exit costs and $17
million for curtailments related to pension and postretirement health care
benefits.
In June, CAV announced that it had signed a definitive agreement to sell
tangible assets to Henan Anyang CPT Glass Bulb Group, Electronic Glass Co.,
Ltd., located in China. The proceeds from this sale may offset a significant
portion of the cash spending on restructuring. The sale is expected to be
completed in the second half of 2003 at which time Corning anticipates
recognizing a gain of approximately $40 million ($13 million after-tax and
minority interest).
Photonic Technologies
On May 12, 2003, Corning entered into an agreement to sell a significant portion
of its photonic technologies business to Avanex Corporation ("Avanex") in
exchange for Avanex common stock. In connection with this transaction, Avanex
will also acquire Alcatel Optronics and combine its existing business with the
two acquisitions to strengthen its position as a market-leading photonics
provider. When this transaction is completed, Corning will own 17% of Avanex's
common stock and account for this investment under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," as available-for-sale.
Avanex will acquire specifically identified inventories and equipment at the
Erwin Park, NY and Milan, Italy locations. Corning will pay Avanex $20 million
plus an undetermined amount (not to exceed $14 million) for product warranty
liabilities upon closing of the transaction which is expected in the third
quarter. Based upon the Avanex closing stock price at June 30, 2003, the value
of stock to be received by Corning is $85 million. The net book value of the
assets to be sold to Avanex (including the $20 million of cash to be contributed
to Avanex and a portion of the Telecommunications segment goodwill) approximates
$85 million. The ultimate value of Avanex stock received will be determined
using the Avanex closing stock price at the transaction closing date with any
resulting gain or loss being recorded at such time. See Note 14.
In the second quarter of 2003, Corning recorded a charge of $33 million ($22
million after-tax) related to the exit of the photonics business. The charge
included $7 million for employee separation costs, $14 million for exit costs,
$7 million for curtailments related to pension and postretirement benefits and
$5 million to impair the remaining assets.
Also in the second quarter, Corning increased the deferred tax valuation
allowance by $21 million as it does not expect to realize certain deferred tax
assets in Italy related to the photonics business. This charge is reflected in
the statement of operations under "Benefit for income taxes."
Finally, Corning impaired $7 million of equity investments in this business that
will be abandoned as part of the exit from the business. This charge is
reflected in the statement of operations under, "Equity in earnings of
associated companies, net of impairments."
Other
Corning also recorded $38 million of restructuring and impairment charges
primarily related to the telecommunications businesses and administrative
staffs. The charge included $17 million for employee separation costs, $2
million for curtailments related to pension and postretirement benefits and $19
million for impairments for assets held for sale or abandonment.
Credits
The current restructuring reserve continues to be evaluated as plans are being
executed. In addition, since the restructuring program is an aggregation of many
individual plans currently being executed, actual costs have differed from
estimated amounts. As a result, there may be additional charges or reversals.
In the second quarter of 2003, Corning recorded a $76 million ($59 million
after-tax) credit related to prior years' restructuring and impairment charges,
primarily in the Telecommunications segment. The reversals included $27 million
related to employee separation costs which were less than estimated, $25 million
related to a decision to change the restructuring plans and not exit a small
cabling business and $24 million related to proceeds in excess of assumed
salvage values for assets that were previously impaired and certain assets
Corning decided to retain.
The following table illustrates the charges, credits and balances of the
restructuring reserves as of June 30, 2003 (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Six months Six months ended Remaining
ended June Reversals Net June 30, 2003 Cash reserve at
January 1, 30, 2003 to existing charges/ Non-cash payments June 30,
2003 charge plans (reversals) charges in 2003 2003
------------------------------------------------------------------------------------------------------------------------------------
Restructuring charges:
Employee related costs $ 273 $ 81 $ (49) $ 32 $ (27) $ (124) $ 154
Other charges 132 33 (15) 18 (19) 131
----------------------------------------------------------------------------------------
Total restructuring charges $ 405 $ 114 $ (64) $ 50 $ (27) $ (143) $ 285
----------------------------------------------------------------------------------------
Impairment of long-lived assets:
Assets to be held and used $ 62 $ 62
Assets to be disposed of by sale
or abandonment 28 $ (45) (17)
Cost investments 5 5
------------------------------------
Total impairment charges $ 95 $ (45) $ 50
------------------------------------
Total restructuring and impairment
charges and credits $ 209 $ (109) $ 100
Tax benefit and minority interest (114) 29 (85)
------------------------------------
Restructuring, impairment and other
charges and credits, net $ 95 $ (80) $ 15
------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Almost half of the remaining $285 million restructuring reserve is expected to
be paid by December 31, 2003. Cash payments for employee-related costs will be
substantially completed by mid-2004, while payments for exit activities will be
substantially completed by 2005.
The following table illustrates the headcount reduction amongst U.S. Hourly,
U.S. Salaried and Non-U.S. positions related to the 2003 plans:
--------------------------------------------------------------------------------
Headcount reduction
--------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
--------------------------------------------------------------------------------
Headcount reduction 950 600 150 1,700
======================================================
--------------------------------------------------------------------------------
As of June 30, 2003, approximately 6,600 of the 7,100 employees had been
separated under the 2002 plans and approximately 1,100 of the 1,700 employees
had been separated under the 2003 plans.
2002 Restructuring Actions
--------------------------
During the second quarter of 2002, Corning undertook actions to reduce its
costs, primarily relating to the Telecommunications segment. The intent to do so
was announced in April 2002.
The following table illustrates the charges, credits and balances of the
restructuring reserves as of June 30, 2002:
(In millions)
------------------------------------------------------------------------------------------------------------------------------------
Remaining
Net Cash reserve
January 1, charges/ Non-cash payments June 30,
2002 reversals charges in 2002 2002
------------------------------------------------------------------------------------------------------------------------------------
Restructuring charges:
Employee related costs $ 198 $ 187 (a) $ (30) $ (105) $ 250
Other charges 78 12 (11) 79
----------------------------------------------------------------------
Total restructuring charges $ 276 $ 199 $ (30) $ (116) $ 329
----------------------------------------------------------------------
Impairment of long-lived assets:
Assets held for disposal $ 235 (b) $ 235
Cost investments 60 60
------------------------
Total impairment charges $ 295 $ 295
------------------------
Total restructuring and impairment
charges and credits $ 494
Tax benefit 166
---------
Restructuring, impairment and other
charges and credits, net $ 328
=========
(a) Amount is net of $5 million adjustment in employee related costs reflecting
the difference between estimated and actual costs.
(b) Amount is net of $5 million adjustment to assumed salvage values on asset
disposals.
In addition, equity earnings included a $14 million charge to impair an
investment in an international cabling venture.
Restructuring Charges
---------------------
The $192 million of employee related costs entailed the elimination of
approximately 3,600 positions in the Telecommunications segment and
corporate research and administrative staffs organizations, of which 1,600
employees were separated at June 30, 2002.
Impairment of Plant and Equipment
---------------------------------
Corning recorded $224 million to impair plant and equipment related to
facilities to be shutdown or disposed, primarily in the fiber and cable
business, the photonic technologies business and certain research
facilities. Of this total charge, $107 million pertained to construction
projects in the fiber and cable business abandoned in 2001, primarily in
Concord, NC and Oklahoma City, OK. The impairment charges were determined
based on the amount by which the carrying value exceeded the fair market
value of the asset.
Loss on Divestiture
-------------------
In May 2002, Corning completed the sale of its appliance controls group
which was included in the controls and connectors business in the
Telecommunications segment. In 2002, Corning received cash of $30 million
and recorded a loss on the sale of approximately $16 million ($10 million
after-tax).
Impairment of Cost Investments
------------------------------
In the second quarter, Corning recorded a $60 million charge for other than
temporary declines in certain cost investments in the Telecommunications
segment. These investments were written off.
3. Asbestos Settlement
On March 28, 2003, Corning announced that it had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future non-premises asbestos claims against Corning and Pittsburgh Corning
Corporation (PCC), which might arise from PCC products or operations.
The agreement is expected to be incorporated into a settlement fund as part of a
reorganization plan for PCC. The plan will be submitted to the federal
bankruptcy court in Pittsburgh for approval, and is subject to a favorable vote
by 75 percent of the asbestos claimants voting on the PCC reorganization plan.
Corning will make its contributions to the settlement trust under the agreement
after the plan is approved and no longer subject to appeal. The approval process
could take one year or longer.
Corning's settlement will require the contribution, when the plan becomes
effective, of Corning's equity interest in PCC, its one-half equity interest in
Pittsburgh Corning Europe N.V. (PCE), a Belgian corporation, 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, thus resulting in
adjustments to income and the settlement liability as appropriate. Corning will
also make cash payments with a current value of $133 million over six years
beginning in June 2005. In addition, Corning will assign insurance policy
proceeds from its primary insurance and a portion of its excess insurance as
part of the settlement. Corning recorded a charge of $298 million ($192 million
after-tax) in the first quarter. In the second quarter, Corning recorded an
additional $39 million charge ($24 million after-tax) to mark-to-market the
value of the common stock. The carrying value of Corning's stock in PCE and the
fair value as of June 30, 2003, of 25 million shares of Corning common stock
have been reflected in current liabilities. The remaining $133 million,
representing the net present value of the cash payments, discounted at 5.5%, is
recorded in noncurrent liabilities. See Part II-Other Information, Item 1, Legal
Proceedings for a history of this matter.
4. Gain on Repurchases of Debt, Net
In June 2003, Corning repurchased and retired 834,000 zero coupon convertible
debentures with an accreted value of $652 million for cash of $623 million in a
modified Dutch tender offer. Corning recorded a gain of $13 million ($8 million
after-tax) net of the write-off of the unamortized issuance costs and deal costs
in the second quarter.
During the first quarter of 2003, Corning repurchased and retired 298,500 zero
coupon convertible debentures with an accreted value of $231 million in exchange
for cash of $189 million in a series of open-market repurchases. Corning
recorded a gain of $38 million on these transactions, net of the write-off of
the unamortized issuance costs. Also in the first quarter, Corning issued 6.5
million shares of common stock from treasury in exchange for 55,000 zero coupon
convertible debentures with an accreted value of $43 million. In accordance with
SFAS No. 84, "Induced Conversions of Convertible Debt," Corning recognized a
charge of $34 million reflecting the fair value of the incremental shares issued
beyond those required by the terms of the debentures. The increase in equity due
to the issuance of shares from treasury stock was $77 million. In total, Corning
recorded a net gain of $4 million ($3 million after-tax) associated with
retirements of its zero coupon convertible debentures in the first quarter.
The balance of zero coupon convertible debentures remaining as of June 30, 2003,
was 886,044 debentures with an accreted value of $693 million. See Note 14.
5. Discontinued Operations
Summarized selected financial information for the discontinued operations
related to the precision lens business was as follows (in millions):
--------------------------------------------------------------------------------
For the three months ended For the six months ended
June 30, 2002 June 30, 2002
--------------------------------------------------------------------------------
Net sales $ 69 $ 128
========= =========
Income before taxes $ 27 $ 43
Provision for income taxes 6 14
--------- ---------
Net income $ 21 $ 29
========= =========
--------------------------------------------------------------------------------
6. Inventories
Inventories shown on the accompanying balance sheets were comprised of the
following (in millions):
--------------------------------------------------------------------------------
June 30, December 31,
2003 2002
--------------------------------------------------------------------------------
Finished goods $ 170 $ 212
Work in process 131 115
Raw materials and accessories 145 135
Supplies and packing materials 92 97
--------------------------------------------------------------------------------
Total inventories $ 538 $ 559
--------------------------------------------------------------------------------
7. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30,
2003, were as follows (in millions):
--------------------------------------------------------------------------------
Telecom-
munications Technologies Total
--------------------------------------------------------------------------------
Balance at January 1, 2003 $ 1,556 $ 159 $ 1,715
Foreign currency translation 30 30
Other 5 5
--------------------------------------------------------------------------------
Balance at June 30, 2003 $ 1,591 $ 159 $ 1,750
--------------------------------------------------------------------------------
Other intangible assets consisted of the following (in millions):
------------------------------------------------------------------------------------------------------------------------------------
June 30, 2003 December 31, 2002
-------------------------------------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Patents and trademarks $ 140 $ 48 $ 92 $ 138 $ 40 $ 98
Non-competition agreements 110 75 35 106 62 44
Other 4 1 3 5 2 3
----------------------------------- -----------------------------------
Total amortized intangible assets 254 124 130 249 104 145
----------------------------------- -----------------------------------
Other intangible assets:
Intangible pension assets 55 55 68 68
----------------------------------- -----------------------------------
Total $ 309 $ 124 $ 185 $ 317 $ 104 $ 213
------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets are primarily related to the Telecommunications
segment.
Amortization expense related to these intangible assets is expected to be in the
range of approximately $20 million to $35 million annually from 2003 to 2007.
8. Product Warranty Liability
Provisions for estimated expenses related to product warranties are made at the
time the products are sold using historical experience as a prediction of
expected settlements. Reserves are adjusted when experience indicates an
expected settlement will differ from initial estimates. Corning's reserve
relates primarily to its Telecommunications segment. Reserves for warranty items
are included in other accrued liabilities. A reconciliation of the changes in
the product warranty liability during the six months ended June 30, 2003, was as
follows (in millions):
--------------------------------------------------------------------------------
Balance at January 1, 2003 $ 64
Accruals 1
Adjustments to liability existing on January 1, 2003 (9)
Settlements made during 2003 (8)
Effect of foreign currency translation 2
------
Balance at June 30, 2003 $ 50
--------------------------------------------------------------------------------
9. Commitments and Contingencies
From time to time, Corning is subject to uncertainties and litigation and is not
always able to predict the outcome of these items with assurance. Various legal
actions, claims and proceedings are pending against Corning, including those
arising out of alleged product defects, shareholder matters, product warranties,
patents, asbestos and environmental matters. These issues are discussed in Part
II-Other Information, Item 1, Legal Proceedings of this Form 10-Q.
At June 30, 2003, Corning's commitments and contingencies decreased
approximately $83 million to $452 million from those disclosed at December 31,
2002, in Corning's 2002 Form 10-K filed February 20, 2003.
10. Shareholders' Equity
On April 28, 2003, Corning announced an equity offering of 50 million shares of
common stock generating net proceeds to Corning of approximately $267 million.
Corning used the net proceeds of this offering and approximately $356 million of
existing cash to reduce debt through a tender offer in the second quarter of
2003 as discussed in Notes 4 and 14.
11. Comprehensive Loss
Comprehensive loss, net of tax, was as follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the three months For the six months
ended June 30, ended June 30,
---------------------------- ---------------------------
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Net loss $ (22) $ (370) $ (227) $ (460)
Other comprehensive (loss) income (9) 110 28 85
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss $ (31) $ (260) $ (199) $ (375)
------------------------------------------------------------------------------------------------------------------------------------
12. Loss Per Common Share
Basic and diluted loss per common share was calculated by dividing net loss
attributable to common shareholders by the weighted average number of common
shares outstanding during the period.
The potential common shares excluded from the calculation of diluted loss per
common share because their effect would be anti-dilutive and the amount of stock
options excluded from the calculation of diluted loss per common share because
their exercise price was greater than the average market price of the common
shares of the periods presented was as follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the three months For the six months
ended June 30, ended June 30,
---------------------- --------------------
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Potential common shares excluded from the calculation
of diluted loss per common share:
Stock options 15 12
7% mandatory convertible preferred stock 77 77
Convertible preferred stock 1 1
4.875% convertible notes 6 6 6 6
3.5% convertible debentures 69 69 69 69
Zero coupon convertible debentures 11 21 12 21
--------------------------------------------------
Total 178 97 176 97
==================================================
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 91 86 90 79
==================================================
------------------------------------------------------------------------------------------------------------------------------------
13. Operating Segments
Corning's reportable operating segments consist of Telecommunications and
Technologies. Corning includes the earnings of equity affiliates that are
closely associated with Corning's operating segments in segment results.
Corning prepared the financial results for its operating segments on a basis
that is consistent with the manner in which Corning management internally
disaggregates financial information to assist in making internal operating
decisions. Corning has allocated certain common expenses among segments
differently than it would for stand-alone financial information prepared in
accordance with GAAP. These expenses include interest, taxes and corporate
functions. This method of preparation may not be consistent with methods used by
other companies. The accounting policies of Corning's operating segments are the
same as those applied in the consolidated financial statements.
Telecom- Non-segment/ Consolidated
munications Technologies Other items Total
----------- ------------ ------------ ------------
For the three months ended June 30, 2003
Net sales $ 347 $ 400 $ 5 $ 752
Research, development and engineering expenses (1) $ 32 $ 55 $ (2) $ 85
Restructuring, impairment and other charges and credits (2) $ (19) $ 58 $ 10 $ 49
Interest expense (3) $ 22 $ 20 $ 42
Benefit for income taxes (4) $ (5) $ (8) $ (21) $ (34)
Loss before minority interests and equity (losses)
earnings (5)(6) $ (53) $ (43) $ (19) $ (115)
Minority interests (7) 33 33
Equity in (losses) earnings of associated companies (8) (8) 43 25 60
-------- -------- ------- --------
Net (loss) income $ (61) $ 33 $ 6 $ (22)
======== ======== ======= ========
For the three months ended June 30, 2002
Net sales $ 437 $ 385 $ 5 $ 827
Research, development and engineering expenses (1) $ 86 $ 45 $ 131
Restructuring, impairment and other charges and credits (2) $ 369 $ 3 $ 122 $ 494
Interest expense (3) $ 25 $ 17 $ 2 $ 44
(Benefit) provision for income taxes $ (191) $ 5 $ 2 $ (184)
Loss before minority interests and equity
(losses) earnings (5)(6) $ (384) $ (4) $ (34) $ (422)
Minority interests 5 1 6
Equity in (losses) earnings of associated companies (8) (17) 41 1 25
Income from discontinued operations 21 21
-------- -------- ------- --------
Net (loss) income $ (401) $ 42 $ (11) $ (370)
======== ======== ======= ========
For the six months ended June 30, 2003
Net sales $ 699 $ 788 $ 11 $ 1,498
Research, development and engineering expenses (1) $ 70 $ 110 $ (2) $ 178
Restructuring, impairment and other charges and credits (2) $ (28) $ 118 $ 10 $ 100
Interest expense (3) $ 43 $ 39 $ 82
Benefit for income taxes (4) $ (30) $ (15) $ (133) $ (178)
Loss before minority interests and equity (losses)
earnings (5)(6) $ (113) $ (98) $ (205) $ (416)
Minority interests (7) 70 70
Equity in (losses) earnings of associated companies (8) (11) 87 43 119
-------- -------- ------- --------
Net (loss) income $ (124) $ 59 $ (162) $ (227)
======== ======== ======= ========
For the six months ended June 30, 2002
Net sales $ 902 $ 754 $ 10 $ 1,666
Research, development and engineering expenses (1) $ 172 $ 85 $ 257
Restructuring, impairment and other charges and credits (2) $ 369 $ 3 $ 122 $ 494
Interest expense (3) $ 57 $ 33 $ 2 $ 92
(Benefit) provision for income taxes $ (255) $ 4 $ 17 $ (234)
Loss before minority interests and equity
(losses) earnings (5)(6) $ (522) $ (8) $ (26) $ (556)
Minority interests 11 1 12
Equity in (losses) earnings of associated companies (8) (21) 74 2 55
Income from discontinued operations 29 29
-------- -------- ------- --------
Net (loss) income $ (543) $ 77 $ 6 $ (460)
======== ======== ======= ========
(1) Non-direct research, development and engineering expenses are allocated
based upon direct project spending for each segment.
(2) Related tax benefit (expense):
Three months ended June 30, 2003: $2, $12, $4 and $18.
Three months ended June 30, 2002: $125, $1, $40 and $166.
Six months ended June 30, 2003: $(2), $24, $4 and $26.
Six months ended June 30, 2002: $125, $1, $40 and $166.
(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) Benefit for income taxes related to the Telecommunications segment in 2003
includes an increase to the deferred tax asset valuation allowance of
approximately $21 million.
(5) Many of Corning's administrative and staff functions are performed on a
centralized basis. Where practicable, Corning charges these expenses to
segments based upon the extent to which each business uses a centralized
function. Other staff functions, such as corporate finance, human resources
and legal are allocated to segments, primarily as a percentage of sales.
(6) Includes an allocation of depreciation of corporate property, plant and
equipment not specifically identifiable to a segment. Related depreciable
assets are not allocated to segment assets.
(7) Includes $28 million and $59 million for the three and six months of 2003,
respectively, related to impairments of CAV.
(8) Includes $7 million for the three and six months of 2003 to impair equity
investments in Telecommunications.
Includes $14 million for the three and six months of 2002 to impair equity
investments in Telecommunications.
Non-segment/other items net income (loss) is detailed below:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- -------- --------- ---------
Non-segment (loss) income and other (1) $ (13) $ 12 $ (25) $ 21
Non-segment restructuring, impairment and other charges (10) (122) (10) (122)
Interest income 9 10 17 24
Asbestos settlement (39) (337)
Gain on repurchases of debt, net 13 68 17 68
Benefit (provision) for income taxes 21 (2) 133 (17)
Minority interests 1 1
Equity in earnings of associated companies (2) 25 1 43 2
Income from discontinued operations 21 29
--------- -------- --------- ---------
Net income (loss) $ 6 $ (11) $ (162) $ 6
========= ======== ========= =========
(1) Includes non-segment operations and other corporate activities.
(2) Includes amounts derived from corporate investments and activities,
primarily Dow Corning Corporation in 2003.
14. Subsequent Events
In July and August 2003, Corning repurchased and retired or reached an agreement
to repurchase and retire 246,000 zero coupon convertible debentures with an
accreted value of $192 million for cash of $187 million. In addition, Corning
repurchased and retired 60,000 euro notes with a book value of 60 million euros
for cash of 63 million euros (including accrued interest), or $70 million. The
respective gains and losses from these transactions will effectively net to a
gain under $1 million. The balance of zero coupon convertible debentures
expected to remain when these transactions are completed in mid August will be
640,044 with a book value of $501 million.
In July 2003, Corning completed an equity offering of 45 million shares of
common stock generating net proceeds to Corning of approximately $363 million.
Corning expects to use the net proceeds of this offering to reduce debt through
open market repurchases, public tender offers or other methods, and for general
corporate purposes. Corning will invest the net proceeds in short-term, interest
bearing, investment grade obligations until they are applied as described.
On July 31, 2003, Corning completed the sale of certain assets from the photonic
technologies business to Avanex in exchange for 21 million shares of Avanex
common stock. Corning also paid Avanex $20 million in cash. Corning does not
expect this transaction to have a significant impact on its results for the
third quarter of 2003. See Note 2.
ITEM 2.
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
The following management's discussion and analysis of financial condition and
results of operations (MDA) should be read in conjunction with the MDA included
in our Annual Report on Form 10-K for the year ended December 31, 2002.
Overview
In the second quarter of 2003, our Telecommunications segment continued to be
depressed as major carriers continued to withhold capital spending and, as
expected, sales to Japan and China declined from the first quarter. At the same
time, our Technologies segment exhibited modest growth as strong gains in the
liquid crystal display and ceramics substrate businesses were offset by
extremely soft demand for high-purity fused silica products and the shut-down of
the conventional video components business.
We announced our decision to exit our photonic technologies business through an
agreement to sell a significant portion of the business. The transaction closed
on July 31, 2003. We recorded total second quarter charges of $33 million ($22
million after-tax) to exit this business. In addition, we recorded charges of
$54 million ($15 million after-tax and minority interest) related to the closing
of our conventional video components business. We also incurred $38 million ($25
million after-tax) of restructuring and impairment charges for several other
businesses and recorded credits of $76 million ($59 million after-tax) for
revisions to prior years' restructuring and impairment charges. A net
restructuring and impairment charge of $49 million ($3 million after-tax and
minority interest) combined with a $39 million ($24 million after-tax)
mark-to-market adjustment related to our asbestos settlement regarding
Pittsburgh Corning Corporation (PCC) led to a net loss of $22 million for the
second quarter.
We also strengthened our balance sheet in the second quarter by repurchasing and
retiring a significant portion of our zero coupon convertible debentures through
a tender offer in June. Additionally, we completed several open market
repurchases of zero coupon convertible debentures and euro notes in July and
August.
RESULTS OF CONTINUING OPERATIONS
Selected highlights from our results of continuing operations for the second
quarter and six months were as follows (in millions, except per share amounts
and percentages):
------------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 752 $ 827 $ 1,498 $ 1,666
Gross margin $ 181 $ 184 $ 381 $ 368
(gross margin %) 24% 22% 25% 22%
Selling, general and administrative expenses $ 148 $ 188 $ 300 $ 376
(as a % of net sales) 20% 23% 20% 23%
Research, development and engineering expenses $ 85 $ 131 $ 178 $ 257
(as a % of net sales) 11% 16% 12% 15%
Restructuring, impairment and other charges
and credits $ 49 $ 494 $ 100 $ 494
(as a % of net sales) 7% 60% 7% 30%
Operating loss $ (110) $ (640) $ (215) $ (781)
(as a % of net sales) (15)% (77)% (14)% (47)%
Asbestos settlement $ (39) $ (337)
(as of % of net sales) (5)% (23)%
Loss from continuing operations $ (22) $ (391) $ (227) $ (489)
(as a % of net sales) (3)% (47)% (15)% (29)%
------------------------------------------------------------------------------------------------------------------------------------
Net sales
Consolidated net sales for the second quarter of 2003 decreased 9%, or $75
million, from sales reported in the prior year quarter. Net sales for the
six-month period ended June 30, 2003, decreased 10%, or $168 million, compared
to the prior year period. The sales decrease for both periods was most
pronounced in the Telecommunications segment where significantly lower demand in
most businesses and price declines for our optical fiber and cable products
drove a sales decline in that segment of 21%, or $90 million, compared to the
prior year quarter and a decline of 23%, or $203 million, compared to the prior
year six-month period. Sales in the Technologies segment for the second quarter
of 2003 increased 4%, or $15 million, compared to the second quarter of 2002,
while net sales for the six months ended June 30, 2003, increased 5%, or $34
million, compared to the prior year period. The increase for both periods was
primarily due to strong demand for liquid crystal display glass and our ceramic
substrate products, partially offset by extremely weak demand for high-purity
fused silica and conventional television funnels.
Gross margin
As a percentage of net sales, gross margin improved 2 points in the second
quarter of 2003 to 24%, compared to the prior year quarter and improved 3 points
in the six months ended June 30, 2003, to 25%, compared to the prior year
period. The improvement in both periods was primarily due to lower depreciation
and other fixed costs due to the restructuring actions taken primarily in the
Telecommunications segment in 2002. Gross margin in the Telecommunications
segment improved 4 points over both the prior year quarter and six-month period
despite downward pricing pressure that continued to negatively impact gross
margins, primarily in the optical fiber and cable business. Gross margin in the
Technologies segment decreased approximately 1 point from the second quarter of
2002 as strong gains in display technologies and environmental technologies were
more than offset by weak performance in the semiconductor business and the
conventional video components business which recorded a $9 million write-down of
inventory. Gross margin in the Technologies segment improved 2 points over the
six-month period of 2002. Improvements in the display technologies business and
the environmental technologies business were partially offset by the write-down
of inventory in the conventional video components business and weak performance
in the semiconductor business.
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses decreased 21%, or $40
million, in the second quarter of 2003, compared to the prior year quarter,
while SG&A as a percentage of net sales improved 3 points, compared with the
second quarter of 2002. SG&A expenses decreased 20%, or $76 million, for the six
months ended June 30, 2003, compared to the prior year period, while SG&A as a
percentage of net sales improved 3 points, compared to the prior year period.
The decrease in SG&A for the quarter and six months reflected the cost savings
which resulted from the restructuring actions that began in 2001.
Research, development and engineering
Research, development and engineering (RD&E) expenses decreased 35%, or $46
million, in the second quarter of 2003, compared to the prior year quarter,
while RD&E as a percentage of net sales, decreased 5 points compared with the
second quarter of 2002. RD&E expenses decreased 31%, or $79 million, for the six
months ended June 30, 2003, compared to the prior year period while RD&E as a
percentage of net sales improved 3 points, compared to the prior year period.
The decrease in RD&E for the quarter and six months reflected the cost savings
which resulted from the restructuring actions that began in 2001.
Restructuring, impairment and other charges and credits
First Quarter
-------------
In the first quarter of 2003, we recorded charges for the shut-down of our
conventional video components business and our optical switching product line
which were announced on April 15, 2003 and February 13, 2003, respectively. We
also recorded credits related to prior years' restructuring and impairment
charges discussed below. See Note 2 to the consolidated financial statements.
Conventional video components business
Corning Asahi Video Products Company (conventional video components business, or
CAV), a 51% owned consolidated subsidiary, is a manufacturer of glass panels and
funnels for use in conventional tube televisions and is reported in the
Technologies segment. In the fourth quarter of 2002, we impaired certain assets
of this business and indicated that we could be required to record additional
impairment charges, or that we could choose to exit the business if performance
differed from expectations. During the first quarter, operating results and cash
flows were less than expected and certain customers significantly reduced
forecasted orders for the year.
On April 15, 2003, we announced that we had agreed with our partner to cease
production. We impaired the long-lived assets of this business to estimated
salvage value and recorded a charge of $62 million ($19 million after-tax and
minority interest). In connection with the cessation of operations, the partners
have reached agreement on the shared funding of CAV's obligations. We expect the
restructuring costs to require $45 million to $60 million in cash spending. As
the business winds down, we will assess whether the disposal of this business
qualifies for discontinued operations treatment under Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets."
Optical Switching
We recorded a charge of $17 million ($11 million after-tax) associated with the
discontinuance of the optical switching product line in the photonic
technologies business due to the downturn in the telecommunications industry.
The charge included $13 million for employee separation costs and $4 million for
asset impairments related to equipment.
Impairment of Cost Investments
In the first quarter, we recorded a $5 million ($3 million after-tax) charge for
other than temporary declines in certain cost investments in the
Telecommunications segment.
Credits
The current restructuring reserve continues to be evaluated as plans are being
executed. In addition, since the restructuring program is an aggregation of many
individual plans currently being executed, actual costs have differed from
estimated amounts. As a result, there may be additional charges or reversals.
During the first quarter, we reversed $33 million ($21 million after-tax)
related to revised cost estimates of existing restructuring plans of which $24
million related to employee separation and exit costs which were less than
estimated, while $9 million related to proceeds in excess of assumed salvage
values for assets that were previously impaired.
Second Quarter
--------------
In the second quarter of 2003, we recorded restructuring, impairment and other
charges of $125 million ($62 million after-tax and minority interest), offset by
credits related to prior years' restructuring charges of $76 million ($59
million after-tax) resulting in a net pre-tax charge of $49 million ($3 million
after-tax and minority interest). These charges primarily relate to our exit of
the conventional video components business and the photonic technologies
business. The charges also reflect certain restructuring actions taken during
the second quarter of 2003 relating to our other businesses. A summary of these
charges and credits follow:
Conventional Video Components
In the second quarter of 2003, we recorded a restructuring charge of $54 million
($15 million after-tax and minority interest). The charge included $18 million
for employee separation costs, $19 million for exit costs and $17 million for
curtailments related to pension and postretirement health care benefits.
In June, CAV announced that it had signed a definitive agreement to sell
tangible assets to Henan Anyang CPT Glass Bulb Group, Electronic Glass Co.,
Ltd., located in China. The proceeds from this sale may offset a significant
portion of the cash spending on restructuring. The sale is expected to be
completed in the second half of 2003 at which time we anticipate recognizing a
gain of approximately $40 million ($13 million after-tax and minority interest).
Photonic Technologies
On May 12, 2003, we entered into an agreement with Avanex Corporation ("Avanex")
to sell certain assets related to our photonic technologies business in exchange
for 21 million shares of Avanex common stock. On July 31, 2003, we completed
this sale. Specifically, Avanex acquired inventories and equipment at our Erwin
Park, NY and Milan, Italy locations. We also paid Avanex $20 million in cash.
Based upon the Avanex closing stock price at July 31, 2003, the value of stock
we received approximated $85 million. The net book value of the assets sold to
Avanex (including the $20 million of cash contributed to Avanex and a portion of
the Telecommunications segment goodwill) approximates $85 million. We do not
expect this transaction to have a significant impact on our results for the
third quarter of 2003. See Notes 2 and 14 to the consolidated financial
statements.
In the second quarter of 2003, we recorded a charge of $33 million ($22 million
after-tax) related to the exit of the photonics business. The charge included $7
million for employee separation costs, $14 million for exit costs, $7 million
for curtailments related to pension and postretirement benefits and $5 million
to impair the remaining assets.
Also in the second quarter, we increased the deferred tax valuation allowance by
$21 million as we do not expect to realize certain deferred tax assets in Italy
related to the photonics business. This charge is reflected in the statement of
operations under "Benefit for income taxes."
Finally, we impaired $7 million of equity investments in this business that will
be abandoned as part of the exit from the business. This charge is reflected in
the statement of operations under, "Equity in earnings of associated companies,
net of impairments."
Other
We also recorded $38 million of restructuring and impairment charges primarily
related to the telecommunications businesses and administrative staffs. The
charge included $17 million for employee separation costs, $2 million for
curtailments related to pension and postretirement benefits and $19 million for
impairments of assets held for sale or abandonment.
Credits
The current restructuring reserve continues to be evaluated as plans are being
executed. In addition, since the restructuring program is an aggregation of many
individual plans currently being executed, actual costs have differed from
estimated amounts. As a result, there may be additional charges or reversals.
In the second quarter of 2003, we recorded a $76 million ($59 million after-tax)
credit related to prior years' restructuring and impairment charges, primarily
in the Telecommunications segment. The reversals included $27 million related to
employee separation costs which were less than estimated, $25 million related to
a decision to change the restructuring plans and not exit a small cabling
business and $24 million related to proceeds in excess of assumed salvage values
for assets that were previously impaired and certain assets we decided to
retain.
The following table illustrates the 2003 headcount reduction amongst U.S.
Hourly, U.S. Salaried and Non-U.S. positions related to the 2003 plans:
--------------------------------------------------------------------------------
Headcount reduction
--------------------------------------------------------------------------------
U.S. Hourly U.S. Salaried Non-U.S. Total
--------------------------------------------------------------------------------
Headcount reduction 950 600 150 1,700
=========================================================
--------------------------------------------------------------------------------
As of June 30, 2003, approximately 6,600 of the 7,100 employees had been
separated under the 2002 plans and approximately 1,100 of the 1,700 employees
had been separated under the 2003 plans.
Operating loss
We incurred an operating loss of $110 million in the second quarter of 2003,
compared to an operating loss of $640 million in the prior year quarter. The
decrease in the operating loss was primarily due to lower restructuring and
impairment charges, improvements in gross margin and lower SG&A and RD&E
expenses. As a percentage of net sales, the operating loss decreased 62 points
over the prior year quarter. For the six months ended June 30, 2003, our
operating loss decreased $566 million over the prior year period primarily due
to lower restructuring and impairment charges, improvements in gross margin and
lower SG&A and RD&E expenses. As a percentage of net sales, the operating loss
decreased 33 points over the prior year period.
Asbestos settlement
On March 28, 2003, we announced that we had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future non-premises asbestos claims against us and PCC, which might arise from
PCC products or operations.
The agreement is expected to be incorporated into a settlement fund as part of a
reorganization plan for PCC. The plan will be submitted to the federal
bankruptcy court in Pittsburgh for approval, and is subject to a favorable vote
by 75 percent of the asbestos claimants voting on the PCC reorganization plan.
We will make contributions to the settlement trust under the agreement after the
plan is approved and no longer subject to appeal. The approval process could
take one year or longer.
Our settlement will require the contribution, when the plan becomes effective,
of our equity interest in PCC, our one-half equity interest in Pittsburgh
Corning Europe N.V. (PCE), a Belgian corporation, and 25 million shares of our
common stock. The common stock will be marked-to-market each quarter until it is
contributed to the settlement trust, thus resulting in adjustments to income and
the settlement liability as appropriate. We will also make cash payments with a
current value of $133 million over six years beginning in June 2005. In
addition, we will assign insurance policy proceeds from our primary insurance
and a portion of the excess insurance as part of the settlement. We recorded a
charge of $298 million ($192 million after-tax) in the first quarter. In the
second quarter, we recorded an additional $39 million charge ($24 million
after-tax) to mark-to-market the value of our common stock. The carrying value
of our stock in PCE and the fair value as of June 30, 2003, of 25 million shares
of our common stock have been reflected in current liabilities. The remaining
$133 million, representing the net present value of the cash payments,
discounted at 5.5%, is recorded in noncurrent liabilities. See Part II-Other
Information, Item 1, Legal Proceedings for a history of this matter.
Gain on repurchases of debt, net
In June 2003, we repurchased and retired 834,000 zero coupon convertible
debentures with an accreted value of $652 million for cash of $623 million in a
modified Dutch tender offer. We recorded a gain of $13 million ($8 million
after-tax) net of the write-off of the unamortized issuance costs and deal costs
in the second quarter.
During the first quarter of 2003, we repurchased and retired 298,500 zero coupon
convertible debentures with an accreted value of $231 million in exchange for
cash of $189 million in a series of open-market repurchases. We recorded a gain
of $38 million on these transactions, net of the write-off of the unamortized
issuance costs. Also in the first quarter, we issued 6.5 million shares of
common stock from treasury in exchange for 55,000 zero coupon convertible
debentures with an accreted value of $43 million. In accordance with SFAS No.
84, "Induced Conversions of Convertible Debt," we recognized a charge of $34
million reflecting the fair value of the incremental shares issued beyond those
required by the terms of the debentures. The increase in equity due to the
issuance of shares from treasury stock was $77 million. In total, we recorded a
net gain of $4 million ($3 million after-tax) associated with retirements of our
zero coupon convertible debentures in the first quarter.
The balance of zero coupon convertible debentures remaining as of June 30, 2003,
was 886,044 debentures with an accreted value of $693 million. See Notes 4 and
14 to the consolidated financial statements.
Income taxes
Our benefit for income taxes and the related effective tax benefit rates for
continuing operations were as follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the three months For the six months
ended June 30, ended June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Benefit for income taxes $ (34) $ (184) $ (178) $ (234)
Effective tax benefit rate (22.8)% (30.4)% (30.0)% (29.6)%
------------------------------------------------------------------------------------------------------------------------------------
The effective tax benefit rate for the three and six months ended June 30, 2003,
was lower than the U.S. statutory income tax rate of 35% due to the impact of
restructuring, impairment and other charges, asbestos settlement and debt
transactions. We recorded $21 million to increase our foreign deferred tax
valuation allowance as we do not expect to realize a portion of our deferred tax
assets in Italy as a result of our exit from the photonic technologies business.
The effective tax benefit rate without consideration of these items was 37% and
33% for the three and six months ended June 30, 2003, respectively.
The effective tax benefit rate for the three and six months ended June 30, 2002,
was lower than the U.S. statutory income tax rate of 35% due to the impact of
unusable tax credits and nondeductible expenses and losses. The tax benefit rate
in the second quarter of 2002 was impacted by specific tax benefit calculations
for restructuring, impairment and other charges and the gain on repurchases of
debt. The effective tax benefit rate without consideration of these items was
24% for the three and six months ended June 30, 2002.
Equity earnings, net of impairments
Equity earnings more than doubled to $60 million in the second quarter of 2003,
compared to the prior year quarter, primarily due to the recognition of $25
million of equity earnings from Dow Corning in 2003 and a strong performance at
Samsung Corning Precision Glass Company Ltd. ("Samsung Corning Precision"), a
Korean manufacturer of liquid crystal display glass. We began recognizing equity
earnings from Dow Corning in the first quarter of 2003 since we concluded that
the emergence of Dow Corning from bankruptcy protection is probable based on the
Bankruptcy Court's findings on December 11, 2002. See Part II-Other Information,
Item 1, Legal Proceedings for a history of this matter. Equity earnings also
included a charge of $7 million related to the impairment of several equity
investments in the Telecommunications segment related to the exit of the
photonic technologies business.
Equity earnings more than doubled to $119 million for the six months ended June
30, 2003, compared to the prior year period primarily due to the recognition of
$42 million of equity earnings from Dow Corning and strong results at Samsung
Corning Precision.
Loss from continuing operations
As a result of the above, the loss from continuing operations and per share data
were as follows (in millions, except per share amounts):
------------------------------------------------------------------------------------------------------------------------------------
For the three months For the six months
ended June 30, ended June 30,
----------------------- ----------------------
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations $ (22) $ (391) $ (227) $ (489)
Basic and diluted loss per common share from
continuing operations $ (0.02) $ (0.41) $ (0.19) $ (0.52)
Shares used in computing basic and diluted per share amounts 1,244 948 1,222 947
------------------------------------------------------------------------------------------------------------------------------------
OPERATING SEGMENTS
Our reportable operating segments consist of Telecommunications and
Technologies. We include the earnings of equity affiliates that are closely
associated with our operating segments in segment results.
We prepared the financial results for the operating segments on a basis that is
consistent with the manner in which we internally disaggregate financial
information to assist in making internal operating decisions. We have allocated
certain common expenses among segments differently than we would for stand-alone
financial information prepared in accordance with accounting principles
generally accepted in the U.S. These expenses include interest, taxes and
corporate functions. This method of preparation may not be consistent with
methods used by other companies. The accounting policies of our operating
segments are the same as those applied in the consolidated financial statements.
Telecom- Non-segment/ Consolidated
munications Technologies Other items Total
----------- ------------ ------------ ------------
For the three months ended June 30, 2003
Net sales $ 347 $ 400 $ 5 $ 752
Research, development and engineering expenses (1) $ 32 $ 55 $ (2) $ 85
Restructuring, impairment and other charges and credits (2) $ (19) $ 58 $ 10 $ 49
Interest expense (3) $ 22 $ 20 $ 42
Benefit for income taxes (4) $ (5) $ (8) $ (21) $ (34)
Loss before minority interests and equity (losses)
earnings (5)(6) $ (53) $ (43) $ (19) $ (115)
Minority interests (7) 33 33
Equity in (losses) earnings of associated companies (8) (8) 43 25 60
-------- -------- ------- --------
Net (loss) income $ (61) $ 33 $ 6 $ (22)
======== ======== ======= ========
For the three months ended June 30, 2002
Net sales $ 437 $ 385 $ 5 $ 827
Research, development and engineering expenses (1) $ 86 $ 45 $ 131
Restructuring, impairment and other charges and credits (2) $ 369 $ 3 $ 122 $ 494
Interest expense (3) $ 25 $ 17 $ 2 $ 44
(Benefit) provision for income taxes $ (191) $ 5 $ 2 $ (184)
Loss before minority interests and equity
(losses) earnings (5)(6) $ (384) $ (4) $ (34) $ (422)
Minority interests 5 1 6
Equity in (losses) earnings of associated companies (8) (17) 41 1 25
Income from discontinued operations 21 21
-------- -------- ------- --------
Net (loss) income $ (401) $ 42 $ (11) $ (370)
======== ======== ======= ========
Telecom- Non-segment/ Consolidated
munications Technologies Other items Total
----------- ------------ ------------ ------------
For the six months ended June 30, 2003
Net sales $ 699 $ 788 $ 11 $ 1,498
Research, development and engineering expenses (1) $ 70 $ 110 $ (2) $ 178
Restructuring, impairment and other charges and credits (2) $ (28) $ 118 $ 10 $ 100
Interest expense (3) $ 43 $ 39 $ 82
Benefit for income taxes (4) $ (30) $ (15) $ (133) $ (178)
Loss before minority interests and equity (losses)
earnings (5)(6) $ (113) $ (98) $ (205) $ (416)
Minority interests (7) 70 70
Equity in (losses) earnings of associated companies (8) (11) 87 43 119
-------- -------- ------- --------
Net (loss) income $ (124) $ 59 $ (162) $ (227)
======== ======== ======= ========
For the six months ended June 30, 2002
Net sales $ 902 $ 754 $ 10 $ 1,666
Research, development and engineering expenses (1) $ 172 $ 85 $ 257
Restructuring, impairment and other charges and credits (2) $ 369 $ 3 $ 122 $ 494
Interest expense (3) $ 57 $ 33 $ 2 $ 92
(Benefit) provision for income taxes $ (255) $ 4 $ 17 $ (234)
Loss before minority interests and equity
(losses) earnings (5)(6) $ (522) $ (8) $ (26) $ (556)
Minority interests 11 1 12
Equity in (losses) earnings of associated companies (8) (21) 74 2 55
Income from discontinued operations 29 29
-------- -------- ------- --------
Net (loss) income $ (543) $ 77 $ 6 $ (460)
======== ======== ======= ========
(1) Non-direct research, development and engineering expenses are allocated
based upon direct project spending for each segment.
(2) Related tax benefit (expense):
Three months ended June 30, 2003: $2, $12, $4 and $18.
Three months ended June 30, 2002: $125, $1, $40 and $166.
Six months ended June 30, 2003: $(2), $24, $4 and $26.
Six months ended June 30, 2002: $125, $1, $40 and $166.
(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) Benefit for income taxes related to the Telecommunications segment in 2003
includes an increase to the deferred tax asset valuation allowance of
approximately $21 million.
(5) Many of Corning's administrative and staff functions are performed on a
centralized basis. Where practicable, Corning charges these expenses to
segments based upon the extent to which each business uses a centralized
function. Other staff functions, such as corporate finance, human resources
and legal are allocated to segments, primarily as a percentage of sales.
(6) Includes an allocation of depreciation of corporate property, plant and
equipment not specifically identifiable to a segment. Related depreciable
assets are not allocated to segment assets.
(7) Includes $28 million and $59 million for the three and six months of 2003,
respectively, related to impairments of CAV.
(8) Includes $7 million for the three and six months of 2003 to impair equity
investments in Telecommunications.
Includes $14 million for the three and six months of 2002 to impair equity
investments in Telecommunications.
Non-segment/other items net income (loss) is detailed below:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- -------- --------- ---------
Non-segment (loss) income and other (1) $ (13) $ 12 $ (25) $ 21
Non-segment restructuring, impairment and other charges (10) (122) (10) (122)
Interest income 9 10 17 24
Asbestos settlement (39) (337)
Gain on repurchases of debt, net 13 68 17 68
Benefit (provision) for income taxes 21 (2) 133 (17)
Minority interests 1 1
Equity in earnings of associated companies (2) 25 1 43 2
Income from discontinued operations 21 29
--------- -------- --------- ---------
Net income (loss) $ 6 $ (11) $ (162) $ 6
========= ======== ========= =========
(1) Includes non-segment operations and other corporate activities.
(2) Includes amounts derived from corporate investments and activities,
primarily Dow Corning Corporation in 2003.
Telecommunications
The Telecommunications segment produces optical fiber and cable, optical
hardware and equipment, photonic modules and components for the worldwide
telecommunications industry. In May 2003, we announced our plans to exit the
photonic technologies business. The following table provides net sales and other
data for the Telecommunications segment:
------------------------------------------------------------------------------------------------------------------------------------
Telecommunications Three months ended June 30, Six months ended June 30,
(In millions) 2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 178 $ 212 $ 371 $ 467
Hardware and equipment 136 153 258 288
Photonic technologies 15 39 33 75
Controls and connectors 18 33 37 72
--------- -------- --------- ---------
Total net sales $ 347 $ 437 $ 699 $ 902
========= ======== ========= =========
Segment loss before minority interests and
equity earnings as a percentage of segment sales (15.3)% (87.9)% (16.2)% (57.9)%
Segment net loss as a percentage of segment sales (17.6)% (91.8)% (17.7)% (60.2)%
------------------------------------------------------------------------------------------------------------------------------------
Sales in the segment declined 21%, or $90 million, from the second quarter of
2002 as each business in the segment experienced a decline in sales, with the
largest decline in the optical fiber and cable business of $34 million. For the
six months ended June 30, 2003, sales in the segment declined 23%, or $203
million, compared to the prior year period. All businesses in the segment
incurred a decline with the largest in the optical fiber and cable business of
$96 million. The segment incurred losses of $61 million in the second quarter of
2003, compared to a net loss of $401 million in the prior year quarter. The
second quarter 2003 loss was primarily due to the significant price declines in
optical fiber and the decrease in sales volume in most businesses, partially
offset by a net credit of $19 million related to restructuring. The segment
incurred restructuring and impairment charges of $56 million in the second
quarter that were offset by $75 million of reversals related to prior years'
restructuring and impairment charges. Each business also reported a loss in the
second quarter of 2003, however the losses were lower than those incurred in the
prior year quarter. The decrease in the loss over the prior year quarter was
primarily due to cost savings resulting from restructuring actions and much
lower restructuring and impairment charges, primarily in the fiber and cable and
hardware and equipment businesses, than those incurred in the prior year
quarter. For the six months ended June 30, 2003, the segment incurred a net loss
of $124 million compared to a net loss of $543 million in the prior year period,
primarily due to lower restructuring and impairment charges and cost
improvements.
In the second quarter of 2003, we recorded a $75 million credit related to prior
years' restructuring and impairment charges in the Telecommunications segment.
The adjustments included $26 million related to employee separation costs which
were less than estimated, $25 million related to a decision to change the
restructuring plans and not exit a small cabling business and $24 million
related to proceeds in excess of assumed salvage values for assets that were
previously impaired and assets we decided to retain.
In the first quarter of 2003, we recorded a $31 million credit related to prior
years' restructuring and impairment charges primarily to reflect favorable
settlements in both proceeds and timing of asset dispositions. These reserve
adjustments more than offset the $22 million of charges associated with the exit
of the optical switching product line and the impairment of certain cost
investments and resulted in a net credit of $9 million.
Telecommunications Businesses
The following discussion of businesses in the Telecommunications segment
excludes the restructuring and impairment charges and credits to provide clarity
on the underlying business trends.
Sales in the optical fiber and cable business declined 16%, or $34 million, for
the second quarter of 2003, compared to the prior year quarter. The decrease was
primarily due to price declines for fiber products which approximated 30%
compared to the prior year quarter partially offset by an overall 6% volume
increase for fiber and cable products. For the six months ended June 30, 2003,
sales in the optical fiber and cable business declined 21%, or $96 million,
compared to the prior year period. The decrease was primarily due to pricing
pressure, but was partially offset by strong demand in Japan and China,
particularly in the first quarter. Sales volume increased almost 20% for the
first six months of 2003 compared to the prior year period. The optical fiber
and cable business incurred a loss in the second quarter of 2003, however the
loss decreased over 40%, compared to the prior year period, as price declines
were more than offset by the cost reductions from 2002 restructuring actions.
The business also incurred a loss for the six months ended June 30, 2003, but
the loss decreased over 35% compared to the prior year period, primarily due to
cost savings from restructuring actions in 2002.
Sales in the hardware and equipment business decreased 11%, or $17 million, for
the second quarter of 2003, compared to the prior year quarter. For the six
months ended June 30, 2003, sales in this business decreased 10%, or $30 million
compared to the prior year period. The sales decreases for both periods were
primarily due to the overall lack of capital spending impacting the entire
telecommunications industry. The business incurred a loss for the second quarter
of 2003 driven by pricing pressure and lower volumes, however the loss decreased
70% over the loss incurred in the prior year quarter due to the 2002
restructuring actions. For the six months ended June 30, 2003, the business
incurred a loss due to pricing pressure and lower volumes, however the loss
decreased 40% over the prior year period due to cost savings from restructuring
actions.
Sales in the photonic technologies business declined 62%, or $24 million, for
the second quarter of 2003, compared to the prior year quarter. For the six
months ended June 30, 2003, sales decreased 56%, or $42 million, compared to the
prior year period. The sales declines in both periods were primarily due to
lower sales volume as network buildouts in the telecommunications industry
declined resulting in much lower demand for photonic products. The business
incurred a loss for the second quarter and first six months of 2003, primarily
due to dramatically lower sales volumes. However, the 2003 quarter and
year-to-date loss decreased more than 70% compared to the losses incurred in the
prior year periods. The results for the second quarter and six months of 2003
reflect cost savings resulting from restructuring actions taken in 2002.
On July 31, 2003, we completed the sale of a significant portion of the photonic
technologies business to Avanex in exchange for common stock valued at
approximately $85 million at closing. The agreement allows Avanex to acquire
assets related to the optical amplifier facility in Erwin, NY and the optical
component plant in Milan, Italy. As a result of this sale, approximately 400
employees of photonic technologies will transition to Avanex. We also expect to
close the pump laser facility in Bedford, MA by the end of the year. See Notes 2
and 14 to the consolidated financial statements.
Sales in the controls and connectors business decreased 45%, or $15 million, for
the second quarter of 2003, compared to the prior year quarter. For the six
months ended June 30, 2003, sales decreased 49%, or $35 million, compared to the
prior year period. The sales declines for both periods were primarily due to the
sale of the appliance controls group in May 2002 and the lack of capital
spending in the telecommunications industry. The business incurred a small loss
for the second quarter of 2003, however the loss decreased over 70% compared to
the prior year quarter. For the six months ended June 30, 2003, the business
incurred a loss, however the loss decreased over 90% compared to the prior year
period, primarily due to the restructuring actions taken in 2002.
A key customer of the Telecommunications segment is in the process of
negotiating a new collective bargaining agreement, which expires in August 2003.
Revenues in the second half of 2003 could be negatively affected if this
customer experiences a prolonged strike.
Technologies
The Technologies segment manufactures specialized products with unique
properties for customer applications utilizing glass, glass ceramic and polymer
technologies. Its primary products include liquid crystal display glass for flat
panel displays, ceramic substrates for automobile and diesel applications,
scientific laboratory products, high-purity fused silica and other advanced
materials used for the manufacture of integrated circuits and glass panels and
funnels for televisions and cathode ray tubes. In April 2003, we announced our
planned exit of the conventional video components business. As a result, we will
no longer manufacture glass panels and funnels.
The following table provides net sales and other data for the Technologies
segment:
------------------------------------------------------------------------------------------------------------------------------------
Technologies Three months ended June 30, Six months ended June 30,
(In millions) 2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Display technologies $ 135 $ 102 $ 252 $ 195
Environmental technologies 117 102 232 196
Life sciences 72 74 145 144
Conventional video components 24 41 49 84
Other technologies businesses 52 66 110 135
-------- --------- -------- ---------
Total net sales $ 400 $ 385 $ 788 $ 754
======== ========= ======== =========
Segment loss before minority interest and equity
earnings as a percentage of segment sales (10.8)% (1.0)% (12.4)% (1.1)%
Segment net income as a percentage of segment sales 8.3% 10.9% 7.5% 10.2%
------------------------------------------------------------------------------------------------------------------------------------
Sales in the Technologies segment increased 4%, or $15 million, for the second
quarter of 2003, compared to the prior year quarter. For the six months ended
June 30, 2003, sales increased 5%, or $34 million, compared to the prior year
period. Increased sales in display technologies and environmental technologies
were partially offset by much lower sales in the mature conventional video
components business, decreased demand for semiconductor materials, the impact of
our exit of the lighting products line in late 2002 and a flat performance at
life sciences. Segment earnings for the second quarter of 2003 decreased 21%, or
$9 million, compared to the prior year quarter. For the six months ended June
30, 2003, segment earnings decreased 23%, or $18 million, compared to the prior
year period. Improved operating performance in the second quarter for
environmental technologies, display technologies and the life sciences business
and stronger equity earnings were more than offset by the restructuring and
impairment charge of $54 million ($15 million after-tax and minority interest)
for the conventional video components business and decreased earnings in the
semiconductor materials business. The decrease in earnings for the six months
ended June 30, 2003, was primarily due to restructuring and impairment charges
of $116 million ($34 million after-tax and minority interest) for CAV and higher
spending on RD&E. See Restructuring, Impairment and Other Charges and Credits
and Note 2 to the consolidated financial statements.
Technologies Businesses
The following discussion of businesses in the Technologies segment excludes the
restructuring and impairment charges and credits to provide clarity on the
underlying business trends.
Sales in the display technologies business increased 32%, or $33 million, for
the second quarter of 2003, compared to the prior year quarter. For the six
months ended June 30, 2003, sales increased 29%, or $57 million, compared to the
prior year period. The increase for both periods was primarily due to higher
sales volume as penetration in the desktop market increased. Volume gains of
almost 40% and 30% for the quarter and six months, respectively, and favorable
yen exchange rates for both periods were partially offset by price declines of
5% and 6% for the quarter and six months, respectively. Earnings in the business
almost doubled for the second quarter of 2003 and increased over 65% for the
six-month period ended June 30, 2003, compared to the prior year periods. The
increased earnings were primarily due to volume gains and more than 60% and 50%
improvements in equity earnings from Samsung Corning Precision for the quarter
and year-to-date periods, respectively, over the prior year. The previously
announced expansions of manufacturing capacity in Taiwan and Korea are expected
to begin production in 2004.
In July 2003, we announced another expansion of our liquid crystal display
manufacturing facility in Taiwan for $180 million. The three-phased project is
expected to be completed by the end of 2004 with production to begin in the
second quarter of 2004.
Sales in the environmental technologies business increased 15%, or $15 million,
for the second quarter of 2003, compared to the prior year quarter. For the six
months ended June 30, 2003, sales increased 18%, or $36 million, compared to the
prior year period. The increased sales for both periods were primarily due to
increased U.S. auto production driven by financing incentives, strong growth in
Europe and Japan and higher sales for diesel products. Earnings in this business
decreased more than 50% and 20% for the second quarter and six months of 2003,
respectively, compared to the prior year periods, primarily due to a loss for
the current quarter and year-to-date at Cormetech, a U.S. designer and
manufacturer of industrial catalysts, and higher spending for the diesel product
line which more than offset increased sales volume, favorable mix, and
manufacturing efficiency gains.
Revenues in the second half of 2003 could be negatively affected if certain
domestic auto manufacturers experience a prolonged strike during the course of
the 2003 labor negotiations scheduled to begin in the third quarter.
Sales in the life sciences business decreased 3%, or $2 million, for the second
quarter of 2003, compared to the prior year quarter, primarily due to weak sales
in Europe. For the six months ended June 30, 2003, sales were relatively flat
compared to the prior year period as strong growth in most product lines was
offset by a soft market in Europe. Earnings in the business decreased more than
20%, compared to the prior year quarter, and were flat for the six months ended
June 30, 2003, compared to the prior year period, primarily due to improved
manufacturing efficiencies and a gain on the disposition of a minor product
line.
Sales in the conventional video components business decreased 41%, or $17
million, for the second quarter of 2003, compared to the prior year quarter. For
the six months ended June 30, 2003, sales decreased 42%, or $35 million,
compared to the prior year period. The sales declines are due to loss of volume,
price declines and our decision to exit the business. As discussed earlier, we
have ceased operations in this business in the second quarter of 2003. Excluding
the asset impairment charges, earnings decreased approximately 30% for the
second quarter of 2003, compared to the prior year period, primarily due to
decreased sales volume, continued competitive pricing pressures and lower equity
earnings. Samsung Corning Company Ltd. ("Samsung Corning"), a 50% owned
manufacturer of glass panels and funnels based in South Korea, reported an
approximate 25% decrease in equity earnings for the second quarter of 2003,
compared to the prior year quarter due to lower sales volumes and price
reductions. We are evaluating the situation at Samsung Corning to determine the
cause and duration of the sudden softness in demand as it may impact second half
results. For the six months ended June 30, 2003, equity earnings were flat
compared to the prior year period as were the overall earnings for this
business. As a result of our decision to exit the conventional video components
business, we will report the equity earnings of Samsung Corning separately
beginning in the third quarter.
Sales in our other technologies businesses decreased 21%, or $14 million, for
the second quarter of 2003, compared to the prior year quarter. For the six
months ended June 30, 2003, sales decreased 19%, or $25 million, compared to the
prior year period. The decrease for both periods was primarily due to the exit
of the lighting business in September 2002 and lower sales volume of high-purity
fused silica products in the semiconductor materials business as capital
spending in the semiconductor equipment industry remained at relatively low
levels as the industry continues to struggle. The losses in these businesses
more than tripled compared to the prior year quarter and six months. The losses
were primarily due to significantly lower sales volume and increased spending in
development and engineering for calcium fluoride products.
LIQUIDITY AND CAPITAL RESOURCES
Financing Structure
In July 2003, we completed an equity offering of 45 million shares of common
stock generating net proceeds to us of approximately $363 million. We will use
the net proceeds of this offering to reduce debt through open market
repurchases, public tender offers or other methods, and for general corporate
purposes. We will invest the net proceeds in short-term, interest bearing,
investment grade obligations until we apply them as described. See Note 14 to
the consolidated financial statements.
In July and August 2003, we repurchased and retired or reached an agreement to
repurchase and retire 246,000 zero coupon convertible debentures with an
accreted value of $192 million for cash of $187 million. In addition, we
repurchased and retired 60,000 euro notes with a book value of 60 million euros
for cash of 63 million euros (including accrued interest), or $70 million. The
respective gains and losses from these transactions will effectively net to a
gain under $1 million. The balance of zero coupon convertible debentures
expected to remain when these transactions are completed in mid August will be
640,044 with a book value of $501 million. See Note 14 to the consolidated
financial statements.
In June 2003, we repurchased and retired 834,000 zero coupon convertible
debentures with an accreted value of $652 million for cash of $623 million in a
modified Dutch tender offer. We recorded a gain of $13 million ($8 million
after-tax), net of the write-off of the unamortized issuance costs and deal
costs in the second quarter.
In May 2003, we completed an equity offering of 50 million shares of common
stock generating net proceeds to us of approximately $267 million. We used the
net proceeds of this offering and approximately $356 million of our existing
cash to reduce debt through a tender offer discussed above.
During the first quarter of 2003, we repurchased and retired 298,500 zero coupon
convertible debentures with an accreted value of $231 million in exchange for
cash of $189 million in a series of open-market repurchases. We recorded a gain
of $38 million on these transactions, net of the write-off of the unamortized
issuance costs. Also in the first quarter, we issued 6.5 million shares of
treasury common stock in exchange for 55,000 zero coupon convertible debentures
with an accreted value of $43 million. In accordance with SFAS No. 84, "Induced
Conversions of Convertible Debt," we recognized a charge of $34 million
reflecting the fair value of the incremental shares issued beyond those required
by the terms of the debentures. The increase in equity due to the issuance of
shares from treasury stock was $77 million. In total, we recorded a net gain of
$4 million ($3 million after-tax) associated with retirements of our zero coupon
convertible debentures in the first quarter.
The remaining debentures may be put back to us on November 8, 2005, at $819.54
per debenture and on November 8, 2010, at $905.29 per debenture. We have the
option of settling this obligation in cash, common stock, or a combination of
both. From time to time, we may repurchase for cash or equity certain additional
debt securities in open-market, privately negotiated or publicly tendered
transactions.
Due to our sub-investment grade rating, we continue to be precluded from
accessing the short-term commercial paper market and our access to the debt
markets has been and will likely continue to be constrained. The terms that we
could receive on new long-term debt issues would likely be consistent with those
generally available to high yield issuers.
As an additional source of funds, we currently have full unrestricted access to
a $2 billion revolving credit facility with 19 banks, expiring on August 17,
2005. As of June 30, 2003, there were no borrowings under the credit facility.
The facility includes one financial covenant limiting the ratio of total debt to
total capital, as defined, to not greater than 60%. At June 30, 2003 and
December 31, 2002, this ratio was 40% and 47%, respectively.
In March 2001, we filed a universal shelf registration statement with the SEC
that became effective in the first quarter of 2001. The shelf permits the
issuance of up to $5.0 billion of various debt and equity securities. As of
August 6, 2003, our remaining capacity under the shelf registration was
approximately $2.9 billion.
Capital Spending
Capital spending totaled $110 million and $210 million in the six months ended
June 30, 2003 and 2002, respectively. Our 2003 capital spending program is
expected to be limited to $350 million to $400 million. We have committed to
capital expenditures of $145 million as of June 30, 2003. Capital spending
activity in 2003 is primarily expected to be the planned expansion in the liquid
crystal display and environmental businesses.
Restructuring
During the six months ended June 30, 2003, we made payments of $124 million
related to employee severance and termination costs and $19 million in other
exit costs resulting from restructuring actions. We expect additional payments
for actions taken in 2001, 2002 and 2003 to approximate $128 million for the
remainder of 2003. Almost half of the remaining $285 million restructuring
reserve is expected to be paid by December 31, 2003. Cash payments for
employee-related costs will be substantially completed by mid-2004, while
payments for exit activities will be substantially completed by 2005.
Key Balance Sheet Data
At June 30, 2003, cash and short-term investments totaled $1.5 billion, compared
with $2.1 billion at December 31, 2002. The decrease from December 31, 2002, was
primarily due to long-term debt repayments, restructuring payments, capital
expenditures and the use for working capital. These items were partially offset
by the proceeds from the May equity offering and the receipt of our U.S. Federal
tax refund of $191 million.
Balance sheet and working capital measures are provided in the following table
(dollars in millions):
----------------------------------------------------------------------------------------------------------------
As of June 30, As of December 31,
2003 2002
----------------------------------------------------------------------------------------------------------------
Working capital $1,518 $2,145
Working capital, excluding cash and short-term investments $5 $55
Current ratio 1.9:1 2.3:1
Trade accounts receivable, net of allowances $482 $470
Days sales outstanding 58 56
Inventories $538 $559
Inventory turns 4.2 4.4
Days payable outstanding 40 46
Long-term debt $3,095 $3,963
Total debt to total capital 40% 47%
----------------------------------------------------------------------------------------------------------------
Credit Ratings
Our credit ratings remain unchanged from those disclosed in the 2002 Form 10-K
as follows:
--------------------------------------------------------------------------------
RATING AGENCY Rating Rating Outlook
Last Update Long-Term Debt Commercial Paper Last Update
--------------------------------------------------------------------------------
Standard & Poor's BB+ B Negative
July 29, 2002 July 29, 2002
Moody's Ba2 Not Prime Negative
July 29, 2002 July 29, 2002
Fitch BB B Stable
July 24, 2002 July 24, 2003
--------------------------------------------------------------------------------
Our six months 2003 earnings were not adequate to cover our fixed charges
(principally interest and related charges on debt), primarily as a result of the
asbestos settlement charge, losses incurred in the Telecommunications segment
and impairment and restructuring charges. It is likely our full year 2003
earnings will not be sufficient to cover our fixed charges.
Management Assessment of Liquidity
Our major source of funding for the remainder of 2003 and beyond will be our
existing balance of cash and short-term investments. We believe we have
sufficient liquidity for the next several years to fund operations,
restructuring, research and development, capital expenditures and to make
scheduled debt repayments. We also believe we have adequate liquidity to fund
our debt reduction objectives.
Deferred Taxes
In the second quarter, we increased our valuation allowance by $21 million as a
result of our exit from the photonic technologies business as we believe it is
more likely than not that we would be unable to recognize certain deferred tax
assets related to this business in Italy. At June 30, 2003, we have recorded
gross deferred tax assets of approximately $1.9 billion with a valuation
allowance of approximately $432 million. The valuation allowance is primarily
attributable to the uncertainty regarding the realization of certain foreign tax
benefits, net operating losses and tax credits. The net deferred tax assets of
approximately $1.5 billion consist of a combination of domestic (U.S. Federal
and State & Local) and foreign tax benefits for a) items which have been
recognized for financial reporting purposes, but which will be reported on tax
returns to be filed in the future, and b) loss and tax credit carryforwards.
Realization of the domestic portion of the net deferred tax asset is dependent
upon profitable operations in the United States during carryforward periods of
approximately 20 years. Although realization is not assured, we have performed
the required assessment of positive and negative evidence regarding the
realization of the net deferred tax assets, in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes," and concluded that it is more
likely than not that such assets will be realized. Should we experience a
significant negative deviation from our current performance expectations,
including significant future unannounced restructuring or impairment charges, it
is possible we could be required to record a valuation allowance on a portion or
all of the deferred tax assets.
U.S. Pension Plans
We sponsor defined benefit pension plans covering certain hourly and salaried
employees in the United States. At December 31, 2002, the projected benefit
obligation exceeded the market value of plan assets by $227 million. We are not
required by employee benefit and tax laws to make contributions to our pension
plans prior to 2004, however, we contributed $30 million in the first half of
2003 and plan to make an additional $70 million in the third quarter of 2003 to
our U.S. pension plans.
Off Balance Sheet Arrangements
We have leased equipment from three unconsolidated special purpose entities
(SPE) for which the sole purpose is the leasing of equipment to us. These SPEs
are not consolidated in the 2002 financial statements since the equity investor
of the SPE has made a substantial investment that is at risk for the life of the
SPE. However, the Financial Accounting Standards Board issued Interpretation 46,
Consolidation of Variable Interest Entities in January 2003. Interpretation 46
will require the consolidation of variable interest entities (VIE's) by the
primary beneficiary. We have assessed the impact of this interpretation and
determined that we will be considered the primary beneficiary of one existing
SPE and therefore would need to consolidate this entity beginning on July 1,
2003. The assets and debt of this entity at June 30, 2003, approximates $32
million and $34 million, respectively. We also evaluated the impact of this
interpretation on two other entities and determined that we are not the primary
beneficiary for both entities. The assets and debt of these entities total $12
million. In addition, our maximum loss exposure as a result of our involvement
with these VIE's is $53 million. This amount represents payments that would be
due to the VIE in the event of a total loss of the equipment. We carry insurance
coverage for this risk. The adoption of this interpretation will not have a
material effect on our results of operations or financial position.
OUTLOOK
Our goal is to return to profitability in 2003 before consideration of
litigation, restructuring and impairment charges or other non-operating items
such as gains or losses from debt retirements. Our goal to return to
profitability is dependent upon stabilization of revenues and continued strength
in North America and world economies.
For the third quarter of 2003, we expect sales in the range of $740 million to
$765 million. We believe fiber volumes may grow sequentially in the range of 5%
to 10% based on growth in Japan. Display technologies is also expected to see
volume growth of approximately 5% to 10% in the third quarter. We anticipate our
results for the third quarter to be in a range of net income of $0.01 per share
to $0.03 per share, excluding the impact of previously announced restructuring
charges related to the exit of photonic technologies or CAV, any gains or losses
related to the Avanex sale or debt buybacks and any adjustments to the asbestos
settlement reserve required by movement in our stock price.
We believe we have sufficient liquidity to meet our funding needs. We finished
the quarter with $1.5 billion in cash and short-term investments, and continue
to have full access to an unused revolving credit facility of $2 billion.
Capital spending is expected to approximate $350 million to $400 million in
2003. The anticipated spending will focus primarily on the planned expansion in
the liquid crystal display and environmental businesses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported therein. The estimates that
required management's most difficult, subjective or complex judgments are
described in our 2002 Form 10-K and remain unchanged through the second quarter
of 2003.
ENVIRONMENT
We have been named by the Environmental Protection Agency under the Superfund
Act, or by state governments under similar state laws, as a potentially
responsible party for 12 active hazardous waste sites. Under the Superfund Act,
all parties who may have contributed any waste to a hazardous waste site,
identified by such Agency, are jointly and severally liable for the cost of
cleanup unless the Agency agrees otherwise. It is our policy to accrue for the
estimated liability related to Superfund sites and other environmental
liabilities related to property owned and operated by us based on expert
analysis and continual monitoring by both internal and external consultants. We
have accrued approximately $21 million for the estimated liability for
environmental cleanup and related litigation at June 30, 2003. Based upon the
information developed to date, we believe that the accrued amount is a
reasonable estimate of our estimated liability and that the risk of an
additional loss in an amount materially higher than that accrued is remote.
We have also been informed that a complaint by the New York Attorney General to
recover approximately $10 million in environmental clean-up costs associated
with a landfill in Bath, NY is about to be brought against us and eight other
potentially responsible parties.
FORWARD-LOOKING STATEMENTS
The statements in this Quarterly Report on Form 10-Q, in reports subsequently
filed by Corning with the SEC on Forms 8-K, and related comments by management
which are not historical facts or information and contain words such as
"believes," "expects," "anticipates," "estimates," "forecasts," and similar
expressions are forward-looking statements. These forward-looking statements
involve risks and uncertainties that may cause the actual outcome to be
materially different. Such risks and uncertainties include, but are not limited
to:
.. global economic and political conditions;
.. tariffs, import duties and currency fluctuations;
.. product demand and industry capacity;
.. competitive products and pricing;
.. sufficiency of manufacturing capacity and efficiencies;
.. cost reductions;
.. availability and costs of critical components and materials;
.. new product development and commercialization;
.. order activity and demand from major customers;
.. fluctuations in capital spending by customers in the liquid crystal display
industry and other business segments;
.. changes in the mix of sales between premium and non-premium products;
.. possible disruption in commercial activities due to terrorist activity,
armed conflict, political instability or major health concerns;
.. facility expansions and new plant start-up costs;
.. effect of regulatory and legal developments;
.. capital resource and cash flow activities;
.. ability to pace capital spending to anticipated levels of customer demand,
which may fluctuate;
.. equity company activities;
.. interest costs;
.. credit rating and ability to obtain financing and capital on commercially
reasonable terms;
.. adequacy and availability of insurance;
.. financial risk management;
.. acquisition and divestiture activities;
.. rate of technology change;
.. level of excess or obsolete inventory;
.. ability to enforce patents;
.. adverse litigation;
.. attracting and maintaining key personnel;
.. product and components performance issues; and
.. stock price fluctuations.
Risk Factors
Set forth below and elsewhere in this Quarterly Report, and in other documents
we file with the SEC, are some of the principal risks and uncertainties that
could cause our actual business results to differ materially from any
forward-looking statements or other projections contained in this Quarterly
Report. In addition, future results could be materially affected by general
industry and market conditions, general U.S. and non-U.S. economic and political
conditions, including a global economic slowdown, fluctuation in tariffs, import
duties, 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 conditions. Our
separate statement labeled Forward-Looking Statements on the preceding page
should be considered in addition to the statements below.
Risks Relating to Our Business
Our sales could be negatively impacted if one or more of our key customers
substantially reduce orders for our products
Our customer base is relatively concentrated with less than 10 significant
customers accounting for a high percentage (greater than 50%) of net sales in
most of our businesses, including those purchasing liquid crystal display glass.
However, no individual customer accounts for more than 10% of consolidated
sales.
Most of our major customers in the Telecommunications segment have reduced
their purchases of our products and have expressed uncertainty as to their
future requirements. As a result, our sales have declined to low levels and it
is difficult to predict future sales accurately. The conditions contributing to
this difficulty include:
. the prolonged downturn in the telecommunications industry;
. uncertainty regarding the capital spending plans of the major
telecommunications carriers, upon which our customers and, ultimately
we, depend for sales;
. uncertainty regarding potential strikes by telecommunications
carriers;
. potential changes in governmental regulations;
. the telecommunications carriers' current limited access to the capital
required for expansion; and
. general market and economic uncertainty.
While we have responded to the depressed market by reducing excess capacity
and cutting costs, we cannot assure you that our plans will be successful in
mitigating the adverse effects of a prolonged downturn. The current downturn in
the telecommunications industry may be more severe and prolonged than expected.
If our net sales continue to decline, our ability to meet financial expectations
for future periods may be impaired.
In our Technologies segment, several of our businesses have a concentrated
customer base. These businesses include Corning's display technologies,
environmental products and semiconductor materials. If we lose a significant
customer in any of these businesses, our sales could be negatively impacted.
Although the sale of display glass has increased from quarter to quarter in
2003, there can be no assurance that this upward trend will continue. As
customers switch to larger size glass, the pace of orders may be uneven while
they adjust their manufacturing processes and facilities. Although we anticipate
growth in demand in this industry, our capital investments in plant and
equipment may not produce the anticipated returns if future customer demand
fails to meet our expectations.
If we do not successfully adjust our manufacturing volumes and fixed cost
structure, or achieve manufacturing yields or sufficient product reliability,
our operating results could suffer and we may not achieve profitability as soon
as anticipated
In the economic and industry downturn for our Telecommunications segment,
we have responded to the softer market by cutting costs, including the reduction
of our manufacturing volumes. We executed our restructuring plans in 2002 and
into 2003. Much of our photonic technologies business assets will be transferred
on or about July 31, 2003, to Avanex Corporation and other portions of that
business being retained by us will be restructured, sold or shut down during
2003. We previously closed two fiber facilities and "mothballed" another and
closed several factories that made photonics, cabling or hardware and equipment.
We have announced a $180 million expansion of our Tainan, Taiwan liquid
crystal display glass facility in response to increased customer demand.
Although we expect to complete planned improvement and expansion projects
associated with this business, we may not achieve the manufacturing
efficiencies, product improvements or level of sales that we anticipate.
As a consequence of the current economic downturn, we have reduced our
workforce by approximately 21,000 positions as of June 30, 2003. Although we
expect to complete our planned restructuring and facility consolidation
activities, we may not achieve all of the cost reductions that we anticipate. We
cannot assure you that our plans will be successful in mitigating the adverse
effects of a softer market, nor can we assure you that additional adjustments
and charges will not be necessary to respond to further market changes.
In addition, our restructuring program and current business plan are
designed to get us back to profitability and positive cash flow, but we cannot
be certain that this will occur or that we will return to profitability and
positive cash flow within the time period we are targeting.
The manufacturing of our products involves highly complex and precise
processes, requiring production in highly controlled and clean environments. Any
changes in our manufacturing processes or those of our suppliers could
significantly reduce our manufacturing yields and product reliability. In some
cases, existing manufacturing may be insufficient to achieve the volume or cost
targets of our customers. We will need to develop new manufacturing processes
and techniques to achieve targeted volume and cost levels. While we continue to
fund projects to improve our manufacturing techniques and processes, we may not
achieve cost levels in our manufacturing activities that will fully satisfy our
customers.
We have incurred, and may in the future incur, restructuring and other charges,
the amounts of which are difficult to predict accurately
The telecommunications industry was severely hampered in 2002 and 2003 by
excess manufacturing capacity, increased intensity of competition and growing
pressure in price and profits. These negative trends are expected to continue in
2003. In 2002 and 2003, we recorded charges for restructuring, impairment of
assets and the write-off of cost and equity based investments. It is possible
that additional impairments, restructuring charges and inventory write-downs
will result from the telecommunications industry downturn.
Our ability to forecast our customers' needs for our products in the
current economic and industry environment is limited. Our results in 2002 and
into 2003 included significant charges for impairment of long-lived assets,
primarily in the conventional television glass and photonic technologies
businesses.
Corning may record additional charges for restructuring or other asset
impairments in 2003 if additional actions become necessary to align costs to a
reduced level of demand.
In the event we incur continued operating losses, we may be unable to
recognize future deferred tax assets and may be required to make an assessment
of our ability to realize the deferred tax assets already recorded. At June 30,
2003, we had recorded net deferred tax assets of approximately $1.5 billion.
If the markets for our products do not develop and expand as we anticipate,
demand for our products may decline, which would negatively impact our results
of operations and financial performance
The markets for our products are characterized by rapidly changing
technologies, evolving industry and regulatory 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 and regulatory standards, our ability
to acquire technologies needed to remain competitive and our ability to address
competing technologies and products. In addition, the following factors related
to our products and the markets for them, if not achieved, could have an adverse
impact on our results of operations and financial performance:
. our ability to introduce leading products such as glass for flat panel
displays, optical fiber and environmental substrate products that can
command competitive prices in the marketplace;
. our ability to maintain or achieve a favorable mix of sales between
premium and non-premium products;
. our ability to continue to develop new product lines to address our
customers' diverse needs within the several market segments in which
we participate. This requires a high level of innovation, as well as
the accurate anticipation of technological and market trends;
. our ability to pace expansions of manufacturing facilities with
sustainable customer demand; or
. our ability to anticipate the pace and timing of clean air regulation
that may affect the emission control products in our environmental
business.
Corning's reduced investment in research, development and engineering could
limit our ability to develop new products for the future.
We face pricing pressures in each of our leading businesses that could adversely
affect our results of operations and financial performance
We periodically face pricing pressures in each of our leading businesses as
a result of intense competition, emerging new technologies, customer
developments, or overcapacity. 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 into 2003, particularly in our optical fiber and
cable business. Pricing pressures are expected to continue for the remainder of
2003.
We have incurred, and may in the future incur, goodwill and other intangible
asset impairment charges
Acquisitions recorded as purchases for accounting purposes have resulted,
and in the future may result, in the recognition of significant amounts of
goodwill and other purchased intangibles. The potential impairment of these
assets could reduce our net income and shareholders' equity.
Effective January 1, 2002, we adopted the Financial Accounting Standards
Board Statement of Financial Accounting Standards (SFAS) No. 142. Under SFAS No.
142, goodwill is no longer amortized but is subject to impairment tests at least
annually. Management completed the impairment test in the fourth quarter of 2002
and recorded required goodwill impairment charges totaling $400 million for the
Telecommunications segment. While we believe the estimates and judgments about
future cash flows in the Telecommunications segment are reasonable, no assurance
can be given that the businesses in this segment will stabilize and recover as
projected. We cannot provide assurance that future impairment charges will not
be required if the telecommunications industry does not recover as projected by
management in its expected cash flow estimates.
We may be limited in our ability to obtain additional capital on commercially
reasonable terms
Although we believe existing cash, short-term investments and borrowing
capacity, collectively, provide adequate resources to fund ongoing operating
requirements, we may be required to seek additional financing to compete
effectively in our markets. Our public debt ratings affect our ability to raise
capital and the cost of such capital. In July 2002, Fitch downgraded our senior
unsecured long-term debt rating from BBB- to BB; Standard & Poor's downgraded
our senior unsecured long-term debt rating from BBB- to BB+ and short-term debt
credit rating from A-3 to B; and Moody's reduced our senior unsecured long-term
debt rating from Baa3 to Ba2 and short-term debt credit rating from Prime-3 to
Not Prime. Two of the rating agencies have maintained negative outlooks while
Fitch recently upgraded our outlook from negative to stable. These and any
further downgrades may increase our borrowing costs and affect our ability to
access the debt capital markets. In addition, the pricing of our common stock
may limit our ability to access the equity capital markets without a significant
dilution to current shareholders.
As a result of our lower debt ratings, we may face difficulties in our
business. For example, we may face increasing requirements to post cash
collateral for performance bonds, and some customers may seek alternative
suppliers.
Our revolving credit facility includes a covenant that requires us to
maintain a ratio of total debt to capital, as defined under the credit facility,
of not greater than 0.60 to 1.00. Our total debt to capital ratio was 0.40 at
June 30, 2003. This covenant may also limit our ability to borrow additional
funds. Further declines in our Telecommunications segment could cause
impairments of goodwill, tangible or intangible assets or restructuring charges
related to our overall business. Additional impairments or charges could
materially increase our total debt to capital ratio, which may reduce the
amounts we are able to borrow under our revolving credit facility.
If our products or components purchased from our suppliers experience
performance issues, our business will suffer
Our business depends on the production of excellent products of
consistently high quality. To this end, our products, including components
purchased from our suppliers, are tested for quality both by us and our
customers. Nevertheless, our products are highly complex and our customers'
testing procedures are limited to evaluating our products under likely and
foreseeable failure scenarios. For various reasons (including, among others, the
occurrence of performance problems unforeseeable in testing), our products and
components purchased from our suppliers may fail to perform as expected.
Performance issues could result from faulty design or problems in manufacturing
or testing. We have experienced such performance issues in the past and remain
exposed to such performance issues. In some cases, product redesigns or
additional capital equipment may be required to correct a defect. In addition,
any significant or systemic product failure could result in customer relations
problems and harm the future sales of our products.
Interruptions of supplies from our key suppliers may affect our results of
operations and financial performance
Interruptions of supplies from our key suppliers could disrupt production
or impact our ability to increase production and sales. We do not have long-term
or volume purchase agreements with every supplier, and may have limited options
for alternative suppliers if these suppliers fail, for any reason, including
their business failure or financial difficulties, to continue the supply of
components.
We face intense competition in most of our businesses
We expect that we will face additional competition from existing
competitors and from a number of companies that may enter our markets. Because
some of the markets in which we compete have been historically characterized by
rapid growth and are characterized by rapid technology changes, smaller niche
and start-up companies may become our principal competitors in the future. We
must invest in research and development, expand our engineering, manufacturing
and marketing capabilities, and continue to improve customer service and support
in order to remain competitive. While we expect to undertake the investment and
effort in each of these areas, we are reducing our expenditure levels and cannot
assure you that we will be able to maintain or improve our competitive position.
In particular, the net losses in our Telecommunications segment may constrain
our ability to invest as much as we would like in each of these areas. In
addition, while some of our competitors are similarly experiencing the effects
of this market turmoil, they may have greater financial, engineering,
manufacturing, marketing or other support resources.
We may experience difficulties in enforcing our intellectual property rights and
we may be subject to claims of infringement of the intellectual property rights
of others
We may encounter difficulties in protecting our intellectual property
rights or obtaining rights to additional intellectual property necessary to
permit us to continue or expand our businesses. We cannot assure you that the
patents that we hold or may obtain will provide meaningful protection against
our competitors or competitive technologies. Litigation may be necessary to
enforce our intellectual property rights, to protect our trade secrets and to
determine the validity and scope of our proprietary rights. Litigation is
inherently uncertain and the outcome is often unpredictable. Other companies
hold patents on technologies used in our industries and are aggressively seeking
to expand, enforce and license their patent portfolios.
The intellectual property rights of others could inhibit our ability to
introduce new products. We are, and may in the future be, subject to claims of
intellectual property infringement or misappropriation, and we cannot assure you
as to the outcome of such claims. Litigation or claims against us could force us
to cease selling or using any of our products that incorporate the intellectual
property that is the subject of such claims, obtain a license from a third party
or redesign or rename our products. These actions, if possible, could result in
substantial costs or loss of revenue.
Current or future litigation may harm our financial condition or results of
operations
Pending, threatened or future litigation is subject to inherent
uncertainties. Our financial condition or results of operations may be adversely
affected by unfavorable outcomes, expenses and costs exceeding amounts estimated
or insured. In particular, we have been named as a defendant in numerous
lawsuits against Pittsburgh Corning Corporation ("PCC") and several other
defendants involving claims alleging personal injury from exposure to asbestos.
As described in this report in "Legal Proceedings," Corning has announced a
settlement arrangement with representatives of the asbestos claimants. This
settlement is expected to be incorporated in a Plan of Reorganization for PCC.
The settlement and the Plan will be subject to a number of contingencies,
including a favorable vote by 75% of the asbestos claimants voting on the PCC
Plan, and approval of the bankruptcy court. Several of our insurance carriers
have not agreed to the settlement or have commenced litigation to challenge
elements of the settlement. Management cannot provide assurances that these
contingencies will be resolved favorably and there remain uncertainties about
the future course of this litigation. Corning recorded an after-tax charge of
$216 million in the first and second quarters of 2003 which management believes
will be adequate to effect the settlement. The amount of the charge may require
adjustment each quarter. See Legal Proceedings.
We face risks related to our international operations and sales
We have customers located outside the United States, as well as significant
non-United States operations, including manufacturing and sales. We have large
manufacturing operations in the Asia-Pacific region, including equity
investments in companies operating in China, Taiwan and South Korea, and several
significant customers are located in this region. As a result of these and other
international operations, we face a number of risks, including:
. major health concerns such as SARS;
. difficulty of effectively managing our diverse global operations;
. change in regulatory requirements;
. tariffs, duties and other trade barriers;
. undeveloped legal systems;
. political and economic instability in foreign markets; and
. fluctuations in foreign currencies which may make our products less
competitive in countries in which local currencies decline in value
relative to the dollar.
Our results of operations and financial performance may suffer as a result of
key personnel changes
Our future success will be determined in part by our ability to retain key
scientific and technical personnel for our research, development and engineering
efforts. Our business also depends on the continued contributions of our
executive officers and other key management. We may also find it more difficult
to retain qualified employees due to our uncertain outlook and reductions
affecting compensation, benefits and employee equity participation programs.
While we believe that we have been successful in retaining key personnel, we
cannot assure you that we will continue to be successful in the future.
If the financial condition of our customers declines, our credit risks could
increase
In 2002 and into 2003, certain of our customers experienced financial
difficulties and several filed with the courts seeking protection under
bankruptcy or reorganization laws. We have experienced, and in the future may
experience, losses as a result of our inability to collect our accounts
receivable, as well as the loss of such customer's ongoing business. If our
customers fail to meet their payment obligations to us, we could experience
reduced cash flows and losses in excess of amounts reserved. As of June 30,
2003, reserves for trade receivables totaled approximately $46 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 and investigations,
whether or not such claims are valid. In addition, our product liability,
fiduciary, directors and officers, property and comprehensive general liability
insurance may not be adequate to cover such claims or may not be available to
the extent we expect. Our insurance costs have increased substantially and may
increase further. We may not be able to get adequate insurance coverage in the
future at acceptable costs. A successful claim that exceeds or is not covered by
our policy limits could require us to pay substantial sums. Some of the carriers
in our historic excess insurance program are not rated, or may have lower
ratings, and may not be able to respond if we should have claims reaching into
excess layers. In addition, we may not be able to insure against certain risks
or obtain some types of insurance, such as terrorism insurance.
Corning's results reflect a concentration of earnings from equity method
investments. Each of these companies is subject to separate risks and
uncertainties that could materially affect its future operating results and,
thus, Corning's share of related earnings.
We have a number of equity method investments. Corning's share of earnings
relating to three of these investments, Samsung Corning Co., Ltd., Samsung
Corning Precision Glass Co., Ltd. and Dow Corning Corporation, is significant to
our consolidated earnings. Our participation in these equity companies exposes
us to risks of shared control and future capital commitments that, among other
things, may adversely affect the companies' business or operating results.
Further, each of these companies is subject to separate risks and uncertainties
that could materially affect its future operating results. For example, Dow
Corning Corporation is a global manufacturer of specialty chemicals known as
silicones that are used in a wide variety of applications for consumer and
industrial uses. Risks relating to this business that may adversely affect
operating results and cash flows include, but are not limited to, the
cyclicality and volatility of the specialty chemical industry, rising costs of
energy and other raw materials, currency risk associated with global operations,
pricing pressure, safety, and environmental regulations. Samsung Corning Co.,
Ltd., based in Korea, is a maker of conventional television tubes and funnels,
which is a mature business. Samsung Corning Precision Glass Co. Ltd., also based
in Korea, manufacturers display glass primarily for sale to panel makers located
in Korea. Corning's share of earnings from these companies may vary materially
from quarter to quarter as a result of industry conditions and other risks and
uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
There have been no material changes to our market risk exposure during the first
six months of 2003. For a discussion of our exposure to market risk, refer to
Item 7A, Quantitative and Qualitative Disclosures About Market Risks, contained
in our 2002 Annual Report on Form 10-K.
Interest Rate Risk
At December 31, 2002, our consolidated debt portfolio contained approximately 8%
of variable rate instruments. As a result of the large amount of debt that we
have repurchased and retired in 2003, variable rate instruments now comprise
approximately 11% of our consolidated debt portfolio. Our policy is that total
floating and variable debt will not exceed 35% of the debt portfolio at anytime.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The company carried out an evaluation, under the supervision and with the
participation of Corning management, including Corning's chief executive
officer and its chief financial officer, of the effectiveness of the design
and operation of Corning's disclosure controls and procedures (as defined
in Rule 13a-15(e) under the Securities and Exchange Act of 1934 (the
"Exchange Act")) as of quarter ended June 30, 2003, the end of the period
covered by this report. Based upon that evaluation, the chief executive
officer and chief financial officer concluded that as of the evaluation
date, the company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by Corning in reports that
it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
(b) Changes in internal controls.
During the quarter ended June 30, 2003, there has been no change in our
internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) that has materially affected or is reasonably
likely to materially affect, our internal control over financial reporting.
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
Environmental Litigation. Corning has been named by the Environmental Protection
Agency under the Superfund Act, or by state governments under similar state
laws, as a potentially responsible party at 12 active hazardous waste sites.
Under the Superfund Act, all parties who may have contributed any waste to a
hazardous waste site, identified by such Agency, are jointly and severally
liable for the cost of cleanup unless the Agency agrees otherwise. It is
Corning's policy to accrue for its estimated liability related to Superfund
sites and other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued approximately $21 million for its estimated
liability for environmental cleanup and litigation at June 30, 2003. Based upon
the information developed to date, management believes that the accrued reserve
is a reasonable estimate of the Company's estimated liability and that the risk
of an additional loss in an amount materially higher than that accrued is
remote. Corning has been informed that a complaint by the New York Attorney
General to recover approximately $10 million in environmental clean-up costs
associated with a landfill in Bath, New York is about to be brought against
Corning and eight other potentially responsible parties.
Schwinger and Stevens Toxins Lawsuits. In April 2002, Corning was named as a
defendant in two actions, Schwinger and Stevens, filed in the United States
District Court for the Eastern District of New York, which asserted various
personal injury and property damage claims against a number of corporate
defendants. These claims allegedly arise from the release of toxic substances
from a Sylvania nuclear materials processing facility near Hicksville, New York.
Amended complaints naming 205 plaintiffs and seeking damages in excess of $3
billion were served in September 2002. The sole basis of liability against
Corning was plaintiffs' claim that Corning was the successor to Sylvania-Corning
Nuclear Corporation, a Delaware corporation formed in 1957 and dissolved in
1960. Management intends to vigorously contest all claims against Corning for
the reason that Corning is not the successor to Sylvania-Corning. Management
will also defend on the grounds that almost all of the wrongful death claims and
personal injury claims are time-barred. At a status conference in December 2002,
the Court decided to "administratively close" the Schwinger and Stevens cases
and ordered plaintiffs' counsel to bring new amended complaints with
"bellwether" plaintiffs. In these actions, known as Schwinger II and Astuto, the
plaintiffs have not named Corning as a defendant. Although it appears that
plaintiffs may proceed only against the other corporate defendants, the original
Schwinger and Stevens cases remain pending and no order has been entered
dismissing Corning. Based upon the information developed to date, and
recognizing that the outcome of litigation is uncertain, management believes
that the risk of a materially adverse verdict is remote.
Dow Corning Bankruptcy. Corning and The Dow Chemical Company each own 50% of the
common stock of Dow Corning Corporation, which has been in reorganization
proceedings under Chapter 11 of the United States Bankruptcy Code since May,
1995. Dow Corning filed for bankruptcy protection to address pending and claimed
liabilities arising from breast-implant product lawsuits. On November 8, 1998,
Dow Corning and the Tort Claimants Committee jointly filed a revised Plan of
Reorganization (Joint Plan) which provided for the settlement or other
resolution of implant claims. The Joint Plan included releases for third parties
(including Corning and Dow Chemical as shareholders) in exchange for
contributions to the Joint Plan. By an order dated November 30, 1999, the
Bankruptcy Court confirmed the Joint Plan, but with certain limitations
concerning the third party releases as reflected in an opinion issued on
December 21, 1999. On November 13, 2000, the U.S. District Court for the Eastern
District of Michigan reversed the Bankruptcy Court's order with respect to these
limitations on the third-party releases and confirmed the Joint Plan. Certain
foreign claimants, the U.S. government, and certain other tort claimants
appealed from the District Court's order. On January 29, 2002, the U.S. Court of
Appeals for the Sixth Circuit affirmed the determinations made in the District
Court with respect to the foreign claimants, but remanded to the District Court
for further proceedings with respect to certain lien claims of the U.S.
government and with respect to the findings supporting the non-debtor releases
in favor of Dow Corning's shareholders, foreign subsidiaries and insurers. The
Plan proponents agreed to settle the lien claims of the U.S. government for $9.8
million to be paid from the Settlement Fund under the Plan. This settlement was
approved by the District Court in the third quarter of 2002. On December 11,
2002, the District Court entered further findings and conclusions supporting the
non-debtor releases. Certain tort claimants filed appeals to the U.S. Court of
Appeals for the Sixth Circuit from the District Court's order. These appeals
have been briefed but not yet scheduled for argument. Management expects the
appellate process may take another 12 months. If the Joint Plan with shareholder
releases is upheld after all appeals, any remaining personal injury claims
against Corning in these matters will be channeled to the resolution procedures
under the Joint Plan. If the Joint Plan with shareholder releases is not upheld
after all appeals, Corning would expect to defend any remaining claims against
it (and any new claims) on the same grounds that led to a series of orders and
judgments dismissing all claims against Corning in the federal courts and in
many state courts as described under the heading Implant Tort Lawsuits
immediately hereafter. Management believes that the claims against Corning lack
merit and that the breast implant litigation against Corning will be resolved
without material impact on Corning's financial statements.
Under the terms of the Joint Plan, Dow Corning would be required to establish a
Settlement Trust and a Litigation Facility to provide a means for tort claimants
to settle or litigate their claims. Dow Corning would have the obligation to
fund the Trust and the Facility, over a period of up to 16 years, in an amount
up to approximately $3.3 billion, subject to the limitations, terms and
conditions stated in the Joint Plan. Corning and Dow Chemical have each agreed
to provide a credit facility to Dow Corning of up to $150 million ($300 million
in the aggregate), subject to the terms and conditions stated in the Joint Plan.
The Joint Plan also provides for Dow Corning to make full payment, through cash
and issuance of senior notes, to its commercial creditors. These creditors claim
approximately $810 million in principal plus an additional sum for pendency
interest, costs and fees from the petition date (May 15, 1995) through the
effective date under the Plan when payment is made. The commercial creditors
have contested the Bankruptcy Court's disallowance of their claims for
post-petition interest at default rates of interest, and have appealed to the
District Court. The District Court heard oral arguments on this appeal on May 2,
2002, and has not ruled. The amount of additional interest, costs and fees
claimed by the commercial creditors is approximately $100 million pre-tax more
than Dow Corning believes it should pay.
In 1995, Corning fully reserved its investment in Dow Corning upon its filing
for bankruptcy and did not recognize equity earnings from the second quarter of
1995 through the end of 2002. Management has assessed the December 11, 2002,
findings by Judge Hood and concluded that emergence of Dow Corning Corporation
from bankruptcy protection is probable. Management has also concluded that it
has adequately provided for the other than temporary decline associated with the
bankruptcy. With the exception of the remote possibility of a future bankruptcy
related charge, Corning considers the difference between the carrying value of
its investment in Dow Corning and its 50 percent share of Dow Corning's equity
to be permanent. This difference was $270 million at June 30, 2003.
Corning resumed recognition of equity earnings from Dow Corning in the first
quarter of 2003. Corning does not expect to receive dividends from Dow Corning
in 2003.
Implant Tort Lawsuits. Corning and Dow Chemical, the shareholders of Dow Corning
Corporation, were named in a number of state and federal tort lawsuits alleging
injuries arising from Dow Corning's implant products. The claims against the
shareholders alleged a variety of direct or indirect theories of liability. In
1992, the federal breast implants cases were coordinated for pretrial purposes
in the United States District Court, Northern District of Alabama (Judge Sam C.
Pointer, Jr.). In April 1995, the District Court granted Corning a summary
judgment dismissing it from over 4,000 federal court cases. On March 12, 1996,
the U.S. Court of Appeals for the Eleventh Circuit dismissed the plaintiffs'
appeal from that judgment. In state court litigation, Corning was awarded
summary judgment in California, Connecticut, Illinois, Indiana, Michigan,
Mississippi, New Jersey, New York, Pennsylvania, Tennessee, and Dallas, Harris
and Travis Counties in Texas, thereby dismissing approximately 7,000 state
cases. In Louisiana, Corning's summary judgment was vacated by an intermediate
appeals court in Louisiana as premature. The Louisiana cases were transferred to
the United States District Court for the Eastern District of Michigan, Southern
Division (Michigan Federal Court) to which substantially all breast implant
cases were transferred in 1997. In the Michigan Federal Court, Corning is named
as a defendant in approximately 70 pending cases (including some cases with
multiple claimants), in addition to the transferred Louisiana cases. The
Michigan Federal Court heard Corning's motion for summary judgment on February
27, 1998, but has not ruled. Based upon the information developed to date and
recognizing that the outcome of complex litigation is uncertain, management
believes that the risk of a materially adverse result in the implant litigation
against Corning is remote and believes the implant litigation against Corning
will be resolved without material impact on Corning's financial statements.
Federal Securities Cases. A federal securities class action lawsuit was filed in
1992 against Corning and certain individual defendants by a class of purchasers
of Corning stock who allege misrepresentations and omissions of material facts
relative to the silicone gel breast implant business conducted by Dow Corning.
This action is pending in the United States District Court for the Southern
District of New York. The class consists of those purchasers of Corning stock in
the period from June 14, 1989, to January 13, 1992, who allegedly purchased at
inflated prices due to the non-disclosure or concealment of material
information. No amount of damages is specified in the complaint. In 1997, the
Court dismissed the individual defendants from the case. In December 1998,
Corning filed a motion for summary judgment requesting that all claims against
it be dismissed. Plaintiffs requested the opportunity to take depositions before
responding to the motion for summary judgment. In June 2003, Corning renewed its
motion for summary judgment upon papers incorporating additional discovery
materials. Corning intends to continue to defend this action vigorously. Based
upon the information developed to date and recognizing that the outcome of
litigation is uncertain, management believes that the likelihood of a materially
adverse verdict is remote.
From December 2001 through April 2002, Corning and three of its officers and
directors were named defendants in lawsuits alleging violations of the U.S.
securities laws in connection with Corning's November 2000 offering of 30
million shares of common stock and $2.7 billion zero coupon convertible
debentures, due November 2015. In addition, the Company and the same three
officers and directors were named in lawsuits alleging selective disclosures and
non-disclosures that allegedly inflated the price of Corning's common stock in
the period from September 2000 through July 9, 2001. The plaintiffs in these
actions seek to represent classes of purchasers of Corning's stock in all or
part of the period indicated. These lawsuits are pending in the United States
District Court for the Western District of New York. On August 2, 2002, the
District Court entered an order consolidating these actions for all purposes,
designating lead plaintiffs and lead counsel, and directing service of a
consolidated complaint. In February 2003, defendants filed a motion to dismiss
the complaint for failure to allege the requisite elements of the claims with
particularity. Plaintiffs responded with opposing papers on April 7, 2003. The
Court heard arguments on May 29 and June 9, 2003, and reserved decision. The
Court's scheduling order further provides that a motion to certify the action as
a class action shall be filed after all motions to dismiss are resolved. Another
lawsuit has been filed, also in the Western District of New York, on behalf of
participants in the Company's Investment Plan for Salaried Employees,
purportedly as a class action on behalf of participants in the Plan who
purchased or held Corning stock in a Plan account. The defendants in that action
responded with a motion to dismiss the lawsuit on a variety of grounds. On
December 12, 2002, the Court entered judgment dismissing the claims as to each
of the defendants. On December 19, 2002, plaintiffs filed a motion to open the
judgment and for leave to file an amended complaint. This motion was argued on
April 10, 2003. The Court reserved decision on the motion for leave to amend.
Management is prepared to defend these lawsuits vigorously and, recognizing that
the outcome of litigation is uncertain, believes that these will be resolved,
net of applicable insurance, without material impact on Corning's financial
statements.
Pittsburgh Corning Corporation. Corning and PPG Industries, Inc. (PPG) each own
50% of the capital stock of Pittsburgh Corning Corporation (PCC). Over a period
of more than two decades, PCC and several other defendants have been named in
numerous lawsuits involving claims alleging personal injury from exposure to
asbestos. On April 16, 2000, PCC filed for Chapter 11 reorganization in the
United States Bankruptcy Court for the Western District of Pennsylvania. As of
the bankruptcy filing, PCC had in excess of 140,000 open claims and had
insufficient remaining insurance and assets to deal with its alleged current and
future liabilities. More than 100,000 additional claims have been filed with PCC
after its bankruptcy filing. At the time PCC filed for bankruptcy protection,
there were approximately 12,400 claims pending against Corning in state court
lawsuits alleging various theories of liability based on exposure to PCC's
asbestos products. Corning has defended those claims on the basis of the
separate corporate status of PCC and the absence of any facts supporting claims
of direct liability arising from PCC's asbestos products. Corning is also
currently named in approximately 10,500 other cases (approximately 36,500
claims) alleging injuries from asbestos. Those cases have been covered by
insurance without material impact to Corning to date. Asbestos litigation is
inherently difficult, and past trends in resolving these claims may not be
indicators of future outcomes.
In the bankruptcy court, PCC in April 2000 obtained a preliminary injunction
against the prosecution of asbestos actions arising from PCC's products against
its two shareholders to afford the parties a period of time (the Injunction
Period) in which to negotiate a plan of reorganization for PCC (PCC Plan). The
Injunction Period was extended as to Corning on several occasions through
September 30, 2002, and later for a period from December 23, 2002, through
January 23, 2003, and was reinstated as of April 22, 2003, and will now
continue, pending developments with respect to the PCC Plan as described below.
On May 14, 2002, PPG announced that it had agreed with certain of its insurance
carriers and representatives of current and future asbestos claimants on the
terms of a settlement arrangement applicable to claims arising from PCC's
products. The announced arrangement would permit PPG and certain of its insurers
to make contributions of cash over a period of years, PPG's shares in PCC and
Pittsburgh Corning Europe N.V. (PCE), a Belgian corporation, and an agreed
number of shares of PPG's common stock in return for a release and injunction
channeling claims against PPG into a settlement trust under the PCC Plan.
On March 28, 2003, Corning announced that it had also reached agreement with
representatives of current and future asbestos claimants on a settlement
arrangement that will be incorporated into the PCC Plan. This settlement is
subject to a number of contingencies, including a favorable vote by 75% of the
asbestos claimants voting on the PCC Plan, and approval by the bankruptcy court.
Corning's settlement will require the contribution, when the Plan becomes
effective, of Corning's equity interest in PCC, its one-half equity interest in
PCE, and 25 million shares of Corning common stock. Corning also will be making
cash payments of $133 million (net present value as of June 30, 2003) in six
installments beginning in June 2005 assuming the Plan is effective. In addition,
Corning will assign policy rights or proceeds under its primary insurance from
1962 through 1984, as well as rights or proceeds under certain excess insurance,
most of which falls within the period from 1962 through 1973. In return for
these contributions, Corning expects to receive a release and an injunction
channeling asbestos claims against it into a settlement trust under the PCC
Plan.
Corning has recorded a charge in the amount of $298 million ($192 million
after-tax) in its results for the period ending March 31, 2003. The amount of
the charge for this settlement will require adjustment each quarter based upon
movement in Corning's common stock price prior to contribution of the shares to
the trust. In the second quarter of 2003, Corning recorded an additional $39
million ($24 million after-tax) to mark-to-market the value of the common stock.
Two of Corning's primary insurers and several of its excess insurers have
commenced litigation against the Company for a declaration of the rights and
obligations of the parties under insurance policies, including rights that may
be affected by the settlement arrangement described above. Corning is vigorously
contesting these cases. Management is unable to predict the outcome of this
insurance litigation.
The PCC Plan, a disclosure statement and various supplement Plan documents were
filed with the Court in the second quarter of 2003. No schedule has been set for
voting on the PCC Plan by claimants or for the confirmation hearings required
for the court to consider approval of the PCC Plan. The process of confirmation
is expected to take six to 12 months from the time the disclosure statement is
approved by the Court. Although the confirmation of the PCC Plan is subject to a
number of contingencies, management believes that the asbestos claims against
the Company will be resolved without additional material impact on the Company's
financial statements.
Astrium. In December of 2000, Astrium, SAS and Astrium, Ltd. filed a complaint
for negligence in the United States District Court for the Central District of
California against TRW, Inc., Pilkington Optronics Inc., Corning NetOptix, Inc.,
OFC Corporation and Optical Filter Corporation claiming damages in excess of
$150 million. The complaint alleges that certain cover glasses for solar arrays
used to generate electricity from solar energy on satellites sold by Astrium's
corporate successor were negligently coated by NetOptix or its subsidiaries
(prior to Corning's acquisition of NetOptix) in such a way that the amount of
electricity the satellite can produce and their effective life were materially
reduced. NetOptix has denied that the coatings produced by NetOptix or its
subsidiaries caused the damage alleged in the complaint, or that it is legally
liable for any damages which Astrium may have experienced. In April 2002, the
Court granted motions for summary judgment by NetOptix and other defendants to
dismiss the negligence claims, but permitted plaintiffs to add fraud and
negligent misrepresentation claims against all defendants and a breach of
warranty claim against NetOptix and its subsidiaries. In October 2002, the Court
again granted defendants' motions for summary judgment and dismissed the
negligent misrepresentation and breach of warranty claims. The intentional fraud
claims were dismissed against all non-settling defendants on February 25, 2003.
On March 19, 2003, Astrium appealed all of the Court's Rulings regarding the
various summary judgment motions to the Ninth Circuit Court of Appeals. Based
upon the information developed to date and recognizing that the outcome of
litigation is uncertain, management believes that there are strong defenses to
these claims and believes they will be resolved without material impact on
Corning's financial statements.
In November 2002, American Motorists Insurance Company and Lumbermens Mutual
Casualty Company (collectively "AIMCO") filed a declaratory judgment action
against Corning, as well as Corning NetOptix, Inc., OFC Corporation and Optical
Filter Corporation. This action is in the United States District Court of the
Central District of California. In the complaint, AIMCO seeks a ruling that its
duty to defend the insureds in the underlying Astrium action ceased with the
dismissal of the negligence claims. AIMCO also seeks reimbursement of
approximately $12 million dollars spent for defense costs through November 2002.
Corning believes that AIMCO remains responsible for the continued representation
of all insureds and for any amount spent on the defense of the insureds to date.
Answers were filed in January 2003 on behalf of the defendants other than
Corning. Corning has moved to dismiss all claims filed against it as it was not
a party to the underlying Astrium action. Based upon the information developed
to date and recognizing that the outcome of litigation is uncertain, management
believes that there are strong defenses to the reimbursement claim.
Optel Arbitration. On June 28, 2002, Madeco S.A. and Madeco Brasil Ltda. filed a
notice of arbitration and statement of claim against Corning International
Corporation ("CIC") with the American Arbitration Association in New York, New
York, alleging breaches of its contractual duties and partnership obligations.
Madeco asserts that it has the right, under a "Put Option," to sell shares of
another company to CIC for approximately $18 million. Arbitration hearings were
completed in late May 2003, and post-hearing written submissions were filed in
June 2003. The parties will each submit legal briefs and additional evidence
over the next two months and a final decision is expected by December 31, 2003.
Based upon the information developed to date and recognizing that the outcome of
arbitration is uncertain, management believes that the risk of a materially
adverse verdict is remote.
Astarte/Tellium. In July of 2002, Corning filed a demand for binding arbitration
between Corning and Astarte Fiber Networks Inc.; Tellium, Inc.; AFN, LLC; and
their related parties. The arbitration concerns a contract relating to certain
patents and patent applications previously owned by Astarte and now held by AFN
and Tellium, Astarte's successor. Corning's demand includes a claim for
approximately $38 million from those parties due to material misrepresentations
and fraud, as well as a claim to have the contract canceled for breach. AFN has
counterclaimed in the arbitration, asking the arbitrators to decide that Corning
remains obligated under the contract for future contingent payments to AFN of up
to $50 million. Tellium and Astarte have filed motions seeking to be dismissed
from the arbitration based on a variety of grounds, and Corning has opposed
these motions. The arbitration hearings on the claims and counterclaims are
scheduled in January 2004. While the outcome of arbitration proceedings
concerning complex contracts involving intellectual property matters cannot be
predicted with certainty, based upon the information discovered to date,
management believes that the disputes in arbitration will be resolved without
material negative impact on Corning's financial statements.
Furukawa Electric Company. On February 3, 2003, The Furukawa Electric Company
filed suit in the Tokyo District Court in Japan against CCS International
Corporation alleging infringement of Furukawa's Japanese Patent No. 2,023,966
which relates to separable fiber ribbon units used in optical cable. Furukawa's
complaint requests slightly over (Y)6 billion in damages and an injunction
against further sales in Japan of these fiber ribbon units. CCS has denied the
allegation of infringement, asserted that the patent is invalid, and is
defending vigorously against this lawsuit. While recognizing that litigation is
inherently uncertain, based upon the information developed to date, management
believes that the claims against CCS will not have a material impact on the
Company's financial statements.
Fitel USA Corp. and OFS Fitel LLC. On February 3, 2003, Corning filed an action
in federal district court for the District of Delaware against Fitel USA Corp.
("Fitel") and OFS Fitel LLC ("OFS") asking the court to declare a Fitel patent
invalid, unenforceable, and not infringed by Corning. The patent generally
relates to low water content fiber used in coarse wavelength division
multiplexing. Fitel and OFS have counterclaimed that Corning has induced
infringement of the patent. Corning has denied the allegations of infringement.
Based upon the information developed to date, management believes this
counterclaim against Corning will not have a material impact on the Company's
financial statements.
Chinese Anti-Dumping Investigation. On July 1, 2003, the Chinese Ministry of
Commerce announced an anti-dumping investigation against manufacturers of
optical fiber based in the U.S, Korea and Japan, alleging selling prices of
standard single-mode optical fiber at lower prices than in the respective home
country as well as material injury alleged to the Chinese fiber industry. The
investigation is underway, with a preliminary determination anticipated in April
2004 and a final determination possible by July 1, 2004. Corning is defending
vigorously and does not believe it engaged in dumping. Corning management is not
able to estimate the impact of this proceeding upon its export business to China
pending a final determination nor to express assurances regarding that final
determination. Based upon the information developed to date and recognizing that
the outcome is uncertain, management believes that the investigation will be
resolved without a material impact on Corning's financial statements.
PicVue Electronics Ltd., PicVue OptoElectronics International, Inc. and
Eglasstrek Gmbh. In June 2002, Corning brought an action seeking to restrain the
use of its trade secrets and for copyright infringement relating to certain
aspects of the fusion draw machine used for liquid crystal display glass melting
in the United States District Court for the Western District of New York against
these three 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. Recognizing that the outcome of litigation is uncertain,
management believes that the PicVue counterclaim is without merit and that the
likelihood of a materially adverse verdict against Corning is remote.
ITEM 5. OTHER INFORMATION
------- -----------------
Dr. Gerald J. Fine, senior vice president of Corning Photonic Technologies, will
begin a one year sabbatical from Corning effective September 30, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
------- --------------------------------
(a) Exhibits
Exhibit Number Exhibit Name
-------------- ------------
12 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends
31.1 Certification Pursuant to Rule 13a-15(e) and 15d-15(e), As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Rule 13a-15(e) and 15d-15(e), As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Four reports on Form 8-K were filed April 22, 2002*, April 24, 2003*,
April 29, 2003 and May 12, 2003* during the quarter end June 30, 2002
reporting matters under Item 5, Other Events and under Item 7,
Financial Statements, Pro Forma Financial Information and Exhibits and
furnishing material under Item 9*.
* Information furnished under Item 9 of Form 8-K is not incorporated
by reference, is not deemed filed and is not subject to liability
under Section 11 of the Securities Act of 1933 or Section 18 of the
Securities Exchange Act of 1934 for such Regulation FD disclosures.
Other items under Part II are not applicable.
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNING INCORPORATED
(Registrant)
August 6, 2003 /s/ JAMES B. FLAWS
------------------------ -------------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
August 6, 2003 /s/ KATHERINE A. ASBECK
------------------------ -------------------------------------------
Date Katherine A. Asbeck
Senior Vice President and Controller
(Principal Accounting Officer)
EXHIBIT INDEX
-------------
Exhibit Number Exhibit Name
-------------- ------------
12 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends
31.1 Certification Pursuant to Rule 13a-15(e) and 15d-15(e), As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Rule 13a-15(e) and 15d-15(e), As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 12
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
DIVIDENDS
(In millions, except ratios)
For the six months ended
June 30, 2003
------------------------
Loss from continuing operations before taxes on income $ (594)
Adjustments:
Distributed income of equity investees 106
Amortization of capitalized interest 3
Fixed charges net of capitalized interest 93
----------
Loss before taxes and fixed charges as adjusted (392)
==========
Fixed charges:
Interest incurred 83
Portion of rent expense which represents an
appropriate interest factor 11
Amortization of debt costs 3
----------
Total fixed charges 97
Capitalized interest (4)
----------
Total fixed charges net of capitalized interest 93
==========
Preferred dividends:
Preferred dividend requirement
Ratio of pre-tax income to income before
minority interest and
equity earnings 1.0
----------
Pre-tax preferred dividend requirement
Total fixed charges 97
----------
Fixed charges and pre-tax preferred
dividend requirement 97
==========
Ratio of earnings to fixed charges *
==========
Ratio of earnings to combined fixed charges
and preferred dividends *
==========
* Loss before taxes and fixed charges as adjusted were inadequate to cover
total fixed charges and inadequate to cover fixed charges and pre-tax
dividend requirement by approximately $489 million at June 30, 2003.
Exhibit 31.1
CERTIFICATION
-------------
I, James R. Houghton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Corning Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
August 6, 2003 /s/ JAMES R. HOUGHTON
-------------------- ----------------------------------------------
Date James R. Houghton
Chairman and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
-------------
I, James B. Flaws, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Corning Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
August 6, 2003 /s/ JAMES B. FLAWS
-------------------- ----------------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
Exhibit 32.1
CORNING INCORPORATED
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Corning Incorporated (the "Company")
on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, James R. Houghton,
Chairman and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
August 6, 2003 /s/ JAMES R. HOUGHTON
--------------------- ---------------------------------------------
Date James R. Houghton
Chairman and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to Corning Incorporated and will be retained by Corning Incorporated
and furnished to the Securities and Exchange Commission or its staff upon
request.
Exhibit 32.2
CORNING INCORPORATED
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Corning Incorporated (the "Company")
on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, James B. Flaws, Vice
Chairman and Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
August 6, 2003 /s/ JAMES B. FLAWS
--------------------- ---------------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to Corning Incorporated and will be retained by Corning Incorporated
and furnished to the Securities and Exchange Commission or its staff upon
request.