FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________to____________
Commission file number 1-3247
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CORNING INCORPORATED
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(Registrant)
New York 16-0393470
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(State of incorporation) (I.R.S. Employer Identification No.)
One Riverfront Plaza, Corning, New York 14831
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-974-9000
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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
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:
1,402,238,744 shares of Corning's Common Stock, $0.50 Par Value, were
outstanding as of October 15, 2004.
INDEX
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PART I - FINANCIAL INFORMATION
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ITEM 1. Financial Statements
Page
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Consolidated Statements of Operations (Unaudited) for
the three and nine months ended September 30, 2004 and 2003 3
Consolidated Balance Sheets at September 30, 2004 (Unaudited)
and December 31, 2003 4
Consolidated Statements of Cash Flows (Unaudited) for the nine
months ended September 30, 2004 and 2003 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 47
Item 4. Controls and Procedures 47
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 53
Item 6. Exhibits 54
Signatures 55
Exhibit Index 56
Certifications 66
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share amounts)
For the three months For the nine months
ended September 30, ended September 30,
------------------------- --------------------------
2004 2003 2004 2003
---------- --------- --------- -----------
Net sales $ 1,006 $ 772 $ 2,821 $ 2,270
Cost of sales 602 546 1,771 1,663
--------- -------- --------- ---------
Gross margin 404 226 1,050 607
Operating expenses:
Selling, general and administrative expenses 153 147 479 447
Research, development and engineering expenses 88 80 257 258
Amortization of purchased intangibles 9 10 28 28
Restructuring, impairment and other charges and
(credits) (Notes 4 and 8) 1,794 (10) 1,794 90
Asbestos settlement (Note 5) (50) 51 16 388
--------- -------- --------- ---------
Operating (loss) income (1,590) (52) (1,524) (604)
Interest income 6 7 16 24
Interest expense (36) (36) (109) (118)
(Loss) gain on repurchases and retirement
of debt, net (Note 11) (4) 2 (36) 19
Other income, net 5 5 6 11
--------- -------- --------- ---------
(Loss) before income taxes (1,619) (74) (1,647) (668)
(Provision) benefit for income taxes (Note 9) (985) 30 (997) 208
--------- -------- --------- ---------
(Loss) before minority interests and
equity earnings (2,604) (44) (2,644) (460)
Minority interests (3) 2 (14) 72
Equity in earnings of associated companies, net of
impairments (Note 7) 96 75 310 194
--------- -------- --------- ---------
(Loss) income from continuing operations (2,511) 33 (2,348) (194)
Income from discontinued operation (Note 3) 20 20
--------- -------- --------- ---------
Net (loss) income $ (2,491) $ 33 $ (2,328) $ (194)
========= ======== ========= =========
Basic (loss) earnings per common share from:
Continuing operations $ (1.79) $ 0.03 $ (1.70) $ (0.15)
Discontinued operation 0.01 0.01
--------- -------- --------- ---------
Basic (loss) earnings per common share $ (1.78) $ 0.03 $ (1.69) $ (0.15)
========= ======== ========= =========
Diluted (loss) earnings per common share from:
Continuing operations $ (1.79) $ 0.02 $ (1.70) $ (0.15)
Discontinued operation 0.01 0.01
--------- -------- --------- ---------
Diluted (loss) earnings per common share $ (1.78) $ 0.02 $ (1.69) $ (0.15)
========= ======== ========= =========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except per share amounts)
September 30, December 31,
2004 2003
------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 1,147 $ 833
Short-term investments, at fair value 592 433
--------- ---------
Total cash, cash equivalents and short-term investments 1,739 1,266
Trade accounts receivable, net of doubtful accounts and allowances - $36 and $38 538 525
Inventories (Note 6) 498 467
Deferred income taxes (Note 9) 81 242
Other current assets 214 194
--------- ---------
Total current assets 3,070 2,694
Investments (Note 7) 1,233 1,045
Property, net of accumulated depreciation - $3,408 and $3,415 (Note 4) 3,505 3,620
Goodwill (Note 8) 276 1,735
Other intangible assets, net (Note 8) 132 166
Deferred income taxes (Note 9) 450 1,225
Other assets 203 267
--------- ---------
Total Assets $ 8,869 $ 10,752
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Loans payable $ 214 $ 146
Accounts payable 489 333
Other accrued liabilities (Notes 5 and 10) 1,027 1,074
--------- ---------
Total current liabilities 1,730 1,553
Long-term debt (Note 11) 2,438 2,668
Postretirement benefits other than pensions (Notes 1 and 2) 605 619
Other liabilities (Note 5) 498 412
Commitments and contingencies (Note 12)
Minority interests 30 36
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: 637 thousand and 854 thousand 64 85
Common stock - Par value $0.50 per share; Shares authorized: 3.8 billion;
Shares issued: 1,418 million and 1,401 million 709 701
Additional paid-in capital 10,342 10,298
Accumulated deficit (7,472) (5,144)
Treasury stock, at cost; Shares held: 17 million and 58 million (166) (574)
Accumulated other comprehensive income 91 98
--------- ---------
Total shareholders' equity 3,568 5,464
--------- ---------
Total Liabilities and Shareholders' Equity $ 8,869 $ 10,752
========= =========
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
For the nine months ended
September 30,
-------------------------
2004 2003
--------- --------
Cash flows from operating activities:
(Loss) income from continuing operations $ (2,348) $ (194)
Adjustments to reconcile net (loss) income from continuing
operations to net cash provided by operating activities:
Amortization of purchased intangibles 28 28
Depreciation 359 363
Restructuring, impairment and other charges and (credits) 1,794 90
Asbestos settlement 16 388
Loss (gain) on repurchases and retirement of debt, net 36 (19)
Undistributed earnings of associated companies (199) (84)
Minority interests, net of dividends paid 14 (76)
Deferred taxes 939 (259)
Interest expense on convertible debentures 4 15
Restructuring payments (75) (201)
Income tax refund 191
Customer deposits 100
Changes in certain working capital items:
Trade accounts receivable (29) 5
Inventories (52) 73
Other current assets (25) 34
Accounts payable and other current liabilities, net of restructuring payments 29 (228)
Other, net 52 (60)
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Net cash provided by operating activities 643 66
-------- -------
Cash flows from investing activities:
Capital expenditures (556) (204)
Net proceeds from sale of businesses 100 9
Net proceeds from sale or disposal of assets 46 39
Net increase in long-term investments and other long-term assets (4)
Short-term investments - acquisitions (969) (1,426)
Short-term investments - liquidations 810 1,481
Restricted investments - liquidations 6 16
-------- -------
Net cash used in investing activities (563) (89)
-------- -------
Cash flows from financing activities:
Net repayments of loans payable (111) (160)
Proceeds from issuance of long-term debt, net 442
Repayments of long-term debt (154) (1,100)
Proceeds from issuance of common stock, net 33 651
Cash dividends to preferred shareholders (6) (15)
Proceeds from the exercise of stock options 34
-------- -------
Net cash provided by (used in) financing activities 238 (624)
-------- -------
Effect of exchange rates on cash (4) 30
-------- -------
Net increase (decrease) in cash and cash equivalents 314 (617)
Cash and cash equivalents at beginning of period 833 1,426
-------- -------
Cash and cash equivalents at end of period $ 1,147 $ 809
======== =======
The accompanying notes are an integral part of these statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
General
Corning Incorporated and its consolidated subsidiaries is hereinafter sometimes
referred to as "the Company," "Registrant," "Corning," "we," "our" or "us."
Corning is a diversified technology company that concentrates its efforts on
high-impact growth opportunities. Corning combines its expertise in specialty
glass, ceramic materials, polymers and the manipulation of the properties of
light, with strong process and manufacturing capabilities to develop, engineer
and commercialize significant innovative products for the telecommunications,
flat panel display, environmental, life sciences and semiconductor industries.
The unaudited consolidated financial statements reflect all adjustments which,
in the opinion of management, are necessary for a fair statement of the results
of operations, financial position and cash flows for the interim periods
presented. All such adjustments are of a normal recurring nature. The
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and in accordance with
accounting principles generally accepted in the United States of America (GAAP)
for interim financial information.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect amounts reported
therein. Significant estimates and assumptions in these consolidated financial
statements include restructuring and other charges and credits, allowances for
doubtful accounts receivable, estimates of fair value associated with goodwill
and long-lived asset impairment tests, estimates of the fair value of assets
held for disposal, environmental and legal liabilities, income taxes including
deferred tax valuation allowances, and the determination of discount and other
rate assumptions for pension and postretirement employee benefit expenses. Due
to the inherent uncertainty involved in making estimates, actual results
reported in future periods may be different from these estimates.
The results for interim periods are not necessarily indicative of results that
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, 2003.
Certain amounts for 2003 were reclassified to conform to 2004 classifications.
Stock-Based Compensation
We apply Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25), for our stock-based compensation plans. The
following table illustrates the effect on (loss) income and (loss) earnings per
share if we had applied the fair value recognition provisions of Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), to
stock-based employee compensation.
(In millions, except per share amounts)
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Three months Nine months
ended September 30, ended September 30,
------------------------- -------------------------
2004 2003 2004 2003
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Loss from continuing operations - as reported $ (2,511) $ 33 $ (2,348) $ (194)
Add: Stock-based employee compensation expense
determined under APB No. 25, included in reported
net (loss) income, net of tax 3 1
Less: Stock-based employee compensation expense
determined under fair value based method, net of tax (20) (38) (77) (106)
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Loss from continuing operations - pro forma $ (2,531) $ (5) $ (2,422) $ (299)
(Loss) earnings per common share:
Basic - as reported $ (1.79) $ 0.03 $ (1.70) $ (0.15)
Basic - pro forma $ (1.81) 0.00 $ (1.76) $ (0.24)
Diluted - as reported $ (1.79) $ 0.02 $ (1.70) $ (0.15)
Diluted - pro forma $ (1.81) 0.00 $ (1.76) $ (0.24)
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For purposes of SFAS 123 fair value disclosures, each option grant's fair value is estimated on the grant date using the
Black-Scholes option pricing model. The following are weighted-average assumptions used for grants under our stock plans:
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Three months Nine months
ended September 30, ended September 30,
--------------------- ----------------------
2004 2003 2004 2003
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Expected life in years 4 5 4 5
Risk free interest rate 3.62% 3.59% 3.34% 3.02%
Expected volatility 50% 80.4% 50% 78.7%
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During the first quarter of 2004, Corning updated its analysis of the historical
stock option exercise behavior of its employees, among other relevant factors,
and determined that the best estimate of the stock options' expected term
granted in the first quarter was 4 years, compared to our previous expected term
estimate of 5 years. Additionally, Corning used a 10-year mean reversion
analysis, as allowed by SFAS 123, to determine the volatility assumption also
used to estimate the fair value of options granted in the first quarter. Prior
to 2004, Corning used historical trailing volatility for a period equal to the
expected term of our stock options. Corning believes a mean reversion analysis
provides a better estimate of future volatility expectations.
Changes in the status of outstanding options follow:
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Number of Shares Weighted-Average
(in thousands) Exercise Price
--------------------------------------------------------------------------------
Options outstanding December 31, 2003 135,352 $ 20.58
Options granted under plans 9,461 $ 11.66
Options exercised (5,900) $ 5.93
Options terminated (1,115) $ 28.24
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Options outstanding September 30, 2004 137,798 $ 20.43
=======
Options exercisable September 30, 2004 100,468 $ 24.04
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New Accounting Standard
In May 2004, the FASB issued Staff Position (FSP) No. FAS 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" (FSP No. 106-2), which provides guidance on how
companies should account for the impact of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Act") on its postretirement
health care plans. To encourage employers to retain or provide postretirement
drug benefits, beginning in 2006 the federal government will provide non-taxable
subsidy payments to employers that sponsor prescription drug benefits to
retirees that are "actuarially equivalent" to the Medicare benefit. Corning has
determined that its postretirement health care plans' prescription drug benefits
are actuarially equivalent to Medicare Part D benefits to be provided under the
Act. Effective July 1, 2004, Corning prospectively adopted the accounting
guidance of FSP No. 106-2, which reduced our postretirement health care and life
insurance plans' accumulated postretirement benefit obligation by $73 million
and will reduce the related annual expense by $10 million. For the three months
ended September 30, 2004, our postretirement benefit expense decreased $3
million reflecting the adoption of this accounting guidance.
2. Employee Retirement Plans
The following table summarizes the components of net periodic benefit cost for Corning's defined benefit pension and postretirement
health care and life insurance plans (in millions):
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Pension benefits Postretirement benefits
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Three months Nine months Three months Nine months
ended Sept. 30, ended Sept. 30, ended Sept. 30, ended Sept. 30,
-------------------- ------------------- -------------------- ------------------
2004 2003 2004 2003 2004 2003 2004 2003
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Service cost $ 10 $ 8 $ 30 $ 27 $ 2 $ 2 $ 7 $ 7
Interest cost 33 28 99 101 11 12 36 36
Expected return on plan assets (37) (33) (111) (120)
Amortization of net loss 5 3 16 5 1 1 5 3
Amortization of prior service cost 2 2 6 8 (1) (1) (5) (4)
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Net periodic benefit expense 13 8 40 21 13 14 43 42
Curtailment loss (gain) 8 (5)
Special termination benefits 14 10
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Total expense $ 13 $ 8 $ 40 $ 43 $ 13 $ 14 $ 43 $ 47
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For the nine months ended September 30, 2004, we contributed $44 million to our
domestic and international pension plans.
3. Discontinued Operation
On December 13, 2002, we completed the sale of our precision lens business to 3M
Company ("3M") for cash proceeds up to $850 million, of which $50 million was
deposited in an escrow account. 3M notified Corning that 3M believed it had
certain claims arising out of the representations and warranties made by Corning
in connection with the sale of the precision lens business to 3M. In the third
quarter of 2004, Corning and 3M reached a final settlement agreement for the
funds held in escrow. Accordingly, we recognized a gain of $20 million upon
receipt of $20 million of proceeds. This gain is included in income from
discontinued operation in the consolidated statements of operations.
4. Restructuring, Impairment and Other Charges and (Credits)
2004 Restructuring Actions
Third Quarter
-------------
In the third quarter of 2004, we recorded restructuring, impairment and other
charges and (credits) of $1,794 million. A summary of the charges and credits
follows:
. We recorded a charge of $1,420 million to impair a significant portion of
our Telecommunications segment goodwill balance. Refer to Note 8 for
additional information on this charge.
. We recorded a $350 million charge to impair certain fixed assets of our
Telecommunications segment in accordance with SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" (SFAS 144). This charge
primarily relates to our third quarter decision to permanently abandon
approximately $332 million of construction in progress at our optical fiber
manufacturing facility in Concord, North Carolina that had been stopped in
2002. As a result of our lowered outlook, we have permanently abandoned
this construction in progress as we no longer believe the demand for
optical fiber will warrant the investment necessary to complete this
facility.
. We recorded an asset held for use impairment charge of $24 million to
impair certain fixed assets and intangible assets other than goodwill in
accordance with SFAS 144. Due to our decision to permanently abandon
certain fixed assets and lower our long-term outlook for the
Telecommunications segment, we determined that an event of impairment, as
defined by SFAS 144, had occurred in our Telecommunications segment which
required us to test the segment's long-lived assets other than goodwill for
impairment. We assess recoverability of the carrying value of long-lived
assets at the lowest level for which indentifiable cash flows are largely
independent of the cash flows of other assets and liabilities. We estimated
the fair value of the long-lived assets using the discounted cash flow
approach as a measure of fair value. As a result of our impairment
evaluation, we recorded an impairment charge to write-down certain assets
to their estimated fair values.
. We recorded a gain of $8 million related to proceeds in excess of assumed
salvage values for assets of Corning Asahi Video Products Company (CAV)
that were previously impaired but later sold to a Henan Anyang CPT Glass
Bulb Group, Electronic Glass Co., Ltd. (Henan Anyang), located in China.
CAV was our 51% owned affiliate that manufactured glass panels and funnels
for use in conventional televisions that was shut down in 2003. This
represents the substantial completion of the sale of CAV's assets.
. We recorded a loss of $14 million on the sale of our frequency controls
business for net cash proceeds of $80 million. The frequency controls
business, which was part of our Telecommunications segment, had annual
sales of $76 million.
. We recorded net credits of $6 million comprised of adjustments to prior
years' restructuring and impairment charges.
Second Quarter
--------------
In the second quarter of 2004, we recorded credits of $34 million included in
restructuring, impairment and other charges and (credits). A summary of these
credits follows:
. We recorded a $25 million gain related to proceeds in excess of assumed
salvage values for assets of CAV that were previously impaired but later
sold to Henan Anyang.
. We recorded a $9 million credit comprised of reversals of reserves related
to prior years' restructuring charges.
First Quarter
-------------
In the first quarter of 2004, we recorded net charges of $34 million included in
restructuring, impairment and other charges and (credits). A summary of these
charges and credits follow:
. We recorded $39 million of accelerated depreciation and $1 million of exit
costs relating to the final shutdown of our semiconductor materials
manufacturing facility in Charleston, South Carolina, which we announced in
the fourth quarter of 2003.
. We recorded credits of $6 million, primarily related to proceeds in excess
of assumed salvage values for assets that were previously impaired.
The following table details the charges, credits and balances of the restructuring liabilities as of and for the nine months ended
September 30, 2004 (in millions):
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Nine months Remaining
ended Sept. Revisions Net Cash reserve at
January 1, 30, 2004 to existing charges/ payments Sept. 30,
2004 charge plans (reversals) in 2004 2004
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Restructuring charges:
Employee related costs $ 78 $ 4 $ 4 $ (55) $ 27
Other charges 108 $ 2 (4) (2) (20) 86
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Total restructuring charges $ 186 $ 2 $ 0 $ 2 $ (75) $ 113
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Impairment of long-lived assets:
Goodwill $ 1,420 $ 1,420
Assets to be disposed of by sale
or abandonment 350 $ (55) 295
Assets to be held and used $ 24 $ 24
---------------------------------------
Other:
Accelerated depreciation $ 39 $ 39
Loss on sale of frequency controls business $ 14 $ 14
---------------------------------------
Total restructuring, impairment and other
charges and (credits) $ 1,849 $ (55) $ 1,794
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Cash payments for employee related costs will be substantially complete by the
end of 2005, while payments for exit activities will be substantially complete
by the end of 2007. As of September 30, 2004, all of the 1,975 employees from
the 2003 restructuring plans have been separated.
2003 Restructuring Actions
Third Quarter
-------------
In the third quarter of 2003, we recorded net credits of $10 million included in
restructuring, impairments and other charges (credits). A summary of the charges
and credits follows:
. We recorded a loss of $13 million for the completion of the sale of certain
photonic technologies assets of our Telecommunications segment to Avanex
Corporation (Avanex).
. We recorded a charge of $3 million related to the exit of the photonic
technologies business for employee separation costs.
. We recorded credits of $20 million for the reversal of restructuring
reserves related to prior years' restructuring charges, primarily in the
Telecommunications segment.
. We recorded a gain of $5 million related to proceeds in excess of assumed
salvage values for assets of CAV that were previously impaired but later
sold to a Henan Anyang.
. We recorded a gain of $1 million on the sale of previously impaired cost
investments in the Telecommunications segment that were later sold to a
third party.
Second Quarter
--------------
In the second quarter of 2003, we recorded net charges of $49 million included
in restructuring, impairment and other charges and (credits). A summary of these
charges and credits follows:
. We recorded a charge of $54 million related to the shut down of CAV.
. We recorded a charge of $33 million related to the exit of the photonic
technologies business.
. We recorded a charge of $38 million related to restructuring and impairment
actions in the Telecommunications segment and administrative staffs.
. We recorded a credit of $76 million related to prior years' restructuring
and impairment charges, primarily in the Telecommunications segment.
First Quarter
-------------
In the first quarter of 2003 we recorded net charges of $51 million included in
restructuring, impairment and other charges and (credits). A summary of these
charges and credits follows:
. We recorded a $17 million charge associated with the discontinuance of
optical switching, which was part of our Telecommunications segment.
. We recorded a $5 million charge for other than temporary declines in
certain cost investments in the Telecommunications segment.
. We recorded a $33 million reversal of prior years' charges related to
revised cost estimates of existing restructuring plans.
. We recorded a $62 million asset impairment charge related to CAV.
The following table details the charges, credits and balances of the restructuring reserves as of September 30, 2003 (in millions):
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Nine months Nine months ended Remaining
ended Sept. Reversals Net Sept. 30, 2003 Cash reserve at
January 1, 30, 2003 to existing charges/ Non-cash payments Sept. 30,
2003 charge plans (reversals) charges in 2003 2003
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Restructuring charges:
Employee related costs $ 273 $ 84 $ (59) $ 25 $ (27) $ (170) $ 101
Other charges 132 33 (21) 12 (31) 113
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Total restructuring charges $ 405 $ 117 $ (80) $ 37 $ (27) $ (201) $ 214
-----------------------------------------------------------------------------------------
Impairment of long-lived assets:
Assets to be held and used $ 62 $ 62
Assets to be disposed of by sale
or abandonment 28 $ (54) (26)
Cost investments 5 (1) 4
-----------------------------------
Total impairment charges $ 95 $ (55) $ 40
-----------------------------------
Other charges:
Loss on Avanex transaction $ 13 $ 13
Total restructuring, impairment and other
charges and (credits) $ 225 $ (135) $ 90
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5. Asbestos Settlement
On March 28, 2003, we announced that we had reached agreement with the
representatives of asbestos claimants for the settlement of all current and
future non-premises asbestos claims against us and Pittsburgh Corning
Corporation (PCC), which might arise from PCC products or operations.
The agreement is expected to be incorporated into a settlement fund as part of a
reorganization plan for PCC. The plan was submitted to the federal bankruptcy
court at the end of 2003, received a favorable vote from creditor classes in the
first quarter of 2004, but remains subject to a number of contingencies. The
Bankruptcy Court has set a schedule for briefing leading to final arguments in
November 2004. We will make our contributions to the settlement trust under the
agreement after the plan is approved, becomes effective and is no longer subject
to appeal.
When the plan becomes effective, our settlement will require the contribution of
our equity interest in PCC, our one-half equity interest in Pittsburgh Corning
Europe N.V. (PCE), and 25 million shares of our common stock. The common stock
will be marked-to-market each quarter until the settlement plan is approved,
thus resulting in adjustments to income and the settlement liability as
appropriate. The agreement also includes the contribution of cash payments with
a current value of $142 million over six years beginning one year after the plan
becomes effective. In addition, we will assign insurance policy proceeds from
our primary insurance and a portion of our excess insurance as part of the
settlement.
The following summarizes the charges we have recorded to reflect the initial settlement and mark-to-market the value of our common
stock (in millions):
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Three months Nine months
ended September 30, ended September 30,
--------------------- ---------------------
2004 2003 2004 2003
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Asbestos settlement charge (credit) $ (50) $ 51 $ 16 $ 388
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Since March 28, 2003, we have recorded total net charges of $429 million to
reflect the initial settlement and mark-to-market the value of our common stock.
The carrying value of our stock in PCE and the fair value of 25 million shares
of our common stock as of September 30, 2004 ($298 million) have been reflected
in other accrued liabilities. The remaining $142 million, representing the net
present value of the cash payments discounted at 5.5%, is recorded in other
liabilities. See Part II-Other Information, Item 1. Legal Proceedings for a
history of this matter.
6. Inventories
(in millions)
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September 30, 2004 December 31, 2003
--------------------------------------------------------------------------------
Finished goods $ 138 $ 141
Work in process 136 113
Raw materials and accessories 138 138
Supplies and packing materials 86 75
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Total inventories $ 498 $ 467
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7. Investments
At September 30, 2004 and December 31, 2003, our total investments accounted for
by the equity method were $1,184 million and $978 million, respectively.
Summarized results of operations of our two significant equity method
investments follow:
Samsung Corning Precision Glass Co., Ltd. (Samsung Corning Precision)
(in millions)
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Three months Nine months
ended September 30, ended September 30,
------------------------ -------------------------
2004 2003 2004 2003
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Statement of Operations
Net sales $ 275 $ 158 $ 774 $ 399
Gross profit $ 211 $ 114 $ 595 $ 284
Net income $ 137 $ 78 $ 408 $ 192
Related Party Transactions:
Sales to Samsung Corning Precision $ 50 $ 6 $ 62
Purchases from Samsung Corning Precision $ 19 $ 17 $ 56 $ 25
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Our investment in Samsung Corning Precision, a 50%-owned South Korea based
manufacturer of liquid crystal display glass, was $465 million and $299 million
at September 30, 2004 and December 31, 2003, respectively.
Balances due to and from Samsung Corning Precision were immaterial at September
30, 2004 and December 31, 2003. Profits related to inventories on hand at the
end of a period are eliminated during consolidation.
Dow Corning Corporation (Dow Corning)
(in millions)
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Three months Nine months
ended September 30, ended September 30,
------------------------- ---------------------------
2004 2003 2004 2003
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Statement of Operations:
Net sales $ 830 $ 724 $ 2,496 $ 2,095
Gross profit $ 262 $ 199 $ 770 $ 605
Net income $ 80 $ 47 $ 168 $ 137
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Our investment in Dow Corning, a 50%-owned U.S. based manufacturer of silicone
products, was $252 million and $185 million at September 30, 2004 and December
31, 2003, respectively.
For the nine months ended September 30, 2004, Dow Corning recorded charges
related to restructuring actions and adjustments to interest liabilities
recorded on its emergence from bankruptcy. Our equity earnings included $21
million related to these charges. Subject to future rulings by the bankruptcy
court and potential changes in estimated bankruptcy-related liabilities, it is
possible that Dow Corning may record bankruptcy-related charges in the future.
For information related to Dow Corning litigation and bankruptcy proceedings,
see Part II-Other Information, Item 1. Legal Proceedings.
Other
In the third quarter of 2004, we recorded impairment charges of $35 million to
write-down certain Telecommunications segment equity method investments to
estimated fair value. As a result of our revised Telecommunications segment
outlook, we determined that these investments were no longer strategic assets
and therefore no longer intend to hold these investments. Accordingly, we
recorded a charge to fully impair the book values of our investments in these
entities. These impairment charges are included in equity in earnings of
associated companies, net of impairments on the consolidated statements of
operations.
8. Goodwill and Other Intangibles Assets
The changes in the carrying amount of goodwill for the nine months ended September 30, 2004 follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Telecom- Display Unallocated
munications Technologies and Other Total
------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2004 $ 1,576 $ 9 $ 150 $ 1,735
Impairment (1,420) (1,420)
Divestiture of frequency controls business (30) (30)
Foreign currency translation & other (9) (9)
------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2004 $ 117 $ 9 $ 150 $ 276
------------------------------------------------------------------------------------------------------------------------------------
Pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets," (SFAS 142)
goodwill is required to be tested for impairment annually at the reporting unit
level. In addition, goodwill should be tested for impairment between annual
tests if an event occurs or circumstances change that would more likely than not
reduce the fair value of the reporting unit below its related carrying value.
The reporting unit for our Telecommunications segment goodwill is our
Telecommunications operating segment. While our annual goodwill recoverability
assessment is completed in the fourth quarter, as it is the traditionally based
on our annual strategic planning process that runs from June to October. This
process includes reviewing expectations for the long-term growth of the
telecommunications industry and, forecasting future cash flows. In the third
quarter, we identified certain factors during this annual strategic planning
process that caused us to lower our estimates and projections for the long-term
revenue growth of the Telecommunications segment, which indicated that the fair
value of the Telecommunications segment reporting unit was less than its
carrying value. As such, we performed an interim impairment test of its
Telecommunications segment goodwill in the third quarter of 2004 and reviewed
the outcome with Corning's board of directors on October 6, 2004.
Although we are currently experiencing stronger than expected volume in this
segment, the improved demand comes from a narrow band of customers, and we see
few signs of a broader recovery in overall demand, mix of premium products, and
pricing for our products. The lack of industry consolidations, increased
competitive pressures in the industry, and revised estimates of future customer
demand for the types of products they will deploy have caused us to change our
assessment of the future pace of recovery. The primary estimates and forecasts
driving this change in our outlook and reducing the fair value of the
Telecommunications segment from that measured in 2003 follow:
. Revised estimates of future pricing for fiber and cable: Pricing in the
telecommunications industry remains depressed as the industry has failed to
reduce capacity. Our previous projections assumed some rationalization of
capacity that would lead to more stable pricing. We now expect the current
depressed pricing conditions to persist into 2005 and beyond.
. Revised estimates of demand for premium fiber product: Based on competitive
conditions and projected future customer requirements, we do not expect to
achieve the level of demand for premium fiber products we previously
projected. Although we have introduced innovative products to the market,
we have not been able to obtain the historical premium prices for such
products. Additionally, demand for premium fiber has declined as there are
fewer projects demanding premium fiber. As a result, we have significantly
reduced our outlook for future revenue and profitability from premium
products. We now do not expect any significant increase in premium fiber
mix for the foreseeable future.
. Revised estimates for the long-term worldwide market volume growth: As we
forecast customer demand, we have lowered the rate of volume growth in the
longer range.
We estimated the fair value of the Telecommunications segment using a discounted
cash flow model based on our current estimates for the long-term growth of the
Telecommunications segment, and concluded that the fair value of the
Telecommunications segment was below its carrying amount. We also retained
valuation specialists to assist in the valuation of its tangible and
identifiable intangible assets for purposes of determining the implied fair
value of goodwill at September 30, 2004. Accordingly, we recorded an impairment
charge of $1,420 million to reduce the carrying value of goodwill to its implied
fair value of $117 million. The goodwill impairment charge has been included in
restructuring, impairments and other charges and (credits) on the consolidated
statements of operations.
As discussed in Note 4, on September 1, 2004, we completed the sale of our
frequency controls business, which was part of the Telecommunications segment,
and recorded a loss on the sale of $14 million. As required by SFAS 142, we
allocated a portion of the Telecommunications segment goodwill balance to the
carrying amount of the frequency controls business in determining the loss on
disposal. The amount of goodwill to be included in that carrying amount was
based on the relative fair value of the business to be disposed and the portion
of the Telecommunications segment to be retained. The amount of goodwill
allocated to the carrying value of frequency controls business was $30 million.
Other intangible assets follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
September 30, 2004 December 31, 2003
------------------------------------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Patents and trademarks $ 144 $ 69 $ 75 $ 145 $ 57 $ 88
Non-competition agreements 108 105 3 113 89 24
Other 4 1 3 4 1 3
---------------------------------- ----------------------------------
Total amortized intangible assets 256 175 81 262 147 115
Other intangible assets:
Intangible pension assets 51 51 51 51
---------------------------------- ----------------------------------
Total $ 307 $ 175 $ 132 $ 313 $ 147 $ 166
------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets are primarily related to the Telecommunications
segment.
Amortization expense related to these intangible assets is expected to
approximate $16 million in 2005, $11 million in 2006, $11 million in 2007, and
insignificant thereafter.
9. Income Taxes
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------- -----------------------
(in millions): 2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations before income taxes:
U.S. companies $ (1,285) $ (168) $ (1,491) $ (831)
Non-U.S. companies (334) 94 (156) 163
------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations before income taxes $ (1,619) $ (74) $ (1,647) $ (668)
------------------------------------------------------------------------------------------------------------------------------------
Current and deferred (provision) benefit for income taxes:
Current:
Federal $ 3 $ (4) $ 13 $ (9)
State and municipal 7 11 7 13
Foreign (16) 9 (74) (45)
Deferred:
Federal (569) 30 (547) 244
State and municipal (234) (2) (220) 28
Foreign (176) (14) (176) (23)
------------------------------------------------------------------------------------------------------------------------------------
(Provision) benefit for income taxes $ (985) $ 30 $ (997) $ 208
------------------------------------------------------------------------------------------------------------------------------------
Effective tax reconciliation:
Benefit for income taxes at U.S. statutory rate $ 566 $ 26 $ 576 $ 234
State income tax, net of federal benefit 19 4 28 25
Nondeductible goodwill and other expenses (417) (1) (427) (3)
Foreign and other tax credits 23 (1) (4)
(Lower) higher taxes on subsidiary earnings (6) 4 (12) (35)
Valuation allowances (a) (1,174) (1) (1,174) (4)
Other items, net 4 (1) 12 (5)
------------------------------------------------------------------------------------------------------------------------------------
Effective (income tax) benefit $ (985) $ 30 $ (997) $ 208
------------------------------------------------------------------------------------------------------------------------------------
(a) For the three and nine months ended September 30, 2004, the increase in our
valuation allowance reflects the following:
. $937 million in provision for income taxes caused by our decision to
record a valuation allowance against certain deferred tax assets;
. the recording of valuation allowances against $237 million of deferred
tax assets attributable to the deductible portion of the third quarter
2004 goodwill impairment, restructuring and other asset impairment
charges.
At September 30, 2004, we have recorded net deferred tax assets of approximately
$2.1 billion with a valuation allowance of approximately $1.6 billion.
Prior to the third quarter of 2004, we believed it was more likely than not that
our domestic (U.S. federal, state and local) and German net deferred tax assets
would be realized. This assessment was based upon the following:
. Approximately $140 million of our net U.S. deferred tax assets were
expected to have been realized through net operating loss carryback claims
to be filed over the next three to five years, which would have generated
cash refunds during such period.
. We expected the remaining net U.S. and German deferred tax assets to be
realized from future earnings.
. In the event future earnings were insufficient, approximately $500 million
of our net U.S. deferred tax assets were expected to have been realized
through a tax-planning strategy involving the sale of a non-strategic
appreciated asset.
As more fully explained below, significant events occurred in the third quarter
of 2004 requiring us to increase our valuation allowance against certain
specific U.S. and German deferred tax assets.
We assess the realizability of our deferred tax assets on a quarterly basis. In
connection with our third quarter assessment, we performed a review of all
available positive and negative evidence, including an evaluation of scheduled
reversals of deferred tax liabilities, estimates of projected future taxable
income, and tax planning strategies, as well as related key assumptions. SFAS
109, "Accounting for Income Taxes," requires that greater weight be given to
previous cumulative losses than the outlook for future profitability when
determining whether deferred tax assets can be used. This review produced the
following conclusions:
. Due to delays in finalizing the PCC settlement, we no longer believe that
it is more likely than not that we will realize a portion of our net U.S.
deferred tax assets through net operating loss carryback claims.
. We have incurred significant losses in the U.S. and Germany due primarily
to the Telecommunications restructuring and impairment charges over the
last four years. Although Corning's profitability has improved over the
last several quarters, a growing portion of our sales and earnings is
outside of the U.S., particularly in Asia. The U.S. portion of our
operations is still operating at a loss. This portion not only includes
most of our Telecommunications segment, but also a significant portion of
our global research, development and engineering and corporate
infrastructure spending. As we have taken additional significant impairment
charges and lowered the outlook for our largest U.S. based business during
the third quarter, we believe that a valuation allowance against these tax
assets is required until realization is more assured. Refer to Notes 4 and
8 for additional information.
Accordingly, we increased our valuation allowance by $1.2 billion in the third
quarter of 2004 to reduce our net deferred tax assets to approximately $530
million, which are primarily U.S. net deferred tax assets. We continue to
believe that it is more likely than not that we could realize these net U.S.
deferred tax assets through a tax-planning strategy involving the sale of a
non-strategic appreciated asset.
We expect to maintain a valuation allowance on future tax benefits until an
appropriate level of profitability, primarily in the U.S. and Germany, is
sustained or we are able to develop tax planning strategies that enable us to
conclude that it is more likely than not that a larger portion of our deferred
tax assets would be realizable, or if the PCC settlement is finalized earlier
than we anticipate. Until then, our tax provision will include only the net tax
expense attributable to certain foreign operations.
10. Product Warranty Liability
Our product warranty reserves relate primarily to our Telecommunications
segment. A reconciliation of the changes in the product warranty liability
during the nine months ended September 30 follows (in millions):
--------------------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------------------
Balance at January 1 $ 41 $ 64
Provision based on current year sales 8 3
Adjustments to liability existing on January 1 (6) (18)
Foreign currency translation 0 (11)
Settlements made during the current period (6) 2
------- -----
Balance at September 30 $ 37 $ 40
--------------------------------------------------------------------------------
11. Long-Term Debt
Third Quarter
-------------
In the third quarter of 2004, we issued 6 million shares of common stock and
paid $4 million in cash in exchange for 57,500 of our 3.5% convertible
debentures with a book value of $58 million. In accordance with SFAS No. 84,
"Induced Conversions of Convertible Debt," we recorded a charge of $4 million
reflecting the fair value of the incremental consideration given (i.e., the
cash) beyond those required by the terms of the debentures. The increase in
equity due to issuance of shares from treasury stock was $53 million.
Second Quarter
--------------
In the second quarter of 2004, we issued 10 million shares of common stock and
paid $9 million in cash in exchange for 97,500 of our 3.5% convertible
debentures with a book value of $98 million. In accordance with SFAS No. 84, we
recorded a loss of $9 million reflecting the fair value of the incremental
consideration given (i.e., cash) shares issued beyond those required by the
terms of the debentures. The increase in equity due to issuance of shares from
treasury stock was $88 million.
First Quarter
-------------
In the first quarter of 2004, our long-term debt transactions included the
following:
Issuance of Long-Term Debt
In March 2004, we issued $400 million of senior unsecured notes, of which $200
million aggregate principal amount of 5.90% notes mature on March 15, 2014 and
$200 million aggregate principal amount of 6.20% notes mature on March 15, 2016.
These senior unsecured notes were issued under our existing $5 billion universal
shelf registration statement, which became effective in March 2001. We realized
net proceeds of approximately $396 million from the issuance of these notes. We
will pay interest semi-annually on these senior unsecured notes on March 15 and
September 15.
Loss on Repurchases and Retirement of Debt, Net
3.5% convertible debentures
---------------------------
In the first quarter of 2004, we issued 22 million shares of common stock and
paid $24 million in cash in exchange for our 3.5% convertible debentures with a
book value of $213 million. In accordance with SFAS No. 84, we recorded a charge
of $23 million reflecting the fair value of the incremental consideration given
(i.e., cash) beyond those required by the terms of the debentures. The increase
in equity due to issuance of shares from treasury was $189 million.
Zero coupon convertible debentures
----------------------------------
In the first quarter of 2004, we repurchased and retired 150,000 zero coupon
convertible debentures with a book value of $119 million in exchange for cash of
$117 million. The gain on the transaction was offset by the write-off of the
unamortized issuance costs.
12. Commitments and Contingencies
In 2003, we adopted the initial recognition and measurement provisions of FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," (FIN 45).
We do not routinely provide significant third-party guarantees and, as a result,
this interpretation has not had a material effect on our financial statements.
We provide financial guarantees and incur contingent liabilities in the form of
purchase price adjustments related to attainment of milestones, stand-by letters
of credit and performance bonds. These guarantees have various terms, and none
of these guarantees are individually significant. We have also agreed to provide
a credit facility related to Dow Corning as discussed in Note 10 to the
Consolidated Financial Statements in our 2003 Annual Report on Form 10-K.
Corning's obligation to fund the Dow Corning $150 million credit facility may be
triggered if in the next ten years Dow Corning is unable to meet its obligations
to fund the settlement payments required under its Bankruptcy Plan. Corning
believes that Dow Corning has sufficient cash flow and liquidity to meet its
current obligations. As of September 30, 2004, we were contingently liable for
the items described above totaling $367 million, compared with $445 million at
December 31, 2003. We believe a significant majority of these guarantees and
contingent liabilities will expire without being funded.
From time to time, we are subject to uncertainties and litigation and are not
always able to predict the outcome of these items with assurance. Various legal
actions, claims and proceedings are pending against us, including those arising
out of alleged product defects, shareholder matters, product warranties,
patents, asbestos and environmental matters. These issues are discussed in Part
II-Other Information, Item 1. Legal Proceedings of this Form 10-Q.
13. Comprehensive (Loss) Income
Comprehensive (loss) income, net of tax, was as follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------- --------------------------
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (2,491) $ 33 $ (2,328) $ (194)
Other comprehensive (loss) income (4) 46 (7) 74
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive (loss) income $ (2,495) $ 79 $ (2,335) $ (120)
------------------------------------------------------------------------------------------------------------------------------------
14. (Loss) Earnings Per Common Share
The reconciliation of the amounts used in the basic and diluted (loss) earnings per common share from continuing operations
computations follows (in millions, except per share amounts):
------------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30,
---------------------------------------------------------------------------------
2004 2003
---------------------------------------- -------------------------------------
Net Weighted- Per Share Net Weighted- Per Share
Loss Average Shares Amount Income Average Shares Amount
------------------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per common share $ (2,511) 1,399 $ (1.79) $ 33 1,314 $ 0.03
------------------------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Stock options 20
7% mandatory convertible preferred stock 56
------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share $ (2,511) 1,399 $ (1.79) $ 33 1,390 $ 0.02
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
---------------------------------------------------------------------------------
2004 2003
---------------------------------------- -------------------------------------
Net Weighted- Per Share Net Weighted- Per Share
Loss Average Shares Amount Loss Average Shares Amount
------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per common share $ (2,348) 1,380 $ (1.70) $ (194) 1,253 $ (0.15)
------------------------------------------------------------------------------------------------------------------------------------
The following potential common shares were excluded from the calculation of diluted (loss) earnings per common share due to
their anti-dilutive effect or, in the case of stock options, because their exercise price was greater than the average market
price for the periods presented (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------- --------------------
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Potential common shares excluded from the calculation
of diluted earnings (loss) per common share:
Stock options 32 34 14
7% mandatory convertible preferred stock 35 37 70
3.5% convertible debentures 39 69 44 69
4.875% convertible notes 6 6 6 6
Zero coupon convertible debentures 3 6 3 11
---------------------------------------------------------
Total 115 81 124 170
---------------------------------------------------------
Stock options excluded from the calculation of diluted
earnings (loss) per share because the exercise price was
greater than the average market price of the common shares 61 69 58 83
------------------------------------------------------------------------------------------------------------------------------------
15. Operating Segments
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," set standards for reporting information regarding operating
segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. Our
Chief Operating Decision-Making group (CODM) is comprised of the chairman and
chief executive officer, vice chairman and chief financial officer, president
and chief operating officer, president-Corning Technologies, executive vice
president-chief administrative officer and executive vice president-chief
technology officer.
Effective with the first quarter of 2004, we revised our reportable operating
segments from Telecommunications and Technologies to Telecommunications, Display
Technologies, Environmental Technologies and Life Sciences. Prior year
information has been restated to conform to this revision. The following
provides a brief description of the products and markets served by each
reportable segment:
. Telecommunications - manufactures optical fiber and cable and hardware and
equipment components for the worldwide telecommunications industry;
. Display Technologies - manufactures liquid crystal display glass substrates
for flat panel displays;
. Environmental Technologies - manufactures ceramic substrates and filters
for automobile and diesel applications; and
. Life Sciences - manufactures glass and plastic consumables for scientific
applications.
The change in our segment presentation reflects how Corning's CODM allocates
resources and assesses the performance of its businesses. Specifically, the CODM
is significantly increasing its level of review of the Display Technologies
segment due to the recent increase in growth and capital spending in that
segment. In addition, the CODM is increasing its review of the Environmental
Technologies and Life Sciences segments to strengthen the overall balance and
stability of Corning's portfolio of businesses.
All other operating segments that do not meet the quantitative threshold for
separate reporting (e.g., Specialty Materials, Ophthalmic, and Conventional
Video Components), certain corporate investments (e.g., Dow Corning and
Steuben), discontinued operations and unallocated expenses have been grouped as
"Unallocated and Other". Unallocated expenses include research and other
expenses related to new business development; gains or losses on repurchases and
retirement of debt; charges related to the asbestos litigation; restructuring
and impairment charges related to the corporate research and development or
staff organizations; and charges for increases in our tax valuation allowance.
Unallocated and Other also represents the reconciliation between the total
operating results for the reportable segments and our consolidated operating
results.
We prepare the financial results for our operating segments on a basis that is
consistent with the manner in which we internally disaggregate financial
information to assist in making internal operating decisions. We include the
earnings of equity affiliates that are closely associated with our operating
segments in the respective segment's net income. We have allocated certain
common expenses among segments differently than we would for stand-alone
financial information prepared in accordance with GAAP. These expenses include
interest, taxes and corporate functions. Segment net income may not be
consistent with measures used by other companies. The accounting policies of our
operating segments are the same as those applied in the consolidated financial
statements.
------------------------------------------------------------------------------------------------------------------------------------
Operating Segments Telecom- Display Environmental Life Unallocated Consolidated
(in millions) munications Technologies Technologies Sciences and Other Total
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended September 30, 2004
Net sales $ 412 $ 295 $ 136 $ 75 $ 88 $ 1,006
Research, development and engineering
expenses (1) $ 21 $ 22 $ 23 $ 9 $ 13 $ 88
Restructuring, impairment and other charges
and (credits) $ 1,802 $ (8) $ 1,794
Interest expense (2) $ 9 $ 15 $ 7 $ 1 $ 4 $ 36
(Provision) benefit for income taxes $ (9) $ (39) $ (1) $ (936) $ (985)
(Loss) income before minority interests and
equity (losses) earnings (3)(4) $(1,785) $ 74 $ 2 $ (895) $ (2,604)
Minority interests (5) (3) (3)
Equity in (losses) earnings of associated
companies, net of impairments (6) (35) 68 63 96
Income from discontinued operations 20 20
------- -------- -------- ------- -------- --------
Net (loss) income $(1,820) $ 142 $ 0 $ 2 $ (815) $ (2,491)
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended September 30, 2003
Net sales $ 370 $ 144 $ 121 $ 70 $ 67 $ 772
Research, development and engineering
expenses (1) $ 25 $ 12 $ 22 $ 7 $ 14 $ 80
Restructuring, impairment and other charges
and (credits) $ (2) $ (8) $ (10)
Interest expense (2) $ 16 $ 9 $ 5 $ 6 $ 36
(Provision) benefit for income taxes $ 16 $ (13) $ (2) $ (1) $ 30 $ 30
(Loss) income before minority interests and
equity earnings (3)(4) $ (28) $ 25 $ 2 $ 3 $ (46) $ (44)
Minority interests (5) 2 2
Equity in earnings of associated
companies, net of impairments 1 39 1 34 75
------- -------- -------- ------- -------- --------
Net (loss) income $ (27) $ 64 $ 3 $ 3 $ (10) $ 33
------------------------------------------------------------------------------------------------------------------------------------
For the nine months ended September 30, 2004
Net sales $ 1,116 $ 802 $ 418 $ 233 $ 252 $ 2,821
Research, development and engineering
expenses (1) $ 69 $ 57 $ 64 $ 27 $ 40 $ 257
Restructuring, impairment and other charges
and (credits) $ 1,797 $ (3) $ 1,794
Interest expense (2) $ 41 $ 37 $ 17 $ 4 $ 10 $ 109
(Provision) benefit for income taxes $ 25 $ (97) $ (5) $ (6) $ (914) $ (997)
(Loss) income before minority interests
and equity (losses) earnings (3)(4) $(1,853) $ 191 $ 10 $ 12 $ (1,004) $ (2,644)
Minority interests (5) 1 (15) (14)
Equity in (losses) earnings of associated
companies, net of impairments (6) (32) 204 138 310
Income from discontinued operations 20 20
------- -------- -------- ------- -------- --------
Net (loss) income $(1,884) $ 395 $ 10 $ 12 $ (861) $ (2,328)
------------------------------------------------------------------------------------------------------------------------------------
For the nine months ended September 30, 2003
Net sales $ 1,069 $ 396 $ 353 $ 215 $ 237 $ 2,270
Research, development and engineering
expenses (1) $ 95 $ 36 $ 63 $ 21 $ 43 $ 258
Restructuring, impairment and other charges
and (credits) $ (30) $ 120 $ 90
Interest expense (2) $ 59 $ 27 $ 15 $ 4 $ 13 $ 118
(Provision) benefit for income taxes $ 46 $ (30) $ (6) $ (7) $ 205 $ 208
(Loss) income before minority interests
and equity (losses) earnings (3)(4) $ (141) $ 60 $ 11 $ 15 $ (405) $ (460)
Minority interests (5) 72 72
Equity in (losses) earnings of associated
companies, net of impairments (6) (10) 94 110 194
------- -------- -------- ------- -------- --------
Net (loss) income $ (151) $ 154 $ 11 $ 15 $ (223) $ (194)
------------------------------------------------------------------------------------------------------------------------------------
(1) Non-direct research, development and engineering expenses are allocated
based upon direct project spending for each segment.
(2) 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.
(3) 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.
(4) (Loss) income before minority interests and equity (losses) earnings
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.
(5) Minority interests include the following restructuring, impairment and
other charges and (credits):
For the three and nine months ended September 30, 2004, gains from the
sale of assets of Corning Asahi Video Products Company in excess of
assumed salvage value of $4 and $17, respectively.
For the nine months ended September 30, 2003, charges of $59 related
to impairment of long-lived assets of Corning Asahi Video Products
Company.
(6) Equity in (losses) earnings of associated companies, net of impairments
includes the following charges related to impairments of equity investments
in the Telecommunications segment:
$35 million for the three and nine months ended September 30, 2004.
$7 million for the nine months ended September 30, 2003.
A reconciliation of reportable segment net (loss) income to consolidated net (loss) income follows:
------------------------------------------------------------------------------------------------------------------------------------
For the three months For the nine months
ended September 30, ended September 30,
------------------------- --------------------------
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income of reportable segments $ (1,676) $ 43 $ (1,467) $ 29
Non-reportable operating segments net income (loss) (1) 9 (1) 10 (48)
Unallocated amounts:
Non-segment loss and other (2) (3) (4) (10) (33)
Non-segment restructuring, impairment and
other (charges) and credits 1 (3) 5 (13)
Asbestos settlement 50 (51) (16) (388)
Interest income 6 7 16 24
(Loss) gain on repurchases of debt (4) 2 (36) 19
(Provision) benefit for income taxes (3) (934) 19 (931) 152
Equity in earnings of associated companies, net
of impairments (4) 40 21 81 64
Income from discontinued operations 20 20
--------- --------- --------- ---------
Net (loss) income $ (2,491) $ 33 $ (2,328) $ (194)
------------------------------------------------------------------------------------------------------------------------------------
(1) Non-reportable operating segments net income (loss) includes the results of
non-reportable operating segments.
(2) Non-segment loss and other includes the results of non-segment operations
and other corporate activities.
(3) (Provision) benefit for income taxes includes taxes associated with
non-segment restructuring, impairment and other charges and (credits) and
$937 for the impact of establishing a valuation allowance against certain
deferred tax assets in the third quarter of 2004.
(4) Equity in earnings of associated companies, net of impairments includes
amounts derived from corporate investments, primarily Dow Corning
Corporation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We continue to focus on three key priorities in 2004: protect our financial
health, improve our profitability, and invest in the future. We continue to make
progress towards all three in 2004.
Financial Health
During the third quarter of 2004, we continued to make strides in improving our
balance sheet and delivering positive cash flows from operating activities. The
following are the highlights for the three and nine months ended September 30,
2004:
. As part of our ongoing debt reduction program, we retired $58 million of
our 3.5% convertible debentures during the third quarter of 2004. For the
nine months ended September 30, 2004, we have retired a total of $368
million of our 3.5% convertible debentures and $119 million of our zero
coupon bonds.
. We ended the third quarter of 2004 with $1.7 billion in cash, cash
equivalents and short-term investments. This represents an increase of
approximately $470 million compared to our December 31, 2003 balance,
primarily due to the issuance of $400 million senior unsecured notes in the
first quarter of 2004 and improved operating cash flows for the nine months
ended September 30, 2004.
. We generated sufficient cash flows from operating activities to cover our
capital expenditures.
Profitability
During the third quarter of 2004, Corning's net loss reflects the following:
. a $1,794 million ($1,798 million after-tax and minority interest) of
restructuring, impairment and other charges and (credits), which primarily
comprised Telecommunications segment impairment charges relating to
goodwill of $1,420 million and fixed assets of $374 million;
. a $50 million asbestos settlement credit, which relates to the
mark-to-market adjustment of the Pittsburgh Corning Corporation liability
to be settled in Corning's common stock;
. a $4 million loss on the repurchases of debt;
. a $937 million in provision for income taxes caused by our decision to
record a valuation allowance against certain deferred tax assets;
. a $35 million impairment charge to write-down certain Telecommunications
equity method investments to fair value, which is reflected in equity in
earnings of associated companies, net of impairments; and
. a $20 million gain related to the sale of our former precision lens
business, which is included in income from discontinued operation.
The goodwill and fixed asset impairment charges were triggered from the results
of our annual strategic planning process of the Telecommunications segment.
Specifically, we determined that we needed to lower our estimates and forecasts
for the long-term revenue growth of the Telecommunications segment. Although we
are currently experiencing stronger than expected volume in this segment, the
improved demand comes from a narrow band of customers, and we see few signs of a
broader recovery in overall demand, mix of premium products, and pricing for our
products. The lack of industry consolidation, increased competitive pressures in
the industry, and revised estimates of future customer demand for the types of
products they will deploy have caused us to change our assessment of the future
pace of recovery. The primary estimates and forecasts driving this change in our
outlook are:
. Revised estimates of future pricing for fiber and cable: Pricing in the
telecommunications industry remains depressed as the industry has failed to
reduce capacity. Our previous projections assumed some rationalization of
capacity that would lead to more stable pricing. We now expect the current
depressed pricing conditions to persist into 2005 and beyond.
. Revised estimates of demand for premium fiber product: Based on competitive
conditions and projected future customer requirements, we do not expect to
achieve the level of demand for premium fiber products we previously
forecasted. Although we have introduced innovative products to the market,
we have not been able to obtain the historically premium prices for such
products. Additionally, demand for premium fiber has declined as there are
fewer long-haul projects. As a result, we have significantly reduced our
outlook for future revenue and profitability from premium products. We now
do not expect any significant increase in premium fiber mix for the
foreseeable future.
. Revised estimates for the long-term worldwide market volume growth: As we
project customer demand, we have lowered the rate of volume growth in the
longer range.
As a result of the impairment charges and lower long-term outlook for our
Telecommunication segment, we have also concluded that we must provide a
valuation allowance against certain of our deferred tax assets in accordance
with Financial Accounting Standards Board Statement of Financial Accounting
Standard (SFAS) No. 109, "Accounting for Income Taxes" (SFAS 109). The valuation
allowance relates to our domestic (U.S. federal, state and local) and German
deferred tax assets. We have incurred significant losses in the U.S. and Germany
due primarily to the Telecommunications restructuring and impairment charges and
operating losses over the last four years. Although Corning's profitability has
improved over the last several quarters, a growing portion of our sales and
earnings is outside of the U.S., particularly in Asia. The U.S. portion of our
operations is still operating at a loss. This portion not only includes most of
our Telecommunications segment, but also a significant portion of our global
research, development and engineering and corporate infrastructure spending. As
we have taken additional significant impairment charges and lowered our outlook
for our largest U.S. based business during the third quarter, we believe that a
valuation allowance against these tax assets is required until realization is
more assured. We remain committed to return to profitability in the U.S. and
Germany so that we will be able to use these deferred tax assets before they
expire. In general, U.S. tax laws allow 20 years to use operating loss
carryforwards.
Investing in our Future
We continue to invest in a wide array of technologies, with our focus being
glass substrates for active matrix liquid crystal displays (LCDs), diesel
filters and substrates in response to tightening emissions control standards,
and optical fiber and cable and hardware and equipment that will enable
fiber-to-the-premises. Our research, development and engineering expenses have
remained relatively constant for the respective three and nine month periods. We
believe our current spending levels are adequate to enable us to execute our
growth strategies.
Our capital expenditures are primarily focused on expanding manufacturing
capacity for LCD glass substrates in the Display Technologies segment and diesel
products in the Environmental Technologies segment. Total capital expenditures
for the three and nine months ended September 30, 2004 were $254 million and
$556 million, respectively. Of these amounts, $191 million and $416 million,
respectively, were directed toward our Display Technologies segment.
On October 6, 2004, Corning's board of directors approved an additional capital
expenditure plan of $326 million to further expand our LCD manufacturing
capacity in Taichung, Taiwan. This is the fourth major LCD capital expansion
announced in the past 18 months. Our 2004 forecasted consolidated capital
spending remains at $950 million to $1 billion. Of this amount, $750 million to
$800 million will be directed toward our Display Technologies segment, with this
year's portion of the recently-announced expansion plan being included in this
range.
RESULTS OF CONTINUING OPERATIONS
Selected highlights for the third quarter follow (dollars in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------- -------------------------
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,006 $ 772 $ 2,821 $ 2,270
Gross margin $ 404 $ 226 $ 1,050 $ 607
(gross margin %) 40% 29% 37% 27%
Selling, general and administrative expenses $ 153 $ 147 $ 479 $ 447
(as a % of net sales) 15% 19% 17% 20%
Research, development and engineering expenses $ 88 $ 80 $ 257 $ 258
(as a % of net sales) 9% 10% 9% 11%
Restructuring, impairment and other charges and (credits) $ 1,794 $ (10) $ 1,794 $ 90
(as a % of net sales) 178% (1)% 64% 4%
Asbestos settlement $ (50) $ 51 $ 16 $ 388
(as a % of net sales) (5)% 7% 1% 17%
Loss from continuing operations before income taxes $ (1,619) $ (74) $(1,647) $ (668)
(as a % of net sales) (161)% (10)% (58)% (29)%
(Provision) benefit for income taxes $ (985) $ 30 $ (997) $ 208
(as a % of net sales) (98)% 4% (35)% 9%
Equity in earnings of associated companies, net
of impairments $ 96 $ 75 $ 310 $ 194
(as a % of net sales) 10% 10% 11% 9%
(Loss) income from continuing operations $ (2,511) $ 33 $(2,348) $ (194)
(as a % of net sales) (250)% 4% (83)% (9)%
------------------------------------------------------------------------------------------------------------------------------------
Net Sales
Net sales increased 30%, or $234 million, for the three months ended September
30, 2004 compared to the prior year quarter. The primary drivers of this growth
were the continued high demand for glass substrates in our Display Technologies
segment and demand for products in our Telecommunications segment mostly due to
the fiber-to-the-premises build-out in North America. For the nine months ended
September 30, 2004, our net sales increased $551 million, or 24%, compared to
the prior year period. The growth in the Display Technologies segment was the
primary driver. Strong performance in the Environmental Technologies segment,
for both automotive and diesel products, as well as our other operating segments
more than offset the sales decreases resulting from our exiting of the
conventional video and photonic technologies businesses in 2003. Movements in
foreign exchange rates, primarily the Japanese Yen and Euro, did not have a
significant impact on sales for the three and nine months ended September 30,
2004, compared to their respective 2003 periods.
Gross Margin
As a percentage of net sales, gross margin improved 11 percentage points for the
three months ended September 30, 2004, compared to the prior year quarter. For
the nine months ended September 30, 2004, the improvement was 10 percentage
points compared to the prior year period. The improvement in both periods can be
attributed to: (a) lower depreciation and fixed costs due to the restructuring
actions taken in 2003, most notably the exit of the conventional television
businesses, and (b) revenue growth in the Display Technologies segment of 105%
and 103% for the respective three and nine month periods.
Selling, General and Administrative Expenses
As a percentage of sales, selling, general and administrative expenses decreased
4 percentage points and 3 percentage points for the three and nine months ended
September 30, 2004, respectively, compared to the corresponding periods in 2003.
For the three and nine months ended September 30, 2004, selling, general and
administrative expenses increased $6 million and $32 million, respectively,
compared to the corresponding periods in 2003. These increases were primarily
related to general increases in compensation costs.
Research, Development and Engineering Expenses
As a percentage of sales, research, development and engineering expenses
decreased by 1 percentage point and 2 percentage points for the three and nine
months ended September 30, 2004, respectively, compared to the corresponding
periods in 2003. Total research, development and engineering expenses has
remained relatively constant for the respective periods. However, during 2004
the focus of our spending has shifted from Telecommunications projects to
Display Technologies projects with investments in Environmental Technologies and
Life Sciences remaining relatively constant.
Restructuring, Impairment and Other Charges and (Credits)
We recorded significant net charges during the third quarter of 2004 impacting the comparison of the three and nine months ended
September 30, 2004 to their respective prior year periods. A summary of the net charges and (credits) recorded during the
periods follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------- --------------------------
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Impairment of goodwill $ 1,420 $ - $ 1,420 $ -
Impairment of long-lived assets other
than goodwill
Assets to be disposed of by
sale or abandonment 330 (9) 295 (26)
Assets to be held and used 24 24 62
Accelerated Depreciation 39
Loss on sale of businesses 14 13 14 13
Impairment of cost investments (1) 4
Restructuring charges and (credits) 6 (13) 2 37
--------- -------- --------- ---------
Total restructuring, impairment
other charges and (credits) $ 1,794 $ (10) $ 1,794 $ 90
------------------------------------------------------------------------------------------------------------------------------------
Impairment of Goodwill
----------------------
Pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets," (SFAS
142) goodwill is required to be tested for impairment annually at the
reporting unit level. In addition, goodwill should be tested for impairment
between annual tests if an event occurs or circumstances change that would
more likely than not reduce the fair value of the reporting unit below its
related carrying value. The reporting unit for our Telecommunications
segment goodwill is our Telecommunications operating segment. Our annual
goodwill recoverability assessment is completed in the fourth quarter, as
it is traditionally based on our annual strategic planning process that
runs from June to October. This process includes reviewing expectations for
the long-term growth of the telecommunications industry and forecasting
future cash flows. In the third quarter, we identified certain factors
during this annual strategic planning process that caused us to lower our
estimates and projections for the long-term revenue growth of the
Telecommunications segment, which indicated that the fair value of the
Telecommunications segment reporting unit was less than its carrying value.
As such, we performed an interim impairment test of our Telecommunications
segment goodwill in the third quarter of 2004 and reviewed the outcome with
Corning's board of directors on October 6, 2004.
We estimated the fair value of the Telecommunications segment using a
discounted cash flow model based on our current estimates for the long-term
growth of the Telecommunications segment, and concluded that the fair value
of the Telecommunications segment was below its carrying amount.
Accordingly, we recorded an impairment charge of $1,420 million to reduce
the carrying value of goodwill to its estimated fair value of $117 million.
Refer to Note 8 of the consolidated financial statements and Critical
Accounting Policies and Estimates for additional details.
Impairment of Long-Lived Assets Other Than Goodwill
---------------------------------------------------
Assets to be disposed of by sale or abandonment
These charges comprise the following:
. Telecommunications segment: In the third quarter of 2004, we recorded
a net $338 million charge to impair plant and equipment related to
certain facilities to be disposed of or shutdown. Approximately $332
million of this charge is comprised of the partially completed
sections of our Concord, N.C. optical fiber facility. As a result of
our lowered outlook, we have permanently abandoned this construction
in progress as we no longer believe the demand for optical fiber will
warrant the investment necessary to complete this facility. Corning
will continue to mothball and depreciate the separate
previously-operated portion of the Concord fiber facility. The
remaining charge of $6 million relates to current impairment charges
for various assets available for sale ($18 million) and credits for
assets originally impaired in 2002 but will now be utilized in
operations ($12 million).
. Other businesses: We recorded gains on the sale of assets of $8
million and $41 million for the three and nine months ended September
30, 2004, respectively, compared to gains on the sale of assets of $9
million and $26 million for the three and nine months ended September
30, 2003, respectively. The 2004 and 2003 gains relate to proceeds in
excess of assumed salvage values for assets previously impaired,
primarily relating to assets of Corning Asahi Video Products Company
(CAV) sold to a third party in China. In July 2004, we completed the
sale of CAV's assets.
Assets to be held and used
These charges comprise the following:
. Telecommunications segment: Due to our decision to permanently abandon
certain assets and lower our long-term outlook for the
Telecommunications segment during the third quarter of 2004, we
determined that an event of impairment had occurred in our
Telecommunications segment which required us to test the segment's
long-lived assets other than goodwill for impairment. As a result of
this impairment evaluation, we recorded a $24 million impairment
charge in the third quarter of 2004 to write-down certain assets to
fair value.
. Other businesses: As a result of our decision to exit CAV in April of
2003, we recorded an asset impairment charge of $62 million during the
nine months ended September 30, 2003. These assets were written down
to estimated salvage value, as this amount was our best estimate of
fair value.
In connection with the above charges, our impairment evaluations included
the development of expected future cash flows against which to compare the
carrying value of the asset group being evaluated.
Accelerated Depreciation
------------------------
We recorded $39 million of accelerated depreciation in the nine months
ended September 30, 2004 relating to the final shutdown of our
semiconductor materials manufacturing facility in Charleston, South
Carolina, which we announced in the fourth quarter of 2003.
Loss on Sale of Businesses
--------------------------
On September 1, 2004 we completed the sale of our frequency controls
business, which was part of the Telecommunications segment, for net cash
proceeds of $80 million. We recorded a loss on the sale of $14 million,
which included an allocation of $30 million of the Telecommunications
segment goodwill. The frequency controls business had 2003 annual sales of
$76 million.
During the three months ended September 30, 2003, we recorded a $13 million
loss on the sale of a significant portion of our photonic technologies
business, which was part of our Telecommunications segment.
Impairment of Cost Investments
------------------------------
In the first quarter of 2003, we recorded a $5 million charge for other
than temporary declines in certain cost investments in the
Telecommunications segment. In the third quarter of 2003, we sold these
investments for $4 million in cash, which was $1 million more than
previously expected. We reported this gain as a credit to restructuring
actions.
Restructuring Charges and (Credits)
-----------------------------------
2004 Restructuring Actions
In the third quarter of 2004, we recorded a charge of $6 million comprised
of adjustments to prior years' restructuring and impairment charges,
including charges of $5 million for employee separation costs and charges
of $1 million for exit costs.
For the nine months ended September 30, 2004, we recorded net charges of $2
million. In addition to the third quarter 2004 charges, we recorded net
credits of $4 million primarily for reversals of reserves related to prior
years' restructuring charges.
2003 Restructuring Actions
In the third quarter of 2003, we recorded net credits of $13 million
comprised of reversals of restructuring reserves related to prior years'
restructuring charges ($16 million) offset by a charge ($3 million) related
to the exit of the photonic technologies business.
For the nine months ended September 30, 2003, we recorded net charges of
$37 million. In addition to the third quarter 2003 net credits, we incurred
net charges of $50 million from the following actions:
. charges for the exit of our photonics technologies business;
. charges for restructuring actions in the Telecommunications segment
and administrative staffs; and
. credits for reversals of restructuring reserves related to prior
years' restructuring charges.
Refer to Note 4 to the consolidated financial statements for additional
information.
Asbestos Settlement
For the three and nine months ended September 30, 2004, we recorded (credits)
charges of $(50) million and $16 million, respectively, related to the quarterly
mark-to-market of our common stock associated with the asbestos settlement
agreement. For the three and nine months ended September 30, 2003, we recorded
charges of $51 million and $388 million, respectively, as part of our asbestos
settlement, the latter of which included $298 million associated with the
initial settlement. Refer to Note 5 to the consolidated financial statements for
additional information.
Loss From Continuing Operations Before Income Taxes
For the three months ended September 30, 2004, we incurred a loss from
continuing operations before income taxes of $1,619 million compared to a loss
of $74 million for the prior year quarter. For the nine months ended September
30, 2004, we incurred a loss from continuing operations before income taxes of
$1,647 million compared to a loss of $668 million for the prior year period. For
both the three and nine month comparisons, the key drivers are outlined under
Gross Margin, Restructuring, Impairment and Other Charges and (Credits), and
Asbestos Settlement.
In addition to the above, the following impacted the results of our loss from continuing operations before income taxes:
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
(Loss) gain on repurchases and retirement of debt, net $(4) $2 $(36) $19
------------------------------------------------------------------------------------------------------------------------------------
Refer to Note 12 to the consolidated financial statements and Corning's 2003
Annual Report on Form 10-K for additional information regarding the (losses)
gains recognized on the repurchase and retirement of debt for the respective
periods.
(Provision) Benefit for Income Taxes
Our (provision) benefit for income taxes and the related effective (income tax) benefit rates were as follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
--------------------- ---------------------
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
(Provision) benefit for income taxes ($985) $30 ($997) $208
Effective income tax rate (61%) 41% (61%) (31%)
------------------------------------------------------------------------------------------------------------------------------------
The effective (income tax) benefit rate for the three and nine months ended
September 30, 2004 differed from the U.S. statutory tax rate of 35% primarily
due to an increase in the valuation allowance against certain domestic (U.S.
federal, state and local) and foreign deferred tax assets and the write-off of
nondeductible goodwill. The effective (income tax) benefit rate for the three
months ended September 30, 2003, was higher than the U.S. statutory income tax
rate of 35% due to the reversal of restructuring charges on which a tax benefit
was not accrued. The effective (income tax) benefit rate for the nine months
ended September 30, 2003, was lower than the U.S. statutory income tax rate of
35% due to the impact of restructuring, impairment and other charges, asbestos
settlement, debt transactions and state and local tax benefits.
In the third quarter of 2004, we increased our tax expense by $937 million as a
result of our decision to establish a valuation allowance against a significant
portion of our deferred tax assets, primarily in the U.S. and Germany. We assess
the realizability of our deferred tax assets on a quarterly basis. In connection
with our third quarter assessment, we performed a review of all available
positive and negative evidence, including an evaluation of scheduled reversals
of deferred tax liabilities, estimates of projected future taxable income and
tax planning strategies as well as related key assumptions. SFAS 109 requires
that a valuation allowance be established when it is more likely than not that
all or a portion of a deferred tax asset will not be realized. SFAS 109 further
requires that "greater weight be given to previous cumulative losses than the
outlook for future profitability when determining whether deferred tax assets
can be used."
We have incurred significant losses in the U.S. and Germany due primarily to the
restructuring and impairment charges and operating losses in our
Telecommunications segment over the last four years. As a result of the third
quarter of 2004 impairment charges and the lowering of our long-term outlook for
the Telecommunications segment, our largest U.S. and German business, we
concluded that a valuation allowance against certain deferred tax assets was
required.
We expect to maintain a valuation allowance on future tax benefits until an
appropriate level of profitability, primarily in the U.S. and Germany, is
sustained or we are able to develop tax planning strategies that enable us to
conclude that it is more likely than not that a larger portion of our deferred
tax assets would be realizable, or if the PCC settlement is finalized earlier
than we anticipate. Until then, our tax provision will include only the net tax
expense attributable to certain foreign operations. Refer to Note 9 to the
consolidated financial statements for additional information.
Equity in Earnings of Associated Companies, Net of Impairments
For the three months ended September 30, 2004, equity earnings increased $21 million, or 28%, compared to the prior year quarter,
primarily due to the strong performance of Samsung Corning Precision Glass Company, Ltd. (Samsung Corning Precision). For the nine
months ended September 30, 2004, equity earnings increased $116 million, or 60%, compared to the prior year period, primarily due to
Samsung Corning Precision. A summary of equity earnings follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------- --------------------------
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Samsung Corning Precision $ 68 $ 39 $ 204 $ 94
Dow Corning Corporation 40 22 81 64
All other (12) 14 25 36
--------- -------- -------- ---------
Total equity earnings $ 96 $ 75 $ 310 $ 194
------------------------------------------------------------------------------------------------------------------------------------
During the third quarter of 2004, we recorded other-than-temporary impairments
of certain Telecommunications segment investments of $35 million.
Refer to Note 7 to the consolidated financial statements for additional
information.
(Loss) Income From Continuing Operations
As a result of the above, our (loss) income from continuing operations and per share data were as follows (in millions, except per
share amounts):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------- --------------------------
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations $ 2,511) $ 33 $ (2,348) $ (194)
Basic (loss) earnings per common share $ (1.79) $ 0.03 $ (1.70) $ (0.15)
Diluted (loss) earnings per common share $ (1.79) $ 0.02 $ (1.70) $ (0.15)
Shares used in computing per share amounts
Basic (loss) earnings per common share 1,399 1,314 1,380 1,253
Diluted (loss) earnings per common share 1,399 1,390 1,380 1,253
------------------------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATION
On December 13, 2002, we completed the sale of our precision lens business to 3M
Company ("3M") for cash proceeds up to $850 million, of which $50 million was
deposited in an escrow account. In 2003, 3M notified Corning that 3M believed it
had certain claims arising out of the representations and warranties made by
Corning in connection with the sale of the precision lens business to 3M. In the
third quarter of 2004, Corning and 3M reached a final settlement agreement for
the funds held in escrow. Accordingly, we recognized a gain of $20 million upon
receipt of $20 million of proceeds. This gain is included in income from
discontinued operation in the consolidated statement of operations.
OPERATING SEGMENTS
Effective with the first quarter of 2004, we revised our reportable operating
segments from Telecommunications and Technologies to Telecommunications, Display
Technologies, Environmental Technologies and Life Sciences. Prior year
information has been restated to conform to this revision. The following
provides a brief description of the products and markets served by each
reportable segment:
. Telecommunications - manufactures optical fiber and cable and hardware and
equipment components for the worldwide telecommunications industry;
. Display Technologies - manufactures liquid crystal display glass substrates
for flat panel displays;
. Environmental Technologies - manufactures ceramic substrates and filters
for automobile and diesel applications; and
. Life Sciences - manufactures glass and plastic consumables for scientific
applications.
The change in our segment presentation reflects how Corning's Chief Operating
Decision Making group (CODM) allocates resources and assesses the performance of
its businesses. Specifically, the CODM is significantly increasing its level of
review of the Display Technologies segment due to the recent increase in growth
and capital spending in that segment. In addition, the CODM is increasing its
review of the Environmental Technologies and Life Sciences segments to
strengthen the overall balance and stability of Corning's portfolio of
businesses.
We prepare the financial results for our operating segments on a basis that is
consistent with the manner in which we internally disaggregate financial
information to assist in making internal operating decisions. We include the
earnings of equity affiliates that are closely associated with our operating
segments in the respective segment's net income. We have allocated certain
common expenses among segments differently than we would for stand-alone
financial information prepared in accordance with accounting principles
generally accepted in the United States. These expenses include interest, taxes
and corporate functions. Segment net income may not be consistent with measures
used by other companies. The accounting policies of our operating segments are
the same as those applied in the consolidated financial statements.
Telecommunications
The following table provides net sales and other data for the Telecommunications segment (dollars in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------- --------------------------
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 202 $ 209 $ 543 $ 580
Hardware and equipment 210 151 573 446
Photonic technologies 10 43
--------- -------- -------- -------
Total net sales $ 412 $ 370 $ 1,116 $ 1,069
========= ======== ======== =======
Net loss $ (1,820) $ (27) $ (1,884) $ (151)
========= ======== ======== =======
Segment net loss as a percentage of segment sales (442)% (7)% (169)% (14)%
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended September 30, 2004, sales increased by $42 million,
or 11%, compared to the prior year quarter. This performance was led by sales of
hardware and equipment and optical fiber and cable in North America, primarily
driven by Verizon Communications' fiber-to-the-premises build-out, and strong
sales in Europe. For the comparable periods, fiber volumes were up 29% while
prices declined 8%. Although fiber volumes were up considerably for the quarter,
optical fiber and cable sales declined due to the price declines and strong
third quarter 2003 sales for aerial and submarine projects that were not
repeated in 2004. Movements in foreign exchange rates, primarily the Japanese
Yen and Euro, did not have a significant impact on sales for the three months
ended September 30, 2004, compared to the prior year quarter.
For the nine months ended September 30, 2004, sales increased $47 million, or
4%, compared to the prior year period. The strong results in the second and
third quarters of 2004 have been substantially offset by the impact of the 2003
exit of the photonic technologies business and a decline of fiber sales in Japan
and China , compared to the prior year period. For the comparable nine month
periods, fiber volumes have increased 9% and prices declined 10%. Movements in
exchange rates for the comparable nine month periods did not significantly
impact sales.
For the Telecommunications segment, the increased losses in each of the 2004
periods compared to their respective 2003 are primarily due to the goodwill,
fixed asset, and equity method investments impairment charges recorded in the
third quarter of 2004. Refer to Results of Continuing Operations for a detailed
discussion of these charges.
Outlook:
--------
We expect sales in the fourth quarter of 2004 to be down from the third quarter
of 2004, primarily reflecting typical seasonal declines in North America and
Europe. We expect fiber volumes to decline between 10% and 20% and moderate
pricing declines compared to the third quarter.
Display Technologies
The following table provides net sales and other data for the Display Technologies segment (dollars in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------- --------------------------
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Sales $ 295 $ 144 $ 802 $ 396
Income before equity earnings $ 74 $ 25 $ 191 $ 60
Equity earnings of associated companies $ 68 $ 39 $ 204 $ 94
Net income $ 142 $ 64 $ 395 $ 154
Segment income before equity earnings as a percentage
of segment sales 25% 17% 24% 15%
Segment net income as a percentage of segment sales 48% 44% 49% 39%
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended September 30, 2004, sales increased $151 million, or
105%, compared to the prior year quarter. This performance is largely reflective
of the overall LCD-market growth. For the third quarter of 2004, glass substrate
volumes (measured in square feet of glass sold) increased greater than 70%.
Sales were also benefited by modest average price increases, primarily the
result of a change in product mix as the market continues to trend toward large
size glass substrates (generation 5 and above) which carry a higher selling
price per square foot. The sales of the Display Technologies segment are largely
Asian based and, as such, are susceptible to movements in the US dollar -
Japanese Yen exchange rates. For the third quarter of 2004, sales benefited by
approximately 9% from a weakening of the US dollar compared to the same period
in 2003.
For the nine months ended September 30, 2004, sales increased $406 million, or
103%, compared to the prior year period. The factors affecting the nine-month
performance are largely the same as those identified for the third quarter of
2004. For the comparable nine month period, glass substrate volumes increased
approximately 75%, average pricing increases were modest, and movements in the
US dollar - Japanese Yen exchange rates benefited sales by approximately 9%
compared to the same period in 2003.
For the three and nine months ended September 30, 2004, income before equity
earnings increased by more than 2.5 times compared to the prior quarter and more
than tripled compared to the prior year period. For both periods, the key
drivers were the impact of incremental volumes and efficiencies realized through
the shift in production toward large size glass substrates. Movements in the
U.S. dollar - Japanese Yen exchange rates did not have a significant impact on
income before equity earnings for the three and nine months ended September 30,
2004, compared to their respective 2003 periods. The increases in our equity
earnings from Samsung Corning Precision for the periods presented were largely
driven by the same factors identified for our wholly-owned business.
The Display Technologies segment manufactures and sells glass substrates to a
concentrated customer base comprised of LCD panel makers primarily located in
Japan and Taiwan. LCD panels are used in computer products, such as notebook
computers and desktop monitors, consumer electronics products, such as digital
cameras and camcorders and car navigation systems, and LCD televisions. For the
three and nine months ended September 30, 2004, six LCD customers accounted for
78% of the Display Technologies segment sales. In addition, Samsung Corning
Precision's sales were also concentrated, with 2 customers accounting for 87%
and 84% of sales for the three and nine months ended September 30, 2004,
respectively.
Corning and these customers have typically entered into multi-year supply
agreements for the purchase and sale of glass substrates. These agreements
provide for Corning to supply a percentage of the customers' requirements and
include mechanisms for forecasting and ordering. During 2004, Corning improved
the payment terms under these agreements to improve cash flow and reduce its
working capital requirements.
The LCD market continues to grow rapidly. This growth is being driven, in part,
by higher demand for LCD televisions, for which our LCD customers require larger
size glass substrates. Over the past few months, Corning has held discussions
with several of its customers to discuss how to meet this demand. As part of its
discussions, Corning has sought improved payment terms, including deposits
against orders, to provide a greater degree of assurance that we are effectively
building capacity to meet the needs of a rapidly growing industry. There can be
no assurance that Corning will be able to pace its capacity expansion to the
actual demand and, while the industry has grown rapidly, it is possible that
glass manufacturing capacity may exceed demand during certain periods. In the
third quarter of 2004, we received approximately $100 million for deposits
against orders.
Outlook:
--------
We expect to see a continuation of the overall industry growth and the trend
toward large size substrates into the fourth quarter. We continue to see
positive trends in the penetration rates of LCD's into the end-markets (notebook
computers, monitors and televisions), and increasing demand for the large size
substrates. Volume growth from the third and fourth quarter of 2004 is
anticipated to be between 3% and 10% and average pricing is projected to remain
stable. In addition, we expect to remain sold out throughout the quarter and
plan to bring on additional capacity throughout the quarter. There can be no
assurance that the end-market rates of growth will continue at the high rates
experienced in recent quarters. Consumer preferences for panels of differing
sizes, or price or other factors, may lead to pauses in market growth from time
to time.
Environmental Technologies
The following table provides net sales and other data for the Environmental Technologies segment (dollars in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------ -------------------------
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Sales $ 136 $ 121 $ 418 $ 353
Net income $ 0 $ 3 $ 10 $ 11
Segment net income as a percentage of segment sales 0% 3% 2% 3%
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended September 30, 2004, sales increased $15 million, or
12%, compared to the prior year quarter. We continue to see strong demand for
our automotive and diesel products in response to ever-tightening emission
standards around the world, although we are experiencing near-term softening in
Asian retrofit markets for diesel products. Our automotive products benefited
from both an increase in volume and a higher mix of our thin-wall and ultra
thin-wall substrates, which allow our customers to meet their emission control
requirements in a more cost effective manner. Although showing strong growth,
diesel products represented a modest portion of the total Environmental
Technologies sales for the three months ended September 30, 2004. A portion of
the sales of the Environmental Technologies segment are susceptible to movements
in the US dollar - Euro exchange rates. Movements in exchange rates did not have
a significant impact on sales for the comparable quarters.
For the nine months ended September 30, 2004, sales increased $65 million, or
18%, compared to the prior year period. The factors affecting the nine-month
period performance are largely the same as those identified for the quarter.
For the three months ended September 30, 2004, the segment operated at a
break-even level compared to a modest profit in the comparable prior year
period. The full benefits of the increases in product volumes and higher mix of
thin-wall and ultra thin wall automotive substrates have been offset by higher
development and engineering costs for our diesel products and lower than
expected manufacturing results in the quarter. For the nine months ended
September 30, 2004, segment net income was essentially equal with the prior
year. Similar to the three month period comparison, the benefit of the sales
increase is not being reflected in net income largely due to increased
development and engineering spending.
Outlook:
--------
For the fourth quarter of 2004, we expect to see a moderate decrease in sales
compared to those of the third quarter, largely due to seasonal declines. Diesel
regulatory trends remain on track for the United States, Europe and Japan.
Life Sciences
The following table provides net sales and other data for the Life Sciences segment (dollars in millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------- -------------------------
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Sales $ 75 $ 70 $ 233 $ 215
Net income $ 2 $ 3 $ 12 $ 15
Segment net income as a percentage of segment sales 3% 4% 5% 7%
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended September 30, 2004, sales increased $5 million, or
7%, compared to the prior year quarter. Volume increases across the majority of
our product lines, drove the sales increase compared to the third quarter of
2003. Movements in foreign exchange rates, primarily the Euro, did not have a
significant impact on sales for the comparable quarters.
For the nine months ended September 30, 2004, sales increased $18 million, or
8%, compared to the prior year period. The factors affecting the nine-month
period performance are largely the same as those identified for the quarter.
For the three and nine months ended September 30, 2004 net income was consistent
with that of the comparable period. For the three and nine month periods the
incremental gross margin improvements resulting from the increase in sales
volumes have been largely offset by new product development costs. In addition,
for the nine month period, the comparison of net income was negatively impacted
due to a gain recognized in the first quarter of 2003 on the disposition of a
minor product line.
Outlook:
--------
For the fourth quarter of 2004, we expect a moderate decrease in sales compared
to those of the third quarter, largely due to seasonal declines. We expect a
continuation of the positive trends in research & development spending for our
pharmaceutical, biotechnology, and academic customers.
Unallocated and Other
The following table provides net sales and other data for the non-reportable operating segments and unallocated items (dollars in
millions):
------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------- -------------------------
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Conventional Video Components $ 14 $ 2 $ 63
Other businesses $ 88 53 250 174
--------- -------- -------- ---------
Total net sales $ 88 $ 67 $ 252 $ 237
========= ======== ======== =========
Loss before minority interests and equity earnings $ (895) $ (46) $ (1,004) $ (405)
Equity earnings of associated companies $ 63 $ 34 $ 138 $ 110
Net loss $ (815) $ (10) $ (861) $ (223)
Loss before minority interests and equity earnings
as a percentage of net sales (1,017)% (69)% (398)% (171)%
Net loss as a percentage of net sales (926)% (15)% (342)% (94)%
------------------------------------------------------------------------------------------------------------------------------------
Unallocated and Other includes all other operating segments that do not meet the
quantitative threshold for separate reporting (e.g., Specialty Materials,
Ophthalmic, and Conventional Video Components), certain corporate investments
(e.g., Dow Corning and Steuben), discontinued operations and unallocated
expenses. Unallocated expenses include research and other expenses related to
new business development; gains or losses on repurchases and retirement of debt;
charges related to the asbestos litigation; restructuring and impairment charges
related to the corporate research and development or staff organizations; and
charges for increases in our tax valuation allowance. Unallocated and Other also
represents the reconciliation between the total operating results for the
reportable segments and our consolidated operating results.
The increase in sales for the three and nine months ended September 30, 2004
compared to their respective prior year periods is primarily attributable to
improvements in our specialty materials business. The 2004 decrease of
conventional video components sales is due to our second quarter 2003 decision,
along with our partner, to cease production and shut down our 51% owned
affiliate, Corning Asahi Video Products Company (CAV), which was a manufacturer
of glass panels and funnels for use in conventional tube televisions. Although
sales in our Specialty Materials segment have increased over prior year periods,
we have recently seen reductions in future forecasts of customer orders for
semiconductor lens glass. It is too early to tell if this is a temporary market
correction or the beginning of a downward cycle in the business. In addition,
technology changes are being made by our customers that will impact certain of
our product lines. We will monitor this situation during the fourth quarter of
2004, and it is possible we could see asset write-offs or impairments as a
result of these changes.
Refer to the discussion regarding Restructuring, Impairment, and Other Charges
and (Credits), Asbestos Settlement and (Provision) Benefit for Income Taxes for
a description of the key drivers of net loss for periods presented.
LIQUIDITY AND CAPITAL RESOURCES
Financing Structure
During the third quarter of 2004, we issued 6 million shares of common stock and
paid $4 million in cash in exchange for 57,500 of our 3.5% convertible
debentures with a book value of $58 million. We recorded a loss of $4 million
relating to the retirement of debt.
During the second quarter of 2004, we issued 10 million shares of common stock
and paid $9 million in cash in exchange for 97,500 of our 3.5% convertible
debentures with a book value of $98 million. We recorded a loss of $9 million
relating to the retirement of debt.
During the first quarter of 2004, we issued 22 million shares of common stock
and paid $24 million in cash in exchange for our 3.5% convertible debentures
with a book value of $213 million. In addition, we repurchased 150,000 of our
zero coupon convertible debentures with a book value $119 million for $117
million in cash. As a result of these transactions, we recorded a loss of $23
million.
In March 2004, we issued $400 million of senior unsecured notes under our
existing $5 billion universal shelf registration statement, which became
effective in March 2001. We realized net proceeds of $396 million from the
issuance of these notes. As of September 30, 2004, our remaining capacity under
the shelf registration was approximately $2.5 billion.
As an additional source of funds, we currently have full unrestricted access to
a $2 billion revolving credit facility with 16 banks, expiring on August 17,
2005. As of September 30, 2004, there were no borrowings under the credit
facility. The facility includes one financial covenant limiting the ratio of
total debt to total capital, as defined, to not greater than 60%. At September
30, 2004, this ratio was 42%.
Capital Spending
Capital spending totaled $556 million and $204 million during the nine months
ended September 30, 2004 and 2003, respectively. Our 2004 forecasted
consolidated capital spending remains at $950 million to $1 billion. Of this
amount, $750 million to $800 million will be directed toward expanding
manufacturing capacity for LCD glass substrates in the Display Technologies
segment.
On October 6, 2004, Corning's board of directors approved an additional capital
expenditure plan of $326 million to further expand our LCD manufacturing
capacity in Taichung, Taiwan. This is the fourth major LCD capital expansion in
the past 18 months. This year's portion of the recent expansion plan is included
in the above ranges.
Restructuring
During the nine months ended September 30, 2004, we made payments of $75 million
related to employee severance and termination costs and $20 million in other
exit costs resulting from restructuring actions. We expect additional payments
to range from $15 million to $20 million in the fourth quarter of 2004 for
actions taken in 2001, 2002 and 2003.
Key Balance Sheet Data
At September 30, 2004, cash, cash equivalents and short-term investments totaled
$1.7 billion, compared with $1.3 billion at December 31, 2003. The increase was
primarily due to cash proceeds received from the issuance of the $400 million of
senior unsecured notes, cash provided by operating activities and proceeds from
divestitures, offset by repurchases of long-term debt and capital spending
during the nine months ended September 30, 2004.
Balance sheet and working capital measures are provided in the following table (dollars in millions):
------------------------------------------------------------------------------------------------------------------------------------
September 30, 2004 December 31, 2003
------------------------------------------------------------------------------------------------------------------------------------
Working capital $ 1,340 $ 1,141
Working capital, excluding cash and short-term investments $ (399) $ (125)
Current ratio 1.8:1 1.7:1
Trade accounts receivable, net of allowances $ 538 $ 525
Days sales outstanding 48 58
Inventories $ 498 $ 467
Inventory turns 4.8 4.8
Days payable outstanding 73 52
Long-term debt $ 2,438 $ 2,668
Total debt to total capital 42% 34%
------------------------------------------------------------------------------------------------------------------------------------
Credit Ratings
Our credit ratings were updated from those disclosed in the 2003 Annual Report
on Form 10-K as follows:
--------------------------------------------------------------------------------
RATING AGENCY Rating Outlook
Last Update Long-Term Debt Last Update
--------------------------------------------------------------------------------
Fitch BB+ Positive
August 12, 2004 August 12, 2004
Standard & Poor's BB+ Stable
July 29, 2002 January 16, 2004
Moody's Ba2 Stable
July 29, 2002 November 19, 2003
--------------------------------------------------------------------------------
Management Assessment of Liquidity
Our major source of funding for 2004 and beyond will be our existing balance of
cash, cash equivalents and short-term investments. From time to time we may also
issue debt or equity securities to raise additional cash to fund a portion of
our capital expenditures related to our growth businesses. We believe we have
sufficient liquidity for the next several years to fund operations,
restructuring, the asbestos settlement, research and development, capital
expenditures and scheduled debt repayments.
Contractual Obligations
There have been no material changes outside the ordinary course of business in
the contractual obligations disclosed in our 2003 Annual Report on Form 10-K
under the caption "Contractual Obligations."
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 us to make difficult, subjective or complex judgments in the third
quarter of 2004 follow. Refer to our 2003 Annual Report on Form 10-K for
additional significant estimates used in the preparation of financial
statements.
Impairment of goodwill
SFAS 142 requires us to make certain difficult, subjective and complex judgments
on a number of matters, including assumptions and estimates used to determine
the fair value of our reporting unites; which are the same as our segments.
We measure fair value on the basis of discounted expected future cash flows. Our
estimates are based upon our historical experience, our current knowledge from
our commercial relationships, and available external information about future
trends.
Pricing in the telecommunications industry remains depressed as the industry has
failed to reduce capacity. Our previous forecasts assumed some rationalization
of capacity that would lead to more stable pricing. We now expect the current
depressed pricing conditions to persist. Based on competitive conditions and
forecasted future customer requirements, we do not expect the level of demand
for premium fiber products we previously forecasted. As a result, we have
significantly reduced our outlook for future revenue and profitability from
premium products. As we forecast customer demand, we have lowered the rate of
volume growth in the longer range. Further negative developments in the
telecommunications industry could cause us to change our forecasts for fiber
volumes, pricing or mix of premium products which may result in additional
goodwill impairment charges of up to $117 million.
Terminal value of the business assumes a growth in perpetuity of 3%. These cash
flows are also used to value intangible and tangible assets which determine the
implied value of reporting unit goodwill. The discount rate applied to these
cash flows represents a telecommunications weighted average cost of capital
based upon current debt and equity activity of 11 public companies representing
a cross section of worldwide competitors of the reporting unit. For our third
quarter 2004 interim test, we used a discount rate of 12.5% in our calculation
of fair value of the expected future cash flows. An impairment charge of $1,420
million was recorded in the third quarter of 2004. Had we used a discount rate
of 12%, the impairment charge would have been approximately $90 million lower.
Had we used a discount rate of 13%, the impairment charge would have been
approximately $80 million higher. In 2003, we used a 12% discount rate for our
annual impairment test. The results of our 2003 test indicated that goodwill was
not impaired. The 2003 results would not have changed had we used a discount
rate of 11.5% or 12.5%.
Valuation allowance for deferred income taxes
SFAS 109 requires us to exercise judgment about our future results in assessing
the realizability of our deferred tax assets. At September 30, 2004, Corning had
gross deferred tax assets of approximately $2.2 billion. We determined that the
likelihood of realization of certain deferred tax assets is less than 50% and
recorded additional valuation allowances of $1.2 billion. If we sustain an
appropriate level of profitability, primarily in the U.S. and Germany, or if we
are able to develop additional tax-planning strategies, or if the PCC settlement
is finalized earlier than we anticipate, adjustments to these allowances will be
required may affect future net income.
In determining the amount of domestic deferred tax assets that we believe are
more likely than not to be realized through a tax planning strategy involving
the sale of a non-strategic asset, we estimated the fair value of the underlying
non-strategic asset based primarily on discounted cash flows and precedent
transactions. Changes in fair value of the non-strategic asset may also affect
future net income.
See (Provision) Benefit for Income Taxes and Note 9 to the consolidated
financial statements for additional information.
ENVIRONMENT
We have been named by the Environmental Protection Agency under the Superfund
Act, or by state governments under similar state laws, as a potentially
responsible party for 11 active hazardous waste sites. Under the Superfund Act,
all parties who may have contributed any waste to a hazardous waste site,
identified by such Agency, are jointly and severally liable for the cost of
cleanup unless the Agency agrees otherwise. It is our policy to accrue for the
estimated liability related to Superfund sites and other environmental
liabilities related to property owned and operated by us based on expert
analysis and continual monitoring by both internal and external consultants. We
have accrued approximately $20 million for the estimated liability for
environmental cleanup and related litigation at September 30, 2004. Based upon
the information developed to date, we believe that the accrued amount is a
reasonable estimate of our liability and that the risk of an additional loss in
an amount materially higher than that accrued is remote.
FORWARD-LOOKING STATEMENTS
The statements in this Quarterly Report on Form 10-Q, in reports subsequently
filed by Corning with the Securities and Exchange Commission (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;
- availability and costs of critical components and materials;
- new product development and commercialization;
- order activity and demand from major customers;
- fluctuations in capital spending by customers;
- possible disruption in commercial activities due to terrorist activity,
armed conflict, political instability or major health concerns;
- facility expansions and new plant start-up costs;
- effect of regulatory and legal developments;
- capital resource and cash flow activities;
- ability to pace capital spending to anticipated levels of customer demand,
which may fluctuate;
- 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;
- level of excess or obsolete inventory;
- ability to enforce patents;
- adverse litigation;
- product and components performance issues;
- stock price fluctuations;
- the rate of substitution by end-users purchasing LCDs for notebook
computers, desktop monitors and televisions;
- a downturn in demand for LCD glass substrates;
- ability of our customers, most notably in the Display Technologies segment,
to maintain profitable operations and obtain financing to fund their
manufacturing expansions;
- fluctuations in inventory levels in the supply chain;
- equity company activities, principally at Dow Corning Corporation and
Samsung Corning Co., Ltd.; and
- other risks detailed in Corning's SEC filings.
Risk Factors
Set forth below and elsewhere in this Quarterly Report on Form 10-Q 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 on Form 10-Q. In addition, future results could be materially affected by
general industry and market conditions, changes in laws or accounting rules,
general U.S. and non-U.S. economic and political conditions, including a global
economic slowdown, fluctuation of interest rates or currency exchange rates,
terrorism, political unrest or international conflicts, political instability or
major health concerns, natural disasters or other disruptions of expected
economic and business conditions. These risk factors should be considered in
addition to our cautionary comments concerning forward-looking statements in
this Quarterly Report on Form 10-Q, including statements related to markets for
our products and trends in our business that involve a number of risks and
uncertainties. Our separate statement labeled Forward-Looking Statements should
be considered in addition to the statements below.
Our sales could be negatively impacted if one or more of our key customers
substantially reduce orders for our products
Our customer base is relatively concentrated with less than 10 significant
customers accounting for a high percentage (greater than 50%) of net sales in
most of our businesses, including those purchasing LCD glass. However, no
individual customer accounts for more than 10% of consolidated sales.
Our Display Technologies, Environmental Technologies, and Life Sciences
segments have concentrated customer bases. If we lose a significant customer in
any of these businesses, or if one or more significant customers reduce orders,
our sales could be negatively impacted. The Display Technologies segment
manufactures and sells glass substrates to a concentrated customer base
comprised of LCD panel makers primarily located in Japan and Taiwan. LCD panels
are used in computer products, such as notebook computers and desktop monitors,
consumer electronics products, such as digital cameras and camcorders and car
navigation systems, and LCD televisions. For the nine months ended September 30,
2004, six LCD customers accounted for 78% of the Display Technologies segment
sales. In addition, Samsung Corning Precision's sales were also concentrated,
with two customers accounting 84% of sales for the nine months ended September
30, 2004.
Although the sale of LCD glass substrates has increased from quarter to
quarter in 2004, there can be no assurance that this upward trend will continue.
Our customers are LCD panel makers, and as they switch to larger size glass, the
pace of their orders may be uneven while they adjust their manufacturing
processes and facilities. Additionally, consumer preferences for panels of
differing sizes, or price or other factors, may lead to pauses in market growth
from time to time. There is further risk that our customers may not be able to
maintain profitable operations or access sufficient capital to fund ongoing
expansions.
In the Environmental Technologies segment, sales of our ceramic substrate
and filter technologies for gasoline and diesel emissions and pollution control
fluctuate with our customers' production and sales of automobiles and other
vehicles, as well as changes in governmental laws and regulations for air
quality and emission controls. Sales in our Life Sciences segment are primarily
through two large distributors to government entities, pharmaceutical and
biotechnology companies, hospitals, universities and other laboratories, and any
changes in distribution could impact our future sales.
Our Telecommunications segment customers' purchases of our products are
affected by general market and economic uncertainty, government regulatory
changes and the June 2004 Chinese Ministry preliminary determination of dumping
of certain U.S. optical fiber exports to China. For the third quarter ended
September 30, 2004, one customer accounted for approximately 17% of our
Telecommunications segment sales, and 10 customers accounted for 51% of total
segment sales.
If we do not successfully adjust our manufacturing volumes and fixed cost
structure, or achieve manufacturing yields or sufficient product reliability,
our operating results could suffer, and we may not achieve profitability levels
anticipated
We are investing heavily in additional manufacturing capacity of certain
businesses, including nearly $800 million in 2004 to expand our liquid crystal
display glass facilities in response to anticipated increases in customer
demand. The speed of constructing the new facilities presents challenges. We may
face technical and process issues in moving to commercial production capacity.
There can be no assurance that Corning will be able to pace its capacity
expansion to the actual demand. While the industry has grown rapidly, it is
possible that glass manufacturing capacity may exceed customer demand during
certain periods.
The manufacturing of our products involves highly complex and precise
processes, requiring production in highly controlled and clean environments. Any
changes in our manufacturing processes or those of our suppliers could
significantly reduce our manufacturing yields and product reliability. In some
cases, existing manufacturing may be insufficient to achieve the volume or
requirements of our customers. We will need to develop new manufacturing
processes and techniques to achieve targeted volume, pricing and cost levels
that will permit profitable operations. While we continue to fund projects to
improve our manufacturing techniques and processes, we may not achieve
satisfactory cost levels in our manufacturing activities that will fully satisfy
our yield and margin targets.
We have incurred, and may in the future incur, restructuring and other charges,
the amounts of which are difficult to predict accurately
As a result of a severe decline in the telecommunications industry
beginning in 2001, we have recorded charges for restructuring, impairment of
assets, and the write-off of cost and equity based investments in the third
quarter of 2004.
It is possible we may record additional charges for restructuring or other
asset impairments if additional actions become necessary to align costs to a
reduced level of demand, or respond to increased competition, regulatory
actions, or other factors impacting our businesses.
If the markets for our products do not develop and expand as we anticipate,
demand for our products may decline further, which would negatively impact our
results of operations and financial performance
The markets for our products are characterized by rapidly changing
technologies, evolving industry government standards and frequent new product
introductions. Our success is expected to depend, in substantial part, on the
timely and successful introduction of new products, upgrades of current products
to comply with emerging industry government standards, our ability to acquire
technologies needed to remain competitive and our ability to address competing
technologies and products. In addition, the following factors related to our
products and the markets for them, if not achieved, could have an adverse impact
on our results of operations and financial performance:
. our ability to introduce leading products such as glass substrates for
liquid crystal displays, optical fiber and environmental substrate
products that can command competitive prices in the marketplace;
. our ability to maintain or achieve a favorable sales mix of large
generation sizes of display glass;
. our ability to continue to develop new product lines to address our
customers' diverse needs within the several market segments that we
participate in, which requires a high level of innovation, as well as
the accurate anticipation of technological and market trends;
. our ability to develop new products in response to favorable
government regulations and laws driving customer demand, particularly
environmental substrate diesel filter products in the Environmental
Technologies segment and Telecommunications segment products
associated with fiber-to-the-premises;
. our ability to create the infrastructure required to support
anticipated growth in certain businesses:
. continued strong demand for notebook computers;
. the rate of substitution by end-users purchasing LCD monitors to
replace cathode ray tube monitors;
. the rate of growth in purchases of LCD televisions to replace other
technologies;
. fluctuations in inventory levels in the supply chain of LCD-based
consumer electronics; or
. the rate of growth of the fiber-to-the-premises build-out in North
America.
We face pricing pressures in each of our leading businesses that could adversely
affect our results of operations and financial performance
We periodically face pricing pressures in each of our leading businesses as
a result of intense competition, emerging new technologies, or over-capacity.
While we will work toward reducing our costs to respond to the pricing pressures
that may continue, we may not be able to achieve proportionate reductions in
costs. As a result of overcapacity and the current economic and industry
downturn in the Telecommunications segment, pricing pressures continued in 2004,
particularly in our optical fiber and cable products. We anticipate pricing
pressures will continue into 2005 and beyond. Increased pricing pressure is
possible in our Display Technologies segment as our customers strive to reduce
their costs.
We have incurred, and may in the future incur, goodwill and other intangible
asset impairment charges
At September 30, 2004, Corning had goodwill of $276 million (including $117
million related to the Telecommunications segment). During the third quarter of
2004, we recorded a $1,420 million impairment charge to write-down the
Telecommunications segment goodwill balance to its estimated fair value.
While we believe the estimates and judgments about future cash flows used
in the goodwill impairment tests are reasonable, we cannot provide assurance
that future impairment charges will not be required if the expected cash flow
estimates as projected by management do not occur or change based on market
conditions.
We may be limited in our ability to obtain additional capital on commercially
reasonable terms
Although we believe existing cash, short-term investments and borrowing
capacity, collectively, provide adequate resources to fund ongoing operating
requirements, we may be required to seek additional financing to compete
effectively in our markets. Our public debt ratings affect our ability to raise
capital and the cost of such capital. In July 2002, our credit ratings were
downgraded to below investment grade. Our ratings as of September 30, 2004 were
BB+ from both Fitch and Standard & Poor's and Ba2 from Moody's. Any downgrades
may increase our borrowing costs and affect our ability to access the debt
capital markets.
As a result of our lower debt ratings, we may face difficulties in our
business. For example, we may face increasing requirements to post cash
collateral for performance bonds and some customers may seek alternative
suppliers.
We are subject under our revolving credit facility to a covenant that
requires us to maintain a ratio of total debt to capital, as defined under the
credit facility, of not greater than 60%. Our total debt to capital ratio was
42% at September 30, 2004. This covenant may limit our ability to borrow funds.
Future losses or significant charges could materially increase our total debt to
capital ratio which may reduce the amounts we are able to borrow under the
revolving credit facility.
If our products or components purchased from our suppliers experience
performance issues, our business will suffer
Our business depends on the production of excellent products of
consistently high quality. To this end, our products, including components
purchased from our suppliers, are tested for quality both by us and our
customers. Nevertheless, our products are highly complex, and our customers'
testing procedures are limited to evaluating our products under likely and
foreseeable failure scenarios. For various reasons (including, among others, the
occurrence of performance problems unforeseeable in testing), our products and
components purchased from our suppliers may fail to perform as expected.
Performance issues could result from faulty design or problems in manufacturing
or testing. We have experienced such performance issues in the past and remain
exposed to such performance issues. In some cases, product redesigns or
additional capital equipment may be required to correct a defect. In addition,
any significant or systemic product failure could result in customer relations
problems and harm the future sales of our products.
Interruptions of supplies from our key suppliers may affect our results of
operations and financial performance
Interruptions of supplies from our key suppliers could disrupt production
or impact our ability to increase production and sales. We do not have long-term
or volume purchase agreements with every supplier, and may have limited options
for alternative supply if these suppliers fail, for any reason, including their
business failure or financial difficulties, to continue the supply of
components.
We face intense competition in most of our businesses
We expect that we will face additional competition from existing
competitors and new entrants. Because some of the markets in which we compete
have been historically characterized by rapid growth and are characterized by
rapid technology changes, smaller niche and start-up companies may become our
principal competitors in the future. We must invest in research and development,
expand our engineering, manufacturing and marketing capabilities, and continue
to improve customer service and support in order to remain competitive. We
cannot assure you that we will be able to maintain or improve our competitive
position.
We may experience difficulties in enforcing our intellectual property rights and
we may be subject to claims of infringement of the intellectual property rights
of others
We may encounter difficulties in protecting our intellectual property
rights or obtaining rights to additional intellectual property necessary to
permit us to continue or expand our businesses. We cannot assure you that the
patents that we hold or may obtain will provide meaningful protection against
our competitors or competitive technologies. Litigation may be necessary to
enforce our intellectual property rights, to protect our trade secrets and to
determine the validity and scope of our proprietary rights. Litigation is
inherently uncertain and the outcome is often unpredictable. Other companies
hold patents on technologies used in our industries and are aggressively seeking
to expand, enforce and license their patent portfolios.
The intellectual property rights of others could inhibit our ability to
introduce new products. We are, and may in the future be, subject to claims of
intellectual property infringement or misappropriation that may result in loss
of revenue or require us to incur substantial costs. We cannot assure you as to
the outcome of such claims.
Current or future litigation may harm our financial condition or results of
operations
Pending, threatened or future litigation is subject to inherent
uncertainties. Our financial condition or results of operations may be adversely
affected by unfavorable outcomes, expenses and costs exceeding amounts estimated
or insured. In particular, we have been named as a defendant in numerous
lawsuits against PCC and several other defendants involving claims alleging
personal injury from exposure to asbestos. As described in Legal Proceedings,
our negotiations with the representatives of asbestos claimants have produced a
tentative settlement, but certain cases may still be litigated. Final approval
of a global settlement through the PCC bankruptcy process may impact the results
of operations for the period in which such costs, if any, are recognized. Total
charges of $429 million have been incurred through September 30, 2004; however,
the final settlement value will be dependent on the price of our common stock at
the time it is contributed to the settlement trust. Management cannot provide
assurances that the ultimate outcome of a settlement will not be materially
different from the amount recorded to date.
We face risks related to our international operations and sales
We have customers and significant operations, including manufacturing and
sales, located outside the U.S. We have large manufacturing operations for
liquid crystal display glass substrates in the Asia-Pacific region, including
equity investments in companies operating in South Korea that make liquid
crystal display glass and in China that make telecommunications products, and
several significant customers are located in this region. As a result of these
and other international operations, we face a number of risks, including:
. major health concerns such as SARS;
. difficulty of effectively managing our diverse global operations;
. change in regulatory requirements;
. tariffs, duties and other trade barriers including anti-dumping duties
as in the pending China proceedings (Refer to Part II - Other
Information, Item 1. Legal Proceedings for additional information);
. undeveloped legal systems; and
. political and economic instability in foreign markets.
We face risks through our equity method investments in companies that we do not
control
Dow Corning Corporation (which makes silicone products) and Samsung Corning
Precision Glass Co., Ltd. (which makes liquid crystal display glass), two
companies in which we have a 50% ownership interest, have contributed to our
earnings by recognition of a share of their earnings. For the nine months ended
September 30, 2004, we have recognized $310 million of equity earnings,
primarily from these two companies. Samsung Corning Precision is located in the
Asia-Pacific region and, as such, is subject to those geographic risks referred
to above. With 50% or lower ownership, we do not control such equity companies
nor their management and operations. Performance of our equity investments may
not continue at the same levels in the future. During 2003, we recognized
charges associated with Samsung Corning Co., Ltd. (our 50% equity method
investment that makes glass panels and funnels for conventional televisions),
which recorded significant fixed asset impairment charges. During 2004, we have
recognized charges associated with Dow Corning Corporation, which recorded
charges for restructuring actions and bankruptcy related settlement activities.
It is possible that future earnings could be negatively impacted by additional
charges recorded by our equity method investments.
We face risks due to foreign currency fluctuations
Because we have significant customers and operations outside the U.S.,
fluctuations in foreign currencies affect our sales and profit levels. Foreign
exchange rates may make our products less competitive in countries where local
currencies decline in value relative to the dollar. These currency risks may
increase as our sales outside the U.S. grow.
If the financial condition of our customers declines, our credit risks could
increase
In 2002 and 2003, certain of our customers experienced financial
difficulties, and some filed with the courts seeking protection under bankruptcy
or reorganization laws. We have experienced, and in the future may experience,
losses as a result of our inability to collect our accounts receivable, as well
as the loss of such customer's ongoing business. If our customers fail to meet
their payment obligations to us, including deposits due under long-term purchase
and supply agreements in our Display Technologies segment, we could experience
reduced cash flows and losses in excess of amounts reserved. As of September 30,
2004, reserves for trade receivables totaled approximately $36 million.
We may not have adequate insurance coverage for claims against us
We face the risk of loss resulting from, and adverse publicity associated
with, product liability, securities, fiduciary liability, intellectual property,
antitrust, contractual, warranty, fraud and other lawsuits, whether or not such
claims are valid. In addition, our product liability, fiduciary, directors and
officers, property and comprehensive general liability insurance may not be
adequate to cover such claims or may not be available to the extent we expect.
Our insurance costs have increased substantially and may increase further. We
may not be able to get adequate insurance coverage in the future at acceptable
costs. A successful claim that exceeds or is not covered by our policy limits
could require us to pay substantial sums. Some of the carriers in our historic
excess insurance program are not rated, or may have lower ratings, or are in
liquidation 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 or war insurance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
There have been no material changes to our market risk exposure during the first
nine months of 2004. For a discussion of our exposure to market risk, refer to
Item 7A, Quantitative and Qualitative Disclosures About Market Risks, contained
in our 2003 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's chief
executive officer and its chief financial officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
September 30, 2004, the end of the period covered by this report. Based upon the
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 the Company
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.
During the fiscal quarter ended September 30, 2004, there has been no change in
our internal control over financial reporting 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 11 active hazardous waste sites.
Under the Superfund Act, all parties who may have contributed any waste to a
hazardous waste site, identified by such Agency, are jointly and severally
liable for the cost of cleanup unless the Agency agrees otherwise. It is
Corning's policy to accrue for its estimated liability related to Superfund
sites and other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued approximately $20 million for its estimated
liability for environmental cleanup and litigation at September 30, 2004. Based
upon the information developed to date, management believes that the accrued
reserve is a reasonable estimate of the Company's estimated liability and that
the risk of an additional loss in an amount materially higher than that accrued
is remote.
Schwinger and Stevens Toxins Lawsuits. In April 2002, Corning was named as a
defendant in two actions, Schwinger and Stevens, filed in the U.S. District
Court for the Eastern District of New York, which asserted various personal
injury and property damage claims against a number of corporate defendants.
These claims allegedly arise from the release of toxic substances from a
Sylvania nuclear materials processing facility near Hicksville, New York.
Amended complaints naming 205 plaintiffs and seeking damages in excess of $3
billion were served in September 2002. The sole basis of liability against
Corning was plaintiffs' claim that Corning was the successor to Sylvania-Corning
Nuclear Corporation, a Delaware corporation formed in 1957 and dissolved in
1960. Management intends to vigorously contest all claims against Corning for
the reason that Corning is not the successor to Sylvania-Corning. Management
will also defend on the grounds that almost all of the wrongful death claims and
personal injury claims are time-barred. At a status conference in December 2002,
the Court decided to "administratively close" the Schwinger and Stevens cases
and ordered plaintiffs' counsel to bring new amended complaints with
"bellwether" plaintiffs. In these actions, known as Schwinger II and Astuto, the
plaintiffs have not named Corning as a defendant. Although it appears that
plaintiffs may proceed only against the other corporate defendants, the original
Schwinger and Stevens cases remain pending and no order has been entered
dismissing Corning. Based upon the information developed to date, and
recognizing that the outcome of litigation is uncertain, management believes
that the likelihood of a materially adverse impact to Corning's financial
statements is remote.
Dow Corning Bankruptcy. Corning and Dow Chemical each own 50% of the common
stock of Dow Corning, which has been in reorganization proceedings under Chapter
11 of the U.S. Bankruptcy Code since May 1995. Dow Corning filed for bankruptcy
protection to address pending and claimed liabilities arising from many thousand
breast-implant product lawsuits each of which typically sought damages in excess
of one million dollars. On November 8, 1998, Dow Corning and the Tort Claimants
Committee jointly filed a revised Plan of Reorganization (Joint Plan) which
provided for the settlement or other resolution of implant claims. After review
and approvals by the Bankruptcy Court and the U.S. District Court of the Eastern
District of Michigan, and an appeal, the District Court on April 2, 2004 entered
an order establishing June 1, 2004 as the effective date of the Joint Plan.
Under the terms of the Joint Plan, Dow Corning will establish a Settlement Trust
and a Litigation Facility to provide a means for tort claimants to settle or
litigate their claims. Dow Corning has 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. As required by the Joint
Plan, Dow Corning has fully satisfied (or reserved for) the claims of its
commercial creditors in accordance with a March 31, 2004 ruling of the District
Court determining the amount of pendency interest allowed on the $810 million in
principal owing on such claims. In the second quarter of 2004, Dow Corning
recorded a $47 million adjustment to its interest liabilities relating to this
matter, of which Corning recognized $14 million reflected in its second quarter
equity earnings. Certain commercial creditors have appealed from that ruling to
the U.S. Court of Appeals of the Sixth Circuit seeking from Dow Corning an
additional sum of approximately $100 million for interest at default rates and
enforcement costs. Corning believes the risk of loss to Dow Corning (net of sums
reserved) is remote.
In 1995, Corning fully impaired its investment in Dow Corning upon its entry
into bankruptcy proceedings and did not recognize equity earnings from the
second quarter of 1995 through the end of 2002. Corning began recognizing equity
earnings in the first quarter of 2003 when management concluded that its
emergence from bankruptcy protection was probable. Corning considers the
difference between the carrying value of its investment in Dow Corning and its
50% share of Dow Corning's equity to be permanent. This difference is $249
million. Subject to future rulings by the bankruptcy court and potential changes
in estimated bankruptcy-related liabilities, it is possible that Dow Corning may
record bankruptcy-related charges in the future.
Corning received no dividends from Dow Corning in 2003 or in 2004 to date.
The Joint Plan includes releases for Corning and Dow Chemical as shareholders in
exchange for contributions to the Joint Plan. Although claims against the
shareholders were included in several thousand state and federal lawsuits filed
pre-bankruptcy, alleging injuries arising from Dow Corning's implant products,
Corning was awarded summary judgment in federal court and in several state
jurisdictions. The remaining claims against Corning will be channeled by the
Joint Plan into facilities established by the Joint Plan. Management believes
that the likelihood of a materially adverse impact to Corning's financial
standards arising from these remaining shareholder claims is remote.
Federal Securities Cases. A federal securities class action lawsuit was filed in
1992 against Corning and certain individual defendants by a class of purchasers
of Corning stock who allege misrepresentations and omissions of material facts
relative to the silicone gel breast implant business conducted by Dow Corning.
This action is pending in the U.S. District Court for the Southern District of
New York. The class consists of those purchasers of Corning stock in the period
from June 14, 1989 to January 13, 1992, who allegedly purchased at inflated
prices due to the non-disclosure or concealment of material information. No
amount of damages is specified in the complaint. In 1997, the Court dismissed
the individual defendants from the case. In June 2003, Corning filed a motion
for summary judgment. Corning intends to continue to defend this action
vigorously. Based upon the information developed to date and recognizing that
the outcome of litigation is uncertain, management believes that the likelihood
of a materially adverse impact to Corning's financial statements is remote.
From December 2001 through April 2002, Corning and three of its officers and
directors were named defendants in lawsuits alleging violations of the U.S.
securities laws in connection with Corning's November 2000 offering of 30
million shares of common stock and $2.7 billion zero coupon convertible
debentures, due November 2015. In addition, the Company and the same three
officers and directors were named in lawsuits alleging misleading disclosures
and non-disclosures that allegedly inflated the price of Corning's common stock
in the period from October 2000 through July 9, 2001. The plaintiffs in these
actions seek to represent classes of purchasers of Corning's stock in all or
part of the period indicated. On August 2, 2002, the U.S. District Court of the
Western District of New York entered an order consolidating these actions for
all purposes, designating lead plaintiffs and lead counsel, and directing
service of a consolidated complaint. The consolidated amended complaint requests
substantial damages in an unspecified amount to be proved at trial. In February
2003, defendants filed a motion to dismiss the complaint for failure to allege
the requisite elements of the claims with particularity. The Court heard
arguments on May 29 and June 9, 2003 and on April 9, 2004 entered a Decision and
Order dismissing the complaint. In May 2004, Plaintiffs filed a notice of appeal
to the U.S. Court of Appeals of the Second Circuit. Plaintiffs filed their
appellate brief on August 30, 2004. Defendants filed their appellate brief on
October 13, 2004. Oral argument has not yet been scheduled. Management is
prepared to defend these lawsuits vigorously. Recognizing that the outcome of
litigation is uncertain, management believes that the likelihood of a materially
adverse impact to Corning's financial statements, net of applicable insurance,
is remote.
Pittsburgh Corning Corporation. Corning and PPG Industries, Inc. ("PPG") each
own 50% of the capital stock of PCC. Over a period of more than two decades, PCC
and several other defendants have been named in numerous lawsuits involving
claims alleging personal injury from exposure to asbestos. On April 16, 2000,
PCC filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the
Western District of Pennsylvania. As of the bankruptcy filing, PCC had in excess
of 140,000 open claims and had insufficient remaining insurance and assets to
deal with its alleged current and future liabilities. More than 100,000
additional claims have been filed with PCC after its bankruptcy filing. At the
time PCC filed for bankruptcy protection, there were approximately 12,400 claims
pending against Corning in state court lawsuits alleging various theories of
liability based on exposure to PCC's asbestos products and typically requesting
monetary damages in excess of one million dollars per claim. Corning has
defended those claims on the basis of the separate corporate status of PCC and
the absence of any facts supporting claims of direct liability arising from
PCC's asbestos products. Corning is also currently named in approximately 11,300
other cases (approximately 42,800 claims) alleging injuries from asbestos and
similar amounts of monetary damages per claim. Those cases have been covered by
insurance without material impact to Corning to date. Asbestos litigation is
inherently difficult, and past trends in resolving these claims may not be
indicators of future outcomes.
In the bankruptcy court, PCC in April 2000 obtained a preliminary injunction
against the prosecution of asbestos actions arising from PCC's products against
its two shareholders to afford the parties a period of time (the Injunction
Period) in which to negotiate a plan of reorganization for PCC ("PCC Plan").
On May 14, 2002, PPG announced that it had agreed with certain of its insurance
carriers and representatives of current and future asbestos claimants on the
terms of a settlement arrangement applicable to claims arising from PCC's
products. On March 28, 2003, Corning announced that it had also reached
agreement with representatives of current and future asbestos claimants on a
settlement arrangement that will be incorporated into the PCC Plan. This
settlement is subject to a number of contingencies, including approval by the
bankruptcy court. Corning's settlement will require the contribution, when the
Plan becomes effective, of its equity interest in PCC, its one-half equity
interest in PCE, and 25 million shares of Corning common stock. Corning also
will be making cash payments of $142 million (net present value as of September
30, 2004) in six installments beginning one year after the Plan is effective. In
addition, Corning will assign policy rights or proceeds under primary insurance
from 1962 through 1984, as well as rights to proceeds under certain excess
insurance, most of which falls within the period from 1962 through 1973. In
return for these contributions, Corning expects to receive a release and an
injunction channeling asbestos claims against it into a settlement trust under
the PCC Plan.
Corning recorded an initial charge of $298 million in the period ending March
31, 2003 to reflect the settlement terms. However, the amount of the charge for
this settlement requires adjustment each quarter based upon movement in
Corning's common stock price prior to contribution of the shares to the trust.
In the third quarter of 2004, Corning recorded a credit of $50 million to
reflect the mark-to-market of Corning common stock. Beginning with the first
quarter of 2003 and through September 30, 2004, Corning recorded total net
charges of $429 million to reflect the initial settlement and mark-to-market the
value of Corning common stock.
Two of Corning's primary insurers and several excess insurers have commenced
litigation for a declaration of the rights and obligations of the parties under
insurance policies, including rights that may be affected by the settlement
arrangement described above. Corning is vigorously contesting these cases.
Management is unable to predict the outcome of this insurance litigation.
The PCC Plan received a favorable vote from creditors in March 2004. Hearings to
consider objections to the Plan were held in the Bankruptcy Court in May 2004.
That Court set a schedule for briefing leading to final arguments in November
2004. The timing and outcome are uncertain and additional appeals by objecting
parties are reasonably possible. Although the confirmation of the PCC Plan is
subject to a number of contingencies, apart from the quarterly adjustment in the
value of 25 million shares of Corning common stock, management believes that the
likelihood of a material adverse impact to Corning's financial statements is
remote.
Astrium. In December of 2000, Astrium, SAS and Astrium, Ltd. filed a complaint
for negligence in the U.S. District Court for the Central District of California
against TRW, Inc., Pilkington Optronics Inc., Corning NetOptix, Inc., OFC
Corporation and Optical Filter Corporation claiming damages in excess of $150
million. The complaint alleges that certain cover glasses for solar arrays used
to generate electricity from solar energy on satellites sold by Astrium's
corporate successor were negligently coated by NetOptix or its subsidiaries
(prior to Corning's acquisition of NetOptix) in such a way that the amount of
electricity the satellite can produce and their effective life were materially
reduced. NetOptix has denied that the coatings produced by NetOptix or its
subsidiaries caused the damage alleged in the complaint, or that it is legally
liable for any damages that Astrium may have experienced. In April 2002, the
Court granted motions for summary judgment by NetOptix and other defendants to
dismiss the negligence claims, but permitted plaintiffs to add fraud and
negligent misrepresentation claims against all defendants and a breach of
warranty claim against NetOptix and its subsidiaries. In October 2002, the Court
again granted defendants' motions for summary judgment and dismissed the
negligent misrepresentation and breach of warranty claims. The intentional fraud
claims were dismissed against all non-settling defendants on February 25, 2003.
On March 19, 2003, Astrium appealed all of the Court's Rulings regarding the
various summary judgment motions to the Ninth Circuit Court of Appeals. The
Circuit Court has stayed the appeal pending a decision in a case being appealed
to the California Supreme Court involving similar issues of law which was argued
on October 5, 2004. Recognizing that the outcome of litigation is uncertain,
management believes that the likelihood of a materially adverse impact to
Corning's financial statements is remote.
Furukawa Electric Company. On February 3, 2003, The Furukawa Electric Company
filed suit in the Tokyo District Court in Japan against Corning Cable Systems
International Corporation ("CCS International") alleging infringement of
Furukawa's Japanese Patent No. 2,023,966 which relates to separable fiber ribbon
units used in optical cable. Furukawa's complaint requests slightly over (Y)6
billion in damages (approximately $56 million) and an injunction against further
sales in Japan of these fiber ribbon units. CCS International has denied the
allegation of infringement, asserted that the patent is invalid, and is
defending vigorously against this lawsuit. Several hearings have been held
before the Tokyo District Court and the next hearing is scheduled for October
29, 2004, at which a ruling from the court is expected. Management believes that
the likelihood of a materially adverse impact to Corning's financial statements
is remote.
Chinese Anti-Dumping Investigation. On July 1, 2003, the Chinese Ministry of
Commerce announced an anti-dumping investigation against manufacturers of
optical fiber based in the U.S, Korea and Japan, alleging that standard
single-mode optical fiber was sold in China at lower prices than in the
respective home country. This matter does not present a claim for damages. On
June 16, 2004 the Ministry's preliminary determination was issued which found
that Corning had dumped optical fiber in China during the relevant period in
2002 and 2003, and that the responding parties had collectively materially
injured Chinese producers. The Ministry stipulated that Corning's preliminary
cash deposit on optical fiber types covered by the investigation was 16%.
Chinese purchasers of the affected Corning optical fiber will have to pay the
amount of this duty in the form of a cash deposit. At the same time, Chinese
customs are also asking that all other Corning optical fiber types imported into
China will be charged a 16% payment, to be refunded when customs' testing
confirms that these types are not covered by the investigation. Corning is
vigorously contesting this preliminary determination through additional filings
and may be able to appeal within the Ministry or the Chinese legal system if the
final determination is adverse. Corning's fiber export revenues to China were
approximately 6% of optical fiber and cable revenues. Corning management
estimates that the impact of any potential loss of fiber export volume to China
should be less than $0.01 in earnings in the second half of 2004.
PicVue Electronics Ltd., PicVue OptoElectronics International, Inc. and
Eglasstrek Gmbh. In June 2002, Corning brought an action seeking to restrain the
use of its trade secrets and for copyright infringement relating to certain
aspects of the fusion draw machine used for liquid crystal display glass
melting. This action is pending in the U.S. District Court for the Western
District of New York against these three named defendants. The District Court in
July 2003 denied the PicVue motion to dismiss and granted a preliminary
injunction in favor of Corning, subject to posting a bond in an amount to be
determined. PicVue, a Taiwanese company, responded in July 2003 with a
counterclaim alleging violations of the antitrust laws and claiming damages of
more than $120 million as well as requesting trebled damages. PicVue has
appealed the District Court's ruling and the District Court has deferred ruling
on the bond amount until the completion of such appeal. The appellate court
affirmed the grant of the preliminary injunction, but remanded the case for the
District Court to clarify the scope of the injunction and to consider what, if
any, bond should be posted. The parties have submitted papers to the District
Court addressing the issues remanded. In those papers, PicVue has requested that
Corning post a bond of $150 million. The court has deferred making a ruling on
the remand issues pending settlement discussions between the parties.
Recognizing that the outcome of litigation is uncertain, management believes
that the PicVue counterclaim is without merit and that the likelihood of a
materially adverse impact to Corning's financial statements is remote.
Tyco Electronics Corporation and Tyco Technology Resources, Inc. On August 13,
2003, CCS Holdings Inc. ("CCS"), a Corning subsidiary, filed an action in the
U.S. District Court for the Middle District of North Carolina against Tyco
Electronics Corporation and Tyco Technology Resources, Inc. ("Tyco"), asking the
court to declare a Tyco patent invalid and not infringed by CCS. The patent
generally relates to a type of connector for optical fiber cables. Tyco has
responded with a motion to dismiss the action for lack of jurisdiction. That
motion has been fully briefed by the parties, and Tyco has requested a hearing.
The motion to dismiss has been withdrawn by Tyco and Tyco has filed an Answer
and Counterclaims to CCS's complaint. Tyco's counterclaims allege patent
infringement by CCS and seeks unspecified monetary damages and an injunction.
Management has not estimated the range of monetary damages that may be claimed
if CCS does not prevail on its claim that the Tyco patent is invalid or not
infringed. Recognizing that the outcome of litigation is uncertain, management
believes that the risk of a material impact on Corning's financial statements is
remote.
Grand Jury Investigation of Conventional Cathode Ray Television Glass Business.
In August 2003, CAV was served with a federal grand jury document subpoena
related to pricing, bidding and customer practices involving conventional
cathode ray television glass picture tube components. Eight employees or former
employees have each received a related subpoena. CAV is a general partnership,
51% owned by Corning and 49% owned by Asahi Glass America, Inc. CAV's only
manufacturing facility in State College, Pennsylvania closed in the first half
of 2003 due to declining sales. CAV is cooperating with the government
investigation. Management is not able to estimate the likelihood that any
charges will be filed as a result of the investigation.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
This table provides information about our purchases of our common stock during
the fiscal third quarter of 2004:
Issuer Purchases of Equity Securities*
------------------------------------------------------------------------------------------------------------------------------------
Total Average Total Number of Approximate Dollar
Number Price Shares Purchased as Value of Shares that
of Shares Paid per Part of Publicly May Yet Be Purchased
Period Purchased** Share** Announced Plan* Under the Plan*
------------------------------------------------------------------------------------------------------------------------------------
July 1-31, 2004 1,675 $12.09 0 $0
August 1-31, 2004 13,518 $12.05 0 $0
September 1-30, 2004 9,191 $10.17 0 $0
------------------------------------------------------------------------------------------------------------------------------------
Total 24,384 $11.35 0 $0
------------------------------------------------------------------------------------------------------------------------------------
* During the quarter ended September 30, 2004, we did not have a publicly
announced program for repurchase of shares of our common stock and did not
repurchase our common stock in open-market transactions outside of such a
program.
** This column reflects the following transactions during the fiscal third
quarter of 2004: (i) the deemed surrender to us of 20,976 shares of common
stock to pay the exercise price and to satisfy tax withholding obligations
in connection with the exercise of employee stock options, and (ii) the
surrender to us of 3,408 shares of common stock to satisfy tax withholding
obligations in connection with the vesting of restricted stock issued to
employees.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Exhibit Name
-------------- ------------
10.1 Form of Corning Incorporated Incentive Stock Plan
Agreement for Restricted Stock Grants
10.2 Form of Corning Incorporated Incentive Stock Plan
Agreement for Restricted Stock Retention Grants
10.3 Form of Corning Incorporated Incentive Stock
Option Agreement
10.4 Form of Corning Incorporated Non-Qualified Stock
Option Agreement
12 Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of Chief Executive Officer Pursuant
to Rule 13a-14(a) under the Exchange Act
31.2 Certification of Chief Financial Officer Pursuant
to Rule 13a-14(a) under the Exchange Act
32 Certification Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
A report on Form 8-K was filed July 19, 2004, in connection with the
registrant's results for the quarter ended June 30, 2004, furnishing
material pursuant to Item 12 and Item 9.*
A report on Form 8-K was filed August 6, 2004 in connection with
registrant's additional reporting segments and segment financial results,
under Items 5 and 7. A report on Form 8-K was filed October 7, 2004, in
connection with certain exit or disposal activities and material impairment
charges under Items 2.05, 2.06 and 9.01.*
A report on Form 8-K was filed October 20, 2004, in connection with the
registrant's results for the quarter ended September 30, 2004, furnishing
material pursuant to Item 2.02 and Item 7.01.*
* Information furnished under Item 9, Item 12, Item 7.01 or Item 2.02 of
Form 8-K is not incorporated by reference, is not deemed filed and is not
subject to liability under Section 18 of the Securities and Exchange Act of
1934, as amended.
* Other items under Part II are not applicable.
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNING INCORPORATED
(Registrant)
October 28, 2004 /s/ JAMES B. FLAWS
---------------- -----------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
October 28, 2004 /s/ KATHERINE A. ASBECK
---------------- -----------------------------------------
Date Katherine A. Asbeck
Senior Vice President and Controller
(Principal Accounting Officer)
EXHIBIT INDEX
-------------
Exhibit Number Exhibit Name
-------------- ------------
10.1 Form of Corning Incorporated Incentive Stock Plan
Agreement for Restricted Stock Grants
10.2 Form of Corning Incorporated Incentive Stock Plan
Agreement for Restricted Stock Retention Grants
10.3 Form of Corning Incorporated Incentive Stock Option
Agreement
10.4 Form of Corning Incorporated Non-Qualified Stock Option
Agreement
12 Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) under the Exchange Act
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) under the Exchange Act
32 Certification Pursuant to 18 U.S.C. Section 1350
Exhibit 10.1
CORNING INCORPORATED
2000 INCENTIVE STOCK PLAN AGREEMENT
(Restricted Stock Grant)
This Incentive Stock Agreement dated ______________ between Corning Incorporated
("Corning") and the employee named below is subject in all respects to Corning's
2000 Employee Equity Participation Program, a copy of which may be obtained from
the Corporate Secretary at One Riverfront Plaza, Corning, New York, 14831-0001.
1. Award of Shares. Corning hereby awards to the below-named employee of
Corning (the "Employee") the number of shares of Corning Common Stock, par
value $.50 per share (the "Incentive Stock"), indicated below.
Employee SSN Shares
2. Non-Transferability. The shares of Incentive Stock (and all shares
subsequently issued or distributed by means of dividends, spin-offs,
splits, combinations, reclassifications, or other capital changes with
respect such shares) may not be sold, assigned, transferred, pledged or
otherwise encumbered by or on behalf of or for the benefit of the Employee
until the Employee is entitled to receive physical possession of the shares
pursuant to the terms of this Agreement.
3. Voluntary Termination, Termination for Cause, Dereliction of Duties or
Harmful Acts. The shares of Incentive Stock are subject to forfeiture and
shall be forfeited to Corning if the Employee voluntarily leaves the employ
of Corning or one of its subsidiaries without its express consent, if the
Employee's employment is terminated "for cause", or if the Employee causes
Corning or one of its subsidiaries to suffer financial harm or damage to
its reputation (either before or after termination of employment) through
(i) dishonesty, (ii) material violation of Corning's standards of ethics or
conduct, or (iii) material deviation from the duties owed Corning or its
subsidiaries by the Employee.
4. Possession of Shares. The shares of Incentive Stock shall be registered in
the name of the Employee but shall be held by Corning (in "book entry"
form) until the Employee is entitled to possession of the shares pursuant
to the terms of this Agreement. Until the Employee has received possession
of the shares of the Incentive Stock, the Employee shall have no right to
sell, assign, transfer, pledge or otherwise encumber the shares of
Incentive Stock in any manner, any attempt to do so to result in the
forfeiture of such shares to which such sale, assignment, transfer, pledge
or other encumbrance purports to relate.
5. Lapse of Forfeiture Provisions. The possibility of forfeiture referred to
in paragraph 3 above shall lapse as to ________ percent (_____%) of the
Incentive Stock after ___________ or upon the occurrence of the events
specified below:
a. The Employee's death.
b. The Employee's termination of employment as the result of total and
permanent disability or for health or medical reasons which prevent
the Employee from fulfilling the duties and responsibilities assigned
to the Employee.
c. The Employee's involuntary termination for reasons other than those
outlined in Paragraph 3 above.
d. The Employee's retirement under the Pension Plan or the pension scheme
applicable to one or more of Corning's subsidiaries on or after age
55.
e. The Employee's termination of employment with Corning or one of its
subsidiaries within four years following a "change of control"
(defined below), which termination shall be deemed to occur if during
such period the Employee determines in good faith that the position,
duties, responsibilities and status assigned to him are inconsistent
with the position, duties, responsibilities and status of the Employee
with Corning or one of its subsidiaries immediately prior to the
change of control. Such determination shall be evidenced by the
Employee in a writing delivered to the Secretary of Corning or one of
its subsidiaries promptly but in no event later than 180 days after
such determination.
For purposes of this Agreement, the term "change of control" shall
mean and shall be deemed to occur if and when:
(i) an offerer (other than Corning) purchases shares of Corning
Common Stock pursuant to a tender or exchange offer for such
shares;
(ii) any person (as such term is used in Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934) is or becomes the
beneficial owner, directly or indirectly, of Corning securities
representing 30% or more of the combined voting power of
Corning's then outstanding securities;
(iii)the membership of Corning's Board of Directors changes as the
result of a contested election of elections, such that a majority
of the individuals who are Directors at any particular time were
initially placed on the Board of Directors as a result of such a
contested election or elections occurring within the previous two
years; or
(iv) the consummation of a merger, consolidation, sale or disposition
of all or substantially all of Corning's assets or a plan or
partial or complete liquidation approved by Corning's
shareholders.
6. Voting rights and dividends. The Employee may vote the shares of Incentive
Stock and receive all dividends as declared and paid by Corning, subject to
the appropriate withholding to satisfy applicable requirements.
7. Legends. The Employee acknowledges that the shares of Incentive Stock are
held in electronic "book entry" in a restricted account by Corning, and if
converted into paper certificate form would bear a restricted legend
indicating the possibility of forfeiture and the restrictions on transfer.
8. Transfers. If the Employee shall be transferred from Corning to a
subsidiary company (being an entity at least 50% owned within the meaning
of Section 424(f) of the Internal Revenue Code), or vice versa or from one
subsidiary company to another, the Employee's employment shall not be
deemed to have terminated.
9. Other. Any dispute, disagreement or matter of interpretation which shall
arise under this Agreement shall be finally determined by Corning's
Compensation Committee in its absolute discretion.
IN WITNESS WHEREOF, this Agreement has been duly executed by Corning and the
Employee.
CORNING INCORPORATED EMPLOYEE
By: By:
--------------------------------- ----------------------
K. P. Gregg
Executive Vice President & Chief Address: -----------------
Administrative Officer
--------------------------
Exhibit 10.2
CORNING INCORPORATED
2000 INCENTIVE STOCK PLAN AGREEMENT
(Restricted Stock Retention Grant)
This Incentive Stock Agreement dated ________________ between Corning
Incorporated ("Corning") and the employee named below is subject in all respects
to Corning's 2000 Employee Equity Participation Program, a copy of which may be
obtained from the Corporate Secretary at One Riverfront Plaza, Corning, New
York, 14831-0001.
1. Award of Shares. Corning hereby awards to the below-named employee of
Corning (the "Employee") the number of shares of Corning Common Stock, par
value $.50 per share (the "Incentive Stock"), indicated below.
Employee SSN Shares
2. Non-Transferability. The shares of Incentive Stock (and all shares
subsequently issued or distributed by means of dividends, spin-offs,
splits, combinations, reclassifications, or other capital changes with
respect such shares) may not be sold, assigned, transferred, pledged or
otherwise encumbered by or on behalf of or for the benefit of the Employee
until the Employee is entitled to receive physical possession of the shares
pursuant to the terms of this Agreement.
3. Voluntary Termination, Termination for Cause, Dereliction of Duties or
Harmful Acts. The shares of Incentive Stock are subject to forfeiture and
shall be forfeited to Corning if the Employee voluntarily leaves the employ
of Corning or one of its subsidiaries without its express consent or if the
Employee causes Corning or one of its subsidiaries to suffer financial harm
or damage to its reputation (either before or after termination of
employment) through (i) dishonesty, (ii) material violation of Corning's
standards of ethics or conduct, or (iii) material deviation from the duties
owed Corning or its subsidiaries by the Employee.
4. Possession of Shares. The shares of Incentive Stock shall be registered in
the name of the Employee but shall be held by Corning (in "book entry"
form) until the Employee is entitled to possession of the shares pursuant
to the terms of this Agreement. Until the Employee has received possession
of the shares of the Incentive Stock, the Employee shall have no right to
sell, assign, transfer, pledge or otherwise encumber the shares of
Incentive Stock in any manner, any attempt to do so to result in the
forfeiture of such shares to which such sale, assignment, transfer, pledge
or other encumbrance purports to relate.
5. Lapse of Forfeiture Provisions. The possibility of forfeiture referred to
in paragraph 3 above shall lapse in whole upon the occurrence of the events
specified in subparagraphs a, b, c and d below.
a. The Employee's death.
b. The Employee's retirement under the Pension Plan or the pension scheme
applicable to one or more of Corning's subsidiaries on or after age
55.
c. The Employee's termination of employment as the result of total and
permanent disability or for health or medical reasons which prevent
the Employee from fulfilling the duties and responsibilities assigned
to the Employee.
d. The Employee's termination of employment with Corning or one of its
subsidiaries within four years following a "change of control"
(defined below), which termination shall be deemed to occur if during
such period the Employee determines in good faith that the position,
duties, responsibilities and status assigned to him are inconsistent
with the position, duties, responsibilities and status of the Employee
with Corning or one of its subsidiaries immediately prior to the
change of control. Such determination shall be evidenced by the
Employee in a writing delivered to the Secretary of Corning or one of
its subsidiaries promptly but in no event later than 180 days after
such determination.
For purposes of this Agreement, the term "change of control" shall
mean and shall be deemed to occur if and when:
(i) an offerer (other than Corning) purchases shares of Corning
Common Stock pursuant to a tender or exchange offer for such
shares;
(ii) any person (as such term is used in Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934) is or becomes the
beneficial owner, directly or indirectly, of Corning securities
representing 30% or more of the combined voting power of
Corning's then outstanding securities;
(iii)the membership of Corning's Board of Directors changes as the
result of a contested election of elections, such that a majority
of the individuals who are Directors at any particular time were
initially placed on the Board of Directors as a result of such a
contested election or elections occurring within the previous two
years; or
(iv) the consummation of a merger, consolidation, sale or disposition
of all or substantially all of Corning's assets or a plan or
partial or complete liquidation approved by Corning's
shareholders.
6. Voting rights and dividends. The Employee may vote the shares of Incentive
Stock and receive all dividends as declared and paid by Corning, subject to
the appropriate withholding to satisfy applicable requirements.
7. Legends. The Employee acknowledges that the shares of Incentive Stock are
held in electronic "book entry" in a restricted account by Corning, and if
converted into paper certificate form would bear a restricted legend
indicating the possibility of forfeiture and the restrictions on transfer.
8. Transfers. If the Employee shall be transferred from Corning to a
subsidiary company (being an entity at least 50% owned within the meaning
of Section 424(f) of the Internal Revenue Code), or vice versa or from one
subsidiary company to another, the Employee's employment shall not be
deemed to have terminated.
9. Other. Any dispute, disagreement or matter of interpretation which shall
arise under this Agreement shall be finally determined by Corning's
Compensation Committee in its absolute discretion.
IN WITNESS WHEREOF, this Agreement has been duly executed by Corning and the
Employee.
CORNING INCORPORATED EMPLOYEE
By: By:
--------------------------------- ----------------------
K. P. Gregg
Executive Vice President & Chief Address: -----------------
Administrative Officer
--------------------------
S.S.N.:
-------------------
Exhibit 10.3
CORNING INCORPORATED
INCENTIVE STOCK OPTION AGREEMENT
The following section summarizes the principal provisions of the 2000 Equity
Participation Program (the "Plan"). The terms of the Plan govern the
administration of all incentive stock options (an "Option") and other equity
grants made by Corning Incorporated (the "Corporation"). A copy of the Plan can
be obtained from the Corporation's Secretary, One Riverfront Plaza, Corning, New
York 14831-0001. If there is a discrepancy between this summary and the Plan,
the terms of the Plan will govern.
1. Award of Option. An Option award is evidenced by a written statement
provided by the Corporation to an Option recipient (the "Optionee"). The
statement will include the date of the Option grant (the "Option Grant
Date"), the number of shares covered by the Option grant, the Option
vesting dates, the Option exercise price, and the expiration date of the
Option (the "Final Expiration Date").
2. Exercise of Option. An Option can be exercised on or after the date the
Option (or a portion of the Option) becomes vested (nonforfeitable). No
Option, however, can be exercised before it is vested or after its Final
Expiration Date. For the specific vesting dates applicable to your Option
grant, you can check the statement provided to you by the Company.
3. Non-Transferability. An Option is not transferable other than by will or
the laws of descent and distribution and may be exercised during the
lifetime of the Optionee only by the Optionee.
4. Exercise for Cash or Stock. The purchase price of shares purchased through
an Option exercise is payable in full with, or in a combination of, (a)
cash, or (b) shares of Corning Common Stock owned by the Optionee duly
endorsed or accompanied by stock powers executed in blank. If payment is
made in whole or in part with shares of Corning Common Stock, the value of
such Common Stock is calculated as the mean between its high and low prices
on the New York Stock Exchange on the day of purchase.
5. Exercise After Termination of Employment, Death, Disability or Change in
Control. The provisions covering the exercise of an Option following
termination of employment, death, disability or change in control are as
follows:
(a) Retirement -- If the Optionee's employment shall terminate on account
of retirement from the Corporation at or after age 55, an Option may
be exercised for the remaining life of the option.
(b) Involuntary Termination -- If the Optionee's employment shall be
involuntarily terminated for any reason not otherwise separately
addressed below, an Option may be exercised for ninety (90) days
following such termination to the extent exercisable at the date of
such termination.
(c) Death -- If the Optionee shall die while employed, or while retired as
described in subsection (a), or while disabled as described in
subsection (d), an Option may be exercised by the Optionee's duly
appointed legal representative during the remaining life of the
option.
(d) Disability -- If the Optionee's employment shall terminate as a result
of a total and permanent disability (as that term is defined in the
Corporation's long-term disability plan(s)), an Option may be
exercised during the remaining life of the option.
(e) Divestiture, etc. -- If the Optionee's employment is terminated due to
a reduction in force or divestiture or discontinuance of certain of
the Corporation's operations, an Option may be exercised for 3 years
after termination of employment.
(f) Voluntary Termination, Termination for Cause, Dereliction of Duties or
Harmful Acts -- If the Optionee voluntarily leaves the employ of the
Corporation other than for Retirement as described in subsection (a),
an Option shall terminate immediately and be of no further force or
effect. If the Optionee shall cause the Corporation to suffer
financial harm or damage to its reputation (either before or after
termination of employment) through (i) dishonesty, (ii) material
violation of the Corporation's standards of ethics or conduct, or
(iii) material deviation from the duties owed the Corporation by the
Optionee, an Option shall terminate and be of no further force or
effect.
(g) Transfers -- If the Optionee shall be transferred from the Corporation
to a subsidiary company (being a 50% owned entity within the meaning
of Section 424(f) of the Code), or vice versa or from one subsidiary
company to another, the Optionee's employment shall not be deemed to
have terminated. An Option shall be treated in accordance with the
rules in subsection (e) if, while the Optionee is employed by a
subsidiary company, such company shall cease to be a subsidiary
company and the Optionee is not thereupon transferred to and employed
by the Corporation or another subsidiary company.
(h) Change of Control -- In the event of a "change of control", the
provisions of Section 2 above shall not be applicable and an Option
shall become fully exercisable.
For purposes of this Agreement, the term "change of control" shall
mean and shall be deemed to occur if and when:
(i) an offerer (other than the Corporation) purchases shares of
Corning Common Stock pursuant to a tender or exchange offer for
such shares;
(ii) any person (as such term is used in Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934) is or becomes the
beneficial owner, directly or indirectly, of the Corporation's
securities representing 50% or more of the combined voting power
of Corporation's then outstanding securities;
(iii)the membership of the Corporation's Board of Directors changes
as the result of a contested election or elections, such that a
majority of the individuals who are Directors at any particular
time were initially placed on the Board of Directors as a result
of such a contested election or elections occurring within the
previous two years; or
(iv) the consummation of a merger in which the Corporation is not the
surviving corporation, consolidation, sale or disposition of all
or substantially all of the Corporation's assets or a plan of
partial or complete liquidation approved by the Corporation's
shareholders.
6. Modification of Agreement. Any modification of the terms of this Agreement
must be approved, and any dispute, disagreement or matter of interpretation
which shall arise under this Agreement shall be finally determined by, the
Corporation's Compensation Committee in its absolute discretion.
7. Exercise Procedures. An Option may be exercised in accordance with the
procedures specified by the Corporation from time to time.
8. Discretionary Award. By acknowledging and accepting this stock option
award, you agree that the granting of this stock option award is completely
at the discretion of the Committee or its designee pursuant to the Plan.
The stock option award is not an acquired right to you, but an offer from
the Company to employees who fulfill specific conditions. As a result, you
do not expect that future options will be granted to you under this Plan,
or any other plan, nor do you expect that the benefits accruing under the
Plan will be reflected in any severance or indemnity payments that the
Company, or an Affiliate, may make to you in the future.
Exhibit 10.4
CORNING INCORPORATED
NON-QUALIFIED STOCK OPTION AGREEMENT
The following section summarizes the principal provisions of the 2000 Equity
Participation Program (the "Plan"). The terms of the Plan govern the
administration of all non-qualified stock options (an "Option") and other equity
grants made by Corning Incorporated (the "Corporation"). A copy of the Plan can
be obtained from the Corporation's Secretary, One Riverfront Plaza, Corning, New
York 14831-0001. If there is a discrepancy between this summary and the Plan,
the terms of the Plan will govern.
1. Award of Option. An Option award is evidenced by a written statement
provided by the Corporation to an Option recipient (the "Optionee"). The
statement will include the date of the Option grant (the "Option Grant
Date"), the number of shares covered by the Option grant, the Option
vesting dates, the Option exercise price, and the expiration date of the
Option (the "Final Expiration Date").
2. Exercise of Option. An Option can be exercised on or after the date the
Option (or a portion of the Option) becomes vested (nonforfeitable). No
Option, however, can be exercised before it is vested or after its Final
Expiration Date. For the specific vesting dates applicable to your Option
grant, you can check the statement provided to you by the Company.
3. Non-Transferability. An Option is not transferable other than by will or
the laws of descent and distribution and may be exercised during the
lifetime of the Optionee only by the Optionee.
4. Exercise for Cash or Stock. The purchase price of shares purchased through
an Option exercise is payable in full with, or in a combination of, (a)
cash, or (b) shares of Corning Common Stock owned by the Optionee duly
endorsed or accompanied by stock powers executed in blank. If payment is
made in whole or in part with shares of Corning Common Stock, the value of
such Common Stock is calculated as the mean between its high and low prices
on the New York Stock Exchange on the day of purchase.
5. Exercise After Termination of Employment, Death, Disability or Change in
Control. The provisions covering the exercise of an Option following
termination of employment, death, disability or change in control are as
follows:
(a) Retirement -- If the Optionee's employment shall terminate on account
of retirement from the Corporation at or after age 55, an Option may
be exercised for the remaining life of the option.
(b) Involuntary Termination -- If the Optionee's employment shall be
involuntarily terminated for any reason not otherwise separately
addressed below, an Option may be exercised for ninety (90) days
following such termination to the extent exercisable at the date of
such termination.
(c) Death -- If the Optionee shall die while employed, or while retired as
described in subsection (a), or while disabled as described in
subsection (d), an Option may be exercised by the Optionee's duly
appointed legal representative during the remaining life of the
option.
(d) Disability -- If the Optionee's employment shall terminate as a result
of a total and permanent disability (as that term is defined in the
Corporation's long-term disability plan(s)), an Option may be
exercised during the remaining life of the option.
(e) Divestiture, etc. -- If the Optionee's employment is terminated due to
a reduction in force or divestiture or discontinuance of certain of
the Corporation's operations, an Option may be exercised for 3 years
after termination of employment.
(f) Voluntary Termination, Termination for Cause, Dereliction of Duties or
Harmful Acts -- If the Optionee voluntarily leaves the employ of the
Corporation other than for Retirement as described in subsection (a),
an Option shall terminate immediately and be of no further force or
effect. If the Optionee shall cause the Corporation to suffer
financial harm or damage to its reputation (either before or after
termination of employment) through (i) dishonesty, (ii) material
violation of the Corporation's standards of ethics or conduct, or
(iii) material deviation from the duties owed the Corporation by the
Optionee, an Option shall terminate and be of no further force or
effect.
(g) Transfers -- If the Optionee shall be transferred from the Corporation
to a subsidiary company (being a 50% owned entity within the meaning
of Section 424(f) of the Code), or vice versa or from one subsidiary
company to another, the Optionee's employment shall not be deemed to
have terminated. An Option shall be treated in accordance with the
rules in subsection (e) if, while the Optionee is employed by a
subsidiary company, such company shall cease to be a subsidiary
company and the Optionee is not thereupon transferred to and employed
by the Corporation or another subsidiary company.
(h) Change of Control -- In the event of a "change of control", the
provisions of Section 2 above shall not be applicable and an Option
shall become fully exercisable.
For purposes of this Agreement, the term "change of control" shall
mean and shall be deemed to occur if and when:
(i) an offerer (other than the Corporation) purchases shares of
Corning Common Stock pursuant to a tender or exchange offer for
such shares;
(ii) any person (as such term is used in Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934) is or becomes the
beneficial owner, directly or indirectly, of the Corporation's
securities representing 50% or more of the combined voting power
of Corporation's then outstanding securities;
(iii)the membership of the Corporation's Board of Directors changes
as the result of a contested election or elections, such that a
majority of the individuals who are Directors at any particular
time were initially placed on the Board of Directors as a result
of such a contested election or elections occurring within the
previous two years; or
(iv) the consummation of a merger in which the Corporation is not the
surviving corporation, consolidation, sale or disposition of all
or substantially all of the Corporation's assets or a plan of
partial or complete liquidation approved by the Corporation's
shareholders.
6. Exercise Procedures. An Option may be exercised in accordance with the
procedures specified by the Corporation from time to time.
7. Discretionary Award. By acknowledging and accepting this stock option
award, you agree that the granting of this stock option award is completely
at the discretion of the Committee or its designee pursuant to the Plan.
The stock option award is not an acquired right to you, but an offer from
the Company to employees who fulfill specific conditions. As a result, you
do not expect that future options will be granted to you under this Plan,
or any other plan, nor do you expect that the benefits accruing under the
Plan will be reflected in any severance or indemnity payments that the
Company, or an Affiliate, may make to you in the future.
8. Modification of Agreement. Any modification of the terms of this Agreement
must be approved, and any dispute, disagreement or matter of interpretation
which shall arise under this Agreement shall be finally determined by, the
Corporation's Compensation Committee in its absolute discretion.
Exhibit 12
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratios)
For the nine months ended
September 30, 2004
-------------------------
Loss before income taxes $ (1,647)
Adjustments:
Distributed income of equity investees 252
Amortization of capitalized interest 4
Fixed charges net of capitalized interest 125
----------
Loss before taxes and fixed charges, as adjusted $ (1,266)
==========
Fixed charges:
Interest incurred $ 120
Portion of rent expense which represents an
appropriate interest factor 16
Amortization of debt costs 3
----------
Total fixed charges 139
Capitalized interest (14)
----------
Total fixed charges, net of capitalized interest $ 125
==========
Ratio of earnings to fixed charges *
==========
* Loss before taxes and fixed charges, as adjusted, were inadequate to cover
total fixed charges by approximately $1.4 billion for the nine months ended
September 30, 2004.
Exhibit 31.1
CERTIFICATIONS
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 report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer 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 we
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;
5. The registrant's other certifying officer 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
controls over financial reporting.
October 28, 2004 /s/ JAMES R. HOUGHTON
---------------- ------------------------------------
Date James R. Houghton
Chairman and Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
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 report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer 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 we
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;
5. The registrant's other certifying officer 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
controls over financial reporting.
October 28, 2004 /s/ JAMES B. FLAWS
---------------- -----------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer
Exhibit 32
CORNING INCORPORATED
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
In connection with the Quarterly Report of Corning Incorporated (the "Company")
on Form 10-Q for the period ended September 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), we, James
R. Houghton and James B. Flaws, Chairman and Chief Executive Officer and Vice
Chairman and Chief Financial Officer, respectively, of the Company, certify,
pursuant to 18 U.S.C. Section 1350.
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
October 28, 2004 /s/ JAMES R. HOUGHTON
---------------- -----------------------------------------
Date James R. Houghton
Chairman and Chief Executive Officer
October 28, 2004 /s/ JAMES B. FLAWS
---------------- -----------------------------------------
Date James B. Flaws
Vice Chairman and Chief Financial Officer