UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to _____
Commission file number: 1-3247
CORNING INCORPORATED
(Exact name of registrant as specified in its charter)
NEW YORK 16-0393470
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE RIVERFRONT PLAZA, CORNING, NY 14831
(Address of principal executive offices) (Zip Code)
607-974-9000
(Registrant's telephone number, including area code)
[None]
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
----------------------- -----------------------------------------
Common Stock, $0.50 par New York Stock Exchange
value per share SWX Swiss Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes X No
--- ---
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes No X
--- ---
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. X
---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ X ] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
As of June 30, 2005, the aggregate market value of the registrant's common stock
held by non-affiliates of the registrant was $23 billion based on the $16.62 as
reported on the New York Stock Exchange.
There were 1,545,982,974 shares of Corning's common stock issued and outstanding
as of January 31, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement dated February 27, 2006,
and filed for the Registrant's 2005 Annual Meeting of Shareholders are
incorporated into Part III, as specifically set forth in Part III.
PART I
Corning Incorporated and its consolidated subsidiaries are hereinafter sometimes
referred to as "the Company," "the Registrant," "Corning," or "we."
This report contains forward-looking statements that involve a number of risks
and uncertainties. These statements relate to our future plans, objectives,
expectations and estimates and may contain words such as "believes," "expects,"
"anticipates," "estimates," "forecasts," or similar expressions. Our actual
results could differ materially from what is expressed or forecasted in our
forward-looking statements. Some of the factors that could contribute to these
differences include those discussed under "Forward-Looking Statements," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere in this report.
Item 1. Business
-----------------
General
Corning traces its origins to a glass business established in 1851. The present
corporation was incorporated in the State of New York in December 1936, and its
name was changed from Corning Glass Works to Corning Incorporated on April 28,
1989.
Corning is a global, technology-based corporation that operates in four
reportable business segments: Display Technologies, Telecommunications,
Environmental Technologies and Life Sciences.
Display Technologies Segment
Corning's Display Technologies segment manufactures glass substrates for active
matrix liquid crystal displays (LCDs), that are used primarily in notebook
computers, flat panel desktop monitors, and LCD televisions. Corning's
facilities in Kentucky, Japan and Taiwan and those of Samsung Corning Precision
Glass Co., Ltd. (Samsung Corning Precision, which is 50% owned by Corning) in
South Korea develop, manufacture and supply high quality glass substrates using
a proprietary fusion manufacturing process and technology expertise. Samsung
Electronics Co., Ltd. has a 43% interest in Samsung Corning Precision, which
sells glass to LCD panel manufacturers in Korea. Another shareholder owns the
remaining 7% interest in Samsung Corning Precision. Panel manufacturers in the
other leading LCD-producing areas of the world, Japan, Taiwan, Singapore and
China, are supplied by Corning.
Corning has been a leader to market with new large-generation sized glass
substrates used by our customers in the production of larger LCDs for monitors
and television. We are recognized for providing product innovations that help
our customers produce larger, lighter, thinner and higher-resolution displays
more affordably. Glass substrates are currently available in sizes up to
Generation 6 (1500mm x 1800mm), and Generations 7 (1870mm x 2200mm) and 7.5
(1950mm x 2250mm) were introduced from Samsung Corning Precision in 2005. Large
substrates allow LCD manufacturers to produce larger and a greater number of
panels from each substrate. The larger size leads to economies of scale for LCD
manufacturers and is expected to help lower display prices for consumers in the
future. At the end of 2005, approximately 76% of Corning and Samsung Corning
Precision's volume of LCD glass was Generation 5 (1100mm x 1250mm) and higher.
Corning's proprietary fusion manufacturing process was invented by the Company.
It is the cornerstone of Corning's technology leadership in the LCD industry.
The automated process yields high quality glass substrates with excellent
dimensional stability and uniformity - essential attributes for the production
of increasingly larger, high performance active matrix LCDs. Corning's fusion
process is scalable and has proven to be among the most effective processes in
producing large size substrates.
LCD glass manufacturing is a highly capital intensive business. Corning
continues to make significant investments to expand its LCD glass facilities in
response to anticipated customer demand. The environment is very competitive.
Important success attributes include efficient manufacturing, access to capital,
technology know-how, and patents.
Patent protection and proprietary trade secrets are important to the segment's
operations. The segment has a growing portfolio of patents relating to its
products, technologies and manufacturing processes. Reference is made to the
material under the heading "Patents and Trademarks" for information relating to
patents and trademarks.
The Display Technologies segment represented 38% of Corning's sales for 2005.
Telecommunications Segment
The Telecommunications segment produces optical fiber and cable, and hardware
and equipment products for the worldwide telecommunications industry. Corning
invented the world's first low-loss optical fiber more than 30 years ago. It
offers a range of optical fiber technology products and enhancements for a
variety of applications, including premises, fiber-to-the-premises access,
metropolitan, long-haul and submarine networks. Corning makes and sells
InfiniCor(R) fibers for local area networks, data centers and central offices;
NexCor(R) fiber for converged services networks; SMF-28e(R) single mode optical
fiber that provides additional transmission wavelengths in metropolitan and
access networks; MetroCor(R) fiber products for metropolitan networks; LEAF(R)
optical fiber for long-haul, regional and metropolitan networks; and Vascade(R)
submarine optical fibers for use in undersea networks. Corning has two large
optical fiber manufacturing facilities in North Carolina, as well as a
controlling interest in Shanghai Fiber Optics Co., Ltd. in China. As a result of
lowered demand for optical fiber products, in 2002 Corning mothballed its
optical fiber manufacturing facility in Concord, North Carolina and transferred
certain capabilities to its Wilmington, North Carolina facility. Corning
believes that the Concord facility can be returned to productive capacity within
six to nine months of a decision to reopen.
A significant portion of Corning's optical fiber is sold to subsidiaries such as
Corning Cable Systems LLC (Corning Cable Systems), Corning Cable Systems GmbH,
and Norddeutsche Seekabelwerke GmbH & Co., KG (NSW). Optical fiber is cabled
prior to being sold in cable form. The remaining fiber production is sold
directly to end users or third party cablers around the world. Corning's cabling
operations include large facilities in North Carolina and Germany and smaller
regional locations or equity affiliates.
Corning's hardware and equipment products include cable assemblies, fiber optic
hardware, fiber optic connectors, optical components and couplers, closures and
pedestals, splice and test equipment and other accessories for optical
connectivity. For copper connectivity, Corning's products include subscriber
demarcation, connection and protection devices, xDSL (different variations of
DSL) passive solutions and outside plant enclosures. Each of the product lines
may be combined in Corning's fiber-to-the-premises solutions. Corning has
manufacturing operations for hardware and equipment products in North Carolina
and Texas, as well as Europe, Mexico, China, and the Caribbean. Corning Gilbert
Inc. offers products for the cable television industry, including coaxial
connectors and associated tools. Corning Gilbert has manufacturing operations
for coaxial connectors and associated assembly tools in Arizona, Mexico and
Denmark.
Patent protection is important to the segment's operations. The segment has an
extensive portfolio of patents relating to its products, technologies and
manufacturing processes. The segment licenses certain of its patents to third
parties and generates revenue from these licenses, but such royalty revenue is
not currently material to the business. Corning is also licensed to use certain
patents owned by others, and such licenses are also important to the segment's
operations. Reference is made to the material under the heading "Patents and
Trademarks" for information relating to the Company's patents and trademarks.
The Telecommunications segment represented 35% of Corning's sales for 2005.
Environmental Technologies Segment
Corning's environmental products include ceramic technologies and solutions for
emissions and pollution control in mobile and stationary applications around the
world, including gasoline and diesel substrate and filter products. In response
to new and tightening emission control obligations around the world, Corning has
continued to develop more efficient substrate products with higher density and
greater surface area. Corning manufactures these products in New York, Virginia,
China, Germany and South Africa. Cormetech Inc., 50% owned by Corning and 50%
owned by Mitsubishi Heavy Industries Ltd. of Japan, manufactures ceramic
environmental substrate products at its North Carolina and Tennessee facilities
for use in power plants. Corning is investing in new ceramic substrate and
filter technologies for diesel emission control device products, with a new
production facility in New York to produce such products for diesel vehicles
worldwide. Corning sells its ceramic substrate and filter products worldwide to
manufacturers of emission control systems who then sell to automotive and diesel
engine manufacturers. Although our sales are to the emission control systems
manufacturers, the use of Corning substrates and filters is generally required
by the specifications of the automotive and diesel engine manufacturers.
Patent protection is important to the segment's operations. The segment has an
extensive portfolio of patents relating to its products, technologies and
manufacturing processes. The segment is also licensed to use certain patents
owned by others, and such licenses are also important to the segment's
operations. Reference is made to the material under the heading "Patents and
Trademarks" for information relating to the Company's patents and trademarks.
The Environmental Technologies segment represented 13% of Corning's sales for
2005.
Life Sciences Segment
Life Sciences laboratory products include microplate products, coated slides,
filter plates for genomics sample preparation, plastic cell culture dishes,
flasks, cryogenic vials, roller bottles, mass cell culture products, liquid
handling instruments, Pyrex(R) glass beakers, pipettors, serological pipettes,
centrifuge tubes and laboratory filtration products. Corning sells products
under 3 primary brands: Corning, Costar and Pyrex. Corning manufactures these
products in Maine, New York, United Kingdom and Mexico and markets them
worldwide, primarily through distributors, to government entities,
pharmaceutical and biotechnology companies, hospitals, universities and other
research facilities.
Patent protection is important to the segment's operations, particularly for
some of its emerging products. The segment has a growing portfolio of patents
relating to its products, technologies and manufacturing processes. Brand
recognition, through some well known trademarks, is important to the segment.
Reference is made to the material under the heading "Patents and Trademarks" for
information relating to the Company's patents and trademarks.
The Life Sciences segment represented approximately 6% of Corning's sales for
2005.
Other Products
Other products made by Corning include semiconductor optics, ophthalmic glass
and plastic products, technical products, such as polarizing glass, glass for
high temperature applications and machinable glass ceramic products.
Semiconductor optics manufactured by Corning include: high-performance optical
material products; optical-based metrology instruments; and optical assemblies
for applications in the global semiconductor industry. Corning's semiconductor
optics products are manufactured in New York. Other specialty glass products
include glass lens and window components and assemblies. Other specialty glass
products are made in New York, Virginia, United Kingdom and France or sourced
from China. Corning's Eurokera and Keraglass equity ventures with Saint Gobain
Vitrage S.A. of France manufacture smooth cooktop glass/ceramic products in
France, China, and South Carolina.
Corning owns a 50% interest in Samsung Corning Company, Ltd. (Samsung Corning),
a producer of glass panels and funnels for cathode ray tubes for televisions and
computer monitors, with manufacturing facilities in Korea, Germany, China and
Malaysia. Samsung Electronics Company, Ltd. owns the remaining 50% interest in
Samsung Corning.
Other products represented approximately 8% of Corning's sales for 2005.
We manufacture and process products at more than 47 plants and 15 countries.
Additional explanation regarding Corning and our four segments is presented in
Management's Discussion and Analysis of Financial Condition under Operating
Review and Results of Operations and Note 18 (Operating Segments) to the
Consolidated Financial Statements.
Corporate Investments
Corning and The Dow Chemical Company (Dow Chemical) each own half of Dow Corning
Corporation (Dow Corning), an equity company in Michigan that manufactures
silicone products worldwide. Dow Corning emerged from its Chapter 11 bankruptcy
proceedings during 2004. Dow Corning's sales were $3.9 billion in 2005.
Additional discussion about Dow Corning appears in the Legal Proceedings section
and Dow Corning's financial statements are attached in Item 15. Exhibits and
Financial Statement Schedules.
Corning and PPG Industries, Inc. each own half of Pittsburgh Corning Corporation
(PCC), an equity company in Pennsylvania that manufactures glass products for
architectural and industrial uses. PCC filed for Chapter 11 bankruptcy
reorganization in April 2000. Additional discussion about PCC appears in the
Legal Proceedings section. Corning also owns half of Pittsburgh Corning Europe
N.V., a Belgian corporation that manufactures glass products for industrial uses
primarily in Europe.
Additional information about corporate investments is presented in Note 7
(Investments) to the consolidated financial statements.
Competition
Corning competes across all of its product lines with many large and varied
manufacturers, both domestic and foreign. Some of these competitors are larger
than Corning, and some have broader product lines. Corning strives to maintain
its position through technology and product innovation. For the future, Corning
believes its competitive advantage lies in its commitment to research and
development, and its commitment to quality. There is no assurance that Corning
will be able to maintain its market position or competitive advantage.
Display Technologies Segment
Corning is the largest worldwide producer of glass substrates for active matrix
LCD displays. That market position remained relatively stable over the past
year. Corning believes it has competitive advantages in LCD glass substrate
products from investing in new technologies, offering a consistent source of
reliable supply and using its proprietary fusion manufacturing process. This
process allows us to deliver glass that is larger, thinner and lighter with
exceptional surface quality. Asahi Glass, Nippon Electric Glass and NH Techno
are Corning's principal competitors in display glass substrates. In addition,
new entrants are seeking to expand their presence in this business.
Telecommunications Segment
Competition within the telecommunications equipment industry is intense among
several significant companies. Corning is a leading competitor in the segment's
principal product lines which include optical fiber and cable and hardware and
equipment. Price and new product innovations are significant competitive
factors. The competitive landscape has experienced increasing competition based
upon pricing in all geographical markets. These competitive conditions are
likely to persist.
Corning is the largest producer of optical fiber and cable products, but faces
significant competition due to continued excess capacity in the market place,
price pressure and new product innovations. Corning believes its large scale
manufacturing experience, fiber process, technology leadership and intellectual
property assets yield cost advantages relative to several of its competitors.
The primary competing producers of optical fiber and cable products are Furukawa
OFS, Alcoa, Fujikura, Sumitomo, Prysmian Communications and Draka Comteq.
For hardware and equipment products, significant competitors are 3M Company
(3M), Tyco Electronics, Furukawa OFS, CommScope, and ADC Communications.
Environmental Technologies Segment
For worldwide automotive ceramic substrate products, Corning has a leading
market position that has remained relatively stable over the past year. Corning
believes its competitive advantage in automotive ceramic substrate products for
catalytic converters is based upon global presence, customer service,
engineering design services and product innovation. The heavy duty and light
duty diesel vehicle market opportunities are still emerging. Corning's
Environmental Technologies products face principal competition from NGK, Denso,
Ibiden and Emitec.
Life Sciences Segment
Corning is a leading supplier of glass and plastic science laboratory products,
with a growing plastics products market presence in North America and Europe,
and a solid laboratory glass products market presence. Corning seeks to maintain
competitive advantages by emphasizing product quality, product availability,
supply chain efficiency, a wide product line and superior product attributes.
For laboratory products, Schott Glaswerke, Kimble, Greiner and Becton Dickinson
are the principal worldwide competitors. Corning also faces increasing
competition from certain distributors that have backward integrated or
introduced private label products.
Other Products
Corning is a leading supplier of materials and products for lithography optics
in the semiconductor industry and that market position remained relatively
stable during the past year. Corning seeks to compete by providing superior
optical quality, leading optical designs and a local Corning presence supporting
its customers. For Corning's semiconductor optical material products, general
specialty glass/glass ceramic products and ophthalmic products, Schott
Glaswerke, Shin-Etsu Quartz Products, Hoya and Heraeus are the main competitors.
Samsung Corning is a leading producer of cathode ray tube glass products for
conventional televisions. Its relative competitive position has remained stable
over the past year, although there has been a significant decline in the
industry as end-market customers have turned to flat panel displays or
projection technologies. Samsung Corning seeks to maintain its competitive
advantage through customer support, logistics expertise and a lower cost
manufacturing structure. Nippon Electric Glass, Asahi, and various other Asian
manufacturers compete with Samsung Corning. Samsung Corning is also pursuing a
diversification strategy to mitigate the impact of the decline in the cathode
ray tube glass.
Raw Materials
Corning's production of specialty glasses, ceramics, and related materials
requires significant quantities of energy, certain precious metals, and batch
materials.
Although energy shortages have not been a problem recently, the cost of energy
has increased. Corning has achieved flexibility through important engineering
changes to take advantage of low-cost energy sources in most significant
processes. Specifically, many of Corning's principal manufacturing processes can
now be operated with natural gas, propane, oil or electricity, or a combination
of these energy sources.
As to resources (ores, minerals, polymers, and processed chemicals) required in
manufacturing operations, availability appears to be adequate. Corning's
suppliers from time to time may experience capacity limitations in their own
operations, or may eliminate certain product lines; nevertheless, Corning
believes it has adequate programs to ensure a reliable supply of batch chemicals
and raw materials. For many products, Corning has alternate glass compositions
that would allow operations to continue without interruption in the event of
specific materials shortages.
Certain key materials and proprietary equipment used in the manufacturing of
products are currently sole sourced or available only from a limited number of
suppliers. Any future difficulty in obtaining sufficient and timely delivery of
components could result in delays or reductions in product shipments, or reduce
Corning's gross margins.
Patents and Trademarks
Inventions by members of Corning's research and engineering staff have been, and
continue to be, important to the Company's growth. Patents have been granted on
many of these inventions in the United States and other countries. Some of these
patents have been licensed to other manufacturers, including companies in which
Corning has equity investments. Many of the earlier patents have now expired,
but Corning continues to seek and obtain patents protecting its newer
innovations. In 2005, Corning was granted over 170 patents in the U.S. and over
325 patents in countries outside the U.S.
Each business segment possesses its own patent portfolio that provides certain
competitive advantages in protecting Corning's innovations. Corning has
historically enforced, and will continue to enforce, its intellectual property
rights. At the end of 2005, Corning and its wholly owned subsidiaries owned over
5,500 unexpired patents in various countries of which about 2,600 were U.S.
patents. Between 2006 and 2008, approximately 7% of these patents will expire,
while at the same time Corning intends to seek patents protecting its newer
innovations. Worldwide, Corning has over 2,600 patent applications in process,
with about 900 in process in the U.S. Corning believes that its patent portfolio
will continue to provide a competitive advantage in protecting Corning's
innovation, although Corning's competitors in each of its businesses are
actively seeking patent protection as well.
The Display Technologies segment has over 260 patents in various countries of
which over 90 were U.S. patents. No one patent is considered material to this
business segment. Some of the important issued U.S. patents in this segment
include patents relating to glass compositions and methods for the use and
manufacture of glass substrates for display applications. There is no group of
important Display Technology segment patents set to expire between 2006 and
2008.
The Telecommunications segment has over 2,300 patents in various countries of
which over 1,000 were U.S. patents. No one patent is considered material to this
business segment. Some of the important issued U.S. patents in this segment
include: (i) patents relating to optical fiber products including dispersion
compensating fiber, low loss optical fiber and high data rate optical fiber and
processes and equipment for manufacturing optical fiber including methods for
making optical fiber preforms and methods for drawing, cooling and winding
optical fiber; (ii) patents relating to packaging of lasers and designs for
optical switch products; (iii) patents relating to optical fiber ribbons and
methods for making such ribbon, fiber optic cable designs and methods for
installing optical fiber cable; and (iv) patents relating to optical fiber and
electrical connectors and associated methods of manufacture. While a few
particular U.S. patents will expire in 2006, there is no group of important
Telecommunications segment patents set to expire between 2006 and 2008.
The Environmental Technologies segment has over 575 patents in various countries
of which over 270 were U.S. patents. No one patent is considered material to
this business segment. Some of the important issued U.S. patents in this segment
include patents relating to cellular ceramic honeycomb products, together with
ceramic batch and binder system compositions, honeycomb extrusion and firing
processes, and honeycomb extrusion dies and equipment for the high-volume,
low-cost manufacture of such products. There is no group of important
Environmental segment patents set to expire between 2006 and 2008.
The Life Sciences segment has over 200 patents in various countries of which
over 75 were U.S. patents. No one patent is considered material to this business
segment. Some of the important issued U.S. patents in this segment include
patents relating to methods and apparatus for the manufacture and use of
scientific laboratory equipment including nucleic acid arrays, multiwell plates,
and cell culture products as well as equipment for label independent drug
discovery. There is no group of important Life Sciences segment patents set to
expire between 2006 and 2008.
Many of these patents are used in Corning's operations or are licensed for use
by others, and Corning is licensed to use patents owned by others. Corning has
entered into cross licensing arrangements with some major competitors, but the
scope of such licenses has been limited to specific product areas or
technologies.
Corning's principal trademarks include the following: Corning, Celcor,
Discovering Beyond Imagination, DuraTrap, Eagle2000, Epic, Flame of Discovery
Design, HPFS, LEAF, Pyrex, SMF-28e, Steuben, Lanscape and Vycor.
Protection of the Environment
Corning has a program to ensure that its facilities are in compliance with
state, federal and foreign pollution-control regulations. This program resulted
in capital and operating expenditures during the past several years. In order to
maintain compliance with such regulations, capital expenditures for pollution
control in continuing operations were approximately $19 million in 2005 and are
estimated to be $26 million in 2006.
Corning's 2005 operating results from continuing operations were charged with
approximately $42 million for depreciation, maintenance, waste disposal and
other operating expenses associated with pollution control. Corning believes
that its compliance program will not place it at a competitive disadvantage.
Document Availability
A copy of Corning's 2005 Annual Report on Form 10-K filed with the Securities
and Exchange Commission is available upon written request to Ms. Denise A.
Hauselt, Secretary and Assistant General Counsel, Corning Incorporated,
HQ-E2-10, Corning, NY 14831. The Annual Report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments pursuant to Section
13(a) or 15(d) of the Exchange Act and other filings are available as soon as
reasonably practicable after such material is electronically filed or furnished
to the SEC, and can be accessed electronically free of charge, through the
Investor Relations category of the Corning home page on the Internet at
www.corning.com.
Item 1A. Risk Factors
----------------------
Set forth below are some of the principal risks and uncertainties that could
cause our actual business results to differ materially from any forward-looking
statements contained in this Report. Future results could be materially affected
by general industry and market conditions, changes in laws or accounting rules,
general 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 business
conditions. These risk factors should be considered in addition to our
cautionary comments concerning forward-looking statements in this Annual Report.
Our sales could be negatively impacted if one or more of our key customers
substantially reduce orders for our products
Corning's ten largest customers account for about 50% of our sales.
However, no individual customer accounts for more than 10% of consolidated
sales.
A relatively small number of customers accounted for a high percentage of
net sales in each of our reportable operating segments. For 2005, five customers
of the Display Technologies segment, each of which accounted for more than 10%
of segment net sales, accounted for 75% of total segment sales. In the
Telecommunications segment, two customers, each of which accounted for more than
10% of this segment's net sales, accounted for 29% of total segment sales in
2005. In the Environmental Technologies segment, three customers, each of which
accounted for more than 10% of segment sales, represented 76% of total segment
sales for 2005. In the Life Sciences segment, one distributor accounted for 53%
of this segment's sales in 2005.
Samsung Corning Precision's sales were also concentrated, with three
customers accounting for 98% of sales in 2005.
Although the sale of LCD glass substrates has increased in 2005, there can
be no assurance that this positive trend will continue. Our customers are LCD
panel and color filter makers. 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,
price, or other factors, may lead to pauses in market growth from time to time.
Our customers may not be able to maintain profitable operations or access
sufficient capital to fund ongoing and future planned expansions, which may
limit their pace of orders to us. Emerging technologies could replace our glass
substrates for certain applications resulting in a decline in demand for our LCD
products.
Our Telecommunications segment customers' purchases of our products are
affected by their capital expansion plans, general market and economic
uncertainty and regulatory changes, including broadband policy. Sales in the
Telecommunications segment are expected to be impacted by Verizon Communication
Inc. (Verizon) fiber-to-the-premises deployments. Our sales will be dependent on
Verizon's planned targets for homes passed and connected. Changes in Verizon's
deployment plan could adversely affect future sales.
In the Environmental Technologies segment, sales of our ceramic substrate
and filter products for automotive and diesel emissions and pollution control
are expected to fluctuate with vehicle production. Changes in governmental laws
and regulations for air quality and emission controls may also influence future
sales. Sales in our Environmental Technologies segment are to four catalyzers
and emission system component manufacturers. Our customers sell these systems to
automotive original equipment manufacturers and diesel engine manufacturers.
Sales in our Life Science segment were historically through two large
distributors to government entities, pharmaceutical and biotechnology companies,
hospitals, universities and other research facilities. During 2005, we did not
renew the contract with one large distributor and transitioned the sales through
this distributor to our remaining primary distributor and other existing and
developing channels. This change has and may continue to adversely impact sales
volumes in the short term. In 2005, our remaining primary distributor accounted
for 53% of total segment sales.
If the markets for our products do not develop and expand as we anticipate,
demand for our products may decline, which would negatively impact our results
of operations and financial performance
The markets for our products are characterized by rapidly changing
technologies, evolving industry or government standards and frequent new product
introductions. Our success is expected to depend, in substantial part, on the
successful introduction of new products, or upgrades of current products, and
our ability to compete with new technologies and products of other suppliers.
The following factors related to our products and markets, if not achieved,
could have an adverse impact on our results of operations:
.. our ability to introduce leading products such as glass substrates for
liquid crystal displays, optical fiber and cable and hardware and
equipment, and environmental substrate products that can command
competitive prices in the marketplace;
.. our ability to achieve a favorable sales mix of large generation sizes of
liquid crystal display glass;
.. our ability to develop new products in response to government regulations
and laws, particularly diesel filter products in the Environmental
Technologies segment;
.. continued strong demand for notebook computers and LCD monitors;
.. the rate of growth in purchases of LCD televisions to replace other
technologies; and
.. 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 face pricing pressure 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 offset pricing pressures, we may not be able
to achieve proportionate reductions in costs. As a result of overcapacity in the
Telecommunications segment, we anticipate pricing pressures will continue into
2006 and beyond. Increased pricing pressure may develop in our Display
Technologies segment as our competitors strive to expand production of larger
generation substrates.
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 Taiwan and the Asia-Pacific region,
including equity investments in companies operating in South Korea that make
glass substrates for the LCD market. All of our Display segment customers are
located in the Asia-Pacific region. As a result of these and other international
operations, we face a number of risks, including:
.. geographical concentration of our factories and operations;
.. major health concerns;
.. difficulty of managing global operations;
.. difficulty in protecting intellectual property;
.. tariffs, duties and other trade barriers including anti-dumping duties;
.. undeveloped legal systems;
.. political and economic instability in foreign markets, and
.. foreign currency risk.
Any of these items could cause our sales and/or profitability to be
significantly reduced.
We face risks due to foreign currency fluctuations
Because we have significant customers and operations outside the U.S.,
fluctuations in foreign currencies, especially the Japanese yen, the New Taiwan
dollar, the Korean won, and the euro, affect our sales and profit levels.
Foreign exchange rates may make our products less competitive in countries where
local currencies decline in value relative to the dollar and Japanese yen. Sales
in our Display Technologies segment, representing 38% of Corning's sales, are
denominated in Japanese yen. The expected sales growth of the Display
Technologies segment will increase our exposure to currency fluctuations.
Although we hedge significant transaction and balance sheet currency exposures,
we do not hedge translation risk and thus changes in exchange rates (especially
the yen) may significantly impact our reported revenues and results of
operations.
If the financial condition of our customers declines, our credit risks could
increase
Although we have a rigorous process to administer credit and believe our
reserve is adequate, we have experienced, and in the future may experience,
losses as a result of our inability to collect our accounts receivable. 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. Some customers of our Display Technologies segment are thinly
capitalized and/or marginally profitable. In our Environmental products segment,
the U.S. auto customers and certain of their suppliers have encountered credit
downgrades or, in the case of Delphi Corporation, bankruptcy. These factors may
result in an inability to collect receivables or a possible loss in business. As
of December 31, 2005, reserves for trade receivables totaled approximately $24
million.
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, principally including liquid crystal display glass and diesel
emission substrates and filters. The speed of constructing the new facilities
presents challenges. We may face technical and process issues in moving to
commercial production. There can be no assurance that Corning will be able to
pace its capacity expansion to the actual demand. It is possible that
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 dust-free environments.
Changes in our manufacturing processes 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 margin targets.
Our future operating results depend on our ability to purchase a sufficient
amount of materials, parts, and manufacturing equipment components to meet the
demands of our customers
Our ability to meet customer demand depends, in part, on our ability to
obtain timely and adequate delivery of materials, parts and components from our
suppliers. We may experience shortages that could adversely affect our
operations. Although we work closely with our suppliers to avoid these types of
shortages, there can be no assurances that we will not encounter these problems
in the future. Furthermore, certain of our components and manufacturing
equipment are available only from a single source or limited sources. We may not
be able to find alternate sources in a timely manner. A reduction or
interruption in supplies, or a significant increase in the price of supplies
could have a material adverse effect on our businesses.
We have incurred, and may in the future incur, restructuring and other charges,
the amounts of which are difficult to predict accurately
We have recorded several charges for restructuring, impairment of assets,
and the write-off of cost and equity based investments. 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 other factors impacting our businesses.
We have incurred, and may in the future incur, goodwill and other intangible
asset impairment charges
At December 31, 2005, Corning had goodwill and other intangible assets of
$338 million. While we believe the estimates and judgments about future cash
flows used in the goodwill impairment tests are reasonable, we cannot provide
assurance that future impairment charges will not be required if the expected
cash flow estimates as projected by management do not occur.
We may be limited in our ability to obtain additional capital on commercially
reasonable terms
Although we believe existing cash, short-term investments and borrowing
capacity, collectively, provide adequate resources to fund ongoing operating
requirements, we may be required to seek additional financing to compete
effectively in our markets. Our public debt ratings affect our ability to raise
capital and the cost of such capital. Our ratings as of February 17, 2006 were
BBB- from both Fitch, Inc. and Standard & Poor's, a division of the McGraw-Hill
Companies, Inc. and Baa3 from Moody's Investors Service, a subsidiary of Moody's
Corporation. Any downgrades may increase our borrowing costs and affect our
ability to access the capital markets.
We are subject under our revolving credit facility to financial covenants
that require us to maintain two ratios including total debt to capital and
interest coverage, as defined under the revolving credit facility. These
covenants limit our ability to borrow funds. Future losses or significant
charges would materially affect these ratios, and may reduce the amounts we are
able to borrow under our revolving credit facility.
If our products or materials purchased from our suppliers experience performance
issues, our business will suffer
Our business depends on the production of products of consistently high
quality. Our products, components and materials purchased from our suppliers,
are typically tested for quality. These testing procedures are limited to
evaluating our products under likely and foreseeable failure scenarios. For
various reasons, our products, including materials purchased from our suppliers,
may fail to perform as expected. In some cases, product redesigns or additional
expense may be required to correct a defect. A significant or systemic product
failure could result in customer relations problems, lost sales, and financial
damages.
We face competition in most of our businesses
We expect that we will face additional competition from existing
competitors, low cost manufacturers and new entrants. We must invest in research
and development, expand our engineering, manufacturing and marketing
capabilities, and continue to improve customer service and support in order to
remain competitive. We cannot provide assurance that we will be able to maintain
or improve our competitive position.
We may experience difficulties in enforcing our intellectual property rights and
we may be subject to claims of infringement of the intellectual property rights
of others
We may encounter difficulties in protecting our intellectual property
rights or obtaining rights to additional intellectual property necessary to
permit us to continue or expand our businesses. We cannot assure you that the
patents that we hold or may obtain will provide meaningful protection against
our competitors. Litigation may be necessary to enforce our intellectual
property 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, require us to incur substantial costs, or lead to monetary damages
or injunctive relief against us. 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 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 through a PCC Plan of
Reorganization, but certain cases may still be litigated. The final approval of
the tentative settlement is subject to a number of uncertainties. 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 $643 million have been incurred through December 31, 2005; however,
additional charges are possible due to the potential fluctuation in the price of
our common stock, other adjustments in the proposed settlement, and other
litigation factors.
We face risks through our equity method investments in companies that we do not
control
Corning's net income includes significant equity in earnings of associated
companies. For the year ended December 31, 2005, we recognized $598 million of
equity earnings, of which $661 million came from our two largest investments:
Dow Corning Corporation (which makes silicone products) and Samsung Corning
Precision Glass Co., Ltd. (which makes liquid crystal display glass). Samsung
Corning Precision Glass Co., Ltd. (Samsung Corning Precision) is located in the
Asia-Pacific region and is subject to political geographic risks mentioned
above. Our equity investments may not continue to perform at the same levels as
in recent years. In the third quarter of 2005, we recognized equity losses
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 and other impairment charges. As the conventional
television market will be negatively impacted by strong growth in the LCD glass
market, it is reasonably possible that Samsung Corning Co., Ltd. may incur
additional restructuring or impairment charges or net operating losses in the
future.
We may not have adequate insurance coverage for claims against us
We face the risk of loss resulting from 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, natural
catastrophe and comprehensive general liability insurance may not be adequate to
cover such claims or may not be available to the extent we expect. Our insurance
costs have increased and may increase further. We may not be able to get
adequate insurance coverage in the future at acceptable costs. A successful
claim that exceeds or is not covered by our policies could require us to pay
substantial sums. Some of the carriers in our excess insurance programs are in
liquidation and may not be able to respond if we should have claims reaching
into excess layers. The financial health of other insurers may deteriorate. In
addition, we may not be able to obtain adequate insurance coverage for certain
risk such as political risk, terrorism or war.
Other
Additional information in response to Item 1 is found in Note 18 (Operating
Segments) to the consolidated financial statements and selected financial data.
Item 1B. Unresolved Staff Comments
-----------------------------------
None.
Item 2. Properties
-------------------
We operate approximately 47 manufacturing plants and processing facilities, of
which approximately one half are located in the U.S. We own substantially all of
our executive and corporate buildings, which are located in Corning, New York.
We also own substantially all of our manufacturing and research and development
facilities and more than half of our sales and administrative facilities.
For the years ended 2005, 2004 and 2003, we invested a total of $2.8 billion,
primarily in facilities outside the U.S. in our Display Technologies segment. Of
the $1.6 billion spent in 2005, $1.3 billion was for facilities outside the U.S.
Manufacturing, sales and administrative, and research and development facilities
at consolidated locations have an aggregate floor space of approximately 22
million square feet. Distribution of this total area follows:
--------------------------------------------------------------------------------
(million square feet) Total Domestic Foreign
--------------------------------------------------------------------------------
Manufacturing 17 9 8
Sales and administrative 4 2 2
Research and development 1 1
--------------------------------------------------------------------------------
Total 22 12 10
--------------------------------------------------------------------------------
Total assets and capital expenditures by operating segment are included in Note
18 (Operating Segments) to the Consolidated Financial Statements. Information
concerning lease commitments is included in Note 13 (Commitments, Contingencies
and Guarantees) to the Consolidated Financial Statements.
During 2005, we continued the restructuring program that closed or consolidated
certain smaller manufacturing facilities. Throughout 2006 we expect to have
excess manufacturing capacity in our Telecommunications segment and will not
utilize a portion of space in the facilities listed above. The largest unused
portion is our optical fiber manufacturing facility in Concord, North Carolina
that has been mothballed until fiber demand rebounds. We believe that the
Concord facility can be returned to productive capacity within six to nine
months of a decision to do so.
Item 3. Legal Proceedings
--------------------------
Environmental Litigation. Corning has been named by the Environmental Protection
Agency (the 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 $13 million (undiscounted) for its estimated
liability for environmental cleanup and litigation at December 31, 2005. Based
upon the information developed to date, management believes that the accrued
reserve is a reasonable estimate of the Company's liability and that the risk of
an additional loss in an amount materially higher than that accrued is remote.
Dow Corning Bankruptcy. Corning and The Dow Chemical Company (Dow Chemical) each
own 50% of the common stock of Dow Corning Corporation (Dow Corning), which was
in reorganization proceedings under Chapter 11 of the U.S. Bankruptcy Code
between May 1995 and June 2004. Dow Corning filed for bankruptcy protection to
address pending and claimed liabilities arising from many thousand
breast-implant product lawsuits. On June 1, 2004, Dow Corning emerged from
Chapter 11 with a Plan of Reorganization (the Plan) which provided for the
settlement or other resolution of implant claims and includes releases for
Corning and Dow Chemical as shareholders in exchange for contributions to the
Plan.
Under the terms of the Plan, Dow Corning has established and is funding a
Settlement Trust and a Litigation Facility to provide a means for tort claimants
to settle or litigate their claims. Dow Corning has paid approximately $1.6
billion (inclusive of insurance) to the Settlement Trust and subject to a number
of conditions, may pay up to an additional $1.6 billion ($710 million after-tax)
over 16 years. Certain commercial creditors continue to pursue an appeal to the
U.S. Court of Appeals of the Sixth Circuit seeking from Dow Corning an
additional sum of approximately $80 million for interest at default rates and
enforcement costs. The appeal was argued on July 27, 2005. Corning believes the
risk of loss to Dow Corning (net of amounts reserved) is remote.
In addition, Dow Corning has received a statutory notice of deficiency from the
United States Internal Revenue Service asserting tax deficiencies totaling
approximately $65 million relating to its federal income tax returns for the
1995 and 1996 calendar years. This matter is pending before the U.S. District
Court in Michigan. Dow Corning has also received a proposed adjustment from the
IRS (approximately $117 million) with respect to its federal income tax returns
for the 1997, 1998 and 1999 calendar years. Dow Corning is vigorously contesting
these deficiencies and proposed adjustments which it believes are excessive.
In 1995, Corning fully impaired its investment in Dow Corning upon its entry
into bankruptcy proceedings and did not recognize net equity earnings from the
second quarter of 1995 through the end of 2002. Corning began recognizing equity
earnings in the first quarter of 2003 when management concluded that its
emergence from bankruptcy protection was probable. Corning considers the
difference between the carrying value of its investment in Dow Corning and its
50% share of Dow Corning's equity to be permanent. This difference is $249
million. Subject to future rulings by the bankruptcy court and potential changes
in estimated bankruptcy-related liabilities, it is possible that Dow Corning may
record bankruptcy-related charges in the future. Corning received $45 million in
dividends from Dow Corning in 2005.
Pittsburgh Corning Corporation. Corning and PPG Industries, Inc. (PPG) each own
50% of the capital stock of Pittsburgh Corning Corporation (PCC). Over a period
of more than two decades, PCC and several other defendants have been named in
numerous lawsuits involving claims alleging personal injury from exposure to
asbestos. On April 16, 2000, PCC filed for Chapter 11 reorganization in the U.S.
Bankruptcy Court for the Western District of Pennsylvania. As of the bankruptcy
filing, PCC had in excess of 140,000 open claims and had insufficient remaining
insurance and assets to deal with its alleged current and future liabilities.
More than 100,000 additional claims have been filed with PCC after its
bankruptcy filing. As a result of PCC's bankruptcy filing, Corning recorded an
after-tax charge of $36 million in 2001 to fully impair its investment in PCC
and discontinued recognition of equity earnings. At the time PCC filed for
bankruptcy protection, there were approximately 12,400 claims pending against
Corning in state court lawsuits alleging various theories of liability based on
exposure to PCC's asbestos products and typically requesting monetary damages in
excess of one million dollars per claim. Corning has defended those claims on
the basis of the separate corporate status of PCC and the absence of any facts
supporting claims of direct liability arising from PCC's asbestos products.
Corning is also currently named in approximately 11,000 other cases
(approximately 43,500 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 in April 2000, PCC 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 in which to
negotiate a plan of reorganization for PCC (the PCC Plan).
On May 14, 2002, PPG announced that it had agreed with certain of its insurance
carriers and representatives of current and future asbestos claimants on the
terms of a settlement arrangement applicable to claims arising from PCC's
products.
On March 28, 2003, Corning announced that it had also reached agreement with
representatives of current and future asbestos claimants on a settlement
arrangement that was thereafter incorporated into the PCC Plan. This settlement
remains subject to a number of contingencies, including approval by the
Bankruptcy Court. Corning's settlement will require the contribution, if the
Plan is approved and becomes effective, of its equity interest in PCC, its
one-half equity interest in Pittsburgh Corning Europe (PCE), and 25 million
shares of Corning common stock. The settlement also requires Corning to make
cash payments of $152 million (net present value as of December 31, 2005) 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 the change in
Corning's common stock price prior to contribution of the shares to the trust.
During the fourth quarter of 2005, Corning recorded a charge of $8 million to
reflect the mark-to-market of Corning common stock. Beginning with the first
quarter of 2003 and through December 31, 2005, Corning recorded total net
charges of $643 million to reflect the initial settlement and subsequent
mark-to-market adjustments for the change in the value of Corning common stock.
Two of Corning's primary insurers and several excess insurers have commenced
litigation for a declaration of the rights and obligations of the parties under
insurance policies, including rights that may be affected by the settlement
arrangement described above. Corning is vigorously contesting these cases.
Management is unable to predict the outcome of this insurance litigation.
The PCC Plan received a favorable vote from creditors in March 2004. Hearings to
consider objections to the Plan were held in the Bankruptcy Court in May 2004.
The parties filed post-hearing briefs and made final oral arguments to the
Bankruptcy Court in November 2004. The Bankruptcy Court allowed an additional
round of briefing to address current case law developments and heard additional
oral arguments on March 16, 2005. In mid-April 2005, the proponents of the PCC
Plan requested that the court rule on the pending objections. If the Bankruptcy
Court does not approve the PCC Plan in its current form, changes to the Plan are
probable as it is likely that the Court will allow the proponents time to
propose amendments. The outcome of these proceedings is uncertain, and
confirmation of the current Plan or any amended Plan is subject to a number of
contingencies. However, apart from the quarterly mark-to-market adjustment in
the value of the 25 million shares of Corning 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. (NetOptix),
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. Briefing
is expected to be completed in early 2006. A hearing for oral argument should be
set for 2006. 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.
Grand Jury Investigation of Conventional Cathode Ray Television Glass Business.
In August 2003, Corning Asahi Video Products Company (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. A number of employees or former employees have 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.
Tax Matters. Corning has not been required to pay any penalty to the Internal
Revenue Service (IRS) for failing to make disclosures required with respect to
certain transactions that the IRS has identified as abusive or that have a
significant tax avoidance purpose under section 6707A(e) of the Internal Revenue
Code.
Seoul Guarantee Insurance Co. and other creditors against Samsung Group and
affiliates. As of December 31, 2005, Samsung Corning Precision Glass Co., Ltd.
(Samsung Corning Precision) and Samsung Corning Co. Ltd. (Samsung Corning) were
two of approximately thirty co-defendants in a lawsuit filed by Seoul Guarantee
Insurance Co. and 14 other creditors (SGI and Creditors) for alleged breach of
an agreement that approximately thirty affiliates of the Samsung group entered
into with SGI and Creditors in September 1999. The lawsuit is pending in the
courts of Korea. According to the agreement, the Samsung affiliates agreed to
sell 3.5 million shares of Samsung Life Insurance Co., Ltd. (SLI) by December
31, 2000, which were transferred to SGI and Creditors in connection with the
petition for court receivership of Samsung Motor Inc. In the lawsuit, SGI and
Creditors allege that, in the event that the proceeds of sale of the SLI shares
is less than 2.45 trillion Korean won (approximately $2.42 billion), the Samsung
affiliates allegedly agreed to compensate SGI and Creditors for the shortfall,
by other means, including Samsung affiliates' purchase of equity or subordinated
debentures to be issued by SGI and Creditors. Any excess proceeds are to be
distributed to the Samsung affiliates. As of December 31, 2005, the shares of
Samsung Life Insurance Co., Ltd. have not been sold. The suit asks for damages
of approximately $4.68 billion plus penalty interest. Samsung Corning Precision
and Samsung Corning combined guarantees should represent no more than 3.1% of
the Samsung affiliates' total financial obligation. Although noting that the
outcome of these matters is uncertain, Samsung Corning Precision and Samsung
Corning have stated that these matters are not likely to result in a material
ultimate loss to their financial statements. No claim in these matters has been
asserted against Corning Incorporated.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
--------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------
(a) Corning Incorporated common stock is listed on the New York Stock Exchange
and the SWX Swiss Exchange. In addition, it is traded on the Boston,
Midwest, Pacific and Philadelphia stock exchanges. Common stock options are
traded on the Chicago Board Options Exchange. The abbreviated ticker symbol
for Corning Incorporated is "GLW."
The following table sets forth the high and low sales price of Corning's common
stock as reported on the Composite Tape.
--------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------
2005
--------------------------------------------------------------------------------
Price range
High $ 12.40 $ 17.08 $ 21.95 $ 21.62
Low $ 10.61 $ 10.97 $ 16.03 $ 16.61
--------------------------------------------------------------------------------
2004
--------------------------------------------------------------------------------
Price range
High $ 13.89 $ 13.19 $ 13.03 $ 12.96
Low $ 10.00 $ 10.08 $ 9.29 $ 10.16
--------------------------------------------------------------------------------
As of December 31, 2005, there were approximately 26,900 record holders of
common stock and approximately 630,000 beneficial shareholders.
Corning discontinued the payment of dividends on our common stock in 2001.
The section entitled "Equity Compensation Plan Information" in our
definitive Proxy Statement for our 2006 annual meeting of shareholders to
be held on April 27, 2006, is incorporated by reference in this Annual
Report on Form 10-K.
(b) Not applicable.
(c) This table provides information about our purchases of our common stock
during the fiscal fourth quarter of 2005:
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*
------------------------------------------------------------------------------------------------------------------------------------
October 1-31, 2005 1,046 $19.30 0 $0
November 1-30, 2005 159,649 $19.92 0 $0
December 1-31, 2005 15,409 $20.30 0 $0
------------------------------------------------------------------------------------------------------------------------------------
Total 176,104 $19.95 0 $0
------------------------------------------------------------------------------------------------------------------------------------
* During the quarter ended December 31, 2005, we did not have a publicly
announced program for repurchase of shares of our common stock and did not
repurchase our common stock in open-market transactions outside of such a
program.
** This column reflects the following transactions during the fiscal fourth
quarter of 2005: (i) the deemed surrender to us of 174,899 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 1,205 shares of common stock to satisfy tax withholding
obligations in connection with the vesting of restricted stock issued to
employees.
Item 6. Selected Financial Data (Unaudited)
--------------------------------------------
(In millions, except per share amounts and number of employees)
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
----------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Results of Operations
Net sales $ 4,579 $ 3,854 $ 3,090 $ 3,164 $ 6,047
Research, development and engineering expenses $ 443 $ 355 $ 344 $ 483 $ 622
Equity in earnings of associated companies, net of
impairments $ 598 $ 443 $ 209 $ 116 $ 148
Income (loss) from continuing operations $ 585 $ (2,185) $ (223) $ (1,780) $ (5,532)
Income from discontinued operations 20 478 34
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (1) $ 585 $ (2,165) $ (223) $ (1,302) $ (5,498)
------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share from (1):
Continuing operations $ 0.40 $ (1.57) $ (0.18) $ (1.85) $ (5.93)
Discontinued operations 0.01 0.46 0.04
------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share $ 0.40 $ (1.56) $ (0.18) $ (1.39) $ (5.89)
------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share from (1):
Continuing operations $ 0.38 $ (1.57) $ (0.18) $ (1.85) $ (5.93)
Discontinued operations 0.01 0.46 0.04
------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share $ 0.38 $ (1.56) $ (0.18) $ (1.39) $ (5.89)
------------------------------------------------------------------------------------------------------------------------------------
Common dividends declared $ 0.12
Shares used in computing per share amounts:
Basic earnings (loss) per common share 1,464 1,386 1,274 1,030 933
Diluted earnings (loss) per common share 1,535 1,386 1,274 1,030 933
------------------------------------------------------------------------------------------------------------------------------------
Financial Position
Working capital $ 1,644 $ 945 $ 1,141 $ 2,145 $ 2,113
Total assets $ 11,175 $ 9,710 $ 10,752 $ 11,406 $ 12,793
Long-term debt $ 1,789 $ 2,214 $ 2,668 $ 3,963 $ 4,463
Shareholders' equity $ 5,609 $ 3,816 $ 5,464 $ 4,691 $ 5,414
------------------------------------------------------------------------------------------------------------------------------------
Selected Data
Capital expenditures $ 1,553 $ 857 $ 366 $ 357 $ 1,741
Depreciation and amortization $ 512 $ 523 $ 517 $ 661 $ 1,060
Number of employees (2) 26,000 24,700 20,600 23,200 30,300
------------------------------------------------------------------------------------------------------------------------------------
Reference should be made to the Notes to consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
(1) Corning adopted SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS
142) on January 1, 2002. Pursuant to SFAS 142, goodwill was no longer
amortized after the adoption. For 2001, the adjusted net loss, excluding
the amortization of goodwill was $5,153. For 2001, the basic and diluted
loss from continuing operations per common share, excluding the
amortization of goodwill, was $5.56. The basic and diluted earnings from
discontinued operations per common share, excluding the amortization of
goodwill was $0.04.
(2) Amounts do not include employees of discontinued operations.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
Overview
We continued to focus on three significant priorities in 2005: protect our
financial health, improve profitability, and invest in our future. We made
significant progress on all three in 2005.
Financial Health
During 2005, we strengthened our balance sheet and delivered positive cash flows
from operating activities. The following are key accomplishments for 2005:
.. As part of a debt reduction program, we reduced the net amount of our
outstanding debt by $885 million through a combination of retirements and
scheduled repayments.
.. All three rating agencies upgraded our ratings to investment grade.
.. We received $457 million in deposits against orders relating to our
multi-year supply agreements with customers in the Display Technologies
segment. These agreements have helped us to meet the rapid growth of the
liquid crystal display (LCD) market.
.. We generated sufficient cash flows from operating activities to cover our
capital expenditures.
We ended 2005 with $2.4 billion in cash, cash equivalents and short-term
investments. This represents an increase of $553 million from December 31, 2004.
In the first quarter of 2005, we entered into a new revolving credit facility
with a group of banks. This facility, which continues through March 2010,
provides us access to a $975 million unsecured multi-currency revolving line of
credit. We believe we have sufficient liquidity for the next several years to
fund operations, capital expenditures and scheduled debt repayments.
Profitability
For the year ended December 31, 2005, we generated net income of $585 million or
$0.38 per share compared to a net loss of $2,165 million or $1.56 per share for
2004.
We recorded restructuring, impairment, and other charges and credits in 2005 and
2004 which affect the comparability of those years. Refer to Note 3
(Restructuring, Impairment and Other Charges and (Credits)), Note 6 (Income
Taxes), and Note 7 (Investments) to the consolidated financial statements for
additional information.
Investing in our future
We remain committed to investing in research, development, and engineering to
drive innovation. We are investing in a wide variety of technologies with a
focus on glass substrates for active matrix LCDs, diesel filters and substrates
in response to tightening emissions control standards, and the optical fiber and
cable and hardware and equipment that will enable fiber-to-the-premises.
Our research, development and engineering expenditures have increased by $88
million or 25% compared to 2004. We believe our spending levels are adequate to
support our growth strategies.
We also remain committed to investing in manufacturing capacity to match
increased demand in our businesses. Our capital expenditures are primarily
focused on expanding manufacturing capacity for LCD glass substrates in the
Display Technologies segment and diesel products in the Environmental
Technologies segment. Total capital expenditures for 2005 were $1,553 million,
of which $1,250 million was directed toward our Display Technologies segment and
$171 million was invested in our Environmental Technologies segment primarily in
anticipation of the emerging market for diesel emission control systems.
We expect our 2006 capital spending to be in the range of $1.3 billion to $1.5
billion, of which $900 million to $1.1 billion will be directed toward our
Display Technologies segment and approximately $200 million will be directed
toward our Environmental Technologies segment.
RESULTS OF CONTINUING OPERATIONS
Selected highlights from our continuing operations follow (dollars in millions):
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% Change
------------------------
2005 2004 2003 05 vs. 04 04 vs. 03
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Net sales $ 4,579 $ 3,854 $ 3,090 19 25
Gross margin $ 1,984 $ 1,415 $ 849 40 67
(gross margin %) 43% 37% 27%
Selling, general and administrative expenses $ 756 $ 653 $ 599 16 9
(as a % of revenues) 17% 17% 19%
Research, development and engineering expenses $ 443 $ 355 $ 344 25 3
(as a % of revenues) 10% 9% 11%
Restructuring, impairment and other charges and (credits) $ (38) $ 1,789 $ 111 (102) 1,512
(as a % of revenues) (1)% 46% 4%
Asbestos settlement $ 197 $ 33 $ 413 497 (92)
(as a % of revenues) 4% 1% 13%
Income (loss) from continuing operations before income taxes $ 572 $(1,580) $ (759) (136) 108
(as a % of revenues) 13% (41)% (25)%
(Provision) benefit for income taxes $ (578) $(1,031) $ 254 (44) (506)
(as a % of revenues) (13)% (27)% 8%
Equity in earnings of associated companies, net of impairments $ 598 $ 443 $ 209 35 112
(as a % of revenues) 13% 11% 7%
Income (loss) from continuing operations $ 585 $(2,185) $ (223) (127) 880
(as a % of revenues) 13% (57)% (7)%
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Net Sales
The net sales increase in 2005 was the result of a significant increase in
demand for LCD glass substrates in our Display Technologies segment and modest
gains in demand for products in our Telecommunications segment to support
fiber-to-the-premises projects and our Environmental segment due to increased
sales of diesel filters. Net sales for our Life Sciences segment declined due to
changes in the distribution channels. Movements in foreign exchange rates did
not significantly impact the comparison of net sales between 2005 and 2004.
The net sales increase in 2004 was the result of strong demand for glass
substrates in our Display Technologies segment, demand for hardware and
equipment products in our Telecommunications segment, and improvements across
the majority of our other businesses. These improvements were partially offset
by the 2003 exit of our photonic technologies and U.S. conventional television
glass businesses. Movements in foreign exchange rates, did not significantly
impact the comparison of net sales between 2004 and 2003.
Reflecting the growth in our Display Technologies segment, net sales into
international markets continue to increase at a faster rate than those into the
U.S. market. For 2005, 2004, and 2003, sales into international markets
accounted for 71%, 65%, and 60% of net sales, respectively.
Gross Margin
As a percentage of net sales, gross margin improved 6 percentage points in 2005
when compared to 2004. The improvement in overall gross margin dollars and as a
percentage of net sales was driven by increased volume, improved mix of large
generation glass, and manufacturing efficiencies in our Display Technologies
segment.
For 2004, as a percentage of net sales, gross margin improved by 10 percentage
points versus 2003. The improvement was driven by net sales growth in the
Display Technologies segment of 87%, operating efficiencies in our
Telecommunications segment, and the 2003 exit of the conventional television
glass business.
Cost of Sales
The types of expenses included in the cost of sales line item are: raw materials
consumption, including direct and indirect materials; salaries, wages and
benefits; depreciation and amortization; production utilities;
production-related purchasing; warehousing (including receiving and inspection);
repairs and maintenance; inter-location inventory transfer costs; production and
warehousing facility property insurance; rent for production facilities; and
other production overhead.
Selling, General and Administrative Expenses
The increase in selling, general and administrative expenses for both 2005 and
2004, when compared to the previous years, was primarily driven by increases in
compensation costs. As a percent of net sales, selling, general, and
administrative expenses were comparable for 2005 and 2004.
The types of expenses included in the selling, general and administrative
expenses line item are: salaries, wages and benefits; travel; sales commissions;
professional fees; and depreciation and amortization, utilities, and rent for
administrative facilities.
Research, Development and Engineering Expenses
Research, development and engineering expenditures increased by $88 million in
2005. The majority of the increase in 2005 expenditures related to our growth
initiatives including glass substrates for LCDs, diesel filter and substrates in
response to tightening emissions control standards, as well as exploratory
projects to support future growth. Expenditures on Display Technologies
projects, Environmental Technologies projects, and Life Sciences projects
increased when compared with 2004.
Restructuring, Impairment and Other Charges and (Credits)
Corning recorded significant net charges in 2004 which affect the comparability
of our results for 2005, 2004, and 2003. A summary of the net charges and
credits for all years presented is provided in the following table (in
millions):
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For the years ended December 31,
----------------------------------------------
2005 2004 2003
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Impairment of goodwill $ 1,420
Impairment of long-lived assets other than goodwill
Assets to be disposed of by sale or abandonment $ 6 302 $ 41
Assets to be held and used 24
Reversal of currency translation adjustment (84)
Accelerated depreciation 37 12
Loss on sale of businesses 12 13
Impairment of available-for-sale securities 25 4
Restructuring charges and (credits) 15 (6) 41
-------- -------- -------
Total restructuring, impairment other charges and (credits) $ (38) $ 1,789 $ 111
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Impairment of Goodwill
----------------------
2004 Impairment Charge
Pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets," (SFAS
142) goodwill is required to be tested for impairment annually at the
reporting unit level. In addition, goodwill should be tested for impairment
between annual tests if an event occurs or circumstances change that would
more likely than not reduce the fair value of the reporting unit below its
related carrying value. In the third quarter of 2004, we identified certain
factors 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. We performed an interim impairment test of
the Telecommunications segment goodwill in the third quarter of 2004 and,
as a result, recorded an impairment charge of $1,420 million to reduce the
carrying value of goodwill to its implied fair value at September 30, 2004
of $117 million.
Impairment of Long-Lived Assets Other Than Goodwill
---------------------------------------------------
Given our restructuring actions and the market conditions facing certain of
our businesses, at various times throughout 2003 to 2005, we performed
evaluations of the recoverability of our held for use long-lived assets
other than goodwill. When an impairment evaluation was required, we
developed expected future cash flows against which to compare the carrying
value of the asset group being evaluated. If our projections indicated that
our long lived assets were not recoverable through future cash flows, we
were then required to estimate the fair value of the long-lived assets,
which were limited to property, plant and equipment, using the expected
cash flow approach as a measure of fair value.
2005 Impairment Charge
Assets to be disposed of by sale or abandonment
In 2005, we recorded $6 million of charges related to adjustments to prior
year restructuring reserves for our Telecommunications segment.
2004 Impairment Charge
Assets to be disposed of by sale or abandonment
These charges comprise the following:
. Telecommunications segment: In 2004, we recorded a net charge of $344
million to impair plant and equipment related to certain facilities to
be disposed of or shutdown. Approximately $332 million of this net
charge was 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. We have mothballed and
will continue to depreciate the separate previously-operated portion
of the Concord fiber facility.
. Other businesses: We recorded net credits of $42 million, primarily
for gains on the sale of assets CAV sold to a third party in China.
This represented proceeds in excess of assumed salvage values for
assets previously impaired. This represented the substantial
completion of the sale of CAV's assets.
Assets to be held and used
Due to our decision to permanently abandon certain assets and lower our
long-term outlook for the Telecommunications segment in 2004, we determined
that an event of impairment had occurred in our Telecommunications segment
which required us to test the segment's long-lived assets other than
goodwill for impairment. As a result of this impairment evaluation, we
recorded a $24 million impairment charge in the third quarter of 2004 to
write-down certain assets to fair value.
2003 Impairment Charge
Assets to be disposed of by sale or abandonment
These charges comprise the following:
. Telecommunications segment: We recorded charges of $24 million to
impair plant and equipment related to the shutdown of a cabling plant
and the final exit of the photonic technologies business. The charges
were more than offset by a $61 million credit related to previous
restructuring plans, primarily the result of our decision not to exit
two of the cable sites previously marked for shutdown in 2002.
. Other businesses: We recorded charges of $78 million, primarily
related to our decision to shutdown CAV, and the closure of our North
Brookfield semiconductor materials plant.
Other Credits
-------------
2005 Reversal of Currency Translation Adjustment
In 2003, Corning sold its photonic business operations to Avanex. The
photonics business was the sole operation of Corning O.T.I. S.r.l. (OTI), a
wholly-owned Italian subsidiary of Corning, whose results were included in
Corning's Telecommunications segment. Subsequent to the sale of the
operating assets of OTI to Avanex, Corning began liquidating OTI. In
October 2005, the assets of OTI were determined to be substantially
liquidated. As a result of the substantial liquidation, OTI's cumulative
translation account was reversed, resulting in a gain of $84 million in the
fourth quarter.
Accelerated Depreciation
------------------------
2004 Accelerated Depreciation
We recorded $37 million of accelerated depreciation relating to the final
shutdown of our semiconductor materials manufacturing facility in
Charleston, South Carolina, which we announced in the fourth quarter of
2003.
2003 Accelerated Depreciation
We recorded $12 million of accelerated depreciation as a result of our
decision to shutdown our semiconductor materials manufacturing facility in
Charleston, South Carolina by March 31, 2004.
Loss on Sale of Businesses
--------------------------
2004 Loss on Sale of Business
On September 1, 2004 we completed the sale of our frequency controls
business, which was part of the Telecommunications segment, for net cash
proceeds of $80 million. We recorded a loss on the sale of $14 million,
which included an allocation of $30 million of the Telecommunications
segment goodwill. The frequency controls business had 2003 annual sales of
$76 million.
2003 Loss on Sale of Business
In the third quarter of 2003, we recorded a $13 million loss on the sale of
a significant portion of our photonic technologies business, which was part
of our Telecommunications segment.
Impairment of Available for Sale Securities
-------------------------------------------
2005 Impairment Charge
In 2005, we recorded impairment charges of $25 million for an other than
temporary decline in the fair value of our investment in Avanex Corporation
(Avanex) below its adjusted cost basis. Our investment in Avanex was
accounted for as an available-for-sale security under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS
115). In the fourth quarter of 2005, we completed the sale of our shares of
Avanex.
2003 Impairment Charge
In 2003, we recorded a $5 million charge for other than temporary declines
in certain cost investments in the Telecommunications segment, subsequently
sold these investments for $4 million in cash, and reported the resulting
$1 million gain as a credit to restructuring actions.
Restructuring Actions
---------------------
2005 Restructuring Actions
Corning recorded net restructuring charges of $15 million in 2005 which
included the following:
. A charge of $30 million comprising severance costs for a restructuring
plan in the Telecommunications segment to continue to reduce costs in
this segment.
. Net credits to prior year restructuring plans totaling $15 million
primarily for revisions to plans related to the shutdown of CAV and to
our specialty materials business.
2004 Restructuring Actions
There were no significant restructuring actions taken during 2004, nor were
there any significant revisions to estimates used in prior year
restructuring plans.
2003 Restructuring Actions
Corning recorded net restructuring charges of $41 million in 2003. Major
actions approved and initiated in 2003 included the following:
. The shutdown of CAV.
. The exit of our photonics products within the Telecommunications
segment.
. Credits to prior year restructuring plans, primarily the result of our
decision not to exit two small cabling sites previously identified for
shutdown in 2002.
. The shutdown of two of our specialty materials manufacturing
facilities in North Brookfield and Charleston, South Carolina.
Legal Settlement - Asbestos
On March 28, 2003, we announced that we had reached agreement with the
representatives of current and future asbestos claimants on a settlement
arrangement that was thereafter incorporated into the Pittsburgh Corning
Corporation (PCC) plan of reorganization (the PCC Plan). This settlement remains
subject to a number of contingencies, including approval by the Bankruptcy
Court. If the PCC Plan is approved and 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
PCC Plan is approved, thus resulting in adjustments to income and the settlement
liability as appropriate. Corning will also make cash payments of $152 million
(net present value as of December 31, 2005) in six installments beginning one
year after the plan is 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. 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 PCC Plan were held in the Bankruptcy Court in May
2004. The parties filed post-hearing briefs and made oral arguments to the
Bankruptcy Court in November 2004. The Bankruptcy Court allowed an additional
round of briefing to address current case law developments and heard additional
oral arguments on March 16, 2005. In mid-April 2005, the proponents of the PCC
Plan requested that the court rule on the pending objections. If the Bankruptcy
Court does not approve the PCC Plan in its current form, changes to the Plan are
probable as it is likely that the Court will allow the proponents time to
propose amendments. The outcome of these proceedings is uncertain, and
confirmation of the current Plan or any amended Plan is subject to a number of
contingencies. However, apart from the quarterly mark-to-market adjustment in
the value of the 25 million shares of Corning stock, management believes that
the likelihood of a material adverse impact to Corning's financial statements is
remote.
The following summarizes the charges we have recorded for the asbestos
settlement (in millions):
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For the years ended December 31,
---------------------------------------------
2005 2004 2003
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Initial settlement charge $ 298
Mark-to-market common stock $ 197 $ 33 115
------- ------- ------
Asbestos settlement $ 197 $ 33 $ 413
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See Legal Proceedings for a history of this matter.
Income (Loss) From Continuing Operations Before Income Taxes
In addition to the drivers identified under Gross Margin, Restructuring,
Impairment and Other Charges and (Credits) and Asbestos Settlement, we also
retired a significant amount of our outstanding debentures during 2005, 2004 and
2003 that resulted in the following (losses) gains for the respective periods
(in millions):
--------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
(Loss) gain on retirement of debt (16) (36) 19
--------------------------------------------------------------------------------
Movements in currency exchange rates did not have a significant impact on income
(loss) from continuing operations for the years presented.
Provision (Benefit) for Income Taxes
Our provision (benefit) for income taxes and the related effective income tax
(benefit) rates were as follows (in millions):
--------------------------------------------------------------------------------------------
For the years ended December 31,
---------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------------------
Provision (benefit) for income taxes $ 578 $ 1,031 $ (254)
Effective income tax (benefit) rate 101.0% 65.2% (33.4)%
--------------------------------------------------------------------------------------------
The effective income tax (benefit) rate for 2005 differed from the U.S.
statutory rate of 35% primarily due to an increase in income tax expense of $525
million resulting from an increase in Corning's valuation allowance. The
increase in the valuation allowance was the result of our conclusion that the
sale of an appreciated asset was no longer prudent and, as such, no longer meets
the criteria in SFAS No. 109, "Accounting for Income Taxes" (SFAS No. 109) for a
viable tax planning strategy. The difference between the effective income tax
(benefit) rate for 2004 and the U.S. statutory rate of 35% was primarily due to
increases 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.
For 2005, the tax provision reflected the following items:
.. The impact of our inability to record tax benefits on net operating losses
generated in the U.S. and certain foreign jurisdictions;
.. An increase in our valuation allowance of $525 million;
.. The benefit of a worthless stock deduction (and a corresponding increase in
our valuation allowance) for the loss on our investment in the photonic
technologies business associated with the Pirelli acquisition which was
completed in December 2000 and was substantially impaired in the second
quarter of 2001;
.. The benefit of tax holidays and investment credits in Taiwan and tax
holidays in China and South Africa;
.. The benefit from the reversal of tax contingency liabilities following the
conclusion of Internal Revenue Service (IRS) examinations; and
.. An $82 million credit primarily for the tax effect of eliminating our
minimum pension liability for the domestic qualified plan.
In 2004, significant events occurred which required us to increase our valuation
allowances against certain U.S. and German deferred tax assets. Refer to Note 3
(Restructuring, Impairment and Other Charges and (Credits)) for additional
information on these events and the related charges. 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. At that time, we
believed that it was more likely than not that we could realize the remaining
net deferred tax assets through a tax planning strategy involving the sale of
our investment in Dow Corning Corporation (DCC), a non-strategic appreciated
asset, if we were faced with expiring net operating loss carryforwards.
During 2005, DCC's performance was much stronger than expected and DCC resumed
paying a dividend; both of which are expected to continue in the future. Due to
this improved performance, DCC now provides strong financial, geographic and
market balance to Corning's portfolio of businesses, the profitability of which
has become more concentrated due to the success of the display operating
segment. As a result, we now consider DCC to be a strategic investment and can
no longer assert that a potential tax planning strategy involving the sale of
DCC would be prudent, as required by FAS 109. Therefore, we no longer believe
that it is more likely than not that we would realize the remaining net deferred
tax assets. Accordingly, we have increased our valuation allowance by $525
million to fully reserve our net U.S. deferred tax assets in the fourth quarter
of 2005.
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 portion of our deferred tax
assets would be realizable. Until then, our tax provision will include only the
net tax expense attributable to certain foreign operations. Refer to Note 6
(Income Taxes) to the consolidated financial statements for additional
information.
During the third quarter of 2005, Corning filed its 2004 consolidated U.S.
Federal income tax return, which included a $3.9 billion worthless stock
deduction for the loss on our investment in the photonic technologies business
associated with the Pirelli acquisition. This acquisition was completed in
December 2000 and was substantially impaired in the second quarter of 2001.
Prior to the third quarter of 2005, we did not record a deferred tax asset for
this item as the ultimate realization of such deduction was uncertain, and
consistent with the requirements of SFAS No. 5, "Accounting for Contingencies,"
recognition of an asset prior to the time management determines the realization
of the asset is probable is prohibited. On September 2, 2005, Corning and the
Commissioner of the IRS entered into a closing agreement under section 7121 of
the Internal Revenue Code of 1986 which provides that Corning is entitled to
this worthless stock deduction. We recorded a $1.5 billion deferred tax asset
for this item in the third quarter, which was concurrently offset by a valuation
allowance of an equal amount due to our current inability to record tax benefits
for U.S. net operating losses.
Certain foreign subsidiaries in China, South Africa, Korea and Taiwan are
operating under tax holiday arrangements. The nature and extent of such
arrangements vary, and the benefits of such arrangements phase out in future
years (2006 to 2009) according to the specific terms and schedules of the
relevant taxing jurisdictions. The impact of the tax holidays on our effective
rate is a reduction in the rate of 8.6%, 1.2%, and 0.5% for 2005, 2004, and
2003, respectively.
Equity in Earnings of Associated Companies, Net of Impairments
The following provides a summary of equity earnings of associated companies, net
of impairments (in millions):
--------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
Samsung Corning Precision $ 408 $ 277 $ 144
Dow Corning 253 116 82
Samsung Corning (112) 32 (39)
All other 49 18 22
--------- --------- ---------
Total equity earnings $ 598 $ 443 $ 209
--------------------------------------------------------------------------------
The 2005 and 2004 increases in equity earnings of associated companies, net of
impairments, are primarily due to strong sales and earnings performance at
Samsung Precision, our 50% owned South Korea-based manufacturer of LCD glass,
and at Dow Corning, our 50% owned U.S. based manufacturer of silicone products.
In addition to the above, equity in earnings of associated companies, net of
impairments, included the following restructuring and impairment charges and
other credits:
.. In 2005, Samsung Corning incurred impairment and other charges as a result
of a decline in the projected operating results for its cathode ray tube
(CRT) glass business. The charge, which included certain manufacturing
assets and severance and exit costs, reduced Corning's equity earnings by
$106 million in the third quarter. As Samsung Corning executes its
restructuring plan over the next several quarters, additional severance and
shutdown costs may be required. We expect our share of these charges to
approximate $30 million. None of the charges is expected to result in cash
expenditures by Corning.
.. In 2005, Dow Corning recorded a gain on the issuance of subsidiary stock.
Our equity earnings included $11 million related to this gain.
.. In 2004 and 2003, Corning incurred charges of $35 million and $7 million,
respectively, to impair equity method investments in the Telecommunications
segment to their estimated fair value.
.. In 2004, Dow Corning recorded charges related to restructuring actions and
adjustments to interest liabilities recorded on its emergence from
bankruptcy. Our equity earnings included $21 million related to these
charges.
.. In 2003, Samsung Corning Co., Ltd. recorded asset impairment charges. Our
equity earnings included $66 million related to these charges.
Income (Loss) From Continuing Operations
As a result of the above, the income (loss) from continuing operations and per
share data was as follows (in millions, except per share amounts):
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For the years ended December 31,
--------------------------------------------
2005 2004 2003
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Income (loss) from continuing operations $ 585 $(2,185) $ (223)
Basic earnings (loss) per common share from continuing operations $ 0.40 $ (1.57) $ (0.18)
Diluted earnings (loss) per common share from continuing operations $ 0.38 $ (1.57) $ (0.18)
Shares used in computing basic per share amounts 1,464 1,386 1,274
Shares used in computing diluted per share amounts 1,535 1,386 1,274
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RESULTS OF DISCONTINUED OPERATIONS
In the third quarter of 2004, Corning and 3M reached a final settlement
agreement for funds held in escrow associated with the 2002 sale of Corning's
precision lens business to 3M. As a result, we recognized a $20 million gain
upon receipt of the proceeds in 2004.
OPERATING SEGMENTS
Our reportable operating segments include Display Technologies,
Telecommunications, Environmental Technologies, and Life Sciences. The
Environmental Technologies reportable segment is an aggregation of our
Automotive and Diesel operating segments, as these two segments share similar
economic characteristics, products, customer types, production processes and
distribution methods. The following provides a brief description of the products
and markets served by each reportable segment:
.. Display Technologies - manufactures liquid crystal display glass for flat
panel displays;
.. Telecommunications - manufactures optical fiber and cable, and hardware and
equipment components for the worldwide telecommunications industry;
.. Environmental Technologies - manufactures ceramic substrates and filters
for automobile and diesel applications; and
.. Life Sciences - manufactures glass and plastic consumables for scientific
applications.
We prepared the financial results for our reportable 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
reportable segments are the same as those applied in the consolidated financial
statements.
On January 1, 2006, Corning changed its measurement of segment profit or loss as
follows:
.. We removed the net impact of financing costs, such as interest expense on
debt instruments and interest costs associated with benefit plans, from
reportable segments and included these amounts in Corporate unallocated
expense.
.. We changed the allocation method for taxes to more closely reflect the
company's current tax position.
.. We removed the impact of non-cash stock compensation expense from
reportable segments and included this amount in Corporate unallocated
expense.
.. We removed the allocation of exploratory research, development and
engineering expense from reportable segments and included these amounts in
Corporate unallocated expense.
.. We changed certain other allocation methods for corporate functions.
The following discussion reflects segment information as reported for 2005 and
has not been restated to reflect the changes to segment performance measurement
made effective January 1, 2006. Refer to Note 19 (Subsequent Events) for
additional information on the change in segment profit or loss measurement.
Display Technologies
The following table provides net sales and other data for the Display
Technologies segment (dollars in millions):
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% Change
----------------------
2005 2004 2003 05 vs. 04 04 vs. 03
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Net sales $ 1,742 $ 1,113 $ 595 57 87
Income before equity earnings $ 679 $ 258 $ 91 163 184
Equity earnings of associated companies $ 416 $ 288 $ 144 44 100
Net income $ 1,095 $ 546 $ 235 101 132
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2005 vs. 2004
The 2005 sales increase reflects the continued overall growth of the LCD glass
substrate market. During 2005, glass substrate volumes (measured in square feet
of glass sold) increased approximately 64% compared with the same period in
2004. Weighted average selling prices decreased 2% compared to 2004. Included in
this weighted average were selling price declines that were offset by increases
in the market demand for large-size glass substrates (generation 5 and above),
which carry a higher selling price per square foot. For 2005, large-size glass
substrates accounted for 69% of total sales volumes, compared to 46% in 2004.
Although sales of the Display Technologies segment are denominated in Japanese
yen, movements in the U.S. dollar - Japanese yen exchange rate did not have a
significant impact on the comparability of sales.
For 2005, the key drivers for the increase in income before equity earnings were
higher volumes, ongoing improvements in manufacturing efficiencies, and a lower
effective tax rate. Movements in currency exchange rates did not have a
significant impact on income before equity earnings. The increase in our equity
earnings from Samsung Corning Precision was largely driven by higher volumes and
ongoing improvements in manufacturing efficiencies.
The Display Technologies segment has a concentrated customer base comprised of
LCD panel and color filter makers primarily located in Japan and Taiwan. For the
year ended December 31, 2005, AU Optronics Corporation, Chi Mei Optoelectronics
Corporation, Dai Nippon Printing Co., Ltd., Sharp Corporation, and Hannstar
Display Corporation, each of which accounted for more than 10% of segment net
sales, accounted for 75% of total segment sales. In addition, Samsung Corning
Precision's sales are concentrated across a small number of its customers. In
2005, sales to three LCD panel makers located in Korea, Samsung Electronics Co.,
Ltd., LG Phillips LCD Co., and Dong Woo STI, accounted for 98% of total Samsung
Corning Precision sales.
In 2005 and 2004, Corning and several customers entered into long-term purchase
and supply agreements in which the Display Technologies segment will supply
large-size glass substrates to the customers over periods of up to six years. As
part of the agreements, these customers agreed to make advance cash deposits to
Corning for a portion of the contracted glass to be purchased. In 2005 and 2004,
we received a total of $457 million and $204 million, respectively, of deposits
against orders.
In the event the customers do not make all customer deposit installment payments
or elect not to purchase the agreed upon quantities of product, subject to
specific conditions outlined in the agreements, Corning may retain certain
amounts of the customer deposits. If Corning does not deliver agreed upon
product quantities, subject to specific conditions outlined in the agreements,
Corning may be required to return certain amounts of the customer deposits.
Refer to Note 1 (Summary of Significant Accounting Policies) and Note 10 (Other
Accrued Liabilities) to the consolidated financial statements for further
information.
In the ordinary course of business, Corning will continue to negotiate
multi-year supply agreements with its large customers where feasible but we
believe it is unlikely that we will negotiate agreements which require
additional deposits.
Corning is investing heavily to expand capacity to meet increasing demand for
LCD glass substrates. In 2005, capital spending was $1.25 billion and is
expected to be $900 million to $1.1 billion in 2006. Capital spending in 2006
will be used mainly to expand manufacturing facilities in Tainan, Taiwan,
Taichung, Taiwan, and Shizuoka, Japan.
2004 vs. 2003
The 2004 sales increase is largely reflective of the overall LCD-market growth.
During 2004, glass substrate volumes increased approximately 65%. Sales also
benefited from modest average price increases, primarily the result of a change
in product mix as the market trended toward large size glass. Sales benefited by
approximately 10% from a weakening of the U.S. dollar against the Japanese yen
compared to 2003.
For 2004, the key drivers for the increase in income before equity earnings were
the impact of incremental volumes and efficiencies realized through the shift in
production toward large size glass substrates. The increase in equity earnings
were driven by the same factors as those identified for our wholly-owned
business.
Outlook:
We expect to see a continuation of the overall industry growth and the trend
toward large size substrates. We continue to see positive trends in the
penetration rates of LCD glass into the end-markets (notebook computers,
monitors and televisions), and increasing demand for the large size substrates.
However, we expect the growth of LCD glass to be more heavily influenced by the
penetration of LCD in the television end market. We anticipate the volume growth
in the LCD market to be over 40% in 2006. We expect the market volume for large
size glass substrates (Generation 5.5 and higher) to grow more than 150% in
2006. As a result of the expected growth in large size substrates, we believe
our total glass volume will grow faster than the overall LCD market in 2006.
This market growth is expected to occur at varying rates in the principal LCD
markets of Japan, Taiwan and Korea. Sales of our wholly-owned business are
primarily to panel manufacturers in Japan and Taiwan with customers in Korea
being serviced by Samsung Corning Precision. The actual growth rates in these
markets will impact our sales and earnings performance.
For 2006, we anticipate price declines that are more significant than
experienced in previous years as competitors bring on additional capacity. In
the third quarter of 2005, we began production at our new Taichung, Taiwan
manufacturing facility. The ramp-up of production and our ability to efficiently
start up operations may impact profitability the first half of 2006. In
addition, we are beginning to see increased amounts of larger-sized glass in the
marketplace from competitors. There can be no assurance that the end-market
rates of growth will continue at the high rates experienced in recent quarters
or that we will be able to pace our capacity expansions to actual demand.
Although we believe we can continue to reduce our manufacturing costs, there can
be no assurance that the rate of cost declines will offset price declines in any
given period. While the industry has grown rapidly, consumer preferences for
panels of differing sizes, or price or other factors, may lead to pauses in
market growth, and it is possible that glass manufacturing capacity may exceed
demand from time to time. In addition, changes in foreign exchange rates,
principally the Japanese yen, will continue to impact the sales and
profitability of this segment.
Telecommunications
The following table provides net sales and other data for the Telecommunications
segment (dollars in millions):
------------------------------------------------------------------------------------------------------------------------------------
% Change
----------------------
2005 2004 2003 05 vs. 04 04 vs. 03
------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 834 $ 755 $ 760 10 (1)
Hardware and equipment 789 784 612 1 28
Photonic technologies 54 -- --
-------- --------- --------
Total net sales $ 1,623 $ 1,539 $ 1,426 5 8
======== ========= ========
Net income (loss) $ 36 $ (1,893) $ (169) (102) (1,020)
------------------------------------------------------------------------------------------------------------------------------------
2005 vs. 2004
Results for the Telecommunications segment reflected a solid performance in
2005. The net sales increase was largely driven by sales in North America and
Europe. Stronger North American volumes and sales of the hardware and equipment
business were largely the result of sales to Verizon to support their
fiber-to-the premises project. Excluding the impact of the frequency controls
business, a hardware and equipment manufacturer sold in September 2004, net
sales for the Telecommunications segment increased 10% in 2005 when compared to
the previous year. Movements in exchange rates did not significantly impact
sales for either 2005 or 2004.
For the Telecommunications segment, net income in 2005 and the net loss in 2004
were impacted by restructuring, impairment, and other charges and (credits). In
2005, we recorded net after-tax credits of $47 million related to these items
and in 2004, we recorded after-tax charges of $1,798 million. Refer to Results
of Continuing Operations for a detailed discussion of these charges.
The Telecommunications segment continues to have a concentrated customer base.
For the year ended December 31, 2005, two customers of the Telecommunications
segment, each of which accounted for more than 10% of segment net sales,
represented 29% of total segment sales. For 2005 and 2004, Verizon accounted for
17% and 13%, respectively, of total segment net sales.
2004 vs. 2003
During 2004 fiber volumes grew at 18% while pricing declined by 9% from 2003
levels. The primary driver for the 2004 sales growth was Verizon's
fiber-to-the-premises project in North America, with the largest benefit
realized in our hardware and equipment products.
Offsetting this sales performance were the following items:
.. During 2003 we completed the sale and exit of our photonic technologies
business.
.. On September 1, 2004, we sold our frequency controls business. This
business had annual sales of $76 million in 2003.
.. Sales in Japan were down in 2004, largely due to 2003 projects that were
not repeated in 2004.
Movements in foreign currency exchange rates, primarily the Japanese yen and
euro, did not have a significant impact on 2004 sales compared to 2003. In 2004,
the Chinese Ministry of Commerce issued an anti-dumping preliminary
determination asserting that Corning had dumped optical fiber into China during
2002 and 2003 and imposed a 16% duty on Corning's optical fiber imports which
Corning later contested. Although the Ministry of Commerce, in December 2004,
concluded that Corning had not dumped optical fiber into China, and removed the
duty, Corning's market share in China was negatively impacted.
The increased net loss for 2004 is primarily attributable to the goodwill, fixed
asset and equity method investments impairment charges recorded in the third
quarter of 2004. Refer to Results of Continuing Operations for additional
information on these charges.
Outlook:
For the Telecommunications segment, we expect sales in 2006 to remain even with
2005 as volume gains are offset by price declines. We expect the worldwide
telecommunications industry market to remain stable particularly in North
America. Sales volumes will largely be dependent on the continuation of
Verizon's fiber-to-the-premises project and cable and hardware and equipment
sales to private networks. Changes in the expected Verizon deployment plan, or
additional reductions in their inventory levels of fiber-to-the-premises
products, could also affect the sales level. Should these plans not occur at the
pace anticipated our sales and earnings would be adversely affected.
Environmental Technologies
The following table provides net sales and other data for the Environmental
Technologies segment (dollars in millions):
------------------------------------------------------------------------------------------------------------------------------------
% Change
----------------------
2005 2004 2003 05 vs. 04 04 vs. 03
------------------------------------------------------------------------------------------------------------------------------------
Net sales:
Automotive $ 482 $ 479 $ 430 1 11
Diesel 98 69 46 42 50
-------- --------- --------
Total net sales $ 580 $ 548 $ 476 6 15
======== ========= ========
Net (loss) income $ (26) $ 4 $ 9 (750) (56)
------------------------------------------------------------------------------------------------------------------------------------
2005 vs. 2004
The 2005 increase in net sales was the result of continued growth in diesel
products sales in response to tightening emissions control standards around the
world. Diesel products sales growth is currently driven, in part, by demand from
retrofit markets, particularly in Korea. In the first half of 2005, we received
letters of intent and other expressions of intent from diesel engine
manufacturers to supply filters for their 2007 model year platforms. We are
continuing to negotiate with several diesel engine manufacturers to develop
supply agreements. Negotiations are likely to continue through the first half of
2006. For automotive products, sales in 2005 were flat when compared to prior
year.
The 2005 decrease in net income compared to 2004 resulted primarily from
increased operating expenses primarily to support our emerging diesel products.
Movements in exchange rates did not significantly impact net sales or net income
of this segment in 2005 when compared to 2004.
The Environmental Technologies segment sells to a concentrated customer base of
manufacturers of catalyzers and emission control systems, who then sell to
automotive and diesel engine manufacturers. Although our sales are to the
emission control systems manufacturers, the use of our substrates and filters
are generally required by the specifications of the automotive and diesel engine
manufacturers. For 2005, three customers of the Environmental Technologies
segment, each of which accounted for more than 10% of segment net sales,
accounted for 76% of total segment sales.
2004 vs. 2003
The 2004 increase in net sales was primarily the result of demand for our
automotive and diesel ceramic filters and substrates. Volumes for our automotive
products were up slightly from 2003 and sales benefited from a higher mix of our
thin-wall and ultra thin-wall substrates, which allow engine manufacturers to
meet their emissions control requirements in a more cost effective manner.
Diesel products sales growth was primarily driven by demand from retrofit
markets, although we experienced a softening in Asian retrofit markets in the
second half of 2004. Movements in exchange rates did not have a significant
impact on sales or net income for 2004 compared to 2003.
The 2004 decline in net income is primarily the result of increased development
costs and plant start-up costs to support our emerging diesel products. These
costs offset the gross margin benefits of increased volumes and the higher mix
of premium automotive products.
Outlook:
We expect sales to increase in 2006. For automotive products, we expect to see
stable demand based on anticipated worldwide auto production. Although volumes
are anticipated to be stable, a slowdown in auto production, particularly in
North America, could adversely impact our growth projections. Diesel product
sales are expected to grow as diesel engine manufacturers ramp up production for
the 2007 model years. The growth rate of diesel product sales in 2006 is very
dependent on the emission standards for heavy duty engines in the United States
continuing to be in place. The net loss for the segment is expected to be only
slightly lower in 2006 as we continue to spend heavily on research, development
and engineering for diesel products.
Life Sciences
The following table provides net sales and other data for the Life Sciences
segment (dollars in millions):
------------------------------------------------------------------------------------------------------------------------------------
% Change
----------------------
2005 2004 2003 05 vs. 04 04 vs. 03
------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 282 $ 304 $ 281 (7) 8
Net (loss) income $ (25) $ 12 $ 14 (308) (14)
------------------------------------------------------------------------------------------------------------------------------------
2005 vs. 2004
The decrease in net sales is due largely to volume decreases as a result of a
change in our distribution channel that was made in early 2005. Prior to 2005,
approximately 56% of the Life Sciences segment sales were to two distributors,
who in turn sold to end-users such as pharmaceutical and biotechnology
companies, government entities, academic institutions and other research
facilities. As a result of a change in business strategy by one of the
distributors, Corning did not renew the distribution agreement. Approximately
30% of Life Sciences 2004 sales were made through this distributor. We have been
successful in transitioning the majority of the sales through this distributor
to our remaining primary distributor and other existing and developing channels.
As anticipated, however, the change had a negative impact on sales volumes in
2005. Approximately 53% of 2005 sales continued to be made through the remaining
primary distributor.
The net loss in 2005 was due to lower sales and higher operating expenses to
implement the change in distribution channels and to support new product
development efforts. Movement in foreign exchange rates did not have a
significant impact on the comparability of this segment's net sales or net
income for 2005 and 2004.
2004 vs. 2003
The 2004 increase in net sales is primarily due to volume increases across the
majority of our product lines. Demand from research, development and production
end-users remained steady for 2004, which represented an improvement over the
industry-wide softness experienced in 2003. Movements in foreign exchange rates,
primarily the Euro, did not have a significant impact on sales for 2004 compared
to 2003.
The 2004 decrease in net income is largely attributable to gross margin
improvements resulting from the increase in sales volume being substantially
offset by new product development costs. In addition, in 2003 net income
benefited from a gain recognized on the disposition of a minor product line.
Movement in exchange rates did not significantly impact net income.
Outlook:
Sales for 2006 are expected to increase modestly as we continue to regain volume
and due to price increases in the first quarter of 2006. We expect a lower net
loss for 2006 as a result of higher sales and a reduction in operating expenses
offset somewhat by a slightly higher level of research, development and
engineering spending.
Unallocated and Other
The following table provides net sales and other data (dollars in millions):
------------------------------------------------------------------------------------------------------------------------------------
% Change
----------------------
2005 2004 2003 05 vs. 04 04 vs. 03
------------------------------------------------------------------------------------------------------------------------------------
Conventional video components $ 3 $ 65 (100) (95)
Other businesses $ 352 347 247 1 40
-------- --------- --------
Total net sales $ 352 $ 350 $ 312 1 12
======== ========= ========
Net (loss) income $ (495) $ (834) $ (312) (41) 167
------------------------------------------------------------------------------------------------------------------------------------
Unallocated and Other includes all other operating segments that do not meet the
quantitative threshold for separate reporting (e.g. Specialty Materials),
certain corporate investments (e.g. Dow Corning, Samsung Corning and Steuben),
discontinued operations, and unallocated expenses. Unallocated expenses include
research and other expenses related to new business development; gains or losses
on repurchases and retirement of debt; charges related to the asbestos
litigation; restructuring and impairment charges related to the corporate
research and development or staff organizations; and charges for increases in
our tax valuation allowance. Unallocated and Other also represents the
reconciliation between the totals for the reportable segments and our
consolidated total.
Sales in this segment for 2005 were even with last year. The 2004 increase in
net sales is primarily attributable to improvements in our Specialty Materials
segment. The decrease in Conventional Video Components sales for 2004 is due to
our 2003 decision, along with our partner, to shutdown CAV.
Refer to Restructuring, Impairment, and Other Charges and (Credits), Legal
Settlement-Asbestos, and Provision (Benefit) for Income Taxes for a description
of the key drivers of net income (loss) for 2005 vs. 2004 and 2004 vs. 2003.
LIQUIDITY AND CAPITAL RESOURCES
Financing Activities
During 2005, we had a number of significant financing transactions. In separate
transactions, we redeemed or repurchased $958 million of debentures for a
combination of $579 million cash and 37 million shares of Corning common stock,
resulting in an increase to equity of $388 million. We recognized losses
totaling $16 million associated with the debt redemptions. In addition, we
issued $100 million of senior unsecured notes for proceeds of approximately $99
million and we completed a common stock offering of 20 million shares for net
proceeds of approximately $323 million. We also contributed 10 million shares of
Corning common stock to our U.S. pension plan resulting in an increase to equity
of $199 million. As a result of these transactions, and our operating cash flow
in excess of capital expenditures, we ended the year with cash and short-term
investments in excess of debt on our balance sheet.
Refer to Note 11 (Debt) to the consolidated financial statements for further
information.
In the first quarter of 2005 we entered a written agreement with a group of
banks on a new revolving credit facility. The new facility provides us access to
a $975 million unsecured multi-currency revolving line of credit and expires in
March 2010. The facility includes two financial covenants, a leverage ratio and
an interest coverage ratio, both of which we are in compliance and also includes
restrictions on the declaration of dividends. Concurrent with the closing of
this credit facility, we terminated our previous $2 billion revolving line of
credit that was set to expire in August 2005.
Customer Deposits
Certain customers of our Display Technologies segment have entered into
long-term supply agreements and agreed to make advance cash deposits to secure
supply of large-size glass substrates. The deposits will be reduced through
future product purchases, thus reducing operating cash flows in later periods as
credits are applied for cash deposits received in earlier periods.
Customer deposits have been or will be received in the following periods (in
millions):
------------------------------------------------------------------------------------------------------------------------------------
Estimated 2006
2004 2005 and Beyond Total
------------------------------------------------------------------------------------------------------------------------------------
Customer deposits received $204 $457 $278 $939
------------------------------------------------------------------------------------------------------------------------------------
The majority of the remaining customer deposits will be received through 2006.
In 2005, we issued $29 million in credit memoranda. These credit amounts are not
included in the above amounts, and were applied against customer receivables.
In 2006, we expect to issue credits approximately equal to the amount of
deposits expected to be received in 2006.
Capital Spending
Capital spending totaled $1.6 billion, $857 million and $366 million in 2005,
2004 and 2003, respectively. Capital spending activity in 2005, 2004 and 2003
primarily included expansion of LCD capacity in the Display Technologies segment
and new capacity for diesel products in the Environmental Technologies segment.
Our 2006 capital spending program is expected to be in the range of $1.3 billion
to $1.5 billion, of which $900 million to $1.1 billion will be to expand
manufacturing capacity for LCD glass substrates in the Display Technologies
segment. These expenditures primarily relate to previously announced expansion
plans for our existing manufacturing facilities in Tainan, Taiwan, Taichung,
Taiwan, and Shizuoka, Japan. Additionally, approximately $200 million will be
directed toward our Environmental Technologies segment to support the emerging
diesel emissions control products.
Restructuring
During 2005, 2004 and 2003, we made payments of $25 million, $85 million, and
$233 million, respectively, related to employee severance and other exit costs
resulting from restructuring actions. Cash payments for employee-related costs
will be substantially completed by the end of 2007, while payments for exit
activities will be substantially completed by the end of 2010.
Key Balance Sheet Data
At December 31, 2005, cash, cash equivalents and short-term investments totaled
$2.4 billion, compared with $1.9 billion at December 31, 2004. The increase from
December 31, 2004, was primarily due to operating cash flows at $1.9 billion
which included $428 million of customer deposits (net of credits issued) offset
by $1.6 billion of capital spending. Net financing activities generated cash of
approximately $147 million.
Balance sheet and working capital measures are provided in the following table
(dollars in millions):
------------------------------------------------------------------------------------------------------------------------------------
As of December 31,
------------------------------
2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Working capital $ 1,644 $ 945
Working capital, excluding cash, cash equivalents, and short-term investments $ (790) $ (936)
Current ratio 1.7:1 1.4:1
Trade accounts receivable, net of allowances $ 629 $ 585
Days sales outstanding 49 52
Inventories $ 570 $ 535
Inventory turns 4.7 4.9
Days payable outstanding 89 67
Long-term debt $ 1,789 $ 2,214
Total debt to total capital 24% 41%
------------------------------------------------------------------------------------------------------------------------------------
Credit Ratings
As of February 17, 2006, our credit ratings were as follows:
-------------------------------------------------------------------------------
RATING AGENCY Rating Outlook
Last Update Long-Term Debt Last Update
-------------------------------------------------------------------------------
Fitch BBB- Stable
April 27, 2005 April 27, 2005
Standard & Poor's BBB- Stable
April 27, 2005 April 27, 2005
Moody's Baa3 Stable
September 20, 2005 September 20, 2005
-------------------------------------------------------------------------------
Management Assessment of Liquidity
Our major source of funding for 2006 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.
Off Balance Sheet Arrangements
Off balance sheet arrangements are transactions, agreements or other contractual
arrangements with an unconsolidated entity that Corning has an obligation to
that are not recorded in our consolidated financial statements.
Corning's off balance sheet arrangements include the following:
.. guarantee contracts that require applying the measurement provisions of
FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" (FIN 45), and
.. variable interests held in certain unconsolidated entities.
FIN 45 requires a company, at the time a guarantee is issued, to recognize a
liability for the fair value or market value of the obligation it assumes. In
the normal course of our business, we do not routinely provide significant
third-party guarantees. Generally, third-party guarantees provided by Corning
are limited to certain financial guarantees, including stand-by letters of
credit and performance bonds, and the incurrence of contingent liabilities in
the form of purchase price adjustments related to attainment of milestones.
These guarantees have various terms, and none of these guarantees are
individually significant.
Refer to Note 13 (Commitments, Contingencies and Guarantees) to the consolidated
financial statements for additional information.
Corning has variable interests in three variable interest entities from which
Corning leases transportation equipment.
For variable interest entities, we assess the terms of our interest in the
entity to determine if we are the primary beneficiary as prescribed by FIN 46R,
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51, Revised (FIN 46R). The primary beneficiary of a
variable interest entity is the party that absorbs a majority of the entity's
expected losses, receives a majority of its expected residual returns, or both,
as a result of holding variable interests, which are the ownership, contractual,
or other pecuniary interests in an entity that change with changes in the fair
value of the entity's net assets excluding variable interests. We consolidate
one variable interest entity in which we are the primary beneficiary.
Corning leases certain transportation equipment from a Trust that qualifies as a
variable interest entity under FIN 46R. The sole purpose of this entity is
leasing transportation equipment to Corning. Since Corning is the primary
beneficiary of this entity, the financial statements of the entity are included
in Corning's consolidated financial statements.
Corning leases certain transportation equipment from two additional Trusts that
qualify as variable interest entities under FIN 46R. Corning is not the primary
beneficiary of these entities. The sole purpose of the entities is leasing
transportation equipment to Corning. Corning has been involved with these
entities as lessee since the inception of the Trusts.
Refer to Note 1 (Summary of Significant Accounting Policies) to the consolidated
financial statements for additional information.
Corning does not have retained interest in assets transferred to an
unconsolidated entity that serve as credit, liquidity or market risk support to
that entity.
SFAS No. 133 requires that all derivative instruments be recorded on the balance
sheet at fair market value. SFAS No. 133, paragraph 11(a) states that contracts
that are indexed to an entity's own stock and classified in the shareholders'
equity section of the consolidated financial statements are not considered
derivative instruments and are therefore excluded from the balance sheet.
Although Corning has contracts that are indexed to our own stock, these
contracts are not classified within the shareholders' equity section of the
consolidated financial statements and therefore are considered derivative
instruments and are accounted for as such.
Contractual Obligations
The amounts of our obligations follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Amount of commitment and contingency expiration per period
----------------------------------------------------------
Less than 1 to 2 2 to 3 3 to 4 5 years and
Total 1 year years years years thereafter
------------------------------------------------------------------------------------------------------------------------------------
Performance bonds and guarantees $ 112 $ 36 $ 2 $ 1 $ 73
Credit facilities for equity companies 165 $ 15 150
Stand-by letters of credit (1) 47 47
Loan guarantees 15 15
------------------------------------------------------------------------------------------------------------------------------------
Subtotal of commitment expirations per period $ 339 $ 83 $ 2 $ 1 $ 15 $ 238
------------------------------------------------------------------------------------------------------------------------------------
Purchase obligations 219 180 33 2 2 2
Capital expenditure obligations (2) 328 328
Total debt (3) 1,792 18 22 21 169 1,562
Minimum rental commitments 228 39 51 41 19 78
Interest on long-term debt (4) 1,185 110 109 109 104 753
------------------------------------------------------------------------------------------------------------------------------------
Subtotal of contractual obligation payments
due by period $ 3,752 $ 675 $ 215 $ 173 $ 294 $ 2,395
------------------------------------------------------------------------------------------------------------------------------------
Total commitments and contingencies $ 4,091 $ 758 $ 217 $ 174 $ 309 $ 2,633
------------------------------------------------------------------------------------------------------------------------------------
(1) At December 31, 2005, $34 million of the $47 million was included in other
accrued liabilities on our consolidated balance sheets.
(2) Capital expenditure obligations, primarily related to our Display
Technologies segment expansions, are included on our balance sheet.
(3) At December 31, 2005, $1,807 million was included on our balance sheet.
Amounts above are stated at their maturity value.
(4) The estimate of interest payments assumes interest is paid through the date
of maturity/expiration of the related debt, based upon stated rates in the
respective debt instruments.
We have provided financial guarantees and contingent liabilities in the form of
stand-by letters of credit and performance bonds, some of which do not have
fixed or scheduled expiration dates. We have agreed to provide a credit facility
related to Dow Corning as noted above and discussed in Note 7 (Investments) and
Note 13 (Commitments, Contingencies, and Guarantees) to the consolidated
financial statements. The funding of the Dow Corning credit facility will be
required only if Dow Corning is not otherwise able to meet its scheduled funding
obligations in its confirmed Bankruptcy Plan. We believe the significant
majority of these guarantees and contingent liabilities will expire without
being funded.
Pensions
We have a number of defined benefit pension plans covering certain domestic and
international employees. Our largest single pension plan is Corning's U.S.
qualified plan. At December 31, 2005, this plan accounted for 81% of our
consolidated defined benefit pension plans' projected benefit obligation and 91%
of the related plans' assets. In 2004, although global equities had positive
returns, interest rates continued to decline. As a result, at December 31, 2004,
the accumulated benefit obligation (ABO) for our domestic qualified and
non-qualified plans and several international plans exceeded the fair value of
related plan assets, requiring Corning to record an additional minimum pension
liability in accordance with SFAS No. 87, "Employers' Accounting for Pensions."
However, in 2005, due primarily to contributions of Corning stock to the
domestic qualified pension plan, the fair value of this plan's assets at
December 31, 2005 exceeded the ABO and, accordingly, Corning eliminated this
plan's minimum pension liability.
Refer to Note 12 (Employee Retirement Plans) to the consolidated financial
statements for additional information.
Balances of these non-cash adjustments follow (in millions):
--------------------------------------------------------------------------------
December 31,
------------------------
2005 2004
--------------------------------------------------------------------------------
Additional minimum pension liability $ 55 $ 417
Intangible assets 3 42
Other accumulated comprehensive loss, pre-tax 52 375
Other accumulated comprehensive loss, after-tax 40 273
--------------------------------------------------------------------------------
We have traditionally contributed to the U.S. qualified pension plan on an
annual basis in excess of the IRS minimum requirements, and as a result,
mandatory contributions are not expected to be required for this plan until at
least 2008. For 2005, we issued and contributed 10 million shares of Corning
common stock with a value of approximately $199 million to our domestic pension
plan. In 2004, we contributed $40 million to our U.S. pension plan. We
anticipate making voluntary contributions of approximately $35 million in cash
to our domestic and international pension plans in 2006.
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 $13 million (undiscounted) for the estimated
liability for environmental cleanup and related litigation at December 31, 2005.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires us to make estimates and
assumptions that affect amounts reported therein. The estimates, including
future projections of performance and relevant discount rates, that required us
to make difficult, subjective or complex judgments follow.
Impairment of goodwill
SFAS 142 requires us to make certain difficult, subjective and complex judgments
on a number of matters, including assumptions and estimates used to determine
the fair value of our reporting units, which are the same as our segments.
We measure fair value on the basis of discounted expected future cash flows. Our
estimates are based upon our historical experience, our current knowledge from
our commercial relationships, and available external information about future
trends.
Telecommunications
Results for the Telecommunications segment in 2005 were moderate as pricing in
the telecommunications industry continues to decline. We expect the worldwide
telecommunications industry market to remain stable particularly in North
America, and fiber volumes to increase modestly and pricing pressures to
continue.
For our 2005 impairment test, we used a discount rate of 13% in our calculation
of fair value of the expected future cash flows. The results of our 2005 tests
indicated that goodwill was not impaired. The results would not have changed had
we used a discount rate of 12.5% or 13.5%. In 2004, an impairment charge of
$1,420 million was recorded. We used a 12.5% discount rate for our 2004 annual
impairment test. 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. Terminal
value of the business assumes a growth in perpetuity of 3%. Business 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 12 public companies representing
a cross section of worldwide competitors of the reporting unit. Growth in the
Telecommunications segment is dependent upon Corning's success in delivering
results in fiber-to-the-premises applications. Increased fiber price pressure or
lack of fiber-to-the-premises penetration may precipitate additional goodwill
charges in the future.
Specialty Materials
Our discounted cash flow test for this reporting unit assumes a growth in
perpetuity of 3%. The discount rate applied to the forecasted cash flows
represents weighed average cost of capital based upon current debt and equity
activity of seven public companies representing a cross section of worldwide
competitors of the reporting unit. For the 2005 and 2004 impairment tests we
used a risk adjusted discount rate of 13% and 12% in our calculation of the fair
value of the expected future cash flows, respectively. The results of our 2005
and 2004 tests indicated that goodwill was not impaired. The results would not
have changed had we used a discount rate of 12.5% or 13.5% for 2005 and 11.5% or
12.5% for 2004.
Impairment of assets held for use
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
requires us to assess the recoverability of the carrying value of long-lived
assets when an event of impairment has occurred. We must exercise judgment in
assessing whether an event of impairment has occurred. For purposes of
recognition and measurement of an impairment loss, a long-lived asset or assets
is grouped with other assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other
assets and liabilities. We must exercise judgment in assessing the lowest level
for which identifiable cash flows are largely independent of the cash flows of
other assets and liabilities. In certain circumstances, we concluded that
locations or businesses which share production along the supply chain must be
combined in order to appropriately identify cash flows that are largely
independent of the cash flows of other assets and liabilities.
Once it has been judged that an impairment has occurred, an impairment
assessment requires exercise of judgment in assessing the future use of and
projected value to be derived from the impaired assets to be held and used. This
may require judgment in estimating future cash flows and relevant discount rates
and terminal values in estimating the current fair value of the impaired assets
to be held and used.
In 2004, based on our decision to permanently abandon certain assets and lower
our outlook for the Telecommunications segment, we determined an event of
impairment had occurred in our Telecommunications segment. We performed an
impairment test on the segment's long-lived assets, and recorded a $24 million
charge to write-down certain assets to their fair value.
In 2003, we concluded events of impairment had occurred in our semiconductor
materials product line, which is part of the specialty materials segment, and
performed an impairment test. The results of our test indicated that our
long-lived assets held for use were not impaired.
Restructuring charges and impairments resulting from restructuring actions
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," requires us to assess whether and when a restructuring event has
occurred and in which periods charges related to such events should be
recognized. We must estimate costs of plans to restructure including, for
example, employee termination costs. Restructuring charges require us to
exercise judgment about the expected future of our businesses, of portions
thereof, their profitability, cash flows and in certain instances eventual
outcome. The judgment involved can be difficult, subjective and complex in a
number of areas including assumptions and estimates used in estimating the
future profitability and cash flows of our businesses.
Restructuring events often give rise to decisions to dispose of or abandon
certain assets or asset groups which, as a result, require impairment in
accordance with SFAS 144. SFAS 144 requires us to carry assets to be sold or
abandoned at the lower of cost or fair value. We must exercise judgment in
assessing the fair value of the assets to be sold or abandoned.
During 2004 and 2003, we recorded write-downs of property, plant and equipment
as a result of decisions to exit facilities, primarily in the Telecommunications
segment. Assets impaired were primarily equipment, construction in progress and
buildings, which were sold or abandoned. We used information available from
recent auctions of telecommunications equipment to estimate salvage value when
measuring impairment. The estimated salvage values were very low, primarily due
to the depressed market for telecommunications related equipment. The salvage
values of property impaired were also estimated to be minimal as certain
facilities will be abandoned and not sold. It is possible that actual results
will differ from assumptions and require adjustments to reserves.
Valuation allowances for deferred income taxes
SFAS 109, "Accounting for Income Taxes" requires us to exercise judgment about
our future results in assessing the realizability of our deferred tax assets.
Inherent in this estimation process, especially since we are in a net gross
deferred tax asset position, in part due to prior year net operating losses, is
the requirement for us to estimate future book taxable income and possible tax
planning strategies. These estimates require us to exercise judgment about our
future results and the prudence and feasibility of possible tax planning
strategies. As more fully discussed in Note 6 (Income Taxes), Corning determined
that a tax planning strategy considered previously to be prudent was no longer
prudent. As such, a $525 million adjustment was recorded in 2005 to increase the
valuation allowance to fully reserve our U.S. deferred tax assets.
If we sustain an appropriate level of profitability, primarily in the U.S. and
Germany, or if we are able to develop tax planning strategies, adjustments to
these allowances will be required and may affect future net income.
Probability of litigation outcomes
SFAS No. 5, "Accounting for Contingencies," (SFAS 5) requires us to make
judgments about future events that are inherently uncertain. In making
determinations of likely outcomes of litigation matters, we consider the
evaluation of outside counsel knowledgeable about each matter, as well as known
outcomes in case law. See Legal Proceedings for a detailed discussion of the key
litigation matters we face. The most significant matter involving judgment is
the PCC asbestos liability. There are a number of factors bearing upon our
potential liability, including the inherent complexity of a Chapter 11 filing,
our history of success in defending ourselves against asbestos claims, our
assessment of the strength of our corporate veil defenses, our continuing
dialogue with our insurance carriers and the claimants' representatives, and
other factors. We have reached a tentative settlement on PCC as disclosed in
Legal Proceedings and Note 7 (Investments) to the Consolidated Financial
Statements. The settlement is subject to a number of contingencies, including
approval by the bankruptcy court and resolution of any appeals.
Other possible liabilities
SFAS 5 and other similarly focused accounting literature requires us to make
judgments about future events that are inherently uncertain. In making
determinations of likely outcomes of certain matters, including certain tax
planning matters and environmental matters, these judgments require us to
consider events and actions that are outside our control in determining whether
probable or possible liabilities require accrual or disclosure.
Pension and other postretirement employee benefits (OPEB)
Pension and OPEB costs and obligations are dependent on assumptions used in
calculating such amounts. These assumptions include discount rates, health care
cost trend rates, benefits earned, interest cost, expected return on plan
assets, mortality rates, and other factors. In accordance with GAAP, actual
results that differ from the assumptions are accumulated and amortized over
future periods and, therefore, generally affect recognized expense and the
recorded obligation in future periods. While management believes that the
assumptions used are appropriate, differences in actual experience or changes in
assumptions may affect Corning's pension and other postretirement obligations
and future expense.
As of December 31, 2005, the Projected Benefit Obligation (PBO) for U.S. pension
plans was $2,202 million and the minimum pension liability charges to equity
with respect to U.S. pension plans was $22 million, net of tax.
The following information illustrates the sensitivity to a change in certain
assumptions for U.S. pension plans:
------------------------------------------------------------------------------------------------------------------------------------
Effect on
Effect on 2006 December 31, 2005
Change in Assumption Pre-Tax Pension Expense PBO
------------------------------------------------------------------------------------------------------------------------------------
25 basis point decrease in discount rate +$4.0 million +$63 million
25 basis point increase in discount rate -$(4.0) million -$62 million
25 basis point decrease in expected return on assets +$4.8 million
25 basis point increase in expected return on assets -$(4.8) million
------------------------------------------------------------------------------------------------------------------------------------
The above sensitivities reflect the impact of changing one assumption at a time.
It should be noted that economic factors and conditions often affect multiple
assumptions simultaneously and the effects of changes in key assumptions are not
necessarily linear.
These changes in assumptions would have no effect on Corning's funding
requirements. In addition, at December 31, 2005, a 25 basis point decrease in
the discount rate would decrease stockholders' equity by $2 million before tax;
a 25 basis point increase in the discount rate would increase stockholders'
equity by $2 million. With a 25 basis point decrease in the discount rate,
certain pension plans would become Accumulated Benefit Obligation (ABO)
underfunded resulting in a significantly larger impact on equity compared to a
25 basis point increase in the discount rate. In addition, the impact of greater
than a 25 basis point decrease in discount rate would not be proportional to the
first 25 basis point decrease in the discount rate.
The following table illustrates the sensitivity to a change in the discount rate
assumption related to Corning's U.S. OPEB plans:
------------------------------------------------------------------------------------------------------------------------------------
Effect on 2006 Effect on
Pre-Tax OPEB December 31, 2005
Change in Assumption Expense APBO
------------------------------------------------------------------------------------------------------------------------------------
25 basis point decrease in discount rate +$1 million +$24 million
25 basis point increase in discount rate -$1 million -$24 million
------------------------------------------------------------------------------------------------------------------------------------
The above sensitivities reflect the impact of changing one assumption at a time.
It should be noted that economic factors and conditions often affect multiple
assumptions simultaneously and the effects of changes in key assumptions are not
necessarily linear.
Revenue Recognition
In certain instances, revenue recognition is based on estimates of fair value of
deliverables as well as estimates of product returns, allowances, discounts and
other factors. While management believes that the estimates used are
appropriate, differences in actual experience or changes in estimates may affect
Corning's future results.
Stock Compensation
Stock based compensation expense and disclosures are dependent on assumptions
used in calculating such amounts. These assumptions include risk-free discount
rates, expected term of the stock based compensation instrument granted,
volatility of stock and option prices, expected time between grant date and date
of exercise, attrition, performance, and other factors. These assumptions
require us to exercise judgment. Our estimates of these assumptions typically
are based upon our historical experience and also currently available market
place data. While management believes that the assumptions used are appropriate,
differences in actual experience or changes in assumptions may affect Corning's
future stock based compensation expense and disclosures.
NEW ACCOUNTING STANDARDS
Refer to Note 1 (Summary of Significant Accounting Policies) to the consolidated
financials statements.
FORWARD-LOOKING STATEMENTS
The statements in this Annual Report on Form 10-K, in reports subsequently filed
by Corning with the Securities and Exchange Commission (SEC) on Forms 10-Q,
Forms 8-K, and related comments by management which are not historical facts or
information and contain words such as "believes," "expects," "anticipates,"
"estimates," "forecasts," and similar expressions are forward-looking
statements. These forward-looking statements involve risks and uncertainties
that may cause the actual outcome to be materially different. Such risks and
uncertainties include, but are not limited to:
- global economic and political conditions;
- tariffs, import duties and currency fluctuations;
- product demand and industry capacity;
- competitive products and pricing;
- sufficiency of manufacturing capacity and efficiencies;
- availability and costs of critical components and materials;
- new product development and commercialization;
- order activity and demand from major customers;
- fluctuations in capital spending by customers;
- possible disruption in commercial activities due to terrorist activity,
armed conflict, political instability or major health concerns;
- facility expansions and new plant start-up costs;
- effect of regulatory and legal developments;
- capital resource and cash flow activities;
- ability to pace capital spending to anticipated levels of customer demand,
which may fluctuate;
- interest costs;
- credit rating and ability to obtain financing and capital on commercially
reasonable terms;
- adequacy and availability of insurance;
- financial risk management;
- capital spending;
- acquisition and divestiture activities;
- rate of technology change;
- level of excess or obsolete inventory;
- ability to enforce patents;
- adverse litigation;
- product and components performance issues;
- stock price fluctuations;
- the rate of substitution by end-users purchasing LCDs for notebook
computers, desktop monitors and televisions;
- a downturn in demand for LCD glass substrates;
- customer ability, most notably in the Display Technologies segment, to
maintain profitable operations and obtain financing to fund their
manufacturing expansions;
- fluctuations in supply chain inventory levels;
- equity company activities, principally at Dow Corning Corporation, Samsung
Corning Precision, and Samsung Corning;
- movements in foreign exchange rates, primarily the Japanese yen, Euro, and
Korean won; and
- other risks detailed in Corning's SEC filings.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
---------------------------------------------------------------------
We operate and conduct business in many foreign countries and as a result are
exposed to movements in foreign currency exchange rates. Our exposure to
exchange rate effects includes:
.. exchange rate movements on financial instruments and transactions
denominated in foreign currencies which impact earnings, and
.. exchange rate movements upon conversion of net assets in foreign
subsidiaries for which the functional currency is not the U.S. dollar,
which impact our net equity.
Our most significant foreign currency exposure is the Japanese yen and to a much
lesser extent the Korean won, the Taiwan dollar, and the Euro. We selectively
enter into foreign exchange forward and option contracts with durations
generally 15 months or less to hedge our exposure to exchange rate risk on
foreign source income and purchases. These hedges are scheduled to mature
coincident with the timing of the underlying foreign currency commitments and
transactions. The objective of these contracts is to neutralize the impact of
exchange rate movements on our operating results. We also enter into foreign
exchange forward contracts when situations arise where our foreign subsidiaries
or Corning enter into lending situations, generally on an intercompany basis,
denominated in currencies other than their local currency. We do not hold or
issue derivative financial instruments for trading purposes. In 2005, Corning
began using derivative instruments (forwards) to limit the exposure to foreign
currency fluctuations associated with certain monetary assets and liabilities.
These derivative instruments are not designated as hedging instruments for
accounting purposes and, as such, are referred to as undesignated hedges.
Changes in the fair value of undesignated hedges, along with foreign currency
gains and losses arising from the underlying monetary assets or liabilities, are
recorded in current period earnings in the other income, net component in the
consolidated statement of operations.
Equity in earnings of associated companies has historically contributed a
significant amount to our income from continuing operations. Equity in earnings
of associated companies, net of impairments was $598 million in 2005 and $443
million in 2004 with foreign-based affiliates comprising over 43% of this
amount. Equity earnings from Samsung Corning and Samsung Corning Precision
totaled $296 million for 2005 and $309 million for 2004. Exchange rate
fluctuations and actions taken by management of these entities can affect the
earnings of these companies.
We use a sensitivity analysis to assess the market risk associated with our
foreign currency exchange risk. Market risk is defined as the potential change
in fair value of assets and liabilities resulting from an adverse movement in
foreign currency exchange rates. At December 31, 2005, we had open forward
contracts, open option contracts, and foreign denominated debt with values
exposed to exchange rate movements, all of which were designated as hedges at
December 31, 2005. A 10% adverse movement in quoted foreign currency exchange
rates could result in a loss in fair value of these instruments of $138 million.
Specific to the Japanese yen, a 10% adverse movement in quoted yen exchange
rates could result in a loss in fair value of these instruments of $75 million.
As we derive approximately 70% of our net sales from outside the U.S., our sales
and net income could be affected if the U.S. dollar significantly strengthens or
weakens against foreign currencies, most notably the Japanese yen and Euro. Our
outlooks included in Management's Discussion and Analysis assume exchange rates
during 2006 remain constant at January 2006 levels. A plus or minus 10 point
movement in the U.S. dollar - Japanese yen exchange rate would result in a
change to 2005 net sales of approximately $200 million and net income of
approximately $130 million. A plus or minus 10 point movement in the U.S. dollar
- Euro exchange rate would result in a change to 2005 net sales of approximately
$50 million but would have a negligible effect on net income.
Interest Rate Risk Management
It is our policy to conservatively manage our exposure to changes in interest
rates. Our policy prescribes that total variable rate debt will not exceed 35%
of the total debt portfolio at anytime. At December 31, 2005, our consolidated
debt portfolio contained less than 1% of variable rate instruments.
Item 8. Financial Statements and Supplementary Data
----------------------------------------------------
See Item 15 (a) 1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
--------------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A. Controls and Procedures
---------------------------------
Disclosure Controls and Procedures
Our principal executive and principal financial officers, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of the end of
the period covered by this report, have concluded that based on the evaluation
of these controls and procedures required by paragraph (b) of Exchange Act Rules
13a-15 or 15d-15, that our disclosure controls and procedures were effective.
Internal Control Over Financial Reporting
(a) Management's Annual Report on Internal Control Over Financial Reporting
-----------------------------------------------------------------------
Management is responsible for establishing and maintaining adequate
disclosure controls and procedures and adequate internal control over
financial reporting for Corning. Management is also responsible for the
assessment of the effectiveness of disclosure controls and procedures and
the effectiveness of internal control over financial reporting.
Disclosure controls and procedures means controls and other procedures of
an issuer that are designed to ensure that information required to be
disclosed by the issuer in the reports that it files or submits under the
Act is recorded, processed, summarized, and reported, within the time
periods specified in the SEC's rules and forms. Corning's disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by
Corning in the reports that it files or submits under the Exchange Act is
accumulated and communicated to Corning's management, including Corning's
principal executive and principal financial officers, or other persons
performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
Corning's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with accounting principles generally accepted in the United
States of America. Corning's internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of Corning's assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with accounting principles generally
accepted in the United States of America, and that Corning's receipts and
expenditures are being made only in accordance with authorizations of
Corning's management and directors; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of Corning's assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies and
procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the system of
internal control over financial reporting based on the framework in
Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, management concluded that Corning's internal control over
financial reporting was effective as of December 31, 2005. Management's
assessment of the effectiveness of Corning's internal control over
financial reporting has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report
which is included on page 49.
(b) Attestation Report of the Registered Public Accounting Firm
-----------------------------------------------------------
Refer to page 44, Part IV, Item 15.
(c) Changes in Internal Control Over Financial Reporting
----------------------------------------------------
There were no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of
Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal
quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information
---------------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
------------------------------------------------------------
Directors of the Registrant
---------------------------
The section entitled "Nominees for Election as Directors" in our Definitive
Proxy Statement relating to our annual meeting of shareholders to be held on
April 27, 2006, is incorporated by reference in this Annual Report on Form 10-K.
Audit Committee and Audit Committee Financial Expert
----------------------------------------------------
Corning has an Audit Committee and has identified at least one member of the
Audit Committee as the Audit Committee Financial Expert. See sections entitled
"Matters Relating to Directors - Board Committees" and "Corporate Governance
Matters" in our definitive Proxy Statement relating to our annual meeting of
shareholders to be held on April 27, 2006, which are incorporated by reference
in this Annual Report on Form 10-K.
Executive Officers of the Registrant
James R. Houghton Chairman of the Board
Mr. Houghton joined Corning in 1962. He was elected a vice president of Corning
and general manager of the Consumer Products Division in 1968, vice chairman in
1971, chairman of the executive committee and chief strategic officer in 1980
and chairman and chief executive officer in April 1983, retiring in April 1996.
Mr. Houghton was the non-executive Chairman of the Board of Corning from June
2001 to April 2002. Mr. Houghton came out of retirement in April 2002 when he
was elected Chairman and Chief Executive officer, he retired as chief executive
officer effective April 28, 2005 and continues as chairman of the board of
Corning. Mr. Houghton is a director of Metropolitan Life Insurance Company and
Exxon Mobil Corporation. He is a trustee of the Metropolitan Museum of Art, the
Pierpont Morgan Library and the Corning Museum of Glass and a member of the
Harvard Corporation. Mr. Houghton has been a member of Corning's Board of
Directors since 1969. Age 70.
Wendell P. Weeks President and Chief Executive Officer
Mr. Weeks joined Corning in 1983 and has served in various accounting, business
development, and business manager positions. He was named a vice president and
deputy general manager of the Opto-Electronics Components Business in 1995, vice
president and general manager of Telecommunications Products in 1996, senior
vice president in 1997, senior vice president of Opto-Electronics in 1998,
executive vice president of Optical Communications in 1999, president of Corning
Optical Technologies in 2001 and became President in 2002. Mr. Weeks was elected
to his current position on April 28, 2005. Mr. Weeks is a director of Merck &
Co., Inc. Mr. Weeks has been a member of Corning's Board of Directors since
2000. Age 46.
James B. Flaws Vice Chairman and Chief Financial Officer
Mr. Flaws joined Corning in 1973 and served in a variety of controller and
business management positions. Mr. Flaws was elected assistant treasurer of
Corning in 1993, vice president and controller in 1997 and vice president of
finance and treasurer in May 1997, senior vice president and chief financial
officer in December 1997, executive vice president and chief financial officer
in 1999 and to his current position in 2002. Mr. Flaws is a director of Dow
Corning Corporation. Mr. Flaws has been a member of Corning's Board of Directors
since 2000. Age 57.
Peter F. Volanakis Chief Operating Officer
Mr. Volanakis joined Corning in 1982 and subsequently held various marketing,
development and commercial positions in several divisions. He was named managing
director Corning GmbH in 1992, executive vice president of CCS Holding, Inc.,
formerly known as Siecor Corporation, in 1995, senior vice president of Advanced
Display Products in 1997, executive vice president of Display Technologies and
Life Sciences in 1999 and president of Corning technologies in 2001. Mr.
Volanakis was elected to his current position on April 28, 2005. Mr. Volanakis
is a director of Dow Corning Corporation. Mr. Volanakis has been a member of
Corning's Board of Directors since 2000. Age 50.
Kirk P. Gregg Executive Vice President and Chief Administrative Officer
Mr. Gregg joined Corning in 1993 as director of Executive Compensation. He was
named vice president of Executive Resources and Employee Benefits in 1994,
senior vice president, administration in December 1997 and to his current
position in 2002. Prior to joining Corning, Mr. Gregg was with General Dynamics
Corporation as corporate director, Key Management Programs, and was responsible
for executive compensation and benefits, executive development and recruiting.
Age 46.
Joseph A. Miller Executive Vice President and Chief Technology Officer
Dr. Miller joined Corning in 2001 as senior vice president and chief technology
officer. He was appointed to his current position in 2002. Prior to joining
Corning, Dr. Miller was with E.I. DuPont de Nemours, Inc., where he served as
chief technology officer and senior vice president for research and development
since 1994. He began his career with DuPont in 1966. Dr. Miller is a director of
Wilson Greatbatch Technologies and Dow Corning Corporation. Age 64.
Pamela C. Schneider Senior Vice President and Operations Chief of Staff
Ms. Schneider joined Corning in 1986 as senior financial analyst in the
Controllers Division. In 1988 she became manager of internal audit. In 1990 she
was named controller and in 1991 chief financial officer of Corning Asahi Video
Products Company. In January 1993, she was appointed vice president and chief
financial officer and in 1995 vice president for Corning Consumer Products
Company. In 1997, she was named vice president and in 1999 senior vice
president, Human Resources and Diversity Officer for Corning. Ms. Schneider was
appointed to her present position in April 2002. Age 51.
Katherine A. Asbeck Senior Vice President - Finance
Ms. Asbeck joined Corning in 1991 as director of accounting. She was appointed
assistant controller in 1993, designated chief accounting officer in 1994,
elected vice president and controller in 1997 and senior vice president in 2001.
She was elected to her current position in October 2005. Ms. Asbeck is a
director of Samsung Corning Co., Ltd. Age 49.
William D. Eggers Senior Vice President and General Counsel
Mr. Eggers joined Corning in 1997 as vice president and deputy general counsel.
He was elected senior vice president and general counsel in February 1998. Mr.
Eggers was a Partner with the Rochester firm of Nixon, Hargrave, Devans & Doyle,
LLP, before joining Corning. Mr. Eggers is a director of Chemung Financial Corp.
Age 61.
Mark S. Rogus Senior Vice President and Treasurer
Mr. Rogus joined Corning in 1996 as manager of corporate finance. He was
appointed assistant treasurer in 1999, vice president and treasurer in 2000 and
was elected to his current position in 2004. Prior to joining Corning, Mr. Rogus
held various business development positions at Wachovia Bank. Mr. Rogus is a
director of Cormetech, Inc. Age 46.
Larry Aiello Jr. President and Chief Executive Officer - Corning Cable Systems
Mr. Aiello joined Corning in 1973 and served in several positions in
manufacturing from 1975 to 1981. He was named manager-Domestic Accounting in
1981, controller-Telecommunications Products Division in 1984, director-Control
and Analysis in 1987 and assistant controller and director in 1989. He was named
division vice president and director-Business Development and Planning,
Opto-Electronics Group in 1990, general manager-Component Products Group in
1992, vice president and controller, Corning Incorporated in 1993, senior vice
president-International and president-Corning International Corporation in 1997,
senior vice president and chief of staff-Corning Optical Communications in 2000
and to his current position in 2002. Age 56.
Robert B. Brown Executive Vice President, Environmental Technologies
Mr. Brown joined Corning in 1972 and served in a variety of manufacturing and
engineering positions. He was appointed division vice president-manufacturing
and engineering, Telecommunications Products Division in 1995, vice president
manufacturing and engineering, Opto-Electronics in 1999, president-Corning
Lasertron in February 2000, vice president and general manager-Amplification
Products in December 2000, vice president and general manager - Optical Fiber in
April 2002, to senior vice president and general manager - Telecommunications in
2003, as senior vice president and general manager - Environmental Technologies
in January 2005, and to his current position in August 2005. Age 55.
Robert L. Ecklin Executive Vice President, Environmental Technologies and
Strategic Growth
Mr. Ecklin joined Corning in 1961 and served in a variety of U.S. and
international manufacturing and engineering managerial positions. He was named
vice president of Corning Engineering in 1982, president of Corning Engineering
in 1983, vice president of Business Development in 1986, general manager of the
Industrial Products Division in 1989 and senior vice president of the Industrial
Products Division in 1990. He was appointed executive vice president of the
Environmental Products Division in 1999, executive vice president, Optical
Communications in 2001 and to his listed position in 2002 and retired effective
December 31, 2005. Mr. Ecklin is a director of Pittsburgh Corning Corporation
and Macdermid Incorporated. Age 67.
Donald B. McNaughton Senior Vice President - International and Strategic
Ventures
Mr. McNaughton joined Corning in 1989 and served in a variety of managerial
positions. He was named general manager, Display Technologies and president,
Display Technologies Asia in 2000, vice president, Display in 2002, senior vice
president, Display in 2003, and to his current position in September 2005. Mr.
McNaughton is a director of Samsung Corning Co., Ltd., and Samsung Corning
Precision Glass Co., Ltd. Age 46.
Lawrence D. McRae Senior Vice President, Strategy and Corporate Development
Mr. McRae joined Corning in 1985 and served in various financial, sales and
marketing positions. He was appointed vice president-Corporate Development in
2000, senior vice president-Corporate Development in 2003 and most recently,
senior vice president-Strategy and Corporate Development in October 2005. Mr.
McRae is on the board of directors of Dow Corning Corporation. Age 47.
Eric S. Musser Vice President and General Manager, Optical Fiber
Mr. Musser joined Corning in 1986 and held various manufacturing, planning and
quality positions. He assumed the role of President for Corning Lasertron in
2000, became Corning's director of Manufacturing Operations, Photonic
Technologies in 2002, then division vice president, Development and Engineering
in 2003, and was elected to his current position in January 2005. Age 46.
Jane D. Poulin Division Vice President and Chief Accounting Officer
Ms. Poulin joined Corning in September 2005. Prior to joining Corning, she was
an Associate Chief Accountant in the Office of the Chief Accountant of the U.S.
Securities and Exchange Commission from June 2000 to September 2005. She
previously served as corporate controller at a privately held manufacturer and
was an audit senior manager at Ernst & Young LLP. Age 43.
Tony Tripeny Vice President and Corporate Controller
Mr. Tripeny became the corporate accounting manager for Corning Cable Systems in
1985. After serving in other financial functions, he was appointed chief
financial officer of Corning Cable Systems in 2000. In 2003, he became group
controller for Corning's Telecommunications business, and division vice
president and operations controller of Corning in 2004, and was elected to his
current position in October 2005. Age 46.
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
The section entitled "Section 16(a) Beneficial Ownership Reporting Compliance"
in our Definitive Proxy Statement relating to our annual meeting of shareholders
to be held on April 27, 2006, is incorporated by reference in this Annual Report
on Form 10-K.
Code of Ethics
--------------
Our Board of Directors adopted the Code of Ethics for the Chief Executive
Officer and Financial Executives and the Code of Conduct for Directors and
Executive Officers which supplements the Code of Conduct governing all employees
and directors that has been in existence for more than ten years. During 2005,
no amendments to or waivers of the provisions of the Code of Ethics were made
with respect to any of our directors or executive officers. A copy of the Code
of Ethics is available on our website at
www.corning.com/inside_corning/corporate_governance/downloads.aspx. We will also
provide a copy of the Code of Ethics to shareholders without charge upon written
request to Ms. Denise A. Hauselt, Secretary and Assistant General Counsel,
Corning Incorporated, HQ-E2-10, Corning, NY 14831. We will disclose future
amendments to, or waivers from, the Code of Ethics on our website within four
business days following the date of such amendment or waiver.
Item 11. Executive Compensation
--------------------------------
The sections entitled "Executive Compensation," "Option SAR Grants in Last
Fiscal Year," "Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal
Year-End Option/SAR Values" and "Pension Plan" in our definitive Proxy Statement
relating to the annual meeting of shareholders to be held on April 27, 2006, are
incorporated by reference in this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
--------------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
The sections entitled "Security Ownership of Certain Beneficial Owners" and
"Equity Compensation Plan Information," in our definitive Proxy Statement
relating to the annual meeting of shareholders to be held on April 27, 2006, are
incorporated by reference in this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------
The section entitled "Other Matters - Certain Business Relationships" in our
definitive Proxy Statement relating to the annual meeting of shareholders to be
held on April 27, 2006, is incorporated by reference in this Annual Report on
Form 10-K.
Item 14. Principal Accounting Fees and Services
------------------------------------------------
The section entitled "Independent Registered Public Accounting Firm" in our
definitive Proxy Statement relating to the annual meeting of shareholders to be
held on April 27, 2006, is incorporated by reference in this Annual Report on
Form 10-K.
The information required by this item is incorporated herein by reference to the
information contained under the caption "Audit and Non-Audit Fees" in our 2006
Proxy Statement.
Our independent auditor, PricewaterhouseCoopers LLP ("PwC"), has recently
notified the Audit Committee of Corning's Board of Directors (the "Audit
Committee") that certain non-audit work performed by its network firms in Europe
and China raised questions regarding PwC's independence with respect to its role
as Corning's independent auditor.
Network firms of PwC performed certain VAT tax representation and remittance
services for Corning entities in Europe and paid government charges on behalf of
Corning in China. The payment of the taxes or fees, and the handling of company
funds by an outside auditor is not permitted under SEC auditor independence
rules. Unremitted amounts for a VAT refund due Corning as of December 31, 2005
were approximately $50,000. The fee paid to tax authorities on behalf of Corning
was $120.
Based upon PwC's disclosure, Corning evaluated PwC's non-audit services provided
to Corning during the relevant time periods and did not identify any additional
non-audit services that may compromise PwC's independence for purposes herein.
Corning and PwC continue to evaluate and review processes relevant to the
maintenance of PwC's independence.
PwC has concluded that its objectivity and impartiality were unaffected by these
services and therefore its independence has not been impaired. This conclusion
is based upon the nature of services and the fact that none of its personnel who
were involved in providing these tax services or remitting amounts on Corning's
behalf performed any audit or audit-related services for Corning. In January
2006, PwC issued its Independence Standards Board Standard No. 1 independence
letter to the Audit Committee of our Board of Directors and therein reported
that it is independent under applicable standards in connection with its audit
opinion for the financial statements contained in this report. The Audit
Committee has discussed with PwC its independence from Corning and concurred
with PwC that its independence was not impaired by the provision of these
services.
PART IV
Item 15. Exhibits and Financial Statement Schedules
----------------------------------------------------
(a) Documents filed as part of this report:
Page
----
1. Financial statements................................................51
2. Financial Statement Schedule:
(i) Valuation Accounts and Reserves...............................99
See separate index to financial statements and financial statement
schedules
(b) Exhibits filed as part of this report:
3 (i) 1 Restated Certificate of Incorporation dated December 6, 2000,
filed with the Secretary of State of the State of New York on
January 22, 2001 (Incorporated by reference to Exhibit 3(i) of
Corning's Annual Report on Form 10-K for the year ended December
31, 2000).
3 (i) 2 Certificate of Amendment to Restated Certificate of Incorporation
filed with the Secretary of State of the State of New York on
August 5, 2002 (Incorporated by reference to Exhibit 99.1 to
Corning's Form 8-K filed on August 7, 2002).
3 (ii) 1 Bylaws of Corning effective as of December 6, 2000 (Incorporated
by reference to Exhibit 3(ii) of Corning's Annual Report on Form
10-K for the year ended December 31, 2000).
3 (ii) 2 Amendment to Article III, Section 9, of Bylaws of Corning
effective as of February 5, 2003 (Incorporated by reference to
Exhibit 3(ii)2 of Corning's Annual Report on Form 10-K for the
year ended December 31, 2003).
4 Rights Agreement of Corning dated as of June 5, 1996
(Incorporated by reference to Exhibit 1 to Corning's Form 8-K
filed on July 10, 1996).
10.1 1994 Employee Equity Participation Program (Incorporated by
reference to Exhibit 1 of Corning Proxy Statement, Definitive 14A
filed March 16, 1994 for April 28, 1994 Annual Meeting of
Shareholders).
10.2 1998 Variable Compensation Plan (Incorporated by reference to
Exhibit 1 of Corning Proxy Statement, Definitive 14A filed March
9, 1998 for April 30, 1998 Annual Meeting of Shareholders).
10.3 1998 Worldwide Employee Share Purchase Plan (Incorporated by
reference to Exhibit 2 of Corning Proxy Statement, Definitive 14A
filed March 9, 1998 for April 30, 1998 Annual Meeting of
Shareholders).
10.4 1998 Employee Equity Participation Program (Incorporated by
reference to Exhibit 3 of Corning Proxy Statement, Definitive 14A
filed March 9, 1998 for April 30, 1998 Annual Meeting of
Shareholders).
10.5 2002 Worldwide Employee Share Purchase Plan (Incorporated by
reference to Exhibit 1 of Corning Proxy Statement, Definitive 14A
filed March 7, 2002 for April 25, 2002 Annual Meeting of
Shareholders).
10.6 2000 Employee Equity Participation Program and 2003 Amendments
(Incorporated by reference to Exhibit 1 of Corning Proxy
Statement, Definitive 14A filed March 10, 2003 for April 24, 2003
Annual Meeting of Shareholders).
10.7 2003 Variable Compensation Plan (Incorporated by reference to
Exhibit 2 of Corning Proxy Statement, Definitive 14A filed March
10, 2003 for April 24, 2003 Annual Meeting of Shareholders).
10.8 2003 Equity Plan for Non-Employee Directors (Incorporated by
reference to Exhibit 3 of Corning Proxy Statement, Definitive 14A
filed March 10, 2003 for April 24, 2003 Annual Meeting of
Shareholders).
10.9 Form of Officer Severance Agreement dated as of February 1, 2004
between Corning Incorporated and each of the following four
individuals: James B. Flaws, James R. Houghton, Peter F.
Volanakis and Wendell P. Weeks (Incorporated by reference to
Exhibit 10.1 of Corning's 10-Q filed May 4, 2004).
10.10 Officer Severance Agreement dated as of February 1, 2004 between
Corning Incorporated and Joseph A. Miller, Jr. (Incorporated by
reference to Exhibit 10.2 of Corning's 10-Q filed May 4, 2004).
10.11 Change In Control Agreement dated as of February 1, 2004 between
Corning Incorporated and James R. Houghton (Incorporated by
reference to Exhibit 10.3 of Corning's 10-Q filed May 4, 2004).
10.12 Form of Amendment dated as of February 1, 2004 to Change In
Control Agreement dated as of October 4, 2000 between Corning
Incorporated and the following two individuals: James B. Flaws
and Peter F. Volanakis (Incorporated by reference to Exhibit 10.4
of Corning's 10-Q filed May 4, 2004).
10.13 Form of Change In Control Amendment dated as of October 4, 2000
between Corning Incorporated and the following two individuals:
James B. Flaws and Peter F. Volanakis (Incorporated by reference
to Exhibit 10.5 of Corning's 10-Q filed May 4, 2004).
10.14 Amendment dated as of February 1, 2004 to Change In Control
Agreement dated as of June 1, 2001 between Corning Incorporated
and Joseph A. Miller, Jr. (Incorporated by reference to Exhibit
10.6 of Corning's 10-Q filed May 4, 2004).
10.15 Change In Control Agreement dated as of June 1, 2001 between
Corning Incorporated and Joseph A. Miller, Jr. (Incorporated by
reference to Exhibit 10.7 of Corning's 10-Q filed May 4, 2004).
10.16 Amendment dated as of February 1, 2004 to Change In Control
Agreement dated as of April 23, 2002 between Corning Incorporated
and Wendell P. Weeks (Incorporated by reference to Exhibit 10.8
of Corning's 10-Q filed May 4, 2004).
10.17 Change In Control Agreement dated as of April 23, 2002 between
Corning Incorporated and Wendell P. Weeks (Incorporated by
reference to Exhibit 10.9 of Corning's 10-Q filed May 4, 2004).
10.18 Form of Corning Incorporated Incentive Stock Plan Agreement for
Restricted Stock Grants (Incorporated by reference to Exhibit
10.1 of Corning's 10-Q filed October 28, 2004).
10.19 Form of Corning Incorporated Incentive Stock Plan Agreement for
Restricted Stock Retention Grants (Incorporated by reference to
Exhibit 10.2 of Corning's 10-Q filed October 28, 2004).
10.20 Form of Corning Incorporated Incentive Stock Option Agreement
(Incorporated by reference to Exhibit 10.3 of Corning's 10-Q
filed October 28, 2004).
10.21 Form of Corning Incorporated Non-Qualified Stock Option Agreement
(Incorporated by reference to Exhibit 10.4 of Corning's 10-Q
filed October 28, 2004).
10.22 2005 Employee Equity Participation Program (Incorporated by
reference to Exhibit I of Corning Proxy Statement, Definitive 14A
filed March 1, 2005 for April 28, 2005 Annual Meeting of
Shareholders).
10.23 Five-Year Revolving Credit Agreement with Citibank, N.A.; J.P.
Morgan Chase Bank, N.A.; Bank of America, N.A.; Bank of
Tokyo-Mitsubishi, Ltd.; Wachovia Bank, National Association;
Barclays Bank PLC; and Deutsche Bank A.G. New York Branch dated
March 17, 2005 (Incorporated by reference to Exhibit 10 of
Corning's Form 10-Q filed April 26, 2005).
12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Dividends.
14 Corning Incorporated Code of Ethics for Chief Executive Officer
and Senior Financial Officer (Incorporated by reference to
Appendix H-3 of Corning's 2006 definitive Proxy Statement).
21 Subsidiaries of the Registrant at December 31, 2005.
23 Consent of Independent Registered Public Accounting Firm.
24 Powers of Attorney.
31.1 Certification Pursuant to Rule 13a-15(e) and 15d-15(e), As
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification Pursuant to Rule 13a-15(e) and 15d-15(e), As
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(c) Financial Statement Schedules
1. Quarterly Operating Results.......................................100
2. Financial Statements of Dow Corning Corporation for the years
ended December 31, 2005, 2004 and 2003............................101
3. Financial Statements of Samsung Corning Precision Glass Co.,
Ltd. for the years ended December 31, 2005, 2004 and 2003.........138
Signatures
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Corning Incorporated
By /s/ Wendell P. Weeks President and Chief Executive Officer February 24, 2006
---------------------------------------- and Director
(Wendell P. Weeks)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Capacity Date
* Chairman of the Board of Directors February 24, 2006
-----------------------------------------------
(James R. Houghton)
* Vice Chairman and Chief Financial Officer February 24, 2006
-----------------------------------------------
(James B. Flaws)
* Senior Vice President, Finance February 24, 2006
-----------------------------------------------
(Katherine A. Asbeck)
* Director February 24, 2006
-----------------------------------------------
(John Seely Brown)
* Director February 24, 2006
-----------------------------------------------
(James B. Flaws)
* Director February 24, 2006
-----------------------------------------------
(Gordon Gund)
* Director February 24, 2006
-----------------------------------------------
(John M. Hennessy)
* Director February 24, 2006
-----------------------------------------------
(Jeremy R. Knowles)
* Director February 24, 2006
-----------------------------------------------
(James J. O'Connor)
* Director February 24, 2006
-----------------------------------------------
(Deborah D. Rieman)
* Director February 24, 2006
-----------------------------------------------
(H. Onno Ruding)
* Director February 24, 2006
-----------------------------------------------
(William D. Smithburg)
* Director February 24, 2006
-----------------------------------------------
(Hansel E. Tookes II)
* Director February 24, 2006
-----------------------------------------------
(Peter F. Volanakis)
* Director February 24, 2006
-----------------------------------------------
(Padmasree Warrior)
*By /s/ William D. Eggers
----------------------------------------
(William D. Eggers, Attorney-in-fact)
Corning Incorporated
2005 Annual Report
Index to Financial Statements and Financial Statement Schedules
Page
Report of Independent Registered Public Accounting Firm.................................................................49
Consolidated Statements of Operations...................................................................................51
Consolidated Balance Sheets.............................................................................................52
Consolidated Statements of Cash Flows...................................................................................53
Consolidated Statements of Changes in Shareholders' Equity..............................................................54
Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Policies............................................................55
2. Discontinued Operation................................................................................61
3. Restructuring, Impairment and Other Charges and (Credits).............................................61
4. Short-Term Investments................................................................................64
5. Inventories...........................................................................................65
6. Income Taxes..........................................................................................65
7. Investments...........................................................................................68
8. Property, Net of Accumulated Depreciation.............................................................74
9. Goodwill and Other Intangible Assets..................................................................74
10. Other Liabilities.....................................................................................76
11. Debt..................................................................................................77
12. Employee Retirement Plans.............................................................................78
13. Commitments, Contingencies, and Guarantees............................................................83
14. Hedging Activities....................................................................................84
15. Shareholders' Equity..................................................................................86
16. Earnings (Loss) Per Common Share......................................................................88
17. Stock Compensation Plans..............................................................................89
18. Operating Segments....................................................................................91
19. Subsequent Events.....................................................................................96
Financial Statement Schedule
II. Valuation Accounts and Reserves.......................................................................99
Quarterly Operating Results............................................................................................100
Financial Statements of Dow Corning Corporation for the years ended
December 31, 2005, 2004 and 2003.......................................................................................101
Financial Statements of Samsung Corning Precision Glass Co., Ltd. for the
years ended December 31, 2005, 2004 and 2003...........................................................................138
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
To the Board of Directors and Shareholders of Corning Incorporated:
We have completed integrated audits of Corning Incorporated's 2005 and 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2005, and an audit of its 2003 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedule
------------------------------------------------------------------
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Corning Incorporated and its subsidiaries at December 31,
2005 and 2004, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal control over financial reporting
-----------------------------------------
Also, in our opinion, management's assessment, included in "Management's Annual
Report on Internal Control Over Financial Reporting" appearing under Item 9A,
that the Company maintained effective internal control over financial reporting
as of December 31, 2005 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the COSO. The Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 24, 2006
Consolidated Statements of Operations Corning Incorporated and Subsidiary Companies
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts) 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 4,579 $ 3,854 $ 3,090
Cost of sales 2,595 2,439 2,241
---------------------------------------------
Gross margin 1,984 1,415 849
Operating expenses:
Selling, general and administrative expenses 756 653 599
Research, development and engineering expenses 443 355 344
Amortization of purchased intangibles 13 38 37
Restructuring, impairment and other charges and (credits) (Note 3) (38) 1,789 111
Asbestos settlement (Note 7) 197 33 413
---------------------------------------------
Operating income (loss) 613 (1,453) (655)
Interest income 61 25 32
Interest expense (116) (141) (154)
(Loss) gain on repurchases and retirement of debt, net (Note 11) (16) (36) 19
Other income (expense), net 30 25 (1)
---------------------------------------------
Income (loss) from continuing operations before income taxes 572 (1,580) (759)
(Provision) benefit for income taxes (Note 6) (578) (1,031) 254
---------------------------------------------
Loss before minority interests and equity earnings (6) (2,611) (505)
Minority interests (7) (17) 73
Equity in earnings of associated companies, net of impairments (Note 7) 598 443 209
---------------------------------------------
Income (loss) from continuing operations 585 (2,185) (223)
Income from discontinued operation (Note 2) 20
---------------------------------------------
Net income (loss) $ 585 $ (2,165) $ (223)
=============================================
Basic earnings (loss) per common share (Note 15):
Continuing operations $ 0.40 $ (1.57) $ (0.18)
Discontinued operation 0.01
---------------------------------------------
Basic earnings (loss) per common share $ 0.40 $ (1.56) $ (0.18)
=============================================
Diluted earnings (loss) per common share (Note 15):
Continuing operations $ 0.38 $ (1.57) $ (0.18)
Discontinued operation 0.01
---------------------------------------------
Diluted earnings (loss) per common share $ 0.38 $ (1.56) $ (0.18)
=============================================
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Balance Sheets Corning Incorporated and Subsidiary Companies
------------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------------------------------------------------------------------------------------------------------
(In millions, except share and per share amounts) 2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,342 $ 1,009
Short-term investments, at fair value 1,092 872
----------------------------------
Total cash, cash equivalents and short-term investments 2,434 1,881
Trade accounts receivable, net of doubtful accounts and allowances - $24 and $30 629 585
Inventories (Note 5) 570 535
Deferred income taxes (Note 6) 44 92
Other current assets 183 188
----------------------------------
Total current assets 3,860 3,281
Investments (Note 7) 1,697 1,484
Property, net of accumulated depreciation - $3,632 and $3,532 (Note 8) 4,675 3,941
Goodwill and other intangible assets, net (Note 9) 338 398
Deferred income taxes (Note 6) 10 440
Other assets 595 166
----------------------------------
Total Assets $ 11,175 $ 9,710
==================================
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt (Note 11) $ 18 $ 478
Accounts payable 690 682
Other accrued liabilities (Note 10) 1,508 1,176
----------------------------------
Total current liabilities 2,216 2,336
Long-term debt (Note 11) 1,789 2,214
Postretirement benefits other than pensions (Note 12) 593 600
Other liabilities (Note 10) 925 715
----------------------------------
Total liabilities 5,523 5,865
----------------------------------
Commitments and contingencies (Note 13)
Minority interests 43 29
----------------------------------
Shareholders' equity (Note 14):
Preferred stock - Par value $100.00 per share; Shares authorized: 10 million
Series C mandatory convertible preferred stock - Shares issued: 5.75 million;
Shares outstanding: 0 and 637 thousand 64
Common stock - Par value $0.50 per share; Shares authorized: 3.8 billion
Shares issued: 1,552 million and 1,424 million 776 712
Additional paid-in capital 11,548 10,363
Accumulated deficit (6,724) (7,309)
Treasury stock, at cost; Shares held: 16 million (168) (162)
Accumulated other comprehensive income 177 148
----------------------------------
Total shareholders' equity 5,609 3,816
----------------------------------
Total Liabilities and Shareholders' Equity $ 11,175 $ 9,710
==================================
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Cash Flows Corning Incorporated and Subsidiary Companies
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
(In millions) 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) $ 585 $ (2,165) $ (223)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 499 485 480
Amortization of purchased intangibles 13 38 37
Asbestos settlement 197 33 413
Gain on sale of discontinued operation (20)
Restructuring, impairment and other (credits) and charges (38) 1,789 111
Loss (gain) on repurchases and retirement of debt 16 36 (19)
Stock compensation charges 29 8 1
Undistributed earnings of associated companies (297) (303) (97)
Deferred taxes 425 947 (263)
Interest expense on convertible debentures (23) 4 18
Restructuring payments (25) (85) (233)
Decrease (increase) in restricted cash 22 34 (3)
Income tax refund 191
Customer deposits, net 428 204
Employee benefit payments less than (in excess of) expense 34 (19) (142)
Changes in certain working capital items:
Trade accounts receivable (77) (40)
Inventories (62) (68) 108
Other current assets 6 (7) 49
Accounts payable and other current liabilities, net of restructuring payments 113 143 (219)
Other, net 94 (5) (76)
-------------------------------------
Net cash provided by operating activities 1,939 1,009 133
-------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (1,553) (857) (366)
Acquisitions of businesses, net of cash acquired (6)
Net proceeds from sale of businesses 100 9
Net proceeds from sale or disposal of assets 18 49 46
Short-term investments - acquisitions (1,668) (1,685) (2,122)
Short-term investments - liquidations 1,452 1,389 2,557
Other, net 39 12 9
-------------------------------------
Net cash (used in) provided by investing activities (1,712) (992) 127
-------------------------------------
Cash Flows from Financing Activities:
Net repayments of short-term borrowings and current portion of long-term debt (451) (115) (181)
Proceeds from issuance of long-term debt, net 147 442
Retirements of long-term debt (102) (154) (1,189)
Proceeds from issuance of common stock, net 365 42 657
Proceeds from the exercise of stock options 202 49 9
Other, net (14) 1 (4)
-------------------------------------
Net cash provided by (used in) financing activities 147 265 (708)
-------------------------------------
Effect of exchange rate changes on cash (41) 39 60
-------------------------------------
Net increase (decrease) in cash and cash equivalents 333 321 (388)
Cash and cash equivalents at beginning of year 1,009 688 1,076
-------------------------------------
Cash and cash equivalents at end of year $ 1,342 $ 1,009 $ 688
=====================================
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Changes in Shareholders' Equity Corning Incorporated and Subsidiary Companies
------------------------------------------------------------------------------------------------------------------------------------
(In millions)
Accumulated
Series C Additional other Total
Preferred Common paid-in Unearned Accumulated Treasury comprehensive shareholders'
stock stock capital compensation deficit stock income (loss) equity
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 155 $ 634 $ 9,697 $ (2) $(4,921) $ (702) $ (170) $ 4,691
Net loss (223) (223)
Foreign currency translation
adjustment 239 239
Minimum pension liability adjustment 26 26
Net unrealized gain on investments
(net of tax of $2 million) 1 1
Other comprehensive income 2 2
----------
Total comprehensive income 45
----------
Series C preferred stock conversions (70) 18 52
Shares issued in equity offerings 47 571 618
Shares issued to benefit plans (37) 65 28
Shares issued in debt retirements 12 65 77
Other, net 2 22 (17) (2) 5
-------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 85 $ 701 $ 10,317 $ (19) $(5,144) $ (574) $ 98 $ 5,464
Net loss (2,165) (2,165)
Foreign currency translation
adjustment 174 174
Minimum pension liability adjustment (126) (126)
Net unrealized gain on
investments 8 8
Other comprehensive loss (6) (6)
----------
Total comprehensive loss (2,115)
----------
Series C preferred stock conversions (21) 5 16
Shares issued to benefit plans 5 36 41
Shares issued in debt retirements (11) 379 368
Other, net 6 82 (27) (3) 58
---------------------------------------------------------------------------------------------
Balance, December 31, 2004 $ 64 $ 712 $ 10,409 $ (46) $(7,309) $ (162) $ 148 $ 3,816
Net income 585 585
Foreign currency translation
adjustment (164) (164)
Reversal of foreign currency
translation adjustment (84) (84)
Minimum pension liability adjustment 246 246
Net loss on investments (13) (13)
Unrealized derivative gain on
cash flow hedges 23 23
Reclassification adjustments on
cash flow hedges 21 21
----------
Total comprehensive income 614
----------
Series C preferred stock conversions (64) 16 48
Shares issued in equity offerings 10 313 323
Shares issued to benefit plans 20 493 (37) 1 477
Shares issued in debt retirements 18 370 388
Other, net (2) (7) (9)
---------------------------------------------------------------------------------------------
Balance, December 31, 2005 $ 0 $ 776 $ 11,631 $ (83) $(6,724) $ (168) $ 177 $ 5,609
=============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Notes to Consolidated Financial Statements Corning Incorporated and Subsidiary Companies
------------------------------------------------------------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Organization
Corning Incorporated is a provider of high-performance glass for computer
monitors and other information display applications; optical fiber and cable and
hardware and equipment products for the telecommunications industry; ceramic
substrates for gasoline and diesel engines in automotive and heavy duty vehicle
markets; scientific laboratory products for the scientific community and
specialized polymer products for biotechnology applications; advanced optical
materials for the semiconductor industry and the scientific community; and other
technologies. In these notes, the terms "Corning," "Company," "we," "us," or
"our" mean Corning Incorporated and subsidiary companies.
Basis of Presentation and Principles of Consolidation
Our consolidated financial statements were prepared in conformity with
accounting principles generally accepted in the United States of America (GAAP)
and include the assets, liabilities, revenues and expenses of all majority-owned
subsidiaries over which Corning exercises control and, when applicable, entities
for which Corning has a controlling financial interest.
For variable interest entities, we assess the terms of our interest in the
entity to determine if we are the primary beneficiary as prescribed by FIN 46R,
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51, Revised (FIN 46R). The primary beneficiary of a
variable interest entity is the party that absorbs a majority of the entity's
expected losses, receives a majority of its expected residual returns, or both,
as a result of holding variable interests, which are the ownership, contractual,
or other pecuniary interests in an entity that change with changes in the fair
value of the entity's net assets excluding variable interests. We consolidate
one variable interest entity in which we are the primary beneficiary.
The equity method of accounting is used for investments in associated companies
which are not controlled by Corning and in which our interest is generally
between 20% and 50% and we have significant influence over the entity. Our share
of earnings or losses of associated companies, in which at least 20% of the
voting securities is owned and we have significant influence but not control
over the entity, is included in consolidated operating results.
We use the cost method to account for our investments in companies that we do
not control and for which we do not have the ability to exercise significant
influence over operating and financial policies. In accordance with the cost
method, these investments are recorded at cost or fair value, as appropriate.
All material intercompany accounts, transactions and profits are eliminated in
consolidation.
Certain prior year amounts have been reclassified to conform to the current-year
presentation, including the classification of auction rate securities as
available-for-sale securities, which are reported as short-term investments,
instead of cash equivalents. These reclassifications had no impact on our
results of operations or changes in shareholders' equity.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect amounts reported in the
consolidated financial statements and related notes. Significant estimates and
assumptions in these consolidated financial statements include restructuring and
other charges and credits, allowances for doubtful accounts receivable,
estimates of fair value associated with goodwill and long-lived asset impairment
tests, estimates of the fair value of assets held for disposal, environmental
and legal liabilities, income taxes and deferred tax valuation allowances, and
the determination of discount and other rate assumptions for pension and other
postretirement employee benefit expenses. Due to the inherent uncertainty
involved in making estimates, actual results reported in future periods may be
different from these estimates.
Revenue Recognition
Revenue for sales of goods is recognized when a firm sales agreement is in
place, delivery has occurred and collectibility of the fixed or determinable
sales price is reasonably assured. If customer acceptance of products is not
reasonably assured, sales are recorded only upon formal customer acceptance.
Sales of goods typically do not include multiple product and/or service
elements.
At the time revenue is recognized, allowances are recorded, with the related
reduction to revenue, for estimated product returns, allowances and price
discounts based upon historical experience and related terms of customer
arrangements. Where we have offered product warranties, we also establish
liabilities for estimated warranty costs based upon historical experience and
specific warranty issues. Warranty liabilities are adjusted when experience
indicates an expected settlement will differ from initial estimates.
1. Summary of Significant Accounting Policies (continued)
Research and Development Costs
Research and development costs are charged to expense as incurred. Research and
development costs totaled $348 million in 2005, and $289 million in 2004 and
2003.
Foreign Currency Translation and Transactions
The determination of the functional currency for Corning's foreign subsidiaries
is made based on the appropriate economic factors. For most foreign operations,
the local currencies are generally considered to be the functional currencies.
Prior to 2005, non-U.S. operations which did not use the local currency as the
functional currency used the U.S. dollar. Effective January 1, 2005, our Taiwan
subsidiary changed its functional currency from the new Taiwan dollar (its local
currency) to the Japanese yen due to the increased significance of Japanese yen
based transactions of that subsidiary. As a result of this change in functional
currency, exchange rate gains and losses are recognized on transactions in
currencies other than the Japanese yen and included in income for the period in
which the exchange rates changed.
For foreign subsidiary functional currency financial statements, balance sheet
accounts are translated at current exchange rates, and statement of operations
accounts are translated at average exchange rates for the year. Translation
gains and losses are recorded as a separate component of accumulated other
comprehensive income (loss) in shareholders' equity. The effects of remeasuring
non-functional currency assets and liabilities into the functional currency are
included in current earnings.
Stock-Based Compensation
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), we apply the recognition
and measurement principles of Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" (APB 25), to our stock options and
other stock-based compensation plans. These plans are more fully described in
Note 17 (Stock Compensation Plans).
In accordance with APB 25, stock option compensation expense is recognized in
earnings based on the excess, if any, of the quoted market price of the stock at
the grant date of the award or other measurement date over the amount an
employee must pay to acquire the stock. The exercise price for stock options
granted to employees equals or exceeds the fair market value of our common stock
at the date of grant.
The following table illustrates the effect on income (loss) from continuing
operations and income (loss) per share if we had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation. The
estimated fair value of each Corning option is calculated using the
Black-Scholes option-pricing model through November 30, 2005. For options
granted after that time, the fair value is estimated using a lattice-based
option valuation model.
1. Summary of Significant Accounting Policies (continued)
(In millions, except per share amounts):
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Years ended December 31,
---------------------------------------------
2005 2004 2003
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Income (loss) from continuing operations - as reported $ 585 $ (2,185) $ (223)
Add: Stock-based employee compensation expense
determined under APB 25, included in reported income
(loss) from continuing operations, net of tax 37 11 1
Less: Stock-based employee compensation expense
determined under fair value based method, net of tax (68) (168) (162)
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Income (loss) from continuing operations - pro forma $ 554 $ (2,342) $ (384)
Earnings (loss) per common share from continuing operations:
Basic - as reported $ 0.40 $ (1.57) $ (0.18)
Basic - pro forma $ 0.38 $ (1.69) $ (0.30)
Diluted - as reported $ 0.38 $ (1.57) $ (0.18)
Diluted - pro forma $ 0.36 $ (1.69) $ (0.30)
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On December 1, 2004, Corning's Compensation Committee of the Board of Directors
considered and adopted a proposal that accelerated the vesting of all unvested
underwater options held by active employees. Unvested underwater options were
defined as options granted prior to December 1, 2004 with a grant price greater
than $12.70. Approximately 7 million stock options or 5 percent of Corning's
outstanding stock options were accelerated. This action was one of a series of
actions taken to manage Corning's anticipated future compensation cost for all
forms of equity incentives within an acceptable range once SFAS 123 (revised),
"Share-Based Payment" (SFAS 123R) is adopted. Other actions included reducing
the use of stock options for all employees, increasing the use of performance
shares in the executive plan, and reviewing the cost considerations of the
global employee share purchase program. As a result of the accelerated vesting,
the 2004 "stock-based employee compensation expense determined under fair value
based method, net of tax" amount above includes $13 million of incremental
expense relating to these accelerated options.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments that are readily
convertible into cash. We consider securities with contractual maturities of
three months or less, when purchased, to be cash equivalents. The carrying
amount of these securities approximates fair value because of the short-term
maturity of these instruments.
Supplemental disclosure of cash flow information follows (in millions):
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Years ended December 31,
---------------------------------------------
2005 2004 2003
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Non-cash transactions:
Retirement of short-term borrowings $ 26
Retirement of debt in exchange for stock $ 388 $ 368 $ 77
Pension contribution $ 199
Issued credit memoranda for settlement of customer receivables $ 29
Cash paid for interest and income taxes:
Interest $ 126 $ 129 $ 124
Income taxes, net of refunds received $ 140 $ 64 $ (145)
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Short-Term Investments
Our short-term investments consist of debt securities classified as
available-for-sale, which are stated at estimated fair value. These debt
securities include U.S. treasury notes, state and municipal bonds, asset-backed
securities, auction rate securities, corporate bonds, commercial paper and
certificates of deposit. These investments are on deposit with a major financial
institution. Unrealized gains and losses, net of tax, are computed on the
first-in first-out basis and are reported as a separate component of accumulated
other comprehensive income (loss) in shareholders' equity until realized.
Realized gains and losses are recorded in other income (expense), net.
1. Summary of Significant Accounting Policies (continued)
Allowance for Doubtful Accounts
The Company's allowance for doubtful accounts is determined based on a variety
of factors that affect the potential collectibility of the related receivables,
including length of time receivables are past due, customer credit ratings,
financial stability of customers, specific one-time events and past customer
history. In addition, in circumstances where the Company is made aware of a
specific customer's inability to meet its financial obligations, a specific
allowance is established. The majority of accounts are individually evaluated on
a regular basis and appropriate reserves are established as deemed appropriate
based on the above criteria. The remainder of the reserve is based on
management's estimates and takes into consideration historical trends, market
conditions and the composition of the Company's customer base.
Environmental Liabilities
The Company accrues for its environmental investigation, remediation, operating
and maintenance costs when it is probable that a liability has been incurred and
the amount can be reasonably estimated. For environmental matters, the most
likely cost to be incurred is accrued based on an evaluation of currently
available facts with respect to each individual site, current laws and
regulations and prior remediation experience. For sites with multiple potential
responsible parties (PRP's), the Company considers its likely proportionate
share of the anticipated remediation costs and the ability of the other parties
to fulfill their obligations in establishing a provision for those costs. Where
no amount within a range of estimates is more likely to occur than another, the
minimum is accrued. When future liabilities are determined to be reimbursable by
insurance coverage, an accrual is recorded for the potential liability and a
receivable is recorded related to the insurance reimbursement. The uncertain
nature inherent in such remediation and the possibility that initial estimates
may not reflect the final outcome could result in additional costs.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
Property, Net of Accumulated Depreciation
Land, buildings and equipment are recorded at cost. Depreciation is based on
estimated useful lives of properties using the straight-line method. Except as
described in Note 3 (Restructuring, Impairment and Other Charges and (Credits))
related to accelerated depreciation arising from restructuring programs, the
estimated useful lives range from 20 to 40 years for buildings and 3 to 20 years
for equipment.
Included in the subcategory of equipment are the following types of assets:
--------------------------------------------------------------------------------
Asset type Range of useful life
--------------------------------------------------------------------------------
Computer hardware and software 3 years
Manufacturing equipment 3 to 15 years
Furniture and fixtures 5 to 7 years
Transportation equipment 20 years
--------------------------------------------------------------------------------
Included in manufacturing equipment are certain components of production
equipment that are coated with or constructed of precious metals. These metals
have an indefinite useful life as they are returned to their elemental state and
reused or sold.
Goodwill and Other Intangible Assets
Goodwill is the excess of cost of an acquired entity over the amounts assigned
to assets acquired and liabilities assumed in a business combination. Goodwill
is tested for impairment annually in the fourth quarter, and will be tested for
impairment between annual tests if an event occurs or circumstances change that
more likely than not would indicate the carrying amount may be impaired.
Impairment testing for goodwill is done at a reporting unit level. Reporting
units are either one level below the operating segment level or an aggregation
of two or more reporting units within the same operating segment if such
reporting units share similar economic characteristics. Goodwill relates and is
assigned directly to a specific reporting unit. An impairment loss generally
would be recognized when the carrying amount of the reporting unit's net assets
exceeds the estimated fair value of the reporting unit. The estimated fair value
of a reporting unit is determined using a discounted cash flow analysis. Refer
to Note 3 (Restructuring, Impairment and Other Charges and (Credits)) and Note 9
(Goodwill and Other Intangible Assets) for additional information.
Other intangible assets include patents, trademarks and other intangible assets
acquired from an independent party. Such intangible assets have a definite life
and are amortized on a straight-line basis with estimated useful lives ranging
from 5 to 20 years.
1. Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets, such as plant and
equipment and intangible assets, when events or changes in circumstances occur
that indicate that the carrying value of the asset or asset group may not be
recoverable. The assessment of possible impairment is based on our ability to
recover the carrying value of the asset or asset group from the expected future
pre-tax cash flows (undiscounted and without interest charges) of the related
operations. We assess the recoverability of the carrying value of long-lived
assets at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities. If these cash
flows are less than the carrying value of such asset or asset group, an
impairment loss is measured based on the difference between estimated fair value
and carrying value. Assets to be disposed are written-down to the greater of
their fair value or salvage value. Fair values are based on assumptions
concerning the amount and timing of estimated future cash flows and assumed
discount rates, reflecting varying degrees of perceived risk.
Treasury Stock
Shares of common stock repurchased by us are recorded at cost as treasury stock
and result in a reduction of shareholders' equity in the consolidated balance
sheets. From time to time, treasury shares may be reissued as contributions to
our employee benefit plans and for the retirement or conversion of certain debt
instruments. When shares are reissued, we use an average cost method for
determining cost. The difference between the cost of the shares and the
reissuance price is added or deducted from additional paid-in capital.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which
establishes financial accounting and reporting standards for the effect of
income taxes. The objective of accounting for income taxes is to recognize the
amount of taxes payable or refundable for the current year and the deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in the entity's financial statements. The Company is subject to
income taxes in the United States and in numerous foreign jurisdictions. No
provision is made for U.S. income taxes on the undistributed earnings of its
wholly owned foreign subsidiaries because substantially all such earnings are
indefinitely reinvested in those companies. Provision for the tax consequences
of distributions, if any, from consolidated foreign subsidiaries is recorded in
the year the distribution is declared. Significant judgment is required in
determining the Company's worldwide income tax position as well as its effective
tax rate.
The Company has provided for potential liabilities due in various jurisdictions.
Judgment is required in determining the worldwide income tax expense provision.
In the ordinary course of global business, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Some of these
uncertainties arise as a consequence of cost reimbursement arrangements among
related entities. SFAS 109 requires us to exercise judgment about our future
results in assessing the realizability of our deferred tax assets. Inherent in
this estimation process, especially since we are in a net gross deferred tax
asset position, in part due to prior year net operating losses, is the
requirement for us to estimate future book taxable income and possible tax
planning strategies. Although the Company believes its estimates are reasonable,
no assurance can be given that the final tax outcome of these matters will not
be different than that which is reflected in the historical income tax
provisions and accruals. Such differences could have a material impact on the
Company's income tax provision and operating results in the period in which such
determination is made.
Fair Value of Financial Instruments
Management believes that the carrying values of financial instruments, including
cash and cash equivalents, short-term investments, accounts receivable, accounts
payable, and accrued liabilities approximate fair value as a result of the
short-term maturities of these instruments.
Derivative Instruments
We participate in a variety of foreign exchange forward contracts and foreign
exchange option contracts entered into in connection with the management of our
exposure to fluctuations in foreign exchange and interest rates. These financial
exposures are managed in accordance with corporate policies and procedures.
1. Summary of Significant Accounting Policies (continued)
All derivatives are recorded at fair value on the balance sheet. Changes in the
fair value of derivatives designated as cash flow hedges and hedges of net
investments in foreign operations are recorded in accumulated other
comprehensive income (loss). Amounts, related to cash flow hedges are
reclassified from accumulated other comprehensive income (loss) when the
underlying hedged item impacts earnings. This reclassification is recorded in
the same line item of the consolidated statement of operations as where the
effects of the hedged item are recorded, typically sales or cost of sales.
Changes in the fair value of derivatives designated as fair value hedges are
recorded currently in earnings offset to the extent the derivative was
effective, by the change in the fair value of the hedged item. Corning currently
does not have any fair value hedges. Changes in the fair value of derivatives
not designated as hedging instruments are recorded currently in earnings in the
other income line of the consolidated statement of operations.
We have issued foreign currency denominated debt that has been designated as a
hedge of the net investment in a foreign operation. The effective portion of the
changes in fair value of the debt is reflected as a component of other
comprehensive income (loss) as part of the foreign currency translation
adjustment.
Variable Interest Entities
Corning leases certain transportation equipment from a Trust that qualifies as a
variable interest entity under FIN 46R. The sole purpose of this entity is
leasing transportation equipment to Corning. Since Corning is the primary
beneficiary of this entity, the financial statements of the entity are included
in Corning's consolidated financial statements. The entity's assets are
primarily comprised of fixed assets which are collateral for the entity's
borrowings. These assets, amounting to approximately $29.5 million and $30.4
million as of December 31, 2005 and 2004, respectively, are classified as
long-term assets in the consolidated balance sheet.
Corning leases certain transportation equipment from two additional Trusts that
qualify as variable interest entities under FIN 46R. Corning is not the primary
beneficiary of these entities. The sole purpose of the entities is leasing
transportation equipment to Corning. Corning has been involved with these
entities as lessee since the inception of the Trusts. Lease revenue generated by
these Trusts was $1.5 million, $1.6 million, and $1.3 million for the years
ended December 31, 2005, 2004 and 2003, respectively. Corning's maximum exposure
to loss as a result of its involvement with the Trusts is estimated at
approximately $16.6 million and $17.3 million at December 31, 2005 and 2004,
respectively.
New Accounting Standards
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4" (SFAS 151). SFAS 151 amends ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify that abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) should be recognized as
current-period charges. Additionally, SFAS 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. Corning is required to adopt SFAS 151 effective
January 1, 2006. Corning does not expect the adoption of SFAS 151 to have a
material impact on its consolidated results of operations and financial
condition.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS 123(R)), which replaces SFAS 123 and supercedes APB 25. SFAS
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements at fair
value. Under SFAS 123(R), Corning must determine the appropriate fair value
model to be used for valuing share-based payments, the attribution method for
compensation cost, and the transition method to be used at date of adoption. We
will implement the provisions of SFAS 123(R) on January 1, 2006 following the
"prospective adoption" transition method. This adoption method requires Corning
to begin expensing share-based payments effective January 1, 2006. Prior periods
will not be restated.
Corning grants restricted shares and stock options that are subject to specific
vesting conditions (e.g., three-year cliff vesting). The awards specify that the
employee will continue to vest in the award after retirement without providing
any additional service. Corning has historically accounted for this type of
arrangement by recognizing compensation cost over the nominal vesting period
and, if the employee retires before the end of the vesting period, recognizing
any remaining unrecognized compensation cost at the date of retirement (the
"nominal vesting period approach").
SFAS 123(R) specifies that an award is vested when the employee's retention of
the award is no longer contingent on providing subsequent service (the
"non-substantive vesting period approach"). This would be the case for Corning
awards that vest when employees retire and are granted to retirement eligible
employees. Effective January 1, 2006, related compensation cost must be
recognized immediately for awards granted to retirement eligible employees or
over the period from the grant date to the date retirement eligibility is
achieved, if that is expected to occur during the nominal vesting period.
1. Summary of Significant Accounting Policies (continued)
We will continue to follow the nominal vesting period approach for any
share-based awards granted prior to adopting SFAS 123(R) and the corresponding
remaining portion of unvested outstanding awards after adopting SFAS 123(R).
Upon adoption of SFAS 123(R), we will apply the non-substantive vesting period
approach to new grants that have retirement eligibility provisions. Had we
applied the non-substantive vesting period approach in prior periods,
stock-based compensation cost would have been $16 million and $7 million higher
for 2005 and 2004, respectively, for stock options and restricted share awards.
Our current estimate is that our pretax and after-tax stock-based compensation
expense will increase by $60 million to $70 million in 2006 and beyond as a
result of adopting SFAS 123(R). This amount includes approximately $15 million
related to the impact of applying the non-substantive vesting period approach.
In December 2004, the FASB issued SFAS No. 153, "Exchanges in Nonmonetary Assets
- an amendment of APB Opinion No. 29" (SFAS 153) which became effective in July
2005. This Statement amends APB No. 29, "Accounting for Nonmonetary
Transactions," by eliminating an exception for nonmonetary exchanges of similar
productive assets and replacing it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Corning adopted SFAS
153 prospectively, on July 1, 2005, as required. The impact of SFAS 153 was not
material to Corning's consolidated results of operations and financial
condition.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations - an interpretation of FASB Statement
No. 143" (FIN 47), which clarifies the term "conditional asset retirement
obligation" used in SFAS No. 143, "Accounting for Asset Retirement Obligations,"
and specifically when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. Corning adopted FIN
47 effective December 31, 2005. The impact of FIN 47 was not material to
Corning's consolidated results of operations and financial condition.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" (SFAS 154), which replaces APB Opinion No. 20, "Accounting
Changes," (APB 20) and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements." SFAS 154 changes the requirements for the accounting for
and reporting of a change in accounting principle. Upon the adoption of SFAS 154
beginning January 1, 2006, Corning will apply the standard's guidance to changes
in accounting methods as required. Corning does not expect the adoption of SFAS
154 will have a material impact on its consolidated results of operations and
financial condition.
2. Discontinued Operation
In the third quarter of 2004, Corning and 3M Company (3M) reached a final
settlement agreement for funds held in escrow associated with the 2002 sale of
Corning's precision lens business to 3M. As a result, we recognized a $20
million gain upon receipt of the proceeds in 2004. This gain is included in
income from discontinued operation in the 2004 consolidated statement of
operations.
3. Restructuring, Impairment and Other Charges and (Credits)
2005 Actions
Corning recorded net credits of $38 million in 2005. A summary of the charges
and credits follows:
.. We recorded a credit of $84 million for the reversal of the cumulative
translation account of O.T.I. S.r.l. (OTI), a wholly-owned foreign
subsidiary of Corning, upon OTI's substantial liquidation. The photonics
business in Milan, Italy, was the sole operation of OTI, whose results were
included in Telecommunications segment. Subsequent to Corning's agreement
to sell its photonics business operations to Avanex Corporation (Avanex) in
2003, Corning began liquidating OTI. In October 2005, the assets were
substantially liquidated and OTI's cumulative translation account was
reversed.
.. We recorded a charge of $30 million which was comprised of severance costs
for a restructuring plan in the Telecommunications segment to continue to
reduce costs in this segment.
.. We recorded net credit adjustments of $9 million to prior year
restructuring plans which included charges of $8 million related to our
Telecommunications segment and credits of $17 million for businesses in our
Unallocated and Other segment.
.. We recorded impairment charges of $25 million in the Telecommunications
segment for an other than temporary decline in the fair value of our
investment in Avanex below its adjusted cost basis. Our investment in
Avanex was accounted for as an available-for-sale security under SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS 115). In the fourth quarter of 2005, we completed the sale of our
remaining shares of Avanex.
3. Restructuring, Impairment and Other Charges and (Credits) (continued)
The following table summarizes the restructuring, impairment, and other charges
and (credits) as of and for the year ended December 31, 2005 (in millions):
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Year ended December 31, 2005
--------------------------------------
Reserve at Revisions Net Reserve at
January 1, Charges/ to existing charges/ Cash Dec. 31,
2005 (credits) plans (reversals) payments 2005
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Restructuring:
Employee related costs $ 18 $ 30 $ (1) $ 29 $ (11) $ 36
Other charges (credits) 77 (14) (14) (14) 49
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Total restructuring charges $ 95 $ 30 $ (15) $ 15 $ (25) $ 85
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Impairment of long-lived assets:
Impairment of available-for-sale
securities $ 25 $ 25
Assets to be disposed of by sale
or abandonment $ 6 6
------------------------------------
Total impairment charges $ 25 $ 6 $ 31
------------------------------------
Reversal of currency translation
adjustment $ (84) $ (84)
------------------------------------
Total restructuring, impairment and
other charges and (credits) $ (29) $ (9) $ (38)
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Cash payments for employee-related costs will be substantially completed by the
end of 2007, while payments for exit activities will be substantially completed
by the end of 2010.
The following table summarizes the net charge (reversals) for 2005
restructuring, impairment, and other charges and (credits) by operating segment
(in millions):
--------------------------------------------------------------------------------
Telecom- Unallocated
munications and Other Total
--------------------------------------------------------------------------------
Net credit $ (47) $ 9 $ (38)
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3. Restructuring, Impairment and Other Charges and (Credits) (continued)
2004 Actions
Corning recorded net charges of $1,789 million in 2004. A summary of the
significant charges and credits follows:
.. We recorded a charge of $1,420 million to impair a significant portion of
our Telecommunications segment goodwill balance. Refer to Note 9 (Goodwill
and Other Intangible Assets) for additional information on this charge.
.. We recorded a $350 million charge to impair certain fixed assets in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS 144). This charge primarily relates to our third
quarter decision to permanently abandon approximately $332 million of
construction in progress at our optical fiber manufacturing facility in
Concord, North Carolina that had been stopped in 2002. As a result of our
lowered outlook for the Telecommunications segment, we have permanently
abandoned this construction in progress as we no longer believe the demand
for optical fiber will warrant the investment necessary to complete this
facility.
.. We recorded an asset held for use impairment charge of $24 million to
impair certain fixed assets and intangible assets other than goodwill in
accordance with SFAS 144. Due to our decision to permanently abandon
certain fixed assets and lower our long-term outlook for the
Telecommunications segment, we determined that an event of impairment, as
defined by SFAS 144, had occurred in our Telecommunications segment which
required us to test the segment's long-lived assets other than goodwill for
impairment. We estimated the fair value of the long-lived assets using the
discounted cash flow approach as a measure of fair value. As a result of
our impairment evaluation, we recorded an impairment charge to write-down
certain assets to their estimated fair values.
.. We recorded a gain of $33 million related to proceeds in excess of assumed
salvage values for assets of Corning Asahi Video Products Company (CAV)
that were previously impaired but later sold to a Henan Anyang CPT Glass
Bulb Group, Electronic Glass Co., Ltd. (Henan Anyang), located in China.
This represented the substantial completion of the sale of CAV's assets.
.. We recorded $37 million of accelerated depreciation relating to the final
shutdown of our semiconductor materials manufacturing facility in
Charleston, South Carolina, which we announced in the fourth quarter of
2003.
.. We recorded a loss of $14 million on the sale of our frequency controls
business for net cash proceeds of $80 million. The frequency controls
business, which was part of our Telecommunications segment, had annual
sales of $76 million.
.. We recorded net credits of $25 million related to adjustments to prior
period restructuring, impairment, and other charges.
The following table summarizes the charges, credits and balances of the
restructuring liabilities as of and for the year ended December 31, 2004 (in
millions):
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Year ended December 31, 2004
-------------------------------------
Reserve at Revisions Net Reserve at
January 1, to existing charges/ Cash Dec. 31,
2004 Charges plans (reversals) payments 2004
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Restructuring:
Employee related costs $ 78 $ (60) $ 18
Exit costs 108 $ 2 $ (8) $ (6) (25) 77
-----------------------------------------------------------------------------
Total restructuring charges $ 186 $ 2 $ (8) $ (6) $ (85) $ 95
-----------------------------------------------------------------------------
Impairment of long-lived assets:
Goodwill $ 1,420 $1,420
Assets to be disposed of by sale
or abandonment 350 $ (48) 302
Asset to be held and used 24 24
------------------------------------
Total impairment charges $ 1,794 $ (48) $1,746
------------------------------------
Other:
Accelerated depreciation $ 37 $ 37
Loss on sale of business 14 $ (2) 12
------------------------------------
Total other charges $ 51 $ (2) $ 49
------------------------------------
Total restructuring, impairment and
other charges and (credits) $ 1,847 $ (58) $1,789
------------------------------------------------------------------------------------------------------------------------------------
In 2004, net charges (reversals) for restructuring, impairment, and other
actions totaled $1,798 million for the Telecommunications segment and were a
credit of $9 million for the Unallocated and Other segment.
3. Restructuring, Impairment and Other Charges and (Credits) (continued)
2003 Actions
Corning recorded net charges of $111 million in 2003. Major actions approved and
initiated in 2003 included the following:
.. The shutdown of CAV.
.. The exit of our photonic technologies products within the
Telecommunications segment, which included the sale of certain assets to
Avanex.
.. Credits to prior year restructuring plans, primarily the result of our
decision not to exit two cabling sites previously marked for shutdown in
2002.
.. The shutdown of two of our specialty materials manufacturing facilities in
North Brookfield and Charleston, South Carolina.
The following table summarizes the charges, credits and balances of the
restructuring liabilities as of and for the year ended December 31, 2003 (in
millions):
------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003
-------------------------------------
Reserve at Reversals Net Reserve at
January 1, to existing charges/ Non-cash Cash Dec. 31,
2003 Charges plans (reversals) uses payments 2003
------------------------------------------------------------------------------------------------------------------------------------
Restructuring:
Employee related costs $ 273 $ 90 $ (63) $ 27 $ (27) $ (195) $ 78
Exit costs 132 37 (23) 14 (38) 108
----------------------------------------------------------------------------------------
Total restructuring charges $ 405 $ 127 $ (86) $ 41 $ (27) $ (233) $ 186
----------------------------------------------------------------------------------------
Impairment of long-lived assets:
Assets to be disposed of by sale
or abandonment $ 40 $ (61) $ (21)
Assets to be held and used 62 62
Cost investments 5 (1) 4
------------------------------------
Total impairment charges $ 107 $ (62) $ 45
------------------------------------
Other:
Accelerated depreciation $ 12 $ 12
Loss on Avanex transaction 13 13
------------------------------------
Total other charges $ 25 $ 25
------------------------------------
Total restructuring, impairment and
other charges and (credits) $ 259 $ (148) $ 111
------------------------------------------------------------------------------------------------------------------------------------
In 2003, net charges (reversals) for restructuring, impairment, and other
actions were a credit of $36 million for the Telecommunications segment and a
charge of $147 million for Unallocated and Other. The headcount reductions
associated with 2003 restructuring plans totaled 975 for U.S. hourly employees,
750 for U.S. salaried employees, and 250 for non-U.S. employees.
As of December 31, 2004, all of the 1,975 employees from the 2003 restructuring
plans had been separated.
4. Short-Term Investments
The following is a summary of the fair value of available-for-sale securities
(in millions):
--------------------------------------------------------------------------------
December 31,
---------------------------
2005 2004
--------------------------------------------------------------------------------
Bonds, notes and other securities
U.S. government and agencies $ 259 $ 85
States and municipalities 77 216
Asset-backed securities 374 245
Commercial paper 57 20
Other debt securities 325 306
--------------------------------------------------------------------------------
Total short-term investments $ 1,092 $ 872
--------------------------------------------------------------------------------
Gross unrealized gains and losses were insignificant at December 31, 2005 and
2004.
4. Short-Term Investments (continued)
The following table summarizes the contractual maturities of available-for-sale
securities at December 31, 2005 (in millions):
--------------------------------------------------------------------------------
Less than one year $ 375
Due in 1-5 years 379
Due in 5-10 years 23
Due after 10 years 315
--------------------------------------------------------------------------------
Total $ 1,092
--------------------------------------------------------------------------------
Proceeds from sales and maturities of short-term investments totaled $1.5
billion, $1.4 billion and $2.6 billion in 2005, 2004 and 2003, respectively. The
gross realized gains and losses related to sales of short-term investments were
insignificant in 2005, 2004 and 2003.
5. Inventories
Inventories comprise the following (in millions):
--------------------------------------------------------------------------------
December 31,
--------------------------
2005 2004
--------------------------------------------------------------------------------
Finished goods $ 135 $ 136
Work in process 198 172
Raw materials and accessories 124 139
Supplies and packing materials 113 88
--------------------------------------------------------------------------------
Total inventories $ 570 $ 535
--------------------------------------------------------------------------------
6. Income Taxes
Income (loss) from continuing operations before income taxes follows (in
millions):
--------------------------------------------------------------------------------
Years ended December 31,
----------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
U.S. companies $ (200) $ (1,554) $ (927)
Non-U.S. companies 772 (26) 168
--------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes $ 572 $ (1,580) $ (759)
--------------------------------------------------------------------------------
The current and deferred amounts of the provision (benefit) for income taxes
follow (in millions):
--------------------------------------------------------------------------------
Years ended December 31,
----------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
Current:
Federal $ (14) $ (20) $ (11)
State and municipal (7) (3)
Foreign 167 111 23
Deferred:
Federal 443 547 (258)
State and municipal 220 (24)
Foreign (18) 180 19
--------------------------------------------------------------------------------
Provision (benefit) for income taxes $ 578 $ 1,031 $ (254)
--------------------------------------------------------------------------------
Amounts are reflected in the preceding tables based on the location of the
taxing authorities.
We do not provide income taxes on the post-1992 earnings of domestic
subsidiaries that we expect to recover tax-free without significant cost. Income
taxes have been provided for post-1992 unremitted earnings of domestic corporate
joint ventures that we do not expect to recover tax-free. Unremitted earnings of
domestic subsidiaries and corporate joint ventures that arose in fiscal years
beginning on or before December 31, 1992 have been indefinitely reinvested. We
currently provide income taxes on the earnings of foreign subsidiaries and
associated companies to the extent these earnings are currently taxable or
expected to be remitted. As of December 31, 2005, taxes have not been provided
on approximately $2.2 billion of accumulated foreign unremitted earnings which
are expected to remain invested indefinitely.
6. Income Taxes (continued)
The American Jobs Creation Act of 2004 (the "Act") was signed into law on
October 22, 2004. The Act introduced a special one-time (for 2004 or 2005) 85%
dividends received deduction for certain repatriated foreign earnings. Our
remittance plans did not change as a result of this provision. Our accumulated
foreign unremitted earnings are expected to remain invested indefinitely.
The Act also provided for the repeal of the extraterritorial income tax regime
(through reduced benefits in 2005 and 2006, with full repeal effective for 2007)
and the allowance of a deduction for qualified domestic production activities
(phased in over the years 2005 to 2009 and fully effective in 2010). Neither of
these changes is expected to have a significant impact on our effective tax rate
or U.S. tax liabilities because of our loss position in the U.S. and the
resulting valuation allowances against our U.S. deferred tax assets.
Reconciliation of the U.S. statutory income tax rate to our effective tax rate
for continuing operations follows:
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
----------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Statutory U.S. income tax (benefit) rate 35.0% (35.0)% (35.0)%
State income benefit, net of federal benefit (1.8) (2.4) (5.3)
Nondeductible goodwill and other expenses 0.3 27.3 0.6
Worthless stock deductions (266.2) (0.3)
Tax holidays (8.6) (1.2) (0.5)
Investment & other tax credits (12.4) (0.6) (0.3)
Rate difference on foreign earnings 9.9 2.5 1.5
Reversal of tax contingency liabilities (2.4)
Minimum pension obligation (14.3)
Currency translation adjustment (5.0)
Valuation allowances 364.2 76.2 4.9
Other items, net (2.3) (1.3) 0.7
------------------------------------------------------------------------------------------------------------------------------------
Effective income tax (benefit) rate 101.0% 65.2% (33.4)%
------------------------------------------------------------------------------------------------------------------------------------
For 2005, the tax provision reflected the following items:
.. The impact of our inability to record tax benefits on net operating losses
generated in the U.S. and certain foreign jurisdictions;
.. An increase in our valuation allowance as a result of the conclusion that
the sale of an appreciated asset was no longer prudent and, as such, no
longer meets the criteria for a tax planning strategy;
.. The benefit of a worthless stock deduction (and a corresponding increase in
our valuation allowance) for the loss on our investment in the photonic
technologies business associated with the Pirelli acquisition which was
completed in December 2000 and was substantially impaired in the second
quarter of 2001;
.. The benefit of tax holidays and investment credits in Taiwan and tax
holidays in China and South Africa;
.. The benefit from the reversal of tax contingency liabilities following the
conclusion of Internal Revenue Service (IRS) examinations; and
.. The tax effect of eliminating our minimum pension liability for the
domestic qualified plan.
In 2004, significant events occurred which required us to increase our valuation
allowances against certain U.S. and German deferred tax assets. Refer to Note 3
(Restructuring, Impairment and Other Charges and (Credits)) for additional
information on these events and the related charges. 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. At that time, we
believed that it was more likely than not that we could realize the remaining
net deferred tax assets through a tax planning strategy involving the sale of
our investment in Dow Corning Corporation (DCC), a non-strategic appreciated
asset, if we were faced with expiring net operating loss carryforwards.
During 2005, DCC's performance was much stronger than expected and DCC resumed
paying a dividend; both of which are expected to continue in the future. Due to
this improved performance, DCC now provides strong financial, geographic and
market balance to Corning's portfolio of businesses, the profitability of which
has become more concentrated due to the success of the display operating
segment. As a result, we now consider DCC to be a strategic investment and can
no longer assert that a potential tax planning strategy involving the sale of
DCC would be prudent, as required by FAS 109. Therefore, we no longer believe
that it is more likely than not that we would realize the remaining net deferred
tax assets. Accordingly, we have increased our valuation allowance by $525
million to fully reserve our net U.S. deferred tax assets in the fourth quarter
of 2005.
As a result of the elimination of the minimum pension liability for the domestic
qualified plan, $82 million tax benefit from the minimum pension liability,
previously included in other comprehensive income, was reflected in our
provision for income taxes in the fourth quarter of 2005.
6. Income Taxes (continued)
During the third quarter of 2005, Corning filed its 2004 consolidated U.S.
Federal income tax return, which included a $3.9 billion worthless stock
deduction for the loss on our investment in the photonic technologies business
associated with the Pirelli acquisition. This acquisition was completed in
December 2000 and was substantially impaired in the second quarter of 2001.
Prior to the third quarter of 2005, we did not record a deferred tax asset for
this item as the ultimate realization of such deduction was uncertain, and
consistent with the requirements of SFAS No. 5, "Accounting for Contingencies,"
recognition of an asset prior to the time management determines the realization
of the asset is probable is prohibited. On September 2, 2005, Corning and the
Commissioner of the IRS entered into a closing agreement under section 7121 of
the Internal Revenue Code of 1986 which provides that Corning is entitled to
this worthless stock deduction. We recorded a $1.5 billion deferred tax asset
for this item in the third quarter, which was concurrently offset by a valuation
allowance of an equal amount due to our current inability to record tax benefits
for U.S. net operating losses.
We expect to maintain a valuation allowance on future tax benefits until an
appropriate level of profitability is sustained, primarily in the U.S. and
Germany, or there are tax planning strategies that would enable us to conclude
that it is more likely than not that a portion of the deferred tax benefits
would be realizable. Until then, our tax provision will include only the net tax
expense attributable to certain foreign operations.
Certain foreign subsidiaries in China, South Africa and Taiwan are operating
under tax holiday arrangements. The nature and extent of such arrangements vary,
and the benefits of such arrangements phase out in future years (2006 to 2009)
according to the specific terms and schedules of the relevant taxing
jurisdictions. The impact of the tax holidays on our effective rate is a
reduction in the rate of 8.6%, 1.2%, and 0.5% for 2005, 2004, and 2003,
respectively.
We establish tax contingency liabilities when, despite our belief that our tax
returns are fully supportable, it is probable that certain positions may not be
sustained through the income tax audit process. These liabilities are analyzed
on a quarterly basis and adjusted based upon changes in facts and circumstances,
such as reviews of intercompany transfer pricing practices, the progress of
income tax audits, new case law and emerging legislation. In the third quarter
of 2005, in conjunction with our reassessment process, we recorded a tax benefit
of $14 million following the conclusion of an IRS examination for the years 2001
and 2002. We continue to believe that our recorded tax contingency liabilities
are adequate for all open years, based on our assessment of the previously
mentioned factors. However, since tax laws and regulations are subject to
interpretation, the final results of income tax audits could differ
significantly from what we have reflected in our income tax accounts and could
have a material effect on our tax provision, net income and/or cash flows in a
future period or periods in which such a conclusion is reached. Due to the
complexity involved in these matters we are not able to estimate the range of
reasonably possible losses in excess of amounts recorded.
The tax effects of temporary differences and carryforwards that gave rise to
significant portions of the deferred tax assets and liabilities follows (in
millions):
--------------------------------------------------------------------------------
December 31,
------------------------------
2005 2004
--------------------------------------------------------------------------------
Loss and tax credit carryforwards $ 2,723 $ 1,189
Capitalized research and development 176 207
Restructuring reserves 230 237
Postretirement medical and life benefits 248 243
Inventory 51 35
Intangible and other assets 86 98
Other accrued liabilities 273 156
Other employee benefits 97
Other 86
--------------------------------------------------------------------------------
Gross deferred tax assets 3,787 2,348
Valuation allowance (3,605) (1,685)
--------------------------------------------------------------------------------
Deferred tax assets 182 663
--------------------------------------------------------------------------------
Fixed assets (80) (131)
Other employee benefits (67)
Other (7)
--------------------------------------------------------------------------------
Deferred tax liabilities (154) (131)
--------------------------------------------------------------------------------
Net deferred tax assets $ 28 $ 532
--------------------------------------------------------------------------------
Based on our estimated 2005 consolidated U.S. Federal income tax return to be
filed, Corning has net operating loss carryforwards of ($5.1) billion for U.S.
Federal income tax purposes. These operating losses will expire in 2022 $0.1
billion, 2023 $0.6 billion, 2024 $4.2 billion and 2025 $0.2 billion.
7. Investments
Investments comprise the following (in millions):
-----------------------------------------------------------------------------------------------------------------------------
December 31,
Ownership -------------------------------
Interest (1) 2005 2004
------------ ---- ----
Associated companies accounted for under the equity method
Samsung Corning Precision Glass Co., Ltd. 50% $ 859 $ 572
Dow Corning Corporation 50% 473 324
Samsung Corning Co., Ltd. 50% 231 365
All other 25%-51% 130 162
-------- --------
1,693 1,423
Other investments (2) 4 61
-------- --------
Total $ 1,697 $ 1,484
-----------------------------------------------------------------------------------------------------------------------------
(1) Amounts reflect Corning's direct ownership interests in the respective
associated companies. Corning does not control any of such entities. In the
cases where Corning owns over 50% of the voting stock of another entity
accounted for by the equity method, Corning does not have control because
the other equity owner has significant participatory rights.
(2) Amounts reflect $53 million of available-for-sale securities at December
31, 2004 stated at market value.
7. Investments (continued)
Associated Companies at Equity
The financial position and results of operations of these investments follow (in
millions):
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 6,842 $ 6,146 $ 4,971
Gross profit $ 2,793 $ 2,341 $ 1,649
Net income $ 1,224 $ 1,036 $ 505
Corning's equity in earnings of affiliated companies (1)(2) $ 598 $ 443 $ 209
Related Party Transactions:
Corning sales to equity company affiliates $ 133 $ 127 $ 115
Corning purchases from equity company affiliates $ 106 $ 106 $ 48
------------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------
2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 3,491 $ 2,779
Noncurrent assets $ 4,992 $ 5,426
Short-term borrowings, including current portion
of long-term debt $ 87 $ 75
Other current liabilities $ 1,498 $ 1,442
Long-term debt $ 153 $ 252
Other long-term liabilities $ 2,671 $ 2,777
Minority interest $ 223 $ 245
Related Party Transactions:
Balances due from equity company affiliates $ 34 $ 23
Balances due to equity company affiliates $ 45 $ 15
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Dividends received from affiliated companies $ 301 $ 140 $ 112
Royalty income from affiliated companies $ 75 $ 47 $ 25
------------------------------------------------------------------------------------------------------------------------------------
(1) Equity in earnings shown above and in the consolidated statements of
operations are net of amounts recorded for income tax.
(2) Amounts include the following restructuring and impairment charges:
. In 2005, Dow Corning Corporation recorded a gain on the issuance of
subsidiary stock. Our equity earnings included $11 million related to
this gain.
. In 2005, Samsung Corning recorded charges to restructure and impair
certain manufacturing assets. Our equity earnings included $106
million related to these charges.
. In 2004, Dow Corning Corporation recorded charges related to
restructuring actions and adjustments to interest liabilities recorded
on its emergence from bankruptcy. Our equity earnings included $21
million related to these charges.
. In 2004 and 2003, Corning recorded $35 million and $7 million,
respectively, of charges to impair equity method investments in the
Telecommunications segment to their estimated fair value.
. In 2003, Samsung Corning Co., Ltd. recorded asset impairment charges.
Our equity earnings included $66 million related to these charges.
We have contractual agreements with several of our equity investees which
include sales, purchasing, licensing and technology agreements.
At December 31, 2005, approximately $1,485 million of equity in undistributed
earnings of equity companies was included in our accumulated deficit.
7. Investments (continued)
A discussion and summarized results of Corning's significant investees at
December 31, 2005 follows:
Samsung Corning Precision Glass Co., Ltd. (Samsung Corning Precision)
-----------------------------------------------------------------------
Samsung Corning Precision is a South Korea-based manufacturer of liquid crystal
display glass for flat panel displays. Samsung Corning Precision's financial
position and results of operations follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 1,660 $ 1,097 $ 590
Gross profit $ 1,234 $ 820 $ 424
Net income $ 848 $ 561 $ 295
Corning's equity in earnings of Samsung Corning Precision $ 408 $ 277 $ 144
Related Party Transactions:
Corning sales to Samsung Corning Precision (1) $ 116 $ 96 $ 68
Corning purchases from Samsung Corning Precision $ 71 $ 76 $ 26
------------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 400 $ 200
Noncurrent assets $ 1,848 $ 1,506
Short-term borrowings, including current portion
of long-term debt $ 57 $ 54
Other current liabilities $ 359 $ 368
Long-term debt $ 28 $ 97
Other long-term liabilities $ 86 $ 45
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Dividends received from Samsung Corning Precision $ 156 $ 71 $ 33
Royalty income from Samsung Corning Precision $ 65 $ 42 $ 22
------------------------------------------------------------------------------------------------------------------------------------
(1) Corning purchases machinery and equipment on behalf of Samsung Corning
Precision to support its capital expansion initiatives. The machinery and
equipment are transferred to Samsung Corning Precision at our cost basis,
resulting in no revenue or gain being recognized on the transaction.
Balances due to and from Samsung Corning Precision were $41 million and $18
million at December 31, 2005 and $12 million and $4 million at 2004,
respectively.
As of December 31, 2005, Samsung Corning Precision and Samsung Corning Co., Ltd.
were two of approximately thirty co-defendants in a lawsuit filed by Seoul
Guarantee Insurance Co. and 14 other creditors. Refer to Samsung Corning Co.,
Ltd. section of this note for additional information.
In February 2006, Corning made a capital contribution to Samsung Corning
Precision in the amount of $77 billion Korean won (approximately $75 million
USD).
7. Investments (continued)
Samsung Corning Co., Ltd. (Samsung Corning)
-------------------------------------------
Samsung Corning is a South Korea-based manufacturer of glass panels and funnels
for cathode ray tube (CRT) television and display monitors. In the third quarter
of 2005, Samsung Corning incurred impairment and other charges of $212 million
as a result of a decline in the projected operating results for its CRT glass
business. The charge, which included certain manufacturing assets and severance
and exit costs, reduced Corning's equity earnings by $106 million in the third
quarter. None of the charges is expected to result in cash expenditures by
Corning.
As of December 31, 2005, Corning's investment in Samsung Corning was $231
million. Corning has determined that a separate impairment of its investment in
Samsung Corning was not necessary in 2005. We will continue to monitor this
investment as it is possible an impairment may be required in the future.
In 2003, Samsung Corning recorded a significant asset impairment charge, our
portion of which was $66 million after tax.
Samsung Corning's financial position and results of operations follow (in
millions):
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 823 $ 1,019 $ 895
Gross profit $ 87 $ 245 $ 199
Net (loss) income $ (249) $ 94 $ (74)
Corning's equity in (losses) earnings of Samsung Corning $ (112) $ 32 $ (39)
------------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 345 $ 425
Noncurrent assets $ 391 $ 652
Other current liabilities $ 154 $ 163
Long-term debt $ 48 $ 47
Other long-term liabilities $ 24 $ 56
Minority interest $ 45 $ 73
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Dividends received from Samsung Corning $ 22 $ 18 $ 29
------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2005, Samsung Corning Precision and Samsung Corning were two
of approximately thirty co-defendants in a lawsuit filed by Seoul Guarantee
Insurance Co. and 14 other creditors (SGI and Creditors) for alleged breach of
an agreement that approximately thirty affiliates of the Samsung group entered
into with SGI and Creditors in September 1999. The lawsuit is pending in the
courts of Korea. According to the agreement, the Samsung affiliates agreed to
sell 3.5 million shares of Samsung Life Insurance Co., Ltd. (SLI) by December
31, 2000, which were transferred to SGI and Creditors in connection with the
petition for court receivership of Samsung Motor Inc. In the lawsuit, SGI and
Creditors allege that, in the event that the proceeds of sale of the SLI shares
is less than 2.45 trillion Korean won (approximately $2.42 billion), the Samsung
affiliates allegedly agreed to compensate SGI and Creditors for the shortfall,
by other means, including Samsung affiliates' purchase of equity or subordinated
debentures to be issued by SGI and Creditors. Any excess proceeds are to be
distributed to the Samsung affiliates. As of December 31, 2005, the shares of
Samsung Life Insurance Co., Ltd. have not been sold. The suit asks for damages
of approximately $4.68 billion plus penalty interest. SCP and SCC combined
guarantees should represent no more than 3.1% of the Samsung affiliates' total
financial obligation. Although noting that the outcome of these matters is
uncertain, Samsung Corning Precision and Samsung Corning have stated that these
matters are not likely to result in a material ultimate loss to their financial
statements. No claim in these matters has been asserted against Corning.
7. Investments (continued)
Dow Corning Corporation (Dow Corning)
-------------------------------------
Dow Corning is a U.S. based manufacturer of silicone products. In 1995, Corning
fully impaired its investment of Dow Corning upon its entry into bankruptcy
proceedings and did not recognize net equity earnings from the second quarter of
1995 through the end of 2002. Corning began recognizing equity earnings in the
first quarter of 2003 when management concluded that its emergence from
bankruptcy protection was probable. Dow Corning emerged from bankruptcy in 2004.
See discussion below for additional information and for a history of this
matter. 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.
Dow Corning's financial position and results of operations follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Statement of Operations:
Net sales $ 3,878 $ 3,373 $ 2,873
Gross profit $ 1,312 $ 1,036 $ 820
Net income $ 507 $ 238 $ 177
Corning's equity in earnings of Dow Corning $ 253 $ 116 $ 82
------------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Current assets $ 2,575 $ 1,828
Noncurrent assets $ 2,573 $ 2,988
Short-term borrowings, including current portion
of long-term debt $ 22 $ 14
Other current liabilities $ 911 $ 764
Long-term debt $ 39 $ 60
Other long-term liabilities $ 2,554 $ 2,660
Minority interest $ 179 $ 172
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Dividends received from Dow Corning $ 45
------------------------------------------------------------------------------------------------------------------------------------
Corning and The Dow Chemical Company (Dow Chemical) each own 50% of the common
stock of Dow Corning, which was in reorganization proceedings under Chapter 11
of the U.S. Bankruptcy Code between May 1995 and May 2004. Dow Corning filed for
bankruptcy protection to address pending and claimed liabilities arising from
many thousand breast-implant product lawsuits each of which typically sought
damages in excess of $1 million. On November 8, 1998, Dow Corning and the Tort
Claimants Committee jointly filed a revised Plan of Reorganization (Joint Plan)
which provided for the settlement or other resolution of implant claims. After
review and approvals by the Bankruptcy Court and the U.S. District Court of the
Eastern District of Michigan, and an appeal, the District Court on April 2, 2004
entered an order establishing June 1, 2004 as the effective date of the Joint
Plan.
Under the terms of the Joint Plan, Dow Corning has established and is funding a
Settlement Trust and a Litigation Facility to provide a means for tort claimants
to settle or litigate their claims. Of the approximately $3.2 billion of
required funding, Dow Corning has paid approximately $1.6 billion (inclusive of
insurance) and expects to pay up to an additional $1.6 billion ($710 million
after-tax) over 16 years. Corning and Dow Chemical have each agreed to provide a
credit facility to Dow Corning of up to $150 million ($300 million in the
aggregate), subject to the terms and conditions stated in the Joint Plan. As
required by the Joint Plan, Dow Corning has fully satisfied (or reserved for)
the claims of its commercial creditors in accordance with a March 31, 2004
ruling of the District Court determining the amount of pendency interest allowed
on the $810 million in principal owing on such claims. In the second quarter of
2004, Dow Corning recorded a $47 million adjustment to its interest liabilities
relating to this matter, of which Corning recognized $14 million in its second
quarter equity in earnings of associated companies, net of impairments. Certain
commercial creditors have appealed that ruling to the U.S. Court of Appeals of
the Sixth Circuit seeking from Dow Corning an additional sum of approximately
$80 million for interest at default rates and enforcement costs. Corning
believes the risk of material loss to Dow Corning (net of sums reserved) is
remote.
7. Investments (continued)
In addition, Dow Corning has received a statutory notice of deficiency from the
United States Internal Revenue Service asserting tax deficiencies totaling
approximately $65 million relating to its federal income tax returns for the
1995 and 1996 calendar years. This matter is pending before the U.S. District
Court in Michigan. Dow Corning has also received a proposed adjustment from the
IRS (approximately $117 million) with respect to its federal income tax returns
for the 1997, 1998 and 1999 calendar years. Dow Corning is vigorously contesting
these deficiencies and proposed adjustments which it believes are excessive.
The Joint Plan includes releases for Corning and Dow Chemical as shareholders in
exchange for contributions to the Joint Plan. Although claims against the
shareholders were included in several thousand state and federal lawsuits filed
pre-bankruptcy, alleging injuries arising from Dow Corning's implant products,
Corning was awarded summary judgment in federal court and in several state
jurisdictions. The remaining claims against Corning will be channeled by the
Joint Plan into facilities established by the Joint Plan. Management believes
that the likelihood of a materially adverse impact to Corning's financial
statements arising from these remaining shareholder claims is remote.
Pittsburgh Corning Corporation (PCC)
------------------------------------
Corning and PPG Industries, Inc. (PPG) each own 50% of the common stock of PCC.
Over a period of more than two decades, PCC and several other defendants have
been named in numerous lawsuits involving claims alleging personal injury from
exposure to asbestos. On April 16, 2000, PCC filed for Chapter 11 reorganization
in the U.S. Bankruptcy Court for the Western District of Pennsylvania. As of the
bankruptcy filing, PCC had in excess of 140,000 open claims and had insufficient
remaining insurance and assets to deal with its alleged current and future
liabilities. More than 100,000 additional claims have been filed with PCC after
its bankruptcy filing. As a result of PCC's bankruptcy filing, Corning recorded
an after-tax charge of $36 million in 2001 to fully impair its investment in PCC
and discontinued recognition of equity earnings. At the time PCC filed for
bankruptcy protection, there were approximately 12,400 claims pending against
Corning in state court lawsuits alleging various theories of liability based on
exposure to PCC's asbestos products and typically requesting monetary damages in
excess of one million dollars per claim. Corning has defended those claims on
the basis of the separate corporate status of PCC and the absence of any facts
supporting claims of direct liability arising from PCC's asbestos products.
Corning is also currently named in approximately 11,300 other cases
(approximately 42,800 claims) alleging injuries from asbestos and similar
amounts of monetary damages per claim. Those cases have been covered by
insurance without material impact to Corning to date. Asbestos litigation is
inherently difficult, and past trends in resolving these claims may not be
indicators of future outcomes.
In the bankruptcy court, PCC in April 2000 obtained a preliminary injunction
against the prosecution of asbestos actions arising from PCC's products against
its two shareholders to afford the parties a period of time (the Injunction
Period) in which to negotiate a plan of reorganization for PCC (PCC Plan).
On May 14, 2002, PPG announced that it had agreed with certain of its insurance
carriers and representatives of current and future asbestos claimants on the
terms of a settlement arrangement applicable to claims arising from PCC's
products.
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 PCC Plan
becomes effective, of its equity interest in PCC, its one-half equity interest
in Pittsburgh Corning Europe N.V. (PCE), and 25 million shares of Corning common
stock. The common stock will be marked-to-market each quarter until it is
contributed to the settlement trust. Corning also will be making cash payments
of $152 million (net present value as of December 31, 2005) in six installments
beginning one year after the PCC Plan is effective. In addition, Corning will
assign policy rights or proceeds under primary insurance from 1962 through 1984,
as well as rights to proceeds under certain excess insurance, most of which
falls within the period from 1962 through 1973. In return for these
contributions, Corning expects to receive a release and an injunction channeling
asbestos claims against it into a settlement trust under the PCC Plan.
The following summarizes the charges we have recorded for the asbestos
settlement (in millions):
--------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
Initial settlement charge $ 298
Mark-to-market common stock $ 197 $ 33 $ 115
------- ------- ------
Asbestos settlement $ 197 $ 33 $ 413
--------------------------------------------------------------------------------
Two of Corning's primary insurers and several excess insurers have commenced
litigation for a declaration of the rights and obligations of the parties under
insurance policies, including rights that may be affected by the settlement
arrangement described above. Corning is vigorously contesting these cases.
Management is unable to predict the outcome of this insurance litigation.
7. Investments (continued)
The PCC Plan received a favorable vote from creditors in March 2004. Hearings to
consider objections to the PCC Plan were held in the Bankruptcy Court in May
2004. The parties filed post-hearing briefs and made oral arguments to the
Bankruptcy Court in November 2004. The Bankruptcy Court allowed an additional
round of briefing to address current case law developments and heard additional
oral arguments on March 16, 2005. In mid-April 2005, the proponents of the PCC
Plan requested that the court rule on the pending objections. If the Bankruptcy
Court does not approve the PCC Plan in its current form, changes to the PCC Plan
are probable as it is likely that the Court will allow the proponents time to
propose amendments. The outcome of these proceedings is uncertain, and
confirmation of the current PCC Plan or any amended Plan is subject to a number
of contingencies. However, apart from the quarterly mark-to-market adjustment in
the value of the 25 million shares of Corning stock, management believes that
the likelihood of a material adverse impact to Corning's financial statements is
remote.
8. Property, Net of Accumulated Depreciation
Property, net follows (in millions):
-------------------------------------------------------------------------------
December 31,
-----------------------------
2005 2004
-------------------------------------------------------------------------------
Land $ 70 $ 76
Buildings 1,999 1,943
Equipment 5,177 4,569
Construction in progress 1,061 885
-------------------------------------------------------------------------------
8,307 7,473
Accumulated depreciation (3,632) (3,532)
-------------------------------------------------------------------------------
Total $ 4,675 $ 3,941
-------------------------------------------------------------------------------
Approximately $27 million, $22 million and $9 million of interest costs were
capitalized as part of property, net in 2005, 2004 and 2003, respectively.
9. Goodwill and Other Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the year ended December 31,
2005, by segment follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Telecommunications Display Technologies Other (1) Total
------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2004 $ 1,576 $ 9 $ 150 $ 1,735
Impairment (1,420) (1,420)
Divestitures (30) (30)
Foreign currency translation & other (3) (3)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 $ 123 $ 9 $ 150 $ 282
------------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation & other $ (5) $ (5)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 $ 118 $ 9 $ 150 $ 277
------------------------------------------------------------------------------------------------------------------------------------
(1) This balance relates to our Specialty Materials operating segment.
2005 Assessment
---------------
Our annual goodwill recoverability assessment is completed in the fourth
quarter, as it is traditionally based on our annual strategic planning process
that runs from June to October. This process includes reviewing expectations for
the long-term growth of our businesses and forecasting future cash flows. The
results of our impairment tests indicated that the fair value of each reporting
unit exceeded its book value.
2004 Assessment
---------------
In the third quarter of 2004, we identified certain factors during our annual
strategic planning process that caused us to lower our estimates and projections
for the long-term revenue growth of the Telecommunications segment, which
indicated that it was more likely than not that the fair value of the
Telecommunications segment reporting unit was less than its carrying value. As
such, we performed an interim impairment test of the Telecommunications segment
goodwill in the third quarter of 2004, the results of which were reviewed with
Corning's Board of Directors on October 6, 2004.
9. Goodwill and Other Intangible Assets (continued)
Although we were experiencing stronger than expected volume in this segment, the
improved demand was from a narrow band of customers, and we saw 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 expected to be deployed caused us to change our assessment of the
future pace of recovery. The primary estimates and forecasts that caused the
change in our outlook and reduced the fair value of the Telecommunications
segment from that measured in 2003 were:
.. Revised estimates of future pricing for fiber and cable;
.. Revised estimates of demand for premium fiber product; and
.. Revised estimates for the long-term worldwide market volume growth.
We estimated the fair value of the Telecommunications segment using a discounted
cash flow model based on our current estimates for the long-term growth of the
Telecommunications segment, and concluded that the fair value of the
Telecommunications segment was below its carrying amount. Accordingly, we
recorded an impairment charge of $1,420 million to reduce the carrying value of
goodwill to its implied fair value. The goodwill impairment charge was included
in restructuring, impairment and other charges and (credits) on the consolidated
statement of operations. We updated our Telecommunications segment goodwill test
in the fourth quarter of 2004. The result of the test concluded that the fair
value of the reporting unit exceeded its book value at that time.
We performed a goodwill impairment test for our Specialty Materials reporting
unit in the fourth quarter of 2004. The result of this impairment test indicated
that the fair value of our reporting unit exceeded its book value.
As discussed in Note 3 (Restructuring, Impairment and Other Charges and
(Credits)), in the third quarter of 2004, we completed the sale of our frequency
controls business, which was part of the Telecommunications segment. As required
by SFAS No. 142, "Goodwill and Other Intangible Assets," we allocated a portion
of the Telecommunications segment goodwill balance to the carrying amount of the
frequency controls business in determining the loss on disposal. The amount of
goodwill to be included in that carrying amount was based on the relative fair
value of the business to be disposed and the portion of the Telecommunications
segment to be retained. The amount of goodwill allocated to the carrying value
of frequency controls business was $30 million.
2003 Assessment
---------------
We performed goodwill impairment tests for our Telecommunications and Specialty
Materials segment reporting units in the fourth quarter of 2003. The results of
our impairment tests indicated that the fair value of each reporting unit
exceeded its book value.
In the third quarter we completed the sale of certain photonic technologies
assets, which was part of the Telecommunications segment. We allocated a portion
of the Telecommunications segment goodwill balance to the carrying amount of the
photonic technologies assets in determining the loss on disposal. The amount of
goodwill allocated to the photonic technologies assets was $21 million.
Other Intangible Assets
The carrying amount of other intangible assets follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------------------------------------------------
2005 2004
---------------------------------- -----------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Patents and trademarks $ 143 $ 88 $ 55 $ 148 $ 79 $ 69
Non-competition agreements 111 111 118 116 2
Other 4 1 3 4 1 3
-------------------------------------------------------------------------------
Total amortized intangible assets 258 200 58 270 196 74
-------------------------------------------------------------------------------
Unamortized intangible assets:
Intangible pension assets 3 3 42 42
-------------------------------------------------------------------------------
Total $ 261 $ 200 $ 61 $ 312 $ 196 $ 116
------------------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets are primarily related to the Telecommunications
segment. Amortization expense related to these intangible assets is expected to
be approximately $11 million in 2006 and 2007, $10 million in 2008, and
insignificant thereafter.
As a result of the elimination of the minimum pension liability for Corning's
U.S. qualified plan, the related intangible pension asset of $39 million was
reversed in 2005.
10. Other Liabilities
Other accrued liabilities follow (in millions):
--------------------------------------------------------------------------------
December 31,
-----------------------------------
2005 2004
--------------------------------------------------------------------------------
Current liabilities:
Wages and employee benefits $ 325 $ 291
Asbestos settlement 513 315
Income taxes 165 153
Customer deposits 164 18
Other current liabilities 341 399
--------------------------------------------------------------------------------
Other accrued liabilities $ 1,508 $ 1,176
--------------------------------------------------------------------------------
Non-current liabilities:
Asbestos settlement $ 152 $ 144
Customer deposits 431 197
Other non-current liabilities 342 374
--------------------------------------------------------------------------------
Other liabilities $ 925 $ 715
--------------------------------------------------------------------------------
Asbestos Settlement
The current liability represents the cost of our investment in PCE and the fair
value of the 25 million shares of Corning common stock as of December 31, 2005,
which will be contributed to the PCC Plan when it becomes effective. As the
timing of the settlement of the obligation under this portion of the PCC
liability is outside of Corning's control, it is considered a "due on demand"
obligation. Accordingly, this portion of the obligation has been classified as a
current liability, even though it is possible that the contribution could be
made in 2007 or later. The non-current liability represents the net present
value of cash payments as of December 31, 2005, which will be contributed to the
PCC Plan in six installments beginning one year after the PCC Plan is effective.
Refer to Note 7 (Investments) for additional information on the asbestos
settlement.
Customer Deposits
In 2005 and 2004, several of Corning's customers entered into long-term purchase
and supply agreements in which Corning's Display Technologies segment will
supply large-size glass substrates to these customers over periods of up to six
years. As part of the agreements, these customers agreed to make advance cash
deposits to Corning for a portion of the contracted glass to be purchased.
Upon receipt of the cash deposits made by customers, we record a customer
deposit liability. This liability is reduced at the time of future product sales
over the life of the agreements. As product is shipped to a customer, Corning
recognizes revenue at the selling price and issues credit memoranda for an
agreed amount of the customer deposit liability. The credit memoranda are
applied against customer receivables resulting from the sale of product, thus
reducing operating cash flows in later periods as these credits are applied for
cash deposits received in earlier periods.
Customer deposits have been or will be received in the following periods (in
millions):
--------------------------------------------------------------------------------
Estimated 2006
2004 2005 and Beyond Total
--------------------------------------------------------------------------------
Gross customer deposits received $204 $457 $278 $939
--------------------------------------------------------------------------------
The majority of customer deposits will be received through 2006. In 2005, we
began issuing credit memoranda which totaled $29 million for the year. These
credits are not included (netted) in the above amounts.
Customer deposit liabilities were $595 million and $215 million at December 31,
2005 and 2004, respectively, of which $164 million and $18 million,
respectively, were recorded in the current portion of other accrued liabilities
in our consolidated balance sheets.
In the event customers do not make all customer deposit installment payments or
elect not to purchase the agreed upon quantities of product, subject to specific
conditions outlined in the agreements, Corning may retain certain amounts of the
customer deposits. If Corning does not deliver agreed upon product quantities,
subject to specific conditions outlined in the agreements, Corning may be
required to return certain amounts of customer deposits.
11. Debt
(In millions):
------------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------
2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Current portion of long-term debt $ 18 $ 478
------------------------------------------------------------------------------------------------------------------------------------
Long-term debt
Euro notes, 5.625%, due 2005 $ 189
Debentures, 7%, due 2007, net of unamortized discount of
$15 million in 2004 85
Convertible notes, 4.875%, due 2008 96
Convertible debentures, 3.5%, due 2008 297
Zero coupon convertible debentures, 2%, due 2015, redeemable
and callable in 2005 272
Notes, 6.3%, due 2009 $ 150 150
Euro notes, 6.25%, due 2010 355 408
Debentures, 6.75%, due 2013 100 100
Debentures, 5.90%, due 2014 200 200
Debentures, callable, 6.05%, due 2015 100
Debentures, 6.20%, due 2016 200 200
Debentures, 8.875%, due 2016 81 81
Debentures, 8.875%, due 2021 82 82
Medium-term notes, average rate 8.1%, due through 2025 175 175
Debentures, 6.85%, due 2029 150 150
Other, average rate 2.9%, due through 2015 214 207
------------------------------------------------------------------------------------------------------------------------------------
Total long-term debt 1,807 2,692
Less current portion of long-term debt 18 478
------------------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 1,789 $ 2,214
------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2005 and 2004, the weighted-average interest rate on short-term
borrowings was 2.2% and 2.3%, respectively.
Based on borrowing rates currently available to us for loans with similar terms
and maturities, the fair value of long-term debt was $1.9 billion at December
31, 2005, and $2.8 billion at December 31, 2004.
The following table shows debt maturities by year at December 31, 2005 (in
millions):
--------------------------------------------------------------------------------
2006 2007 2008 2009 2010 Thereafter
--------------------------------------------------------------------------------
$18 $22 $21 $169 $384 $1,178
--------------------------------------------------------------------------------
In the first quarter of 2005, we completed negotiations with a group of banks on
a new revolving credit facility. Concurrent with the closing of this credit
facility, we terminated our previous $2 billion revolving line of credit that
was set to expire in August 2005. The new facility provides us access to a $975
million unsecured multi-currency revolving line of credit and expires in March
2010. The facility includes two financial covenants, including a leverage test
(debt to capital ratio) and an interest coverage ratio (calculated on the most
recent four quarters) and also includes restriction on the declaration of
dividends. As of December 31, 2005, we were in compliance with these covenants.
11. Debt (continued)
Debt Retirements
During the years ended December 31, 2005, 2004 and 2003, we retired a
significant portion of our outstanding notes and debentures as part of a debt
reduction program. The debt was retired through a combination of cash
repurchases and exchanges for Corning common stock. The following table
summarizes the activities related to our debt retirements (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Book Value of Cash Shares
Debentures Retired Paid Issued Gain (Loss)
------------------------------------------------------------------------------------------------------------------------------------
2005 activity:
Convertible debentures, 3.5%, due 2008 $ 297 $ 2 31
Euro notes, 5.625%, due 2005 189 189
Oak 4 7/8% Subordinated notes, due 2008 96 6
Debentures, 7% due 2007 88 100 $ (12)
Zero coupon convertible debentures, 2%, due 2015 277 277 (1) (4)
Other Loans payable 11 11
------------------------------------------------------------------------------------------------------------------------------------
Total 2005 activity $ 958 $ 579 37 $ (16)
------------------------------------------------------------------------------------------------------------------------------------
2004 activity:
Convertible debentures, 3.5%, due 2008 $ 368 $ 37 38 $ (36)
Zero coupon convertible debentures, 2%, due 2015 119 117
Other Loans payable 115 115
------------------------------------------------------------------------------------------------------------------------------------
Total 2004 activity $ 602 $ 269 38 $ (36)
------------------------------------------------------------------------------------------------------------------------------------
2003 activity:
Zero coupon convertible debentures, 2%, due 2015 $ 1,239 $ 1,121 6 $ 20
Euro notes, 5.625%, due 2005 67 68 (1)
Other Loans payable 181 181
------------------------------------------------------------------------------------------------------------------------------------
Total 2003 activity $ 1,487 $ 1,370 6 $ 19
------------------------------------------------------------------------------------------------------------------------------------
(1) The zero coupon convertible debentures cash payment includes $23 million of
interest.
Issuance of Long-Term Debt
In the second quarter of 2005, we issued $100 million of 6.05% senior unsecured
notes for net proceeds of approximately $99 million. The notes mature on June
15, 2015. We may redeem the debentures at any time. The $100 million debt
issuance, along with a common stock offering of 20 million shares for net
proceeds of approximately $323 million, were issued under our existing $5
billion universal shelf registration statement that became effective in March
2001. At December 31, 2005, our remaining capacity under the shelf registration
statement was approximately $2.1 billion.
In the first quarter of 2004, we issued $400 million of debentures, of which
$200 million aggregate principal amount of 5.90% notes mature on March 15, 2014
and $200 million aggregate principal amount of 6.20% notes mature on March 15,
2016. These debentures were issued under our existing $5 billion universal shelf
registration statement, which became effective in March 2001. We realized net
proceeds of approximately $396 million from the issuance of these debentures,
which was used to fund debt repurchases, capital expenditures and cost of
operations.
In 2004, Corning entered into a 10-year loan agreement with a Japanese bank to
fund certain capital expansion activities in Japan. An initial loan of
approximately $46 million, bearing interest at 2.6%, was received in 2004. A
final loan of approximately $48 million, bearing interest at 2.1%, was received
in January 2005. The loans will amortize equally from July 2006 through
maturity.
12. Employee Retirement Plans
Defined Benefit Plans
We have defined benefit pension plans covering certain domestic and
international employees. Our funding policy has been to contribute, as
necessary, an amount in excess of the minimum requirements in order to achieve
the company's long-term funding targets. In 2005, we issued and contributed 10
million shares of Corning common stock, with a value of approximately $199
million, to our domestic defined benefit plan. In 2004, we made a voluntary
incremental contribution of $52 million to our domestic and international
pension plans.
We use a December 31 measurement date for our domestic defined benefit plans.
The measurement dates for our foreign defined benefit pension plans are
September 30 and December 31.
12. Employee Retirement Plans (continued)
In 2000, we amended our U.S. pension plan to include a cash balance pension
feature. All salaried and non-union hourly employees hired before July 1, 2000
were given the choice of staying in the existing plan or participating in the
cash balance plan beginning January 1, 2001. Salaried employees hired after July
1, 2000 automatically became participants in the new cash balance plan. Under
the cash balance plan, employee accounts are credited monthly with a percentage
of eligible pay based on age and years of service. Benefits are 100% vested
after five years of service.
Corning and certain of its domestic subsidiaries also offer postretirement plans
that provide health care and life insurance benefits for retirees and eligible
dependents. Certain employees may become eligible for such postretirement
benefits upon reaching retirement age. Prior to January 1, 2003, our principal
retiree medical plans required retiree contributions each year equal to the
excess of medical cost increases over general inflation rates. In response to
rising health care costs, effective January 1, 2003, we changed our cost-sharing
approach for retiree medical coverage. For current retirees (including surviving
spouses) and active employees eligible for the salaried retiree medical program,
we are placing a "cap" on the amount we will contribute toward retiree medical
coverage in the future. The cap will equal 150% of our 2001 contributions toward
retiree medical benefits. Once our contributions toward salaried retiree medical
costs reach this cap, impacted retirees will have to pay the excess amount in
addition to their regular contributions for coverage.
Obligations and Funded Status
-----------------------------
The change in benefit obligation and funded status of our employee retirement plans follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
------------------------- -------------------------
December 31, 2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 2,365 $ 2,095 $ 767 $ 829
Service cost 46 42 10 8
Interest cost 132 132 44 46
Plan participants' contributions 2 2 5 4
Amendments 48
Curtailment gain (1) (4)
Special termination benefits 1
Actuarial losses (gains) 194 228 68 (49)
Benefits paid (155) (155) (68) (71)
Foreign currency translation (39) 24
------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 2,544 2,365 874 767
------------------------------------------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at beginning of year 1,978 1,839
Actual gain on plan assets 218 225
Employer contributions 217 52
Plan participants' contributions 2 2
Benefits paid (155) (155)
Foreign currency translation (22) 15
------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 2,238 1,978
------------------------------------------------------------------------------------------------------------------------------------
Unfunded status (306) (387) (874) (767)
Unrecognized transition asset (1) (1)
Unrecognized prior service cost (credit) 37 44 (19) (72)
Unrecognized actuarial loss 623 537 235 176
------------------------------------------------------------------------------------------------------------------------------------
Recognized asset (liability) $ 353 $ 193 $ (658) $ (663)
------------------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid benefit cost $ 456 $ 287
Accrued benefit liability (103) (94) $ (658) $ (663)
Additional minimum liability (56) (417)
Intangible asset 3 42
Accumulated other comprehensive loss 53 375
------------------------------------------------------------------------------------------------------------------------------------
Recognized asset (liability) $ 353 $ 193 $ (658) $ (663)
------------------------------------------------------------------------------------------------------------------------------------
The accumulated benefit obligation for defined benefit pension plans was $2.0
billion and $2.3 billion at December 31, 2005 and 2004, respectively.
12. Employee Retirement Plans (continued)
The following information is presented for pension plans where the projected
benefit obligation as of December 31, 2005 and 2004 exceeded the fair value of
plan assets (in millions):
--------------------------------------------------------------------------------
December 31,
-------------------------
2005 2004
--------------------------------------------------------------------------------
Projected benefit obligation $ 2,544 $ 2,365
Fair value of plan assets 2,238 1,978
--------------------------------------------------------------------------------
The following information is presented for pension plans where the accumulated
benefit obligation as of December 31, 2005 and 2004 exceeded the fair value of
plan assets (in millions):
--------------------------------------------------------------------------------
December 31,
-------------------------
2005 2004
--------------------------------------------------------------------------------
Accumulated benefit obligation $ 220 $ 2,076
Fair value of plan assets 7 1,798
--------------------------------------------------------------------------------
The components of net periodic benefit expense for our employee retirement plans
follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
--------------------------------- ---------------------------------
Years ended December 31, 2005 2004 2003 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 46 $ 42 $ 33 $ 10 $ 8 $ 9
Interest cost 132 132 126 43 46 48
Expected return on plan assets (154) (147) (146)
Amortization of net loss 29 21 9 9 7 5
Amortization of prior service cost (credit) 7 9 9 (4) (6) (6)
------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit expense 60 57 31 58 55 56
------------------------------------------------------------------------------------------------------------------------------------
Discontinued operation
Curtailment loss (gain) 1 (1) 9 (5)
Special termination benefits 1 1 15 10
------------------------------------------------------------------------------------------------------------------------------------
Total expense $ 62 $ 57 $ 55 $ 58 $ 55 $ 61
------------------------------------------------------------------------------------------------------------------------------------
Additional information on our pension plan follows (in millions):
--------------------------------------------------------------------------------
Pension Benefits
---------------------------
2005 2004
--------------------------------------------------------------------------------
(Decrease) increase in minimum liability
included in other comprehensive income
(loss), after tax $ (221) (1) $ 126 (1)
--------------------------------------------------------------------------------
(1) Includes $12 million after-tax increase in minimum liability included in
other comprehensive income related to an investment accounted for under the
equity method.
In 2005, Corning used a specific bond matching/spot rate yield curve model for
estimating the appropriate discount rate for pension and postretirement benefit
assumptions. This model develops a hypothetical yield curve and associated spot
rate curve to discount the plan's projected benefit payments and match payment
durations. Once the present value of projected benefit payments is calculated,
the suggested discount rate is equal to the level rate that results in the same
present value. The yield curve is based on actual high-quality corporate bonds
across the full maturity spectrum. The curve is developed from yields on
approximately 550-600 Moody's Aa-graded, non-callable bonds. The highest and
lowest 10th percentile yields are excluded from the curve in order to eliminate
outliers in the bond population. We believe such method provides a better
estimate of the pension and postretirement benefit discount rates.
Prior to 2005, Corning used a benchmark index technique to establish an
appropriate discount rate. The Moody's Aa Corporate Bond Index was the starting
point for previous years' discount rate assumptions. It was then adjusted upward
to restate the rate from a semi-annual coupon basis to an annual discount rate
basis. The composite duration of the cash flows for our benefits obligation was
comparable to the Moody's Aa benchmark. This method was consistently applied
since the adoption of FAS 87 in 1988 and FAS 106 in 2002.
12. Employee Retirement Plans (continued)
Measurement of postretirement benefit expense is based on assumptions used to
value the postretirement benefit obligation at the beginning of the year.
The weighted-average assumptions used to determine benefit obligations at
December 31 follow:
------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
------------------------------------------------------------- -------------------------------
Domestic International Domestic
---------------------------- ---------------------------- -------------------------------
2005 2004 2003 2005 2004 2003 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Discount rate 5.50% 5.75% 6.25% 4.52% 5.21% 5.29% 5.50% 5.75% 6.25%
Rate of compensation increase 4.50% 4.50% 4.50% 3.73% 3.58% 3.34% 4.50% 4.50% 4.50%
------------------------------------------------------------------------------------------------------------------------------------
The weighted-average assumptions used to determine net periodic benefit cost for
years ended December 31 follow:
------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
------------------------------------------------------------- -------------------------------
Domestic International Domestic
---------------------------- ---------------------------- -------------------------------
2005 2004 2003 2005 2004 2003 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Discount rate 5.75% 6.25% 6.75% 5.27% 5.33% 5.79% 5.75% 6.25% 6.75%
Expected return on plan assets 8.50% 8.50% 8.50% 7.22% 7.41% 7.95%
Rate of compensation increase 4.50% 4.50% 4.50% 3.42% 3.42% 3.89% 4.50% 4.50% 4.50%
------------------------------------------------------------------------------------------------------------------------------------
The expected rate of return on plan assets was determined based on the current
interest rate environment and historical market premiums relative to fixed
income rates of equity and other asset classes and adjusted for active
management of certain portions of the portfolio.
------------------------------------------------------------------------------------------------------------------------------------
Assumed Health Care Trend Rates at December 31 2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Health care cost trend rate assumed for next year 10% 9%
Rate that the cost trend rate gradually declines to 5% 5%
Year that the rate reaches the ultimate trend rate 2010 2009
------------------------------------------------------------------------------------------------------------------------------------
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects (in millions):
------------------------------------------------------------------------------------------------------------------------------------
One-Percentage-Point One-Percentage-Point
Increase Decrease
------------------------------------------------------------------------------------------------------------------------------------
Effect on annual total of service and interest cost $ 4.0 $ (3.3)
Effect on postretirement benefit obligation $ 47.5 $ (42.3)
------------------------------------------------------------------------------------------------------------------------------------
Medicare Prescription Drug, Improvement and Modernization Act of 2003
---------------------------------------------------------------------
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) was passed which expands Medicare to include an outpatient
prescription drug benefit beginning in 2006. In May 2004, the FASB issued Staff
Position (FSP) No. FAS 106-2, "Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (FSP
No. 106-1), which provides guidance on how companies should account for the
impact of the Act on its postretirement health care plans. To encourage
employers to retain or provide postretirement drug benefits, beginning in 2006
the federal government will provide non-taxable subsidy payments to employers
that sponsor prescription drug benefits to retirees that are "actuarially
equivalent" to the Medicare benefit. Corning has determined that its
postretirement health care plans' prescription drug benefits are actuarially
equivalent to Medicare Part D benefits to be provided under the Act. Effective
in the third quarter of 2004, Corning prospectively adopted the accounting
guidance of FSP No. 106-2, which reduced our postretirement health care and life
insurance plans' accumulated postretirement benefit obligation by $73 million
and the related annual expense by $10 million. For 2004, our postretirement
benefit expense decreased $5 million reflecting the adoption of this accounting
guidance.
12. Employee Retirement Plans (continued)
Plan Assets
-----------
The weighted-average asset allocation for domestic and international pension
plans at December 31, 2005 and December 31, 2004 by asset category were as
follows:
--------------------------------------------------------------------------------
Plan Assets
At December 31,
--------------------------
2005 2004
--------------------------------------------------------------------------------
Equity Securities 40% 50%
Fixed Income Securities 42% 35%
Real Estate 5% 7%
Other 13% 8%
------ -------
Total 100% 100%
--------------------------------------------------------------------------------
The total fair value of domestic plan assets at December 31, 2005 was $2,040
million and the expected long-term rate of return on these assets was 8.5%.
We have an investment policy for domestic and international pension plans with a
primary objective to adequately provide for both the growth and liquidity needed
to support all current and future benefit payment obligations. For domestic
plans, the investment strategy is to invest in a diversified portfolio of assets
which are expected to satisfy the above objective and produce both absolute and
risk adjusted returns competitive with a benchmark that for domestic plans is
60% Russell 3000 Index, 20% Lehman Long Government/Credit Index and 20% Lehman
Long Credit Index. For international plans, the investment strategy is the same
as for domestic plans and the benchmark is a composite of 50% equities and 50%
fixed income indexes. The strategy includes the following target asset
allocation:
--------------------------------------------------------------------------------
Domestic International
--------------------------------------------------------------------------------
Equity Securities 39% 48%
Fixed Income Securities 40% 49%
Real Estate 6%
Other 15% 3%
--------------------------------------------------------------------------------
Total 100% 100%
--------------------------------------------------------------------------------
A tactical allocation mandate, which is part of the overall investment strategy,
allows the actual domestic allocation in equity securities to be reduced by
maximum of 6% relative to the total based on market valuations.
Equity securities include Corning common stock in the amount of $11 million
(0.5% of total plan assets) and $7 million (0.4% of total plan assets) at
December 31, 2005 and 2004, respectively.
Cash Flow Data
--------------
We anticipate making voluntary contributions of approximately $35 million in
cash to our domestic and international pension plans in 2006.
The following reflects the gross benefit payments which are expected to be paid
for the domestic and international plans and the gross amount of annual Medicare
Part D federal subsidy expected to be received (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Expected Benefit Payments
------------------------------------------------- Expected Federal Subsidy Payments
Pension Benefits Postretirement Benefits Post Retirement Benefits
------------------------------------------------------------------------------------------------------------------------------------
2006 $ 153 $ 76 $ 6
2007 $ 150 $ 81 $ 7
2008 $ 149 $ 84 $ 8
2009 $ 147 $ 87 $ 8
2010 $ 148 $ 90 $ 9
Years 2011-2015 $ 781 $ 475 $ 49
------------------------------------------------------------------------------------------------------------------------------------
Other Benefit Plans
We offer defined contribution plans covering employees meeting certain
eligibility requirements. On January 1, 2003, we reduced our matching
contributions to the domestic Corning Incorporated Investment Plan by 2.5% of
pay for all salaried employees. This reduction was temporary, and we increased
our contributions to prior levels effective January 1, 2004. Total consolidated
defined contribution plan expense was $34 million, $28 million and $24 million
for the years ended December 31, 2005, 2004 and 2003, respectively.
13. Commitments, Contingencies, and Guarantees
Commitments, Contingencies and Guarantees
FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" (FIN 45), requires a company, at the time a guarantee is issued, to
recognize a liability for the fair value or market value of the obligation it
assumes. In the normal course of our business, we do not routinely provide
significant third-party guarantees. Generally, third-party guarantees provided
by Corning are limited to certain financial guarantees, including stand-by
letters of credit and performance bonds, and the incurrence of contingent
liabilities in the form of purchase price adjustments related to attainment of
milestones. These guarantees have various terms, and none of these guarantees
are individually significant.
Minimum rental commitments under leases outstanding at December 31, 2005 follow
(in millions):
--------------------------------------------------------------------------------
2006 2007 2008 2009 2010 2011 and thereafter
--------------------------------------------------------------------------------
$39 $51 $41 $19 $16 $62
--------------------------------------------------------------------------------
Total rental expense was $67 for 2005, $54 million for 2004 and $66 million for
2003.
The ability of certain subsidiaries and associated companies to transfer funds
is limited by provisions of foreign government regulations, affiliate agreements
and certain loan agreements. At December 31, 2005, the amount of equity subject
to such restrictions for consolidated subsidiaries totaled $208 million. While
this amount is legally restricted, it does not result in operational
difficulties since we have generally permitted subsidiaries to retain a majority
of equity to support their growth programs. In addition, we have provided other
financial guarantees and contingent liabilities in the form of stand-by letters
of credit and performance bonds. We have agreed to provide a credit facility
related to Dow Corning as discussed in Note 7 (Investments). The funding of the
Dow Corning credit facility will be required only if Dow Corning is not
otherwise able to meet its scheduled funding obligations in its confirmed
Bankruptcy Plan. The purchase obligations primarily represent raw material and
energy-related take-or-pay contracts. We believe a significant majority of these
guarantees and contingent liabilities will expire without being funded.
The amounts of our obligations follow (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Amount of commitment and contingency expiration per period
----------------------------------------------------------
Less than 1 to 2 2 to 3 3 to 4 5 years and
Total 1 year years years years thereafter
------------------------------------------------------------------------------------------------------------------------------------
Performance bonds and guarantees $ 112 $ 36 $ 2 $ 1 $ 73
Credit facilities for equity companies 165 $ 15 150
Stand-by letters of credit (1) 47 47
Loan guarantees 15 15
------------------------------------------------------------------------------------------------------------------------------------
Subtotal of commitment expirations per period $ 339 $ 83 $ 2 $ 1 $ 15 $ 238
------------------------------------------------------------------------------------------------------------------------------------
Purchase obligations 219 180 33 2 2 2
Capital expenditure obligations (2) 328 328
Total debt (3) 1,792 18 22 21 169 1,562
Minimum rental commitments 228 39 51 41 19 78
Interest on long-term debt (4) 1,185 110 109 109 104 753
------------------------------------------------------------------------------------------------------------------------------------
Subtotal of contractual obligation payments
due by period $ 3,752 $ 675 $ 215 $ 173 $ 294 $ 2,395
------------------------------------------------------------------------------------------------------------------------------------
Total commitments and contingencies $ 4,091 $ 758 $ 217 $ 174 $ 309 $ 2,633
------------------------------------------------------------------------------------------------------------------------------------
(1) At December 31, 2005, $34 million of the $47 million was included in other
accrued liabilities on our consolidated balance sheets.
(2) Capital expenditure obligations, primarily related to our Display
Technologies segment expansions, are included on our balance sheet.
(3) At December 31, 2005, $1,807 million was included on our balance sheet.
Amounts above are stated at their maturity value.
(4) The estimate of interest payments assumes interest is paid through the date
of maturity/expiration of the related debt, based upon stated rates in the
respective debt instruments.
Corning is a defendant in various lawsuits, including environmental,
product-related suits, the Dow Corning and PCC matters discussed in Note 7
(Investments), and is subject to various claims which arise in the normal course
of business. In the opinion of management, the likelihood that the ultimate
disposition of these matters will not have a material adverse effect on
Corning's consolidated financial position, liquidity or results of operations.
13. Commitments, Contingencies, and Guarantees (continued)
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 $13 million (undiscounted) for the estimated
liability for environmental cleanup and related litigation at December 31, 2005.
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.
14. Hedging Activities
We operate and conduct business in many foreign countries and as a result are
exposed to movements in foreign currency exchange rates. Our exposure to
exchange rate effects includes:
.. exchange rate movements on financial instruments and transactions
denominated in foreign currencies which impact earnings, and
.. exchange rate movements upon conversion of net assets in foreign
subsidiaries for which the functional currency is not the U.S. dollar,
which impact our net equity.
Our most significant foreign currency exposures relate to Japan, Korea, Taiwan
and western European countries. We selectively enter into foreign exchange
forward and option contracts with durations generally 15 months or less to hedge
our exposure to exchange rate risk on foreign source income and purchases. The
hedges are scheduled to mature coincident with the timing of the underlying
foreign currency commitments and transactions. The objective of these contracts
is to neutralize the impact of exchange rate movements on our operating results.
We engage in foreign currency hedging activities to reduce the risk that changes
in exchange rates will adversely affect the eventual net cash flows resulting
from the sale of products to foreign customers and purchases from foreign
suppliers. The hedge contracts reduce the exposure to fluctuations in exchange
rate movements because the gains and losses associated with foreign currency
balances and transactions are generally offset with gains and losses of the
hedge contracts. Because the impact of movements in foreign exchange rates on
the value of hedge contracts offsets the related impact on the underlying items
being hedged, these financial instruments help alleviate the risk that might
otherwise result from currency exchange rate fluctuations.
The following table summarizes the notional amounts and respective fair values
of Corning's derivative financial instruments, which mature at varying dates, at
December 31, 2005 (in millions):
--------------------------------------------------------------------------------
Notional Amount Fair Value
--------------------------------------------------------------------------------
Foreign exchange forward contracts $829 $11
Foreign exchange option contracts $374 $10
--------------------------------------------------------------------------------
The forward and option contracts we use in managing our foreign currency
exposures contain an element of risk in that the counterparties may be unable to
meet the terms of the agreements. However, we minimize this risk by limiting the
counterparties to a diverse group of highly-rated major domestic and
international financial institutions with which we have other financial
relationships. We are exposed to potential losses in the event of
non-performance by these counterparties; however, we do not expect to record any
losses as a result of counterparty default. We do not require and are not
required to place collateral for these financial instruments.
In the second quarter of 2005, Corning began using derivative instruments
(forwards) to limit the exposure to foreign currency fluctuations associated
with certain monetary assets and liabilities. These derivative instruments are
not designated as hedging instruments for accounting purposes and, as such, are
referred to as undesignated hedges. Changes in the fair value of undesignated
hedges are recorded in current period earnings in the other income, net
component, along with the foreign currency gains and losses arising from the
underlying monetary assets or liabilities, in the consolidated statement of
operations. At December 31, 2005, the notional amount of the undesignated
derivatives was $366 million.
Cash Flow Hedges
----------------
Corning has cash flow hedges that relate to foreign exchange forward and option
contracts. The critical terms of each cash flow hedge are identical to the
critical terms of the hedged item. Therefore, Corning utilizes the critical
terms test under SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), and the presumption is that there is no hedge
ineffectiveness as long as the critical terms of the hedge and the hedged item
do not change. During the life of each hedge, the critical terms of the hedge
and the hedged item did not change. We did not have any gain or loss from hedge
ineffectiveness. We did not exclude any components of a hedge's gain or loss
from the assessment of hedge effectiveness.
14. Hedging Activities (continued)
Corning defers net gains and losses from cash flow hedges into accumulated other
comprehensive income (loss) on the consolidated balance sheet, until such time
as the hedged item impacts earnings. At that time Corning reclassifies net gains
and losses from cash flow hedges into the same line item of the consolidated
statement of operations as where the effects of the hedged item are recorded,
typically sales or cost of sales. Amounts are reclassified from accumulated
other comprehensive income (loss) when the underlying hedged item impacts
earnings. At December 31, 2005, the amount of net gains expected to be
reclassified into earnings within the next 12 months is $22 million.
Fair Value Hedges
-----------------
In March and April of 2002, we entered into three interest rate swaps that are
fair value hedges and economically exchanged a notional amount of $275 million
of fixed rate long-term debt to floating rate debt. Under the terms of the swap
agreements, we paid the counterparty a floating rate that is indexed to the six
month LIBOR rate and received the fixed rates of 8.3% to 8.875%, which are the
stated interest rates on the long-term debt instruments. As a result of these
transactions, Corning was exposed to the impact of interest rate changes.
Each fair value hedge (swap) had identical terms to the critical terms of the
hedged item. Therefore, Corning utilized the short-cut method allowed under FAS
133 which presumes that there is no hedge ineffectiveness as long as the
critical terms of the hedge and the hedged item do not change. During the life
of each hedge, the critical terms of the hedge and the hedged item did not
change. We did not have any gain or loss from hedge ineffectiveness. We did not
exclude any components of a hedge's gain or loss from the assessment of hedge
ineffectiveness.
In 2004 and 2003, we terminated the interest rate swap agreements described
above. The termination of these swaps resulted in gains of $5 million in 2004
and $15 million in 2003 which we will amortize to earnings as a reduction of
interest expense over the remaining life of the debt. The cash proceeds from the
termination of the swaps total $8 million in 2004 and $17 million in 2003 and
are included in the financing section of our consolidated statement of cash
flows.
Corning records net gains and losses from fair value hedges into the same line
item of the consolidated statement of operations as where the effects of the
hedged item are recorded.
Net Investment in Foreign Operations
------------------------------------
We have issued foreign currency denominated debt that has been designated as a
hedge of the net investment in a foreign operation. The effective portion of the
changes in fair value of the debt is reflected as a component of other
accumulated comprehensive income (loss) as part of the foreign currency
translation adjustment. Net losses included in the cumulative translation
adjustment at December 31, 2005 and 2004, were $107 million and $166 million,
respectively.
15. Shareholders' Equity
The following table presents changes in capital stock for the period from
January 1, 2003 to December 31, 2005 (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Series C Preferred Stock Common Stock Treasury Stock
------------------------------------------------------------------------------------------------------------------------------------
Shares Par Value Shares Par Value Shares Cost
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 2 $ 155 1,267 $ 634 (70) $ (702)
Shares issued in equity offerings 95 47
Conversion of preferred stock (1) (70) 35 18
Shares issued to benefit plans 6 65
Shares issued in debt retirement 6 65
Other 4 2 (2)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 1 $ 85 1,401 $ 701 (58) $ (574)
------------------------------------------------------------------------------------------------------------------------------------
Conversion of preferred stock (21) 11 5
Shares issued to benefit plans 4 36
Shares issued in debt retirement 38 379
Other 12 6 (3)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 1 $ 64 1,424 $ 712 (16) $ (162)
------------------------------------------------------------------------------------------------------------------------------------
Shares issued in equity offerings 20 10
Conversion of preferred stock (1) (64) 32 16
Shares issued to benefit plans 39 20 1
Shares issued in debt retirement 37 18
Other (7)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 1,552 $ 776 (16) $ (168)
------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock
We have designated 2.4 million shares as Series A Junior Participating Preferred
Stock for which no shares have been issued. In June 1996, the Board of Directors
approved the renewal of the Preferred Share Purchase Right Plan, which entitles
shareholders to purchase 0.01 of a share of Series A Junior Participating
Preferred Stock upon the occurrence of certain events. In addition, the rights
entitle shareholders to purchase shares of common stock at a 50% discount in the
event a person or group acquires 20% or more of our outstanding common stock.
The preferred share purchase rights became effective July 15, 1996 and expire
July 15, 2006.
On the mandatory conversion date of August 16, 2005, the remaining shares of our
7.00% Series C Mandatory Convertible Preferred Stock were converted into Corning
common stock at a conversion rate of 50.813 shares of common stock for each
preferred share. Upon conversion of the preferred shares, we issued 31 million
shares of Corning common stock resulting in an increase to equity of $62
million. The Series C mandatory convertible preferred stock had a liquidation
preference of $100 per share, plus accrued and unpaid dividends.
15. Shareholders' Equity (continued)
Accumulated Other Comprehensive Income (Loss)
Components of accumulated other comprehensive income (loss) follow (in
millions):
------------------------------------------------------------------------------------------------------------------------------------
Net
Net unrealized
Foreign Minimum unrealized gains Accumulated
currency pension gains (losses) on other
translation liability (losses) on cash flow comprehensive
adjustment adjustment investments hedges (loss) income
------------------------------------------------------------------------------------------------------------------------------------
December 31, 2002 $ 9 $ (173) $ 2 $ (8) $ (170)
Foreign currency translation adjustment (net of
tax of $38 million) 239 239
Minimum pension liability adjustment (net of
tax of $(18) million) (1) 26 26
Net unrealized gain on investments
(net of tax of $3 million) 1 1
Unrealized derivative loss on cash flow hedges
(net of tax of $4 million) (30) (30)
Reclassification adjustments on cash flow hedges
(net of tax of $4 million) 32 32
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 248 $ (147) $ 3 $ (6) $ 98
------------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment (2) 174 174
Minimum pension liability adjustment (1)(2) (126) (126)
Net unrealized gain on investments (2) 8 8
Unrealized derivative loss on cash flow hedges (2) (19) (19)
Reclassification adjustments on cash flow hedges (2) 13 13
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 $ 422 $ (273) $ 11 $ (12) $ 148
------------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment (2) (248) (248)
Minimum pension liability adjustment (1)(3) 246 246
Net unrealized loss on investments (4) (13) (13)
Unrealized derivative gain on cash flow hedges (2) 23 23
Reclassification adjustments on cash flow hedges (2) 21 21
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 $ 174 $ (27) $ (2) $ 32 $ 177
------------------------------------------------------------------------------------------------------------------------------------
(1) Includes adjustments from Dow Corning.
(2) Zero tax effect for 2004 and 2005. Refer to Note 6 (Income Taxes) for an
explanation of Corning's tax paying position.
(3) Net of tax effect of $84 million in 2005.
(4) Net of tax effect of $2 million in 2005.
16. Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing income (loss)
attributable to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings (loss) per common share
assumes the issuance of common shares for all potentially dilutive securities
outstanding. Since we reported a loss from continuing operations in 2004 and
2003, the diluted loss per common share is the same as the basic loss per common
share, as any potentially dilutive securities would reduce the loss per common
share from continuing operations.
The reconciliation of the amounts used to compute basic and diluted loss per
common share from continuing operations follows (in millions, except per share
amounts):
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------ ------------------------------ ----------------------------
Weighted- Per Weighted- Per Weighted- Per
Average Share Average Share Average Share
Income Shares Amount Loss Shares Amount Loss Shares Amount
------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss)
per common share $ 585 1,464 $0.40 $ (2,185) 1,386 $(1.57) $(223) 1,274 $(0.18)
Effect of dilutive securities:
Stock compensation awards 41
7% mandatory convertible
preferred stock (1) 20
3.5% convertible debentures 3 10
------------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss)
Per Common Share $ 588 1,535 $0.38 $ (2,185) 1,386 $(1.57) $(223) 1,274 $(0.18)
------------------------------------------------------------------------------------------------------------------------------------
(1) On the mandatory conversion date of August 16, 2005, the remaining shares
of our 7.00% Series C Mandatory Convertible Preferred Stock were converted
into Corning common stock at a conversion rate of 50.813 shares of common
stock for each preferred share. Upon conversion of the preferred shares, we
issued 31 million shares of Corning common stock resulting in an increase
to equity of $62 million.
The following potential common shares were excluded from the calculation of
diluted loss per common share due to their anti-dilutive effect or, in the case
of stock options, because their exercise price was greater than the average
market price for the periods presented (in millions):
--------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
Potential common shares excluded from the
calculation of diluted loss per share:
Stock options 34 19
7% mandatory convertible preferred
stock (1) 36 65
3.5% convertible debentures 41 69
4.875% convertible notes (2) 4 6 6
Zero coupon convertible debentures 2 3 10
--------------------------------------------------------------------------------
Total 6 120 169
--------------------------------------------------------------------------------
Stock options excluded from the calculation of
diluted loss per share because the
exercise price was greater than the
average market price of the common shares 47 59 76
--------------------------------------------------------------------------------
(1) On the mandatory conversion date of August 16, 2005, the remaining shares
of our 7.00% Series C Mandatory Convertible Preferred Stock were converted
into Corning common stock at a conversion rate of 50.813 shares of common
stock for each preferred share. Upon conversion of the preferred shares, we
issued 31 million shares of Corning common stock resulting in an increase
to equity of $62 million.
(2) In the third quarter of 2005, substantially all holders of our $96 million
outstanding Oak 4 7/8% subordinated notes elected to convert their notes
into Corning common stock. The conversion ratio was 64.41381 shares of
Corning common stock for each $1,000 principal amount of notes. Upon the
conversion of these notes, we issued 6 million shares of Corning common
stock resulting in an increase to equity of $95 million.
17. Stock Compensation Plans
At December 31, 2005, our stock compensation programs are in accordance with the
2005 Employee Equity Participation Program and 2003 Equity Plan for Non-Employee
Directors Program. Any ungranted shares from prior years will be available for
grant in the current year. At December 31, 2005, 111 million shares are
available under these programs for 2006. Any remaining shares available for
grant, but not yet granted, will be carried over and used in the following year.
Stock Option Plans
Our stock option plans provide non-qualified and incentive stock options to
purchase authorized but unissued or treasury shares at the market price on the
grant date and generally become exercisable in installments from one to five
years from the grant date. The maximum term of non-qualified and incentive stock
options is 10 years from the grant date.
Changes in the status of outstanding options follow:
--------------------------------------------------------------------------------
Number Weighted-
of Shares Average
(in thousands) Exercise Price
--------------------------------------------------------------------------------
Options outstanding January 1, 2003 97,327 $ 26.47
Options granted under plans 40,953 $ 5.85
Options exercised (1,547) $ 6.75
Options terminated (1,381) $ 16.26
--------------------------------------------------------------------------------
Options outstanding December 31, 2003 135,352 $ 20.58
--------------------------------------------------------------------------------
Options granted under plans 13,625 $ 11.98
Options exercised (8,401) $ 6.15
Options terminated (1,553) $ 27.49
--------------------------------------------------------------------------------
Options outstanding December 31, 2004 139,023 $ 20.43
--------------------------------------------------------------------------------
Options granted under plans 10,141 $ 14.87
Options exercised (24,360) $ 8.72
Options terminated (4,300) $ 39.23
--------------------------------------------------------------------------------
Options outstanding December 31, 2005 120,504 $ 21.67
Options exercisable at December 31, 2005 97,015 $ 24.55
--------------------------------------------------------------------------------
Options exercisable at December 31, 2004 108,126 $ 24.22
Options exercisable at December 31, 2003 72,867 $ 27.47
--------------------------------------------------------------------------------
The weighted-average fair value of options granted was $6.18 in 2005, $4.99 in
2004 and $3.82 in 2003.
The following table summarizes information about our stock option plans at
December 31, 2005:
------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------------------------------------------
Number Weighted-Average Number
Outstanding at Remaining Weighted- Exercisable at Weighted-
Range of December 31, 2005 Contractual Life Average December 31, 2005 Average
Exercise Prices (in thousands) in Years Exercise Price (in thousands) Exercise Price
------------------------------------------------------------------------------------------------------------------------------------
$ 1.54 to 3.80 11,761 5.4 $ 3.28 4,157 $ 2.36
$ 4.06 to 6.93 15,775 7.0 $ 4.79 13,674 $ 4.85
$ 7.08 to 9.95 24,049 6.1 $ 8.44 23,846 $ 8.45
$ 10.05 to 15.87 27,255 7.7 $ 12.66 16,521 $ 13.02
$ 16.02 to 29.58 14,087 6.1 $ 20.20 11,275 $ 20.06
$ 30.01 to 59.35 11,518 4.7 $ 46.86 11,483 $ 46.86
$ 60.24 to 74.09 15,566 4.6 $ 69.31 15,566 $ 69.31
$76.03 to 111.00 493 4.7 $ 92.23 493 $ 92.23
------------------------------------------------------------------------------------------------------------------------------------
120,504 6.3 $ 21.67 97,015 $ 24.55
------------------------------------------------------------------------------------------------------------------------------------
17. Stock Compensation Plans (continued)
Incentive Stock Plans
The Corning Incentive Stock Plan permits stock grants, either determined by
specific performance goals or issued directly, in most instances, subject to the
possibility of forfeiture and without cash consideration. Shares under the
Incentive Stock Plan are generally granted at-the-money, contingently vest over
a period of [1 to 5] years, and have contractual lives of [7 to 10] years.
In 2005, 2004 and 2003, grants of 2,726,000 shares, 3,051,000 shares and
1,842,000 shares, respectively, were made under this plan. The weighted-average
price of the grants was $17.70 in 2005, $12.57 in 2004 and $10.61 in 2003,
respectively. A total of 7.6 million shares issued remained subject to
forfeiture at December 31, 2005.
We apply APB 25 accounting for our stock-based compensation plans. Compensation
expense is recorded for awards of shares or share rights over the period earned.
Compensation expense of $37 million, $5 million and $1 million, net of tax, was
recorded in 2005, 2004 and 2003, respectively.
SFAS 123 requires that reload options be treated as separate grants from the
related original option grants. Under our reload program, upon exercise of an
option, employees may tender unrestricted shares owned at the time of exercise
to pay the exercise price and related tax withholding, and receive a reload
option covering the same number of shares tendered for such purposes at the
market price on the date of exercise. The reload options vest in one year and
are only granted in certain circumstances according to the original terms of the
option being exercised. The existence of the reload feature results in a greater
number of options being measured.
For purposes of SFAS 123 disclosure, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
through November 30, 2005. For options granted after that time, the fair value
is estimated using a lattice-based option valuation model.
The following are weighted-average inputs for the Black-Scholes option-pricing
model used for grants under our stock plans through November 2005 and in 2004,
and 2003, respectively:
--------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
Expected life in years 4 4 5
Risk free interest rate 3.8% 3.4% 2.9%
Expected volatility 50% 50% 79%
--------------------------------------------------------------------------------
During 2004, Corning updated its analysis of the historical stock exercise
behavior of its employees, among other relevant factors, and determined that the
best estimate of the stock options' expected term granted in 2004 was 4 years,
compared to our previous expected term estimate of 5 years. Additionally,
Corning used a 10-year mean reversion analysis, as allowed by SFAS 123, to
determine the volatility assumption also used to estimate the fair value of
options granted in 2004. Prior to 2004, Corning used historical trailing
volatility for a period equal to the expected term of our stock options. Corning
believes a mean reversion analysis provides a better estimate of future
volatility expectations.
The lattice-based valuation model, used to estimate the fair values of option
and restricted stock grants after November 30, 2005, incorporates the
assumptions (including ranges of assumptions) noted in the table below. Expected
volatilities are based on implied volatilities from traded options on Corning's
stock, historical volatility of Corning's stock, and other factors.
In estimating option grant fair value under the lattice based model, Corning
uses historical data to estimate future option exercise and employee termination
within the valuation model and separate groups of employees that have similar
historical exercise behavior are considered separately for valuation purposes.
The expected term of options granted is derived using a regression model and
represents the period of time that options granted are expected to be
outstanding. The range given below results from certain groups of employees
exhibiting different behavior. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
17. Stock Compensation Plans (continued)
The following inputs for the lattice-based valuation model were used for option
grants under our Stock Option Plans since December 1, 2005:
--------------------------------------------------------------------------------
2005
--------------------------------------------------------------------------------
Expected volatility 37-53%
Weighted-average volatility 49%
Expected dividends 0
Expected term (in years) 3.7-4.9
Risk-free rate 1.0-9.7%
Expected time to exercise (in years) 2.5-3.6
Pre-vesting departure rate 3%
Post vesting departure rates 10-16%
--------------------------------------------------------------------------------
The fair value of each restricted stock grant under the Incentive Stock Plans
after November 30, 2005 was estimated on the date of grant using the lattice
valuation model and for performance based grants assumes that performance goals
will be achieved. The assumptions for annual departure probability used in
estimating Incentive Stock grant fair values are the same as those noted in the
table above related to grants under our Stock Option Plans, for stock issued
since December 1, 2005. The expected term for grants under the Incentive Stock
Plans is 1 to 10 years.
Worldwide Employee Share Purchase Plan
In addition to the Stock Option Plan and Incentive Stock Plans, we have a
Worldwide Employee Share Purchase Plan (WESPP). Under the WESPP, substantially
all employees can elect to have up to 10% of their annual wages withheld to
purchase our common stock. The purchase price of the stock is 85% of the lower
of the beginning-of-quarter or end-of-quarter closing market price.
18. Operating Segments
Corning conducts its worldwide operations through operating segments, which are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to allocate resources
and in assessing performance. Our Chief Operating Decision Making group (CODM)
is comprised of the president and chief executive officer, vice chairman and
chief financial officer, chief operating officer, executive vice president-chief
administrative officer, executive vice president-chief technology officer, and
senior vice president and operations chief of staff.
Our reportable operating segments follow:
.. Display Technologies - manufactures liquid crystal display glass for flat
panel displays;
.. Telecommunications - manufactures optical fiber and cable and hardware and
equipment components for the telecommunications industry;
.. Environmental Technologies - manufactures ceramic substrates and filters
for automobile and diesel applications; and
.. Life Sciences - manufactures glass and plastic consumables for scientific
applications.
The Environmental Technologies reportable segment is an aggregation of our
Automotive and Diesel operating segments, as these two segments share similar
economic characteristics, products, customer types, production processes and
distribution methods.
All other operating segments that do not meet the quantitative threshold for
separate reporting (e.g., Specialty Materials, Ophthalmic and Conventional Video
Components), certain corporate investments (e.g. Dow Corning and Steuben),
discontinued operations, and unallocated expenses (including other corporate
items) have been grouped as "Unallocated and Other." Unallocated expenses
include: gains or losses on repurchases and retirement of debt; charges related
to the asbestos litigation; restructuring and impairment charges related to the
corporate research and development or staff organizations; and charges for
increases in our tax valuation allowance. Unallocated and Other also represents
the reconciliation between the totals for the reportable segments and our
consolidated operating results.
We prepared the financial results for our reportable 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
reportable segments are the same as those applied in the consolidated financial
statements. Revenue attributed to geographic areas is based on the location of
the customer.
Geographic Concentration
A significant amount of specialized manufacturing capacity for our Display
Technologies segment is concentrated in Asia. It is at least reasonably possible
that the use of a facility located outside of an entity's home country could be
disrupted. Due to the specialized nature of the assets, it would not be possible
to find replacement capacity quickly. Accordingly, loss of the facility could
produce a near-term severe impact to our display business and the company as a
whole.
18. Operating Segments (continued)
------------------------------------------------------------------------------------------------------------------------------------
Display Telecom- Environmental Life Unallocated Consolidated
Technologies munications Technologies Sciences and Other Total
------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2005
Net sales $ 1,742 $ 1,623 $ 580 $ 282 $ 352 $ 4,579
Depreciation (1) $ 186 $ 172 $ 72 $ 21 $ 48 $ 499
Amortization of purchased intangibles $ 13 $ 13
Research, development and engineering expenses (2) $ 121 $ 96 $ 114 $ 53 $ 59 $ 443
Restructuring, impairment and other charges and
(credits) (8) $ (47) $ 9 $ (38)
Interest expense (3) $ 55 $ 30 $ 20 $ 4 $ 7 $ 116
(Provision) benefit for income taxes (9) $ (151) $ 4 $ 7 $ 6 $ (444) $ (578)
Income (loss) before minority interests and equity
(losses) earnings (4) $ 679 $ 29 $ (26) $ (25) $ (663) $ (6)
Minority interests (5) 2 (9) (7)
Equity in earnings of associated companies,
net of impairments (6) 416 5 177 598
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,095 $ 36 $ (26) $ (25) $ (495) $ 585
------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 860 $ 11 $ 31 $ 791 $ 1,693
Segment assets (7) $ 3,626 $ 1,153 $ 726 $ 137 $ 5,533 $ 11,175
Capital expenditures $ 1,250 $ 43 $ 171 $ 17 $ 72 $ 1,553
------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2004
Net sales $ 1,113 $ 1,539 $ 548 $ 304 $ 350 $ 3,854
Depreciation (1) $ 131 $ 204 $ 65 $ 22 $ 63 $ 485
Amortization of purchased intangibles $ 37 $ 1 $ 38
Research, development and engineering expenses (2) $ 83 $ 90 $ 87 $ 38 $ 57 $ 355
Restructuring, impairment and other charges and (credits) $ 1,798 $ (9) $ 1,789
Interest expense (3) $ 52 $ 50 $ 22 $ 5 $ 12 $ 141
(Provision) benefit for income taxes $ (146) $ 29 $ (6) $ (908) $ (1,031)
Income (loss) before minority interests and equity
(losses) earnings (4) $ 258 $(1,862) $ 3 $ 12 $ (1,022) $ (2,611)
Minority interests (5) 2 (19) (17)
Equity in earnings of associated companies,
net of impairments (6) 288 (33) 1 187 443
Income from discontinued operations 20 20
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 546 $(1,893) $ 4 $ 12 $ (834) $ (2,165)
------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 582 $ 23 $ 31 $ 787 $ 1,423
Segment assets (7) $ 2,470 $ 1,341 $ 587 $ 123 $ 5,189 $ 9,710
Capital expenditures $ 640 $ 32 $ 124 $ 11 $ 50 $ 857
------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2003
Net sales $ 595 $ 1,426 $ 476 $ 281 $ 312 $ 3,090
Depreciation (1) $ 110 $ 246 $ 80 $ 38 $ 6 $ 480
Amortization of purchased intangibles $ 37 $ 37
Research, development and engineering expenses (2) $ 55 $ 120 $ 87 $ 28 $ 54 $ 344
Restructuring, impairment and other charges and (credits) $ (36) $ 147 $ 111
Interest expense (3) $ 39 $ 75 $ 19 $ 5 $ 16 $ 154
(Provision) benefit for income taxes $ (45) $ 78 $ (5) $ (7) $ 233 $ 254
Income (loss) before minority interests and equity
(losses) earnings (4) $ 91 $ (158) $ 9 $ 14 $ (461) $ (505)
Minority interests (5) 73 73
Equity in earnings of associated companies,
net of impairments (6) 144 (11) 76 209
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 235 $ (169) $ 9 $ 14 $ (312) $ (223)
------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 299 $ 59 $ 30 $ 590 $ 978
Segment assets (7) $ 1,297 $ 1,848 $ 485 $ 111 $ 7,011 $ 10,752
Capital expenditures $ 251 $ 15 $ 69 $ 7 $ 24 $ 366
------------------------------------------------------------------------------------------------------------------------------------
18. Operating Segments (continued)
(1) Depreciation expense for Corning's reportable segments includes an
allocation of depreciation of corporate property not specifically
identifiable to a segment. Related depreciable assets are not allocated to
segment assets.
(2) Non-direct research, development and engineering expenses are allocated to
segments based upon direct project spending for each segment.
(3) Interest expense is allocated to segments based on a percentage of segment
net operating assets.
(4) Many of Corning's administrative and staff functions are performed on a
centralized basis. Where practicable, Corning charges these expenses to
segments based upon the extent to which each business uses a centralized
function. Other staff functions, such as corporate finance, human resources
and legal are allocated to segments, primarily as a percentage of sales.
(5) Minority interests include the following restructuring, impairment and
other charges and (credits):
. In 2004, gains from the sale of assets of Corning Asahi Video (CAV) in
excess of assumed salvage value of $17 million, and reversals of CAV
severance reserves of $2 million.
. In 2003, impairment charges for long-lived assets of CAV and exit
costs of $57 million.
(6) Equity in earnings of associated companies, net of impairments includes the
following restructuring and impairment charges:
. In 2004 and 2003, charges of $35 million and $7 million, respectively,
to impair equity method investments in the Telecommunications segment
to their estimated fair value.
. In 2004, Dow Corning Corporation recorded charges related to
restructuring actions and adjustments to interest liabilities recorded
on its emergence from bankruptcy. Our equity earnings included $21
million related to these charges.
. In 2005 and 2003, charges of $106 million and $66 million,
respectively, to reflect our share of Samsung Corning Co., Ltd.'s
asset impairment charges.
(7) Segment assets include inventory, accounts receivable, property and
associated equity companies and cost investments.
(8) Restructuring, impairment and other charges and (credits) includes: in
2005, an impairment charge of $25 million for the other-than-temporary
decline in our investment in Avanex below its cost basis; a loss of $16
million associated with the redemption or retirement of debt.
(9) (Provision) benefit for income taxes includes, in 2005, a net $443 million
charge to tax expense which included a $525 million increase to our
valuation allowance against deferred tax assets resulting from our
conclusion that the sale of an appreciated asset no longer met the criteria
established by SFAS No. 109, "Accounting for Income Taxes" (SFAS No. 109)
for a viable tax planning strategy offset by an $82 million credit to tax
expense primarily related to the tax impact of eliminating the minimum
pension liability associated with our domestic defined benefit plan.
Each of our reportable segments is concentrated across a relatively small number
of customers. For the year ended December 31, 2005, five customers of the
Display Technologies segment, each of which accounted for more than 10% of
segment net sales, accounted for 75% of total segment sales. In the
Telecommunications segment, two customers, each of which accounted for more than
10% of this segment's net sales, accounted for 29% of total segment sales in
2005. In the Environmental Technologies segment, three customers, each of which
accounted for more than 10% of segment sales, represented 76% of total segment
sales in 2005. In the Life Sciences segment, one customer accounted for 53% of
this segment's sales for 2005.
A reconciliation of reportable segment net income (loss) to consolidated net
income (loss) follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) of reportable segments $ 1,080 $ (1,331) $ 89
Non-reportable operating segments net (loss) income (1) (100) 16 (139)
Unallocated amounts:
Non-segment loss and other (2) (21) (13) (51)
Non-segment restructuring, impairment and
other (charges) and credits (25) 4 (13)
Asbestos settlement (197) (33) (413)
Interest income 61 25 32
(Loss) gain on repurchases of debt (16) (36) 19
(Provision) benefit for income taxes (3) (451) (933) 170
Minority interests
Equity in earnings of associated companies, net of impairments (4) 254 116 83
Income from discontinued operations 20
-------- --------- --------
Net income (loss) $ 585 $ (2,165) $ (223)
------------------------------------------------------------------------------------------------------------------------------------
(1) Non-reportable operating segments net (loss) income includes the results of
non-reportable operating segments.
(2) Non-segment loss and other includes the results of non-segment operations
and other corporate activities.
(3) (Provision) benefit for income taxes includes taxes associated with
non-segment restructuring, impairment and other charges (credits) as well
as $525 million and $937 million for the impact of establishing a valuation
allowance against certain deferred tax assets in 2005 and 2004,
respectively, and offset by an $82 million benefit primarily for the impact
of eliminating the minimum pension liability of our domestic qualified plan
in 2005.
(4) Equity in earnings of associated companies, net of impairments includes
amounts derived from corporate investments, primarily Dow Corning
Corporation.
The following table provides net sales for the Telecommunications segment (in
millions):
--------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
Net sales:
Optical fiber and cable $ 834 $ 755 $ 760
Hardware and equipment 789 784 612
Photonic technologies 54
-------- --------- --------
Total net sales $ 1,623 $ 1,539 $ 1,426
--------------------------------------------------------------------------------
18. Operating Segments (continued)
The following table provides net sales for the Environmental Technologies
segment (in millions):
--------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
Net sales:
Automotive $ 482 $ 479 $ 430
Diesel 98 69 46
-------- --------- --------
Total net sales $ 580 $ 548 $ 476
--------------------------------------------------------------------------------
The following table provides net sales for the Unallocated and Other segment (in
millions):
--------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
Net sales:
Conventional video components $ 3 $ 65
Other businesses $ 352 347 247
-------- --------- --------
Total net sales $ 352 $ 350 $ 312
--------------------------------------------------------------------------------
A reconciliation of reportable segment assets to consolidated assets follows (in
millions):
--------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
Total assets of reportable segments $ 5,642 $ 4,521 $ 3,732
Non-reportable operating segments assets 772 724 682
Unallocated amounts:
Current assets (1) 2,682 2,169 1,698
Investments (2) 300 407 274
Property, net (3) 836 886 973
Other non-current assets (4) 943 1,003 3,393
-------- --------- --------
Total assets $ 11,175 $ 9,710 $ 10,752
--------------------------------------------------------------------------------
(1) Includes current corporate assets, primarily cash, short-term investments
and deferred taxes.
(2) Represents corporate investments in associated companies, at both cost and
equity (primarily Dow Corning Corporation).
(3) Represents corporate property not specifically identifiable to an operating
segment.
(4) Includes non-current corporate assets, pension assets and deferred taxes.
18. Operating Segments (continued)
Information concerning principal geographic areas was as follows (in millions):
------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Net Long-lived Net Long-lived Net Long-lived
Sales Assets (1) Sales Assets (1) Sales Assets (1)
------------------------------------------------------------------------------------------------------------------------------------
North America
United States $ 1,339 $ 3,400 $ 1,337 $ 2,982 $ 1,222 $ 4,435
Canada 107 120 88 70
Mexico 56 114 43 23 65 72
------------------------------------------------------------------------------------------------------------------------------------
Total North America 1,502 3,514 1,500 3,005 1,375 4,577
------------------------------------------------------------------------------------------------------------------------------------
Asia Pacific
Japan 688 541 540 511 382 349
Taiwan 1,230 1,696 705 985 322 231
China 144 74 101 73 134 191
Korea 53 1,092 60 938 55 620
Other 155 3 174 8 150 22
------------------------------------------------------------------------------------------------------------------------------------
Total Asia Pacific 2,270 3,406 1,580 2,515 1,043 1,413
------------------------------------------------------------------------------------------------------------------------------------
Europe
Germany 261 159 274 212 198 295
France 43 105 40 124 42 133
United Kingdom 81 69 65 80 74 67
Italy 30 38 36 268
Other 265 36 236 32 194 77
------------------------------------------------------------------------------------------------------------------------------------
Total Europe 680 369 653 448 544 840
------------------------------------------------------------------------------------------------------------------------------------
Latin America
Brazil 19 3 19 3 17 2
Other 16 12 11 1
------------------------------------------------------------------------------------------------------------------------------------
Total Latin America 35 3 31 3 28 3
------------------------------------------------------------------------------------------------------------------------------------
All Other 92 13 90 18 100
------------------------------------------------------------------------------------------------------------------------------------
Total $ 4,579 $ 7,305 $ 3,854 $ 5,989 $ 3,090 $ 6,833
------------------------------------------------------------------------------------------------------------------------------------
(1) Long-lived assets primarily include investments, plant and equipment,
goodwill and other intangible assets.
19. Subsequent Events
On January 1, 2006, Corning changed its measurement of segment profit or loss
for the following items:
.. We removed the net impact of financing costs, such as interest expense on
debt instruments and interest costs associated with benefit plans, from
reportable segments and included these amounts in Corporate unallocated
expense.
.. We changed the allocation method for taxes to more closely reflect the
company's current tax position.
.. We removed the impact of non-cash stock compensation expense from
reportable segments and included this amount in Corporate unallocated
expense.
.. We removed the allocation of exploratory research, development and
engineering expense from the reportable segments and included these amounts
in Corporate unallocated expense.
.. We changed certain other expense allocation methods for Corporate
functions.
The following provides historical segment information reflecting these changes
in the measurement of segment profit or loss for 2005, 2004 and 2003 and
quarterly information for 2005.
Our reportable operating segments follow:
.. Display Technologies - manufactures liquid crystal display glass for flat
panel displays;
.. Telecommunications - manufactures optical fiber and cable and hardware and
equipment components for the telecommunications industry;
.. Environmental Technologies - manufactures ceramic substrates and filters
for automobile and diesel applications; and
.. Life Sciences - manufactures glass and plastic consumables for scientific
applications.
The Environmental Technologies reportable segment is an aggregation of our
Automotive and Diesel operating segments, as these two segments share similar
economic characteristics, products, customer types, production processes and
distribution methods.
All other operating segments that do not meet the quantitative threshold for
separate reporting have been grouped as "Other Segments."
19. Subsequent Events (continued)
Restated Segment Information (in millions)
------------------------------------------------------------------------------------------------------------------------------------
Display Telecom- Environmental Life Other
Technologies munications Technologies Sciences Segments Total
------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2005
Net sales $ 1,742 $ 1,623 $ 580 $ 282 $ 352 $ 4,579
Depreciation (1) $ 185 $ 180 $ 70 $ 20 $ 35 $ 490
Amortization of purchased intangibles $ 13 $ 13
Research, development and engineering expenses (2) $ 107 $ 76 $ 102 $ 40 $ 28 $ 353
Restructuring, impairment and other charges and
(credits) (before-tax and minority interest) $ (47) $ (16) $ (63)
Income tax provision $ (122) $ (15) $ (5) $ (2) $ (3) $ (147)
Earnings (loss) before minority interest and equity
earnings (loss) (3) $ 823 $ 61 $ 15 $ (4) $ 19 $ 914
Minority interests (4) $ 2 $ (9) $ (7)
Equity in earnings (loss) of associated companies (5) $ 416 $ 5 $ (76) $ 345
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,239 $ 68 $ 15 $ (4) $ (66) $ 1,252
------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 860 $ 11 $ 31 $ 296 $ 1,198
Segment assets (6) $ 3,626 $ 1,153 $ 726 $ 137 $ 573 $ 6,215
Capital expenditures $ 1,250 $ 43 $ 171 $ 17 $ 25 $ 1,506
------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2004
Net sales $ 1,113 $ 1,539 $ 548 $ 304 $ 350 $ 3,854
Depreciation (1) $ 129 $ 209 $ 63 $ 20 $ 51 $ 472
Amortization of purchased intangibles $ 37 $ 37
Research, development and engineering expenses (2) $ 70 $ 69 $ 76 $ 27 $ 32 $ 274
Restructuring, impairment and other charges and
(credits) (before-tax and minority interest) $ 1,798 $ (6) $ 1,792
Income tax (provision) benefit $ (71) $ (25) $ (40) $ (30) $ 12 $ (154)
Earnings (loss) before minority interest and equity
earnings (loss) (3) $ 429 $(1,843) $ 20 $ 16 $ (23) $ (1,401)
Minority interests (4) $ 2 $ (18) $ (16)
Equity in earnings (loss) of associated companies (5) $ 288 $ (33) $ 1 $ 72 $ 328
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 717 $(1,874) $ 21 $ 16 $ 30 $ (1,090)
Discontinued operations $ 20 $ 20
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 717 $(1,874) $ 21 $ 16 $ 50 $ (1,070)
------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 582 $ 23 $ 31 $ 441 $ 1,077
Segment assets (6) $ 2,470 $ 1,341 $ 587 $ 123 $ 724 $ 5,245
Capital expenditures $ 640 $ 32 $ 124 $ 11 $ 26 $ 833
------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2003
Net sales $ 595 $ 1,426 $ 476 $ 281 $ 312 $ 3,090
Depreciation (1) $ 97 $ 245 $ 55 $ 21 $ 52 $ 470
Amortization of purchased intangibles $ 37 $ 37
Research, development and engineering expenses (2) $ 48 $ 108 $ 74 $ 20 $ 41 $ 291
Restructuring, impairment and other charges and
(credits) (before-tax and minority interest) $ (36) $ 133 $ 97
Income tax (provision) benefit $ (69) $ 68 $ (22) $ (15) $ 70 $ 32
Earnings (loss) before minority interest and equity
earnings (loss) (3) $ 130 $ (108) $ 43 $ 31 $ (190) $ (94)
Minority interests (4) $ 75 $ 75
Equity in earnings (loss) of associated companies (5) $ 144 $ (11) $ (7) $ 126
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 274 $ (120) $ 43 $ 31 $ (122) $ 106
------------------------------------------------------------------------------------------------------------------------------------
Investment in associated companies, at equity $ 299 $ 59 $ 30 $ 383 $ 771
Segment assets (6) $ 1,297 $ 1,848 $ 485 $ 111 $ 720 $ 4,461
Capital expenditures $ 251 $ 15 $ 69 $ 7 $ 23 $ 365
------------------------------------------------------------------------------------------------------------------------------------
19. Subsequent Events (continued)
(1) Depreciation expense for Corning's reportable segments includes an
allocation of depreciation of corporate property not specifically
identifiable to a segment.
(2) Research, development, and engineering expenses includes direct project
spending which is identifiable to a segment.
(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) Minority interests included the impact of the following restructuring,
impairment, and other charges (credits):
. In 2004, gains from the sale of assets of Corning Asahi Video (CAV) in
excess of assumed salvage value of $17 million, and reversals of CAV
severance reserves of $2 million.
. In 2003, impairment charges for long-lived assets of CAV and exit
costs of $57 million.
(5) Equity in earnings of associated companies, net of impairments includes the
following restructuring and impairment charges:
. In 2004 and 2003, charges of $35 million and $7 million, respectively,
to impair equity method investments in the Telecommunications segment
to their estimated fair value.
. In 2005 and 2003, $106 million and $66 million, respectively, to
reflect our share of Samsung Corning Co., Ltd.'s asset impairment
charges.
(6) Segment assets include inventory, accounts receivable, property and
associated equity companies and cost investments.
A reconciliation of reportable segment net income (loss) to consolidated net
income (loss) follows (in millions):
--------------------------------------------------------------------------------
Years ended December 31,
-------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
Net income (loss) of reportable segments $ 1,318 $ (1,120) $ 228
Non-reportable segments (66) 50 (122)
Unallocated amounts:
Net financing costs (1) (101) (172) (155)
Stock-based compensation expense (37) (11) (1)
Exploratory research (77) (68) (43)
Corporate contributions (24) (17) (24)
Equity in earnings of associated
companies, net of impairments (2) 253 116 82
Asbestos settlement (3) (197) (33) (413)
Other corporate items (4) (484) (910) 225
-------- --------- --------
Net income (loss) $ 585 $ (2,165) $ (223)
--------------------------------------------------------------------------------
(1) Net financing costs include interest expense, interest income, and interest
costs and investment gains associated with benefit plans.
(2) Equity in earnings of associated companies, net of impairments represents
equity in earnings of Dow Corning Corporation which includes the following
items:
. In 2005, a gain of $11 million which represents our share of Dow
Corning's gain on the issuance of subsidiary stock.
. In 2004, charges of $21 million which represents our share of Dow
Corning's charges related to restructuring actions and adjustments to
interest liabilities recorded on its emergence from bankruptcy.
(3) As part of Corning's asbestos settlement arrangement to be incorporated
into the Pittsburgh Corning Corporation reorganization plan, Corning will
contribute, when the reorganization plan becomes effective, 25 million
shares of Corning common stock to a trust. This portion of the asbestos
liability requires adjustment based upon movements in Corning's common
stock price prior to contribution of the shares to the trust. In 2005,
2004, and 2003, Corning recorded a charge of $197 million, $33 million, and
$115 million, respectively, to reflect the movement in Corning's common
stock price in each year. In 2003, Corning also recorded a charge of $298
million to reflect the initial liability based on the terms of the
settlement agreement.
(4) Other corporate items include the tax impact of the unallocated amounts and
the following significant items:
. In 2005, an impairment charge of $25 million for the
other-than-temporary decline in our investment in Avanex below its
cost basis; a loss of $16 million associated with the redemption or
retirement of debt; a net $443 million charge to tax expense which
included a $525 million increase to our valuation allowance against
deferred tax assets resulting from our conclusion that the sale of an
appreciated asset no longer met the criteria established by SFAS No.
109, "Accounting for Income Taxes" (SFAS No. 109) for a viable tax
planning strategy offset by an $82 million credit to tax expense
primarily related to the tax impact of eliminating the minimum pension
liability associated with our domestic defined benefit plan.
. In 2004, a $937 million charge to tax expense as a result of the
company's decision to provide a valuation allowance against a
significant portion of its deferred tax assets and a loss of $36
million associated with the retirement of significant portion of
Corning's long-term debt.
A reconciliation of reportable segment assets to consolidated assets follows (in
millions):
--------------------------------------------------------------------------------
Years ended December 31,
--------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
Total assets of reportable segments $ 5,642 $ 4,521 $ 3,741
Non-reportable segments 573 724 720
Unallocated amounts:
Current assets (1) 2,682 2,169 1,701
Investments (2) 499 407 274
Property, net (3) 836 886 932
Other non-current assets (4) 943 1,003 3,384
--------- --------- --------
Total assets $ 11,175 $ 9,710 $ 10,752
--------------------------------------------------------------------------------
(1) Includes current corporate assets, primarily cash, short-term investments
and deferred taxes.
(2) Represents corporate investments in associated companies, at both cost and
equity (primarily Dow Corning Corporation).
(3) Represents corporate property not specifically identifiable to an operating
segment.
(4) Includes non-current corporate assets, pension assets and deferred taxes.
Corning Incorporated and Subsidiary Companies
Schedule II - Valuation Accounts and Reserves
(in millions)
------------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year ended December 31, 2005 Beginning of Period Additions and Other End of Period
------------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 30 $ 3 $ 9 $ 24
Deferred tax assets valuation allowance $ 1,685 $ 2,025 $ 105 $ 3,605
Accumulated amortization of
purchased intangible assets $ 196 $ 13 $ 9 $ 200
Reserves for accrued costs of
business restructuring $ 95 $ 30 $ 40 $ 85
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year ended December 31, 2004 Beginning of Period Additions and Other End of Period
------------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 38 $ 4 $ 12 $ 30
Deferred tax assets valuation allowance $ 469 $ 1,216 $ 1,685
Accumulated amortization of
purchased intangible assets $ 147 $ 49 $ 196
Reserves for accrued costs of
business restructuring $ 186 $ 2 $ 93 $ 95
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year ended December 31, 2003 Beginning of Period Additions and Other End of Period
------------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 59 $ 5 $ 26 $ 38
Deferred tax assets valuation allowance $ 417 $ 52 $ 469
Accumulated amortization of
purchased intangible assets $ 104 $ 43 $ 147
Reserves for accrued costs of
business restructuring $ 405 $ 127 $ 346 $ 186
------------------------------------------------------------------------------------------------------------------------------------
QUARTERLY OPERATING RESULTS
(unaudited)
(In millions, except per share amounts)
------------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Total
2005 Quarter Quarter Quarter Quarter Year
------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,050 $ 1,141 $ 1,188 $ 1,200 $ 4,579
Gross margin $ 429 $ 483 $ 545 $ 527 $ 1,984
Restructuring, impairment and other charges and (credits) $ 19 $ (1) $ 28 $ (84) $ (38)
Asbestos settlement $ (16) $ 137 $ 68 $ 8 $ 197
(Loss) income from continuing operations before income
taxes, minority interests and equity earnings $ 103 $ 42 $ 159 $ 268 $ 572
(Provision) benefit for income taxes (19) (44) (28) (487) (578)
Minority interests (1) (5) (2) 1 (7)
Equity in earnings of associated companies, net of impairments 166 172 74 186 598
------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ 249 $ 165 $ 203 $ (32) $ 585
------------------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per common share $ 0.18 $ 0.11 $ 0.14 $ (0.02) $ 0.40
Diluted (loss) earnings per common share $ 0.17 $ 0.11 $ 0.13 $ (0.02) $ 0.38
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Total
2004 Quarter Quarter Quarter Quarter Year
------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 844 $ 971 $ 1,006 $ 1,033 $ 3,854
Gross margin $ 300 $ 346 $ 404 $ 365 $ 1,415
Restructuring, impairment and other charges and (credits) $ 34 $ (34) $ 1,794 $ (5) $ 1,789
Asbestos settlement $ 19 $ 47 $ (50) $ 17 $ 33
(Loss) income from continuing operations before income
taxes, minority interests and equity earnings $ (64) $ 36 $ (1,619) $ 67 $ (1,580)
(Provision) benefit for income taxes 12 (24) (985) (34) (1,031)
Minority interests (11) (3) (3) (17)
Equity in earnings of associated companies, net of impairments 107 107 96 133 443
------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations $ 55 $ 108 $ (2,511) $ 163 $ (2,185)
Income from discontinued operations (1) 20 20
------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ 55 $ 108 $ (2,491) $ 163 $ (2,165)
------------------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per common share from:
Continuing operations $ 0.04 $ 0.08 $ (1.79) $ 0.12 $ (1.57)
Discontinued operations 0.01 0.01
------------------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per common share $ 0.04 $ 0.08 $ (1.78) $ 0.12 $ (1.56)
------------------------------------------------------------------------------------------------------------------------------------
Diluted (loss) earnings per common share from:
Continuing operations $ 0.04 $ 0.07 $ (1.79) $ 0.11 $ (1.57)
Discontinued operations 0.01 0.01
------------------------------------------------------------------------------------------------------------------------------------
Diluted (loss) earnings per common share $ 0.04 $ 0.07 $ (1.78) $ 0.11 $ (1.56)
------------------------------------------------------------------------------------------------------------------------------------
(1) Discontinued operations are described in Note 2 (Discontinued Operations)
to the Consolidated Financial Statements.
DOW CORNING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2005
DOW CORNING CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm 103
Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003 104
Consolidated Balance Sheets at December 31, 2005 and 2004 105
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 107
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2005, 2004 and 2003 108
Consolidated Statements of Comprehensive Income for the years ended December 31, 2005, 2004 and 2003 109
Notes to the Consolidated Financial Statements 110
Supplementary Data for the years ended December 31, 2005 and 2004:
Quarterly Financial Information 137
Report of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
To the Stockholders and
Board of Directors of
Dow Corning Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows, stockholders' equity and
comprehensive income present fairly, in all material respects, the financial
position of Dow Corning Corporation and its subsidiaries at December 31, 2005
and 2004, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
February 9, 2006
DOW CORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except for per share amounts)
Year ended December 31,
2005 2004 2003
---- ---- ----
Net Sales $3,878.7 $3,372.6 $2,872.5
Operating Costs and Expenses:
Cost of sales 2,567.2 2,336.7 2,052.7
Marketing and administrative expenses 556.2 549.7 479.0
Restructuring costs - 44.0 -
--------- --------- --------
Total operating costs and expenses 3,123.4 2,930.4 2,531.7
Operating Income 755.3 442.2 340.8
Interest income 22.8 17.4 31.8
Interest expense (3.9) (97.8) (93.6)
Gain on issuance of subsidiary stock 21.2 - -
Other nonoperating income (expense), net 16.9 20.1 (1.7)
--------- --------- --------
Income before Income Taxes and Minority Interests 812.3 381.9 277.3
Income tax provision 253.8 125.2 94.3
Minority interests' share in income 52.0 18.4 6.4
--------- --------- --------
Net Income $ 506.5 $ 238.3 $ 176.6
========= ========= ========
Weighted-Average Common Shares Outstanding
(basic and diluted) 2.5 2.5 2.5
Net Income per Share (basic and diluted) $ 202.60 $ 95.32 $ 70.64
========= ========= ========
Dividends Declared per Common Share $ 36.00 $ - $ -
========= ========= ========
(See Notes to the Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions of U.S. dollars)
ASSETS
December 31, 2005 December 31, 2004
----------------- -----------------
Current Assets:
Cash and cash equivalents $ 137.6 $ 322.0
Marketable securities 1,081.8 298.5
Accounts receivable (net of allowance for doubtful
accounts of $8.2 in 2005 and $11.7 in 2004) 517.4 511.3
Anticipated implant insurance receivable 47.2 30.8
Notes and other receivables 110.6 114.5
Inventories 506.6 425.0
Deferred income taxes 123.8 101.2
Other current assets 49.8 25.0
----------- -----------
Total current assets 2,574.8 1,828.3
----------- -----------
Property, Plant and Equipment 4,573.3 4,805.6
Less - Accumulated Depreciation (3,249.8) (3,382.7)
----------- -----------
Net property, plant and equipment 1,323.5 1,422.9
----------- -----------
Other Assets:
Marketable securities 8.8 57.3
Anticipated implant insurance receivable 218.2 277.0
Deferred income taxes 750.3 929.0
Intangible assets (net of accumulated amortization
of $15.7 in 2005 and $12.6 in 2004) 103.1 81.4
Goodwill 66.1 75.9
Restricted investments 25.9 55.8
Other 74.1 88.8
----------- -----------
Total other assets 1,246.5 1,565.2
----------- -----------
Total Assets $ 5,144.8 $ 4,816.4
=========== ===========
(See Notes to the Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions of U.S. dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, 2005 December 31, 2004
----------------- -----------------
Current Liabilities:
Short-term borrowings and current maturities of
long-term debt $ 22.3 $ 13.9
Trade accounts payable 309.7 278.4
Accrued payrolls and employee benefits 210.4 171.9
Accrued taxes 116.4 102.1
Accrued interest 66.4 63.5
Current portion of implant reserve 57.8 50.0
Other current liabilities 150.0 150.3
----------- -----------
Total current liabilities 933.0 830.1
----------- -----------
Other Liabilities:
Long-term debt 39.3 60.2
Implant reserve 1,755.7 1,834.9
Employee benefits 547.2 565.7
Co-insurance payable 36.2 46.8
Deferred revenue 103.4 -
Other noncurrent liabilities 111.0 160.7
----------- -----------
Total other liabilities 2,592.8 2,668.3
----------- -----------
Minority Interest in Consolidated Subsidiaries 178.6 171.6
----------- -----------
Stockholders' Equity:
Common stock ($5.00 par value - 2,500,000 shares
authorized, issued and outstanding) 12.5 12.5
Retained earnings 1,514.8 1,098.3
Accumulated other comprehensive income (loss):
Cumulative translation adjustment 35.1 170.6
Minimum pension liability (131.1) (135.8)
Other equity adjustments 9.1 0.8
----------- -----------
Total accumulated other comprehensive income (loss) (86.9) 35.6
----------- -----------
Total stockholders' equity 1,440.4 1,146.4
----------- -----------
Total Liabilities and Stockholders' Equity $ 5,144.8 $ 4,816.4
=========== ===========
(See Notes to the Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars)
Year ended December 31,
2005 2004 2003
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 506.5 $ 238.3 $ 176.6
Depreciation and amortization 211.6 210.6 243.9
Changes in deferred revenue 111.4 - -
Other, net 83.9 93.3 (49.3)
Changes in operating assets and liabilities
Changes in accounts and notes receivable (33.2) (10.5) 26.1
Changes in accounts payable 21.2 (36.7) (13.4)
Changes in inventory (107.2) 37.2 (4.9)
Changes in other operating assets and liabilities 76.6 163.7 7.4
--------- --------- --------
Cash provided by operating activities 870.8 695.9 386.4
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (200.5) (109.4) (77.4)
Acquisitions of businesses, net of cash received - (92.0) (42.6)
Proceeds from sales and maturities of securities 3,379.1 4,529.8 3,243.2
Purchases of securities (4,113.3) (3,645.0) (3,815.7)
Other, net 2.2 (1.3) 6.7
--------- --------- --------
Cash provided by (used in) investing activities (932.5) 682.1 (685.8)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings - 12.0 2.8
Payments on long-term debt (11.1) (9.3) (16.9)
Net change in short-term borrowings 7.4 (2.1) 4.2
Distributions to minority interests (58.2) (3.8) (8.3)
Cash received from minority interests 48.6 - -
Dividends paid to stockholders (90.0) - -
--------- --------- --------
Cash used in financing activities (103.3) (3.2) (18.2)
--------- --------- --------
CASH FLOWS RELATED TO REORGANIZATION ACTIVITIES:
Reorganization costs (3.4) (7.2) (5.4)
Implant reserve and other payments (40.3) (505.7) (6.4)
Release of insurance proceeds - 207.4 (29.4)
Payments under co-insurance arrangement (2.1) (30.8) (5.3)
Implant insurance reimbursements 42.4 128.5 29.4
Payments on long-term debt - (273.7) -
Payments of notes payable - (375.0) -
Payments of interest - (673.8) -
--------- --------- --------
Cash used in reorganization activities (3.4) (1,530.3) (17.1)
--------- --------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (16.0) 15.5 33.4
--------- --------- --------
CHANGES IN CASH AND CASH EQUIVALENTS:
Net decrease in cash and cash equivalents (184.4) (140.0) (301.3)
Cash and cash equivalents at beginning of year 322.0 462.0 763.3
--------- --------- --------
Cash and cash equivalents at end of year $ 137.6 $ 322.0 $ 462.0
========= ========= ========
(See Notes to the Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions of U.S. dollars)
Year ended December 31,
2005 2004 2003
---- ---- ----
Common Stock ($5.00 par value - 2,500,000 shares authorized,
issued and outstanding)
Balance at beginning and end of year $ 12.5 $ 12.5 $ 12.5
--------- --------- --------
Retained Earnings
Balance at beginning of year 1,098.3 860.0 683.4
Net income 506.5 238.3 176.6
Common stock dividends declared (90.0) - -
--------- --------- --------
Balance at end of year 1,514.8 1,098.3 860.0
--------- --------- --------
Accumulated Other Comprehensive Income (Loss)
Cumulative translation adjustment balance at beginning of year 170.6 110.1 (39.6)
Translation adjustments (136.8) 60.2 161.5
Income tax benefit (provision) 1.3 0.3 (11.8)
--------- --------- --------
Balance at end of year 35.1 170.6 110.1
--------- --------- --------
Additional minimum pension liability balance at beginning of year (135.8) (143.8) (117.9)
(Increase) decrease in minimum pension liability 3.2 8.4 (33.5)
Income tax benefit (provision) 1.5 (0.4) 7.6
--------- --------- --------
Balance at end of year (131.1) (135.8) (143.8)
--------- --------- --------
Other equity adjustments balance at beginning of year 0.8 3.7 2.4
Change in unrealized gain (loss) on cash flow hedges 14.2 (2.1) 0.8
Change in unrealized gain (loss) on available-for-sale securities (1.4) (2.3) 1.4
Income tax benefit (provision) (4.5) 1.5 (0.9)
--------- --------- --------
Balance at end of year 9.1 0.8 3.7
--------- --------- --------
Total Accumulated Other Comprehensive Income (Loss) (86.9) 35.6 (30.0)
--------- --------- --------
Stockholders' Equity $ 1,440.4 $ 1,146.4 $ 842.5
========= ========= ========
(See Notes to the Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions of U.S. dollars)
Year ended December 31,
2005 2004 2003
---- ---- ----
Net Income $ 506.5 $ 238.3 $ 176.6
Other Comprehensive Income (Loss):
Foreign currency translation adjustments
(net of tax of $(1.3), $0.2, $(11.8)) (135.5) 60.5 149.7
Unrealized net gain (loss) on available-for-sale
securities (net of tax of $0.4, $1.5, $(0.9)) (1.0) (0.8) 0.5
Net gain (loss) on cash flow hedges
(net of tax of $(4.9), $0, $0) 9.3 (2.1) 0.8
(Increase) decrease in minimum pension liability
(net of tax of $1.5, $(0.4), $7.7) 4.7 8.0 (25.9)
--------- -------- ---------
Other comprehensive income (loss), net of tax (122.5) 65.6 125.1
--------- -------- ---------
Comprehensive Income $ 384.0 $ 303.9 $ 301.7
========= ======== =========
(See Notes to the Consolidated Financial Statements)
DOW CORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
Note Page
---- ----
1 BUSINESS AND BASIS OF PRESENTATION 111
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 111
3 ACQUISITIONS AND DIVESTITURES 116
4 GLOBAL RESTRUCTURING 117
5 UNRESTRICTED INVESTMENTS 117
6 INVENTORIES 118
7 INCOME TAXES 119
8 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES 121
9 PROPERTY, PLANT AND EQUIPMENT 121
10 GOODWILL AND OTHER INTANGIBLE ASSETS 122
11 RESTRICTED ASSETS 123
12 NOTES PAYABLE AND CREDIT FACILITIES 124
13 DEFERRED REVENUE 124
14 LONG-TERM DEBT 125
15 PENSION AND OTHER POSTRETIREMENT BENEFITS 126
16 PROCEEDING UNDER CHAPTER 11 131
17 COMMITMENTS AND CONTINGENCIES 133
18 RELATED PARTY TRANSACTIONS 135
DOW CORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars except where noted)
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
-------------------------------------------
Business
--------
Dow Corning Corporation ("Dow Corning") was incorporated in 1943 by Corning
Glass Works, now Corning Incorporated ("Corning"), and The Dow Chemical Company
("Dow Chemical") for the purpose of developing and producing polymers and other
materials based on silicon chemistry. Dow Corning operates in various countries
around the world through numerous wholly owned or majority owned subsidiary
corporations (hereinafter, the consolidated operations of Dow Corning and its
subsidiaries will be referred to as the "Company").
Dow Corning built its business based on silicon chemistry. Silicon is one
of the most abundant elements in the world. Most of Dow Corning's products are
based on polymers known as silicones, which have a silicon-oxygen-silicon
backbone. Through various chemical processes, Dow Corning manufactures silicones
that have an extremely wide variety of characteristics, in forms ranging from
fluids, gels, greases and elastomeric materials to resins and other rigid
materials. Silicones combine the temperature and chemical resistance of glass
with the versatility of plastics. Regardless of form or application, silicones
generally possess such qualities as electrical resistance, resistance to extreme
temperatures, resistance to deterioration from aging, water repellency,
lubricating characteristics, relative chemical and physiological inertness and
resistance to ultraviolet radiation.
The Company engages primarily in the discovery, development, manufacturing,
marketing and distribution of silicon-based materials and offers related
services. Since its inception, Dow Corning has been engaged in a continuous
program of basic and applied research on silicon-based materials to develop new
products and processes, to improve and refine existing products and processes
and to develop new applications for existing products. The Company manufactures
over 7,000 products and serves approximately 25,000 customers worldwide, with no
single customer accounting for more than three percent of the Company's sales in
any of the past three years. Principal United States manufacturing plants are
located in Kentucky and Michigan. Principal foreign manufacturing plants are
located in Belgium, China, France, Germany, Japan, South Korea and the United
Kingdom. The Company operates research and development facilities in the United
States, Belgium, China, Germany, Ireland, Japan, South Korea and the United
Kingdom. The Company also operates technical service centers in the United
States, Belgium, Brazil, China, Germany, Japan, South Korea, Taiwan and the
United Kingdom. Dow Corning's average employment for 2005 was approximately
8,900 persons.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Certain prior year items have been reclassified to conform
to the 2005 presentation.
Bankruptcy Proceedings
----------------------
On May 15, 1995, the Company voluntarily filed for protection under Chapter
11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Eastern
District of Michigan, Northern Division in order to resolve the Company's breast
implant liabilities and related matters. The Company emerged from its Chapter 11
proceeding on June 1, 2004. Upon emergence from the Company's Chapter 11
proceeding, the Company was not subject to "fresh start" reporting as defined in
SOP 90-7. See Note 16 for further information on this matter.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Dow Corning
and all of its wholly owned and majority owned domestic and foreign
subsidiaries. The Company's interests in 20% to 50% owned subsidiaries are
carried on the equity basis and are included under the caption "Other Assets -
Other" in the consolidated balance sheets. Intercompany transactions and
balances have been eliminated in consolidation.
Cash and Cash Equivalents
-------------------------
Cash equivalents include all highly liquid investments with an original
maturity of ninety days or less. The carrying amounts for cash equivalents
approximate their fair market values.
Inventories
-----------
The value of inventories is determined using lower of cost or market as the
basis. Produced goods are valued using a first-in, first-out cost flow
methodology, while purchased materials and supplies are valued using an average
cost flow methodology. See Note 6 for further information.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------
Property and Depreciation
-------------------------
Property, plant and equipment is carried at cost less any impairment and is
depreciated principally using accelerated methods over estimated useful lives.
Upon retirement or other disposal, the asset cost and related accumulated
depreciation are removed from the accounts and the net amount, less any
proceeds, is charged or credited to income. If an asset is determined to be
impaired, either based on value or a shortened life, the carrying amount of the
asset is reduced to its fair value and the difference is charged to income in
the period incurred.
The Company capitalizes the costs of internal-use software in accordance
with American Institute of Certified Public Accountants Statement of Position
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." Amounts capitalized during the years ended December 31, 2005
and 2004 were $4.2 and $5.8, respectively. As of December 31, 2005 and 2004,
unamortized software costs were $4.6 and $6.2, respectively.
Expenditures for maintenance and repairs are charged against income as
incurred. Expenditures that significantly increase asset value, extend useful
asset lives or adapt property to a new or different use are capitalized.
The Company follows the policy of capitalizing interest as a component of
the cost of capital assets constructed for its own use. See Note 9 for further
information.
Marketable Securities
---------------------
The Company accounts for investments in debt and equity securities in
conformity with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires the use of fair value accounting for trading or available-for-sale
securities, while retaining the use of the amortized cost method for investments
in debt securities that the Company has the positive intent and ability to hold
to maturity. Investments in debt and equity securities are included in the
captions "Marketable securities" and "Restricted investments" in the
consolidated balance sheets. All such investments are considered to be available
for sale. If the decline in fair value of an investment in debt or equity
securities is determined to be other than temporary, the carrying amount of the
asset is reduced to its fair value, and the difference is charged to income in
the period incurred. See Notes 5 and 11 for further information.
Credit Risk
-----------
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash, investments, derivative financial
instruments and trade receivables. The Company's policies limit the amount of
credit exposure to any single counterparty for cash and investments. The Company
uses major financial institutions with high credit ratings to engage in
transactions involving investments and derivative instruments. The Company
minimizes credit risk in its receivables from customers through its sale of
products to a wide variety of customers and markets in locations throughout the
world. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses, and historically such losses have been within
expectations. Management believes the risk of incurring material losses related
to credit risk is remote, and any losses would be immaterial to consolidated
financial results.
Intangibles
-----------
Intangible assets of the Company include goodwill, patents and licenses,
and other assets acquired by the Company that are separable and measurable apart
from goodwill. Goodwill, representing the excess of cost over the fair value of
net assets of businesses acquired, is tested for impairment in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets." Other intangible assets
with finite lives are amortized on a straight-line basis over their estimated
useful lives. See Note 10 for further information.
Revenue
-------
The Company recognizes revenue in accordance with the U.S. Securities and
Exchange Commission's Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition in Financial Statements." The Company recognizes revenue only when
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the price to the customer is fixed or determinable and
collectibility is reasonably assured. Generally, revenue is recognized when
title and risk of loss transfer to the customer for products and as work is
performed for professional services. Amounts billed to a customer in a sale
transaction related to shipping costs are classified as revenue. The Company
reduces revenue for product returns, allowances and price discounts. Amounts
billed to customers in excess of amounts recognized as revenue are reported as
deferred revenue in the consolidated balance sheets.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------
Shipping Costs
--------------
Shipping costs are primarily comprised of payments to third party shippers.
The Company records shipping costs incurred as a component of "Cost of sales" in
the consolidated statements of income. Shipping costs totaled $113.9, $94.3, and
$76.6 for the years ended December 31, 2005, 2004 and 2003, respectively.
Research and Development Costs
------------------------------
Research and development costs are charged to operations when incurred and
are included in "Cost of sales" in the consolidated statements of income. These
costs totaled $182.3 in 2005, $181.4 in 2004, and $162.5 in 2003, and were
comprised primarily of labor costs, outside services and depreciation.
Income Taxes
------------
The Company accounts for income taxes in conformity with the provisions of
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires a company to
recognize deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in a company's financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse. The Company records a valuation allowance on deferred tax assets when
appropriate to reflect the expected future tax benefits to be realized. In
determining the appropriate valuation allowance, certain judgments are made
relating to recoverability of deferred tax assets, use of tax loss
carryforwards, level of expected future taxable income and available tax
planning strategies. These judgments are routinely reviewed by management. At
December 31, 2005 and 2004, the Company had net deferred tax asset balances of
$869.1 and $983.3, respectively, after valuation allowances of $1.6 and $3.1,
respectively. For additional information, see Note 7.
Currency Translation
--------------------
The value of the U.S. dollar fluctuates against foreign currencies. Since
the Company does business in many countries, these fluctuations affect the
Company's consolidated financial position and results of operations. The Company
accounts for these fluctuations in accordance with SFAS No. 52, "Foreign
Currency Translation."
Subsidiaries in Europe and Japan translate their assets and liabilities,
stated in their functional currency, into U.S. dollars at current exchange
rates, that is, the rates in effect at the end of the period. The gains or
losses that result from this process affect "Cumulative translation adjustment"
in the stockholders' equity section of the consolidated balance sheets. Changes
in the functional currency value of monetary assets and liabilities denominated
in foreign currencies are recognized in the caption, "Other nonoperating income
(expense), net" in the consolidated statements of income. The revenues and
expenses of these non-U.S. subsidiaries are translated into U.S. dollars at the
average exchange rates that prevailed during the period. Therefore, the reported
U.S. dollar results included in the consolidated statement of income fluctuate
from period to period, depending on the value of the U.S. dollar against foreign
currencies.
For non-U.S. subsidiaries outside of Europe and Japan, where the U.S.
dollar is the functional currency, inventories, property, plant and equipment
and other non-monetary assets, together with their related elements of expense,
are translated at historical rates of exchange. All other assets and liabilities
are translated at current exchange rates. All other revenues and expenses are
translated at average exchange rates. Translation gains and losses for these
subsidiaries are recognized in the caption, "Other nonoperating income
(expense), net" in the consolidated statements of income.
Derivative Financial Instruments
--------------------------------
The Company uses derivative financial instruments to reduce the impact of
changes in foreign exchange rates on its earnings, cash flows and fair values of
assets and liabilities. In addition, the Company uses derivative financial
instruments to reduce the impact of changes in natural gas and other commodity
prices on its earnings and cash flows. The Company enters into derivative
financial contracts based on analysis of specific and known economic exposures.
The Company's policy prohibits holding or issuing derivative financial
instruments for trading or speculative purposes. The types of instruments
typically used are forward contracts, but may also include option combinations
and purchased option contracts.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------
The Company recognizes all derivatives as "Other current assets" or "Other
current liabilities" in the consolidated balance sheets at fair value. On the
date the derivative instrument is entered into, if the Company is designating
the instrument as a hedge, the Company designates the derivative as either (1) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment (fair value hedge), (2) a hedge of
the exposure to variability in cash flows of a forecasted transaction (cash flow
hedge), or (3) a hedge of the foreign currency exposure of a net investment in a
foreign operation. Changes in the fair value of a derivative that is designated
as and meets all the required criteria for a fair value hedge, along with the
gain or loss on the hedged asset or liability that is attributable to the hedged
risk, are recorded in current period earnings. Changes in the fair value of a
derivative that is designated as and meets all the required criteria for a cash
flow hedge are recorded in other comprehensive income and reclassified into
earnings as the underlying hedged item affects earnings. Changes in the fair
value of a derivative or non-derivative that is designated as and meets all the
required criteria for a hedge of a net investment are recorded in other
comprehensive income. Changes in the fair value of a derivative that is not
designated as a hedge are recorded immediately in earnings.
The majority of currency derivative instruments entered into by the Company
are not designated as hedging instruments. Contracts used to hedge the exposure
to foreign currency fluctuations associated with certain monetary assets and
liabilities are not designated as hedging instruments. Net foreign currency
(gains) and losses recognized in income, which include changes in the fair value
of such currency derivatives as well as foreign exchange gains and losses on
monetary assets and liabilities of the Company, amounted to ($1.5) in 2005, $1.7
in 2004, and $5.7 in 2003. In addition, the income tax provision in the
consolidated statements of operations includes net foreign currency (gains) and
losses from currency derivatives of ($0.3), $2.7, and $6.3 for 2005, 2004, and
2003, respectively, which when considered together with the related tax benefits
and gains from underlying exposures, had the effect of decreasing (increasing)
the income tax provision by $(2.0), $1.0, and ($0.1) in 2005, 2004, and 2003,
respectively. See Note 7 for further information.
Where an instrument is designated as a hedge, the Company formally
documents all relationships between the hedging instruments and hedged items, as
well as its risk-management objective and strategy for undertaking various hedge
transactions. This process includes relating all derivatives that are designated
as fair value or cash flow hedges to specific assets and liabilities on the
balance sheet or to specific firm commitments or forecasted transactions. The
Company also formally assesses, both at the inception of the hedge and on an
ongoing basis, whether each derivative is highly effective in offsetting changes
in fair values or cash flows of the hedged item. If it is determined that a
derivative is not highly effective as a hedge, or if a derivative ceases to be a
highly effective hedge, the Company will discontinue hedge accounting with
respect to that derivative prospectively.
Litigation
----------
The Company is subject to legal proceedings and claims arising out of the
normal course of business. The Company routinely assesses the likelihood of any
adverse judgments or outcomes to these matters, as well as ranges of probable
losses. A determination of the amount of the reserves required, if any, for
these contingencies is made after analysis of each known issue and an analysis
of historical claims experience for incurred but not reported matters. The
Company expenses these legal costs, including those expected to be incurred in
connection with a loss contingency, as incurred. The Company has an active risk
management program consisting of numerous insurance policies secured from many
carriers. These policies provide coverage that is utilized to mitigate the
impact, if any, of certain of the legal proceedings. The required reserves may
change in the future due to new developments in each matter. See Notes 16 and 17
for further information.
Environmental Matters
---------------------
The Company determines the costs of environmental remediation for its
facilities, facilities formerly owned by the Company and third party waste
disposal facilities based on evaluations of current law and existing
technologies. Inherent uncertainties exist in these evaluations primarily due to
unknown conditions, changing governmental regulations and legal standards
regarding liability, and evolving technologies. The Company records a charge to
earnings for environmental matters when it is probable that a liability has been
incurred and the Company's costs can be reasonably estimated. The recorded
liabilities are adjusted periodically as remediation efforts progress or as
additional technical or legal information becomes available. The Company had
accrued obligations of $2.9 at December 31, 2005 and 2004 for environmental
remediation and restoration costs. Management believes that any costs incurred
in excess of those accrued will not have a material adverse impact on the
Company's consolidated financial position or results of operations.
Issuance of Shares by Subsidiaries
----------------------------------
Gains or losses arising from the issuance of shares by subsidiaries due to
changes in the Company's proportionate share of the value of the issuing
subsidiary's equity are recorded in the consolidated statements of income as
"Other nonoperating income (expense), net" pursuant to SAB Topic 5H, "Accounting
for Sales of Stock by a Subsidiary."
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------
New Accounting Standards
------------------------
On September 15, 2005, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board ("FASB") reached a consensus on Issue
04-13, "Accounting for Purchases and Sales of Inventory with the Same
Counterparty." EITF 04-13 describes the circumstances under which two or more
inventory transactions with the same counterparty should be viewed as a single
nonmonetary transaction, and describes the circumstances under which nonmonetary
exchanges of inventory within the same line of business should be recognized at
fair value. EITF 04-13 will be effective for transactions completed in reporting
periods beginning after March 15, 2006. The Company is currently evaluating the
applicability of EITF 04-13 to the Company's inventory transactions.
On June 8, 2005, the FASB issued FASB Staff Position ("FSP") No. FAS 143-1,
"Accounting for Electronic Equipment Waste Obligations." FSP No. FAS 143-1
addresses the accounting for asset waste obligations associated with Directive
2002/96/EC on Waste Electrical and Electronic Equipment ("the Directive")
adopted by the European Union. Under the Directive, commercial users of certain
electronic equipment have an obligation to ensure proper disposal of such
equipment until the equipment is sold or otherwise disposed. FSP No. FAS 143-1
requires such obligations to be accounted for as an asset retirement obligation
by applying the provisions of SFAS No. 143, "Accounting for Asset Retirement
Obligations," and FASB Interpretation ("FIN") No. 47, "Accounting for
Conditional Asset Retirement Obligations." The Company adopted FSP No. FAS 143-1
during the three months ended June 30, 2005. The adoption of FSP No. FAS 143-1
did not have a material impact on the Company's consolidated financial position
or results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." SFAS No. 154 supersedes Accounting Principles Board ("APB")
Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements." SFAS No. 154 requires all voluntary
changes in accounting principle because of preferability or any change resulting
from the issuance of an accounting pronouncement that does not include detailed
transition instructions to be handled by retrospective application, unless it is
impracticable to determine the effect on prior period financial statements. SFAS
No. 154 is effective for fiscal years beginning after December 15, 2005. The
Company plans to adopt SFAS No. 154 effective January 1, 2006. The adoption of
SFAS No. 154 is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations." FIN No. 47 clarifies that the term "conditional
asset retirement obligation" as used in SFAS No. 143, "Accounting for Asset
Retirement Obligations," refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
Company. FIN No. 47 is effective no later than the end of fiscal years ending
after December 15, 2005. The Company adopted FIN No. 47 in the three month
period ended December 31, 2005. The adoption of FIN No. 47 did not have a
material impact on the Company's consolidated financial position or results of
operations.
In December 2004, the Financial FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment of Accounting Principles Board ("APB") Opinion
No. 29." APB No. 29 requires that exchanges of nonmonetary assets be measured
based on the fair value of the assets exchanged, with certain exceptions. SFAS
No. 153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and includes a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The Statement is
effective for fiscal years beginning after June 15, 2005. The Company plans to
adopt SFAS No. 153 on January 1, 2006 and does not expect its adoption to have a
material effect on future consolidated results.
On October 22, 2004, the American Jobs Creation Act of 2004 (the "Jobs
Creation Act") became law in the United States. In December 2004, the FASB
issued FSP Nos. FAS 109-1 and FAS 109-2, which provide guidance on accounting
and disclosure related to the Jobs Creation Act. FSP No. FAS 109-1, "Application
of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004," requires the qualified production activities deduction provided for under
the Jobs Creation Act to be accounted for as a special deduction in accordance
with SFAS No. 109. FSP No. FAS 109-2, "Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American Jobs Creation
Act of 2004," provides accounting and disclosure requirements for the one-time
dividends received deduction on the repatriation of certain foreign earnings
under the Jobs Creation Act. See Note 7 for further information.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
Amendment of Accounting Research Bulletin ("ARB") No. 43, Chapter 4." SFAS No.
151 amends Chapter 4 of ARB No. 43, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material. The Statement requires such costs to be recorded as
charges in the period incurred, and also requires the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for annual periods
beginning after June 15, 2005. The Company plans to adopt SFAS No. 151 effective
January 1, 2006 and does not expect the adoption of SFAS No. 151 to have a
material effect on future consolidated results.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------
In January 2004, the FASB issued FSP No. FAS 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003." This FSP was superseded in June 2004 by FSP No.
FAS 106-2 of the same title. These FSP's provide guidance on the accounting for
and disclosure of the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act"). The Act expands Medicare to provide
prescription drug benefits to eligible enrollees and contains provisions that
apply to employers who sponsor postretirement health care plans that provide
prescription drug benefits. Beginning in 2006, sponsors of postretirement plans
that provide a prescription drug benefit that is "actuarially equivalent" to the
benefit provided by Medicare will receive a subsidy from the federal government.
The Company adopted FSP No. FAS 106-1 effective April 30, 2004 and FSP No. FAS
106-2 effective July 1, 2004. The Company has determined that the benefits
provided under its postretirement health care plan are "actuarially equivalent"
with those provided under the Act. The adoption of FSP No. FAS 106-1 and FSP No.
FAS 106-2 did not have a material impact on the Company's consolidated financial
statements. See Note 15 for further information related to the impact of these
FSP's.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the reported amounts of revenues and expenses during the reporting
period and disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
NOTE 3 - ACQUISITIONS AND DIVESTITURES
--------------------------------------
On April 1, 2005, the Company consolidated its Japanese operations in a
transaction involving Dow Corning Asia Ltd. ("DCAL"), a wholly-owned subsidiary,
Dow Corning Toray Silicone Co. Ltd. ("DCTS"), a subsidiary owned 65% by the
Company, and Toray Industries, Inc. ("TI"), an independent company that owns the
35% minority interest in DCTS. The Company contributed property, plant, and
equipment, working capital, and other net assets of DCAL valued at $90.0 to DCTS
in exchange for additional shares of DCTS. DCTS recorded the contribution of
assets at the Company's historical carrying value. In addition, TI contributed
cash of $48.6 to DCTS in exchange for additional shares of DCTS. Upon completion
of the transaction, DCTS was renamed Dow Corning Toray Company Ltd. ("DCT"), and
the Company retained a 65% ownership interest in DCT. However, because the fair
value per share issued to TI exceeded the value per share issued to the Company
based upon the carrying value of the assets contributed by DCAL, the Company
recognized a pre-tax gain of $21.2. This gain is reported in the "Gain on
issuance of subsidiary stock" line in the Company's consolidated statement of
income.
On September 30, 2004, the Company, through DCTS, purchased the net assets
of the Silicone Division of Nippon Unicar Co., Ltd. ("NUC"). NUC is located in
Tokyo, Japan and is a manufacturer of specialty chemicals and silicone products.
The net assets were purchased by DCTS for cash of approximately $92.0 and
consisted primarily of working capital items, intangible assets and property,
plant and equipment. The Company recorded $3.0 of goodwill as a result of the
transaction. The results of operations for the acquisition were included in the
consolidated statement of income beginning in the three month period ended
December 31, 2004. Purchase accounting for this acquisition was finalized during
the three month period ended December 31, 2004.
On September 2, 2004, the Company, through its wholly owned subsidiary Dow
Corning Enterprises, Inc. ("DCEI"), sold its 50% ownership interest in SDC
Technologies Inc. ("SDC") for $10.0. The Company recognized a gain of
approximately $7.1 on the sale. SDC is a California-based developer of
proprietary, high-performance coating systems for application to plastics and
glass.
On July 1, 2003, DCEI purchased 20% of the outstanding stock of DC Dongjue
Silicone Group Company Ltd. ("DCDSG"), bringing DCEI's total ownership of DCDSG
to 60%. Previously, in November 2001, DCEI and New Energy Chemicals Group Ltd.
formed DCDSG as a corporate joint venture. At that time, DCEI was the minority
interest shareholder, owning 25% of the outstanding stock and the joint venture
was accounted for on an equity basis. In January 2003, DCEI increased its
ownership to 40%. The July 1, 2003 purchase resulted in an aggregate purchase
price of $6.4, of which $4.6 was recognized as goodwill. The Company has
consolidated the results of DCDSG in the consolidated financial statements since
July 1, 2003.
On June 16, 2003, the Company purchased all of the outstanding stock of
Simcala, Inc. ("Simcala"), a silicon metal manufacturer located near Montgomery,
Alabama. The consideration paid for the stock was approximately $15.5. In
addition, immediately prior to the transaction closing, Simcala redeemed the
stock of its executive management for consideration of approximately $1.5. Also,
Dow Corning provided intercompany loans of approximately $13.3 to Simcala, $7.1
of which was for the purpose of retiring Simcala's outstanding debt and $6.2 of
which was for the purpose of securing Simcala's obligations under outstanding
industrial development revenue bonds. Purchase accounting for this acquisition
was finalized during the three month period ended June 30, 2004.
On February 27, 2003, the Company purchased substantially all of the assets
of Tyco Electronics, Inc., a wholly owned subsidiary of Tyco International Inc.
for a purchase price of $9.4. Tyco Electronics, Inc.'s primary facility is
located in Menlo Park, California. The transaction resulted in goodwill of $0.6.
NOTE 3 - ACQUISITIONS AND DIVESTITURES (Continued)
--------------------------------------
On January 23, 2003, DCEI purchased substantially all of the assets of
Sterling Semiconductor, Inc., a wholly owned subsidiary of Uniroyal Technology
Corporation, for a purchase price of $11.5. On December 4, 2002, DCEI purchased
substantially all of the assets of GAN Semiconductor, Inc., of Sunnyvale,
California for a purchase price of $4.9. Included in the purchase was $2.9 of
in-process research and development, which was charged to "Other" expense. The
transaction resulted in goodwill of $0.3. Dow Corning has consolidated the
assets acquired from GAN Semiconductor, Inc. and Sterling Semiconductor, Inc. in
Midland, Michigan, forming Dow Corning Compound Semiconductor Solutions, LLC.
NOTE 4 - GLOBAL RESTRUCTURING
-----------------------------
The Company implemented a restructuring program during 2004, consisting of
separation of employees and the withdrawal of certain fixed assets from service.
During the year ended December 31, 2004, the Company incurred pre-tax expense of
$34.9 primarily for one-time termination benefits related to the workforce
reduction of approximately 212 employees. Results for the year ended December
31, 2004 also included a pre-tax charge of $2.7 for non-cash restructuring
activity related to curtailment and special termination benefits. See Note 15
for additional information regarding the global workforce reduction effect on
defined benefit pension plans and the U.S. retiree medical plan. Additionally,
the Company recorded charges of $6.4 related to the impairment of its
manufacturing site located in Yamakita, Japan, and classified the related fixed
assets as long-lived assets to be disposed of by sale. These restructuring
charges were reported in the "Restructuring costs" line in the Company's
consolidated statement of income for the year ended December 31, 2004.
As of December 31, 2005, the Company's liability for restructuring had been
reduced to zero. The restructuring activity for the years ended December 31,
2005 and 2004 is illustrated in the following table:
Year Ended December 31, 2005 Year Ended December 31, 2004
--------------------------------------------------- ------------------------------------------------
Beginning of year balance $ 5.4 Beginning of year balance $ -
Restructuring charges - Restructuring charges 44.0
Cash payments (3.8) Cash payments (29.5)
Non-cash adjustments (1.6) Non-cash adjustments (9.1)
--------- ---------
Balance - December 31, 2005 $ - Balance - December 31, 2004 $ 5.4
========= =========
NOTE 5 - UNRESTRICTED INVESTMENTS
---------------------------------
The carrying amounts of unrestricted investments reflected under the
caption "Marketable securities" in the current and noncurrent sections of the
consolidated balance sheets at December 31, 2005 and 2004 totaled $1,090.6 and
$355.8, respectively. These unrestricted investments consist principally of
obligations backed by the U. S. Government or one of its agencies and corporate
and municipal issue bonds. These investments have been classified as "available
for sale" in conformity with SFAS No. 115. The Company does not invest in
securities that are below investment grade. Fair values are determined based on
quoted market prices or, if quoted market prices are not available, on market
prices of comparable instruments. For purposes of computing realized gain or
loss on the disposition of unrestricted investments, the specific identification
method is used.
The Company reviews all marketable securities to determine if any decline
in value is other than temporary. The analysis includes a review of the amount
and duration of the decline in value of a security and a comparison between the
amount and duration of the decline in value of the security and that of similar
securities in the same market sector. The Company has reviewed the investments
that have a gross unrealized loss as of December 31, 2005 and has concluded that
the decline in value is not other than temporary.
NOTE 5 - UNRESTRICTED INVESTMENTS (Continued)
---------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and
market value of the unrestricted investments consisted of the following as of
December 31, 2005 and 2004:
December 31, 2005
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
---- ----- -------- -----
Debt Securities:
U.S. government agency obligations $ 50.0 $ - $ (0.4) $ 49.6
Corporate bonds 102.6 - (0.4) 102.2
Municipal bonds 934.5 - - 934.5
--------- -------- -------- --------
Total Debt Securities $1,087.1 $ - $ (0.8) $1,086.3
-------- -------- -------- --------
Foreign Equity Securities 2.1 2.2 - 4.3
--------- -------- -------- --------
Total Marketable Securities $1,089.2 $ 2.2 $ (0.8) $1,090.6
======== ======== ======== ========
December 31, 2004
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
---- ----- -------- -----
Debt Securities:
U.S. government agency obligations $ 60.0 $ - $ (0.8) $ 59.2
Corporate bonds 68.8 - (0.2) 68.6
Municipal bonds 224.8 - - 224.8
--------- -------- -------- --------
Total Debt Securities $ 353.6 $ - $ (1.0) $ 352.6
--------- -------- -------- --------
Foreign Equity Securities 1.5 1.7 - 3.2
--------- -------- -------- --------
Total Marketable Securities $ 355.1 $ 1.7 $ (1.0) $ 355.8
========= ======== ======== ========
The contractual maturities of the debt securities included in unrestricted
investments consisted of the following at December 31, 2005 and 2004:
2005 2004
---- ----
Mature in one year or less $1,081.8 $ 288.5
Mature after one year through five years 4.5 64.1
Mature after five years - -
-------- ---------
Total debt securities $1,086.3 $ 352.6
======== =========
NOTE 6 - INVENTORIES
--------------------
The value of inventories is determined using lower of cost or market as the
basis. Produced goods are valued using a first-in, first-out (FIFO) cost flow
methodology, while purchased materials and supplies are valued using an average
cost flow methodology.
The following table provides a breakdown of inventories at December 31,
2005 and 2004.
December 31, 2005 December 31, 2004
----------------- -----------------
Produced goods $ 400.3 $ 329.5
Purchased materials 74.1 61.8
Maintenance and supplies 32.2 33.7
-------- ---------
Total Inventory $ 506.6 $ 425.0
======== =========
NOTE 6 - INVENTORIES (Continued)
--------------------
Produced goods include both work-in-process and finished goods. Due to the
nature of the Company's operations, it is impractical to classify inventory
between work-in-process and finished goods as such classifications can be
interchangeable for certain inventoriable items. Purchased materials primarily
consist of the Company's raw material inventories. Maintenance and supplies
included in inventory primarily represent spare component parts that are
critical to the Company's manufacturing processes.
NOTE 7 - INCOME TAXES
---------------------
The components of income before income taxes and minority interests as of
December 31, 2005, 2004 and 2003 are as follows:
2005 2004 2003
---- ---- ----
Income Before Income Taxes and Minority Interests:
Domestic $ 550.1 $ 215.6 $ 148.1
Foreign 262.2 166.3 129.2
--------- -------- --------
Total Income Before Income Taxes and Minority Interests $ 812.3 $ 381.9 $ 277.3
========= ======== ========
The components of the income tax provision as of December 31, 2005, 2004
and 2003 are as follows:
2005
--------------------------------------------
Current Deferred Total
--------- -------- ---------
Provision (Credit) for Income Taxes:
Domestic $ 98.8 $ 62.8 $ 161.6
Foreign 64.1 28.1 92.2
--------- -------- ---------
Total Provision (Credit) for Income Taxes $ 162.9 $ 90.9 $ 253.8
========= ======== =========
2004
--------------------------------------------
Current Deferred Total
--------- -------- ---------
Provision (Credit) for Income Taxes:
Domestic $ 71.9 $ 15.8 $ 87.7
Foreign 50.5 (13.0) 37.5
--------- -------- ---------
Total Provision (Credit) for Income Taxes $ 122.4 $ 2.8 $ 125.2
========= ======== =========
2003
--------------------------------------------
Current Deferred Total
--------- -------- ---------
Provision (Credit) for Income Taxes:
Domestic $ 25.7 $ 24.9 $ 50.6
Foreign 45.3 (1.6) 43.7
--------- -------- ---------
Total Provision (Credit) for Income Taxes $ 71.0 $ 23.3 $ 94.3
========= ======== =========
NOTE 7 - INCOME TAXES (Continued)
---------------------
The tax effects of the principal temporary differences as of December 31,
2005 and 2004 giving rise to deferred tax assets and liabilities were as
follows:
2005 2004
---- ----
Deferred Tax Assets:
Implant costs $ 586.3 $ 619.5
Accruals and other 67.0 138.1
Postretirement benefit obligations 192.7 183.1
Inventories 28.8 28.5
Long-term debt 31.7 22.2
Tax loss carryforwards 160.6 192.8
-------- ---------
Total Deferred Tax Assets 1,067.1 1,184.2
Deferred Tax Liabilities:
Property, plant and equipment (196.4) (197.8)
-------- ---------
Net Deferred Tax Asset Prior to Valuation Allowance 870.7 986.4
Less: Valuation Allowance (1.6) (3.1)
-------- ---------
Net Deferred Tax Asset $ 869.1 $ 983.3
======== =========
Management believes that it is more likely than not that the net deferred
tax asset will be realized. This belief is based on criteria established in SFAS
No. 109. The criteria that management considered in making this determination
were historical and projected operating results, the ability to utilize tax
planning strategies and the period of time over which the tax benefits can be
utilized.
Tax effected operating loss carryforwards at December 31, 2005 amounted to
$160.6 compared to $192.8 at the end of 2004. All of the tax effected operating
loss carryforwards are subject to expiration in 2007 or have an indefinite
carryforward period. Substantially all tax effected operating loss carryforwards
were generated by the Company's subsidiary in the United Kingdom. There is an
unlimited carryforward of net operating losses in the United Kingdom and
management has determined that no valuation allowance is needed for these net
operating losses.
The valuation allowance of $1.6 is attributable to the inability to utilize
net operating loss carryforwards from the Company's subsidiaries of $0.5 in
Australia, and $1.1 in Ireland. The operating loss carryforward in Australia is
subject to expiration in 2007. The operating loss carryforward in Ireland has an
indefinite carryforward period.
Cash paid during the year for income taxes, net of refunds received, was
$156.8 in 2005, $103.7 in 2004 and $66.5 in 2003.
The income tax provision at the effective rate differs from the income tax
provision at the United States federal statutory tax rate in effect during
December 31, 2005, 2004 and 2003 for the reasons illustrated in the following
table:
2005 2004 2003
---- ---- ----
Income Tax Provision at Statutory Rate $ 284.3 $ 133.6 $ 97.0
Foreign provisions and related items 0.4 (11.5) (0.4)
Extra territorial income (14.7) (7.2) (5.9)
Domestic manufacturing deduction (4.8) - -
U.S. tax effect of foreign earnings and dividends (21.2) 12.3 (2.5)
State income taxes 27.4 1.1 3.2
Tax exempt interest income (4.7) (1.9) (2.2)
Other, net (12.9) (1.2) 5.1
-------- --------- ---------
Total Income Tax Provision at Effective Rate $ 253.8 $ 125.2 $ 94.3
======== ========= =========
Effective Rate 31.2% 32.8% 34.0%
======== ========= =========
NOTE 7 - INCOME TAXES (Continued)
---------------------
The Company has completed its evaluation of FSP No. FAS 109-2 with respect
to all foreign subsidiaries. As of December 31, 2005, the Company had
repatriated approximately $246.7 of earnings from eleven foreign subsidiaries
under this provision. The total net tax expense associated with these
remittances was approximately $12.7. Income of $4.5 was recognized during the
year ended December 31, 2005, and expense of $17.2 was recognized during the
year ended December 31, 2004, as the result of these remittances.
During the year ended December 31, 2005, the Company recorded a deferred
income tax asset of $9.8 on $46.4 of undistributed earnings that will be
repatriated in the foreseeable future. In addition, the Company recorded a
deferred income tax liability of $1.1 on $10.9 of undistributed earnings that
are not considered to be permanently reinvested. As of December 31, 2005, income
and remittance taxes have not been recorded on $166.2 of undistributed earnings
of foreign subsidiaries, either because any taxes on dividends would be offset
substantially by foreign tax credits or because the Company intends to reinvest
those earnings indefinitely.
NOTE 8 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
------------------------------------------------------
The Company uses forward exchange contracts and options to hedge the
exposure to foreign currency fluctuations associated with certain monetary
assets and liabilities. Changes in the fair value of these items are recorded in
earnings to offset the foreign exchange gains and losses of the monetary assets
and liabilities. The maturities of these contracts and options do not exceed one
year. The carrying amounts, which represent fair values, of these forward
contracts and options were net unrealized gains of $5.3 and net unrealized
losses of $19.1 at December 31, 2005 and 2004, respectively. The fair value of
the Company's forward exchange contracts and options is based principally on
quoted market prices. The results of these hedges are reflected in the
consolidated statements of income as "Other nonoperating income (expense), net."
Cash flows from such derivatives are a component of cash flows from operating
activities in the consolidated statements of cash flows.
The Company also uses forward contracts and options to hedge the exposure
to changes in the prices of commodities, primarily natural gas. The carrying
amounts, which represent fair values, of these forward contracts and options
were net unrealized gains of $13.5 as of December 31, 2005. The forward
contracts and options outstanding at December 31, 2005 hedge forecasted
transactions expected to occur within the next 27 months. Net unrealized gains
and losses on these contracts are recorded as a component of "Accumulated other
comprehensive income (loss)" in the Company's balance sheet until the underlying
hedged item impacts earnings. Net gains of $10.1 ($6.4 after tax) are expected
to be reclassified from Accumulated other comprehensive income (loss) to the
consolidated statements of income as "Cost of sales" during the next 12 months.
Cash flows from such derivatives are a component of cash flows from operating
activities in the consolidated statements of cash flows.
Forward exchange options are also used to hedge specific firm commitments
or forecasted transactions by locking in exchange rates for such anticipated
cash flows. Gains and losses on these instruments are recorded as a component of
other comprehensive income until the forecasted transaction occurs. There were
no outstanding instruments at December 31, 2005 designated as hedges of specific
firm commitments or forecasted transactions. At December 31, 2004, the carrying
amounts of such options, which represent fair values, were net unrealized losses
of $0.1.
NOTE 9 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------
The following table provides a breakdown of property, plant and equipment
balances at December 31, 2005 and 2004:
Estimated Useful
Life (Years) 2005 2004
------------ ----------- -----------
Land - $ 94.0 $ 100.0
Land improvements 11-20 130.8 140.0
Buildings 10-33 802.0 790.3
Machinery and equipment 3-25 3,428.6 3,724.8
Construction-in-progress - 117.9 50.5
----------- ----------
Total property, plant and equipment 4,573.3 4,805.6
----------- ----------
Accumulated depreciation (3,249.8) (3,382.7)
----------- ----------
Net property, plant and equipment $ 1,323.5 $ 1,422.9
=========== ==========
NOTE 9 - PROPERTY, PLANT AND EQUIPMENT (Continued)
--------------------------------------
The Company recorded depreciation expense of $206.2, $207.9 and $242.5 for
the years ended December 31, 2005, 2004 and 2003, respectively. In the first
quarter of 2004, the Company changed its estimate of the service lives of
certain depreciable assets to increase the useful economic life beyond the
original service life assigned to these assets. The Company made this decision
based on design factors, which were confirmed by actual operating experience.
The change in accounting estimate reduced expenses by approximately $6.4 ($4.0
net of tax) for the year ended December 31, 2004.
The amount of interest capitalized as a component of the cost of capital
assets constructed for the years ended December 31, 2005, 2004 and 2003 was $4.3
($2.7 after tax), $3.1 ($2.0 after tax) and $6.6 ($4.2 after tax), respectively.
NOTE 10 - GOODWILL AND OTHER INTANGIBLE ASSETS
----------------------------------------------
As of December 31, 2005 and 2004, the gross and net amounts of intangible
assets, excluding goodwill were:
2005
---------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------ ------------ ------
Patents and licenses $ 10.9 $ (1.9) $ 9.0
Customer/Distributor
relationships 19.9 (3.6) 16.3
Completed technology 12.5 (1.2) 11.3
Pension intangible asset 57.9 - 57.9
Other 17.6 (9.0) 8.6
--------- --------- --------
Total $ 118.8 $ (15.7) $ 103.1
========= ========= ========
2004
---------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------ ------------ ------
Patents and licenses $ 11.8 $ (1.8) $ 10.0
Customer/Distributor
relationships 17.9 (0.6) 17.3
Completed technology 14.5 (0.3) 14.2
Pension intangible asset 20.5 - 20.5
Other 29.4 (10.0) 19.4
--------- --------- --------
Total $ 94.1 $ (12.7) $ 81.4
========= ========= ========
The Company recorded amortization expense related to these intangible
assets of $5.4, $2.7 and $1.4 for the years ended December 31, 2005, 2004 and
2003, respectively. The estimated aggregate amortization expense to be recorded
in each of the next five succeeding years is as follows:
2006 $5.0
2007 $5.0
2008 $4.9
2009 $4.8
2010 $3.3
The changes in the carrying amount of goodwill for the years ended December
31, 2005 and 2004 are as follows:
2005 2004
---- ----
Beginning balance $ 75.9 $ 67.8
Change from acquisitions - 3.0
Translation (9.8) 5.1
------- ------
Total ending balance $ 66.1 $ 75.9
======= ======
NOTE 10 - GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
----------------------------------------------
The Company tests the carrying value of goodwill for impairment annually,
as required by SFAS No. 142, "Goodwill and Other Intangible Assets." The Company
completed its tests for impairment of goodwill during the three month period
ended September 30, 2005. No impairments were identified as a result of the
tests performed.
In the three month period ended September 30, 2004, the Company acquired
the Silicone Division of NUC (see Note 3). The Company assigned the following
amounts and estimated useful lives to the intangible assets identified in this
transaction:
Weighted-
Amount Average
Assigned Life (Years)
-------- ------------
Customer/Distributor relationships $ 17.9 7.0
Completed technology 14.5 14.0
Patents 5.9 14.0
------- ----
Total $ 38.3 10.7
====
None of the intangible assets acquired from NUC have significant residual
value. The amount assigned to the intangible assets is amortized on a
straight-line basis over the applicable estimated useful lives. No research and
development assets were acquired from NUC as part of the transaction. Goodwill
of $3.0 was recognized by the Company from the NUC acquisition.
NOTE 11 - RESTRICTED ASSETS
---------------------------
The composition of restricted investments as of December 31, 2005 and 2004
are as follows:
2005 2004
---- ----
Restricted Securities:
U.S. government obligations $ 1.2 $ 3.0
U.S. government agency obligations 5.7 7.2
Mortgage-backed and asset-backed securities 2.3 2.8
Corporate bonds 7.6 9.7
Foreign bonds 1.1 -
Foreign bank deposit 0.8 1.8
Money market funds 7.2 31.3
------- ------
Total Restricted Securities $ 25.9 $ 55.8
======= ======
The contractual maturities of restricted securities at December 31, 2005
and 2004 are as follows:
2005 2004
---- ----
Mature in one year or less $ 10.4 $ 37.4
Mature after one year through five years 7.2 9.0
Mature after five years 8.3 9.4
------- ------
Total restricted securities $ 25.9 $ 5.8
======= ======
Restricted assets consist principally of obligations backed by the U.S.
Government or one of its agencies and corporate and municipal issue bonds, which
have been classified as "available for sale" in conformity with SFAS No. 115.
The aggregate carrying value of the marketable securities classified as
restricted assets approximates the fair market value. Fair values are determined
based on quoted market prices or, if quoted market prices are not available, on
market prices of comparable instruments. For purposes of computing realized gain
or loss on the disposition of restricted assets, the specific identification
method is used. Restricted assets are included in the caption "Restricted
investments" in the "Other Assets" section of the consolidated balance sheets.
The Company has Letters of Credit outstanding of $23.1 and $28.7 at
December 31, 2005 and 2004, respectively, for which the Company has legally
restricted funds to serve as collateral for the purpose of reducing the
effective cost of those letters of credit. As of December 31, 2005 and 2004, the
Company had $24.4 and $30.3, respectively, of funds restricted to support these
obligations. In addition, the Company had foreign bank deposits of $0.8 and $1.8
at December 31, 2005 and 2004, respectively, included in restricted assets.
NOTE 11 - RESTRICTED ASSETS (Continued)
---------------------------
In order to comply with certain environmental regulations, as of December
31, 2005 and 2004, the Company maintained $0.7 and $23.7, respectively in
certain trusts in order to provide financial assurance for the potential payment
of aggregate estimated closure, post-closure, corrective action and potential
liability costs associated with the operation of hazardous waste storage
facilities at certain plant sites (see Note 17 for further discussion). Those
amounts are included in the caption "Restricted investments" in the consolidated
balance sheets.
NOTE 12 - NOTES PAYABLE AND CREDIT FACILITIES
---------------------------------------------
Notes payable include amounts outstanding under short-term lines of credit
and were $11.7 and $5.6 at December 31, 2005 and 2004, respectively. The
carrying amounts of these short-term borrowings approximated their fair value.
DCT maintains an accounts receivable securitization facility with its
primary bank. The discount rate under this facility is TIBOR plus 0.25%.
Pursuant to this facility, DCT has sold accounts receivable in the amount of
$129.6 to such bank in exchange for $129.6 during 2005, and $197.7 was sold to
such bank in exchange for $197.6 in 2004. Under the facility, DCT retains no
interest in the accounts receivable. However, it maintains insurance to protect
95% of the receivables liquidated under the program; premiums for such insurance
of $0.3 and $0.2 were paid in 2005 and 2004, respectively. As of December 31,
2005 and 2004, $0.0 and $27.3, respectively, remained outstanding under the
facility.
On December 16, 2004, the Company entered into a $500.0 unsecured revolving
credit agreement with a syndicate of commercial banks, which expires on December
16, 2009. This agreement replaced the $500.0 364-day revolving credit agreement
dated June 1, 2004. The new revolving credit agreement allows for borrowing in
various currencies for general corporate purposes of the Company and its
subsidiaries. These credit facilities require the payment of commitment fees. As
of December 31, 2005, these credit lines were unused.
In addition, the Company had unused and committed credit facilities for use
by foreign subsidiaries at December 31, 2005 and 2004 with various U.S. and
foreign banks totaling $107.9 and $130.3, respectively. These credit facilities
require the payment of commitment fees. The Company intends to renew these
facilities at their respective maturities. These facilities are available in
support of working capital requirements.
NOTE 13 - DEFERRED REVENUE
--------------------------
During the year ended December 31, 2005, the Company, through a
consolidated subsidiary, entered into long-term product sales agreements with
certain customers. Under these agreements, customers are obligated to purchase
minimum quantities of product at specified prices. The product sales agreements
have an aggregate value of $2,150.7 and extend over 10 years with delivery to
customers commencing on January 1, 2006. Revenue associated with the agreements
will be recognized using the average sales price over the life of the
agreements. Differences between amounts invoiced to customers under the
agreements and the amounts recognized using the average price methodology will
be reported as deferred revenue in the consolidated balance sheets.
Under the agreements, customers were required to make non-refundable
advanced cash payments of $111.4 during 2005 and are required to make additional
advanced payments of $111.4 during 2006. The amounts are recorded as deferred
revenue and will be recognized as income ratably on a per kilogram basis as
products are shipped over the life of the agreements. In the event that certain
product delivery timelines are not met, subject to specific conditions outlined
in the agreements, customers may be entitled to damages up to the amount of the
advanced cash payments. As of December 31, 2005, $111.4 in advanced payments had
been received, of which $8.0 of deferred revenue has been classified as "Other
current liabilities" and $103.4 has been classified as "Deferred revenue" in the
consolidated balance sheets. The advanced payments received during the year
ended December 31, 2005 have been classified as cash flows from operating
activities on the consolidated statements of cash flows.
NOTE 14 - LONG-TERM DEBT
------------------------
Long-term debt at December 31, 2005 and 2004 consisted of the following:
2005 2004
---- ----
Long-Term Debt
Fixed rate note due 2005
6.50% at December 31, 2004 $ - $ 2.8
Fixed rate note due 2006
4.70% at December 31, 2005 7.3 8.6
Variable rate notes due 2007
2.98% at December 31, 2005 1.2 2.2
Fixed rate notes due 2007
5.85% at December 31, 2005 2.5 9.4
Fixed rate note due 2015
6.36% at December 31, 2004 - 11.2
Variable rate bonds due 2019
4.41% at December 31, 2005 5.5 5.8
Other obligations and capital leases
5.39-6.40% at December 31, 2005 33.5 28.5
------- ------
Total Long-Term Debt 50.0 68.5
Less - payments due within one year 10.7 8.3
------- ------
Total Long-Term Debt Due after one year $ 39.3 $ 60.2
======= ======
The fair value of the Company's long-term debt, including the portion due
within one year, approximated its book value of $50.0 at December 31, 2005. At
December 31, 2004, the fair value of the long-term debt, including the portion
due within one year, approximated the book value of $68.5.
Annual aggregate maturities of the long-term debt of the Company are: $10.7
in 2006, $3.6 in 2007, $1.7 in 2008, $1.8 in 2009, $2.0 in 2010 and $30.2
thereafter.
Cash paid during the year for interest was $5.1 in 2005, $679.3 in 2004 and
$5.4 in 2003. Cash paid for interest in 2004 includes the payment of $673.8 in
accrued interest on pre-petition debt, payables, and other liabilities upon the
Company's emergence from Chapter 11 in June 2004.
NOTE 15 - PENSION AND OTHER POSTRETIREMENT BENEFITS
---------------------------------------------------
The Company maintains defined benefit employee retirement plans covering
most domestic and certain non-U.S. employees. The Company also has various
defined contribution and savings plans covering certain employees. The
components of pension expense for the Company's domestic and foreign plans are
set forth below for the years ended December 31, 2005, 2004 and 2003:
U.S. Plans Non-U.S. Plans
------------------------------ ---------------------------
2005 2004 2003 2005 2004 2003
---- ---- ---- ---- ---- ----
Defined Benefit Plans:
Service cost $ 23.7 $ 20.2 $ 19.7 $ 17.9 $ 17.2 $ 14.3
Interest cost on projected benefit obligations 59.8 58.7 58.6 24.2 22.5 19.0
Expected return on plan assets (54.5) (51.2) (55.7) (23.8) (23.0) (18.6)
Net amortization of losses 19.1 17.0 9.9 6.1 4.9 2.6
Curtailments, settlements and
special termination benefits - 5.2 - (0.2) 2.0 -
------ ------ ------ ------ ------ ------
Total Pension Expense $ 48.1 $ 49.9 $ 32.5 $ 24.2 $ 23.6 $ 17.3
====== ====== ====== ====== ====== ======
Total
-----------------------------
2005 2004 2003
---- ---- ----
Defined Benefit Plans:
Service cost $ 41.6 $ 37.4 $ 34.0
Interest cost on projected benefit obligations 84.0 81.2 77.6
Expected return on plan assets (78.3) (74.2) (74.3)
Net amortization of losses 25.2 21.9 12.5
Curtailments, settlements and
special termination benefits (0.2) 7.2 -
------ ------ ------
Total Pension Expense $ 72.3 $ 73.5 $ 49.8
====== ====== ======
The Company made matching contributions under various defined contribution
plans of $16.8, $17.0 and $18.9 for the years ended December 31, 2005, 2004 and
2003, respectively.
During the year ended December 31, 2005, the Company terminated the defined
benefit plan of a Japanese subsidiary. Upon the plan termination, employees
became participants in the defined benefit plan of DCT. The plan termination
resulted in a net gain from curtailment and settlement of $0.2.
On April 5, 2004, Dow Corning announced a global workforce reduction, which
was primarily the result of internal restructuring. The Company accounted for
the workforce reduction under the guidelines of SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits." During the year ended December 31, 2004, the Company
recognized pre-tax charges related to its defined benefit plans of $2.7 for
special termination benefits and the effect of curtailment. In addition, the
Company accounted for the effects of the workforce reduction on its U.S. Retiree
Medical Plan by recognizing a pre-tax charge of $0.7 for special termination
benefits and pre-tax income of $0.7 for curtailment.
The Company settled a portion of its obligation under defined benefit plans
during 2004 through lump sum payments to participants and annuity arrangements
with third-party financial institutions. The reduction in these obligations was
accounted for as settlements under SFAS No. 88 and resulted in settlement
expense of $4.5 from early recognition of unrealized actuarial losses.
NOTE 15 - PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
---------------------------------------------------
The majority of the Company's defined benefit employee retirement plans
have a measurement date of December 31 of the applicable year. The following
table reconciles the defined benefit plans' funded status with amounts
recognized in the Company's consolidated balance sheets at December 31, 2005 and
2004, respectively as part of other assets and other long-term liabilities:
U.S. Plans Non-U.S. Plans Total
--------------------- -------------------- --------------------
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
Net Accrued Pension Liability:
Projected benefit obligation in
excess of plan assets $ (336.0) $ (351.9) $ (227.2) $ (189.5) $ (563.2) $ (541.4)
Unrecognized net loss 274.9 254.1 175.1 152.6 450.0 406.7
Unrecognized prior service costs 37.6 19.7 15.3 1.7 52.9 21.4
Unrecognized net transition obligation - - 0.5 1.0 0.5 1.0
Minimum pension liability (137.2) (146.4) (122.2) (82.9) (259.4) (229.3)
Intangible asset 45.7 19.7 12.2 0.8 57.9 20.5
--------- --------- -------- -------- -------- --------
Net Accrued Pension Liability $ (115.0) $ (204.8) $ (146.3) $ (116.3) $ (261.3) $ (321.1)
========= ========= ======== ======== ======== ========
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for defined benefit plans with accumulated benefit
obligations in excess of plan assets for the years ended December 31, 2005 and
2004 are as follows:
U.S. Plans Non-U.S. Plans Total
--------------------- -------------------- --------------------
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
Projected benefit obligation $1,093.5 $1,026.6 $ 512.1 $ 465.0 $1,605.6 $1,491.6
Accumulated benefit obligation 918.0 899.1 351.7 403.3 1,269.7 1,302.4
Fair value of plan assets 757.3 674.8 296.4 285.1 1,053.7 959.9
The following table provides a reconciliation of beginning and ending
balances of the projected benefit obligation as of December 31, 2005 and 2004:
U.S. Plans Non-U.S. Plans Total
-------------------- -------------------- --------------------
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
Projected Benefit Obligation:
Projected benefit obligation,
beginning of year $1,026.7 $ 968.2 $ 518.8 $ 450.0 $1,545.5 $1,418.2
Service cost 23.7 20.2 17.9 17.2 41.6 37.4
Interest cost 59.8 58.7 24.2 22.5 84.0 81.2
Actuarial losses 24.2 45.5 85.1 12.8 109.3 58.3
Foreign currency exchange
rate changes - - (57.4) 36.1 (57.4) 36.1
Benefits paid and settlements (61.9) (72.9) (27.3) (21.0) (89.2) (93.9)
Curtailments and special
termination benefits - (1.4) (1.4) (1.2) (1.4) (2.6)
Plan amendments 21.0 8.4 15.5 - 36.5 8.4
Other - - 2.4 2.4 2.4 2.4
--------- --------- --------- --------- --------- ---------
Projected benefit obligation,
end of year $1,093.5 $1,026.7 $ 577.8 $ 518.8 $1,671.3 $1,545.5
======== ======== ========= ========= ======== ========
NOTE 15 - PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
---------------------------------------------------
The following table provides a reconciliation of the beginning and ending
balances of the fair value of plan assets as of December 31, 2005 and 2004:
U.S. Plans Non-U.S. Plans Total
--------------------- -------------------- --------------------
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
Fair Value of Plan Assets:
Fair value of plan assets,
beginning of year $ 674.8 $ 614.9 $ 329.2 $ 270.7 $1,004.0 $ 885.6
Actual return on plan assets 41.9 64.0 61.1 28.5 103.0 92.5
Foreign currency exchange
rate changes - - (38.4) 23.4 (38.4) 23.4
Employer contributions 102.5 68.8 16.4 24.9 118.9 93.7
Participant contributions - - 2.0 2.0 2.0 2.0
Benefits paid and settlements (61.9) (72.9) (27.3) (21.0) (89.2) (93.9)
Other - - - 0.7 - 0.7
--------- --------- --------- --------- --------- ---------
Fair value of plan assets,
end of year $ 757.3 $ 674.8 $ 343.0 $ 329.2 $1,100.3 $1,004.0
========= ========= ========= ========= ======== ========
For the United States defined benefit plan, as of December 31, 2005 and
2004, the fair value of plan assets included 65% of equity securities and 35% of
debt securities. The plan targets an asset allocation of 60-70% equity
securities and 30-40% debt securities. The plan's expected long-term rate of
return is primarily based on historical returns of similarly diversified passive
portfolios and expected results from active investment management.
Given the relatively long horizon of the Company's aggregate obligation,
its investment strategy is to improve and maintain the funded status of its U.S.
and non-U.S. plans over time without exposure to excessive asset value
volatility. The Company manages this risk primarily by maintaining actual asset
allocations between equity and fixed income securities for the plans within a
specified range of its target asset allocation. In addition, the Company ensures
that diversification across various investment subcategories within each plan
are also maintained within specified ranges.
All of the Company's pension assets are managed by outside investment
managers and held in trust by third-party custodians. The selection and
oversight of these outside service providers is the responsibility of investment
committees and their advisors. The selection of specific securities is at the
discretion of the investment manager and is subject to the provisions set forth
by written investment management agreements and related policy guidelines
regarding permissible investments and risk control practices.
The Company's funding policy is to contribute to defined benefit plans when
pension laws and economics either require or encourage funding. Of the defined
benefit plans maintained by the Company, the U.S. plans covering the parent
company are the largest plans. Contributions to the U.S. defined benefit plans
for the year ended December 31, 2005 totaled $102.5. Contributions of
approximately $55.0 are planned for the U.S. plans in 2006.
Of the defined contribution and savings plans maintained by the Company,
the U.S. plan covering the parent company is the largest plan. Employer matching
contributions for the U.S. defined contribution plan for the year ended December
31, 2005 totaled $11.4. The Company expects to make contributions of
approximately $12.0 during 2006.
NOTE 15 - PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
---------------------------------------------------
The weighted-average assumptions used to determine the benefit obligation
and to determine the net benefit costs are shown in the following table.
Discount rates and rates of increase in future compensation are weighted based
upon the projected benefit obligations of the respective plans. The expected
long-term rate of return on plan assets is weighted based on total plan assets
for each plan at year end. The long-term rate of return on plan assets
assumption is determined considering historical returns and expected future
asset allocation and returns for each plan.
Benefit Obligations at December 31
----------------------------------------------------------------------
U.S. Plans Non-U.S. Plans Total
---------------- --------------- ---------------
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
Discount rate 5.75% 6.00% 4.40% 5.05% 5.28% 5.68%
Rate of increase in future
compensation levels 4.25% 4.25% 4.10% 4.10% 4.20% 4.20%
Expected long-term rate of
return on plan assets 8.50% 8.75% 6.96% 7.13% 8.02% 8.22%
Net Periodic Pension Cost for the Year Ended December 31
----------------------------------------------------------------------
U.S. Plans Non-U.S. Plans Total
---------------- --------------- ---------------
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
Discount rate 6.00% 6.25% 5.05% 4.97% 5.68% 5.85%
Rate of increase in future
compensation levels 4.25% 4.25% 4.10% 4.06% 4.20% 4.19%
Expected long-term rate of
return on plan assets 8.75% 8.75% 7.13% 7.10% 8.22% 8.24%
The Company uses a bond mapping analysis, which matches cash flows from a
hypothetical portfolio of corporate bonds against the estimated future benefit
payments of the U.S. defined benefit plans, to arrive at an effective discount
rate. The discount rates for non-U.S. defined benefit plans are based on
benchmark rate indices specific to the respective countries and durations
similar to those of the plans' liabilities.
The Company expects to pay benefits under its defined benefit plans in
future periods as detailed in the following table. The expected benefits have
been estimated based on the same assumptions used to measure the Company's
benefit obligation as of December 31, 2005 and include benefits attributable to
future employee service.
Estimated Future Benefit Payments
-------------------------------------------------------
U.S. Plans Non-U.S. Plans Total
---------- -------------- ---------
2006 $ 60.0 $ 17.3 $ 77.3
2007 59.2 19.5 78.7
2008 58.9 22.6 81.5
2009 58.8 22.3 81.1
2010 59.2 23.3 82.5
2011 - 2015 320.5 136.7 457.2
In addition to providing pension benefits, the Company, primarily in the
United States, provides certain health care and life insurance benefits for most
retired employees. The cost of providing these benefits to retirees outside the
United States is not significant. Net periodic postretirement benefit cost
includes the following components for the years ended December 31, 2005, 2004
and 2003:
2005 2004 2003
--------- --------- ---------
Net Periodic Postretirement Benefit Cost:
Service cost $ 4.8 $ 4.4 $ 3.9
Interest cost 16.3 15.9 18.2
Amortization of prior service benefits (5.6) (4.6) (0.8)
Amortization of actuarial losses 3.9 2.3 1.2
Other 1.7 - -
--------- --------- ---------
Total Net Periodic Postretirement Benefit Cost $ 21.1 $ 18.0 $ 22.5
========= ========= =========
NOTE 15 - PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
---------------------------------------------------
The following table presents a reconciliation of the beginning and ending
balances as of December 31, 2005 and 2004 of the accumulated postretirement
benefit obligation, as well as the accrued postretirement benefit cost
recognized in the Company's consolidated balance sheets as part of other
long-term liabilities.
2005 2004
--------- --------
Accumulated Postretirement Benefit Obligation:
Accrued postretirement benefit obligation at beginning of year $ 281.8 $ 267.3
Service cost 4.8 4.4
Interest cost 16.3 15.9
Actuarial loss (gain) (9.1) 20.6
Curtailment and special termination benefits - 0.4
Plan change (12.2) (7.9)
Benefits paid (19.7) (18.9)
--------- --------
Accumulated Postretirement Benefit Obligation at End of Year 261.9 281.8
Unrecognized prior service benefit 49.2 42.5
Unrecognized net loss (70.4) (85.1)
--------- --------
Total Accrued Postretirement Benefit Obligation $ 240.7 $ 239.2
========= ========
The Company adopted FSP No. FAS 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," effective April 30, 2004. FSP No. FAS 106-2 of the
same title superseded this FSP in June 2004. The adoption of these FSP's reduced
the accumulated post retirement benefit obligation related to the Company's
retiree health care and life insurance benefit plans by $6.1 at April 30, 2004.
In addition, the adoption of these FSP's reduced the net periodic benefit cost
recognized for these plans by $0.5 during the year ended December 31, 2004.
The health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 10.0% in 2005 and was assumed to decrease
gradually to 5.0% in 2011 and remain at that level thereafter. For retirees
under age 65, plan features limit the health care cost trend rate assumption to
a maximum of 8.0% for years 1994 and later. The health care cost trend rate
assumption has a significant effect on the amounts reported. Increasing the
assumed health care cost trend rate by one percentage point in each year would
increase the accumulated postretirement benefit obligation by 2.7% and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 2005 by 5.4%. Decreasing the assumed health care
cost trend rates by one percentage point in each year would decrease the
accumulated postretirement benefit obligation by 2.4% and the aggregate of the
service and interest cost components of net periodic postretirement benefit cost
for 2005 by 6.3%.
The discount rate used in determining the accumulated postretirement
benefit obligation was 5.75% and 6.0% at December 31, 2005 and 2004,
respectively.
The Company funds most of the cost of the postretirement health care and
life insurance benefits as incurred. Benefit payments to retirees totaled $19.7
for the year ended December 31, 2005. The Company expects to pay future benefits
under its postretirement health care and life insurance benefit plan as detailed
in the following table. The expected payments have been estimated based on the
same assumptions used to measure the Company's postretirement benefit
obligations as of December 31, 2005.
Estimated Future
Postretirement
Benefit Payments
----------------
2006 $ 20.2
2007 20.2
2008 20.1
2009 20.1
2010 20.0
2011 - 2015 99.2
NOTE 16 - PROCEEDING UNDER CHAPTER 11
-------------------------------------
Prior to 1992, the Company was engaged in the manufacture and sale of
silicone gel breast implants and the raw material components of those products.
In January 1992, the Company ceased production of these products following a
request by the United States Food and Drug Administration that breast implant
producers voluntarily halt the sale of silicone gel breast implants. Between
1991 and 1995, the Company experienced a substantial increase in the number of
lawsuits against the Company relating to breast implants.
By May 1995, the Company was named in thousands of lawsuits filed by, or on
behalf of, individuals who claim to have, or have had, breast implants. As a
result, on May 15, 1995 (the "Filing Date"), the Company voluntarily filed for
protection under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code")
with the U.S. Bankruptcy Court for the Eastern District of Michigan, Northern
Division (the "Bankruptcy Court") in order to resolve the Company's breast
implant liabilities and related matters (the "Chapter 11 Proceeding"). The
Company emerged from the Chapter 11 Proceeding on June 1, 2004 (the "Effective
Date") and is currently in the process of implementing its plan of
reorganization.
Plan of Reorganization
----------------------
In 1999, the Company, with the Committee of Tort Claimants, a committee
appointed in the Chapter 11 Proceeding to represent products liability
claimants, filed a joint plan of reorganization (the "Joint Plan of
Reorganization") and a related disclosure statement. In November 1999, the
Bankruptcy Court issued an order confirming the Joint Plan of Reorganization.
The Joint Plan of Reorganization became effective on the Effective Date. The
Joint Plan of Reorganization provides funding for the resolution of breast
implant and other products liability litigation covered by the Chapter 11
Proceeding through several settlement options or through litigation and for the
satisfaction of commercial creditor claims.
Breast Implant and Other Products Liability Claims
--------------------------------------------------
Products liability claims to be resolved by settlement will be administered
by a settlement facility (the "Settlement Facility"), and products liability
claims to be resolved by litigation will be defended by a litigation facility
(the "Litigation Facility"). Products liability claimants choosing to litigate
their claims will be required to pursue their claims through litigation against
the Litigation Facility. Under the Joint Plan of Reorganization, the present
value of the total amount of payments by the Company committed to resolve
products liability claims will not exceed $2.35 billion valued as of the
Effective Date. Of this amount, no more than $400.0 will be used to fund the
Litigation Facility. Payments made by the Company will be placed in a trust and
withdrawn by the Settlement Facility to pay eligible settling claimants and to
cover the Settlement Facility's operating expenses. Amounts will also be
withdrawn from the trust as necessary to fund the resolution of claims via the
Litigation Facility and the operational expenses of the Litigation Facility.
Funding the Settlement and Litigation Facilities
------------------------------------------------
The Company has an obligation to fund the Settlement Facility and the
Litigation Facility (collectively, the "Facilities") over a 16-year period,
commencing at the Effective Date. The Company anticipates that it will be able
to meet its remaining payment obligations to the Facilities utilizing cash flow
from operations, insurance proceeds and/or prospective borrowings. Under certain
circumstances, the Company will also have access to a ten-year unsecured
revolving credit commitment, established by Dow Chemical and Corning, to assist
in the timely funding of the Facilities. During the first five years after the
Effective Date, the maximum aggregate amount available to the Company under this
revolving credit commitment is $300.0, thereafter decreasing by $50.0 per year.
Borrowings under this revolving credit commitment will only be permitted in the
event that the Company is unable to meet its remaining obligations to fund the
Facilities. As of December 31, 2005, the Company had not drawn any amounts
against the revolving credit commitment.
Funds will be paid by the Company (a) to the Settlement Facility with
respect to products liability claims, as such claims are processed and allowed
by the Settlement Facility, and (b) via the Settlement Facility with respect to
products liability claims processed through the Litigation Facility, as such
claims are resolved. Insurance settlements are paid by the Company's insurers
directly to the Settlement Facility on behalf of the Company. The amount of
funds paid by or on behalf of the Company are subject to annual and aggregate
funding limits. The Company has made payments of $1,424.2 to the Settlement
Facility through December 31, 2005.
Based on funding agreements relating to the amount and timing of the
Company's remaining payment obligations to the Settlement Facility, future
payments to the Settlement Facility will be made on a periodic basis until such
payment obligations are met. These funding agreements restrict the application
of payments made by the Company in advance of their due dates (the "Early
Payments"). Under these funding agreements, the Company receives credit for the
future value equivalent, at the due date of the scheduled payment obligations,
of the Early Payments using a discount rate of 7%. The actual amounts payable
and the timing of such payments by the Company are uncertain and will be
affected by, among others, the rate at which claims are resolved by the
Facilities, the rate at which insurance proceeds are received by the Company
from its insurers and the degree to which the Company receives credit for the
future value equivalent of Early Payments. The ultimate amount of additional
future value equivalent credit is subject to confirmation by the claims
administrator of the Settlement Facility.
NOTE 16 - PROCEEDING UNDER CHAPTER 11 (Continued)
-------------------------------------
Insurance
---------
The Company had a substantial amount of unexhausted products liability
insurance coverage with respect to breast implant lawsuits and claims. Many of
the Company's insurers reserved the right to deny coverage, in whole or in part.
Litigation between the Company and its insurers ("Litigating Insurers")
regarding coverage for products liability was conducted between 1993 and 1999,
and resulted in judicial rulings substantially in favor of the Company's
position (the "Insurance Litigation"). A majority of the Litigating Insurers
have reached settlements with the Company. The Company is continuing settlement
negotiations with the remaining Litigating Insurers and other insurers that were
not involved in the Insurance Litigation. In addition, certain previously
settling insurers have claimed a reimbursement right with respect to a portion
of previously paid insurance proceeds.
Insurance Allocation Agreement between the Company and Dow Chemical
-------------------------------------------------------------------
A number of the products liability insurance policies relevant to claims
against the Company name the Company and Dow Chemical as co-insureds (the
"Shared Insurance Assets"). A portion of the Shared Insurance Assets may, under
certain conditions, become payable by the Company to Dow Chemical under an
insurance allocation agreement, as amended, between the Company and Dow Chemical
(the "Insurance Allocation Agreement"). The Insurance Allocation Agreement was
reached between Dow Chemical and the Company in order to resolve issues related
to the amount of the Shared Insurance Assets that would be available to the
Company for resolution of its products liability claims. Under the Insurance
Allocation Agreement, 25% of certain of the Shared Insurance Assets will be paid
by the Company to Dow Chemical subsequent to the Effective Date. However, the
amount of Shared Insurance Assets that will be payable to Dow Chemical by the
Company under the Insurance Allocation Agreement will not exceed approximately
$285.0. In addition, a portion of any such amounts paid to Dow Chemical, to the
extent not used by Dow Chemical to pay certain products liability claims, will
be paid over to the Company after the expiration of a 17.5-year period
commencing on the Effective Date. Furthermore, the Company recognized an
obligation of $35.0 to Dow Chemical related to additional insurance coverage
under which the Company and Dow Chemical are co-insureds. The Company previously
recorded an estimate of amounts of insurance proceeds payable or to be paid to
Dow Chemical (the "Co-insurance payable"). As a result of certain insurance
settlements and an amendment to the Insurance Allocation Agreement between the
Company and Dow Chemical, as of December 31, 2005, the Co-insurance payable has
been reduced to $46.8.
Commercial Creditor Issues
--------------------------
The Joint Plan of Reorganization provides funding to satisfy commercial
creditor claims, including accrued interest. The Joint Plan of Reorganization,
as amended pursuant to a May 21, 2004 ruling of the U.S. District Court for the
Eastern District of Michigan (the "District Court"), provides that each of the
Company's commercial creditors (the "Commercial Creditors") would receive in
cash the sum of (a) an amount equal to the principal amount of their claims and
(b) interest on such claims. As of December 31, 2005, the Company has paid
approximately $1.5 billion in principal and the undisputed portion of interest
payable to the Commercial Creditors of the Company.
The actual amount of interest that will ultimately be paid to these
Commercial Creditors is uncertain due to pending litigation in the U.S. Court of
Appeals for the Sixth Circuit (the "Court of Appeals"). As previously reported
between 1999 and 2004, there have been a number of Bankruptcy Court and District
Court rulings related to the interest rate that should be applied to claims of
the Commercial Creditors from the Filing Date through the Effective Date
("Pendency Interest"). The Commercial Creditors and the Company disagree on the
interpretation and application of these rulings to determine the amount of
Pendency Interest. This disagreement is currently the subject of appeals by
certain Commercial Creditors, the Committee of Unsecured Creditors, and the
Company to the Court of Appeals.
The Company's position is that non-default rates of interest for floating
rate obligations should be determined in accordance with the formulas in the
relevant contracts, except that the aggregate amount of interest cannot be less
than that resulting from the application of a fixed rate of 6.28% through June
1, 2004. The undisputed interest portion was calculated by application of this
position (the "Undisputed Portion"). As of September 29, 2004, the position of
certain Commercial Creditors, joined by the Committee of Unsecured Creditors, is
that, in addition to the Undisputed Portion, interest in excess of $140.0, plus
an unquantified amount of certain fees, costs and expenses, should be added to
the claims filed by holders of the fixed and floating rate obligations. As of
December 31, 2005 and 2004, the amount of interest included in the caption
"Accrued interest" recorded in the consolidated balance sheets related to the
Company's potential obligation to pay additional interest to its Commercial
Creditors in the Chapter 11 Proceeding was $66.3 and $63.5, respectively. The
Court of Appeals heard oral arguments regarding this issue on July 27, 2005. The
Company is uncertain as to when the Court of Appeals will issue its ruling
regarding Pendency Interest.
Reorganization Costs
--------------------
The Company has incurred and will continue to incur costs associated with
(a) the matters related to the Chapter 11 Proceeding that will be resolved by
the District Court and the Court of Appeals, and (b) the implementation of the
Joint Plan of Reorganization. The aggregate amount of these costs, which are
being expensed as incurred, are recorded in the caption "Other nonoperating
income (expense), net" in the consolidated statements of income. For the years
ended December 31, 2005, 2004 and 2003, the Company's reorganization costs
included legal expenses of $2.0, $5.1 and $3.9, respectively, and administrative
expenses of $1.4, $2.1 and $1.5, respectively.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
---------------------------------------
Chapter 11 Related Matters
--------------------------
Insurance Receivable
--------------------
Of the total "Anticipated implant insurance receivable" of $265.4 as of
December 31, 2005, $55.2 related to insurance that has not yet been settled with
certain of the Litigating Insurers, which are subject to the Insurance
Litigation rulings, and $210.2 represented amounts to be received by the Company
pursuant to settlements with other of the Company's insurance carriers. Of the
total "Anticipated implant insurance receivable" of $307.8 as of December 31,
2004, $73.5 related to insurance that has not yet been settled with certain of
the Litigating Insurers and $234.3 represented amounts to be received by the
Company pursuant to settlements with other of the Company's insurance carriers.
The principal uncertainties that exist with respect to the realization of
the "Anticipated implant insurance receivable" include the ultimate cost of
resolving implant litigation and claims, the results of settlement negotiations
with insurers, and the extent to which insurers may become insolvent in the
future. Management believes that, while uncertainties regarding this asset
continue to exist, these uncertainties are not reasonably likely to result in a
material adverse change to the Company's financial position or results of
operations, and that it is probable that this asset will ultimately be realized.
This belief is further supported by the fact that the Company received insurance
recoveries of $1,310.8 from September 1, 1994 through December 31, 2005, and
entered into settlements with certain insurers for future reimbursement.
Implant Reserve
---------------
As of December 31, 2005 and 2004, the Company's "Implant reserve" recorded
in the consolidated balance sheets was $1,813.5 and $1,884.9, respectively, to
reflect the Company's estimated remaining obligation to fund the resolution of
breast implant claims pursuant to the Company's Chapter 11 plan of
reorganization and other breast implant litigation related matters (see Note 16
for further discussion). During the years ended December 31, 2005 and 2004, the
Company recorded $21.0 and $12.1, respectively, in the caption "Other
nonoperating income (expense), net" to reflect a credit for the future value
equivalent credit of Early Payments from restricted insurance proceeds to the
Settlement Facility of $346.3 and $306.0, respectively.
Accrued Interest
----------------
As of December 31, 2005 and 2004, the amount of interest included in the
caption "Accrued interest" recorded in the consolidated balance sheets related
to the Company's potential obligation to pay interest to the Commercial
Creditors in the Chapter 11 Proceeding was $66.3 and $63.5, respectively. The
actual amount of interest that will be paid to these creditors is uncertain and
will ultimately be resolved through continued proceedings in the Court of
Appeals (see Note 16 for further discussion). The Company's results reflected
interest expense for the amount of interest potentially payable to the
Commercial Creditors of $3.1 ($2.0 after tax) and $95.5 ($60.2 after tax) for
the years ended December 31, 2005 and 2004, respectively.
Co-Insurance Payable
--------------------
As of December 31, 2005 and 2004, the amount payable pursuant to the
"Insurance Allocation Agreement" recorded in the consolidated balance sheets was
$46.8 and $48.9, respectively. Of the total amount payable, $10.6 and $2.1 were
recorded as "Other current liabilities" in the consolidated balance sheets as of
December 31, 2005 and 2004, respectively. As of December 31, 2005 and 2004,
$36.2 and $46.8, respectively, were included in the caption "Co-insurance
payable" in the Company's consolidated balance sheets (see Note 16 for further
discussion).
Tax Matters
-----------
In May 1999, the Company received a Statutory Notice of Deficiency (the
"Notice") from the United States Internal Revenue Service ("IRS"). The Notice
asserts tax deficiencies totaling approximately $65.3 relating to the Company's
consolidated federal income tax returns for the 1995 and 1996 calendar years.
Management believes that the deficiencies asserted by the IRS are excessive and
is vigorously contesting the IRS' claims. Management anticipates that this
matter will be resolved by the District Court which retains jurisdiction over
items that occurred during the Chapter 11 Proceeding and believes that such
resolution will not have a material adverse impact on the Company's consolidated
financial position or results of operations. The Company is engaged in
discussions with the IRS in an effort to resolve this matter.
In August 2004, the Company received a Notice of Proposed Adjustment (the
"Adjustment Notice") from the IRS related to the Company's consolidated federal
income tax returns for the 1997, 1998, and 1999 calendar years. If the IRS
prevails with respect to the issues identified in the Adjustment Notice, the
amount of a resulting tax deficiency would total approximately $116.9.
Management believes that the deficiencies asserted by the IRS are excessive and
is vigorously contesting the IRS' claims. Management believes that the
resolution of the issues identified in the Adjustment Notice will not have a
material adverse impact on the Company's consolidated financial position or
results of operations.
NOTE 17 - COMMITMENTS AND CONTINGENCIES (Continued)
---------------------------------------
Risks and Uncertainties
-----------------------
While the Company does not anticipate a need to further revise amounts
recorded in its consolidated financial statements for these Chapter 11 related
matters, as additional facts and circumstances develop, it is at least
reasonably possible that amounts recorded in the Company's consolidated
financial statements may be revised. Future revisions, if required, could have a
material effect on the Company's financial position or results of operations in
the period or periods in which such revisions are recorded. Since any specific
future developments, and the impact such developments might have on amounts
recorded in the Company's consolidated financial statements, are unknown at this
time, an estimate of possible future adjustments cannot be made.
Environmental Matters
---------------------
The Company had been advised by the United States Environmental Protection
Agency ("EPA") or by similar state and non-U.S. national regulatory agencies
that the Company, together with others, is a Potentially Responsible Party
("PRP") with respect to a portion of the cleanup costs and other related matters
involving a number of abandoned hazardous waste disposal sites. Management
believes that there are 16 sites at which the Company may have some liability,
although management expects to settle the Company's liability for eight of these
sites for de minimis amounts. Based upon preliminary estimates by the EPA or the
PRP groups formed with respect to these sites, the aggregate liabilities for all
PRP's at those sites at which management believes the Company may have more than
a de minimis liability is $5.8. Management cannot estimate the aggregate
liability for all PRP's at all of the sites at which management expects the
Company has a de minimis liability.
The Company records accruals for environmental matters when it is probable
that a liability has been incurred and the Company's costs can be reasonably
estimated. The amount accrued for environmental matters as of December 31, 2005
and 2004, was $2.9. In addition, receivables of $0.1 for probable third-party
recoveries have been recorded related to these environmental matters.
As additional facts and circumstances develop, it is at least reasonably
possible that either the accrued liability or the recorded receivable related to
environmental matters may be revised. While there are a number of uncertainties
with respect to the Company's estimate of its ultimate liability for cleanup
costs at these hazardous waste disposal sites, management believes that any
costs incurred in excess of those accrued will not have a material adverse
impact on the Company's consolidated financial position or results of
operations. This opinion is based upon the number of identified PRP's at each
site, the number of such PRP's that are believed by management to be financially
capable of paying their share of the ultimate liability, and the portion of
waste sent to the sites for which management believes the Company might be held
responsible based on available records.
As a result of financial provisions recorded with respect to breast implant
liabilities, the Company has been unable to meet certain federal and state
environmental statutory financial ratio tests. Consequently, in order for the
Company to continue to operate hazardous waste storage facilities at certain
plant sites, the states involved have required the Company to establish trusts
to provide for aggregate estimated closure, post-closure, corrective action and
potential liability costs. Interest on the funds held in trust will be available
to the Company under certain circumstances, and the amount required to be held
in trust may vary annually. During the year ended December 31, 2005, the Company
satisfied the financial ratio requirements specified by the State of Michigan
and $23.2 reverted to the Company. Funds of $0.7 remain restricted in
environmental trusts to fulfill requirements in other states as of December 31,
2005. At such time as the Company satisfies the above referenced financial ratio
tests, or the Company no longer needs or closes the permitted facilities, the
funds then remaining in these trusts will revert to the Company.
Other Regulatory Matters
------------------------
Companies that manufacture and sell chemical products may experience risks
under current or future laws and regulations, which may result in significant
costs and liabilities. The Company routinely conducts health, toxicological and
environmental tests of its products. The Company cannot predict what future
legal, regulatory or other actions, if any, may be taken regarding the Company's
products or the consequences of their production and sale. Such actions could
result in significant losses, and there can be no assurance that significant
losses would not be incurred. However, based on currently available information,
the Company's management does not believe that any such actions would have a
material adverse effect on the Company's financial condition or results of
operations.
Leases
------
The Company leases certain real and personal property under agreements that
generally require the Company to pay for maintenance, insurance and taxes.
Rental expense was $34.3 in 2005, $32.2 in 2004 and $35.2 in 2003. The minimum
future rental payments required under noncancellable operating leases at
December 31, 2005, in the aggregate, are $121.8 including the following amounts
due in each of the next five years: 2006 - $36.2, 2007 - $29.8, 2008 - $22.1,
2009 - $8.3 and 2010 - $7.2.
NOTE 17 - COMMITMENTS AND CONTINGENCIES (Continued)
---------------------------------------
Guarantees
----------
Guarantees arise during the ordinary course of business from relationships
with customers, employees and nonconsolidated affiliates when the Company
undertakes an obligation to guarantee the performance of others (via delivery of
cash or other assets) if specified triggering events occur. Non-performance
under a contract by the guaranteed party triggers the obligation of the Company.
The maximum amount of potential future payments under such guarantees of the
Company was $6.3 and $7.9 at December 31, 2005 and 2004, respectively, primarily
related to guarantees of housing loan obligations of certain employees of the
Company's subsidiaries in Japan. Such guarantees have various expiration dates
and typically span approximately 20 years. The Company's estimated potential
obligation under these guarantees is not material to the consolidated financial
statements and no liability has been recorded on the Company's consolidated
balance sheets for the years ended December 31, 2005 and 2004.
The Company also has guarantees related to its performance under certain
operating lease arrangements and the residual value of leased assets. If certain
operating leases are terminated by the Company, it guarantees a portion of the
residual value loss, if any, incurred by the lessors in disposing of the related
assets. Expiration dates vary, and certain leases contain renewal options. The
maximum amount of future payments the Company was potentially obligated to make
for guarantees of residual values of leased assets was $3.8 and $5.3 at December
31, 2005 and 2004, respectively. Management believes that, based on facts and
circumstances, the Company's estimated potential obligation under its residual
value lease guarantees is not material to the Company's consolidated financial
statements and as such, no liability has been recorded on the Company's
consolidated balance sheets for the years ended December 31, 2005 and 2004.
Warranties
----------
In the normal course of business to facilitate sales of its products, the
Company has issued product warranties, and it has entered into contracts and
purchase orders that often contain standard terms and conditions that typically
include a warranty. The Company's warranty activities do not have a material
impact on the Company's consolidated financial position or results of
operations.
NOTE 18 - RELATED PARTY TRANSACTIONS
------------------------------------
The Company has transactions in the normal course of business with its
shareholders, Dow Chemical and Corning, and their affiliates. The following
tables summarize related party transactions and balances with the Company's
shareholders.
Year Ended December 31,
2005 2004 2003
--------- -------- ---------
Sales to Dow Chemical $ 9.5 $ 8.6 $ 8.2
Sales to Corning 8.7 7.4 7.5
Purchases from Dow Chemical 61.9 54.6 44.9
December 31,
2005 2004
--------- --------
Accounts Receivable from Dow Chemical $ 1.6 $ 1.2
Accounts Receivable from Corning 0.6 0.8
Accounts Payable to Dow Chemical 5.1 4.2
In addition, non-wholly owned subsidiaries of the Company have transactions
in the normal course of business with their minority shareholders. The following
tables summarize related party transactions and balances between these
non-wholly owned subsidiaries and their minority owners.
Year Ended December 31,
2005 2004 2003
--------- -------- ---------
Sales to minority owners $ 162.1 $ 80.1 $ 63.1
Purchases from minority owners 10.3 7.3 6.6
December 31,
2005 2004
--------- --------
Accounts receivable from minority owners $ 34.1 $ 26.5
Accounts payable to minority owners 4.1 3.0
NOTE 18 - RELATED PARTY TRANSACTIONS (Continued)
------------------------------------
Management believes the costs of such purchases and the prices for such
sales were competitive with purchases from other suppliers and sales to other
customers.
In addition, DCT loans excess funds to its minority shareholder Toray
Industries, Inc. The amount of loans receivable at December 31, 2005 and 2004
was $5.9 and $29.3, respectively. These balances are included in "Notes and
other receivables" in the consolidated balance sheets. Management believes that
interest earned from this loan arrangement is at rates commensurate with market
rates for companies of similar credit standing.
DOW CORNING CORPORATION AND SUBSIDIARES
SUPPLEMENTARY DATA - QUARTERLY FINANCIAL INFORMATION
YEARS ENDED DECEMBER 31, 2005 AND 2004 (Unaudited)
(in millions of dollars except share data)
Quarter Ended: March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2005
Net sales $ 982.5 $ 1,007.1 $ 946.4 $ 942.7
Gross profit 345.8 357.5 318.5 289.7
Net income 135.9 154.2 116.4 100.0
Net income per share 54.36 61.68 46.56 40.00
Dividends declared per share - 12.00 - 24.00
2004
Net sales $ 814.3 $ 851.9 $ 829.7 $ 876.7
Gross profit 229.5 278.4 262.5 265.5
Net income 52.2 35.7 79.9 70.5
Net income per share 20.88 14.28 31.96 28.20
Dividends declared per share - - - -
SAMSUNG CORNING PRECISION
GLASS CO., LTD.
As of December 31, 2005 and 2004 and for the
years ended December 31, 2005, 2004 and 2003
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Contents
As of December 31, 2005 and 2004
And for the years ended December 31, 2005, 2004 and 2003
--------------------------------------------------------------------------------
Page(s)
Report of Independent Registered Public Accounting Firm.................140
Financial Statements
Balance Sheets..........................................................141
Statements of Income....................................................142
Statements of Cash Flows................................................143
Notes to Financial Statements.......................................144-152
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Samsung Corning Precision Glass Co., Ltd.
In our opinion, the accompanying balance sheets and the related statements of
income and cash flows present fairly, in all material respects, the financial
position of Samsung Corning Precision Glass Co., Ltd. (the "Company") at
December 31, 2005 and December 31, 2004, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2005, in conformity with accounting principles which, as described in Note 2,
are generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ Samil PricewaterhouseCoopers
Seoul, Korea
January 13, 2006
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Balance Sheets
December 31, 2005 and 2004
(in thousands, except share and per share amounts)
--------------------------------------------------------------------------------
2005 2004
Assets
Current assets
Cash and cash equivalents $ 162,749 $ 45,315
Accounts and notes receivable
Customers, net of allowance for doubtful accounts
of $1,898 and $1,200 77,965 68,432
Related parties 110,098 50,364
Inventories 27,338 17,518
Prepaid value added tax 17,834 15,517
Other current assets 4,227 2,374
----------- -----------
Total current assets 400,211 199,520
Property, plant and equipment, net 1,819,808 1,478,075
Other non-current assets 27,841 27,567
----------- -----------
Total assets $ 2,247,860 $ 1,705,162
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 56,877 $ 24,844
Short-term borrowings - 28,783
Accounts payable
Trade accounts payable 7,910 3,559
Non-trade accounts payable 46,886 119,939
Related parties 136,294 115,074
Income taxes payable 126,019 108,003
Accrued bonus payable 31,085 18,422
Other current liabilities 10,621 3,771
----------- -----------
Total current liabilities 415,692 422,395
Long-term debt 28,396 97,040
Accrued severance benefits, net 7,155 5,508
Deferred income tax liabilities 78,506 38,813
----------- -----------
Total liabilities 529,749 563,756
----------- -----------
Commitments and contingencies
Stockholders' equity
Preferred stock: par value $8.51 per share, 153,190 shares authorized,
41,000 shares issued and outstanding 349 349
Common stock: par value $8.35 per share, 3,640,000 shares authorized,
2,400,000 shares issued and outstanding 20,040 20,040
Retained earnings 1,528,270 995,695
Accumulated other comprehensive income 169,452 125,322
----------- -----------
Total stockholders' equity 1,718,111 1,141,406
----------- -----------
Total liabilities and stockholders' equity $ 2,247,860 $1,705,162
=========== ==========
The accompanying notes are an integral part of these financial statements.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Statements of Income
Years ended December 31, 2005, 2004 and 2003
(in thousands)
--------------------------------------------------------------------------------
2005 2004 2003
Net sales
Related parties $ 876,182 $ 525,527 $ 290,958
Other 784,099 571,324 299,179
----------- ----------- -----------
1,660,281 1,096,851 590,137
Cost of sales 426,535 276,599 166,570
----------- ----------- -----------
Gross profit 1,233,746 820,252 423,567
Selling and administrative expenses 54,023 38,050 28,527
Research and development expenses 39,386 30,706 8,120
Royalty expenses to related parties 81,233 52,260 27,649
----------- ----------- -----------
Operating income 1,059,104 699,236 359,271
Other income (expense):
Interest income 4,432 3,006 2,380
Interest expense (4,112) (2,365) (1,430)
Foreign exchange gain (loss), net 14,070 7,498 (3,177)
Donations (15,124) (5,333) (2,532)
Other income (expense), net 128 (690) 191
----------- ----------- -----------
Income before income taxes 1,058,498 701,352 354,703
Provision for income taxes 210,895 140,715 59,936
----------- ----------- -----------
Net income $ 847,603 $ 560,637 $ 294,767
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Statements of Cash Flows
Years ended December 31, 2005, 2004 and 2003
(in thousands)
--------------------------------------------------------------------------------
2005 2004 2003
Cash flows from operating activities
Net income $ 847,603 $ 560,637 $ 294,767
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 183,341 111,077 53,076
Foreign exchange (gain) loss, net (13,155) (8,373) 5,163
Deferred income tax expense 31,488 20,619 9,948
Other, net 3,218 3,819 1,385
Changes in operating assets and liabilities
Trading securities - - 62,925
Accounts and notes receivable (67,059) (41,745) (32,785)
Inventories (9,202) (981) (2,252)
Prepaid VAT and other current assets (3,123) 1,614 (12,810)
Accounts payable and other current liabilities 59,029 63,406 39,812
----------- ----------- -----------
Net cash provided by operating activities 1,032,140 710,073 419,229
----------- ----------- -----------
Cash flows from investing activities
Purchases of property, plant and equipment (559,184) (661,541) (309,836)
Refund of leasehold deposits 1,574 (7,091) (4,796)
Other, net (1,132) (2,219) (2,224)
------------ ----------- -----------
Net cash used in investing activities (558,742) (670,851) (316,856)
------------ ----------- -----------
Cash flows from financing activities
Net decrease in short-term borrowings (29,296) 14,089 13,064
Proceeds from issuance of long-term debt - 91,183 -
Repayment of long-term debt (25,287) (25,229) (5,705)
Payment of cash dividend (315,028) (147,668) (64,159)
------------ ----------- -----------
Net cash used in financing activities (369,611) (67,625) (56,800)
------------ ----------- -----------
Effect of exchange rate changes on cash
and cash equivalents 13,647 6,790 (5,627)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 117,434 (21,613) 39,946
Cash and cash equivalents
Beginning of year 45,315 66,928 26,982
----------- ----------- -----------
End of year $ 162,749 $ 45,315 $ 66,928
=========== =========== ===========
Supplemental cash flow information
Cash paid for interest $ 3,857 $ 2,275 $ 750
Cash paid for income taxes 160,865 65,325 25,027
The accompanying notes are an integral part of these financial statements.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
--------------------------------------------------------------------------------
1. Organization and Nature of Operations
Samsung Corning Precision Glass Co., Ltd. (the "Company") was incorporated
on April 20, 1995 under the laws of the Republic of Korea in accordance
with a joint venture agreement between Corning Incorporated ("Corning")
located in the U.S.A. and domestic companies in Korea.
As of December 31, 2005, the issued and outstanding number of common shares
of the Company is 2,400,000, 50% of which are owned by Corning Hungary Data
Services Limited Liability Company, 42.6% by Samsung Electronics Co., Ltd.
and 7.4% by another domestic shareholder.
The Company operates in one business segment, the production and marketing
of precision flat glass substrates. Glass substrates provided by the
Company are used to make TFT-LCD (Thin-Film Transistor Liquid Crystal
Display) panels for notebook computers, LCD monitors, LCD TVs and other
handheld devices such as digital cameras, PDAs and navigators. The
Company's major customers are Korean LCD panel makers such as Samsung
Electronics Co., Ltd., LG Philips LCD Co., Ltd. and BOE Hydis Technology
Co., Ltd. The Company's current market is primarily limited to companies
incorporated in Korea.
2. Summary of Significant Accounting Policies
The accompanying financial statements are presented in accordance with
accounting principles generally accepted in the United States of America
("U.S. GAAP"). Significant accounting policies followed by the Company in
the preparation of the accompanying financial statements are summarized
below.
Basis of Presentation
The accounting records of the Company are expressed in Korean Won and are
maintained in accordance with the laws and regulations of the Republic of
Korea.
Foreign Currencies
The Company operates primarily in Korean Won, its local and functional
currency. The Company has chosen the U.S. Dollar as its reporting currency.
In accordance with the Statement of Financial Accounting Standards ("SFAS")
No. 52, Foreign Currency Translation, revenues and expenses have been
translated into U.S. Dollars at average exchange rates prevailing during
the period. Assets and liabilities have been translated at the exchange
rates on the balance sheet date. Equity accounts have been translated at
historical rates. The resulting translation gain or loss adjustments are
recorded directly as a separate component of stockholders' equity.
Transaction gains or losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency
are included in the income statement as incurred. Assets and liabilities
denominated in currencies other than the functional currency are translated
at the exchange rates at the balance sheet date and the related exchange
gains or losses are recorded in the statement of income.
Revenue Recognition
The Company derives its revenue from the sale of precision flat glass
substrates to its customers, primarily located in Korea. The Company
recognizes its revenue when persuasive evidence of an arrangement exists,
the products or the services have been delivered and all risks of ownership
have been transferred to the customer, the sales price is fixed or
determinable, and collectibility is reasonably assured. This typically
occurs upon delivery of the products to the customers, as the majority of
the customers are large Korean manufacturers of LCD panels who enter into
general supply agreements with the Company and place large orders of
products for delivery on a regular basis. Sales revenue is recorded net of
discounts and rebates.
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect amounts
reported in the accompanying financial statements and disclosures. The most
significant estimates and assumptions relate to the useful life of
property, plant and equipment, allowance for uncollectible accounts
receivable, contingent liabilities, inventory valuation, impairment of
long-lived assets and allocated expenses. Although these estimates are
based on management's best knowledge of current events and actions that the
Company may undertake in the future, actual results may be different from
those estimates.
Financial Instruments
The amounts for cash and cash equivalents, short-term financial
instruments, accounts receivable, certain other assets, accounts payable,
certain accrued and other liabilities, short-term loan and long-term debt
are reported at their fair value due to their short maturities or market
interest rates. Obligations due to or receivables from related parties have
no ascertainable fair value as no market exists for such instruments.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
--------------------------------------------------------------------------------
Cash and Cash Equivalents
Cash and cash equivalents include cash, demand deposits and short-term
investments with an original maturity of three months or less at the time
of acquisition.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined by the weighted-average method, which approximates the first-in,
first-out method.
Property and Depreciation
Property, plant and equipment ("PP&E") are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method based
on the following estimated useful lives:
Buildings From 20 to 40 years
Machinery and equipment From 1.5 to 8 years
Vehicle, tools, furniture and fixtures From 2 to 8 years
Expenditures that enhance the value or materially extend the useful life of
the facilities are capitalized as additions to property, plant and
equipment. Costs of normal, recurring or periodic repairs and maintenance
activities are charged to expense as incurred.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparing the carrying amount of an asset or asset group against future
undiscounted cash flows expected to be generated from the asset or asset
group. If the sum of the expected future cash flows is less than the
carrying amount of the asset or asset group, an impairment loss equates the
difference between the estimated fair value and the carrying value.
Accrued Severance Benefits
Employees and directors with at least one year of service are entitled to
receive a lump-sum payment upon termination of their employment with the
Company, based on their length of service and rate of pay at the time of
termination. Accrued severance benefits represent the amount which would be
payable assuming all employees and directors were to terminate their
employment with the Company as of the balance sheet date.
The Company has funds deposited at the Korean National Pension Fund in
accordance with National Pension Funds Law. The use of the deposit is
restricted to the payment of severance benefits. Accordingly, accrued
severance benefits in the accompanying balance sheet are presented net of
this deposit.
In addition, accrued severance benefits are funded at approximately 60% and
57% as of December 31, 2005 and 2004, respectively, through a group
severance insurance plan and are presented as a deduction from accrued
severance benefits.
Research and Development Costs
Research and development expenditures which include costs in relation to
new product, development, research, process improvement and product use
technology are expensed as incurred and included in operating expenses.
Income Taxes and Investment Tax Credit
The Company recognizes deferred income taxes for anticipated future tax
consequences resulting from temporary differences between amounts reported
for financial reporting and income tax purposes. Deferred tax assets and
liabilities are computed on the said temporary differences by applying the
enacted statutory tax rates applicable to the years when such differences
are expected to reverse. Deferred tax assets are recognized when it is more
likely than not that they will be realized. The total income tax provision
includes the current tax expense under the applicable tax regulations and
the change in the balance of deferred tax assets and liabilities during the
year.
The Company is eligible to use investment tax credits that are temporarily
allowed for qualified plant and equipment expenditures. The investment tax
credit is recognized as a reduction of tax expense in the year in which the
qualified plant and equipment expenditure is incurred.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
--------------------------------------------------------------------------------
Derivative Instruments
The Company has entered into foreign exchange forward contracts to manage
its exposure to the fluctuations in foreign exchange rates. The risk being
hedged is the fluctuation in future cash flows from the Company's sales as
a result of the changes in exchange rate between the Japanese Yen and
Korean Won. The Company's foreign exchange forward contracts are
denominated in Japanese Yen and for periods consistent with the terms of
the underlying sales transactions, generally one year or less. Since the
Company's foreign exchange forward contracts are made in the normal course
of business and not speculative in nature, they are designated as cash flow
hedging instruments.
All derivative instruments are recorded at fair value. Effective changes in
the fair value of the derivative instruments designated as cash flow
hedging instruments are recorded in accumulated other comprehensive income
(or loss). Amounts are reclassified from accumulated other comprehensive
income (or loss) when the underlying hedged transactions impact earnings.
If the transaction being hedged fails to occur, the gain or loss on the
associated financial instruments are recorded immediately in earnings. As
of December 31, 2005 and 2004, there were no outstanding balances of
forward foreign exchange contracts.
Cash flows associated with the derivative instruments are classified
consistent with the cash flows from the transactions being hedged.
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standard Board ("FASB") issued
SFAS No. 151, Inventory Costs, which amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). This standard requires items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs to be
recognized as current-period charges. In addition, this standard requires
allocation of fixed production overheads to the costs of conversion to be
based on the normal capacity of the production facilities. The provisions
of this standard are effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The Company does not expect the
adoption of SFAS No. 151 to have a material impact on its financial
position or results of operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements.
SFAS No. 154 changes the requirements for the accounting for and reporting
of a change in accounting principle. Previously, most voluntary changes in
accounting principles were required recognition via a cumulative effect
adjustment within net income of the period of the change. SFAS No. 154
requires retrospective application to prior periods' financial statements,
unless it is impracticable to determine either the period-specific effects
or the cumulative effect of the change. SFAS No. 154 is effective for
accounting changes made in fiscal years beginning after December 15, 2005;
however, the Statement does not change the transition provisions of any
existing accounting pronouncements. The Company does not expect the
adoption of SFAS No. 154 to have a material effect on its financial
position or results of operations.
3. Inventories
Inventories consist of the following:
(in thousands) 2005 2004
Finished goods $ 9,357 $ 6,570
Semi-finished goods 11,628 4,009
Raw materials 3,035 2,920
Auxiliary materials 3,318 4,019
----------- ----------
$ 27,338 $ 17,518
=========== ==========
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
--------------------------------------------------------------------------------
4. Property, Plant and Equipment
Property, plant and equipment comprise the following:
(in thousands) 2005 2004
Building $ 643,140 $ 413,274
Machinery and equipment 997,468 590,778
Vehicle, tools, furniture and fixtures 85,222 56,501
----------- ----------
1,725,830 1,060,553
Less: accumulated depreciation (329,726) (212,129)
----------- ----------
1,396,104 848,424
Land 51,057 49,501
Construction-in-progress 372,647 580,150
----------- ----------
$ 1,819,808 $1,478,075
=========== ==========
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
--------------------------------------------------------------------------------
5. Transactions with Related Parties
In the normal course of business, the Company sells its products to Samsung
Electronics Co., Ltd., Corning and Samsung Corning Co., Ltd. ("SSC", a
Korean-based company in which Samsung and Corning each own a 50% interest),
purchases semi-finished goods from Corning and purchases property, plant
and equipment from Samsung affiliates and Corning. In addition, the Company
pays a 5% royalty on net sales amounts of certain products to Corning and
Corsam Glasstec R&D Center, in which Corning and SSC each own a 50%
interest. A summary of these transactions and related receivable and
payable balances as of December 31 is as follows:
2005 Cost &
(in thousands) Sales (1) Purchases (2) Expenses Receivables Payables
Samsung affiliates
Samsung Electronics Co., Ltd. $ 800,703 $ - $ 12,514 $ 69,217 $ 3,000
Samsung Corporation 32 92,052 686 - 7,932
Samsung Engineering Co., Ltd. - 120,305 573 - 93,802
Others 467 30,304 33,362 203 11,553
----------- ----------- ----------- ----------- -----------
801,202 242,661 47,135 69,420 116,287
Corning 71,199 115,645 68,568 40,559 17,698
Samsung Corning Co., Ltd. 3,781 - 6,858 119 666
Corsam Glasstec R&D Center - - 16,247 - 1,643
----------- ----------- ----------- ----------- -----------
$ 876,182 $ 358,306 $ 138,808 $ 110,098 $ 136,294
=========== =========== =========== =========== ===========
2004 Cost &
(in thousands) Sales (1) Purchases (2) Expenses Receivables Payables
Samsung affiliates
Samsung Electronics Co., Ltd. $ 441,146 $ 25,652 $ 5,970 $ 37,800 $ 25,384
Samsung Corporation 18 97,466 34 4 33,624
Samsung Engineering Co., Ltd. - 118,962 - - 44,656
Others 394 11,638 26,581 158 5,336
----------- ----------- ----------- ----------- -----------
441,558 253,718 32,585 37,962 109,000
Corning 76,327 95,811 41,808 11,533 4,256
Samsung Corning Co., Ltd. 7,642 114 6,360 869 754
Corsam Glasstec R&D Center - - 10,452 - 1,064
----------- ----------- ----------- ----------- -----------
$ 525,527 $ 349,643 $ 91,205 $ 50,364 $ 115,074
=========== =========== =========== =========== ===========
2003 Cost &
(in thousands) Sales (1) Purchases (2) Expenses Receivables Payables
Samsung affiliates
Samsung Electronics Co., Ltd. $ 260,355 $ 2,763 $ 717 $ 22,384 $ 8,469
Samsung Corporation 14 86,354 123 11 48,154
Samsung Engineering Co., Ltd. - 77,940 8 - 41,660
Others 375 2,887 13,317 128 2,758
----------- ----------- ----------- ----------- -----------
260,744 169,944 14,165 22,523 101,041
Corning 25,934 67,976 22,119 4,759 14,064
Samsung Corning Co., Ltd. 4,280 6,283 6,015 220 644
Corsam Glasstec R&D Center - - 5,530 - 3,250
----------- ----------- ----------- ----------- -----------
$ 290,958 $ 244,203 $ 47,829 $ 27,502 $ 118,999
=========== =========== =========== =========== ===========
(1) Gain and loss on foreign exchange forward contracts are included.
(2) Purchases of property, plant and equipment are included.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
--------------------------------------------------------------------------------
6. Long-term Debt
Long-term debt at December 31, 2005 and 2004 consists of the following:
Annual
(in thousands) interest rate 2005 2004
Foreign currency debt
Facilities finance, due through 2005 Libor + 2.5% $ - $ 584
Floating Rate Notes issued,
due through 2005 Libor + 0.77% - 24,260
due through 2007 Libor + 0.60% 85,273 97,040
--------- ---------
85,273 121,884
Less: Current maturities (56,877) (24,844)
--------- ---------
$ 28,396 $ 97,040
========= =========
The schedules of principal payments of long-term debt are as follows:
For the year ending December 31 (in thousands)
2006 $ 56,877
2007 28,396
-----------
$ 85,273
===========
The Floating Rate Notes issued in 2005 includes a covenant requiring the
Company to maintain its total liabilities to not exceed 170% of its
tangible net worth as defined in the related agreement. Another covenant
requires Samsung affiliates to directly maintain at least 30% of the
aggregate issued and outstanding common shares of the Company and
management control of the Company.
7. Income Taxes
Income tax expense consists of the following:
(in thousands) 2005 2004 2003
Current $ 179,407 $ 120,096 $ 49,988
Deferred 31,488 20,619 9,948
----------- ----------- -----------
$ 210,895 $ 140,715 $ 59,936
=========== =========== ===========
The following table reconciles the expected amount of income tax expense
based on statutory rates to the actual amount of taxes recorded by the
Company:
(in thousands) 2005 2004 2003
Income before taxes $ 1,058,498 $ 701,352 $ 354,703
Statutory tax rate 27.5% 29.7% 29.7%
----------- ----------- -----------
Expected taxes at statutory rate 291,087 208,302 105,347
Permanent differences
- Tax exemption for foreign
investment (71,555) (51,199) (34,575)
- Tax rate changes 7,892 5,640 (792)
- Tax credits, net of surtax effect (13,733) (21,495) (9,931)
- Others, net (2,796) (533) (113)
----------- ----------- -----------
Income tax expense $ 210,895 $ 140,715 $ 59,936
=========== =========== ===========
Effective tax rate 19.92% 20.1% 16.9%
=========== =========== ===========
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
--------------------------------------------------------------------------------
The statutory tax rate is 27.5% for 2005 and 29.7% for 2004 and 2003, but
the applicable tax rate is 20.74%, 22.40% and 19.95% for 2005, 2004 and
2003, respectively, due to tax exemption benefits for a foreign invested
company under the Korean Tax Preference Control Law ("TPCL"). In accordance
with the TPCL and the approval of the Korean government, the Company is
exempted fully from the corporate income taxes on the taxable income
arising from the sales of manufactured goods in proportion to the
percentage of qualified foreign shareholder's equity for seven years and
50% exemption for the subsequent three years. The 100% exemption expired in
2003 and the 50% exemption expired in 2005.
As a result of the revision of the Korean Corporation Tax Law, the
statutory tax rate applicable from the beginning of 2005 was reduced to
27.5%. The Company recognized its deferred tax assets and liabilities as of
December 31, 2005 and 2004 based on the revised tax rate and the expiring
schedule of tax exemption for foreign investment.
Significant components of deferred income tax assets and liabilities are as
follows:
(in thousands) 2005 2004
Deferred income tax assets
Inventories $ 1,504 $ 446
Accrued bonus payables 994 -
Other 293 278
----------- -----------
2,791 724
----------- -----------
Deferred income tax liabilities
Property, plant and equipment $ (76,792) $ (35,187)
Reserve for technology development (3,893) (4,218)
Other - (11)
----------- -----------
(80,685) (39,416)
------------ -----------
Deferred income tax liabilities, net $ (77,894) $ (38,692)
============ ===========-
8. Stockholders' Equity
The components of and changes in stockholders' equity are as follows:
(in thousands) 2005 2004 2003
Preferred Stock $ 349 $ 349 $ 349
=========== =========== ===========
Common Stock $ 20,040 $ 20,040 $ 20,040
=========== =========== ===========
Retained Earnings:
Balance at the beginning of year $ 995,695 $ 582,726 $ 352,118
Net income 847,603 560,637 294,767
Dividends paid to preferred shareholders (3,678) (2,488) (1,081)
Dividends paid to common shareholders (311,350) (145,180) (63,078)
------------ ----------- -----------
Balance at end of year $ 1,528,270 $ 995,695 $ 582,726
=========== =========== ===========
Accumulated Other Comprehensive
(Income) Loss:
Balance at the beginning of year $ 125,322 $ (4,230) $ 612
Foreign currency translation adjustment 44,130 129,552 (4,842)
----------- ----------- -----------
Balance at end of year $ 169,452 $ 125,322 $ (4,230)
=========== =========== ===========
Total Stockholders' Equity $ 1,718,111 $ 1,141,406 $ 598,885
=========== =========== ===========
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
--------------------------------------------------------------------------------
Total comprehensive income is as follows:
(in thousands) 2005 2004 2003
Net income $ 847,603 $ 560,637 $ 294,767
Foreign currency translation adjustment 44,130 129,552 (4,842)
----------- ----------- -----------
Total comprehensive income $ 891,733 $ 690,189 $ 289,925
=========== =========== ===========
Preferred Stock
There were 41,000 shares of non-voting preferred stock with a par value of
$8.51 issued and outstanding as of December 31, 2005 and 2004. Each share
is entitled to non-cumulative dividends at the rate of 5% on par value. In
addition, if the dividend ratio of common stock exceeds that of preferred
stock, the additional dividend on preferred stock may be declared by a
resolution of the general shareholders' meeting.
Retained Earnings
Retained earnings as of December 31, 2005 and 2004 comprised of the
following:
(in thousands) 2005 2004
Appropriated
Legal reserve $ 9,733 $ 9,733
Reserve for business development 30,800 30,800
Reserve for research and manpower development 14,164 11,600
Voluntary reserve 4,157 4,157
------------ ------------
58,854 56,290
Unappropriated 1,469,416 939,405
------------ ------------
$ 1,528,270 $ 995,695
============ ============
Legal Reserve
The Commercial Code of the Republic of Korea requires the Company to
appropriate a portion of the retained earnings as a legal reserve equal to
a minimum of 10% of its cash dividends until such reserve equals 50% of its
capital stock. The reserve is not available for dividends, but may be
transferred to capital stock or used to reduce accumulated deficit, if any,
through resolution by the Company's shareholders.
Reserve for Business Development
Pursuant to the Corporate Income Tax Law of Korea, the Company is allowed
to appropriate a portion of the retained earnings as a reserve for business
development. This reserve is not available for dividends, but may be
transferred to capital stock or used to reduce accumulated deficit, if any,
through resolution by the Company's shareholders.
Reserve for Research and Manpower Development
Pursuant to the former Korean Tax Exemption and Reduction Control Law and
the Korean Tax Preference Control Law, the Company appropriates a portion
of the retained earnings as a reserve for research and manpower
development. This reserve is not available for dividends until it is used
for the specified purpose or reversed.
Voluntary Reserve
The Company appropriates a certain portion of retained earnings pursuant to
shareholder resolution as a voluntary reserve. This reserve may be reversed
and transferred to unappropriated retained earnings by the resolution of
shareholders and may be distributed as dividends after reversal.
9. Commitments and Contingencies
Credit Facilities
The Company has overdraft facilities up to $5,432 thousand, general loan
facilities up to $49,378 thousand and trade financing facility up to $5,000
thousand with local banks as of December 31, 2005. As of December 31, 2005,
there are no outstandings under credit facilities.
SAMSUNG CORNING PRECISION GLASS CO., LTD.
Notes to Financial Statements
--------------------------------------------------------------------------------
Business and Credit Risk Concentration
The Company sells its products on a credit basis to its customers including
certain related parties. Management estimates the collectibility of
accounts receivable based on the financial condition of the customers and
prevailing economic trends. Based on management's estimates, the Company
established allowances for doubtful accounts receivable which management
believes are adequate. Concentrations of credit risk with respect to
accounts receivable are limited to the credit worthiness of the Company's
customers. Four of the five major customers of the Company are domestic
TFT-LCD makers incorporated in Korea and another is a domestic Color-Filter
maker incorporated in Korea. Trade accounts receivables from these five
major customers are 83% and 90% of total trade accounts receivable of the
Company as of December 31, 2005 and 2004, respectively, and revenues from
these five major customers constitute 94%, 90% and 95% of total revenues of
the Company for the years ended December 31, 2005, 2004 and 2003,
respectively.
In addition, a substantial portion of the Company's long-term debt is
denominated in foreign currencies, giving rise to financial exposure to
fluctuations in currency exchange rates.
Pending Litigation
As of December 31, 2005, the Company is a co-defendant in a lawsuit filed
by Seoul Guarantee Insurance Co. and 14 other creditors (the "Creditors")
for alleged breach of an agreement that the Company and thirty other
Samsung affiliates (collectively "Samsung affiliates") entered into with
the Creditors in September 1999. According to the Agreement, Samsung
affiliates agreed to sell 3.5 million shares of Samsung Life Insurance Co.,
Ltd. ("SLI") by December 31, 2000, which were transferred to the Creditors
in connection with the petition for court receivership of Samsung Motor
Inc. ("SMI"). In the event that the sales proceeds fall short of $2.42
billion, Samsung affiliates have agreed to compensate the Creditors for the
shortfall, by other means, including Samsung affiliates' participation in
any equity offering or subordinated debentures to be issued by the
Creditors. Any excess proceeds over $2.42 billion are to be distributed to
Samsung affiliates.
As of December 31, 2005, the shares of SLI have not been sold. The suit
asks for actual and punitive damages of $4.68 billion plus penalty
interest.
The Company believes that although the outcome of these matters is
uncertain, they would not result in a material ultimate loss for the
Company. Accordingly, no provision for potential losses arising from this
claim is reflected in the accompanying financial statements.
10. Subsequent event (Unaudited)
In the Board of Directors meeting and Extraordinary General Shareholder's
meeting on January 17, 2006, the Company resolved to issue 15 million
shares of common stock at W10,000 per share on February 2, 2006.
Item 15(b) Exhibit 21
Corning Incorporated and Subsidiary Companies
Subsidiaries of the Registrant as of December 31, 2005 are listed below:
CCS Holdings, Inc. Delaware
CCS Technology, Inc. Delaware
Corning (Australia) Partnership Holdings, GP Australia
Corning (Shanghai) Co., Ltd. China
Corning Asahi Video Products Company (Partnership) Delaware
Corning Cabelcon A/S Denmark
Corning Cable Systems International Ltd. Cayman Islands
Corning Cable Systems LLC North Carolina
Corning Cable Systems Brand, Inc. Delaware
Corning Cable Systems Polska Sp. Z o.o. Poland
Corning Costar Holding, LLC Delaware
Corning Display Technologies Taiwan Co., Ltd. Taiwan
Corning Gilbert Inc. Delaware
Corning Holding GmbH Germany
Corning Hungary Data Services, LLC Hungary
Corning International Corporation Delaware
Corning International Holding, LLC Delaware
Corning International KK Japan
Corning Japan KK Japan
Corning Limited United Kingdom
Corning Mauritius Mauritius
Corning NetOptix, Inc. Delaware
Corning Noble Park, LLC Australia
Corning Oak Holding Inc. Delaware
Corning Products South Africa (Pty) Ltd. South Africa
Corning Property Management Corporation Delaware
Corning S.A.S. France
Corning Specialty Materials Inc. Delaware
Corning Treasury Services Limited Ireland
Corning Tropel Corporation Delaware
Costar Europe Ltd. Delaware
Optical Fiber Corporation Delaware
Companies accounted for under the equity method as of December 31, 2005
are listed below:
Advanced Cable Systems Corporation Japan
Cormetech, Inc. Delaware
Dow Corning Corporation Michigan
Eurokera North America, Inc. Delaware
Eurokera S.N.C. France
Keraglass S.N.C. France
Pittsburgh Corning Europe N.V. Belgium
Samsung Corning Co., Ltd. Korea
Samsung Corning Precision Glass Co., Ltd. Korea
Summary financial information on Corning's equity basis companies is included in
Note 7 (Investments) to the Consolidated Financial Statements in this Annual
Report on Form 10-K. Certain subsidiaries, which considered in the aggregate as
a single subsidiary, that would not constitute a significant subsidiary, per
Regulation S-X, Article 1, as of December 31, 2005, have been omitted from this
exhibit.
Item 15(c) Exhibit 12
Corning Incorporated and Subsidiary Companies
Computation of Ratio of Earnings (Losses) to Combined Fixed Charges and Preferred Dividends:
(In millions, except ratios)
Fiscal Years ended
--------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2005 2004 2003 2002 2001
--------- -------- -------- --------- ---------
Income (loss) from continuing operations before
taxes on income $ 572 $(1,580) $ (759) $ (2,720) $ (6,161)
Adjustments:
Distributed income of equity investees 302 139 112 83 73
Amortization of capitalized interest 4 5 6 9 10
Fixed charges net of capitalized interest 134 159 176 207 191
--------- ------- -------- --------- --------
Earnings (loss) before taxes and fixed charges as adjusted $ 1,012 $(1,277) $ (465) $ (2,421) $ (5,887)
========= ======= ======== ========= ========
Fixed charges:
Interest incurred $ 140 $ 159 $ 158 $ 186 $ 202
Portion of rent expense which represents an appropriate
interest factor 22 18 22 28 30
Amortization of debt costs 3 4 5 6 8
--------- ------- -------- --------- --------
Total fixed charges 165 181 185 220 240
Capitalized interest (27) (22) (9) (13) (49)
--------- ------- -------- --------- --------
Total fixed charges net of capitalized interest $ 138 $ 159 $ 176 $ 207 $ 191
========= ======= ======== ========= ========
Preferred dividends:
Preferred dividend requirement $ 128 $ 1
Ratio of pre-tax income to income before minority interest
and equity earnings
--------- --------
Pre-tax preferred dividend requirement 128 1
Total fixed charges $ 165 $ 181 $ 185 220 240
--------- ------- -------- --------- --------
Fixed charges and pre-tax preferred dividend requirement $ 165 $ 181 $ 185 $ 348 $ 241
========= ======= ======== ========= ========
Ratio of earnings to fixed charges 6.1x * * * *
========= ======= ======== ========= ========
Ratio of earnings to combined fixed charges and preferred
dividends 6.1x * * * *
========= ======= ======== ========= ========
* Loss before taxes and fixed charges as adjusted were inadequate to cover
total fixed charges by approximately $1,458 million and $650 million and
inadequate to cover fixed charges and pre-tax preferred dividend
requirement by approximately $1,458 million and $650 million at December
31, 2004 and 2003, respectively.
Item 15(c) Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-3 (Nos. 333-41244, 333-57082, and 333-100302) and Forms
S-8 (Nos. 33-55345, 33-58193, 333-24337, 333-26049, 333-26151, 333-41246,
333-61975, 333-61983, 333-91879, 333-95693, 333-60480, 333-82926, 333-87128,
333-106265, and 333-109405) of Corning Incorporated of our report dated February
24, 2006 relating to the financial statements, financial statement schedule,
management's assessment of the effectiveness of internal control over financial
reporting and the effectiveness of internal control over financial reporting,
which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 24, 2006
Exhibit 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Wendell P. Weeks, President and Chief Executive Officer of Corning
Incorporated, certify that:
1. I have reviewed this annual report on Form 10-K of Corning Incorporated
(the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f))for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
February 24, 2006
/s/ Wendell P. Weeks
------------------------------------------------
Wendell P. Weeks
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION
I, James B. Flaws, Vice Chairman and Chief Financial Officer of Corning
Incorporated, certify that:
1. I have reviewed this annual report on Form 10-K of Corning Incorporated
(the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f))for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
February 24, 2006
/s/ James B. Flaws
------------------------------------------------
James B. Flaws
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned Wendell P. Weeks, President and Chief Executive Officer of
Corning Incorporated (the "Company") and James B. Flaws, Vice Chairman and Chief
Financial Officer of the Company, certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K of the Company for the year ended December
31, 2005 (the "Report") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: February 24, 2006
/s/ Wendell P. Weeks
--------------------------------------------
Wendell P. Weeks
President and Chief Executive Officer
/s/ James B. Flaws
--------------------------------------------
James B. Flaws
Vice Chairman and Chief Financial Officer
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL BY THESE PRESENTS, that the undersigned director and/or officer of
Corning Incorporated, a New York corporation (the "Corporation"), does hereby
make, constitute and appoint Katherine A. Asbeck, William D. Eggers and James B.
Flaws and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
director and/or officer of the Corporation to (1) a Form 10-K, Annual Report,
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
for the fiscal year ended December 31, 2005, or other applicable form, including
any and all exhibits, schedules, amendments, supplements and supporting
documents thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required under the 1934 Act; (2) one or more
Registration Statements, on Form S-8, or other applicable forms, and all
amendments, including post-effective amendments, thereto, to be filed by the
Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of securities of the
Corporation, and to file the same, with all exhibits thereto and other
supporting documents, with the SEC; and (3) one or more Registration Statements
on Form S-3, or other applicable forms, establishing a universal shelf under
Rule 415 of the 1933 Act, and any and all amendments or supplements thereto
(including post-effective amendments), or any Registration Statements relating
to the same offering of securities that are filed pursuant to Rule 462(b) of the
1933 Act, and to file the same, with all exhibits thereto and other supporting
documents, with the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 1st
of February, 2006.
/S/ JOHN SEELY BROWN
-----------------------------------
John Seely Brown
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL BY THESE PRESENTS, that the undersigned director and/or officer of
Corning Incorporated, a New York corporation (the "Corporation"), does hereby
make, constitute and appoint Katherine A. Asbeck, William D. Eggers and James B.
Flaws and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
director and/or officer of the Corporation to (1) a Form 10-K, Annual Report,
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
for the fiscal year ended December 31, 2005, or other applicable form, including
any and all exhibits, schedules, amendments, supplements and supporting
documents thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required under the 1934 Act; (2) one or more
Registration Statements, on Form S-8, or other applicable forms, and all
amendments, including post-effective amendments, thereto, to be filed by the
Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of securities of the
Corporation, and to file the same, with all exhibits thereto and other
supporting documents, with the SEC; and (3) one or more Registration Statements
on Form S-3, or other applicable forms, establishing a universal shelf under
Rule 415 of the 1933 Act, and any and all amendments or supplements thereto
(including post-effective amendments), or any Registration Statements relating
to the same offering of securities that are filed pursuant to Rule 462(b) of the
1933 Act, and to file the same, with all exhibits thereto and other supporting
documents, with the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 1st
of February, 2006.
/S/ JAMES B. FLAWS
-----------------------------------
James B. Flaws
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL BY THESE PRESENTS, that the undersigned director and/or officer of
Corning Incorporated, a New York corporation (the "Corporation"), does hereby
make, constitute and appoint Katherine A. Asbeck, William D. Eggers and James B.
Flaws and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
director and/or officer of the Corporation to (1) a Form 10-K, Annual Report,
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
for the fiscal year ended December 31, 2005, or other applicable form, including
any and all exhibits, schedules, amendments, supplements and supporting
documents thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required under the 1934 Act; (2) one or more
Registration Statements, on Form S-8, or other applicable forms, and all
amendments, including post-effective amendments, thereto, to be filed by the
Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of securities of the
Corporation, and to file the same, with all exhibits thereto and other
supporting documents, with the SEC; and (3) one or more Registration Statements
on Form S-3, or other applicable forms, establishing a universal shelf under
Rule 415 of the 1933 Act, and any and all amendments or supplements thereto
(including post-effective amendments), or any Registration Statements relating
to the same offering of securities that are filed pursuant to Rule 462(b) of the
1933 Act, and to file the same, with all exhibits thereto and other supporting
documents, with the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 1st
of February, 2006.
/S/ GORDON GUND
-----------------------------------
Gordon Gund
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL BY THESE PRESENTS, that the undersigned director and/or officer of
Corning Incorporated, a New York corporation (the "Corporation"), does hereby
make, constitute and appoint Katherine A. Asbeck, William D. Eggers and James B.
Flaws and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
director and/or officer of the Corporation to (1) a Form 10-K, Annual Report,
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
for the fiscal year ended December 31, 2005, or other applicable form, including
any and all exhibits, schedules, amendments, supplements and supporting
documents thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required under the 1934 Act; (2) one or more
Registration Statements, on Form S-8, or other applicable forms, and all
amendments, including post-effective amendments, thereto, to be filed by the
Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of securities of the
Corporation, and to file the same, with all exhibits thereto and other
supporting documents, with the SEC; and (3) one or more Registration Statements
on Form S-3, or other applicable forms, establishing a universal shelf under
Rule 415 of the 1933 Act, and any and all amendments or supplements thereto
(including post-effective amendments), or any Registration Statements relating
to the same offering of securities that are filed pursuant to Rule 462(b) of the
1933 Act, and to file the same, with all exhibits thereto and other supporting
documents, with the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 1st
of February, 2006.
/S/ JOHN M. HENNESSY
-----------------------------------
John M. Hennessy
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL BY THESE PRESENTS, that the undersigned director and/or officer of
Corning Incorporated, a New York corporation (the "Corporation"), does hereby
make, constitute and appoint Katherine A. Asbeck, William D. Eggers and James B.
Flaws and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
director and/or officer of the Corporation to (1) a Form 10-K, Annual Report,
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
for the fiscal year ended December 31, 2005, or other applicable form, including
any and all exhibits, schedules, amendments, supplements and supporting
documents thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required under the 1934 Act; (2) one or more
Registration Statements, on Form S-8, or other applicable forms, and all
amendments, including post-effective amendments, thereto, to be filed by the
Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of securities of the
Corporation, and to file the same, with all exhibits thereto and other
supporting documents, with the SEC; and (3) one or more Registration Statements
on Form S-3, or other applicable forms, establishing a universal shelf under
Rule 415 of the 1933 Act, and any and all amendments or supplements thereto
(including post-effective amendments), or any Registration Statements relating
to the same offering of securities that are filed pursuant to Rule 462(b) of the
1933 Act, and to file the same, with all exhibits thereto and other supporting
documents, with the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 1st
of February, 2006.
/S/ JAMES R. HOUGHTON
-----------------------------------
James R. Houghton
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL BY THESE PRESENTS, that the undersigned director and/or officer of
Corning Incorporated, a New York corporation (the "Corporation"), does hereby
make, constitute and appoint Katherine A. Asbeck, William D. Eggers and James B.
Flaws and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
director and/or officer of the Corporation to (1) a Form 10-K, Annual Report,
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
for the fiscal year ended December 31, 2005, or other applicable form, including
any and all exhibits, schedules, amendments, supplements and supporting
documents thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required under the 1934 Act; (2) one or more
Registration Statements, on Form S-8, or other applicable forms, and all
amendments, including post-effective amendments, thereto, to be filed by the
Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of securities of the
Corporation, and to file the same, with all exhibits thereto and other
supporting documents, with the SEC; and (3) one or more Registration Statements
on Form S-3, or other applicable forms, establishing a universal shelf under
Rule 415 of the 1933 Act, and any and all amendments or supplements thereto
(including post-effective amendments), or any Registration Statements relating
to the same offering of securities that are filed pursuant to Rule 462(b) of the
1933 Act, and to file the same, with all exhibits thereto and other supporting
documents, with the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 1st
of February, 2006.
/S/ JAMES J. O'CONNOR
-----------------------------------
James J. O'Connor
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL BY THESE PRESENTS, that the undersigned director and/or officer of
Corning Incorporated, a New York corporation (the "Corporation"), does hereby
make, constitute and appoint Katherine A. Asbeck, William D. Eggers and James B.
Flaws and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
director and/or officer of the Corporation to (1) a Form 10-K, Annual Report,
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
for the fiscal year ended December 31, 2005, or other applicable form, including
any and all exhibits, schedules, amendments, supplements and supporting
documents thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required under the 1934 Act; (2) one or more
Registration Statements, on Form S-8, or other applicable forms, and all
amendments, including post-effective amendments, thereto, to be filed by the
Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of securities of the
Corporation, and to file the same, with all exhibits thereto and other
supporting documents, with the SEC; and (3) one or more Registration Statements
on Form S-3, or other applicable forms, establishing a universal shelf under
Rule 415 of the 1933 Act, and any and all amendments or supplements thereto
(including post-effective amendments), or any Registration Statements relating
to the same offering of securities that are filed pursuant to Rule 462(b) of the
1933 Act, and to file the same, with all exhibits thereto and other supporting
documents, with the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 1st
of February, 2006.
/S/ JEREMY R. KNOWLES
-----------------------------------
Jeremy R. Knowles
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL BY THESE PRESENTS, that the undersigned director and/or officer of
Corning Incorporated, a New York corporation (the "Corporation"), does hereby
make, constitute and appoint Katherine A. Asbeck, William D. Eggers and James B.
Flaws and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
director and/or officer of the Corporation to (1) a Form 10-K, Annual Report,
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
for the fiscal year ended December 31, 2005, or other applicable form, including
any and all exhibits, schedules, amendments, supplements and supporting
documents thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required under the 1934 Act; (2) one or more
Registration Statements, on Form S-8, or other applicable forms, and all
amendments, including post-effective amendments, thereto, to be filed by the
Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of securities of the
Corporation, and to file the same, with all exhibits thereto and other
supporting documents, with the SEC; and (3) one or more Registration Statements
on Form S-3, or other applicable forms, establishing a universal shelf under
Rule 415 of the 1933 Act, and any and all amendments or supplements thereto
(including post-effective amendments), or any Registration Statements relating
to the same offering of securities that are filed pursuant to Rule 462(b) of the
1933 Act, and to file the same, with all exhibits thereto and other supporting
documents, with the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 1st
of February, 2006.
/S/ DEBORAH D. RIEMAN
-----------------------------------
Deborah D. Rieman
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL BY THESE PRESENTS, that the undersigned director and/or officer of
Corning Incorporated, a New York corporation (the "Corporation"), does hereby
make, constitute and appoint Katherine A. Asbeck, William D. Eggers and James B.
Flaws and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
director and/or officer of the Corporation to (1) a Form 10-K, Annual Report,
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
for the fiscal year ended December 31, 2005, or other applicable form, including
any and all exhibits, schedules, amendments, supplements and supporting
documents thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required under the 1934 Act; (2) one or more
Registration Statements, on Form S-8, or other applicable forms, and all
amendments, including post-effective amendments, thereto, to be filed by the
Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of securities of the
Corporation, and to file the same, with all exhibits thereto and other
supporting documents, with the SEC; and (3) one or more Registration Statements
on Form S-3, or other applicable forms, establishing a universal shelf under
Rule 415 of the 1933 Act, and any and all amendments or supplements thereto
(including post-effective amendments), or any Registration Statements relating
to the same offering of securities that are filed pursuant to Rule 462(b) of the
1933 Act, and to file the same, with all exhibits thereto and other supporting
documents, with the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 1st
of February, 2006.
/S/ H. ONNO RUDING
-----------------------------------
H. Onno Ruding
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL BY THESE PRESENTS, that the undersigned director and/or officer of
Corning Incorporated, a New York corporation (the "Corporation"), does hereby
make, constitute and appoint Katherine A. Asbeck, William D. Eggers and James B.
Flaws and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
director and/or officer of the Corporation to (1) a Form 10-K, Annual Report,
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
for the fiscal year ended December 31, 2005, or other applicable form, including
any and all exhibits, schedules, amendments, supplements and supporting
documents thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required under the 1934 Act; (2) one or more
Registration Statements, on Form S-8, or other applicable forms, and all
amendments, including post-effective amendments, thereto, to be filed by the
Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of securities of the
Corporation, and to file the same, with all exhibits thereto and other
supporting documents, with the SEC; and (3) one or more Registration Statements
on Form S-3, or other applicable forms, establishing a universal shelf under
Rule 415 of the 1933 Act, and any and all amendments or supplements thereto
(including post-effective amendments), or any Registration Statements relating
to the same offering of securities that are filed pursuant to Rule 462(b) of the
1933 Act, and to file the same, with all exhibits thereto and other supporting
documents, with the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 1st
of February, 2006.
/S/ EUGENE C. SIT
-----------------------------------
Eugene C. Sit
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL BY THESE PRESENTS, that the undersigned director and/or officer of
Corning Incorporated, a New York corporation (the "Corporation"), does hereby
make, constitute and appoint Katherine A. Asbeck, William D. Eggers and James B.
Flaws and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
director and/or officer of the Corporation to (1) a Form 10-K, Annual Report,
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
for the fiscal year ended December 31, 2005, or other applicable form, including
any and all exhibits, schedules, amendments, supplements and supporting
documents thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required under the 1934 Act; (2) one or more
Registration Statements, on Form S-8, or other applicable forms, and all
amendments, including post-effective amendments, thereto, to be filed by the
Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of securities of the
Corporation, and to file the same, with all exhibits thereto and other
supporting documents, with the SEC; and (3) one or more Registration Statements
on Form S-3, or other applicable forms, establishing a universal shelf under
Rule 415 of the 1933 Act, and any and all amendments or supplements thereto
(including post-effective amendments), or any Registration Statements relating
to the same offering of securities that are filed pursuant to Rule 462(b) of the
1933 Act, and to file the same, with all exhibits thereto and other supporting
documents, with the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 1st
of February, 2006.
/S/ WILLIAM D. SMITHBURG
-----------------------------------
William D. Smithburg
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL BY THESE PRESENTS, that the undersigned director and/or officer of
Corning Incorporated, a New York corporation (the "Corporation"), does hereby
make, constitute and appoint Katherine A. Asbeck, William D. Eggers and James B.
Flaws and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
director and/or officer of the Corporation to (1) a Form 10-K, Annual Report,
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
for the fiscal year ended December 31, 2005, or other applicable form, including
any and all exhibits, schedules, amendments, supplements and supporting
documents thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required under the 1934 Act; (2) one or more
Registration Statements, on Form S-8, or other applicable forms, and all
amendments, including post-effective amendments, thereto, to be filed by the
Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of securities of the
Corporation, and to file the same, with all exhibits thereto and other
supporting documents, with the SEC; and (3) one or more Registration Statements
on Form S-3, or other applicable forms, establishing a universal shelf under
Rule 415 of the 1933 Act, and any and all amendments or supplements thereto
(including post-effective amendments), or any Registration Statements relating
to the same offering of securities that are filed pursuant to Rule 462(b) of the
1933 Act, and to file the same, with all exhibits thereto and other supporting
documents, with the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 1st
of February, 2006.
/S/ HANSEL E. TOOKES II
-----------------------------------
Hansel E. Tookes II
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL BY THESE PRESENTS, that the undersigned director and/or officer of
Corning Incorporated, a New York corporation (the "Corporation"), does hereby
make, constitute and appoint Katherine A. Asbeck, William D. Eggers and James B.
Flaws and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
director and/or officer of the Corporation to (1) a Form 10-K, Annual Report,
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
for the fiscal year ended December 31, 2005, or other applicable form, including
any and all exhibits, schedules, amendments, supplements and supporting
documents thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required under the 1934 Act; (2) one or more
Registration Statements, on Form S-8, or other applicable forms, and all
amendments, including post-effective amendments, thereto, to be filed by the
Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of securities of the
Corporation, and to file the same, with all exhibits thereto and other
supporting documents, with the SEC; and (3) one or more Registration Statements
on Form S-3, or other applicable forms, establishing a universal shelf under
Rule 415 of the 1933 Act, and any and all amendments or supplements thereto
(including post-effective amendments), or any Registration Statements relating
to the same offering of securities that are filed pursuant to Rule 462(b) of the
1933 Act, and to file the same, with all exhibits thereto and other supporting
documents, with the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 1st
of February, 2006.
/S/ PETER F. VOLANAKIS
-----------------------------------
Peter F. Volanakis
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL BY THESE PRESENTS, that the undersigned director and/or officer of
Corning Incorporated, a New York corporation (the "Corporation"), does hereby
make, constitute and appoint Katherine A. Asbeck, William D. Eggers and James B.
Flaws and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
director and/or officer of the Corporation to (1) a Form 10-K, Annual Report,
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act'),
for the fiscal year ended December 31, 2005, or other applicable form, including
any and all exhibits, schedules, amendments, supplements and supporting
documents thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required under the 1934 Act; (2) one or more
Registration Statements, on Form S-8, or other applicable forms, and all
amendments, including post-effective amendments, thereto, to be filed by the
Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of securities of the
Corporation, and to file the same, with all exhibits thereto and other
supporting documents, with the SEC; and (3) one or more Registration Statements
on Form S-3, or other applicable forms, establishing a universal shelf under
Rule 415 of the 1933 Act, and any and all amendments or supplements thereto
(including post-effective amendments), or any Registration Statements relating
to the same offering of securities that are filed pursuant to Rule 462(b) of the
1933 Act, and to file the same, with all exhibits thereto and other supporting
documents, with the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 1st
of February, 2006.
/S/ PADMASREE WARRIOR
-----------------------------------
Padmasree Warrior
CORNING INCORPORATED
--------------------------
POWER OF ATTORNEY
--------------------------
KNOW ALL BY THESE PRESENTS, that the undersigned director and/or officer of
Corning Incorporated, a New York corporation (the "Corporation"), does hereby
make, constitute and appoint Katherine A. Asbeck, William D. Eggers and James B.
Flaws and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
director and/or officer of the Corporation to (1) a Form 10-K, Annual Report,
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
for the fiscal year ended December 31, 2005, or other applicable form, including
any and all exhibits, schedules, amendments, supplements and supporting
documents thereto, to be filed by the Corporation with the Securities and
Exchange Commission (the "SEC"), as required under the 1934 Act; (2) one or more
Registration Statements, on Form S-8, or other applicable forms, and all
amendments, including post-effective amendments, thereto, to be filed by the
Corporation with the SEC in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of securities of the
Corporation, and to file the same, with all exhibits thereto and other
supporting documents, with the SEC; and (3) one or more Registration Statements
on Form S-3, or other applicable forms, establishing a universal shelf under
Rule 415 of the 1933 Act, and any and all amendments or supplements thereto
(including post-effective amendments), or any Registration Statements relating
to the same offering of securities that are filed pursuant to Rule 462(b) of the
1933 Act, and to file the same, with all exhibits thereto and other supporting
documents, with the SEC.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 1st
of February, 2006.
/S/ WENDELL P. WEEKS
-----------------------------------
Wendell P. Weeks
The following exhibits are included only in copies of the 2005 Annual Report on
Form 10-K filed with Securities and Exchange Commission ("SEC") or are
incorporated by reference herein. Any document incorporated by reference is
identified by a parenthetical reference to the SEC filing which included such
document.
3 (i) 1 Restated Certificate of Incorporation dated December 6, 2000, filed
with the Secretary of State of the State of New York on January 22,
2001 (Incorporated by reference to Exhibit 3(i) of Corning's Annual
Report on Form 10-K for the year ended December 31, 2000).
3 (i) 2 Certificate of Amendment to Restated Certificate of Incorporation
filed with the Secretary of State of the State of New York on August
5, 2002 (Incorporated by reference to Exhibit 99.1 to Corning's Form
8-K filed on August 7, 2002).
3 (ii) 1 Bylaws of Corning effective as of December 6, 2000 (Incorporated by
reference to Exhibit 3(ii) of Corning's Annual Report on Form 10-K for
the year ended December 31, 2000).
3 (ii) 2 Amendment to Article III, Section 9, of Bylaws of Corning effective as
of February 5, 2003 (Incorporated by reference to Exhibit 3(ii)2 of
Corning's Annual Report on Form 10-K for the year ended December 31,
2003).
4 Rights Agreement of Corning dated as of June 5, 1996 (Incorporated by
reference to Exhibit 1 to Corning's Form 8-K filed on July 10, 1996).
10.1 1994 Employee Equity Participation Program (Incorporated by reference
to Exhibit 1 of Corning Proxy Statement, Definitive 14A filed March
16, 1994 for April 28, 1994 Annual Meeting of Shareholders).
10.2 1998 Variable Compensation Plan (Incorporated by reference to Exhibit
1 of Corning Proxy Statement, Definitive 14A filed March 9, 1998 for
April 30, 1998 Annual Meeting of Shareholders).
10.3 1998 Worldwide Employee Share Purchase Plan (Incorporated by reference
to Exhibit 2 of Corning Proxy Statement, Definitive 14A filed March 9,
1998 for April 30, 1998 Annual Meeting of Shareholders).
10.4 1998 Employee Equity Participation Program (Incorporated by reference
to Exhibit 3 of Corning Proxy Statement, Definitive 14A filed March 9,
1998 for April 30, 1998 Annual Meeting of Shareholders).
10.5 2002 Worldwide Employee Share Purchase Plan (Incorporated by reference
to Exhibit 1 of Corning Proxy Statement, Definitive 14A filed March 7,
2002 for April 25, 2002 Annual Meeting of Shareholders).
10.6 2000 Employee Equity Participation Program and 2003 Amendments
(Incorporated by reference to Exhibit 1 of Corning Proxy Statement,
Definitive 14A filed March 10, 2003 for April 24, 2003 Annual Meeting
of Shareholders).
10.7 2003 Variable Compensation Plan (Incorporated by reference to Exhibit
2 of Corning Proxy Statement, Definitive 14A filed March 10, 2003 for
April 24, 2003 Annual Meeting of Shareholders).
10.8 2003 Equity Plan for Non-Employee Directors (Incorporated by reference
to Exhibit 3 of Corning Proxy Statement, Definitive 14A filed March
10, 2003 for April 24, 2003 Annual Meeting of Shareholders).
10.9 Form of Officer Severance Agreement dated as of February 1, 2004
between Corning Incorporated and each of the following four
individuals: James B. Flaws, James R. Houghton, Peter F. Volanakis and
Wendell P. Weeks (Incorporated by reference to Exhibit 10.1 of
Corning's 10-Q filed May 4, 2004).
10.10 Officer Severance Agreement dated as of February 1, 2004 between
Corning Incorporated and Joseph A. Miller, Jr. (Incorporated by
reference to Exhibit 10.2 of Corning's 10-Q filed May 4, 2004).
10.11 Change In Control Agreement dated as of February 1, 2004 between
Corning Incorporated and James R. Houghton (Incorporated by reference
to Exhibit 10.3 of Corning's 10-Q filed May 4, 2004).
10.12 Form of Amendment dated as of February 1, 2004 to Change In Control
Agreement dated as of October 4, 2000 between Corning Incorporated and
the following two individuals: James B. Flaws and Peter F. Volanakis
(Incorporated by reference to Exhibit 10.4 of Corning's 10-Q filed May
4, 2004).
10.13 Form of Change In Control Amendment dated as of October 4, 2000
between Corning Incorporated and the following two individuals: James
B. Flaws and Peter F. Volanakis (Incorporated by reference to Exhibit
10.5 of Corning's 10-Q filed May 4, 2004).
10.14 Amendment dated as of February 1, 2004 to Change In Control Agreement
dated as of June 1, 2001 between Corning Incorporated and Joseph A.
Miller, Jr. (Incorporated by reference to Exhibit 10.6 of Corning's
10-Q filed May 4, 2004).
10.15 Change In Control Agreement dated as of June 1, 2001 between Corning
Incorporated and Joseph A. Miller, Jr. (Incorporated by reference to
Exhibit 10.7 of Corning's 10-Q filed May 4, 2004).
10.16 Amendment dated as of February 1, 2004 to Change In Control Agreement
dated as of April 23, 2002 between Corning Incorporated and Wendell P.
Weeks (Incorporated by reference to Exhibit 10.8 of Corning's 10-Q
filed May 4, 2004).
10.17 Change In Control Agreement dated as of April 23, 2002 between Corning
Incorporated and Wendell P. Weeks (Incorporated by reference to
Exhibit 10.9 of Corning's 10-Q filed May 4, 2004).
10.18 Form of Corning Incorporated Incentive Stock Plan Agreement for
Restricted Stock Grants (Incorporated by reference to Exhibit 10.1 of
Corning's 10-Q filed October 28, 2004).
10.19 Form of Corning Incorporated Incentive Stock Plan Agreement for
Restricted Stock Retention Grants (Incorporated by reference to
Exhibit 10.2 of Corning's 10-Q filed October 28, 2004).
10.20 Form of Corning Incorporated Incentive Stock Option Agreement
(Incorporated by reference to Exhibit 10.3 of Corning's 10-Q filed
October 28, 2004).
10.21 Form of Corning Incorporated Non-Qualified Stock Option Agreement
(Incorporated by reference to Exhibit 10.4 of Corning's 10-Q filed
October 28, 2004).
10.22 2005 Employee Equity Participation Program (Incorporated by reference
to Exhibit I of Corning Proxy Statement, Definitive 14A filed March 1,
2005 for April 28, 2005 Annual Meeting of Shareholders).
10.23 Five-Year Revolving Credit Agreement with Citibank, N.A.; J.P. Morgan
Chase Bank, N.A.; Bank of America, N.A.; Bank of Tokyo-Mitsubishi,
Ltd.; Wachovia Bank, National Association; Barclays Bank PLC; and
Deutsche Bank A.G. New York Branch dated March 17, 2005 (Incorporated
by reference to Exhibit 10 of Corning's Form 10-Q filed April 26,
2005).
14 Corning Incorporated Code of Ethics for Chief Executive Officer and
Senior Financial Officer (Incorporated by reference to Appendix H-3 of
Corning's 2006 definitive Proxy Statement).
24 Powers of Attorney.
Copies of these exhibits may be obtained by writing to Ms. Denise Hauselt,
assistant general counsel and secretary, Corning Incorporated, MP-HQ-E2-10,
Corning, New York 14831.