Did the restatement change Corning's 2005 net income?

No. Restated 2005 net income remains $585 million, or $0.38 per diluted share. The restatement reclassified amounts within the income statement: asbestos settlement expense rose by $21 million, interest expense fell by $8 million, and equity in earnings of associated companies rose by $13 million. Restatements of 2004 and 2003 were larger: 2004 net loss was restated from $2.165 billion to $2.231 billion, and 2003 from $223 million to $280 million.

What do the material weaknesses mean for investors?

Management and PwC concluded that Corning did not maintain effective internal control over financial reporting as of December 31, 2005. The two weaknesses concern valuation of asbestos settlement liabilities (including fair value treatment of PCE equity and insurance assignments) and completeness and accuracy of equity investment earnings. Corning expects remediation by September 30, 2006. Until then, investors face a higher risk of further restatements or misstatements.

How much does Corning rely on equity affiliates for earnings?

Equity in earnings of associated companies was $611 million in 2005, which is larger than the company's total pre-tax income of $559 million. The largest contributors were Samsung Corning Precision ($408 million) and Dow Corning ($253 million), partly offset by losses at Samsung Corning Co. ($112 million). Because these entities are not controlled by Corning, their earnings and dividends may not match recent levels.

What is the outlook for Display Technologies and capital spending in 2006?

Management expects LCD glass volume growth above 40% in 2006 but anticipates more significant price declines as competitors add capacity. Capital spending is planned at $1.3 to $1.5 billion for 2006, of which $900 million to $1.1 billion is directed to LCD glass expansion in Taiwan and Japan. Customer deposits of $939 million received from multi-year supply agreements will be credited against future purchases, which reduces operating cash flow in later periods.

What is the status of the asbestos liability and why does it matter?

Corning has a tentative settlement tied to Pittsburgh Corning Corporation's bankruptcy plan. It requires surrendering the PCC equity interest and PCE, contributing 25 million Corning shares, and paying $152 million in present value cash over six years. Total charges since 2003 are $818 million, and these are marked to market with Corning's stock price, so future share price moves will affect earnings. Final approval by the bankruptcy court remains uncertain, and insurance litigation is ongoing.

GLW 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K/A filed May 9, 2006. Cited figures are marked; the original filing is the authoritative source.

Corning's amended 2005 Form 10-K/A (filed May 9, 2006) is primarily a restatement filing.

Management concluded the company had to restate 2003–2005 results to correct errors in accounting for the PCC asbestos settlement liability (fair value vs. book value treatment of components settled via PCE equity and insurance assignments), the suspension of equity earnings from Pittsburgh Corning Europe, and the classification of accretion on the cash portion of the settlement. Restated 2005 net income is unchanged at $585 million^a ($0.38 diluted EPS), but the restatement shifted $21 million into asbestos settlement expense, reduced operating income to $592 million, and increased equity earnings to $611 million. The restatement also increased accumulated deficit by $123 million and other accrued liabilities by $154 million as of year-end 2005.

Management and PwC concluded that Corning had material weaknesses in internal control over financial reporting as of December 31, 2005, meaning the company's previously reported effective controls assessment was withdrawn. Underlying operations were strong in 2005. Net sales rose 19% to $4.579 billion^b, driven by Display Technologies (LCD glass volumes up about 64%) and gross margin expanded to 43% from 37%.

The company returned to profitability after a $2.2 billion^c loss in 2004 that was driven largely by a $1.42 billion Telecommunications goodwill impairment. Results were helped by a $525 million valuation allowance increase on U.S. deferred tax assets, which pushed the effective tax rate to 103%. The balance sheet improved meaningfully: cash and short-term investments reached $2.4 billion, total debt fell by roughly $885 million, and all three rating agencies upgraded the company to investment grade (BBB-/Baa3).

Management expects 2006 capital spending of $1.3 to $1.5 billion^d, mostly for LCD glass capacity, and anticipates sharper LCD price declines in 2006. For investors, the key issues are the quality of earnings and governance.

Equity earnings from Samsung Corning Precision and Dow Corning contributed $611 million, a large share of the total. The restatement, material weaknesses, PwC's disclosed non-audit services in Europe and China (raising independence questions), pending PCC bankruptcy approval, and concentrated customer and LCD exposure are all material risks that could affect future results.

02—Key points

Key Highlights

Restatement: 2003–2005 financials restated for asbestos settlement accounting and equity earnings from Pittsburgh Corning Europe; 2005 asbestos charge rose $21 million to $218 million, and equity earnings rose $13 million to $611 million, with net income unchanged at $585 million.
Material weaknesses: management concluded internal control over financial reporting was not effective as of December 31, 2005, reversing the original 10-K conclusion; remediation targeted by September 30, 2006.
Revenue and margin growth: 2005 net sales rose 19% to $4.58 billion and gross margin improved to 43% (from 37%), led by Display Technologies sales of $1.74 billion (up 57%).
Balance sheet strengthening: cash and short-term investments of $2.4 billion, debt reduced by about $885 million, and ratings upgraded to investment grade by all three agencies (BBB-/Baa3).
Tax charge: a $525 million valuation allowance on U.S. deferred tax assets drove a 103% effective tax rate in 2005, reflecting reduced confidence in realizing tax benefits from a planned sale of Dow Corning.
Concentration risk: five customers account for 75% of Display segment sales, and three Korean customers account for 98% of Samsung Corning Precision sales; the Life Sciences distributor transition also hurt volumes.
Litigation exposure: the PCC asbestos settlement (total charges $818 million since 2003) awaits bankruptcy court approval, and Dow Corning and Samsung-related claims remain unresolved.

03—Questions

Frequently Asked Questions

Did the restatement change Corning's 2005 net income?
No. Restated 2005 net income remains $585 million, or $0.38 per diluted share. The restatement reclassified amounts within the income statement: asbestos settlement expense rose by $21 million, interest expense fell by $8 million, and equity in earnings of associated companies rose by $13 million. Restatements of 2004 and 2003 were larger: 2004 net loss was restated from $2.165 billion to $2.231 billion, and 2003 from $223 million to $280 million.
What do the material weaknesses mean for investors?
Management and PwC concluded that Corning did not maintain effective internal control over financial reporting as of December 31, 2005. The two weaknesses concern valuation of asbestos settlement liabilities (including fair value treatment of PCE equity and insurance assignments) and completeness and accuracy of equity investment earnings. Corning expects remediation by September 30, 2006. Until then, investors face a higher risk of further restatements or misstatements.
How much does Corning rely on equity affiliates for earnings?
Equity in earnings of associated companies was $611 million in 2005, which is larger than the company's total pre-tax income of $559 million. The largest contributors were Samsung Corning Precision ($408 million) and Dow Corning ($253 million), partly offset by losses at Samsung Corning Co. ($112 million). Because these entities are not controlled by Corning, their earnings and dividends may not match recent levels.
What is the outlook for Display Technologies and capital spending in 2006?
Management expects LCD glass volume growth above 40% in 2006 but anticipates more significant price declines as competitors add capacity. Capital spending is planned at $1.3 to $1.5 billion for 2006, of which $900 million to $1.1 billion is directed to LCD glass expansion in Taiwan and Japan. Customer deposits of $939 million received from multi-year supply agreements will be credited against future purchases, which reduces operating cash flow in later periods.
What is the status of the asbestos liability and why does it matter?
Corning has a tentative settlement tied to Pittsburgh Corning Corporation's bankruptcy plan. It requires surrendering the PCC equity interest and PCE, contributing 25 million Corning shares, and paying $152 million in present value cash over six years. Total charges since 2003 are $818 million, and these are marked to market with Corning's stock price, so future share price moves will affect earnings. Final approval by the bankruptcy court remains uncertain, and insurance litigation is ongoing.

04—Continue

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