| CORNING INC /NY 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 Corningapstas ten largest customers account for about 50prca of our sales |
| However, no individual customer accounts for more than 10prca 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 10prca of segment net sales, accounted for 75prca of total segment sales |
| In the Telecommunications segment, two customers, each of which accounted for more than 10prca of this segmentapstas net sales, accounted for 29prca of total segment sales in 2005 |
| In the Environmental Technologies segment, three customers, each of which accounted for more than 10prca of segment sales, represented 76prca of total segment sales for 2005 |
| In the Life Sciences segment, one distributor accounted for 53prca of this segmentapstas sales in 2005 |
| Samsung Corning Precisionapstas sales were also concentrated, with three customers accounting for 98prca of sales in 2005 |
| 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 &apos 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 |
| Our sales will be dependent on Verizonapstas planned targets for homes passed and connected |
| Changes in Verizonapstas 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 53prca 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 |
| 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 US 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 US, 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 38prca of Corningapstas 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 US 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 dlra24 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 |
| There can be no assurance that Corning will be able to pace its capacity expansion to the actual demand |
| 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 |
| 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 dlra338 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 |
| 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 |
| 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 dlra643 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 |
| For the year ended December 31, 2005, we recognized dlra598 million of equity earnings, of which dlra661 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) is located in the Asia-Pacific region and is subject to political geographic risks mentioned above |
| (our 50prca 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 |
| 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 |