SEC Company Response from CORNING (GLW) — Dec 14, 2005
CORNING INC /NY (GLW) (CIK 0000024741)
Date: Dec. 14, 2005 · CIK: 0000024741 · Accession: 0000024741-05-000783
AI Filing Summary & Sentiment
Referenced dates: November 17, 2005
Letter
Re: Form 10-K for the Fiscal Year ended December 31, 2004 Forms 10-Q for the Fiscal Quarters ended March 31, 2005, June 30, 2005 and September 30, 2005 File No. 1-3247
December 14, 2005
U.S. Securities and Exchange Commission RULE 83 CONFIDENTIAL 100 F Street, NE TREATMENT HAS BEEN Washington, D.C. 20002 REQUESTED, LETTER OMITS CONFIDENTIAL INFORMATION IN VERSION DELIVERED ONLY TO SEC DIVISION OF CORPORATION FINANCE, AND ASTERISKS DENOTE SUCH OMISSIONS.
Ladies and Gentlemen:
We are responding to the comments in the Securities and Exchange Commission (the "Staff") letter dated November 17, 2005 to Mr. James B. Flaws of Corning Incorporated ("Corning"). For your convenience, we have included the Staff's comments below followed by our related response.
Form 10-K for the year ended December 31, 2004 ---------------------------------------------- General -------
1. Where a comment below requests additional disclosures or other revisions to be made, please show us in your response what the revisions will look like. These revisions should be included in your future filings, including your interim filings where applicable.
Response
Please see our individual responses below.
Financial Statements --------------------
Note 1 - Summary of Significant Accounting Policies ---------------------------------------------------
Basis of Presentation and Principles of Consolidation -----------------------------------------------------
2. We have reviewed your response to prior comment 4. You disclose that the sole purpose of all three variable interest entities is to lease transportation equipment to you and that you are the primary beneficiary for only one of these three entities. Please also disclose how you determined you were not the primary beneficiary for the two entities that are not consolidated.
<PAGE>
Response
Corning has a variable interest in three different variable interest entities, one of which is consolidated because we are the primary beneficiary and two which are not. This response addresses the two entities which we do not consolidate. Each entity has been assessed individually, however, some comments in this response will refer to the two entities in aggregate when referencing certain provisions and detailed characteristics of the entities. This is only for convenience due to certain similarities across the entities and not because they were analyzed in aggregate.
Each of the two entities are trusts which own and lease transportation equipment to Corning via a leveraged lease (from the Trust's perspective). The leases are operating leases to Corning as lessee.
The equipment leases were entered into at terms that are consistent with market terms at the inception of the leases. The leases do not include a residual value guarantee. The leases do include a purchase option which is a variable interest in the Trust(s). However, because the purchase option is at fair market value (except in a highly unlikely circumstance), Corning would not be exposed to a majority of the residual returns or residual losses of the Trusts.
The purchase option provides Corning with the right to purchase the transportation equipment at the end of the Basic Term of the lease, or in the event of default. The Basic Term of the lease is 18 years. The purchase option at the end of this Basic Term allows Corning to purchase the equipment at the lesser of Fair Market Sales Value (defined as the retail sales value between willing buyer and willing seller) or 37.5% of the Purchase Price ($9.785 million per each asset). In the expected case that the fair value of the asset is less than 37.5% of the purchase price at the end of 18 years, by exercising its purchase option, Corning would simply be getting the transportation equipment at its then fair value. The only theoretical residual returns resulting from the purchase option would be if the fair value of the equipment at the end of 18 years exceeds 37.5% of the purchase price. In Corning's judgment, there is a remote likelihood that the equipment's value would exceed this level after 18 years. Therefore, the purchase option does not provide Corning with rights to substantive residual returns in the Trusts.
Because there is no residual value guarantee by Corning (and therefore no risk of residual loss), and because the purchase option does not provide any substantive opportunity for residual returns, Corning concluded that it would not be the primary beneficiary of these entities. In sum, Corning would not be exposed to the majority of the residual losses or the majority of the residual returns of the Trusts.
<PAGE>
We thought it might also be helpful for the staff to understand the relative size of these entities in relation to Corning's financial position and results of operations. Therefore, for the staff's convenience, we have provided information about the impact of consolidating the Trusts would have on Corning's consolidated financial position and result of operations.
<TABLE> <CAPTION> ($ in millions) --------------------------------------------------------------------------------------------------------- Corning Corning Results for Results for the Nine the Quarter Months Nine Ended Quarter Ended Month September Impact of % of September Impact of % of 30, 2005 the Trusts Corning 30, 2005 the Trusts Corning ------------------ --------------- ------------- ------------ -------------- -------------- ------------- <S> <C> <C> <C> <C> <C> <C> SG&A $178 $ .4 .22% $553 $ 1.6 .29% ------------------ --------------- ------------- ------------ -------------- -------------- ------------- Depreciation 127 .2 .16 373 .6 .16
------------------ --------------- ------------- ------------ -------------- -------------- ------------- Interest expense 25 .2 .8 90 .6 .67 ------------------ --------------- ------------- ------------ -------------- -------------- -------------
------------------ --------------- ------------- ------------ -------------- -------------- ------------- Property, net 4,367 11.6 .27
------------------ --------------- ------------- ------------ -------------- -------------- ------------- Assets 10,883 11.6 .11 ------------------ --------------- ------------- ------------ -------------- -------------- ------------- Debt - current 293 .8 .27 ------------------ --------------- ------------- ------------ -------------- -------------- ------------- Debt - LT 1,804 9.2 .51 ------------------ --------------- ------------- ------------ -------------- -------------- ------------- Current liabilities 2,231 .8 .04 ------------------ --------------- ------------- ------------ -------------- -------------- ------------- Total liabilities 5,630 10.0 .18 --------------------------------------------------------------------------------------------------------- </TABLE>
As indicated in our previous response to the Staff, Corning believes the FIN 46R, paragraph 24, disclosures are necessary and have been made in the September 30, 2005 Form 10-Q. However, we do not plan to disclose the basis for not consolidating these entities because we do not believe that FIN 46R requires such disclosure. The only impact of Corning's relationship with these Trusts that could be considered material is the maximum loss, which has been disclosed.
<PAGE>
Foreign Currency Translation and Transactions ---------------------------------------------
3. We have reviewed your response to prior comment 5. It is not clear what significant changes in economic facts and circumstances led you to determine it was appropriate to change the functional currency of your Taiwanese subsidiary from the New Taiwan Dollar to the Japanese Yen. Given that it appears your primary basis for the change in functional currency is due to the currency in which capital expenditures are denominated and product sales are priced and transacted, please tell us the currency in which capital expenditures were denominated and sales of products were priced and transacted during the nine months ended September 30, 2005 and each of the two years ended December 31, 2004. If capital expenditures and sales transactions were denominated in multiple currencies, please tell us the estimated dollar amount and percentage for each of these currencies. Please also provide us with a detailed explanation as to why you believe it is appropriate to use the Japanese Yen as the functional currency with reference to Appendix A of SFAS 52. If multiple currencies are used for any of the indicators provided in Appendix A, please tell us the estimated dollar amount and percentage for each of these currencies.
Response
FAS 52 Foreign Currency Translation (FAS 52), Paragraph 5 states, "An entity's functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which the entity primarily generates and expends cash."
Paragraph 45 of FAS 52, indicates that once a determination of the functional currency is made, that decision shall be consistently used for each foreign entity unless significant changes in economic facts and circumstances indicate clearly that the functional currency has changed. Paragraph 5 indicates that in many situations, the determination of the functional currency is plainly clear. In others, a significant amount of management judgment is required.
Our Taiwanese subsidiary (CDTT) has historically had the New Taiwan Dollar (NTD) as its functional currency. Our initial determination of the NTD as the functional currency was based upon the application of the criteria outlined in FAS 52. Specifically, we noted that while CDTT's revenues were in Japanese Yen (JPY), other cash flows were denominated in the local currency, with the exception of intercompany purchases of full sheet glass, which were originally denominated in US Dollar (USD).
<PAGE>
During our evaluation of CDTT's functional currency at the end of 2003, the 2003 cash flows indicated that there was an increase in JPY denominated cash flows as more transactions were occurring in JPY. That increase was primarily due to a change in the denomination of the intercompany purchases of full sheet glass from USD to JPY. During late 2003 and into the first half of 2004, Corning management was also evaluating whether to change the billing currency for all sales of its LCD glass business (including those of CDTT) from JPY to USD. Ultimately, management retained the JPY as the billing currency because of concern that a change to the USD might put the business at an economic disadvantage in the marketplace. Although 2003 cash flows were trending toward JPY and CDTT appeared to be moving toward a functional currency of JPY, Corning believed the changes were not yet significant enough to make the functional currency change to JPY, especially in light of management's considerations to change the billing currency from JPY to USD.
By December 31, 2004, with continued growth in the LCD glass business, CDTT's JPY denominated cash flows more than doubled. In addition, Corning had negotiated a long-term supply agreement with one customer to receive deposits on future JPY denominated sales transactions. Corning was in the process of negotiating similar agreements with other of CDTT's customers, in each case denominated in JPY. These large supply agreements, with deposits in JPY, were a major change in CDTT's business environment. By the end of 2004, management could determine that CDTT's future cash flows would be heavily weighted toward JPY and therefore CDTT's functional currency needed to be changed to JPY.
At the end of 2004, Corning forecasted that the 2005 JPY denominated sales and customer deposit cash flows would continue to increase dramatically, and cash outflows would continue to shift from being denominated in NTD to being denominated in JPY and USD. Based on the 2005 forecast, the amount of NTD denominated cash outflow expenditures were expected to decline approximately 13 points to 35%, while the JPY denominated expenditures were expected to increase approximately 6 points to 36%, a spread of 19 points. Management considered this to be yet another indicator that Taiwan's functional currency needed to be changed to JPY.
Based on the foregoing facts, management concluded that there had been significant changes in the economic circumstances of CDTT's business at the end of 2004 indicating that its functional currency was no longer the NTD, but rather was the JPY.
<PAGE>
The following charts depict relevant transactional data for the years 2003 and 2004, and projected full year 2005, including the data requested by the Staff. This information was used in making the decision to change the functional currency to JPY as of January 1, 2005.
<TABLE> <CAPTION> ---------------------------------------------------------------------------------------------- (in millions) 2003 USD equivalents -------------------- Transactions denominated in: ------------------------------------------------- FAS 52 Determining Factor NTD JPY USD EUR / Other ------------------------- --- --- --- -----------
-------------------------------------------- ----------- ----------- ---------- -------------- <S> <C> <C> <C> <C> Sales Price 316
Customer Deposits 0.0
-------------------------------------------- ----------- ----------- ---------- -------------- Sales Market 316
-------------------------------------------- ----------- ----------- ---------- -------------- Labor Costs
Show Raw Text
<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.txt
<TEXT>
December 14, 2005
U.S. Securities and Exchange Commission RULE 83 CONFIDENTIAL
100 F Street, NE TREATMENT HAS BEEN
Washington, D.C. 20002 REQUESTED, LETTER
OMITS CONFIDENTIAL
INFORMATION IN VERSION
DELIVERED ONLY TO SEC
DIVISION OF CORPORATION
FINANCE, AND ASTERISKS
DENOTE SUCH OMISSIONS.
Re: Form 10-K for the Fiscal Year ended December 31, 2004
Forms 10-Q for the Fiscal Quarters ended March 31, 2005,
June 30, 2005 and September 30, 2005
File No. 1-3247
Ladies and Gentlemen:
We are responding to the comments in the Securities and Exchange Commission (the
"Staff") letter dated November 17, 2005 to Mr. James B. Flaws of Corning
Incorporated ("Corning"). For your convenience, we have included the Staff's
comments below followed by our related response.
Form 10-K for the year ended December 31, 2004
----------------------------------------------
General
-------
1. Where a comment below requests additional disclosures or other revisions to
be made, please show us in your response what the revisions will look like.
These revisions should be included in your future filings, including your
interim filings where applicable.
Response
Please see our individual responses below.
Financial Statements
--------------------
Note 1 - Summary of Significant Accounting Policies
---------------------------------------------------
Basis of Presentation and Principles of Consolidation
-----------------------------------------------------
2. We have reviewed your response to prior comment 4. You disclose that the
sole purpose of all three variable interest entities is to lease
transportation equipment to you and that you are the primary beneficiary
for only one of these three entities. Please also disclose how you
determined you were not the primary beneficiary for the two entities that
are not consolidated.
<PAGE>
Response
Corning has a variable interest in three different variable interest entities,
one of which is consolidated because we are the primary beneficiary and two
which are not. This response addresses the two entities which we do not
consolidate. Each entity has been assessed individually, however, some comments
in this response will refer to the two entities in aggregate when referencing
certain provisions and detailed characteristics of the entities. This is only
for convenience due to certain similarities across the entities and not because
they were analyzed in aggregate.
Each of the two entities are trusts which own and lease transportation equipment
to Corning via a leveraged lease (from the Trust's perspective). The leases are
operating leases to Corning as lessee.
The equipment leases were entered into at terms that are consistent with market
terms at the inception of the leases. The leases do not include a residual value
guarantee. The leases do include a purchase option which is a variable interest
in the Trust(s). However, because the purchase option is at fair market value
(except in a highly unlikely circumstance), Corning would not be exposed to a
majority of the residual returns or residual losses of the Trusts.
The purchase option provides Corning with the right to purchase the
transportation equipment at the end of the Basic Term of the lease, or in the
event of default. The Basic Term of the lease is 18 years. The purchase option
at the end of this Basic Term allows Corning to purchase the equipment at the
lesser of Fair Market Sales Value (defined as the retail sales value between
willing buyer and willing seller) or 37.5% of the Purchase Price ($9.785 million
per each asset). In the expected case that the fair value of the asset is less
than 37.5% of the purchase price at the end of 18 years, by exercising its
purchase option, Corning would simply be getting the transportation equipment at
its then fair value. The only theoretical residual returns resulting from the
purchase option would be if the fair value of the equipment at the end of 18
years exceeds 37.5% of the purchase price. In Corning's judgment, there is a
remote likelihood that the equipment's value would exceed this level after 18
years. Therefore, the purchase option does not provide Corning with rights to
substantive residual returns in the Trusts.
Because there is no residual value guarantee by Corning (and therefore no risk
of residual loss), and because the purchase option does not provide any
substantive opportunity for residual returns, Corning concluded that it would
not be the primary beneficiary of these entities. In sum, Corning would not be
exposed to the majority of the residual losses or the majority of the residual
returns of the Trusts.
<PAGE>
We thought it might also be helpful for the staff to understand the relative
size of these entities in relation to Corning's financial position and results
of operations. Therefore, for the staff's convenience, we have provided
information about the impact of consolidating the Trusts would have on Corning's
consolidated financial position and result of operations.
<TABLE>
<CAPTION>
($ in millions)
---------------------------------------------------------------------------------------------------------
Corning
Corning Results for
Results for the Nine
the Quarter Months Nine
Ended Quarter Ended Month
September Impact of % of September Impact of % of
30, 2005 the Trusts Corning 30, 2005 the Trusts Corning
------------------ --------------- ------------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
SG&A $178 $ .4 .22% $553 $ 1.6 .29%
------------------ --------------- ------------- ------------ -------------- -------------- -------------
Depreciation 127 .2 .16 373 .6 .16
------------------ --------------- ------------- ------------ -------------- -------------- -------------
Interest
expense 25 .2 .8 90 .6 .67
------------------ --------------- ------------- ------------ -------------- -------------- -------------
------------------ --------------- ------------- ------------ -------------- -------------- -------------
Property, net 4,367 11.6 .27
------------------ --------------- ------------- ------------ -------------- -------------- -------------
Assets 10,883 11.6 .11
------------------ --------------- ------------- ------------ -------------- -------------- -------------
Debt -
current 293 .8 .27
------------------ --------------- ------------- ------------ -------------- -------------- -------------
Debt - LT 1,804 9.2 .51
------------------ --------------- ------------- ------------ -------------- -------------- -------------
Current
liabilities 2,231 .8 .04
------------------ --------------- ------------- ------------ -------------- -------------- -------------
Total
liabilities 5,630 10.0 .18
---------------------------------------------------------------------------------------------------------
</TABLE>
As indicated in our previous response to the Staff, Corning believes the FIN
46R, paragraph 24, disclosures are necessary and have been made in the September
30, 2005 Form 10-Q. However, we do not plan to disclose the basis for not
consolidating these entities because we do not believe that FIN 46R requires
such disclosure. The only impact of Corning's relationship with these Trusts
that could be considered material is the maximum loss, which has been disclosed.
<PAGE>
Foreign Currency Translation and Transactions
---------------------------------------------
3. We have reviewed your response to prior comment 5. It is not clear what
significant changes in economic facts and circumstances led you to
determine it was appropriate to change the functional currency of your
Taiwanese subsidiary from the New Taiwan Dollar to the Japanese Yen. Given
that it appears your primary basis for the change in functional currency is
due to the currency in which capital expenditures are denominated and
product sales are priced and transacted, please tell us the currency in
which capital expenditures were denominated and sales of products were
priced and transacted during the nine months ended September 30, 2005 and
each of the two years ended December 31, 2004. If capital expenditures and
sales transactions were denominated in multiple currencies, please tell us
the estimated dollar amount and percentage for each of these currencies.
Please also provide us with a detailed explanation as to why you believe it
is appropriate to use the Japanese Yen as the functional currency with
reference to Appendix A of SFAS 52. If multiple currencies are used for any
of the indicators provided in Appendix A, please tell us the estimated
dollar amount and percentage for each of these currencies.
Response
FAS 52 Foreign Currency Translation (FAS 52), Paragraph 5 states, "An entity's
functional currency is the currency of the primary economic environment in which
the entity operates; normally, that is the currency of the environment in which
the entity primarily generates and expends cash."
Paragraph 45 of FAS 52, indicates that once a determination of the functional
currency is made, that decision shall be consistently used for each foreign
entity unless significant changes in economic facts and circumstances indicate
clearly that the functional currency has changed. Paragraph 5 indicates that in
many situations, the determination of the functional currency is plainly clear.
In others, a significant amount of management judgment is required.
Our Taiwanese subsidiary (CDTT) has historically had the New Taiwan Dollar (NTD)
as its functional currency. Our initial determination of the NTD as the
functional currency was based upon the application of the criteria outlined in
FAS 52. Specifically, we noted that while CDTT's revenues were in Japanese Yen
(JPY), other cash flows were denominated in the local currency, with the
exception of intercompany purchases of full sheet glass, which were originally
denominated in US Dollar (USD).
<PAGE>
During our evaluation of CDTT's functional currency at the end of 2003, the 2003
cash flows indicated that there was an increase in JPY denominated cash flows as
more transactions were occurring in JPY. That increase was primarily due to a
change in the denomination of the intercompany purchases of full sheet glass
from USD to JPY. During late 2003 and into the first half of 2004, Corning
management was also evaluating whether to change the billing currency for all
sales of its LCD glass business (including those of CDTT) from JPY to USD.
Ultimately, management retained the JPY as the billing currency because of
concern that a change to the USD might put the business at an economic
disadvantage in the marketplace. Although 2003 cash flows were trending toward
JPY and CDTT appeared to be moving toward a functional currency of JPY, Corning
believed the changes were not yet significant enough to make the functional
currency change to JPY, especially in light of management's considerations to
change the billing currency from JPY to USD.
By December 31, 2004, with continued growth in the LCD glass business, CDTT's
JPY denominated cash flows more than doubled. In addition, Corning had
negotiated a long-term supply agreement with one customer to receive deposits on
future JPY denominated sales transactions. Corning was in the process of
negotiating similar agreements with other of CDTT's customers, in each case
denominated in JPY. These large supply agreements, with deposits in JPY, were a
major change in CDTT's business environment. By the end of 2004, management
could determine that CDTT's future cash flows would be heavily weighted toward
JPY and therefore CDTT's functional currency needed to be changed to JPY.
At the end of 2004, Corning forecasted that the 2005 JPY denominated sales and
customer deposit cash flows would continue to increase dramatically, and cash
outflows would continue to shift from being denominated in NTD to being
denominated in JPY and USD. Based on the 2005 forecast, the amount of NTD
denominated cash outflow expenditures were expected to decline approximately 13
points to 35%, while the JPY denominated expenditures were expected to increase
approximately 6 points to 36%, a spread of 19 points. Management considered this
to be yet another indicator that Taiwan's functional currency needed to be
changed to JPY.
Based on the foregoing facts, management concluded that there had been
significant changes in the economic circumstances of CDTT's business at the end
of 2004 indicating that its functional currency was no longer the NTD, but
rather was the JPY.
<PAGE>
The following charts depict relevant transactional data for the years 2003 and
2004, and projected full year 2005, including the data requested by the Staff.
This information was used in making the decision to change the functional
currency to JPY as of January 1, 2005.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
(in millions) 2003 USD equivalents
--------------------
Transactions denominated in:
-------------------------------------------------
FAS 52 Determining Factor NTD JPY USD EUR / Other
------------------------- --- --- --- -----------
-------------------------------------------- ----------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
Sales Price 316
Customer Deposits 0.0
-------------------------------------------- ----------- ----------- ---------- --------------
Sales Market 316
-------------------------------------------- ----------- ----------- ---------- --------------
Labor Costs