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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
[ ] 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
(Registrant)
New York 16-0393470
(State of incorporation) (I.R.S. Employer Identification No.)
One Riverfront Plaza, Corning, New York 14831
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-974-9000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to the filing
requirements for at least the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
231,164,745 shares of Corning's Common Stock, $0.50 Par Value, were outstanding
as of October 10, 1997.
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
Index to consolidated financial statements of Corning Incorporated and
Subsidiary Companies filed as part of this report:
Page
----
Consolidated Statements of Income for the nine months and
three months ended September 30, 1997 and 1996 3
Consolidated Balance Sheets at September 30, 1997 and
December 31, 1996 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
The consolidated financial statements reflect all adjustments which, in the
opinion of management, are necessary for a fair statement of the results of
operations and financial position for the interim periods presented. All such
adjustments are of a normal recurring nature. The consolidated financial
statements have been compiled without audit and are subject to such year-end
adjustments as may be considered appropriate by the registrant and should be
read in conjunction with Corning's Annual Report on Form 10-K for the year
ended December 31, 1996.
<PAGE>
Corning Incorporated and Subsidiary Companies
Consolidated Statements of Income
(Unaudited; in millions, except per-share amounts)
9 Mons. Ended Sept. 30, 3 Months Ended Sept. 30,
----------------------- -----------------------
1997 1996 1997 1996
----- ---- ---- ----
Revenues
Net sales $3,014.3 $2,661.5 $1,037.8 $ 910.2
Royalty, interest, and
dividend income 29.8 24.0 9.8 9.0
-------- -------- -------- --------
3,044.1 2,685.5 1,047.6 919.2
Deductions
Cost of sales 1,765.0 1,636.9 617.0 551.2
Selling, general and
administrative expenses 499.5 470.1 168.4 163.3
Research and development
expenses 175.4 137.5 70.8 47.3
Interest expense 67.2 53.8 18.9 17.8
Other, net 28.5 19.7 12.7 8.5
-------- -------- -------- --------
Income from continuing
operations before
taxes on income 508.5 367.5 159.8 131.1
Taxes on income from
continuing operations 172.4 123.1 52.1 43.9
--------- --------- --------- --------
Income from continuing
operations before
minority interest and
equity earnings 336.1 244.4 107.7 87.2
Minority interest in earnings
of subsidiaries (56.5) (41.0) (23.0) (13.0)
Dividends on convertible
preferred securities
of subsidiary (10.3) (10.3) (3.4) (3.4)
Equity in earnings of
associated companies 62.0 58.5 31.0 24.4
---------- -------- --------- ---------
Income from continuing
operations 331.3 251.6 112.3 95.2
Loss from discontinued
operations,
net of income taxes (162.6) (115.0)
Net Income (Loss) $ 331.3 $ 89.0 $ 112.3 $ (19.8)
======= ======= ======= ========
Per Common Share:
Continuing operations $ 1.45 $ 1.10 $ 0.49 $ 0.42
Discontinued operations (0.72) (0.51)
-------- --------- --------- --------
$ 1.45 $ 0.38 $ 0.49 $ (0.09)
======== ======== ======== ========
Assuming Dilution:
Continuing operations $ 1.39 $ 1.08 $ 0.47 $ 0.41
Discontinued operations (0.67) (0.48)
-------- --------- -------- --------
$ 1.39 $ 0.41 $ 0.47 $ (0.07)
======== ========= ========= ========
Dividends Declared $ 0.54 $ 0.54 $ 0.18 $ 0.18
======== ======== ========= =========
The accompanying notes are an integral part of these statements.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(In millions, except shares and per-share amounts)
September 30, December 31,
ASSETS 1997 1996
------- ------------- -----------
CURRENT ASSETS
Cash $ 15.3 $ 51.9
Short-term investments, at cost, which
approximates market value 64.7 171.3
Accounts receivable, net of doubtful
accounts and allowances - $18.0/1997;
$22.0/year-end 1996 642.8 566.3
Inventories 597.7 498.5
Deferred taxes on income and other
current assets 137.9 130.7
--------- ---------
Total current assets 1,458.4 1,418.7
--------- ----------
INVESTMENTS
Associated companies, at equity 343.9 313.8
Others, at cost 16.4 23.4
-------- ---------
360.3 337.2
-------- ---------
PLANT AND EQUIPMENT, AT COST, NET OF
ACCUMULATED DEPRECIATION 2,143.7 1,977.7
GOODWILL AND OTHER INTANGIBLE ASSETS,
NET OF ACCUMULATED AMORTIZATION -
$103.5/1997; $86.8/year-end 1996 366.6 330.4
OTHER ASSETS 293.8 257.3
-------- ---------
$4,622.8 $4,321.3
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Loans payable $ 151.6 $ 53.9
Accounts payable 169.9 268.9
Other accrued liabilities 516.7 484.7
------- --------
Total current liabilities 838.2 807.5
------- --------
OTHER LIABILITIES 672.2 646.2
LOANS PAYABLE BEYOND ONE YEAR 1,144.7 1,208.5
MINORITY INTEREST IN SUBSIDIARY COMPANIES 355.1 310.7
CONVERTIBLE PREFERRED SECURITIES OF
SUBSIDIARY 365.2 365.1
CONVERTIBLE PREFERRED STOCK 20.1 22.2
COMMON STOCKHOLDERS' EQUITY
Common stock, including excess over
par value and other capital -
Par value $0.50 per share; Shares
authorized: 500 million;
Shares issued: 263.6 million/1997 and
261.0 million/year-end 1996 693.3 566.0
Retained earnings 1,229.6 1,024.0
Less cost of 32.4 million/1997 and
32.3 million/year-end 1996 shares
of common stock in treasury (714.9) (672.5)
Cumulative translation adjustment 19.3 43.6
-------- --------
Total common stockholders' equity 1,227.3 961.1
-------- --------
$4,622.8 $4,321.3
======== ========
The accompanying notes are an integral part of these statements.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Nine Months Ended September 30,
--------------------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 331.3 $ 89.0
Adjustments to reconcile net income
to net cash provided by operating
activities from continuing operations:
Loss from discontinued operations 162.6
Depreciation and amortization 257.5 212.1
Equity in earnings of associated companies,
in excess of dividends received (25.0) (9.0)
Minority interest in earnings of
subsidiaries in excess of dividends paid 45.0 20.2
Gain on disposition of properties and
investments (4.6) (5.4)
Deferred tax provision (19.8) 1.0
Other 55.2 15.8
Changes in operating assets and liabilities:
Accounts receivable (64.6) (50.7)
Inventory (105.5) (74.8)
Deferred taxes and other current assets (31.0) (1.5)
Accounts payable and other current liabilities (64.4) (25.3)
------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF
CONTINUING OPERATIONS 374.1 334.0
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant and equipment (424.5) (376.6)
Acquisitions of businesses, net (32.0) (15.1)
Net proceeds from disposition of
properties and investments 56.0 31.6
Increase in long-term investments (7.6) (12.1)
Other, net 1.9 8.0
------- -------
NET CASH USED IN INVESTING ACTIVITIES OF
CONTINUING OPERATIONS (406.2) (364.2)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of loans 68.0 272.7
Repayments of loans (30.7) (72.2)
Increase in minority interest due to
capital contribution 7.6
Proceeds from issuance of common stock 33.7 18.0
Repurchases of common stock (41.5) (26.1)
Dividends paid (125.7) (125.7)
-------- -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES OF CONTINUING OPERATIONS (96.2) 74.3
-------- --------
Effect of exchange rates on cash 3.6 (1.5)
--------- --------
Effect of accounting calendar change on cash (17.5)
--------- --------
Cash used in discontinued operations (18.5) (85.2)
--------- --------
Net change in cash and cash equivalents (143.2) (60.1)
Cash and cash equivalents at beginning of year 223.2 187.6
--------- --------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 80.0 $ 127.5
========== ===========
SUPPLEMENTAL DATA:
Income taxes paid, net $ 125.5 $ 100.5
======= =========
Interest paid $ 82.9 $ 90.7
======= =========
The accompanying notes are an integral part of these statements.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Earnings per common share are computed by dividing net income less
dividends on Series B convertible preferred stock by the weighted
average number of common shares outstanding during each period. The
weighted average number of common shares outstanding for the third
quarter and third quarter year-to-date 1997 was 228.7 million and 227.7
million, respectively, and 227.4 million for both periods in 1996. The
weighted average of common shares outstanding for earnings per share
calculations does not include shares held by the Corning Stock Ownership
Trust which totaled approximately 2.4 million and 2.3 million shares
during 1997 and 1996, respectively. Series B preferred dividends
amounted to $0.4 million and $1.2 million in the third quarter and third
quarter year-to-date 1997, respectively, and $0.5 million and $1.5
million, respectively, for the same periods in 1996.
Earnings per common share assuming dilution are computed by dividing net
income plus dividends on convertible preferred securities of subsidiary
by the weighted average number of common shares outstanding during the
period after giving effect to dilutive stock options and adjusted for
dilutive common shares assumed to be issued on conversion of Corning's
convertible securities. The shares used in computing earnings per share
assuming dilution for the third quarter and third quarter year-to-date
1997 were 246.5 million and 245.1 million, respectively, and 239.7
million and 239.4 million, respectively, for the same periods in 1996.
Common dividends of $41.6 million and $124.5 million were declared in the
third quarter and third quarter year-to-date 1997, respectively, compared
with $41.8 million and $124.2 million for the same periods in 1996.
(2) In April, 1997, Corning acquired 100% of the stock of Optical
Corporation of America (OCA) for a total purchase price of approximately
$70 million. The consideration was comprised of approximately 950,000
shares of Corning restricted stock and options and $32 million of cash.
The acquisition was recorded under the purchase method of accounting.
The results of operations of OCA are included in the consolidated
financial statements from the date of acquisition. The excess cost over
the fair value of net tangible assets acquired is approximately $52
million and is being amortized over periods of up to 20 years.
(3) On August 20, 1997, Corning's Board of Directors approved a definitive
agreement for a recapitalization and sale of a controlling interest in
its consumer housewares business to a company formed by AEA Investors.
Corning announced an amendment to the transaction on October 15, 1997.
The planned transaction will result in Corning receiving proceeds of
$779 million in cash and $21 million face amount of long-term debt of
the consumer housewares business at closing. Corning will continue to
retain an 11% interest in the equity of the business. In addition,
Corning could receive up to an additional $62 million face amount of
long-term debt if certain 1998 business performance targets are
exceeded. However, $50 million of the cash proceeds and the $21 million
in long-term debt would be contingently returnable based on the 1998
performance of the business. The amount of cash proceeds is subject to
a customary working capital adjustment at closing.
The transaction is expected to close on or before December 31, 1997.
Corning expects to recognize an after tax gain in excess of $125 million
in the fourth quarter 1997. Any gains on the contingent proceeds will be
recognized when realized. The results of the consumer housewares business
are included in continuing operations.
<PAGE>
(4) Inventories shown on the accompanying balance sheets were comprised of the
following (in millions):
September 30, December 31,
1997 1996
------------ ------------
Finished goods $ 272.5 $ 223.0
Work in process 195.8 156.7
Raw materials and accessories 99.2 104.5
Supplies and packing materials 74.8 64.5
--------- ----------
Total inventories valued at current cost 642.3 548.7
Reduction to LIFO valuation (44.6) (50.2)
--------- ----------
$ 597.7 $ 498.5
========= ==========
(5) Plant and equipment shown on the accompanying balance sheets were
comprised of the following (in millions):
September 30, December 31,
1997 1996
------------- ------------
Land $ 56.5 $ 54.2
Buildings 844.6 810.4
Equipment 3,201.0 2,906.3
Accumulated depreciation (1,958.4) (1,793.2)
---------- ---------
$2,143.7 $ 1,977.7
============ =========
(6) On December 31, 1996, Corning completed a strategic repositioning of the
company by distributing all of the shares of Quest Diagnostics
Incorporated and Covance Inc. (the Distributions) to its shareholders on a
pro rata basis. Corning's results for 1996 report Quest Diagnostics and
Covance as discontinued operations. The loss from discontinued operations
in the third quarter of 1996 was $115 million, or $0.51 per share and
primarily related to a charge taken by Quest Diagnostics to increase
reserves related to certain government investigations of billing practices
of certain clinical laboratories acquired by Quest Diagnostics in 1993 and
1994. The loss from discontinued operations in the third quarter year-to-
date 1996 was $162.6 million, or $0.72 per share.
As described in Note 18 to Corning's 1996 consolidated financial
statements included in its Annual Report on Form 10-K, Corning has agreed
to indemnify Quest Diagnostics on an after-tax basis, for the settlement
of certain governmental claims and certain other claims that were pending
at December 31, 1996. Coincident with the Distributions, Corning recorded
a payable to Quest Diagnostics of approximately $25 million which is equal
to management's best estimate of amounts which are probable of being paid
by Corning to Quest Diagnostics to satisfy the remaining indemnified
claims on an after-tax basis.
Although management believes that established reserves for indemnified
claims are sufficient, it is possible that additional information may
become available to Quest Diagnostics' management which may cause the
final resolution of these matters to exceed established reserves by an
amount which could be material to Corning's results of operations and cash
flow in the period in which such claims are settled. Corning does not
believe that these issues will have a material adverse impact on Corning's
overall financial condition.
<PAGE>
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
---------------------
Net sales for the third quarter 1997 totaled $1.04 billion, an increase of 14%
compared with third quarter 1996 sales. Net sales for the third quarter year-
to-date 1997 totaled $3.01 billion, an increase of 13% compared with third
quarter year-to-date 1996 sales. The increase in sales in the third quarter
and third quarter year-to-date 1997 was due primarily to gains in the
Communications segment.
Net income increased 18% to $112.3 million for the third quarter 1997 compared
with $95.2 million from continuing operations for the third quarter 1996. Net
income increased 32% to $331.3 million for the third quarter year-to-date 1997
compared with $251.6 million from continuing operations for the same period in
1996. Earnings per share increased 17% to $0.49 per share for the third
quarter 1997 compared with $0.42 per share from continuing operations for the
third quarter 1996. Earnings per share increased 32% to $1.45 in the third
quarter year-to-date 1997 compared to $1.10 per share from continuing
operations for the same period in 1996. The increase in earnings in the third
quarter and third quarter year-to-date 1997 was due primarily to continued
performance gains in the Communications segment, to improved results in the
Consumer Products segment and from an increase in equity earnings driven by
Samsung-Corning Company, Ltd. and Eurokera, S.N.C.
Segment overview
- ----------------
Sales and earnings in the Communications segment increased significantly in both
the third quarter and third quarter year-to-date 1997 due to continued growth in
the opto-electronics businesses and strong improvement in the information-
display businesses. Earnings in the opto-electronics businesses were up in the
third quarter and third quarter year-to-date 1997 primarily as a result of
volume gains in optical-fiber and optical-cable businesses driven by strong
market demand and increased capacity. Although the sales and earnings grew
significantly, the growth rate in the third quarter was lower than that
experienced during the first half of 1997. Sales in the photonic-technologies
business continued to grow in the third quarter and third quarter year-to-date
1997. Earnings of this business, which have increased year-to-date 1997 over
1996, were impacted by higher development and expansion-related activities in
the third quarter.
The substantial improvement in the sales and earnings of the information-display
businesses in the third quarter and third quarter year-to-date 1997 was
primarily driven by favorable sales mix and volume-related gains in the
conventional-television business. Earnings in the third quarter and third
quarter year-to-date 1997 also reflect improved manufacturing efficiencies over
the same periods in 1996 which were adversely impacted by expansion-related
costs.
Sales for the Specialty Materials segment increased modestly in the third
quarter and were essentially flat in the third quarter year-to-date 1997.
Strong sales gains in the advanced-materials business driven by high purity
fused silica glass applications for the semiconductor-equipment industry, were
offset by a sales decline in the optical-products business and relatively flat
sales in the environmental-products and science-products businesses. Earnings
for the third quarter and third quarter year-to-date 1997 increased
significantly due to the sales gains in the advanced-materials business and
performance improvements at Quanterra and in the science-products business,
which more than offset the sales related earnings decline in the optical-
products business. Results for the segment have been somewhat impacted by
unfavorable foreign exchange rates.
<PAGE>
Sales in the Consumer Products segment decreased in the third quarter and third
quarter year-to-date 1997 due to sales declines in the consumer housewares
business and as a result of the sale of the Serengeti eyewear business in the
first quarter 1997. The decrease in sales in the consumer housewares business
is due primarily to the planned reduction in the number of stock-keeping units
the business offers and from market softness in the third quarter. Earnings
increased significantly in the third quarter and third quarter year-to-date
1997 reflecting the benefit of manufacturing efficiencies and cost-reduction
programs in the consumer housewares business.
On August 20, 1997, Corning's Board of Directors approved a definitive
agreement for a recapitalization and sale of a controlling interest in its
consumer housewares business to a company formed by AEA Investors. Corning
announced an amendment to the transaction on October 15, 1997. The planned
transaction will result in Corning receiving proceeds of $779 million in cash
and $21 million face amount of long-term debt of the consumer housewares
business at closing. Corning will continue to retain an 11% interest in the
equity of the business. In addition, Corning could receive up to an
additional $62 million face amount of long-term debt if certain 1998 business
performance targets are exceeded. However, $50 million of the cash proceeds
and the $21 million in long-term debt would be contingently returnable based
on the 1998 performance of the business. The amount of cash proceeds is
subject to a customary working capital adjustment at closing.
The transaction is expected to close on or before December 31, 1997. Corning
expects to recognize an after tax gain in excess of $125 million in the fourth
quarter 1997. Any gains on the contingent proceeds will be recognized when
realized. The results of the consumer housewares business are included in
continuing operations. Corning intends to use proceeds from the anticipated
divestiture of its consumer housewares business to invest for future growth in
its communications, environmental-products and advanced-materials businesses,
and to improve its balance sheet.
Equity in Earnings
- ------------------
Third quarter 1997 equity in earnings of associated companies totaled $31
million, a 27% increase from $24.4 million in the same period last year. Third
quarter year-to-date 1997 equity in earnings of associated companies totaled
$62 million, a 6% increase from $58.5 million in the same period last year.
Equity in earnings of associated companies for the third quarter and third
quarter year-to-date 1997 reflect increased earnings at Samsung-Corning
Company, Ltd. and Eurokera. Earnings at Samsung-Corning benefited largely from
increased sales resulting from an employee strike at a competitor. Equity
earnings for the third quarter year-to-date were impacted by costs associated
with new equity ventures, including the start up of American Video Glass
Company and Samsung Corning Precision Glass Co. Ltd.
Taxes on Income
- ----------------
Corning's effective tax rate for continuing operations was 32.6% and 33.9% for
the third quarter and third quarter year-to-date 1997, respectively, and 33.5%
for the same periods of 1996.
<PAGE>
Liquidity and Capital Resources
-------------------------------
Corning's working capital increased from $611.2 million at the end of 1996 to
$620.2 million at September 30, 1997. The ratio of current assets to current
liabilities was 1.7 at the end of the third quarter 1997 compared with 1.8 at
year-end 1996. Corning's long-term debt as a percentage of total capital was
37% at the end of the third quarter 1997 compared to 42% at year-end 1996. The
decrease in this percentage is primarily due to the increase in Corning's
stockholders' equity.
Cash and short-term investments declined from year-end 1996 by $143.2 million
primarily due to investing and financing activities which used cash of $406.2
million and $96.2 million, respectively, offset by operating activities which
provided cash of $374.1 million. Net cash provided by operating activities
increased in the third quarter year-to-date 1997 compared to the same period in
1996 due to increased earnings which more than offset an increase in cash used
for working capital. Net cash used in investing activities increased in the
third quarter year-to-date 1997 due primarily to an increase in capital
spending driven by capacity expansions in its Communications segment and
advanced-materials business. Management expects capital spending to be
approximately $750 million in 1997. Corning used cash in financing activities
in the third quarter year-to-date 1997 as a result of dividend payments and
repurchases of common stock which more than offset net borrowings. Financing
activities provided cash in the third quarter year-to-date 1996 as net
borrowings were higher than dividend payments and repurchases of common stock.
Cash used in discontinued operations totaled $18.5 million and $85.2 million in
the third quarter year-to-date 1997 and 1996, respectively. Cash used by
discontinued operations in 1997 was primarily due to payments of transaction
costs associated with the December 31, 1996 Distributions of Quest Diagnostics
and Covance.
New Accounting Pronouncement
- ----------------------------
In February 1997, the Financial Accounting Standards Board issued Statement No.
128 "Earnings per Share" (FAS 128), which establishes standards for computing
and presenting earnings per share (EPS). FAS 128 requires presentation of both
EPS and diluted EPS. FAS 128 will be effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. The EPS
calculations under FAS 128 will not differ from Corning's current EPS
calculations under the provisions of Accounting Principles Board Opinion No. 15
(APB 15) for the periods presented.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
- -----------------------------------------------------------------------------
1995
- -----
The statements in this Form 10-Q which are not historical facts or information
are forward-looking statements. These forward-looking statements involve risks
and uncertainties that could cause the outcome to be materially different.
Such risks and uncertainties include, but are not limited to, global economic
conditions, product demand and industry capacity, competitive products and
pricing, manufacturing efficiencies, costs reductions, availability and costs
of critical materials, new product development and commercialization,
manufacturing capacity, facility expansions and new plant start-up costs, the
effect of regulatory and legal developments, capital resource and cash flow
activities, capital spending, equity company activities, interest costs,
acquisition and divestiture activity, the rate of technology change, ability to
enforce patents and other risks detailed in Corning's 1996 Form 10-K.
<PAGE>
Part II - Other Information
---------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
There are no pending legal proceedings to which Corning or any of its
subsidiaries is a party or of which any of their property is the subject which
are material in relation to the consolidated financial statements.
Environmental Litigation. Corning has been named by the Environmental
Protection Agency under the Superfund Act, or by state governments under similar
state laws, as a potentially responsible party for 18 hazardous waste sites.
Under the Superfund Act, all parties who may have contributed any waste to a
hazardous waste site, identified by such Agency, are jointly and severally
liable for the cost of cleanup unless the Agency agrees otherwise. It is
Corning's policy to accrue for its estimated liability related to Superfund
sites and other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued approximately $21 million for its estimated
liability for environmental cleanup and litigation at September 30, 1997.
Breast-implant Litigation. Dow Corning Bankruptcy: On May 15, 1995, Dow
Corning Corporation sought protection under the reorganization provisions of
Chapter 11 of the United States Bankruptcy Code. The effect of the bankruptcy,
which is pending in the United States Bankruptcy Court for the Eastern District
of Michigan, Northern Division (Bay City, Michigan), is to stay the prosecution
against Dow Corning of the 45 purported breast-implant product liability class
action lawsuits and its approximately 19,000 breast-implant product liability
lawsuits. In June 1995 Dow Corning and its shareholders (Corning and The Dow
Chemical Company) attempted to remove various state court implant lawsuits
against itself and its shareholders to federal court, and to transfer these
cases to the United States District Court for the Eastern District of Michigan,
Southern District (the "Michigan Federal Court"). The transfer motion also
contemplated a trial of the consolidated, transferred cases on the "common
issue" of whether silicones cause diseases as alleged by plaintiffs. On
September 12, 1995 Judge Hood of the Michigan Federal Court issued an order
granting the motion to transfer the Dow Corning cases to federal court, but
denying the motion to the extent it requested the transfer of cases against Dow
Corning's shareholders to her court. Judge Hood also denied the motion for the
purpose of holding one causation trial prior to the estimation process by the
Bankruptcy Court, but without prejudice to subsequent motions for one or more
such trials to assist in the bankruptcy estimation process. Judge Hood's order
refusing to transfer to the Michigan Federal Court the cases "related to" the
Dow Corning case was reversed by the Sixth Circuit and remanded to Judge Hood to
determine whether the District Court should abstain from hearing the cases.
Judge Hood again refused to transfer the "related to" cases, and her action was
again appealed. On May 8, 1997 the Sixth Circuit reversed Judge Hood again,
resulting in her May 13, 1997 order transferring all pending breast implant
claims against Corning and The Dow Chemical Company to the Michigan Federal
Court.
At the end of June 1997, the Chief Justice of the United States Supreme Court
designated and assigned Judge Sam C. Pointer, Jr. to serve in the U.S. District
Court for the Eastern District of Michigan to preside over all implant personal
injury claims arising out of the reorganization of Dow Corning Corporation and
against Corning and The Dow Chemical Company.
On December 2, 1996, Dow Corning filed its first Plan of Reorganization in the
bankruptcy. The Plan contemplated a common issues trial to resolve the question
of whether or not silicones cause disease and whether a significant fund is
needed to resolve disease claims. The Plan also contemplated that the
shareholders would retain their shares in Dow Corning and receive a release from
all breast implant claims. On January 10, 1997, the Tort Claimants Committee
and the Commercial Creditors Committee filed a joint motion to modify Dow
Corning's exclusivity with respect to filing a plan of reorganization,
requesting the right to file their own competing plan. The motion was denied by
the Bankruptcy Court in May 1997 and Dow Corning retained its exclusivity. On
August 25, 1997, Dow Corning filed its Amended Plan of Reorganization in the
bankruptcy. The Bankruptcy Court has set a disclosure statement hearing on the
Amended Plan for November 3, 1997. The Amended Plan of Reorganization provides
that Dow Chemical and Corning will make available a $300 million credit facility
to Dow Corning Corporation in return for their releases from the litigation.
<PAGE>
On April 7, 1997, Dow Corning filed in the Bankruptcy Court an Omnibus Objection
to all claims in the bankruptcy to the extent based on the alleged causation of
disease by silicones, and a Motion for Summary Judgment on its Omnibus
Objection. Hearing dates on these motions have not yet been set. On July 29,
1997, the Bankruptcy Court issued its opinion concerning Estimation, Panel of
Scientific Experts and Common Issues Trial. The opinion stated a preference
for a consensual plan, but indicated that common issue causation trials would be
recommended if the disease causation issue was not resolved through the Amended
Plan or pending motions.
Implant Tort Lawsuits: Despite the bankruptcy filing of Dow Corning, Corning
- ---------------------
continues to be a defendant in two types of cases previously reported involving
the silicone-gel implant products or materials formerly manufactured or supplied
by Dow Corning or a Dow Corning subsidiary. These cases include (1) a purported
federal securities class action lawsuit filed against Corning by shareholders of
Corning alleging, among other things, misrepresentations and omissions of
material facts relative to the silicone-gel breast implant business conducted by
Dow Corning and (2) lawsuits filed in various federal and state courts against
Corning and others (including Dow Corning) by persons claiming injury from the
silicone-gel implant products or materials formerly manufactured by Dow Corning
or a Dow Corning subsidiary. Several of such suits have been styled as class
actions and others involve multiple plaintiffs.
As of September 30, 1997, Corning had been named in approximately 11,470 state
and federal tort lawsuits.. More than 4,100 tort lawsuits filed against Corning
in federal courts were consolidated in the United States District Court,
Northern District of Alabama. On April 25, 1995 that District Court issued a
final order dismissing Corning from those federal, consolidated breast-implant
cases and plaintiffs appealed. On March 12, 1996, the U.S. Court of Appeals for
the Eleventh Circuit dismissed the plaintiffs' appeal of that order. In orders
entered in May and June 1997, the District Court clarified that pending breast
implant claims against Corning are dismissed and that Corning is to be stricken
as a party in new cases in that Court. Certain state court tort cases against
Corning were also consolidated in various states for the purposes of discovery
and pretrial matters. During 1994, 1995, 1996 and 1997, Corning made several
motions for summary judgment in state courts and judges have dismissed Corning
from over 7,200 tort cases filed in California, Connecticut, Illinois, Indiana,
Louisiana, Michigan, Mississippi, New Jersey, New York, Pennsylvania, Tennessee
and Dallas, Harris and Travis Counties in Texas, some of which are on appeal.
Corning's motions seeking dismissal remain pending, and continue to be filed, in
various courts. In certain Texas tort cases, Dow Chemical and Corning have each
filed cross claims against each other and against Dow Corning. In late 1996,
Dow Chemical filed cross claims against Corning in the Louisiana state implant
class action. On February 21, 1997, the Louisiana judge dismissed Dow
Chemical's and the plaintiffs' claims against Corning. Dow Chemical and the
plaintiffs have appealed that dismissal.
Quest Diagnostics: Government Investigations and Related Claims. On December
- -----------------------------------------------------------------
31, 1996, Corning completed the spin-off of its health care services businesses
by the distribution to its shareholders of the Common Stock of Quest Diagnostics
Incorporated ("Quest Diagnostics") and Covance Inc. ("Covance"). In connection
with these distributions, Quest Diagnostics assumed financial responsibility for
the liabilities related to the clinical laboratory business and Covance assumed
financial responsibility for the liabilities related to the contract research
business. Corning agreed to indemnify Quest Diagnostics against all monetary
penalties, fines or settlements for any governmental claims arising out of
alleged violations of applicable federal fraud and health care statutes and
relating to billing practices of Quest Diagnostics and its predecessors that
were pending at December 31, 1996. Corning also agreed to indemnify Quest
Diagnostics for 50% of the aggregate of all judgment or settlement payments made
by Quest Diagnostics that are in excess of $42.0 million in respect of claims by
private parties (i.e., nongovernmental parties such as private insurers) that
relate to indemnified or previously settled governmental claims and that allege
overbillings by Quest Diagnostics, or any existing subsidiaries of Quest
Diagnostics, for services provided prior to December 31, 1996; provided,
however, such indemnification is not to exceed $25.0 million in the aggregate
and that all amounts indemnified against by Corning for the benefit of Quest
Diagnostics are to be calculated on a net after-tax basis. Such indemnification
does not cover (i) any governmental claims that arise after December 31, 1996
pursuant to service of subpoena or other notice of such investigation after
December 31, 1996, (ii) any nongovernmental claims unrelated to the indemnified
governmental claims or investigations, (iii) any nongovernmental claims not
settled prior to December 31, 2001, (iv) any consequential or incidental damages
relating to the billing claims, including losses of revenues and profits as a
consequence of exclusion for participation in federal or state health care
programs or (v) the fees and expenses of litigation.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
See the Exhibit Index which is located on page 15.
(b) Reports on Form 8-K
A report on Form 8-K dated July 15, 1997, was filed in
connection with the Registrant's medium-term notes facility. The
Registrant's second quarter earnings press release of July 15, 1997
was filed as an exhibit to this Form 8-K.
Other items under Part II are not applicable.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNING INCORPORATED
------------------------------
(Registrant)
October 30, 1997 /s/ ROGER G. ACKERMAN
- ------------------ -----------------------------------
Date R. G. Ackerman
Chairman and Chief Executive Officer
October 30, 1997 /s/ JAMES B. FLAWS
- ------------------ --------------------------------------
Date J. B. Flaws
Vice President-Finance and Treasurer
October 30, 1997 /s/ KATHERINE A. ASBECK
- ------------------ -------------------------------------
Date K. A. Asbeck
Vice President and Controller
<PAGE>
CORNING INCORPORATED
--------------------
EXHIBIT INDEX
-------------
This exhibit is numbered in accordance
with Exhibit Table I of Item 601 of Regulation S-K
Page number
in manually
Exhibit # Description signed original
--------- ----------- ---------------
12 Computation of ratio of earnings
to combined fixed charges and
preferred dividends 16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 15,300
<SECURITIES> 64,700
<RECEIVABLES> 642,800
<ALLOWANCES> 18,043
<INVENTORY> 597,700
<CURRENT-ASSETS> 1,458,400
<PP&E> 2,143,700
<DEPRECIATION> 1,958,311
<TOTAL-ASSETS> 4,622,800
<CURRENT-LIABILITIES> 838,200
<BONDS> 1,144,700
365,200
20,100
<COMMON> 693,300
<OTHER-SE> 534,000
<TOTAL-LIABILITY-AND-EQUITY> 4,622,800
<SALES> 3,014,300
<TOTAL-REVENUES> 3,044,100
<CGS> 1,765,000
<TOTAL-COSTS> 1,765,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 19,400
<INTEREST-EXPENSE> 67,200
<INCOME-PRETAX> 508,500
<INCOME-TAX> 172,400
<INCOME-CONTINUING> 331,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 331,300
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.39
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT #12
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
DIVIDENDS
(Dollars in millions, except ratios)
Nine Months Ended Fiscal Year Ended
---------------------- -------------------------------------------
Sept. 30, Sept. 30, Dec. 31, Dec. 31, Jan. 1, Jan. 2, Jan. 3,
1997 1996 1996 1995 1995 1994 1993
--------- --------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before taxes on income $508.5 $367.5 $487.3 $406.1 $343.8 $74.3 $156.2
Adjustments:
Share of earnings (losses)
before taxes of 50% owned
companies 94.0 89.6 130.3 95.2 89.0 (137.0) 103.2
Gain (loss) before taxes of
greater than 50% owned
unconsolidated subsidiary (1.1) 0.7 (3.1) (4.0) (3.1) (2.1)
Distributed income of less than
50% owned companies and share of
loss if debt is guaranteed 2.1 4.5 (4.3)
Amortization of capitalized interest 10.8 8.7 11.8 9.6 13.3 13.0 11.8
Fixed charges net of capitalized
interest 126.5 93.5 127.0 102.3 148.5 110.1 103.5
------ ----- ----- ----- ----- ------ ------
Earnings before taxes and fixed
charges as adjusted $ 739.8 $558.2 $757.1 $610.1 $592.7 $ 61.8 $368.3
======= ====== ======= ====== ====== ======= =======
Fixed charges:
Interest incurred $84.2 $ 65.5 $86.7 $79.7 $ 77.5 $63.3 $53.1
Share of interest incurred of 50%
owned companies and interest
on guaranteed debt of less than
50% owned companies 39.8 26.5 38.7 10.2 60.8 40.9 42.0
Interest incurred by greater than
50% owned unconsolidated
subsidiary 0.7 0.8 0.8 0.9
Portion of rent expense which
represents interest factor 18.0 15.1 20.1 19.3 17.5 13.4 15.8
Share of portion of rent expense
which represents interest
factor for 50% owned companies 2.7 1.1 1.4 2.7 9.4 9.1 9.2
Portion of rent expense which
represents interest factor for
greater than 50% owned unconsolidated
subsidiary 0.1 0.1 0.1
Amortization of debt costs 2.7 1.1 3.4 0.9 2.0 1.8 1.5
------ ----- ---- ---- ---- ---- ----
Total fixed charges 147.4 109.3 150.3 113.5 168.1 129.4 122.6
Capitalized interest (20.9) (15.8) (23.3) (11.2) (19.6) (19.3) (19.1)
------- ------- ------- ------ ------ ------ ------
Total fixed charges net of
capitalized interest $126.5 $93.5 $127.0 $102.3 $148.5 $110.1 $103.5
====== ===== ====== ====== ====== ====== ======
Preferred dividends:
Preferred dividend requirements $11.5 $ 11.8 $15.7 $15.7 $ 8.2 $ 2.1 $ 2.2
Ratio of pre-tax income to
income before minority interest
and equity earnings 1.5 1.5 1.5 1.4 1.5 0.9 1.2
------ ------ ----- ----- ------- ------ -------
Pre-tax preferred dividend
requirement 17.3 17.7 23.6 22.0 12.3 1.9 2.6
Total fixed charges 147.4 109.3 150.3 113.5 168.1 129.4 122.6
------ ------ ------ ------ ------ ------ -------
Fixed charges and pre-tax preferred
dividend requirement $164.7 $127.0 $173.9 $135.5 $180.4 $131.3 $125.2
======= ====== ====== ====== ====== ===== ======
Ratio of earnings to combined
fixed charges and preferred
dividends 4.5x 4.4x 4.3x 4.5x 3.3x - 2.9x
======= ======= ====== ====== ====== ====== =======
</TABLE>
Earnings did not cover combined fixed charges and preferred dividends by $69.5
in the fiscal year ended January 2, 1994.
