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 JUNE 30, 1998
[ ] 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:
231,897,734 shares of Corning's Common Stock, $0.50 Par Value, were outstanding
as of July 20, 1998.
<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 six months and
three months ended June 30, 1998 and 1997 3
Consolidated Balance Sheets at June 30, 1998 and
December 31, 1997 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 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, 1997, as amended on July 8, 1998.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
Six Months Ended Three Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
-------- --------- --------- --------
Revenues
Net sales $1,650.7 $1,722.6 $ 855.9 $ 905.5
Royalty, interest, and
dividend income 21.1 19.0 12.0 9.1
Non-operating gain 20.5 20.5
-------- -------- -------- --------
1,692.3 1,741.6 888.4 914.6
Deductions
Cost of sales 1,045.1 991.0 530.4 515.3
Selling, general and
administrative expenses 239.5 267.7 126.6 138.9
Provision for restructuring 84.6 84.6
Research and development
expenses 142.2 104.4 75.1 53.4
Interest expense 32.5 40.7 14.9 19.5
Other, net 29.7 5.0 2.6 (1.8)
-------- -------- -------- --------
Income from continuing
operations before taxes
on income 118.7 332.8 54.2 189.3
Taxes on income from continuing
operations 34.9 113.2 13.9 64.2
-------- -------- -------- --------
Income from continuing
operations before minority
interest and equity earnings 83.8 219.6 40.3 125.1
Minority interest in earnings
of subsidiaries (18.3) (33.3) (12.8) (20.8)
Dividends on convertible preferred
securities of subsidiary (6.9) (6.9) (3.5) (3.5)
Equity in earnings of associated
companies 60.2 31.0 32.7 24.2
-------- -------- -------- --------
Income from continuing
operations 118.8 210.4 56.7 125.0
Income from discontinued
operations, net of taxes 66.5 8.6 67.1 2.0
-------- -------- -------- --------
Net Income $ 185.3 $ 219.0 $ 123.8 $ 127.0
======== ======== ======== ========
Basic Earnings Per Share
Continuing operations $ 0.51 $ 0.92 $ 0.24 $ 0.55
Discontinued operations 0.30 0.04 0.30 0.01
$ 0.81 $ 0.96 $ 0.54 $ 0.56
======== ======== ======== ========
Diluted Earnings Per Share
Continuing operations $ 0.51 $ 0.89 $ 0.24 $ 0.52
Discontinued operations 0.28 0.03 0.29 0.01
-------- -------- -------- --------
$ 0.79 $ 0.92 $ 0.53 $ 0.53
======== ======== ======== ========
Dividends Declared $ 0.36 $ 0.36 $ 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 per share amounts)
June 30, December 31,
ASSETS 1998 1997
------ -------- -----------
CURRENT ASSETS
Cash $ 22.1 $ 61.0
Short-term investments, at cost, which
approximates market value 169.2 36.0
Accounts receivable, net of doubtful
accounts and allowances - $10.5/1998;
$10.7/year-end 1997 543.3 559.7
Inventories 464.7 428.3
Deferred taxes on income and other
current assets 135.2 114.1
-------- --------
Total current assets 1,334.5 1,199.1
-------- --------
INVESTMENTS
Associated companies, at equity 364.4 292.9
Others 64.6 17.1
-------- --------
429.0 310.0
-------- --------
PLANT AND EQUIPMENT, AT COST, NET OF
ACCUMULATED DEPRECIATION 2,358.5 2,267.9
GOODWILL AND OTHER INTANGIBLE ASSETS,
NET OF ACCUMULATED AMORTIZATION
$60.7/1998; $51.5/year-end 1997 281.1 294.2
OTHER ASSETS 338.9 263.1
NET ASSETS FROM DISCONTINUED OPERATIONS 357.6
-------- --------
$4,742.0 $4,691.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Loans payable $ 38.8 $ 213.0
Accounts payable 207.4 300.0
Other accrued liabilities 628.8 444.7
-------- --------
Total current liabilities 875.0 957.7
-------- --------
OTHER LIABILITIES 655.9 627.5
LOANS PAYABLE BEYOND ONE YEAR 1,095.9 1,125.8
MINORITY INTEREST IN SUBSIDIARY COMPANIES 343.7 349.3
CONVERTIBLE PREFERRED SECURITIES OF
SUBSIDIARY 365.5 365.3
CONVERTIBLE PREFERRED STOCK 18.7 19.8
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: 265.3 million/1998 and
264.3 million/year-end 1997 749.1 707.2
Retained earnings 1,397.3 1,296.0
Less cost of 33.3 million/1998 and 32.7
million/year-end 1997 shares of common stock
in treasury (755.2) (724.5)
Unrealized gain on marketable securities 7.2
Cumulative translation adjustment (11.1) (32.2)
-------- --------
Total common stockholders' equity 1,387.3 1,246.5
-------- --------
$4,742.0 $4,691.9
======== ========
The accompanying notes are an integral part of these statements.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Six Months Ended June 30,
-------------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $185.3 $219.0
Adjustments to reconcile net income to net
cash provided by operating activities from
continuing operations:
Income from discontinued operations (66.5) (8.6)
Depreciation and amortization 157.2 150.5
Equity in earnings of associated companies
in excess of dividends received (46.7) (2.4)
Minority interest in earnings of subsidiaries
in excess of dividends paid 7.9 27.7
(Gain) loss on disposition of properties and
investments 5.9 (13.4)
Non-operating gain (20.5)
Provision for restructuring, net of cash spent 84.6
Deferred tax benefit (3.7) (15.7)
Other 36.9 43.6
Changes in operating assets and liabilities:
Accounts receivable 11.5 (82.3)
Inventory (38.7) (57.8)
Other current assets 11.5 (21.4)
Accounts payable and other current liabilities (140.8) (35.8)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF
CONTINUING OPERATIONS 183.9 203.4
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant and equipment (353.7) (231.1)
Acquisitions of businesses, net (5.7) (32.0)
Net proceeds from disposition of properties
and investments 100.3 51.7
Proceeds from divestiture of consumer housewares
business 583.0
Increase in long-term investments (96.0) (4.3)
Other, net 19.0 (0.6)
------ ------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES OF CONTINUING OPERATIONS 246.9 (216.3)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of loans 195.1 54.2
Repayments of loans (57.4) (19.2)
Repayments of loans with proceeds from divestiture
of consumer housewares business (343.0)
Proceeds from issuance of common stock 15.0 25.4
Repurchases of common stock (24.4) (28.0)
Dividends paid (84.0) (83.5)
------ ------
NET CASH USED IN FINANCING ACTIVITIES OF
CONTINUING OPERATIONS (298.7) (51.1)
------ ------
Effect of exchange rates on cash (0.1) 3.2
------ ------
Cash used in discontinued operations (37.7) (16.0)
------ ------
Net change in cash and cash equivalents 94.3 (76.8)
Cash and cash equivalents at beginning of year 97.0 215.1
------ ------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $191.3 $138.3
====== ======
SUPPLEMENTAL DATA:
Income taxes paid, net $ 63.6 $ 40.0
====== ======
Interest paid $ 45.8 $ 49.8
====== ======
The accompanying notes are an integral part of these statements.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) On April 1, 1998, Corning completed the recapitalization and sale of a
controlling interest in its consumer housewares business to an affiliate of
Borden, Inc. (the Consumer transaction). Corning received cash proceeds of
$583 million in the second quarter and an additional $10.1 million in July
due to normal closing balance sheet adjustments. Corning will continue to
retain an 8 percent interest in the Corning Consumer Products Company. In
addition, Corning could receive an additional payment of up to $15 million
if certain financial targets are met by Corning Consumer Products Company
for the three year period 1998 - 2000.
Corning recorded an after-tax gain of $67.1 million, or $0.29 per share, in
the second quarter. Corning used approximately $350 million of the
proceeds to repay current borrowings and will use the remaining proceeds to
fund restructuring activities and invest in its future operations.
Corning's consolidated financial statements and notes thereto report the
consumer housewares business as a discontinued operation. Prior period
consolidated financial statements and notes have been restated accordingly.
Summarized results of Corning's discontinued operations for the first half
and second quarter of 1998 and 1997 are as follows (in millions, except per
share amounts):
Six Months Ended Three Months Ended
-------------------- ---------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
----- ----- ---- ----
Sales $116.8 $254.9 $126.0
====== ====== ======
Income (loss) from operations,
net of income taxes $ (0.6) $ 8.6 $ 2.0
Gain on sale of consumer
housewares Business, net
of tax of $75.8 million 67.1 $ 67.1
------ ------ ------ ------
Discontinued operations,
net of income taxes $ 66.5 $ 8.6 $ 67.1 $ 2.0
====== ====== ====== ======
Basic earnings per share $ 0.30 $ 0.04 $ 0.30 $ 0.01
====== ====== ====== ======
Diluted earnings per share $ 0.28 $ 0.03 $ 0.29 $ 0.01
====== ====== ====== ======
The 1998 sales of $116.8 million and loss from operations of $0.6 million
of the discontinued business includes results through March 31, 1998.
Income from operations of the discontinued business includes an allocation
of Corning's interest expense totaling $2.7 million for the six months
ended June 30, 1998, and $3.8 million and $7.6 million for the second
quarter and six months ended June 30, 1997, respectively. The allocations
were based on the ratio of net assets of discontinued operations to
consolidated net assets.
Net assets of discontinued operations consist primarily of receivables,
inventory, plant and equipment, goodwill and other intangible assets, and
other accrued liabilities.
<PAGE>
(2) In the second quarter of 1998, Corning recorded a restructuring charge of
$84.6 million ($49.2 million after tax and minority interest) or $0.21 per
share. The charge is comprised of early retirement incentives and
severance costs.
The separation charge relates to approximately 650 employees, of which
500 have been terminated or notified of their termination at June 30,
1998. Management believes that the workforce reductions will
significantly reduce operating costs and will be substantially completed
within one year. Management believes that the costs of restructuring
will be financed through operating cash flow and the proceeds from the
Consumer transaction and does not anticipate any significant impact on
its liquidity as a result of the restructuring plan.
(3) In June, 1998, Molecular Simulations, Inc. (MSI) merged with Pharmacopeia,
Inc., a publicly traded company (NASDAQ: PCOP). Corning previously owned
35% of MSI and owns approximately 15% of the combined entity. Corning
realized a gain of $20.5 million ($13.2 million after tax), or $0.06 per
share, from this transaction.
(4) Basic earnings per share is 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. Diluted earnings per share
is computed by dividing net income, increased in 1997 by dividends on
convertible preferred stock, by the weighted average number of common
shares outstanding during the period after giving effect to dilutive stock
options and, in 1997, dilutive common shares assumed to be issued on
conversion of Corning's convertible securities.
Common dividends of $41.5 million and $83.2 million were declared in the
second quarter and first half of 1998, respectively, compared with $41.5
million and $82.8 million for the same periods in 1997.
A reconciliation of the basic and diluted earnings per share computations
for the first half and second quarters of 1998 and 1997 are as follows (in
millions, except per share amounts):
For the six months ended June 30,
------------------------------------------------
1998 1997
---------------------- -----------------------
Weighted Per Weighted Per
Average share Average share
Income Shares Amount Income Shares Amount
------ ------ ------ ------- ------- ------
Net income from
continuing
operations $ 118.8 $ 210.4
Less: Preferred
stock dividends (0.8) (0.8)
------- -------
Basic earnings per
share 118.0 229.8 $0.51 209.6 227.2 $0.92
===== =====
Effect of Dilutive
Securities
Options 3.5 4.9
Convertible monthly
income preferred
securities 6.9 11.5
Convertible preferred
stock 0.8 1.0
------- ----- ------- -----
Diluted earnings per
share $ 118.0 233.3 $0.51 $ 217.3 244.6 $0.89
======= ===== ===== ======= ===== =====
<PAGE>
For the three months ended June 30,
-------------------------------------------------
1998 1997
----------------------- ------------------------
Weighted Per Weighted Per
Average share Average share
Income Shares Amount Income Shares Amount
------ ------- ------ ------- ------ ------
Net income from
continuing
operations $ 56.7 $125.0
Less: Preferred
stock dividends (0.4) (0.4)
------ ------
Basic earnings per
share 56.3 229.9 $0.24 124.6 227.8 $0.55
===== =====
Effect of Dilutive
Securities
Options 4.0 5.5
Convertible monthly
income preferred
securities 3.5 11.5
Convertible preferred
stock 0.4 1.0
------ ----- ------ -----
Diluted earnings per
share $ 56.3 233.9 $0.24 $128.5 245.8 $0.52
====== ===== ===== ====== ===== =====
At June 30, 1998, Corning had convertible monthly income preferred
securities which paid dividends of $3.5 million and were convertible into
11.5 million shares of common stock. In addition, Corning had convertible
preferred stock which paid dividends of $0.4 million at June 30, 1998 and
were convertible into 0.9 million shares of common stock. These shares
were not included in the calculation of diluted earnings per share due to
the anti-dilutive effect they would have had on earnings per share if
converted.
(5) Inventories shown on the accompanying balance sheets were comprised of the
following (in millions):
June 30, December 31,
1998 1997
-------- -----------
Finished goods $ 250.8 $ 193.5
Work in process 116.7 107.3
Raw materials and accessories 92.3 84.3
Supplies and packing materials 69.9 64.0
-------- --------
Total inventories valued at current cost 529.7 449.1
Reduction to LIFO valuation (65.0) (20.8)
-------- --------
$ 464.7 $ 428.3
======== ========
(6) Plant and equipment shown on the accompanying balance sheets were
comprised of the following (in millions):
June 30, December 31,
1998 1997
-------- ------------
Land $ 51.0 $ 51.4
Buildings 842.3 842.6
Equipment 3,295.4 3,107.2
Accumulated depreciation (1,830.2) (1,733.3)
-------- --------
$2,358.5 $2,267.9
======== ========
(7) Corning's change in stockholders' equity from non-stockholder transactions
for the periods ended June 30, 1998 and 1997 was $218.1 million and $195.3
million, and includes net income of $185.3 million and $219.0 million and
foreign currency translation adjustments of $21.1 million and ($23.7)
million, respectively. In addition, Corning recorded unrealized gains on
marketable securities of $11.7 million in the period ending June 30, 1998.
<PAGE>
(8) In January, 1998, Corning completed a financing transaction related to
certain production equipment which resulted in net cash proceeds of
approximately $15 million. There was no gain or loss recorded or material
change to the balance sheet as a result of this transaction.
(9) On July 8, 1998, Dow Corning Corporation, 50% owned by each Corning and The
Dow Chemical Corporation, announced that the Federal Bankruptcy Court
accepted an agreement in principle between the debtor and the Tort
Claimants Committee in which Dow Corning will settle outstanding breast
implant claims. The agreement is subject to final documentation, approval
and/or appeal by all parties involved with the bankruptcy. Corning
continues to believe that it is impossible to predict if and when Dow
Corning will successfully emerge from Chapter 11 proceedings.
(10) On December 31, 1996, Corning distributed all of the shares of Quest
Diagnostics Incorporated and Covance, Inc. to its shareholders on a pro
rata basis. As described in Note 19 to Corning's 1997 consolidated
financial statements included in its Annual Report of Form 10-K, as
amended on July 8, 1998, 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. Corning
recorded a reserve 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 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
Continuing operations
Net sales for the second quarter and first half of 1998 totaled $855.9 million
and $1.65 billion, respectively, compared to 1997 net sales from the same
operations of $905.5 million and $1.72 billion, respectively. Net income from
continuing operations totaled $56.7 million in the second quarter 1998, compared
with second quarter net income from the same operations of $125.0 million in
1997. Net income from continuing operations for the first half of 1998 totaled
$118.8 million, compared to $210.4 million for the same period in 1997. Second
quarter and first half 1998 results reflect the continued effect of Asia's
instability on several of Corning's consolidated businesses, increased research
and development spending compared to the first half of 1997 and certain
nonrecurring items.
In the second quarter of 1998, Corning recorded a restructuring charge of $84.6
million ($49.2 million after tax) for early retirement incentives and severance
costs. Approximately $33 million of the charge related to workforce reductions
in corporate staffs groups. The charge related to the Specialty Materials and
Communications operating segments approximated $27 million and $24.6 million,
respectively. Additional information on the restructuring charge is included in
Note 2 to the consolidated financial statements.
Also in the second quarter of 1998, Corning recorded a non-operating gain of
$20.5 million ($13.2 million after tax) resulting from the merger of Molecular
Simulations, Inc. (MSI) and Pharmacopeia, Inc. a publicly traded company
(NASDAQ: PCOP). Corning previously owned 35% of MSI and owns approximately 15%
of the combined entity.
The following table summarizes the impact of these non-recurring items on
Corning's second quarter and first half 1998 net income from continuing
operations and diluted earnings per share:
Six months ended Three months ended
June 30, June 30,
---------------- -------------------
1998 1997 1998 1997
----- ---- ---- -----
Net income
Before special items $ 154.8 $ 210.4 $ 92.7 $ 125.0
Provision for restructuring (49.2) (49.2)
Non-operating gain 13.2 13.2
------- ------- ------- ------
Net income from continuing
operations $ 118.8 $ 210.4 $ 56.7 $ 125.0
======= ======= ====== =======
Diluted earnings per share
Before special items $ 0.66 $ 0.89 $ 0.39 $ 0.52
Provision for restructuring (0.21) (0.21)
Non-operating gain 0.06 0.06
------- ------- ------ -------
Net income from continuing
operations $ 0.51 $ 0.89 $ 0.24 $ 0.52
======= ======= ====== =======
As shown, excluding the restructuring charge and non-operating gain, Corning's
diluted earnings per share decreased 25% and 26%, in the second quarter and
first half of 1998, respectively, while net income from continuing operations
decreased 26% for both periods.
<PAGE>
Segment overview
Sales and earnings in the Communications segment, excluding the impact of
special items, decreased in both the second quarter and first half of 1998 due
primarily to lower prices in the optical fiber business. Earnings in the opto-
electronic businesses were also impacted by increased research and development
spending. Optical fiber sales reflect strong volume growth in the domestic
fiber markets for the second quarter and first half of 1998, which was more than
offset by volume decreases in the international fiber markets during the first
quarter and first half of 1998 and continued pricing pressures, particularly
within the international fiber markets. Sales in the photonic technologies
business were down slightly in the second quarter from 1997, but have increased
year to date primarily due to the acquisition of Corning OCA in April, 1997.
Earnings in this business, excluding the impact of special items, decreased and
resulted in a loss in the second quarter and first half of 1998 due to increased
research and development spending and costs associated with startup of a new
factory. Sales and earnings within the information display businesses decreased
in the second quarter and first half of 1998, primarily due to volume and price
declines attributed to the increased competition from Asia and a scheduled glass
furnace repair that was completed in the beginning of the second quarter.
Sales in the Specialty Materials segment increased slightly and earnings,
excluding the impact of special items, declined in the second quarter and first
half of 1998 compared to the same periods in 1997. Revenue gains in the
advanced materials and science products businesses were more than offset by
increased research and development spending and expansion related costs in the
advanced material business.
Taxes on Income
Corning's effective tax rate for continuing operations, excluding the impact of
special items, was 32.5% for the second quarter and first half of 1998, compared
to 34% for the same periods in 1997. The lower 1998 rate is due to a higher
percentage of Corning's earnings resulting from consolidated entities with lower
effective tax rates.
Equity in Earnings
Equity in earnings of associated companies increased significantly in the second
quarter, from $24.2 million in 1997 to $32.7 million in 1998, and in the first
half of the year from $31 million in 1997 to $60.2 million in 1998. The growth
in equity earnings is primarily the result of strong performance and foreign
currency exchange gains at Samsung Corning Co., Ltd. This favorable performance
trend at Samsung Corning is not expected to continue in the second half of 1998.
Decreased earnings from the optical fiber equity companies were offset by the
absence of costs incurred in 1997 associated with new equity ventures in the
information display businesses.
Discontinued operations
Income from discontinued operations for the second quarter of 1998 totaled $67.1
million, or $0.29 per share, compared to income of $2.0 million, or $0.01 per
share, in 1997 and represented the after-tax gain from the recapitalization and
sale of a controlling interest in the consumer housewares business (the Consumer
transaction). Income from discontinued operations for the first half of 1998
totaled $66.5 million, or $0.28 per share, compared income of $8.6 million, or
$0.03 per share, in 1997.
Liquidity and Capital Resources
Corning's working capital increased from $241.4 million at the end of 1997 to
$459.5 million at June 30, 1998. The ratio of current assets to current
liabilities was 1.5 at the end of the second quarter of 1998 compared to 1.3 at
year-end 1997. The increase in working capital and the ratio of current assets
to current liabilities is due primarily to the proceeds from the Consumer
transaction, net of transaction related liabilities, exceeding the repayment of
current debt and reserve for restructuring activities. Corning's long-term debt
as a percentage of total capital was 34% at the end of the second quarter 1998
compared to 36% at year-end 1997. The decrease in the long-term debt percentage
is primarily due to the increase in stockholders' equity.
<PAGE>
Cash and short-term investments increased over year-end 1997 by $94.3 million,
due to operating and investing activities which provided cash of $183.9 million
and $246.9 million, respectively, partially offset by cash used in financing
activities of $298.7 million. Net cash provided by operating activities
decreased for the first half of 1998 over the same period in 1997 due to a
decrease in earnings, which more than offset a decrease in cash used for working
capital. Net cash provided by investing activities increased in the first half
of 1998 over the same period in 1997 primarily due to the proceeds received from
the Consumer transaction. Corning used a portion of the proceeds to repay long-
term debt causing an increase in cash used in financing activities over the same
period in 1997. Net cash used in discontinued operations in the first half of
1998 increased over 1997 as a result of costs related to the Consumer
transaction.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS 133), which
establishes accounting and reporting standards for derivative instruments and
hedging activities. FAS 133 requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Corning currently enters into derivatives in
the form of foreign currency hedge instruments to reduce its exposure to
exchange rate risk on foreign source income and purchases. Under FAS 133, gains
and losses associated with foreign currency hedges will be reported as part of
the cumulative translation adjustment. Management believes that its current
foreign currency hedge instruments qualify as hedges under FAS 133. FAS 133 is
effective for fiscal years beginning after June 15, 1999, and is not expected to
have a material effect on Corning's financial position or results of operations.
Year 2000
Corning has performed an assessment of required modifications or replacement of
its internal software to become Year 2000 compliant. Incremental spending for
software modifications and testing required for Year 2000 are currently
estimated to be approximately $10 million, with the majority expected to be
incurred in 1998. Corning's target date for completing its Year 2000
modifications for mission critical systems is December 31, 1998 with additional
modifications for non-critical systems to be completed in 1999.
The Year 2000 issue also creates risk for Corning from unforeseen problems from
suppliers and other third parties with whom Corning deals. Corning has
initiated formal communications with all of its significant suppliers and other
third parties to determine the extent to which Corning is vulnerable to third
parties' failures to remediate their own potential problems related to the Year
2000. The inability of Corning or significant third parties to adequately
address Year 2000 issues could cause inefficiencies in Corning's business
operations.
"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 are based on
expectations, estimates, and projections about the industries in which Corning
operates. These forward-looking statements are not guarantees of future
performance. They involve risks and uncertainties that may 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,
reliance on large customers, 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, foreign exchange rates, divestiture
activity, the rate of technology change, ability to enforce patents and other
risks detailed in Corning's 1997 Form 10-K, as amended on July 8, 1998.
<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 at 13 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 $23 million for its estimated
liability for environmental cleanup and litigation at June 30, 1998.
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 bankruptcy proceeding is
pending in the United States Bankruptcy Court for the Eastern District of
Michigan, Northern Division (Bay City, Michigan). The effect of the bankruptcy
is to stay the prosecution against Dow Corning of approximately 19,000 breast-
implant product liability lawsuits, including 45 class actions. On December 2,
1996, Dow Corning filed its first Plan of Reorganization in the bankruptcy case.
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. On
August 25, 1997, Dow Corning filed its First Amended Plan of Reorganization in
the bankruptcy case. After several days of hearings in November 1997 to
consider the disclosure statement pertaining to the Plan, the Bankruptcy Court
identified several potential issues with the Amended Plan and set February 17,
1998 as the date for Dow Corning to file further amendments. On February 17,
1998, Dow Corning filed its Second Amended Plan of Reorganization. The
Bankruptcy Court held hearings in April, 1998 to consider the disclosure
statement proposed by Dow Corning with this Plan and to consider objections and
motions made by the Tort Claimants. While the Bankruptcy Court had these
matters under consideration, Dow Corning and the Tort Claimants held a series of
meetings facilitated by a court-appointed mediator. On July 8, 1998, the Court
announced that Dow Corning and the Tort Claimants had reached an agreement in
principle on the treatment of tort claims within a consensual plan of
reorganization. The agreement provides for a grid of settlement values
analogous to those in the Revised Global Settlement offered by other makers of
silicone breast implants and sets up a litigation facility to address the claims
of those claimants who decline the settlement and prefer a jury trial. The
parties have agreed upon a schedule of payments that Dow Corning must make to
fund the settlement and the litigation facility, subject to certain annual
limitations and an overall limit on the total funding to be provided by Dow
Corning. These agreements remain subject a number of contingencies, including:
the need to reach separate agreements with certain other creditor
constituencies; court approval of a revised disclosure statement; a favorable
vote within each creditor class; and court confirmation of the plan. While the
agreement in principle between Dow Corning and the Tort Claimants represents a
significant milestone, the confirmation hearings are not likely to be scheduled
before the first quarter of 1999, and appeals may take the balance of the year.
The breast implant claims against Dow Corning's shareholders (Corning and The
Dow Chemical Company), which allege a variety of direct or indirect theories why
they should have liability for Dow Corning's implant products, were in 1997
(with a few exceptions) transferred to the United States District Court for the
Eastern District of Michigan, Southern District (the "Michigan Federal Court")
for coordinated proceedings with the similar cases against Dow Corning. These
transfers resulted from motions made to the Michigan Federal Court in mid-1995.
The Michigan Federal Court granted transfer as to claims against Dow Corning
only, and declined to order transfer of the claims against the shareholders.
The transfer motion as to the shareholders was later granted as a result of
appellate rulings by the United States Court of Appeals for the Sixth Circuit
entered in June 1996 and May 1997. As mandated by the Sixth Circuit, the
Michigan Federal Court entered the transfer order on May 13, 1997 to transfer to
it those breast implant cases against the shareholders pending in state courts
around the country or in federal court As the single exception to date, the
Michigan Federal Court declined to order the transfer of a Louisiana case, which
was already in the midst of a lengthy trial against Dow Chemical. At the end of
the liability phase of that trial, the jury rendered a verdict against Dow
Chemical, finding it liable with respect to Dow Corning's implant products. Dow
Chemical has taken an appeal to a state appellate court in Louisiana.
<PAGE>
In related developments, a Panel of Scientific Experts appointed by Judge
Pointer in the coordinated federal implant cases in the Northern District of
Alabama was asked to address certain questions pertinent to the disease
causation issues in the cases against Dow Corning or its shareholders. The
Panel held hearings in 1997 and is expected to issue its report by September
30, 1998. In April 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. Dow Corning also filed a motion for summary
judgment that asserts that the disease claims are not supported by any
admissible scientific evidence of disease causation. The Michigan Federal Court
has set a schedule for considering the objection and the related motion after
the Panel of Scientific Experts issues its report.
Implant Tort Lawsuits: As a result of its success in obtaining summary judgment
in the federal coordinating court, and through similar motions in state courts,
and through the transfer orders mentioned above, Corning has substantially
limited the number of breast implant cases pending against it. From 1991
through August 1, 1998, Corning had been named in approximately 11,475 state and
federal tort lawsuits, some of which were filed as class actions or on behalf of
multiple claimants. In 1992, the federal breast implant cases were coordinated
for pretrial purposes in the United States District Court, Northern District of
Alabama (Judge Sam C. Pointer, Jr.). In 1993, Corning obtained an interlocutory
order of summary judgment, which was made final in April 1995, thereby
dismissing Corning from over 4,000 federal court cases. On March 12, 1996, the
U.S. Court of Appeals for the Eleventh Circuit dismissed the plaintiffs' appeal
from that judgment. The District Court thereafter entered orders in May and
June 1997 directing that Corning be dismissed from each case pending in or later
transferred to that Court. That order dismissing Corning encompassed hundreds
of state court cases that were removed to federal court and transferred to the
Northern District of Alabama after Dow Corning filed for bankruptcy protection.
In state court litigation, Corning was awarded summary judgment in California,
Connecticut, Illinois, Indiana, Michigan, Mississippi, New Jersey, New York,
Pennsylvania, Tennessee, and Dallas, Harris and Travis Counties in Texas,
thereby dismissing approximately 7,000 state cases. On July 30, 1997, the
judgment in California became final when the Supreme Court of California
dismissed further review as improvidently granted as to Corning. In Louisiana,
Corning was awarded summary judgment dismissing all claims by plaintiffs and a
cross-claim by Dow Chemical on February 21, 1997. On February 11, 1998, this
judgment was vacated as premature by the intermediate appeals court in
Louisiana. On July 2, 1998, the Louisiana Supreme Court denied an application
for a writ permitting early review in that court. Corning expects to renew its
motion for summary judgment after additional pretrial proceedings.
Approximately 1,500 additional plaintiffs have sought to intervene in the
pending Louisiana state action. Both Dow Chemical and Corning have opposed
intervention on the grounds, among others, that all individual cases were
transferred to the Michigan Federal Court by the orders entered in May 1997. In
the Michigan Federal Court, Corning is named as a defendant in approximately 60
pending cases (including some cases with multiple claimants), but Corning is not
named as a defendant in the Master Complaint, which contains claims against Dow
Chemical only. Corning has moved for summary judgment in the Michigan Federal
Court to dismiss these remaining cases by plaintiffs as well as the third party
complaint and all cross-claims by Dow Chemical. Plaintiffs have taken no
position on that Corning motion. The Michigan Federal Court heard Corning's
motion for summary judgment on February 27, 1998 but has not yet ruled.
In March 1998, Dow Chemical served a third party complaint against Corning in a
class action previously filed in the Michigan Federal Court. Corning has
answered the complaint and denied the allegations.
Federal securities case: A federal securities class action lawsuit was filed in
1992 against Corning and certain individual defendants by a class of purchasers
of Corning stock who allege misrepresentations and omissions of material facts
relative to the silicone gel breast implant business conducted by Dow Corning.
This action is pending in the United States District Court for the Southern
District of New York. The court in 1997 dismissed the individual defendants
from the case, but has permitted the case to proceed into discovery.
<PAGE>
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 4. SUBMISSION OF MATTERS TO A VOTE
(a) The annual meeting of shareholders of the registrant was held on
April 30, 1998.
(b) The following nominees for the office of director, provided in
the registrant's proxy statement dated March 11, 1998, which appears
as Exhibit #23 to this report, were elected by the following number
of shareholder votes for and withheld:
For Withheld
Roger G. Ackerman 196,873,240 2,497,016
Lawrence S. Eagleburger 196,867,473 2,502,783
John H. Foster 196,958,831 2,411,425
Norman E. Garrity 196,921,208 2,449,049
Catherine A. Rein 196,965,689 2,404,567
William D. Smithburg 196,719,141 2,651,116
The following persons continue as directors:
Robert Barker
John Seely Brown
Van C. Campbell
Gordon Gund
John M. Hennessy
James R. Houghton
James W. Kinnear
John W. Loose
James J. O'Connor
Henry Rosovsky
H. Onno Ruding
(c) 1. The proposed 1998 Variable Compensation Plan which provides for
the payment of additional compensation to the registrant's
executive officers whose compensation may be subject to the
deductibility provisions of Section 162(m) of the Internal
Revenue Code was approved by vote of the shareholders as
follows: 192,837,605 affirmative votes, 4,969,401 negative
votes, 1,560,696 abstentions, and 2,554 broker nonvotes.
The Variable Compensation Plan provides for the award of
performance-based annual cash incentives. A more extensive
description of this proposal is found in the registrant's
proxy statement dated March 11, 1998, filed with the
Securities and Exchange Commission as a definitive proxy
statement on March 9, 1998, which is incorporated by reference
in this Form 10-Q.
2. Management's proposal of the 1998 Worldwide Employee Share
Purchase Plan in which the registrant may make available for
sale to employees up to 2,000,000 shares of its common stock
at a price equal to 85% of the market value on the first or
last day of each calendar quarter, whichever is lower, was
approved by vote of the shareholders as follows:
196,352,285 affirmative votes, 1,921,603 negative votes,
1,095,068 abstentions, and 1,301 broker nonvotes. A
more extensive description of this proposal is found in the
registrant's proxy statement dated March 11, 1998, filed with
the Securities and Exchange Commission as a definitive proxy
statement on March 9, 1998, which is incorporated by reference
in this Form 10-Q.
<PAGE>
3. Management's proposal on the 1998 Employee Equity Participation
Program was adopted by vote of the shareholders as follows:
186,234,876 affirmative votes, 12,017,269 negative votes,
1,116,756 abstentions, and 1,356 broker nonvotes. The 1998
Employee Equity Participation Program covering up to 8,960,149
shares of common stock consists of two plans: (i.) a Stock
Option Plan and (ii.) an Incentive Stock Plan. Under terms
of the Stock Option Plan, eligible employees may be granted
either non-qualified or incentive stock options, or both, to
purchase shares of the registrant's common stock at prices
not less than 100% of fair market value at the date of
grant. Under terms of the Incentive Stock Plan, eligible
employees may be granted shares, the right to receive shares
of the registrant's common stock, the equivalent value in
cash or a combination thereof. A more extensive description
of this proposal is found in the registrant's proxy statement
dated March 11, 1998, filed with the Securities and Exchange
Commission as a definitive proxy statement on March 9, 1998,
which is incorporated by reference in this Form 10-Q.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index which is located on page 20.
(b) Reports on Form 8-K
A report on Form 8-K dated April 13, 1998, was filed in
connection with the Registrant's sale and divestiture of a
controlling interest in its worldwide consumer housewares business.
A report on Form 8-K dated April 17, 1998, was filed in
connection with the Registrant's first quarter results.
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)
August 7, 1998 /s/ ROGER G. ACKERMAN
-------------- ------------------------------------
Date Roger G. Ackerman
Chairman and Chief Executive Officer
August 7, 1998 /s/ JAMES B. FLAWS
-------------- -------------------------------------
Date James B. Flaws
Senior Vice President, Treasurer
and Chief Financial Officer
August 7, 1998 /s/ KATHERINE A. ASBECK
-------------- -------------------------------------
Date Katherine 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 21
23 Registrant's proxy statement dated
March 11, 1998, filed with the
Securities and Exchange Commission
as a definitive proxy statement on
March 9, 1998, is incorporated
herein by reference
27 Financial Data Schedule
<TABLE>
<CAPTION>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES Exhibit #12
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
DIVIDENDS
(Dollars in millions, except ratios)
Six Months Ended Fiscal Year Ended
------------------ ------------------------------------------
June 30, June 30, Dec. 31, Dec. 31, Dec. 31, Jan. 1, Jan. 2,
1998 1997 1997 1996 1995 1995 1994
------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before taxes on income $118.7 $332.8 $629.2 $455.9 $389.4 $286.3 $ 93.7
Adjustments:
Share of earnings (losses) before
taxes of 50% owned companies 82.6 51.5 111.5 130.3 95.2 89.0 (137.0)
Gain (loss) before taxes of greater
than 50% owned unconsolidated
subsidiary 0.7 (3.1) (4.0) (3.1)
Distributed income of less than
50% owned companies and share of
loss if debt is guaranteed (0.3) 2.1 4.5
Amortization of capitalized interest 7.1 7.1 16.6 11.8 9.6 13.3 13.0
Fixed charges net of capitalized
interest 53.8 75.4 141.9 105.9 82.6 128.8 91.4
------ ------ ------ ------ ------ ------ ------
Earnings before taxes and fixed
charges as adjusted $261.9 $466.8 $899.2 $704.6 $573.7 $515.5 $ 62.5
====== ====== ====== ====== ====== ====== ======
Fixed charges:
Interest incurred $ 52.4 $ 49.5 $ 96.7 $ 73.6 $ 65.4 $64.9 $ 51.1
Share of interest incurred of 50%
owned companies and interest on
guaranteed debt of less than 50%
owned companies 8.4 26.3 51.0 38.7 10.2 60.8 40.9
Interest incurred by greater than
50% owned unconsolidated subsidiary 0.7 0.8 0.8
Portion of rent expense which
represents interest factor 9.6 6.7 15.9 12.1 13.3 10.8 7.3
Share of portion of rent expense
which represents interest factor
for 50% owned companies 2.9 1.8 3.8 1.4 2.7 9.4 9.1
Portion of rent expense which
represents interest factor for
greater than 50% owned
unconsolidated subsidiary 0.1 0.1
Amortization of debt costs 1.5 1.4 1.6 2.2 (0.1) 0.6 0.4
------ ------ ------- ------ ------ ------ ------
Total fixed charges 74.8 85.7 169.0 128.0 92.2 147.4 109.7
Capitalized interest (21.0) (10.3) (27.1) (22.1) (9.6) (18.6) (18.3)
------ ------ ------- ------ ------ ------ ------
Total fixed charges net of
capitalized interest $ 53.8 $ 75.4 $141.9 $105.9 $ 82.6 $128.8 $ 91.4
====== ====== ====== ====== ====== ====== ======
Preferred dividends:
Preferred dividend requirements $ 7.7 $ 7.7 $ 15.3 $ 15.7 $ 15.7 $ 8.2 $ 2.1
Ratio of pre-tax income to income
before minority interest and
equity earnings 1.4 1.5 1.5 1.5 1.4 1.4 1.0
------ ------ ------ ------ ------ ------ ------
Pre-tax preferred dividend
requirement 10.8 11.6 23.0 23.6 22.0 11.5 2.1
Total fixed charges 74.8 85.7 169.0 128.0 92.2 147.4 109.7
------ ------ ------ ------ ------ ------ ------
Fixed charges and pre-tax preferred
dividend requirement $ 85.6 $ 97.3 $192.0 $151.6 $114.2 $158.9 $111.8
====== ====== ====== ====== ====== ====== ======
Ratio of earnings to combined fixed
charges and preferred dividends 3.1x 4.8x 4.7x 4.7x 5.0x 3.2x -
====== ====== ====== ====== ====== ====== ======
</TABLE>
Earnings did not cover combined fixed charges and preferred dividends by $49.4
in the fiscal year ended January 2, 1994.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 22,100
<SECURITIES> 169,200
<RECEIVABLES> 543,300
<ALLOWANCES> 10,520
<INVENTORY> 464,700
<CURRENT-ASSETS> 1,334,500
<PP&E> 2,358,500
<DEPRECIATION> 1,830,000
<TOTAL-ASSETS> 4,742,000
<CURRENT-LIABILITIES> 875,000
<BONDS> 1,095,900
365,500
18,700
<COMMON> 749,100
<OTHER-SE> 631,000
<TOTAL-LIABILITY-AND-EQUITY> 4,742,000
<SALES> 1,650,700
<TOTAL-REVENUES> 1,671,200
<CGS> 1,045,100
<TOTAL-COSTS> 1,045,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14,100
<INTEREST-EXPENSE> 32,500
<INCOME-PRETAX> 118,700
<INCOME-TAX> 34,900
<INCOME-CONTINUING> 118,800
<DISCONTINUED> 66,500
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 185,300
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
