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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 MARCH 31, 1999
------------------------------
[ ] 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:
244,056,733 shares of Corning's Common Stock, $0.50 Par Value, were outstanding
as of April 31, 1999.
<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 three months
ended March 31, 1999 and 1998 3
Consolidated Balance Sheets at March 31, 1999
and December 31, 1998 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998 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 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 or its independent accountants and
should be read in conjunction with Corning's Annual Report on Form 10-K for the
year ended December 31, 1998.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
Revenues
Net sales $892.2 $794.8
Royalty, interest and dividend income 9.9 9.1
------ ------
902.1 803.9
Deductions
Cost of sales 548.3 514.7
Selling, general and administrative expenses 136.8 112.9
Research, development and engineering expenses 79.6 67.1
Interest expense 16.3 17.6
Other, net 9.9 27.1
------ ------
Income from continuing operations before taxes
on income 111.2 64.5
Taxes on income from continuing operations 33.9 21.0
------ ------
Income from continuing operations before minority
interest and equity earnings 77.3 43.5
Minority interest in earnings of subsidiaries (10.1) (5.5)
Dividends on convertible preferred
securities of subsidiary (2.3) (3.4)
Equity in earnings of associated companies 21.6 27.5
------ ------
Income from continuing operations 86.5 62.1
Loss from discontinued operations, net of taxes (0.6)
------ ------
Net Income $ 86.5 $ 61.5
====== ======
Basic Earnings Per Share
Continuing operations $ 0.37 $ 0.27
Discontinued operations
------ ------
Net Income $ 0.37 $ 0.27
====== ======
Diluted Earnings Per Share
Continuing operations $ 0.36 $ 0.27
Discontinued operations (0.01)
------ ------
Net Income $ 0.36 $ 0.26
====== ======
Dividends Declared $ 0.18 $ 0.18
====== ======
</TABLE>
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)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1999 1998
--------- ------------
<S> <C> <C>
Current assets
Cash $ 43.2 $ 12.2
Short-term investments, at cost, which
approximates market value 108.7 33.2
Accounts receivable, net of doubtful accounts
and allowances - $14.9/1999; $15.2/year-end
1998 592.3 636.0
Inventories 514.0 458.7
Deferred taxes on income and other current
assets 180.2 170.2
-------- --------
Total current assets 1,438.4 1,310.3
-------- --------
Investments
Associated companies, at equity 333.2 313.1
Others, at cost or fair value 44.3 53.1
-------- --------
377.5 366.2
-------- --------
Plant and equipment, at cost, net of
accumulated depreciation 2,729.4 2,684.9
Goodwill and other intangible assets,
net of accumulated amortization -
$70.9/1999; $66.7/year-end 1998 309.0 309.7
Other assets 312.1 310.8
-------- --------
Total assets $5,166.4 $4,981.9
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Loans payable $ 143.9 $ 204.6
Accounts payable 250.5 291.7
Other accrued liabilities 524.2 578.4
-------- --------
Total current liabilities 918.6 1,074.7
-------- --------
Other liabilities 683.1 674.1
Loans payable beyond one year 1,291.1 998.3
Minority interest in subsidiary companies 349.6 346.1
Convertible preferred securities of subsidiary 365.2
Convertible preferred stock 16.0 17.9
Common shareholders' equity
Common stock, including excess over par value
and other capital - Par value $0.50 per share;
Shares authorized: 500 million; Shares issued:
268.0 million/1999 and 265.9 million/year-end
1998 960.6 766.0
Retained earnings 1,564.2 1,521.7
Less cost of 24.0 million/1999 and 34.4 million/
year-end 1998 shares of common stock in
treasury (582.1) (790.0)
Accumulated other comprehensive income (34.7) 7.9
-------- --------
Total common shareholders' equity 1,908.0 1,505.6
-------- --------
Total liabilities and shareholders' equity $5,166.4 $4,981.9
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 86.5 $ 61.5
Adjustments to reconcile net income to net
cash provided by operating activities of
continuing operations:
Loss from discontinued operations 0.6
Depreciation and amortization 94.6 78.9
Employee benefit expense in excess of
(less than) cash funding (3.1) 23.8
Equity in earnings of associated companies
in excess of dividends received (22.9) (28.5)
Minority interest in earnings of subsidiaries
in excess (less than) dividends paid 3.9 (5.2)
Deferred tax (benefit)/expense 4.5 (2.3)
Other 11.0 15.0
Changes in operating assets and liabilities:
Accounts receivable 37.8 45.2
Inventory (59.6) (15.2)
Other current assets (12.3) (10.7)
Accounts payable and other current liabilities (90.5) (171.4)
------ ------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES OF CONTINUING OPERATIONS 49.9 (8.3)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant and equipment (146.3) (132.9)
Acquisition of business, net (6.7)
Net proceeds from disposition of properties
and investments 0.8 97.8
Increase in long-term investments and other
non current assets (6.0) (79.1)
Other, net (10.8) (1.5)
------ ------
NET CASH USED IN INVESTING ACTIVITIES OF
CONTINUING OPERATIONS (169.0) (115.7)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of loans and long-term
debt securities 308.0 170.8
Repayments of loans (76.7) (6.2)
Proceeds from issuance of common stock 49.4 6.3
Repurchases of common stock (7.6) (9.5)
Dividends paid (43.9) (42.1)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF
CONTINUING OPERATIONS 229.2 119.3
------ ------
Effect of exchange rates on cash (2.2) (0.6)
------ ------
Cash used in discontinued operations (1.4) (12.2)
------ ------
Net change in cash and cash equivalents 106.5 (17.5)
Cash and cash equivalents at beginning of year 45.4 97.0
------ ------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $151.9 $ 79.5
====== ======
SUPPLEMENTAL DATA:
Income taxes paid, net $ 26.0 $ 8.3
====== ======
Interest paid $ 31.0 $ 31.6
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Information about the performance of Corning's three operating segments for
the first quarter of 1999 and 1998 are below. These amounts do not include
revenues, expenses and equity earnings not specifically identifiable to
segments.
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1999 1998
------ -------
<S> <C> <C>
Telecommunications
Net sales $488.5 $387.2
Income from continuing operations
before minority interest and
equity earnings $ 48.6 $ 34.9
Minority interest in earnings
of subsidiaries (4.3) (6.9)
Equity in earnings of associated
companies 4.4 4.5
------ ------
Segment net income $ 48.7 $ 32.5
====== ======
Advanced Materials
Net sales $252.1 $258.7
Income from continuing operations
before minority interest and
equity earnings $ 20.0 $ 18.9
Minority interest in earnings
of subsidiaries 0.1 0.2
Equity in earnings of associated
companies 4.1 3.2
------ ------
Segment net income $ 24.2 $ 22.3
====== ======
Information Display
Net sales $145.7 $143.3
Income from continuing operations
before minority interest and
equity earnings $ 9.4 $ (9.4)
Minority interest in earnings
of subsidiaries (5.9) 1.2
Equity in earnings of associated
companies 12.4 16.4
------ ------
Segment net income $ 15.9 $ 8.2
====== ======
Total segments
Net sales $886.3 $789.2
Income from continuing operations
before minority interest and
equity earnings $ 78.0 $ 44.4
Minority interest in earnings
of subsidiaries (10.1) (5.5)
Equity in earnings of associated
companies 20.9 24.1
------ ------
Segment net income $ 88.8 $ 63.0
====== ======
</TABLE>
<PAGE>
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as
follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1999 1998
------- -------
<S> <C> <C>
Revenues
Total segment net sales $886.3 $789.2
Non-segment net sales (a) 5.9 5.6
Royalty, interest and dividend
income 9.9 9.1
------ ------
Total revenues $902.1 $803.9
====== ======
Net income
Total segment income (b) $ 88.8 $ 63.0
Unallocated items:
Non-segment loss (a) (0.6) (0.6)
Interest expense (0.4) (0.4)
Income tax 0.3 0.1
Equity in earnings of associated
companies (a) 0.7 3.4
Dividends on convertible preferred
securities of subsidiary (2.3) (3.4)
------ ------
Net income from continuing
operations $ 86.5 $ 62.1
====== ======
</TABLE>
(a) Includes amounts derived from corporate investments.
(b) Includes royalty, interest and dividend income.
(2) During the first quarter of 1999, Corning issued $300 million of debt
securities under a shelf registration statement previously filed with the
Securities and Exchange Commission. This issuance consisted of $150
million of notes with a 6.30% coupon due in 2009, and $150 million of
debentures with a 6.85% coupon due in 2029. The proceeds from these
borrowings ($297.4 after consideration of underwriting commissions and
discount) will be used for the repayment of short and long-term debt,
working capital, capital spending and acquisitions.
(3) During the first quarter of 1999, Corning Delaware L.P., a special purpose
limited partnership in which Corning is the sole general partner, called
for the redemption of all Convertible Monthly Income Preferred Securities
(MIPS). The MIPS were guaranteed by Corning and convertible into Corning
common stock at a rate of 1.534 shares of Corning common stock for each
MIPS. As of March 31, 1999, all of the MIPS were converted into 11.5
million shares of Corning common stock. The conversion will cause
Corning's reported income to increase in comparison to 1998, but will have
no impact on Corning's diluted earnings per share.
<PAGE>
(4) A reconciliation of the basic and diluted earnings per share from
continuing operations computations for the first quarters of 1999 and
1998 are as follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
For the three months ended March 31,
----------------------------------------------
1999 1998
---------------------- ----------------------
Weighted Per Weighted Per
Average share Average share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net income from
continuing
operations $86.5 $62.1
Less: Preferred
Stock dividends (0.4) (0.4)
----- -----
Basic earnings per
share 86.1 233.8 $0.37 61.7 229.6 $0.27
===== =====
Effect of Dilutive
Securities
Options 3.7 3.0
Convertible monthly
income preferred
securities 2.3 7.7
Convertible preferred
stock
----- ----- ----- -----
Diluted earnings per share $88.4 245.2 $0.36 $61.7 232.6 $0.27
===== ===== ===== ===== ===== =====
</TABLE>
During the first quarter of 1999, all of the convertible monthly income
preferred securities (MIPS) were redeemed and converted into 11.5 million
shares of Corning common stock. The dilutive impact of the MIPS prior to
conversion is reflected in Corning's 1999 earnings per share calculation.
These securities were not included in the calculation of diluted earnings
per share in 1998 due to the anti-dilutive effect they would have had if
converted.
The impact of the convertible preferred stock was not included in the
calculation of diluted earnings per share for either quarter due to the
anti-dilutive effect it would have if converted. The convertible preferred
stock paid dividends of $0.4 million each quarter and was convertible into
1.0 million and 0.8 million shares of common stock in the first quarter of
1998 and 1999, respectively.
Common dividends of $43.6 million were declared in the first quarter
1999, compared with $41.7 million for the same period in 1998.
(5) On April 30, 1999, Corning acquired BICC's telecommunications cable
business and the 50 percent equity interest in Optical Waveguides
Australia, Pty. Ltd. it did not already own for cash consideration of
approximately $135 million. Customary purchase price adjustments will be
settled in the third quarter.
(6) In the second quarter of 1998, Corning recorded a restructuring charge of
$84.6 million ($49.2 million after tax and minority interest). The charge
is comprised of early retirement incentives and severance costs. The
restructuring charge related to approximately 650 employees, all of whom
have been terminated or notified of their termination at March 31, 1999.
As of March 31, 1999, $34.5 million of the restructuring and severance
related costs have been paid.
(7) Inventories shown on the accompanying balance sheets were comprised of the
following (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Finished goods $ 233.6 $ 205.6
Work in process 98.7 104.9
Raw materials and accessories 125.6 96.7
Supplies and packing materials 75.2 70.6
------- -------
Total inventories valued at current cost 533.1 477.8
Reduction to LIFO valuation (19.1) (19.1)
------- -------
$ 514.0 $ 458.7
======= =======
</TABLE>
<PAGE>
(8) Plant and equipment shown on the accompanying balance sheets were
comprised of the following (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Land $ 56.0 $ 57.3
Buildings 978.1 944.1
Equipment 3,739.6 3,677.4
Accumulated depreciation (2,044.3) (1,993.9)
-------- --------
$2,729.4 $2,684.9
======== ========
</TABLE>
(9) Comprehensive income for the periods ended March 31, 1999 and 1998 was
$43.9 million and $77.8 million, and includes net income of $86.5 million
and $61.5 million and foreign currency translation adjustments of $(39.6)
million and $16.3 million in 1999 and 1998, respectively. In addition,
Corning recorded unrealized losses on marketable securities of $3.0
million in the period ended March 31, 1999.
(10) Dow Corning and the Committee of Tort Claimants, one of Dow Corning's
Chapter 11 creditor committees, filed with the United States Bankruptcy
Court (the Bankruptcy Court) a joint plan of reorganization on November 9,
1998 (the Joint Plan). After hearings held in early 1999, the Bankruptcy
Court ruled in early February 1999 that the disclosure statement related
to the Joint Plan was adequate to send to Dow Corning's creditors for
consideration. In that ruling, the Bankruptcy Court indicated that the
period for voting will extend through May 14, 1999 and hearings to confirm
the Joint Plan are scheduled to begin on June 28, 1999. To become
effective, the Joint Plan will require a favorable vote by many classes of
creditors and final Bankruptcy Court approval after confirmation hearings.
In addition, appeals of the Bankruptcy Court's confirmation order are
possible. The recent developments, including the support of the Committee
of Tort Claimants, tend to increase the probability that Dow Corning will
successfully emerge from Chapter 11 proceedings, but the timing and the
eventual outcome of these proceedings is uncertain.
(11) 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 18 to Corning's 1998 consolidated
financial statements included in its Annual Report of 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. 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
Results of Operations
Corning's first quarter results increased substantially in comparison to the
first quarter of 1998, primarily as a result of stronger demand for optical
fiber, cable and environmental products and improved performance in the
Information Display Segment. Net income for the first quarter of 1999 totaled
$86.5 million, an increase of 39% compared with income from the same operations
of $62.1 million for the first quarter of 1998. Diluted earnings per share rose
33% to $0.36 per share compared to $0.27 per share from the same operations for
the first quarter of 1998. Net sales for the first quarter of 1999 totaled
$892.2 million, an increase of 12% compared with first quarter 1998 sales of
$794.8 million. Excluding the impact of acquisitions, Corning's net sales
increased 9% in the first quarter of 1999.
Segment Overview
Corning's products are grouped into three operating segments:
Telecommunications, Advanced Materials and Information Display. The earnings of
equity affiliates, which are closely associated with Corning's operating
segments, are included in segment net income.
The financial results for Corning's three operating segments have been prepared
on a basis that is consistent with the manner in which Corning management
internally disaggregates financial information for the purpose of assisting in
making internal operating decisions. In this regard, certain common expenses
have been allocated among segments differently than would be required for stand
alone financial information prepared in accordance with generally accepted
accounting principles.
Telecommunications
Sales in the Telecommunications Segment increased 26% in the first quarter of
1999 due primarily to volume gains in the optical fiber, cable and photonic
technologies businesses. Demand was particularly strong for Corning's new high
data rate fiber, which began to experience growth in the latter part of 1998,
and cable products. Fiber sales were also favorably impacted by the acquisition
of Optical Fibres, which Corning began consolidating at year-end 1998. Sales in
the photonic technologies business increased significantly due primarily to
higher demand.
Segment net income grew 50% primarily due to increased volume and improved mix
of fiber and cable products, which offset increased research and development
spending, particularly within the photonic technologies business. Equity
earnings from Corning's international optical fiber equity companies were
consistent with the first quarter of 1998, as gains from German and Australian
ventures were offset by the consolidation of Optical Fibres.
Advanced Materials
Sales in the Advanced Materials Segment decreased 3% during the first quarter of
1999, as volume gains from new thinwall ceramic substrates in the environmental
products business were more than offset by a decline in volume in the
semiconductor materials and optical products businesses. The slowdown in the
semiconductor manufacturing equipment industry continued to impact demand for
high purity fused silica products, while worldwide demand for glass optical
products continues to be impacted by consumers' increased preference for plastic
lenses.
<PAGE>
Segment net income increased 9% in comparison to the first quarter of 1998
reflecting the strong volume gains and manufacturing efficiencies in the
environmental products business, which were mostly offset by volume declines in
the semiconductor materials and optical products businesses.
Information Display
First quarter sales in the Information Display Segment increased by 2% in
comparison to 1998, as strong volume gains from flat panel liquid crystal
display products in the advanced display products business more than offset weak
volume and price reductions in the conventional video components business.
Sales in the projection video components business for the first quarter of 1999
remained flat as strong volume gains in the consumer market were offset by
softness in the institutional market.
Segment net income grew 94% in the first quarter of 1999, as manufacturing
efficiencies recognized in the projection video and advanced display products
businesses offset lower equity earnings from Samsung Corning. Equity earnings
decreased primarily due to the impact of price declines which more than offset
volume gains. Results of the conventional video components business also
improved over first quarter 1998 earnings, which were impacted by costs
associated with a glass furnace repair and expansion related activities.
Taxes on Income
Corning's effective tax rate for continuing operations was 30.5% for the first
quarter of 1999 and 32.5% for the first quarter of 1998. The lower 1999 rate
was due to a higher percentage of Corning's earnings resulting from consolidated
entities with lower effective tax rates.
Liquidity and Capital Resources
Corning's working capital increased from $235.6 million at the end of 1998 to
$519.8 million at March 31, 1999. The ratio of current assets to current
liabilities was 1.6 at the end of the first quarter of 1999 compared to 1.2 at
year-end 1998. The increase in working capital and ratio of current assets to
current liabilities is due primarily to the addition of cash and short-term
investments and the repayment of $100 million in short-term borrowings with the
proceeds received from the issuance of $300 million of long-term debt securities
during the first quarter of 1999. This issuance increased Corning's long-term
debt as a percentage of total capital from 31% at year-end 1998 to 36% at March
31, 1999.
Cash and short-term investments increased from year-end 1998 by $106.5 million,
due to operating and financing activities that provided cash of $49.9 million
and $229.2 million, respectively, partially offset by investing activities which
used cash of $169 million. Net cash provided by operating activities in the
first quarter totaled $49.9 million in 1999, versus a use of cash of $8.3
million in 1998. The increase in cash from operations was due to both greater
earnings and a decrease in cash used in working capital. Net cash used in
investing activities increased primarily due to higher capital spending. In
1998, investing activities included the receipt and investment of proceeds from
a sale leaseback transaction. Net cash provided by financing activities over
1998, reflecting the proceeds received from the issuance of long-term debt and
common stock, partially offset by the repayment of loans.
Year 2000 Readiness Disclosure
Corning has completed an assessment of required modifications or replacement of
its key internal software to become Year 2000 compliant. The assessment
involved all known areas of concern, including business applications,
manufacturing, engineering, research, facilities systems, third party suppliers
and service providers.
<PAGE>
Implementation, including testing, of required changes to key applications was
substantially completed at December 31, 1998, with the remainder to be completed
by the third quarter of 1999. In addition, an external study team is assisting
management in evaluating its processes surrounding the Year 2000 project.
Progress is monitored and reported to management and to the Audit Committee of
the Board of Directors on a regular basis.
In 1995, Corning initiated a significant project to upgrade and improve access
to business information with integrated enterprise-wide corporate applications
that were Year 2000 compliant. This initiative has mitigated to some extent the
amount of Year 2000 costs incurred to date. Corning's current estimate of the
total cost for Year 2000 compliance is approximately $29 million, of which
approximately $17.5 million has been spent to date. This estimate includes
incremental costs of approximately $13 million comprised primarily of contractor
costs to modify existing systems, of which approximately 60% has been spent to
date.
Corning has initiated formal communications with all of its significant
customers, 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. Risk assessments, readiness
evaluation and contingency plans to protect Corning's business from Year 2000
related interruptions from these third parties and from key customers are
expected to be substantially completed by the middle of 1999. Contingency plans
will include, for example, stocking of additional inventory and identifying
alternative suppliers.
Corning's risk management program includes emergency backup and recovery
procedures to be followed in the event of a failure of a key application. This
program is being expanded to include specific procedures for potential Year 2000
issues. Corning is taking what it considers to be reasonable steps to prevent
major interruptions in its business due to Year 2000 issues. The inability of
Corning or significant third parties to adequately address Year 2000 issues
could cause inefficiencies in Corning's business operations. The extent to
which Corning's operating results may be impacted by customers or suppliers who
are not fully Year 2000 compliant is not readily determinable. Corning's
operating results and ability to conduct business is dependent upon the
infrastructure of the geographic regions in which its operations and customers
are located. A breakdown in the infrastructure of a particular region could
adversely impact Corning's operating results. Corning continues to monitor
closely the information about infrastructure preparedness for the Year 2000,
especially in the Asian regions.
"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, currency fluctuations, product demand and industry capacity,
competitive products and pricing, manufacturing efficiencies, cost 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
Securities and Exchange Commission filings.
<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 11 active 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 $25 million for its estimated
liability for environmental cleanup and litigation at March 31, 1999.
Breast-implant Litigation. Dow Corning Bankruptcy: Corning and The Dow
Chemical Company each own 50% of the common stock of Dow Corning Corporation.
On May 15, 1995, Dow Corning 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. Dow Corning filed a First Amended Plan of Reorganization on
August 25, 1997 and a Second Amended Plan of Reorganization on February 17,
1998. The Tort Claimants Committee and other creditor representatives opposed
these Plans. As a result of extended negotiations, Dow Corning and the Tort
Claimants Committee reached certain compromises and on November 8, 1998 jointly
filed a revised Plan of Reorganization. After hearings held in early 1999, the
Federal Bankruptcy Court ruled in February 1999 that the Amended Joint Plan of
Reorganization filed on February 4, 1999 (the "Joint Plan") and related
disclosure materials were adequate. These materials were mailed to claimants,
who have until May 14, 1999 to return their votes on the Joint Plan. A hearing
to confirm the Joint Plan is scheduled to begin on June 28, 1999 and various
parties have filed objections. Although the Tort Claimants Committee has
supported the Joint Plan, the timing and eventual outcome of these proceedings
remain uncertain.
Under the terms of the Joint Plan, Dow Corning would be required to establish a
Settlement Trust and a Litigation Facility to provide means for tort claimants
to settle or litigate their claims. Dow Corning would have the obligation to
fund the Trust and the Facility, over a period of up to 16 years, in an amount
up to approximately $3.2 billion (nominal value), subject to the limitations,
terms and in conditions stated in the Joint Plan. Dow Corning proposes to
provide the required funding over the 16 year period through a combination of
cash, proceeds from insurance, and cash flow from operations. Each of Corning
and Dow Chemical have agreed to provide a credit facility to Dow Corning of up
to $150 million ($300 million in the aggregate), subject to the terms and
conditions stated in the Joint Plan. The Joint Plan also provides for Dow
Corning to make full payment, through cash and the issuance of senior notes, to
its commercial creditors.
In related developments, a Panel of Scientific Experts appointed by Judge Sam C.
Pointer, Jr., a United States District Judge in the Northern District of Alabama
who has been serving since 1992 as the coordinating federal judge for all breast
implant matters, was asked to address certain questions pertinent to the disease
causation issues in the cases against various defendants, including Dow Corning
or its shareholders. The Panel held hearings in 1998 and issued its report on
November 30, 1998. The report is generally favorable to the implant
manufacturers concerning connective tissue disease and immunologic dysfunction
issues.
<PAGE>
Implant Tort Lawsuits: In the period from 1991 through 1998, Corning and Dow
Chemical, the shareholders of Dow Corning Corporation, were named in a number of
state and federal tort lawsuits alleging injuries arising from Dow Corning's
implant products. The claims against the shareholders allege a variety of
direct or indirect theories of liability. From 1991 through 1998, Corning has
been named in approximately 11,470 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 entered orders in May and June 1997 and thereafter directing
that Corning be dismissed from each case pending in or later 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. Corning has filed notices transferring the Louisiana cases to the
United States District Court for the Eastern District of Michigan, Southern
District (the "Michigan Federal Court") to which substantially all breast
implant cases were transferred in 1997. In the Michigan Federal Court, Corning
is named as a defendant in approximately 70 pending cases (including some cases
with multiple claimants), in addition to the transferred Louisiana cases, 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 such motion. The Michigan Federal Court heard Corning's
motion for summary judgment on February 27, 1998, but has not yet ruled.
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. In
December 1998, Corning filed a motion for summary judgment requesting that all
claims against it be dismissed. Plaintiffs claimed the need to take the
depositions of certain officers and directors of Dow Corning and other
individuals before responding to the motion for summary judgment. Plaintiffs
have proposed a schedule giving them until June 28, 1999 to file papers in
opposition to Corning's motion for summary judgment. Although no written order
has been entered, the Court has indicated that limited additional discovery
would be permitted before Corning's motion is entertained. The discovery
process is continuing.
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 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 over billings 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 share of judgments or settlement payments 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 17.
(b) Reports on Form 8-K
Reports on Form 8-K dated January 25, 1999 and January 26, 1999
in connection with the 1998 results.
Reports on Form 8-K dated January 19, 1999 and February 4, 1999
in connection with the registrant's 1996, 1997 and 1998 segment
disclosure under FAS 131.
A report on Form 8-K dated March 1, 1999 in connection with the
registrant's announced acquisition of BICC's telecommunications cable
businesses.
A report on Form 8-K dated March 10, 1999 in connection with the
registrant's issuance of $300 million in debt securities.
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)
May 12, 1999 /s/ ROGER G. ACKERMAN
------------ ------------------------------------------------------------
Date Roger G. Ackerman
Chairman and Chief Executive Officer
May 12, 1999 /s/ JAMES B. FLAWS
------------ ------------------------------------------------------------
Date James B. Flaws
Senior Vice President, Treasurer and Chief Financial Officer
May 12, 1999 /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 18
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
DIVIDENDS
(Dollars in millions, except ratios)
<TABLE>
<CAPTION>
Three Months Ended Fiscal Year Ended
------------------- -----------------------------------------
March 31, March 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Jan. 1,
1999 1998 1998 1997 1996 1995 1995
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income before taxes on income $111.2 $64.5 $439.6 $629.2 $455.9 $389.4 $286.3
Adjustments:
Share of earnings before taxes
of 50% owned companies 23.9 27.1 173.3 111.5 130.3 95.2 89.0
Gain (loss) before taxes of
greater than 50% owned
unconsolidated subsidiary 0.7 (3.1) (4.0)
Distributed income of less than
50% owned companies and share
of loss if debt is guaranteed 0.1 (1.1) 2.1
Amortization of capitalized interest 3.8 3.6 14.4 16.6 11.8 9.6 13.3
Fixed charges net of capitalized
interest 32.9 34.5 126.8 141.9 105.9 82.6 128.8
------ ------ ------ ------ ------ ------ ------
Earnings before taxes and fixed
charges as adjusted $171.8 $129.8 $753.0 $899.2 $704.6 $573.7 $515.5
====== ====== ====== ====== ====== ====== ======
Fixed charges:
Interest incurred $ 29.3 $ 27.3 $103.5 $ 96.7 $ 73.6 $ 65.4 $ 64.9
Share of interest incurred of 50%
owned companies and interest on
guaranteed debt of less than 50%
owned companies 9.6 10.2 45.4 51.0 38.7 10.2 60.8
Interest incurred by greater than
50% owned unconsolidated subsidiary 0.7 0.8
Portion of rent expense which
represents interest factor 4.9 5.3 18.0 15.9 12.1 13.3 10.8
Share of portion of rent expense
which represents interest factor
for 50% owned companies 1.4 1.6 5.0 3.8 1.4 2.7 9.4
Portion of rent expense which
represents interest factor for
greater than 50% owned
unconsolidated subsidiary 0.1
Amortization of debt costs 0.7 0.7 2.9 1.6 2.2 (0.1) 0.6
------ ------ ----- ------ ------ ------ ------
Total fixed charges 45.9 45.1 174.8 169.0 128.0 92.2 147.4
Capitalized interest (13.0) (10.6) (48.0) (27.1) (22.1) (9.6) (18.6)
------ ------ ------ ------ ------ ------ ------
Total fixed charges net of
capitalized interest $ 32.9 $ 34.5 $126.8 $141.9 $105.9 $ 82.6 $128.8
====== ====== ====== ====== ====== ====== ======
Preferred dividends:
Preferred dividend requirements $ 2.6 $ 3.8 $ 15.3 $ 15.3 $ 15.7 $ 15.7 $ 8.2
Ratio of pre-tax income to
income before minority interest
and equity earnings 1.4 1.5 1.4 1.5 1.5 1.4 1.4
------ ------ ------ ------ ------ ------ ------
Pre-tax preferred dividend
requirement 3.6 5.7 21.4 23.0 23.6 22.0 11.5
Total fixed charges 45.9 45.1 174.8 169.0 128.0 92.2 147.4
------ ------ ------ ------ ------ ------ ------
Fixed charges and pre-tax preferred
dividend requirement $ 49.5 $ 50.8 $196.2 $192.0 $151.6 $114.2 $158.9
====== ====== ====== ====== ====== ====== ======
Ratio of earnings to combined fixed
charges and preferred dividends 3.5x 2.6x 3.8x 4.7x 4.7x 5.0x 3.2x
====== ====== ====== ====== ====== ====== ======
</TABLE>
- 18 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 43,200
<SECURITIES> 108,700
<RECEIVABLES> 592,300
<ALLOWANCES> 14,900
<INVENTORY> 514,000
<CURRENT-ASSETS> 1,438,400
<PP&E> 2,729,400
<DEPRECIATION> 2,044,400
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<BONDS> 1,291,100
0
16,000
<COMMON> 960,600
<OTHER-SE> 947,400
<TOTAL-LIABILITY-AND-EQUITY> 5,166,400
<SALES> 892,200
<TOTAL-REVENUES> 902,100
<CGS> 548,300
<TOTAL-COSTS> 548,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 20,600
<INTEREST-EXPENSE> 16,300
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<INCOME-TAX> 33,900
<INCOME-CONTINUING> 86,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,500
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
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