- 35 -
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, 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:
244,717,029 shares of Corning's Common Stock, $0.50 Par Value, were outstanding
as of July 23, 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 six months and
three months ended June 30, 1999 and 1998 3
Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 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 and financial position for the interim periods presented. All such
adjustments are of a normal recurring nature. The consolidated financial
statements have been prepared under Generally Accepted Accounting Principles
(GAAP), 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, 1998.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Net sales $1,912.2 $1,650.7 $1,020.0 $ 855.9
Royalty, interest, and
dividend income 21.1 21.1 11.2 12.0
Non-operating gain 20.5 20.5
-------- ------- -------- -------
1,933.3 1,692.3 1,031.2 888.4
Deductions
Cost of sales 1,164.9 1,037.2 621.7 526.4
Selling, general and
administrative expenses 272.9 239.5 136.1 126.6
Provision for restructuring 84.6 84.6
Research, development and
engineering expenses 164.4 142.2 84.8 75.1
Amortization of purchased
intangibles 10.3 7.9 5.2 4.0
Interest expense 33.5 32.5 17.2 14.9
Other, net 20.6 29.7 10.7 2.6
-------- -------- -------- -------
Income from continuing
operations before taxes
on income 266.7 118.7 155.5 54.2
Taxes on income from
continuing operations 81.3 34.9 47.4 13.9
-------- -------- -------- -------
Income from continuing
operations before minority
interest and equity earnings 185.4 83.8 108.1 40.3
Minority interest in earnings
of subsidiaries (27.5) (18.3) (17.4) (12.8)
Dividends on convertible
preferred securities of
subsidiary (2.3) (6.9) (3.5)
Equity in earnings of
associated companies 52.7 60.2 31.1 32.7
-------- -------- -------- -------
Income from continuing
operations 208.3 118.8 121.8 56.7
Income from discontinued
operations, net of taxes 66.5 67.1
-------- -------- -------- -------
Net Income $ 208.3 $ 185.3 $ 121.8 $ 123.8
======== ======== ======== =======
Basic Earnings Per Share
Continuing operations $ 0.87 $ 0.51 $ 0.50 $ 0.24
Discontinued operations 0.30 0.30
-------- -------- -------- -------
$ 0.87 $ 0.81 $ 0.50 $ 0.54
======== ======== ======== =======
Diluted Earnings Per Share
Continuing operations $ 0.85 $ 0.51 $ 0.49 $ 0.24
Discontinued operations 0.28 0.29
-------- -------- -------- -------
$ 0.85 $ 0.79 $ 0.49 $ 0.53
======== ======== ======== =======
Dividends Declared $ 0.36 $ 0.36 $ 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>
June 30, December 31,
ASSETS 1999 1998
--------- ------------
<S> <C> <C>
Current Assets
Cash $ 51.8 $ 12.2
Short-term investments, at cost, which
approximates market value 24.3 33.2
Accounts receivable, net of doubtful
accounts and allowances - $11.4/1999;
$15.2/year-end 1998 742.4 636.0
Inventories 553.2 458.7
Deferred taxes on income and other
current assets 241.1 170.2
-------- --------
Total current assets 1,612.8 1,310.3
-------- --------
Investments
Associated companies, at equity 354.6 313.1
Others 57.9 53.1
-------- --------
412.5 366.2
-------- --------
Plant and equipment, at cost, net of
accumulated depreciation 2,826.5 2,684.9
Goodwill and other intangible assets,
net of accumulated amortization
$71.9/1999; $66.7/year-end 1998 311.0 309.7
Other assets 327.7 310.8
-------- --------
Total Assets $5,490.5 $4,981.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Loans payable $ 350.0 $ 204.6
Accounts payable 243.2 291.7
Other accrued liabilities 570.5 578.4
-------- --------
Total current liabilities 1,163.7 1,074.7
-------- --------
Other liabilities 685.7 674.1
Loans payable beyond one year 1,286.6 998.3
Minority interest in subsidiary companies 363.5 346.1
Convertible preferred securities of subsidiary 365.2
Convertible preferred stock 15.1 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: 268.9 million/1999 and
265.9 million/year-end 1998 992.0 766.0
Retained earnings 1,641.8 1,521.6
Less cost of 24.7 million/1999 and 34.4
million/year-end 1998 shares
of common stock in treasury (624.4) (789.9)
Accumulated other comprehensive income (33.5) 7.9
-------- --------
Total common shareholders' equity 1,975.9 1,505.6
-------- --------
$5,490.5 $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>
Six Months Ended June 30,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $208.3 $ 185.3
Adjustments to reconcile net income to
net cash provided by operating
activities from continuing operations:
Income from discontinued operations (66.5)
Depreciation and amortization 189.7 157.2
Employee benefit expense less than
cash funding (25.5) (0.2)
Equity in earnings of associated companies
in excess of dividends received (30.2) (46.7)
Minority interest in earnings of
subsidiaries in excess of dividends paid 17.2 7.9
Non-operating gain (20.5)
Provision for restructuring, net of
cash spent 84.6
Deferred tax (benefit)/expense 19.6 (3.7)
Other 30.2 43.0
Changes in operating assets and liabilities:
Accounts receivable (65.1) 11.5
Inventory (101.4) (38.7)
Other current assets (18.2) 11.5
Accounts payable and other current
liabilities (92.2) (140.8)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES
OF CONTINUING OPERATIONS 132.4 183.9
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant and equipment (284.4) (353.7)
Acquisitions of businesses, net (131.8) (5.7)
Net proceeds from disposition of properties
and investments 11.6 100.3
Proceeds from divestiture of consumer
housewares business 583.0
Increase in long-term investments and other
noncurrent assets (24.7) (96.0)
Other, net (15.0) 19.0
------ ------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES OF CONTINUING OPERATIONS (444.3) 246.9
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of loans 535.6 195.1
Repayments of loans (106.2) (57.4)
Repayments of loans with proceeds from
divestiture of consumer housewares business (343.0)
Proceeds from issuance of common stock 51.6 15.0
Repurchases of common stock (41.6) (24.4)
Dividends paid (88.1) (84.0)
------ ------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES OF CONTINUING OPERATIONS 351.3 (298.7)
------ ------
Effect of exchange rates on cash (3.7) (0.1)
------ ------
Cash used in discontinued operations (5.0) (37.7)
------ ------
Net change in cash and cash equivalents 30.7 94.3
Cash and cash equivalents at beginning of year 45.4 97.0
------ ------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 76.1 $191.3
====== ======
SUPPLEMENTAL DATA:
Income taxes paid, net $ 66.6 $ 63.6
====== ======
Interest paid $ 44.4 $ 45.8
====== ======
</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 second quarter and first half of 1999 and 1998 is provided below.
These amounts do not include revenues, expenses and equity earnings not
specifically identifiable to segments.
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
---------------- -----------------
1999 1998 1999 1998
------- ------ ------ -------
<S> <C> <C> <C> <C>
Telecommunications
Net sales $1,071.3 $ 828.6 $ 582.8 $ 441.4
Research, development and
engineering expenses $ 108.2 $ 89.8 $ 55.9 $ 48.0
Income from continuing
operations before minority
interest and equity earnings $ 114.8 $ 87.7 $ 66.4 $ 52.8
Minority interest in
earnings of subsidiaries (12.9) (17.9) (8.7) (11.0)
Equity in earnings of
associated companies 7.4 12.9 2.9 8.4
-------- -------- -------- -------
Segment net income $ 109.3 $ 82.7 $ 60.6 $ 50.2
======== ======== ======== =======
Advanced Materials
Net sales $ 516.8 $ 520.0 $ 264.7 $ 261.3
Research, development and
engineering expenses $ 45.1 $ 40.5 $ 23.2 $ 20.8
Income from continuing
operations before minority
interest and equity earnings $ 48.1 $ 38.7 $ 28.0 $ 19.8
Minority interest in
earnings of subsidiaries 0.3 0.1
Equity in earnings of
associated companies 7.6 7.5 3.5 4.3
-------- -------- -------- -------
Segment net income $ 55.7 $ 46.5 $ 31.5 $ 24.2
======== ======== ======== =======
Information Display
Net sales $ 311.7 $ 289.5 $ 166.0 $ 146.2
Research, development and
engineering expenses $ 11.1 $ 11.9 $ 5.7 $ 6.3
Income from continuing
operations before minority
interest and equity earnings $ 27.1 $ (2.2) $ 17.8 $ 7.2
Minority interest in
earnings of subsidiaries (14.6) (4.4) (8.8) (5.6)
Equity in earnings of
associated companies 34.6 33.9 22.2 17.5
-------- -------- -------- -------
Segment net income $ 47.1 $ 27.3 $ 31.2 $ 19.1
======== ======== ======== =======
Total segments
Net sales $1,899.8 $1,638.1 $1,013.5 $ 848.9
Research, development and
engineering expenses $ 164.4 $ 142.2 $ 84.8 $ 75.1
Income from continuing
operations before minority
interest and equity earnings $ 190.0 $ 124.2 $ 112.2 $ 79.8
Minority interest in
earnings of subsidiaries (27.5) (22.0) (17.5) (16.5)
Equity in earnings of
associated companies 49.6 54.3 28.6 30.2
-------- -------- -------- -------
Segment net income $ 212.1 $ 156.5 $ 123.3 $ 93.5
======== ======== ======== =======
</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>
Six months ended Three months ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
Total segment net sales $1,899.8 $1,638.1 $1,013.5 $848.9
Non-segment net sales (a) 12.4 12.6 6.5 7.0
Royalty, interest and
dividend income 21.1 21.1 11.2 12.0
Non-operating gain 20.5 20.5
-------- -------- -------- ------
Total revenues $1,933.3 $1,692.3 $1,031.2 $888.4
======== ======== ======== ======
Net income
Total segment income (b) $ 212.1 $ 156.5 $ 123.3 $ 93.5
Unallocated items:
Non-segment income (loss)
and other items (a) (6.4) 19.8 (5.8) 20.4
Provision for
restructuring (c) (84.6) (84.6)
Interest expense (0.4) (0.4)
Income tax (d) 2.2 28.5 1.8 28.4
Equity in earnings of
associated companies (a) 3.1 5.9 2.5 2.5
Dividends on convertible
preferred securities
of subsidiary (2.3) (6.9) (3.5)
-------- -------- -------- ------
Net income from
continuing operations $ 208.3 $ 118.8 $ 121.8 $ 56.7
======== ======== ======== ======
</TABLE>
(a) Includes amounts derived from corporate investments. Non-segment net
income includes non-operating gains in the second quarter of 1998.
(b) Includes royalty, interest and dividend income.
(c) The portion of this charge related to Telecommunications, Advanced
Materials, and Information Display segments was $8.3 million, $26.9
million, and $16.3 million, respectively. The remainder pertains to
corporate functions.
(d) Includes tax associated with the restructuring charge and non-
operating gain in 1998.
(2) On April 30, 1999, Corning acquired BICC, plc's telecommunications cable
business and the 50 percent equity interest in Optical Waveguides
Australia, Pty. Ltd. (OWA) it did not already own for cash consideration of
approximately $135 million. Customary purchase price adjustments will be
settled in the third quarter. The acquisition was recorded using the
purchase method of accounting. The excess cost over the fair value of the
net tangible assets acquired, accounted for as goodwill and other
intangible assets, was approximately $11 million and is being amortized
over periods ranging from 5 to 25 years. OWA became a wholly owned
subsidiary as a result of this transaction and the results of its
operations are included in the consolidated financial statements from the
date of the transaction. The acquisitions in comparison to Corning's
consolidated results were not significant.
Corning reviews the recoverability of its long-lived assets, including
goodwill and other intangible assets, when events or changes in
circumstances occur that indicate that the carrying value of the asset may
not be recoverable. The assessment of possible impairment is based on
Corning's ability to recover the asset from the expected future pre-tax
cash flows (undiscounted and without interest charges) of the related
operations. If these cash flows are less than the carrying value of such
asset, an impairment loss is recognized for the difference between
estimated fair value and carrying value. The measurement of impairment
requires management to make estimates of these cash flows related to long-
lived assets. It is reasonably possible that future events or
circumstances could cause these estimates to change.
<PAGE>
(3) A reconciliation of the basic and diluted earnings per share from
continuing operations computations for the first half and second
quarters of 1999 and 1998 are as follows (in millions, except per share
amounts):
<TABLE>
<CAPTION>
For the six months ended June 30,
----------------------------------------------
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 $208.3 $118.8
Less: Preferred stock
dividends (0.7) (0.8)
------ ------
Basic earnings per
share 207.6 238.1 $0.87 118.0 229.8 $0.51
===== =====
Effect of Dilutive
Securities
Options 4.1 3.5
Convertible monthly
income preferred
securities 2.3 3.8
Convertible preferred
stock 0.7 0.8
------ ----- ------ -----
Diluted earnings
per share $210.6 246.8 $0.85 $118.0 233.3 $0.51
====== ===== ===== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
For the three months ended June 30,
----------------------------------------------
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 $121.8 $ 56.7
Less: Preferred stock
dividends (0.3) (0.4)
------ ------
Basic earnings per
share 121.5 242.4 $0.50 56.3 229.9 $0.24
===== =====
Effect of Dilutive
Securities
Options 4.4 4.0
Convertible preferred
stock 0.3 0.7
------ ----- ------ -----
Diluted earnings
per share $121.8 247.5 $0.49 $ 56.3 233.9 $0.24
====== ===== ===== ====== ===== =====
</TABLE>
During the first quarter of 1999, the convertible monthly income preferred
securities (MIPS) were redeemed and converted into 11.5 million shares of
Corning common stock (see Note 5). 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 convertible preferred stock paid dividends of $0.4 million and $0.8
million during the second quarter and first half of 1998, and was
convertible into 0.9 million shares of common stock in each period. 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.
Common dividends of $43.9 million and $87.5 million were declared in the
second quarter and first half of 1999, respectively, compared with $41.5
million and $83.2 million for the same periods in 1998.
(4) 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 million after consideration of underwriting
commissions and discount) have been used for the repayment of short and
long-term debt, working capital, capital spending and acquisitions.
<PAGE>
(5) 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 has caused Corning's reported income to increase in
comparison to 1998, but has no impact on Corning's diluted earnings per
share.
(6) Corning historically used the last-in, first-out (LIFO) method for
approximately 45% of its inventories, with the remaining inventories valued
on a first-in, first-out (FIFO) basis. In the second quarter of 1999,
Corning changed its method of determining the cost of its LIFO inventories
to the FIFO method. As a result of declining costs and prices for such
inventories, Corning believes that the use of the FIFO method results in a
more current inventory valuation at period end dates and minimizes the
likelihood of lower-of-cost-or-market valuation issues. As a result,
Corning recorded a charge of approximately $5.8 million ($3.9 million after
tax) in the second quarter of 1999. The impact of this change on
historical operating results was not material and, accordingly, the
historical financial statements have not been restated to reflect this
change. Inventories shown on the accompanying balance sheets were
comprised of the following (in millions):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------ --------
<S> <C> <C>
Finished goods $226.4 $205.6
Work in process 124.2 104.9
Raw materials and accessories 125.0 96.7
Supplies and packing materials 77.6 70.6
------ ------
Total inventories valued at current cost 553.2 477.8
Reduction to LIFO valuation (19.1)
------ ------
$553.2 $458.7
====== ======
</TABLE>
(7) Land, buildings and equipment are recorded at cost. Depreciation is based
on estimated useful lives of properties using straight-line and
accelerated methods. The estimated useful lives range from 20-40 years
for buildings and 3-20 years for a majority of Corning's equipment. Plant
and equipment shown on the accompanying balance sheets were comprised of
the following (in millions):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ---------
<S> <C> <C>
Land $ 61.3 $ 57.3
Buildings 1,023.6 944.1
Equipment 3,863.7 3,677.4
Accumulated depreciation (2,122.1) (1,993.9)
-------- --------
$2,826.5 $2,684.9
======== ========
</TABLE>
(8) 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 was comprised of early retirement
incentives offered to certain salaried non-union employees 55 years old
or older satisfying service criteria and severance costs associated with
workforce reductions of other non-union employees. The restructuring
charge related to approximately 650 employees, all of whom were
terminated as of June 30, 1999. During the second quarter of 1999,
Corning paid approximately $7.9 million of the $42.4 million of
restructuring and severance related costs paid to date. Corning
anticipates the remaining restructuring costs will be paid over the next
six months. As of June 30, 1999, Corning's restructuring reserve
totaled $42.2 million, most of which related to lump sum payments to be
made during the last six months of 1999 in accordance with the original
terms of the restructuring plan. No adjustments to the liability are
anticipated. Management estimates that the annualized cost savings
related to these programs are expected to be approximately $30 million
per year after taxes, which Corning began realizing in the fourth
quarter of 1998.
<PAGE>
(9) Comprehensive income for the quarters ended June 30, 1999 and 1998 was
$123.0 million and $135.8 million, and includes net income of $121.8
million and $123.8 million and foreign currency translation adjustments of
$(5.5) million and $4.8 million in 1999 and 1998, respectively. In
addition, Corning recorded unrealized gains on marketable securities of
$6.7 million and $7.2 million in the quarters ended June 30, 1999 and
1998, respectively.
Comprehensive income for the year to date periods ended June 30, 1999 and
1998 was $166.9 million and $213.6 million, and includes net income of
$208.3 million and $185.3 million and foreign currency translation
adjustments of $(45.1) million and $21.1 million in 1999 and 1998,
respectively. In addition, Corning recorded unrealized gains on
marketable securities of $3.7 million and $7.2 million in the periods
ended June 30, 1999 and 1998, respectively.
(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). The disclosure statement related to the Joint Plan
was sent to Dow Corning's creditors for consideration and action. During
the voting period ended May 14, 1999, 94% of those voting voted in favor of
the Joint Plan. Hearings to confirm the Joint Plan began on June 28, 1999.
To become effective, the Joint Plan requires 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 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 on Form 10-K, Corning
has agreed to indemnify Quest Diagnostics on an after-tax basis, for the
settlement of certain governmental claims and certain other claims that
were pending at December 31, 1996. 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. The timing of
the resolution of these claims is uncertain.
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 is not readily estimable and 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 1999 second quarter and first half results from continuing operations
increased 115% and 75%, respectively, in comparison to the same periods in 1998.
Diluted earnings per share from continuing operations for the second quarter and
first half of 1999 increased 104% and 66%, respectively, in comparison to the
same periods in 1998.
Corning's 1998 results were adversely impacted by significant non-recurring
items. The non-recurring items included a restructuring charge of $49.2 million
after tax, or $0.21 per share, and a non-operating gain of $13.2 million after
tax, or $0.06 per share. Management believes that the comparison of operating
results excluding non-recurring items, although not a GAAP measure, is useful to
the readers of the financial statements in understanding the changes in
Corning's operating results. Excluding the impact of these non-recurring items,
net income from continuing operations for the second quarter and first half of
1999 were up 31% and 35%, respectively, from the same periods in the prior year.
Diluted earnings per share from continuing operations for the second quarter and
first half of 1999 increased 26% and 29%, respectively, over the same periods in
1998, excluding the impact of non-recurring items. Corning's 1999 results
compared to 1998, adjusted for these non-recurring items, reflect the impact of
stronger demand for premium fiber, environment products and liquid crystal
display glass.
Net sales totaled $1.02 billion and $1.9 billion for the second quarter and
first half of 1999, respectively, compared with 1998 net sales of $855.9 million
and $1.65 billion, respectively, with the Telecommunications and Information
Display Segments each reflecting increases.
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. The charge for restructuring in 1998 is excluded from
segment net income in the following discussion.
<PAGE>
Telecommunications
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $ 1,071.3 $ 828.6 $ 582.8 $ 441.4
Research, development and
engineering expenses $ 108.2 $ 89.8 $ 55.9 $ 48.0
Income from continuing operations
before minority interest and
equity earnings $ 114.8 $ 87.7 $ 66.4 $ 52.8
Minority interest in earnings
of subsidiaries (12.9) (17.9) (8.7) (11.0)
Equity in earnings of associated
companies 7.4 12.9 2.9 8.4
--------- ------- ------- -------
Segment net income $ 109.3 $ 82.7 $ 60.6 $ 50.2
========= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
Sales in the Telecommunications Segment increased approximately 30% in both the
second quarter and first half of 1999, primarily due to volume gains in the
optical fiber, cable and photonic technologies businesses. Demand remains
strong for Corning's new LEAF brand high data rate fiber, continuing the trend
begun in the latter part of 1998. Fiber sales were also favorably impacted by
the acquisition of the optical cable business from BICC, plc in the second
quarter of 1999 and the fourth quarter 1998 purchase of Optical Fibres, which
Corning began consolidating at year-end 1998. Incremental sales from these
acquisitions totaled approximately $36 million in the second quarter and $58
million in the first half of 1999. Excluding the impact of these acquisitions,
sales in the Telecommunications Segment increased approximately 23% in both the
second quarter and first half of 1999 over the same periods in 1998.
Segment net income also increased significantly in the second quarter and first
half of 1999 in comparison to the same periods in 1998, as the increase in
volume, changes in mix of fiber products and improved operating performance in
the photonics business more than offset a decrease in equity earnings and
continued research and development spending. Equity earnings were impacted by
the elimination of equity earnings from Optical Fibres, whose results are now
consolidated, and price declines at Corning's optical fiber equity companies.
The impact of the acquisitions on segment net income was not material.
<PAGE>
Advanced Materials
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
--------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $516.8 $520.0 $264.7 $261.3
Research, development and
engineering expenses $ 45.1 $ 40.5 $ 23.2 $ 20.8
Income from continuing operations
before minority interest and
equity earnings $ 48.1 $ 38.7 $ 28.0 $ 19.8
Minority interest in earnings
of subsidiaries 0.3 0.1
Equity in earnings of associated
companies 7.6 7.5 3.5 4.3
------ ------ ------ ------
Segment net income $ 55.7 $ 46.5 $ 31.5 $ 24.2
====== ====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
Sales in the Advanced Materials Segment were flat in both the second quarter and
first half of 1999, as volume gains in the environmental products business were
offset by a decline in volume in the semiconductor materials and optical
products businesses. The strong gains in the environmental products business
were primarily driven by sales of Corning's new high-efficiency emission control
product and increased penetration into the North American auto market. A
slowdown in the semiconductor manufacturing equipment industry continued during
the second quarter of 1999, which impacted demand for Corning's high purity
fused silica products. In addition, the worldwide demand for glass optical
products continues to be impacted by consumers' increased preference for plastic
lenses.
Segment net income increased significantly in both the second quarter and first
half of 1999, reflecting the strong volume gains and manufacturing efficiencies
in the environmental products business, which more than offset declines in the
semiconductor materials, science products and optical products businesses.
Information Display
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION> Six months ended Three months ended
June 30, June 30,
--------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $311.7 $289.5 $166.0 $146.2
Research, development and
engineering expenses $ 11.1 $ 11.9 $ 5.7 $ 6.3
Income from continuing operations
before minority interest and
equity earnings $ 27.1 $ (2.2) $ 17.8 $ 7.2
Minority interest in earnings
of subsidiaries (14.6) (4.4) (8.8) (5.6)
Equity in earnings of
associated companies 34.6 33.9 22.2 17.5
------ ------ ------ ------
Segment net income $ 47.1 $ 27.3 $ 31.2 $ 19.1
====== ====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
Sales in the Information Display Segment increased in both the second quarter
and first half of 1999, primarily driven by volume gains from flat panel liquid
crystal display products in the advanced display products business. First half
gains by this business were partially offset by weak volume and price reductions
in the conventional video components businesses, which occurred mostly in the
first quarter. Second quarter results for this business were flat in comparison
to 1998. Sales in the projection video components business remained flat during
the second quarter and first half of 1999, as strong volume gains in the
consumer market sector were offset by the cost impact of Corning's decision to
exit the institutional market.
<PAGE>
Segment net income increased significantly in both the second quarter and first
half of 1999, primarily due to volume gains and manufacturing efficiencies in
the advanced display products business and strong equity earnings from Samsung
Corning Precision. Gains recognized in the conventional video components
business for the first half of 1999 were also the result of favorable
comparisons to 1998 earnings, which were impacted by the costs associated with a
glass furnace repair.
Taxes on Income
Corning's effective tax rate for continuing operations, excluding the impact of
special items, was 30.5% for the second quarter and year-to-date 1999, and 32.5%
for the same periods in 1998. The lower 1999 rate is 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
$449.1 million at June 30, 1999. The ratio of current assets to current
liabilities was 1.4 at the end of the second quarter 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 higher accounts receivable and inventory
balances. Corning's long-term debt as a percentage of total capital increased
from 31% at year-end 1998 to 35% at June 30, 1999, primarily due to the issuance
of $300 million in long-term debt securities in the first quarter of 1999.
Corning's management believes the Company has sufficient financial flexibility
and ready access to funds to meet seasonal working capital requirements, capital
expenditures, acquisitions and other long-term growth opportunities. Corning
filed a shelf registration statement with the Securities and Exchange Commission
in the second quarter of 1999. The shelf registration, when effective, will
allow Corning to offer and sell various types of securities.
Cash and short-term investments increased from year-end 1998 by $30.7 million.
Operating and financing activities for the six months ended June 30, 1999
provided cash of $132.4 million and $351.3 million, respectively, the total of
which exceeded cash used by investing activities of $444.3 million. Net cash
provided by operating activities decreased for the first half of 1999 compared
to the same period in 1998 as increases in net income from continuing operations
were more than offset by an increase in cash used for working capital. Net cash
used in investing activities for the first half of 1999 totaled $444.3 million,
versus cash provided of $246.9 million for the same period in 1998. This 1998
activity reflects receipt of proceeds from the divestiture of the consumer
housewares business. Although capital expenditures in the first half of 1999
are less than those for the same period in 1998, Corning expects capital
spending in 1999 to total approximately $750 million. Net cash provided by
financing activities totaled $351.3 million for the first half of 1999, due
primarily to the issuance of long-term debt securities in the first quarter.
This compares to a use of cash of $298.7 million during the same period in 1998,
which reflected repayments of long-term debt with a portion of the proceeds from
the divestiture of the consumer housewares business.
Year 2000 Readiness Disclosure
Corning has completed an assessment and developed an implementation plan to
mitigate risks associated with the Year 2000. The assessment and subsequent
implementation plans have included both internal systems and external
dependencies. Each business unit has developed and implemented its own plan of
action and the Company has managed and monitored Corning's Year 2000 readiness
on an enterprise wide basis. In addition, an external study team is assisting
management in evaluating systems remediation and contingency planning
surrounding the Year 2000 project. Progress has been monitored and reported to
management and to the Audit Committee of the Board of Directors on a regular
basis.
<PAGE>
Corning is using a four-phase process to address our internal systems:
. Phase 1: Problem Definition
Includes inventorying of software, hardware, and interfaces
. Phase 2: Assessment
Includes identification of what will fail, the impact on operations and a
determination of a resolution strategy
. Phase 3: Planning and Preparation
Includes developing specific plans for implementing the required
modifications or replacements
. Phase 4: Implementation
Includes testing and implementing the planned solutions
The Problem Definition and Assessment Phases were completed at December 31,
1998, and involved all known areas of concern including business, manufacturing,
process controls, engineering, research, and facilities systems, third party
suppliers and service providers. The Planning and Preparation Phase has been
completed for all key systems. The Implementation Phase was substantially
completed for key systems at December 31, 1998, with the remainder to be
completed by the third quarter of 1999. Changes may occur to Corning's
operations during the implementation of its Year 2000 program, which may require
periodic revision to these plans. Corning will continue to review systems for
Year 2000 compliance as changes occur.
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 $28 million, of which
approximately $21 million has been spent to date. This estimate includes
incremental costs of approximately $14 million comprised primarily of contractor
costs to modify existing systems, of which approximately 75% has been spent to
date.
In addition to evaluating the readiness of internal systems, Corning's Year 2000
program includes a review of its key business processes, internal systems and
external dependencies to determine the need for contingency plans. This
includes a review of Year 2000 preparedness in geographic regions where Corning
operates or has other key dependencies. Where there is sufficient risk,
contingency plans are developed accordingly.
Although Corning has little control over the Year 2000 readiness of our
customers, suppliers, and other third party providers, the Company is taking
appropriate action to determine their level of Year 2000 readiness and the
potential impact on Corning. Corning has communicated with its significant
customers, suppliers and other third parties to determine the extent to which it
is vulnerable to third parties' failures to remediate its own potential problems
related to the Year 2000. These communications included written
correspondences, telephone interviews, face-to-face discussions, and independent
tests. Each business unit has developed contingency plans to deal with the
potential impact of third party failures. Risk assessments and Year 2000
readiness evaluations that relate to third parties are substantially complete.
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. The risk assessment performed by each business evaluates
the systems used by Corning's foreign entities and the potential impact of Year
2000 failure at those entities' customers and suppliers. A breakdown in the
infrastructure of a particular region could adversely impact the operating
results of the Company.
Contingency plans to protect Corning's business from Year 2000 related
interruptions are substantially complete. These plans include, for example,
enhancing existing contingency procedures to encompass Year 2000 specific risks,
stocking of additional inventory, identifying alternative suppliers, and
developing manual contingency procedures for key automated process.
Implementation of the contingency plans will continue throughout the year.
<PAGE>
Corning is taking what it considers to be reasonable steps to prevent major
interruptions in its business due to Year 2000 issues. Corning's Year 2000
program can only minimize, but not eliminate, the risk of a Year 2000 impact on
Corning. The inability of Corning or significant third parties to adequately
address Year 2000 issues could cause inefficiencies in Corning's business
operations, the extent of which is not readily determinable. Possible
consequences of failure include, but are not limited to, disruptions in
manufacturing, inability to make payments and delays in shipments. Although
Corning believes that its Year 2000 readiness efforts will minimize the
likelihood of these items occurring, Corning has put in place a special crisis
management program to monitor, manage and appropriately communicate any
disruptions during the period before and subsequent to December 31, 1999.
"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 may 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 10 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 $24.5 million for its estimated
liability for environmental cleanup and litigation at June 30, 1999. Based upon
the information developed to date, management believes that the accrued reserve
is a reasonable estimate of the Company's estimated liability and that the risk
of an additional loss in an amount materially higher than that accrued is
remote.
The largest single component of the estimated liability for environmental
litigation relates to property damage and personal injury cases pending in state
court in Phoenix, Arizona. In the first part of 1999, the court granted summary
judgment in favor of the Corning defendants in the personal injury cases. An
appeal of that ruling to the intermediate state court is possible. As of June
30, 1999, settlement discussions were underway to effect a settlement of all
claims against Corning and one of its subsidiaries. Management expects that a
settlement will be concluded in the second half of 1999, and believes that the
risk of a loss exceeding the estimated liability for these matters is remote.
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 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 had until May 14,
1999 to return their votes on the Joint Plan. There was strong support for the
Joint Plan, with more than 94% of those voting in favor. Dissenting classes
include the U.S. Government, the Commercial Creditors and certain miscellaneous
product claimants. Various parties filed objections. A hearing to confirm the
Joint Plan began on June 28, 1999 and ended on July 30, 1999. On July 13th the
Bankruptcy Court ruled in Dow Corning's favor on the interest rate issue raised
by the Commercial Creditors Committee, and determined that interest accruing on
Dow Corning's commercial debt after the petition date should be calculated at
the federal judgment rate of interest. The Commercial Creditors have announced
their intention to appeal this ruling. At the conclusion of the confirmation
hearings, the Bankruptcy Court ordered various post-hearing briefs be submitted
by August 20th and August 30th. Although the Tort Claimants Committee has
supported the Joint Plan, the timing and eventual outcome of these proceedings
remain uncertain.
<PAGE>
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. A recent report by the Institute of Medicine and other studies have
reached similar conclusions.
Implant Tort Lawsuits: In the period from 1991 through June 1999, 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 June
1999, 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 60
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. Based upon the information developed
to date and recognizing that the outcome of complex litigation is uncertain,
management believes that the risk of a materially adverse result in the implant
litigation against Corning is remote.
<PAGE>
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.
The class consists of those purchasers of Corning stock in the period from June
14, 1989 to January 13, 1992 who allegedly purchased at inflated prices due to
the non-disclosure or concealment of material information and were damaged when
the stock price declined in January 1992 after the Food and Drug Administration
(FDA) requested a moratorium on Dow Corning's sale of silicone gel implants. No
amount of damages is specified in the complaint. 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 concluded the
complaint contained sufficient pleading against Corning concerning the alleged
withholding of material information about Dow Corning's potential liabilities.
In December 1998, Corning filed a motion for summary judgment requesting that
all claims against it be dismissed. Plaintiffs claimed the need to take
depositions before responding to the motion for summary judgment. The Court has
permitted limited additional discovery of certain Dow Corning, Corning and Dow
Chemical officers and directors before Corning's motion is entertained. At a
July 1, 1999 hearing, the Court said it would review certain documents before
ruling on plaintiffs' motion to compel their disclosure. The discovery process
is continuing and the Court has set no schedule to address the pending summary
judgment motion. Corning intends to continue to defend this action vigorously.
Based upon the information developed to date and recognizing that the outcome of
litigation is uncertain, management believes that the possibility of a
materially adverse verdict is remote.
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 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 4. SUBMISSION OF MATTERS TO A VOTE
(a) The annual meeting of shareholders of the registrant was held on
April 29, 1999.
(b) The following nominees for the office of director, provided in
the registrant's proxy statement dated March 10, 1999, which appears
as Exhibit #23 to this report, were elected by the following number
of shareholder votes for and withheld:
For Withheld
John Seely Brown 222,230,763 1,518,458
Gordon Gund 222,319,472 1,569,749
John M. Hennessy 222,346,208 1,543,013
John W. Loose 222,208,263 1,680,958
H. Onno Ruding 222,355,326 1,533,895
The following persons continue as Directors:
Roger G. Ackerman
Robert Barker
John H. Foster
Norman E. Garrity
James R. Houghton
James W. Kinnear
James J. O'Connor
Catherine A. Rein
William D. Smithburg
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index which is located on page 23.
(b) Reports on Form 8-K
A report on Form 8-K dated April 14, 1999, 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 11, 1999 /s/ ROGER G. ACKERMAN
--------------- ------------------------------------------------------------
Date Roger G. Ackerman
Chairman and Chief Executive Officer
August 11, 1999 /s/ JAMES B. FLAWS
--------------- ------------------------------------------------------------
Date James B. Flaws
Senior Vice President, Treasurer and Chief Financial Officer
August 11, 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 24
18 Letter from independent auditors
regarding change in inventory method 25
23 Registrant's proxy statement dated
March 10, 1999, filed with the
Securities and Exchange Commission
as a definitive proxy statement on
February 24, 1999, is incorporated
herein by reference
27 Financial Data Schedule
<TABLE>
<CAPTION>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
(Dollars in millions, except ratios)
Three Months Ended Fiscal Year Ended
----------------- ------------------------------------------
June 30, June 30, 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 $266.7 $118.7 $439.6 $629.2 $455.9 $389.4 $286.3
Adjustments:
Share of earnings before taxes
of 50% owned companies 72.5 82.6 173.3 111.5 130.3 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 (0.3) (1.1) 2.1
Amortization of capitalized interest 7.4 7.1 14.4 16.6 11.8 9.6 13.3
Fixed charges net of capitalized
interest 65.9 53.8 126.8 141.9 105.9 82.6 128.8
------ ------ ------ ------ ------ ------ ------
Earnings before taxes and fixed
charges as adjusted $412.5 $261.9 $753.0 $899.2 $704.6 $573.7 $515.5
====== ====== ====== ====== ====== ====== ======
Fixed charges:
Interest incurred $ 60.1 $52.4 $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 18.7 8.4 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 9.6 9.6 18.0 15.9 12.1 13.3 10.8
Share of portion of rent expense
which represents interest factor
for 50% owned companies 2.6 2.9 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 1.5 1.5 2.9 1.6 2.2 (0.1) 0.6
------ ------ ------ ------ ------ ------ ------
Total fixed charges 92.5 74.8 174.8 169.0 128.0 92.2 147.4
Capitalized interest (26.6) (21.0) (48.0) (27.1) (22.1) (9.6) (18.6)
------ ------ ------ ------ ------ ------ ------
Total fixed charges net of
capitalized interest $ 65.9 $ 53.8 $126.8 $141.9 $105.9 $ 82.6 $128.8
====== ====== ====== ====== ====== ====== ======
Preferred dividends:
Preferred dividend requirements $ 2.9 $ 7.7 $ 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 1.4 1.4 1.5 1.5 1.4 1.4
------ ------ ------ ------ ------ ------ ------
Pre-tax preferred dividend
requirement 4.1 10.8 21.4 23.0 23.6 22.0 11.5
Total fixed charges 92.5 74.8 174.8 169.0 128.0 92.2 147.4
------ ------ ------ ------ ------ ------ ------
Fixed charges and pre-tax preferred
dividend requirement $ 96.6 $ 85.6 $196.2 $192.0 $151.6 $114.2 $158.9
====== ====== ====== ====== ====== ====== ======
Ratio of earnings to combined fixed
charges and preferred dividends 4.3x 3.1x 3.8x 4.7x 4.7x 5.0x 3.2x
====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 51,800
<SECURITIES> 24,300
<RECEIVABLES> 742,400
<ALLOWANCES> 11,400
<INVENTORY> 553,200
<CURRENT-ASSETS> 1,612,800
<PP&E> 2,826,500
<DEPRECIATION> 2,173,200
<TOTAL-ASSETS> 5,490,500
<CURRENT-LIABILITIES> 1,163,700
<BONDS> 1,286,600
0
15,100
<COMMON> 992,000
<OTHER-SE> 983,900
<TOTAL-LIABILITY-AND-EQUITY> 5,490,500
<SALES> 1,912,200
<TOTAL-REVENUES> 1,933,300
<CGS> 1,164,900
<TOTAL-COSTS> 1,164,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,300
<INTEREST-EXPENSE> 33,500
<INCOME-PRETAX> 266,700
<INCOME-TAX> 81,300
<INCOME-CONTINUING> 208,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 208,300
<EPS-BASIC> 0.87
<EPS-DILUTED> 0.85
</TABLE>
Exhibit #18
Board of Directors
Corning Incorporated
One Riverfront Plaza
Corning, NY 14831
August 11, 1999
Dear Directors:
We are providing this letter to you for inclusion as an
exhibit to your Form 10-Q filing pursuant to Item 601 of
Regulation S-K.
We have been provided a copy of the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1999.
Note 6 therein describes a change in accounting principle
from the last-in, first-out (LIFO) method of valuing
inventories to the first-in, first-out (FIFO) method. It
should be understood that the preferability of one
acceptable method of inventory accounting over another
has not been addressed in any authoritative accounting
literature, and in expressing our concurrence below we
have relied on management's determination that this
change in accounting principle is preferable. Based on
our reading of management's stated reasons and
justification for this change in accounting principle in
the Form 10-Q, and our discussions with management as to
their judgment about the relevant business planning
factors relating to the change, we concur with management
that such change represents, in the Company's
circumstances, the adoption of a preferable accounting
principle in conformity with Accounting Principles Board
Opinion No. 20.
We have not audited any financial statements of the
Company as of any date or for any period subsequent to
December 31, 1998. Accordingly, our comments are subject
to change upon completion of an audit of the financial
statements covering the period of the accounting change.
Very truly yours,
PricewaterhouseCoopers LLP
