FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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:
244,784,698 shares of Corning's Common Stock, $0.50 Par Value, were outstanding
as of September 30, 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 nine months and
three months ended September 30, 1999 and 1998 3
Consolidated Balance Sheets at September 30, 1999 and
December 31, 1998 4
Consolidated Statements of Cash Flows for the nine months
ended September 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>
Nine Months Ended Three Months Ended
Sept. 30, Sept. 30,
------------------- -------------------
1999 1998 1999 1998
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Net sales $3,048.8 $2,557.2 $1,136.6 $ 906.5
Royalty, interest,
and dividend income 29.6 32.9 8.5 11.8
Non-operating gain 30.0 20.5 30.0
-------- -------- -------- --------
3,108.4 2,610.6 1,175.1 918.3
Deductions
Cost of sales 1,861.6 1,583.4 696.7 546.2
Selling, general and
administrative expenses 428.4 352.1 155.5 112.6
Research, development and
engineering expenses 260.9 213.8 96.5 71.6
Provision for impairment
and restructuring 15.5 84.6 15.5
Amortization of purchased
intangibles 15.9 11.8 5.6 3.9
Interest expense 56.1 43.8 22.6 11.3
Other, net 32.5 40.4 11.9 10.7
-------- -------- -------- --------
Income from continuing
operations before taxes
on income 437.5 280.7 170.8 162.0
Taxes on income from
continuing operations 132.4 84.1 51.1 49.2
-------- -------- -------- --------
Income from continuing
operations before minority
interest and equity earnings 305.1 196.6 119.7 112.8
Minority interest in earnings
of subsidiaries (46.1) (38.6) (18.6) (20.3)
Dividends on convertible
preferred securities of
subsidiary (2.3) (10.3) (3.4)
Equity in earnings of
associated companies 84.9 75.5 32.2 15.3
-------- -------- -------- --------
Income from continuing
operations 341.6 223.2 133.3 104.4
Income from discontinued
operations, net of taxes 66.5
-------- -------- -------- --------
Net Income $ 341.6 $ 289.7 $ 133.3 $ 104.4
======== ======== ======== ========
Basic Earnings Per Share
Continuing operations $ 1.42 $ 0.97 $ 0.55 $ 0.45
Discontinued operations 0.29
-------- -------- -------- --------
Net Income $ 1.42 $ 1.26 $ 0.55 $ 0.45
======== ======== ======== ========
Diluted Earnings Per Share
Continuing operations $ 1.39 $ 0.95 $ 0.54 $ 0.44
Discontinued operations 0.28
-------- -------- -------- --------
Net Income $ 1.39 $ 1.23 $ 0.54 $ 0.44
======== ======== ======== ========
Dividends Declared $ 0.54 $ 0.54 $ 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>
September 30, December 31,
ASSETS 1999 1998
------------- -----------
<S> <C> <C>
Current Assets
Cash $ 70.0 $ 12.2
Short-term investments, at cost, which
approximates market value 31.5 33.2
Accounts receivable, net of doubtful
accounts and allowances - $16.7/1999;
$15.2/year-end 1998 768.4 636.0
Inventories 550.6 458.7
Deferred taxes on income and other
current assets 211.5 170.2
-------- --------
Total current assets 1,632.0 1,310.3
-------- --------
Investments
Associated companies, at equity 393.0 313.1
Others 58.8 53.1
-------- --------
451.8 366.2
-------- --------
Plant and equipment, at cost, net of
accumulated depreciation 2,909.9 2,684.9
Goodwill and other intangible assets,
net of accumulated amortization
$80.9/1999; $66.7/year-end 1998 344.5 309.7
Other assets 335.6 310.8
-------- --------
Total Assets $5,673.8 $4,981.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Loans payable $ 297.8 $ 204.6
Accounts payable 283.8 291.7
Other accrued liabilities 637.1 578.4
-------- --------
Total current liabilities 1,218.7 1,074.7
-------- --------
Other liabilities 690.1 674.1
Loans payable beyond one year 1,287.6 998.3
Minority interest in subsidiary companies 361.4 346.1
Convertible preferred securities of subsidiary 365.2
Convertible preferred stock 15.2 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: 269.7 million/1999 and
265.9 million/year-end 1998 1,032.5 766.0
Retained earnings 1,730.8 1,521.6
Less cost of 25.0 million/1999 and 34.4
million/year-end 1998 shares of common
stock in treasury (642.9) (789.9)
Accumulated other comprehensive income (loss) (19.6) 7.9
-------- --------
Total common shareholders' equity 2,100.8 1,505.6
-------- --------
$5,673.8 $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>
Nine Months Ended Sept. 30,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $341.6 $289.7
Adjustments to reconcile net income to
net cash provided by operating
activities from continuing operations:
Income from discontinued operations (66.5)
Depreciation and amortization 281.0 233.0
Employee benefit expense in excess of
(less than) cash funding (21.2) 18.1
Equity in earnings of associated companies
in excess of dividends received (61.8) (57.6)
Minority interest in earnings of
subsidiaries in excess of dividends paid 32.1 25.9
Non-operating gain (30.0) (20.5)
Provision for impairment and restructuring,
net of cash spent 15.5 79.2
Deferred tax (benefit)/expense 25.2 (20.7)
Other 48.2 55.7
Changes in operating assets and liabilities:
Accounts receivable (83.5) (44.3)
Inventory (104.9) (19.1)
Other current assets 0.7 5.2
Accounts payable and other current
liabilities 33.1 (73.7)
------ ------
NET CASH PROVIDED BY OPERATING
ACTIVITIES OF CONTINUING OPERATIONS 476.0 404.4
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant and equipment (480.0) (522.9)
Acquisitions of businesses, net (170.5) (5.7)
Net proceeds from disposition of properties
and investments 53.2 100.5
Proceeds from divestiture of consumer
housewares business 593.1
Increase in long-term investments and
other noncurrent assets (37.4) (101.3)
Other, net (32.4) 13.4
------ ------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES OF CONTINUING OPERATIONS (667.1) 77.1
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of loans 585.9 199.7
Repayments of loans (209.8) (43.3)
Repayments of loans with proceeds from
divestiture of consumer housewares business (343.0)
Proceeds from issuance of common stock 72.5 16.1
Repurchases of common stock (56.6) (50.7)
Dividends paid (132.4) (126.3)
------ ------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES OF CONTINUING OPERATIONS 259.6 (347.5)
------ ------
Effect of exchange rates on cash (2.1) 4.3
------ ------
Cash used in discontinued operations (10.3) (142.3)
------ ------
Net change in cash and cash equivalents 56.1 (4.0)
Cash and cash equivalents at beginning of year 45.4 97.0
------ ------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $101.5 $ 93.0
====== ======
SUPPLEMENTAL DATA:
Income taxes paid, net $129.4 $117.5
====== ======
Interest paid $ 62.0 $ 77.1
====== ======
</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 third quarter and third quarter year-to-date of 1999 and 1998 is
presented below. These amounts do not include revenues, expenses and
equity earnings not specifically identifiable to segments.
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
----------------- ------------------
1999 1998 1999 1998
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Telecommunications
Net sales $1,766.0 $1,312.4 $ 694.7 $483.8
Research, development and
engineering expenses 175.8 136.5 67.6 46.7
Income from continuing
operations before minority
interest and equity earnings $ 190.3 $ 166.6 $ 75.5 $ 78.9
Minority interest in earnings
of subsidiaries (20.4) (30.4) (7.5) (12.5)
Equity in earnings of
associated companies 12.3 14.4 4.9 1.5
-------- -------- -------- ------
Segment net income (1) $ 182.2 $ 150.6 $ 72.9 $ 67.9
======== ======== ======== ======
Advanced Materials
Net sales $ 774.5 $ 767.7 $ 257.7 $247.7
Research, development and
engineering expenses 68.8 60.3 23.7 19.8
Income from continuing
operations before minority
interest and equity earnings $ 71.6 $ 55.7 $ 23.5 $ 17.0
Minority interest in earnings
of subsidiaries 0.3
Equity in earnings of
associated companies 13.7 11.2 6.1 3.7
-------- -------- -------- ------
Segment net income (2) $ 85.3 $ 67.2 $ 29.6 $ 20.7
======== ======== ======== ======
Information Display
Net sales $ 490.4 $ 459.3 $ 178.7 $169.8
Research, development and
engineering expenses 16.4 16.9 5.3 5.0
Income from continuing
operations before minority
interest and equity earnings $ 40.1 $ 15.3 $ 13.0 $ 17.5
Minority interest in earnings
of subsidiaries (16.2) (12.2) (1.6) (7.8)
Equity in earnings of
associated companies 52.9 40.5 18.3 6.6
-------- -------- -------- ------
Segment net income $ 76.8 $ 43.6 $ 29.7 $ 16.3
======== ======== ======== ======
Total segments
Net sales $3,030.9 $2,539.4 $1,131.1 $901.3
Research, development and
engineering expenses 261.0 213.7 96.6 71.5
Income from continuing
operations before minority
interest and equity earnings $ 302.0 $ 237.6 $ 112.0 $113.4
Minority interest in earnings
of subsidiaries (36.6) (42.3) (9.1) (20.3)
Equity in earnings of
associated companies 78.9 66.1 29.3 11.8
-------- -------- -------- ------
Segment net income (1) (2) $ 344.3 $ 261.4 $ 132.2 $104.9
======== ======== ======== ======
(1) Does not include a non-operating gain described in Footnote 2.
(2) Does not include an impairment charge described in Footnote 3.
</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>
Nine months ended Three months ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues
Total segment net sales $3,030.9 $2,539.4 $1,131.1 $901.3
Non-segment net sales (a) 17.9 17.8 5.5 5.2
Royalty, interest and
dividend income 29.6 32.9 8.5 11.8
Non-operating gain 30.0 20.5 30.0
-------- -------- -------- ------
Total revenues $3,108.4 $2,610.6 $1,175.1 $918.3
======== ======== ======== ======
Net income
Total segment income (b) $ 344.3 $ 261.4 $ 132.2 $104.9
Unallocated items:
Non-segment loss and
other (a) (7.7) (1.5) (1.3) (0.8)
Non-operating gain 30.0 20.5 30.0
Provision for impairment
and restructuring (c) (15.5) (84.6) (15.5)
Interest expense (0.4) (0.4)
Income tax (d) (3.3) 28.7 (5.5) 0.2
Equity in earnings of
associated companies (a) 6.0 9.4 2.9 3.5
Minority interest in
non-operating gain (9.5) (9.5)
Dividends on convertible
preferred securities
of subsidiary (2.3) (10.3) (3.4)
-------- -------- -------- ------
Net income from
continuing operations $ 341.6 $ 223.2 $ 133.3 $104.4
======== ======== ======== ======
(a) Includes amounts derived from corporate investments.
(b) Includes royalty, interest and dividend income.
(c) The 1999 impairment charge related to the Advanced Materials Segment.
The portion of the 1998 restructuring 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 impairment and restructuring charges
and non-operating gains.
</TABLE>
(2) During the third quarter of 1999, Corning sold Republic Wire and Cable, a
manufacturer of elevator cables and a subsidiary of Siecor Corporation, for
approximately $52 million in cash and short-term notes. Corning recorded a
non-operating gain of $30 million ($9.5 million after tax and minority
interest) or $0.04 per share as a result of this transaction.
(3) In the third quarter of 1999, Corning recognized an impairment loss of
$15.5 million pretax ($10.0 million after tax), or $0.04 per share, in
connection with management's decision to sell or dispose of certain assets
within the Advanced Materials segment. The impairment loss reduces
Corning's investment in these assets to an amount equal to management's
current estimate of fair value. This charge primarily resulted in a
decrease to plant and equipment of $11 million. The results of operations
of this business are not material to Corning. Sale or disposal of the
assets is expected within the next six months.
<PAGE>
(4) During the third quarter of 1999, Corning acquired the 21% interest in
Corning Japan KK it did not own for cash consideration of approximately $32
million. The excess purchase price over the fair value of the net assets
acquired, accounted for as goodwill, was approximately $18 million and is
being amortized over 20 years. Corning Japan KK produces flat panel
display glass within the Information Display Segment, and will continue to
be consolidated within Corning's operating results.
(5) 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. The acquisition was recorded using the
purchase method of accounting. The excess purchase price over the fair
value of the net tangible assets acquired, accounted for as goodwill and
other intangible assets, was approximately $30 million and is being
amortized over periods ranging from 5 to 25 years. During the third
quarter, adjustments to purchase accounting increased goodwill and
primarily reduced property, plant and equipment. 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 material.
(6) A reconciliation of the basic and diluted earnings per share from
continuing operations computations for the third quarter year-to-date
and third quarters of 1999 and 1998 are as follows (in millions, except
per share amounts):
<TABLE>
<CAPTION>
For the nine months ended September 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 $341.6 $223.2
Less: Preferred stock
dividends (0.9) (1.2)
------ ------
Basic earnings per
share 340.7 239.7 $1.42 222.0 229.7 $0.97
===== =====
Effect of Dilutive
Securities
Options 4.2 2.7
Convertible monthly
income preferred
securities 2.3 2.6 10.3 11.5
Convertible preferred
stock 0.9 0.7
------ ----- ------ -----
Diluted earnings per
share $343.9 247.2 $1.39 $232.3 243.9 $0.95
====== ===== ===== ====== ===== =====
For the three months ended September 30,
---------------------------------------------
1999 1998
--------------------- ---------------------
Weighted Per Weighted Per
Average share Average share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Net income from
continuing operations $133.3 $104.4
Less: Preferred stock
dividends (0.3) (0.4)
------ -----
Basic earnings per
share 133.0 243.0 $0.55 104.0 229.5 $0.45
===== =====
Effect of Dilutive
Securities
Options 4.6 1.2
Convertible monthly
income preferred
securities 3.4 11.5
Convertible preferred
stock 0.3 0.7
------ ----- ------ ----
Diluted earnings per
share $133.3 248.3 $0.54 $107.4 242.2 $0.44
====== ===== ===== ====== ===== =====
</TABLE>
<PAGE>
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 8). The dilutive impact of the MIPS prior
to conversion is reflected in Corning's 1999 and 1998 earnings per share
calculations.
The convertible preferred stock paid dividends of $0.4 million and $1.2
million during the third quarter and third quarter year-to-date 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 $44.1 million and $131.6 million were declared in
the third quarter and third quarter year-to-date of 1999, respectively,
compared with $41.9 million and $125.2 million for the same periods in
1998.
(7) 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.
(8) 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.
(9) 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>
September 30, December 31,
1999 1998
--------- --------
<S> <C> <C>
Finished goods $207.8 $205.6
Work in process 128.2 104.9
Raw materials and accessories 134.5 96.7
Supplies and packing materials 80.1 70.6
------ ------
Total inventories valued at current cost 550.6 477.8
Reduction to LIFO valuation (19.1)
------ ------
$550.6 $458.7
====== ======
</TABLE>
<PAGE>
(10) Plant and equipment shown on the accompanying balance sheets were
comprised of the following (in millions):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Land $ 63.0 $ 57.3
Buildings 1,042.9 944.1
Equipment 4,001.9 3,677.4
Accumulated depreciation (2,197.9) (1,993.9)
-------- --------
$2,909.9 $2,684.9
======== ========
</TABLE>
(11) 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 third quarter of 1999,
Corning paid approximately $8.6 million of the $51.0 million of
restructuring and severance related costs paid to date. As of September
30, 1999, Corning's restructuring reserve totaled $33.6 million, most of
which related to lump sum payments to be made during the last three
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.
(12) Comprehensive income for the quarters ended September 30, 1999 and 1998
was $147.3 million and $86.7 million, and includes net income of $133.3
million and $104.4 million and foreign currency translation adjustments of
$14.8 million and $(10.1) million in 1999 and 1998, respectively. In
addition, Corning recorded unrealized losses on marketable securities of
$(0.8) million and $(7.6) million in the quarters ended September 30, 1999
and 1998, respectively.
Comprehensive income for the year to date periods ended September 30, 1999
and 1998 was $314.1 million and $300.2 million, and includes net income of
$341.6 million and $289.7 million and foreign currency translation
adjustments of $(30.3) million and $11.0 million in 1999 and 1998,
respectively. In addition, Corning recorded unrealized gains (losses) on
marketable securities of $2.8 million and $(0.5) million in the nine-month
periods ended September 30, 1999 and 1998, respectively.
(13) Dow Corning and the Committee of Tort Claimants, one of Dow Corning's
Chapter 11 creditor committees, filed with the United States Bankruptcy
Court a joint plan of reorganization on November 9, 1998 (the Joint Plan).
In the first half of 1999, the Joint Plan received a favorable vote from
nearly all of the creditor classes, although four creditor classes did not
support the Plan and certain groups of creditors within assenting classes
have opposed the Plan. Beginning on June 28, 1999, the Bankruptcy Court
conducted ten days of hearings on the application by Dow Corning and the
Committee of Tort Claimants to confirm the Joint Plan. The hearings
concluded with oral arguments on July 30, 1999. The post-hearing briefing
was completed by mid-September 1999. The parties are awaiting the decision
of the Bankruptcy Court. The determinations to be made by the Bankruptcy
Court are likely to be subject to further review in the District Court for
the Eastern District of Michigan and further appeals are possible. The
recent developments tend to increase the probability that Dow Corning will
successfully emerge from Chapter 11 proceedings, but the timing and
eventual outcome of these proceedings remain uncertain.
<PAGE>
(14) 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
Corning's net income from continuing operations increased 28% in the third
quarter of 1999 and 53% in the first nine months of 1999 compared with the same
periods in 1998. Diluted earnings per share from continuing operations
increased 23% in the third quarter of 1999 and 46% in the first nine months of
1999 compared with the same periods in 1998.
Significant non-recurring items impacted our 1998 and 1999 results as follows:
. an impairment charge of $15.5 million ($10.0 million after tax), or $0.04
per share, in the third quarter of 1999
. a non-operating gain of $30.0 million ($9.5 million after tax and minority
interest), or $0.04 per share, in the third quarter of 1999
. a restructuring charge of $84.6 million ($49.2 million after tax), or $0.21
per share, in the second quarter of 1998
. a non-operating gain of $20.5 million ($13.2 million after tax), or $0.06
per share, in the second quarter of 1998
Corning believes comparing its operating results excluding non-recurring items,
a measure that is not GAAP and may not be consistent with measures used at other
companies, provides a better understanding of the changes in its operating
results. Excluding these non-recurring items, net income from continuing
operations was up 28% in the third quarter of 1999 and 32% in the first nine
months of 1999 compared with the same periods in the prior year. Diluted
earnings per share from continuing operations, excluding these non-recurring
items, increased 23% in the third quarter of 1999 and 26% for the first nine
months of 1999, over the same periods in 1998. These results reflect the impact
of stronger demand for premium fiber, environmental products and liquid crystal
display glass.
Net sales totaled $1.1 billion for the third quarter of 1999, an increase of 25%
over sales of $906.5 million for the same period in 1998. Net sales for the
first nine months of 1999 increased 19% to $3.0 billion. Excluding the impact
of acquisitions, Corning's sales increased 17% in the third quarter of 1999 and
14% in the first nine months of 1999. Each of Corning's operating segments
contributed to the increase in sales.
Segment Overview
Corning groups its products into three operating segments: Telecommunications,
Advanced Materials and Information Display. Corning also includes the earnings
of equity affiliates that are closely associated with Corning's operating
segments in segment net income.
Corning prepared the financial results for its three operating segments on a
basis that is consistent with the manner in which Corning management internally
disaggregates financial information to assist in making internal operating
decisions. Corning has allocated some common expenses among segments
differently than it would for stand alone financial information prepared in
accordance with GAAP. The non-recurring items noted above are excluded from
segment net income.
<PAGE>
Telecommunications
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
------------------ ---------------
1999 1998 1999 1998
-------- -------- ------ ------
<S> <C> <C> <C> <C>
Net sales $1,766.0 $1,312.4 $694.7 $483.8
Research, development and
engineering expenses $ 175.8 $ 136.5 $ 67.6 $ 46.7
Income from continuing operations
before minority interest and
equity earnings $ 190.3 $ 166.6 $ 75.5 $ 78.9
Minority interest in earnings
of subsidiaries (20.4) (30.4) (7.5) (12.5)
Equity in earnings of associated
companies 12.3 14.4 4.9 1.5
-------- -------- ------ ------
Segment net income $ 182.2 $ 150.6 $ 72.9 $ 67.9
======== ======== ====== ======
Segment net income as a percentage
of segment sales 10.3% 11.5% 10.5% 14.0%
</TABLE>
Third quarter
The Telecommunications Segment produces optical fiber and cable, optical
hardware and equipment and photonic components for the worldwide
telecommunications industry.
Sales in the Telecommunications Segment increased 44% over the third quarter of
1998 to $695 million. The sales growth in the segment was led primarily by
volume gains in our optical fiber and cable and photonic technologies
businesses. Segment net income rose 7% in the third quarter of 1999 compared to
the same period in 1998. The percentage increase in net income is lower than
that of sales because of higher research and development spending and an
increased volume of lower margin products.
Sales in the optical fiber and cable business increased 53% over the third
quarter of 1998 to approximately $480 million. The increase in sales resulted
primarily from the impact of acquisitions and volume gains. Approximately $75
million of the increase in optical fiber and cable sales resulted from the
following acquisitions:
. the acquisition of the optical cable business from BICC, plc and the
remaining 50% interest in Optical Waveguides Australia, Pty. Ltd. in the
second quarter of 1999
. the acquisition of Optical Fibres in the fourth quarter of 1998
Excluding the impact of these acquisitions, sales in the optical fiber and cable
business increased approximately 30% in the third quarter of 1999 in comparison
to the same period last year due to volume gains of approximately 40%,
reflecting continued strong demand for Corning's premium fiber products. Volume
of premium fiber and cable products, including Corning's new LEAF optical fiber,
tripled over the same period in 1998. Price declines ranged between 10% and 25%
for Corning's optical fiber and cable products in comparison with the same
period last year. However, the weighted average optical fiber and cable price
declined approximately 5% compared to the same period last year, due to the
higher mix of premium product sales. The rate of price declines slowed during
the third quarter commensurate with the worldwide tightening of supply of
optical fiber.
Net income from the optical fiber and cable business increased more than 20%
over the third quarter of 1998. The percentage increase in net income is lower
than that of sales because of an increased volume of lower margin products and
start-up costs incurred at the new optical fiber production facility in Concord,
North Carolina.
<PAGE>
The photonic technologies business, which manufactures photonic modules and
components primarily for the optical amplification market, realized strong
volume gains in the third quarter of 1999 led by new product sales. Third
quarter sales in this business increased 50% to approximately $105 million over
the same period in 1998. Although the operating performance of the current
modules business significantly improved in the third quarter of 1999 in
comparison to the same period last year, significantly higher research and
development spending on future photonic products caused the business to continue
to incur a net loss.
The other business in this segment, the telecommunications hardware and
equipment business, increased sales 14% in the third quarter of 1999 to
approximately $100 million. This increase resulted primarily from a higher
volume of existing products, offset by price declines. Net income declined
modestly reflecting the impact of lower margins due to price declines.
Third quarter year to date
Sales in the Telecommunications Segment increased 35% over the first three
quarters of 1998 to $1.77 billion. Segment net income increased approximately
20% in the first three quarters of 1999, compared to the same period in 1998.
The increases in segment sales and net income reflect operating trends
consistent with those in the third quarter. Cost reductions experienced within
this segment, particularly within the photonic technologies business, mitigated
the impact of price declines on segment net income.
Sales in the optical fiber and cable business increased 40% over the first three
quarters of 1998 to $1.2 billion. This increase resulted primarily from
acquisitions and volume gains, which were led by the continued strong demand for
Corning's premium fiber products. Acquisitions increased third quarter year to
date optical fiber and cable sales by $132 million. Excluding the impact of
these acquisitions, sales in the optical fiber and cable business increased
approximately 25% for the first three quarters of 1999 in comparison to the same
period last year. The impact of volume and price on year to date sales of this
business mirrors the trends on the quarter. Net income from the optical fiber
and cable business increased more than 25% over the first three quarters of
1998.
Sales in the photonics technologies business increased approximately 60% to $275
million led by higher volume of new products. Results of this business continued
to be impacted by higher research and development spending, which offset
significant improvement in operating performance as a result of cost reductions.
Sales in the hardware and equipment business increased approximately 5% to $285
million, primarily due to a higher volume of existing products, offset by price
declines. Net income decreased in this business, reflecting the impact of lower
margins due to price declines.
<PAGE>
Advanced Materials
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
----------------- ------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $774.5 $767.7 $257.7 $247.7
Research, development and
engineering expenses $ 68.8 $ 60.3 $ 23.7 $ 19.8
Income from continuing operations
before minority interest and
equity earnings $ 71.6 $ 55.7 $ 23.5 $ 17.0
Minority interest in earnings
of subsidiaries 0.3
Equity in earnings of associated
companies 13.7 11.2 6.1 3.7
------ ------ ------ ------
Segment net income $ 85.3 $ 67.2 $ 29.6 $ 20.7
====== ====== ====== ======
Segment net income as a percentage
of segment sales 11.0% 8.8% 11.5% 8.4%
</TABLE>
Third quarter
The Advanced Materials Segment manufactures specialized products with unique
applications utilizing glass, glass ceramic and polymer technologies. The
largest businesses in this segment are environmental products and science
products.
Sales in the Advanced Materials Segment increased 4% over the third quarter of
1998 to $258 million, primarily due to growth in the environmental products
business, offset by lower sales in the science products businesses. Sales in
the environmental products business, the largest business in the segment,
increased approximately 7% over the third quarter of 1998 to approximately $100
million. The increase in sales in this business resulted primarily from the
introduction of Corning's new thinwall ceramic substrate product and strong
sales in North America. The decline in sales in the science products business
was primarily due to the impact of divestitures in 1998 and 1999. Sales in
Corning's other Advanced Material businesses, including semiconductor materials
and optical products, increased 7% over the third quarter of 1998.
Segment net income increased 43% in the third quarter of 1999 in comparison to
the same period in 1998. This significant increase resulted from sales gains,
as well as manufacturing efficiencies in the environmental products,
semiconductor materials and optical products businesses. Increased equity
earnings also contributed to segment results. The science products business had
lower earnings in 1999 compared to 1998, caused by increased research and
development spending for advanced life sciences.
Third quarter year to date
Sales in the Advanced Materials Segment were up slightly for the first three
quarters of 1999 in comparison to the same period last year. Softness in the
semiconductor materials and optical products businesses offset volume gains in
the environmental products business.
Sales in the environmental products business increased approximately 12% over
the first three quarters of 1998 to $295 million. The increase resulted
primarily from gains in Corning's new thinwall ceramic substrate product and
strong sales in North America. Sales in the science products business were flat
at $200 million despite divestitures in 1998 and 1999. Sales in the other
Advanced Materials businesses declined 7% as the result of the slowdown in the
semiconductor manufacturing equipment industry, which impacted demand for
Corning's high purity fused silica products. Sales in these businesses were
also impacted by the erosion in the worldwide demand for glass optical products
due to the consumer's increasing preference for plastic lenses.
<PAGE>
Segment net income increased 27% for the first three quarters of 1999 in
comparison to the same period in 1998. The significant increase was the result
of manufacturing efficiencies and the introduction of new thinwall products in
the environmental products business. This improvement helped to offset earnings
declines in the science products business caused by higher research and
development spending.
Information Display
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
----------------- ------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $490.4 $459.3 $178.7 $169.8
Research, development and
engineering expenses $ 16.4 $ 16.9 $ 5.3 $ 5.0
Income from continuing operations
before minority interest and
equity earnings $ 40.1 $ 15.3 $ 13.0 $ 17.5
Minority interest in earnings
of subsidiaries (16.2) (12.2) (1.6) (7.8)
Equity in earnings of associated
companies 52.9 40.5 18.3 6.6
------ ------ ------ ------
Segment net income $ 76.8 $ 43.6 $ 29.7 $ 16.3
====== ====== ====== ======
Segment net income as a percentage
of segment sales 15.7% 9.5% 16.6% 9.6%
</TABLE>
Third quarter
The Information Display Segment manufactures glass panels and funnels for
televisions and CRTs, and projection video lens assemblies and liquid crystal
display glass for flat panel display (advanced display products).
Sales in the Information Display Segment increased 5% over the third quarter of
1998 to $179 million, primarily due to growth in the advanced display products
business.
Sales in the advanced display products business increased almost 50% over the
third quarter of 1998 to approximately $45 million. The increase was primarily
due to volume growth in sales of liquid crystal display glass products over the
same period last year. Net income in this business increased (versus a loss in
1998) due to manufacturing efficiencies and strong equity earnings from Samsung
Corning Precision, a Korean manufacturer of liquid crystal display glass.
Third quarter sales of approximately $85 million in the conventional video
components business were impacted by weak volume and price declines which led to
a decrease in sales of approximately 10% in comparison to the third quarter of
1998. Net income in this business decreased significantly compared to the third
quarter of 1998, as a result of the decline in volume and price.
Sales in the projection video business increased approximately 10% over the
third quarter of 1998 to approximately $45 million. The increase was primarily
due to higher volume in the entertainment market segment. Net income from this
business increased modestly over last year.
Segment net income increased over 80% compared to the third quarter of 1998, led
by strong equity earnings from Samsung Corning and gains within the advanced
display business. Earnings from Samsung Corning, a Korean manufacturer of glass
panels and funnels for television and display monitors, doubled in the third
quarter of 1999 as a result of improved volume and stable pricing.
<PAGE>
Third quarter year to date
Sales in the Information Display Segment increased 7% over the first three
quarters of 1998 to $490 million primarily due to growth in the advanced display
products business.
Sales in the advanced display products business increased 60% over the first
three quarters of 1998 to approximately $130 million, primarily due to continued
volume growth in liquid crystal display glass products. Net income in this
business also increased significantly due to manufacturing efficiencies and
strong equity earnings from Samsung Corning Precision.
Sales in the conventional video components business totaled approximately $250
million for the first three quarters of 1999, a decline of 8% in comparison to
the same period last year. Sales in this business were impacted by continued
weak volume and price declines. Net income in this business increased
significantly compared to the first three quarters of 1998, which were impacted
by losses incurred from tank repairs.
Sales in the projection video business increased 4% over the first three
quarters of 1998 to approximately $110 million, while earnings increased
significantly due to strong growth in the entertainment market segment.
Segment net income increased almost 80% over the first three quarters of 1998,
primarily due to gains in the advanced display products business.
<PAGE>
Taxes on Income
Corning's effective tax rate for continuing operations, excluding non-recurring
items, was 29.2% for the third quarter of 1999 and 30% for the first nine months
of 1999, compared to 30.4% and 31.5% 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
$413.3 million at September 30, 1999. Corning's ratio of current assets to
current liabilities was 1.3 at the end of the third 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 34% at September 30, 1999. The increase is
primarily due to the issuance of $300 million in long-term debt securities in
the first quarter of 1999.
Corning believes it has sufficient financial flexibility and ready access to
funds to meet seasonal working capital requirements and to fund capital
expenditures, acquisitions and other long-term growth opportunities. Corning
filed with the Securities and Exchange Commission a $2 billion shelf
registration statement in the second quarter of 1999 which became effective in
October. With this registration, Corning can offer and sell up to $2.1 billion
in various types of debt and equity securities. Corning also increased its bank
credit line commitments by $400 million in the third quarter of 1999. This
raised its available line of credit to $1.2 billion.
Cash and short-term investments increased from year-end 1998 by $56.1 million.
Operating activities for the nine months ended September 30, 1999 provided cash
of $476.0 million. Financing activities for the nine months ended September 30,
1999 provided cash of $259.6 million. Total cash provided by operating and
financing activities exceeded cash used by investing activities of $667.1
million. Net cash provided by operating activities increased for the first nine
months of 1999 compared to the same period in 1998 because increases in net
income from continuing operations more than offset the increase in cash used for
working capital. Net cash used in investing activities for the first nine
months of 1999 totaled $667.1 million, versus cash provided by investing
activities of $77.1 million for the same period in 1998. The 1998 amount
includes the receipt of proceeds from the divestiture of the consumer housewares
business. Although capital expenditures in the first nine months of 1999 are
less than those for the same period in 1998, Corning expects capital spending in
1999 to approximate $750 million. Net cash provided by financing activities
totaled $259.6 million for the first nine months of 1999, due primarily to the
issuance of long-term debt securities in the first quarter. During the same
period in 1998, Corning used cash in financing activities of $347.5 million,
reflecting 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 implementation
plans address 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 assisted Corning in evaluating systems
remediation and contingency planning for 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 may 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 implementing and testing the planned solutions
Corning completed the Problem Definition and Assessment Phases by December 31,
1998. These phases involved all known areas of concern including business,
manufacturing, process controls, engineering, research, and facilities systems,
third party suppliers and service providers. Corning completed the Planning and
Preparation Phase for all key systems. Corning substantially completed the
Implementation Phase for key systems by December 31, 1998, and completed the
remainder by October 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 operational changes occur.
During the Problem and Definition Phase, Corning identified 334 key systems
which are considered critical to its overall operational success. These systems
are integral to many functional areas and processes, including manufacturing,
process controls, financial, order entry and purchasing.
In 1995, Corning initiated a significant project to upgrade and improve access
to business information using 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 this
amount, Corning has spent approximately $24 million to date. This estimate
includes incremental costs of approximately $15 million comprised primarily of
contractor costs to modify existing systems. Corning has spent approximately
80% of this amount 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, it is taking appropriate
action to determine their level of Year 2000 readiness and the potential impact
on Corning. Corning's significant external parties were identified during the
business contingency planning process, a process in which each business unit
assessed the impact these third parties would have on their operations and the
impact they would have on the Company as a whole. Corning has communicated with
its approximately 750 identified significant customers, suppliers and other
third parties to determine the extent to which it is vulnerable to third
parties' failures to remediate their own potential Year 2000 problems. These
communications included written correspondences, telephone interviews, face-to-
face discussions and independent tests. To date, approximately 85% of these
third parties have responded with an assessment of their Year 2000 compliance
efforts.
<PAGE>
Corning has substantially completed contingency plans to protect its business
from Year 2000 related interruptions. These plans include the following:
. enhancing existing contingency procedures to encompass Year 2000 specific
risks
. stocking additional inventory
. identifying alternative suppliers
. developing manual contingency procedures for key automated processes
Corning will continue to implement its contingency plans during the remainder of
the year.
Corning's operating results and ability to conduct business depend upon the
infrastructure of the geographic regions in which its operations and customers
are located. The risk assessment performed by each business unit evaluates both
the systems used by Corning's foreign entities and the potential impact of Year
2000 failures by their customers and suppliers. A breakdown in the
infrastructure of a particular region could adversely impact Corning's operating
results.
Corning believes it is taking reasonable steps to prevent major interruptions in
its business due to Year 2000 issues. However, its Year 2000 program can only
minimize, but not eliminate, its Year 2000 risk. The inability of Corning or
the inability of significant third parties to adequately address Year 2000
issues could cause inefficiencies in Corning's business operations. Corning
cannot readily determine the extent of the impact. Possible consequences
include the following:
. disruptions in manufacturing
. inability to make payments
. delays in shipments
Although Corning believes that its Year 2000 readiness efforts will minimize the
likelihood of these events, Corning has put in place a special transition
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, . the effect of regulatory and legal
. currency fluctuations, developments,
. product demand and industry . capital resource and cash flow
capacity, activities,
. competitive products and pricing, . capital spending,
. sufficiency of manufacturing . equity company activities,
capacity and efficiencies, . interest costs,
. realization of cost reductions, . acquisition and divestiture activity,
. availability and costs of . the rate of technology change,
critical materials, . the ability to enforce patents and
. new product development and . other risks detailed in Corning's
commercialization, Securities and Exchange Commission
. facility expansions and new filings.
plant start-up costs,
<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 $20.1 million for its estimated
liability for environmental cleanup and litigation at September 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 third quarter, the personal injury cases and
the class action property damages cases were settled for $4.5 million, subject
to court approval of the terms of the class action settlement. The hearing for
court approval of the settlement is likely to be set in the first quarter of
2000. Management expects that approximately 60% of the settlement payment will
be offset by insurance recoveries.
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 disclosure materials relating to the Amended Joint Plan of
Reorganization contained adequate disclosures. 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. Post-hearing briefing
was completed by mid-September. The parties are awaiting the findings and
conclusions of the Bankruptcy Court. To date, the Bankruptcy Court has not
issued its decision on confirmation of the Joint Plan. If the Bankruptcy Court
overrules the objection and confirms the Joint Plan, review in the United States
District Court for the Eastern District of Michigan is probable and further
appeals are possible. The timing and eventual outcome of these bankruptcy
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 report by the Institute of Medicine and other studies have reached
similar conclusions.
Implant Tort Lawsuits: In the period from 1991 through September 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
September 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 directed 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, summary judgment dismissing all claims by plaintiffs and a cross-
claim by Dow Chemical was entered in favor of Corning on February 21, 1997, but
this judgment was later 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. In late 1997, Corning 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 took no position on Corning's 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
permitted limited additional discovery of certain Dow Corning, Corning and Dow
Chemical officers and directors. These depositions were completed in the second
quarter of 1999. On September 23, 1999, the Court granted in part the request
by plaintiffs for certain additional documentary discovery. 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.
Shin Etsu Quartz Products Company In July 1999, Shin Etsu Quartz Products
Company filed a patent suit in Japan against Corning for alleged patent
infringement of a patent relating to the properties of fused silica materials
used in the optical components of stepper machines. The suit requests damages
and an injunction preventing sales of infringing products in Japan. Corning has
denied infringement and claimed prior user rights to continue the sale of its
fused silica. Corning intends to defend this suit vigorously. While
recognizing that litigation is inherently uncertain, based upon the information
developed to date, management believes that Corning has very strong defenses to
Shin Etsu's claims and that the likelihood of a materially adverse outcome 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. 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index which is located on page 26.
(b) Reports on Form 8-K
A report on Form 8-K dated July 8, 1999, was filed containing the
Registrant's segment information by quarter for 1997.
A report on Form 8-K dated July 19, 1999, was filed in
connection with the Registrant's second 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)
November 2, 1999 /s/ ROGER G. ACKERMAN
- ---------------- ------------------------------------------------------------
Date Roger G. Ackerman
Chairman and Chief Executive Officer
November 2, 1999 /s/ JAMES B. FLAWS
- ---------------- ------------------------------------------------------------
Date James B. Flaws
Senior Vice President, Treasurer and Chief Financial Officer
November 2, 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 27
2 Financial Data Schedule
<TABLE>
<CAPTION>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES Exhibit #12
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
(Dollars in millions, except ratios)
Nine Months Ended Fiscal Year Ended
------------------- ------------------------------------------------
Sept. 30, Sept. 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 $437.5 $280.7 $439.6 $629.2 $455.9 $389.4 $286.3
Adjustments:
Share of earnings before taxes
of 50% owned companies 119.1 110.5 173.3 111.5 130.3 95.2 89.0
Gain (loss) before taxes of
greater than 50% owned
unconsolidated subsidiary (0.2) 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 10.8 10.8 14.4 16.6 11.8 9.6 13.3
Fixed charges net of
capitalized interest 105.1 75.3 126.8 141.9 105.9 82.6 128.8
------ ------ ------ ------ ------ ------ ------
Earnings before taxes and
fixed charges as adjusted $672.3 $477.0 $753.0 $899.2 $704.6 $573.7 $515.5
====== ====== ====== ====== ====== ====== ======
Fixed charges:
Interest incurred $ 92.9 $ 77.4 $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 27.2 12.5 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 14.9 14.0 18.0 15.9 12.1 13.3 10.8
Share of portion of rent
expense which represents
interest factor for 50%
owned companies 4.4 4.2 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 2.5 2.2 2.9 1.6 2.2 (0.1) 0.6
------ ------ ------ ------ ------ ------ ------
Total fixed charges 141.9 110.3 174.8 169.0 128.0 92.2 147.4
Capitalized interest (36.8) (35.0) (48.0) (27.1) (22.1) (9.6) (18.6)
------ ------ ------ ------ ------ ------ ------
Total fixed charges net of
capitalized interest $105.1 $ 75.3 $126.8 $141.9 $105.9 $ 82.6 $128.8
====== ====== ====== ====== ====== ====== ======
Preferred dividends:
Preferred dividend
requirements $ 3.2 $ 11.5 $ 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 4.5 16.1 21.4 23.0 23.6 22.0 11.5
Total fixed charges 141.9 110.3 174.8 169.0 128.0 92.2 147.4
------ ------ ------ ------ ------ ------ ------
Fixed charges and pre-tax
preferred dividend requirement $146.4 $126.4 $196.2 $192.0 $151.6 $114.2 $158.9
====== ====== ====== ====== ====== ====== ======
Ratio of earnings to combined
fixed charges and preferred
dividends 4.6x 3.8x 3.8x 4.7x 4.7x 5.0x 3.2x
====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 70,000
<SECURITIES> 31,500
<RECEIVABLES> 768,400
<ALLOWANCES> 15,200
<INVENTORY> 550,600
<CURRENT-ASSETS> 1,632,000
<PP&E> 2,909,900
<DEPRECIATION> 2,197,900
<TOTAL-ASSETS> 5,673,800
<CURRENT-LIABILITIES> 1,218,700
<BONDS> 1,287,600
0
15,200
<COMMON> 1,032,500
<OTHER-SE> 1,068,300
<TOTAL-LIABILITY-AND-EQUITY> 5,673,800
<SALES> 3,048,800
<TOTAL-REVENUES> 3,108,400
<CGS> 1,861,600
<TOTAL-COSTS> 1,861,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15,300
<INTEREST-EXPENSE> 56,100
<INCOME-PRETAX> 437,500
<INCOME-TAX> 132,400
<INCOME-CONTINUING> 341,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 341,600
<EPS-BASIC> 1.42
<EPS-DILUTED> 1.39
</TABLE>
