FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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[ ] 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
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CORNING INCORPORATED
--------------------
(Registrant)
New York 16-0393470
---------------------------------------- ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
One Riverfront Plaza, Corning, New York 14831
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(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:
277,911,505 shares of Corning's Common Stock, $0.50 Par Value, were outstanding
as of May 1, 2000.
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
Index to consolidated financial statements of Corning Incorporated and
Subsidiary Companies filed as part of this report:
Page
------
Consolidated Statements of Income for the three months
ended March 31, 2000 and 1999 3
Consolidated Balance Sheets at March 31, 2000 and
December 31, 1999 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 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, 1999 as amended on April 7, 2000.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues
Net sales $1,351.4 $ 997.0
Royalty, interest and dividend income 23.5 10.0
Non-operating gains 6.8
-------- --------
1,381.7 1,007.0
Deductions
Cost of sales 787.8 613.9
Selling, general and administrative
expenses 199.8 152.2
Research, development and engineering
expenses 110.1 83.4
Amortization of purchased intangibles
including goodwill 13.1 6.9
Interest expense 24.2 19.7
Acquisition-related charges 89.0
Other, net 20.9 9.9
-------- --------
Income before taxes 136.8 121.0
Taxes on income 54.9 37.3
-------- --------
Income before minority interest and
equity earnings 81.9 83.7
Minority interest in earnings of subsidiaries (2.6) (10.1)
Dividends on convertible preferred securities
of subsidiary (2.3)
Equity in earnings of associated companies 33.9 21.2
Impairment of equity investment (36.3)
-------- --------
Net Income $ 76.9 $ 92.5
======== ========
Basic Earnings Per Share $ 0.28 $ 0.37
======== ========
Diluted Earnings Per Share $ 0.28 $ 0.36
======== ========
Dividends Declared Per Share $ 0.18 $ 0.18
======== ========
Shares used in computing earnings per share
Basic earnings per share 270.4 248.4
======== ========
Diluted earnings per share 277.3 260.4
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
------ --------- ------------
<S> <C> <C>
Current Assets
Cash $ 68.4 $ 121.8
Short-term investments, at cost, which
approximates market value 1,244.7 158.6
Accounts receivable, net of doubtful accounts
and allowances - $24.6/2000; $19.9/
year-end 1999 1,146.6 872.4
Inventories 787.0 602.2
Deferred taxes on income and other
current assets 253.9 229.2
-------- --------
Total current assets 3,500.6 1,984.2
-------- --------
Investments
Associated companies, at equity 384.5 421.9
Other, at cost or fair value 137.5 82.5
-------- --------
522.0 504.4
-------- --------
Plant and equipment, at cost, net of accumulated
depreciation 3,629.1 3,201.7
Goodwill and other intangible assets, net of
accumulated amortization $119.8/2000;
$112.3/year-end 1999 1,150.3 506.7
Other assets 212.3 329.0
-------- --------
Total Assets $9,014.3 $6,526.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Loans payable $ 150.1 $ 420.7
Accounts payable 416.7 418.0
Other accrued liabilities 698.2 715.3
-------- --------
Total current liabilities 1,265.0 1,554.0
-------- --------
Other liabilities 745.8 720.6
Loans payable beyond one year 1,987.8 1,490.4
Minority interest in subsidiary companies 126.5 284.8
Convertible preferred stock 10.4 13.5
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:
302.9 million/2000 and 285.2 million/
year-end 1999 3,775.8 1,359.3
Retained earnings 1,816.8 1,790.0
Less cost of 25.3 million/2000 and 25.0
million/year-end 1999 shares of common
stock in treasury (715.6) (656.0)
Accumulated other comprehensive income (loss) 1.8 (30.6)
-------- --------
Total common shareholders' equity 4,878.8 2,462.7
-------- --------
Total Liabilities and Shareholders' Equity $9,014.3 $6,526.0
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999*
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 76.9 $ 92.5
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 125.6 101.6
Non-operating gains (6.8)
Acquisition-related charges 89.0
Impairment of equity investment 36.3
Employee benefit expense less than cash funding (3.9) (3.1)
Equity in earnings of associated companies in
excess of dividends received (14.7) (22.5)
Minority interest in earnings of subsidiaries
in excess of (less than) dividends paid (95.8) 3.9
Deferred tax (benefit)/expense (24.4) 7.4
Other 12.5 12.5
Changes in operating assets and liabilities:
Accounts receivable (55.8) 23.5
Inventory (81.5) (54.1)
Other current assets (22.3) (13.1)
Accounts payable and other current liabilities (86.8) (85.8)
-------- ------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (51.7) 62.8
-------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (213.1) (150.0)
Acquisitions of businesses and leased assets,
net of cash acquired (1,143.8) (6.7)
Proceeds from disposition of properties and
investments 35.5 0.8
Decrease (increase) in long-term investments
and other noncurrent assets 61.3 (6.0)
Transaction costs related to pooling of
interests (39.2)
Other, net 0.7
-------- ------
NET CASH USED IN INVESTING ACTIVITIES (1,299.3) (161.2)
-------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of loans 766.5 321.0
Repayments of loans (554.4) (89.4)
Proceeds from issuance of common stock 2,266.9 39.7
Repurchases of common stock (7.6)
Redemption of common stock for income
tax withholding (42.3) (8.0)
Dividends paid (50.1) (43.9)
-------- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,386.6 211.8
-------- ------
Effect of exchange rates on cash (1.7) (3.0)
-------- ------
Cash used in discontinued operations (1.2) (1.4)
-------- ------
Net change in cash and cash equivalents 1,032.7 109.0
Cash and cash equivalents at beginning of year 280.4 59.2
-------- ------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $1,313.1 $168.2
======== ======
SUPPLEMENTAL DATA:
Income taxes paid, net $ 9.6 $ 30.1
======== ======
Interest paid $ 36.6 $ 35.3
======== ======
</TABLE>
* Certain amounts have been reclassified to conform to 2000 classifications.
The accompanying notes are an integral part of these statements.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Information about the performance of Corning's three operating segments for
the first quarter of 2000 and 1999 are below. These amounts do not include
revenues, expenses and equity earnings not specifically identifiable to
segments. Corning has changed the performance measurement of its operating
segments to a new metric - net income excluding amortization of purchased
intangibles and goodwill, purchased in-process research and development
costs, one-time acquisition costs, discontinued operations and other
non-recurring items. This measure is not in accordance with generally
accepted accounting principles (GAAP) and may not be consistent with
measures used by other companies. The segment results for 1999 have been
restated to conform to the new measure.
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.
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Telecommunications
Net sales $ 893.4 $ 593.3
Research, development and engineering expenses $ 77.1 $ 56.1
Interest expense $ 15.2 $ 12.4
Segment earnings before minority interest
and equity earnings $ 107.8 $ 60.4
Minority interest in earnings of subsidiaries 3.0 (4.3)
Equity in earnings (losses) of associated
companies (0.4) 4.0
-------- -------
Segment net income $ 110.4 $ 60.1
======== =======
Advanced Materials
Net sales $ 264.2 $ 252.1
Research, development and engineering expenses $ 27.2 $ 21.9
Interest expense $ 5.5 $ 4.3
Segment earnings before minority interest
and equity earnings $ 21.9 $ 20.0
Minority interest in earnings of subsidiaries 0.1
Equity in earnings of associated companies 6.5 4.1
-------- -------
Segment net income $ 28.4 $ 24.2
======== =======
Information Display
Net sales $ 187.9 $ 145.7
Research, development and engineering expenses $ 5.8 $ 5.4
Interest expense $ 3.4 $ 2.6
Segment earnings before minority interest
and equity earnings $ 19.3 $ 9.4
Minority interest in earnings of subsidiaries (5.6) (5.9)
Equity in earnings of associated companies 26.8 12.4
-------- -------
Segment net income $ 40.5 $ 15.9
======== =======
Total segments
Net sales $1,345.5 $ 991.1
Research, development and engineering expenses $ 110.1 $ 83.4
Interest expense $ 24.1 $ 19.3
Segment earnings before minority interest
and equity earnings $ 149.0 $ 89.8
Minority interest in earnings of subsidiaries (2.6) (10.1)
Equity in earnings of associated companies 32.9 20.5
-------- -------
Segment net income $ 179.3 $ 100.2
======== =======
</TABLE>
<PAGE>
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues
Total segment net sales $1,345.5 $ 991.1
Non-segment net sales (a) 5.9 5.9
Royalty, interest and dividend income 23.5 10.0
Non-operating gain 6.8
-------- --------
Total revenues $1,381.7 $1,007.0
======== ========
Net income
Total segment net income (b) $ 179.3 $ 100.2
Unallocated items:
Non-segment loss and other (a) (2.2) (0.6)
Non-operating gain 6.8
Amortization of purchased intangibles
and goodwill (c) (13.1) (6.9)
Acquisition-related charges (89.0)
Interest income (d) 15.2
Interest expense (0.1) (0.4)
Income tax (e) 15.3 1.8
Equity in earnings of associated
companies (a) 1.0 0.7
Impairment of equity investment
after tax (36.3)
Dividends on convertible preferred
securities of subsidiary (2.3)
-------- --------
Net income $ 76.9 $ 92.5
======== ========
</TABLE>
(a) Includes amounts derived from corporate investments.
(b) Includes royalty, interest and dividend income.
(c) Amortization of purchased intangibles and goodwill relates primarily
to the Telecommunications segment.
(d) Interest earned from proceeds related to equity offering and euro debt
offering.
(e) Includes tax associated with acquisition-related charges (unless
otherwise noted), interest income (d), amortization of purchased
intangibles and goodwill and non-operating gains.
(2) On January 28, 2000, Corning merged with Oak Industries, Inc. (Oak
Industries) in a pooling of interests transaction. Oak Industries
shareholders received 0.83 of a share of Corning common stock for each
share of Oak Industries stock owned. Corning issued 14.8 million shares of
Corning common stock and 2.7 million options to purchase Corning common
shares to complete the transaction. The consolidated financial statements
for the prior period of 1999 have been restated to include the financial
position and results of operations of Oak Industries. During the first
quarter of 2000, Corning recognized a charge of $47.0 million ($43.4
million after tax), or $0.16 per share, for one-time acquisition costs
related to Oak Industries. The acquisition costs are primarily related to
investment banking and legal fees of approximately $30 million. The charge
also includes $17 million of severance and other termination benefits for
Oak Industries corporate officers and headquarters employees.
<PAGE>
(3) On February 2, 2000, Corning acquired the worldwide optical cable and
hardware business of Siemens AG and the remaining 50% of its investment in
Siecor Corporation and Siecor GmbH (the Siemens transaction). The purchase
price of $1.4 billion (subject to customary purchase price adjustments)
includes approximately $120 million in assumed debt and $145 million in
contingent performance payments to be paid, if earned, over a four-year
period. Portions of the transaction will close at various dates into 2001.
At March 31, 2000, total cash paid to Siemens approximated $1.0 billion.
This acquisition has been accounted for under the purchase method of
accounting. The purchase price has been allocated based on estimated fair
values at date of acquisition, pending final determination of certain
acquired balances. This preliminary allocation has resulted in purchased
intangibles and goodwill of approximately $650 million, which is being
amortized over lives of 5 to 20 years.
The following unaudited pro forma financial information reflects the
consolidated results of operations of Corning as if the acquisition took
place at the beginning of January 1999. The pro forma information includes
adjustments for interest expense and shares outstanding that would have
been incurred to finance the transaction, additional depreciation based on
the fair market value of the property, plant and equipment acquired,
amortization of purchased intangibles and goodwill, and the elimination of
minority interest related to Siemen's 50% ownership of Siecor Corporation.
The pro forma financial information is not necessarily indicative of the
results of operations as they would have been had the transactions been
effected on the assumed dates.
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
In millions, except per share amounts 2000 1999
--------------------------------------------------------------------
<S> <C> <C>
Sales $1,549.2 $1,217.8
Net income $ 66.6 $ 81.6
Diluted earnings per share $ 0.24 $ 0.31
</TABLE>
(4) On February 14, 2000, Corning acquired British Telecommunication's
Photonics Research Center for approximately $66 million in cash. Corning
recorded a charge of $42.0 million ($25.7 million after tax), or $0.09 per
share, for in-process research and development costs. Remaining purchase
price has been recorded as property, plant and equipment and purchased
intangibles and goodwill being amortized over lives up to 9 years.
(5) On February 14, 2000, Corning announced that it had signed a definitive
agreement to acquire NetOptix Corporation for approximately 12 million
shares of Corning common stock. NetOptix manufactures thin film filters
for use in dense wavelength division multiplexing components. Under the
terms of the agreement, Corning will exchange 0.90 shares of Corning common
stock for each share of NetOptix common stock. Corning will account for
the transaction under the purchase method of accounting. Based on the
average closing price for Corning for a range of days surrounding the
announcement, the transaction is valued at approximately $2.1 billion, most
of which will be allocated to purchased intangibles and goodwill. Corning
currently expects purchased intangibles and goodwill to be amortized over
10 years and to be non deductible for tax purposes. A study is currently
underway to determine the existence of any in-process research and
development. If the study concludes a charge is necessary, Corning will
record the appropriate amount in the period the transaction closes.
Corning expects the transaction to close in mid-May.
(6) On May 5, 2000, Corning acquired the remaining 80% interest in NZ Applied
Technologies (NZAT) not already owned in exchange for Corning common
stock. NZAT is a developer and manufacturer of photonic components for
optical telecommunications applications including the optical data
networks industry. Corning issued 440,000 shares of common stock, with a
value of $75 million at closing and agreed to issue an additional 440,000
shares over the next three years contingent upon NZAT achieving certain
product development and sales milestones following the completion of the
transaction. The contingent proceeds, if earned, will be recorded at the
current fair value of Corning common stock when issued. The acquisition
will be accounted for using the purchase method of accounting.
(7) On January 31, 2000, Corning sold Quanterra Incorporated to Severn Trent
Laboratories for $35 million. In the first quarter of 2000, Corning
recorded a non-operating gain of $6.8 million ($4.2 million after tax), or
$0.02 per share, as a result of this transaction.
<PAGE>
(8) Pittsburgh Corning (PCC) is a 50% owned equity investment of Corning
Incorporated and PPG Industries, Inc. In the first quarter of 2000, PCC
incurred adverse verdicts in five trials involving 19 claimants. The
aggregate amount of those verdicts may exceed $30 million, although
insurance available to PCC may offset a portion of those verdicts. On
April 16, 2000, PCC filed for Chapter 11 reorganization in the United
States Bankruptcy Court for the Western District of Pennsylvania. In this
filing, PCC indicated that the high costs of defending or settling asbestos
claims, coupled with sharply increasing settlement demands, had threatened
its financial health and left it with no alternative means of resolving the
asbestos claims brought against it. As a result of this event, Corning
recorded an after tax charge of $36.3 million, or $0.13 per share to impair
its entire investment in PCC. Although the Chapter 11 filing may lead to
additional claims, management believes that the separate corporate status
of PCC will continue to be upheld and that no grounds exist for direct
claims against Corning.
(9) A reconciliation of the basic and diluted earnings per share
computations for the first quarter of 2000 and 1999 are as follows (in
millions, except per share amounts):
<TABLE>
<CAPTION>
For the three months ended March 31,
------------------------------------------------
2000 1999
------------------------------------------------
Weighted Per Weighted Per
Average share Average share
Income Shares Amount Income Shares Amount
------ -------- ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Net income $76.9 $92.5
Less: Preferred
stock dividends 0.2 0.3
----- -----
Basic earnings
per share 76.7 270.4 $0.28 92.2 248.4 $0.37
===== =====
Effect of Dilutive
Securities
Options 6.9 4.3
Convertible monthly
income preferred
securities 2.3 7.7
Convertible
preferred
stock
Convertible
subordinated
notes
----- ----- ----- -----
Diluted earnings
per share $76.7 277.3 $0.28 $94.5 260.4 $0.36
===== ===== ===== ===== ===== =====
</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. The dilutive impact of the MIPS prior to conversion
is reflected in Corning's 1999 earnings per share calculation.
The convertible preferred stock paid dividends of $0.2 million and $0.3
million during the first quarter 2000 and 1999, respectively, and was
convertible into 0.5 and 0.8 million shares of common stock. These
securities were not included in the calculation of diluted earnings per
share in 2000 and 1999 due to the anti-dilutive effect they would have had
if converted.
Interest expense and amortization of deferred costs, net of tax, related
to the convertible subordinated notes was $0.9 million and $0.8 million
during the first quarter of 2000 and 1999, respectively. The notes were
convertible into 2.1 million shares of common stock in each period.
These securities were not included in the calculation of diluted
earnings per share in 2000 and 1999 due to the anti-dilutive effect they
would have had if converted.
Common dividends of $49.9 million were declared in the first quarter of
2000 compared with $43.6 million for the same period in 1999.
(10) Excluding the impact of non-recurring items, Corning's effective tax rate
was 33.0% for the first quarter of 2000, and 30.8% for the first quarter of
1999.
<PAGE>
(11) Inventories shown on the accompanying balance sheets were comprised of the
following (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Finished goods $334.4 $206.1
Work in process 179.3 152.6
Raw materials and accessories 188.2 162.0
Supplies and packing materials 85.1 81.5
------ ------
Total inventories $787.0 $602.2
====== ======
</TABLE>
(12) Plant and equipment shown on the accompanying balance sheets were
comprised of the following (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Land $ 76.1 $ 68.8
Buildings 1,476.7 1,446.7
Equipment 4,465.6 4,043.1
Accumulated depreciation (2,389.3) (2,356.9)
-------- --------
$3,629.1 $3,201.7
======== ========
</TABLE>
(13) On January 31, 2000, Corning completed an equity offering of 14.95 million
shares of common stock generating net proceeds of $2.2 billion. The
proceeds were used to repay $98 million of bank debt assumed in the Oak
Industries merger and $372 million of commercial paper and to fund a
portion of the Siemens transaction. The remaining proceeds of
approximately $1.1 billion will be used for general corporate purposes,
including funding Corning's capital spending program.
(14) On February 18, 2000, Corning completed an offering of Euro-denominated
debt securities, which generated net proceeds of $485 million. The
proceeds were used to finance a portion of the Siemens transaction.
(15) Comprehensive income for the quarters ended March 31, 2000 and 1999 was
$109.3 million and $44.3 million, and includes net income of $76.9 million
and $92.5 million and foreign currency translation adjustments of $(2.7)
million and $(45.2) million in 2000 and 1999, respectively. Comprehensive
income also includes unrealized gains/(losses) on marketable securities of
$39.9 million and $(3.0) million in the quarters ended March 31, 2000 and
1999, respectively, offset by a realized gain of $4.8 million on
marketable securities in the quarter ended March 31, 2000.
(16) In the fourth quarter of 1999, the United States Bankruptcy Court for the
Northern District of Michigan entered an order confirming the plan of
reorganization filed jointly by Dow Corning Corporation and the Committee
of Tort Claimants ("Joint Plan"). Corning and The Dow Chemical Company
each own 50% of the shares of Dow Corning. On December 21, 1999, the
Bankruptcy Court issued an opinion that approved the principal elements of
the Joint Plan with respect to tort claimants, but construed the Joint Plan
as providing releases for third parties (including Corning and Dow Chemical
as shareholders) only with respect to tort claimants who voted in favor of
the Joint Plan. A number of parties opposing the Joint Plan filed appeals
on a variety of grounds to the United States District Court for the Eastern
District of Michigan. Dow Corning and the Committee of Tort Claimants have
filed a notice of appeal (as well as motions to vacate and for related
relief) seeking review of the ruling limiting the scope of the shareholder
releases. Corning and Dow Chemical filed separate notices of appeal on
this issue and each joined in the motions by the Proponents of the Joint
Plan. Some parties, including the United States of America and the Nevada
tort claimants, have filed motions asking the District Court to dismiss the
appeals of Dow Corning, Dow Chemical and Corning, and the Tort Claimants
Committee, as untimely as not taken within 10 days of the November 30 order
of confirmation. These appeals and motions were argued together before the
District Court on April 12-13, 2000. The District Court reserved judgment.
The ruling on the appeals and motions is expected in the second quarter of
2000. Further appellate review is anticipated regardless of the outcome in
the District Court. After all appeals are exhausted, if the Joint Plan is
upheld but the shareholder releases are effective only for those voting in
favor of the Joint Plan, Corning would expect to defend any remaining
claims against it on the same grounds that led to a series of orders and
judgments dismissing all claims against Corning in the federal courts and
the state courts as described under the heading IMPLANT TORT LAWSUITS in
Part II, Item 1, Legal Proceedings. With respect to the possibility of
additional direct or indirect claims against Corning if the anticipated
full releases are not reinstated in the Joint Plan, management believes
that such claims lack merit and that the breast implant litigation against
Corning will be resolved without material impact on Corning's financial
statements.
<PAGE>
ITEM 2.
- -------
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Results of Operations
Net sales totaled $1.35 billion for the first quarter of 2000, an increase of
36% over sales of $997 million for the same period in 1999. Excluding the
impact of acquisitions, net sales increased approximately 30% over the first
quarter of 1999. Sales growth in the first quarter was most pronounced in the
Telecommunications Segment, where the impact of acquisitions and demand for
Corning's premium fiber and cable products drove quarter to quarter sales growth
over 50%.
Corning's net income totaled $76.9 million in the first quarter of 2000, a
decrease of 17% from the same period in 1999. Diluted earnings per share
decreased 22% to $0.28 per share in the first quarter of 2000 compared to the
same period in 1999.
Corning's first quarter 2000 results were impacted by several non-recurring
items:
. a non-operating gain of $6.8 million ($4.2 million after tax), or $0.02 per
share
. an in-process research and development charge of $42.0 million ($25.7
million after tax), or $0.09 per share
. a charge for acquisition costs related to Oak Industries of $47.0 million
($43.4 million after tax), or $0.16 per share
. an after-tax charge of $36.3 million or $0.13 per share to impair Corning's
investment in Pittsburgh Corning Corporation
The first quarter results were also impacted by an increase in amortization of
purchased intangibles and goodwill, primarily due to increased acquisition
activity. The pre-tax amortization charge increased from $6.9 million ($5.4
million after tax, or $0.02 per share) in the first quarter of 1999 to $13.1
million ($10.2 million after tax, or $0.04 per share) in the same period of
2000. Corning expects the earnings dilution from the amortization of purchased
intangibles and goodwill to be much more significant in the future when Corning
completes the pending NetOptix Corporation acquisition.
Corning believes comparing its operating results on a pro forma basis excluding
amortization of purchased intangibles and goodwill and non-recurring items, a
measure that is not in accordance with generally accepted accounting principles
(GAAP) and may not be consistent with measures used by other companies, provides
a better understanding of the changes in its operating results. It should not
be considered an alternative to GAAP. Pro forma net income was $188.3 million
in first quarter 2000, an increase of 92% compared to first quarter 1999 pro
forma net income of $97.9 million. Pro forma diluted earnings per share was
$0.68 in the first quarter of 2000, an increase of 79% compared to 1999 first
quarter pro forma diluted earnings per share of $0.38. The first quarter 2000
pro forma results reflect growth in all three of Corning's segments.
Business Combinations
During the first quarter Corning completed the merger with Oak Industries. The
merger was accounted for as a pooling of interests and thus Corning's financial
statements present the retroactively restated results of the merged companies.
On February 2, 2000, Corning substantially completed the acquisition of Siemens
AG's worldwide optical fiber and cable and equipment business, including its 50%
ownership in Siecor Corporation and Siecor GmbH (Siemens transaction). A
broader discussion of these acquisitions appears in Corning's Form 10-K for 1999
as amended on April 7, 2000.
During the first quarter Corning also completed the acquisition of British
Telecommunications Photonics Technology Research Center (PTRC) for approximately
$66 million in cash. The acquisition of PTRC is expected to expedite Corning's
commercialization of new opto-electronic products in the near future and
strengthen research on the next generation of photonic components and network
devices. A portion of the purchase price relates to in-process research and
development costs and resulted in a first quarter charge. The transaction is
accounted for as a purchase transaction.
<PAGE>
On May 5, 2000, Corning acquired the remaining 80% interest in NZ Applied
Technologies (NZAT) not already owned in exchange for Corning common stock.
NZAT is a developer and manufacturer of photonic components for optical
telecommunications applications including the optical data networks industry.
Corning issued 440,000 shares of common stock, with a value of $75 million at
closing and agreed to issue an additional 440,000 shares over the next three
years contingent upon NZAT achieving certain product development and sales
milestones following the completion of the transaction. The contingent
proceeds, if earned, will be recorded at the current fair value of Corning
common stock when issued. The acquisition will be accounted for using the
purchase method of accounting.
On February 14, 2000, Corning announced that it had signed a definitive
agreement to acquire NetOptix Corporation for approximately 12 million shares of
Corning common stock. NetOptix manufactures thin film filters for use in dense
wavelength division multiplexing components. The acquisition of NetOptix
Corporation will allow Corning to increase its thin film filter capacity and
strengthen its position as a supplier of optical networking devices. Under the
terms of the agreement, Corning will exchange 0.90 shares of Corning common
stock for each share of NetOptix common stock. Corning will account for the
transaction under the purchase method of accounting. Based on the average
closing price for Corning for a range of days surrounding the announcement, the
transaction is valued at approximately $2.1 billion, most of which will be
allocated to purchased intangibles and goodwill. Corning currently expects
purchased intangibles and goodwill to be amortized over 10 years and to be non
deductible for tax purposes. A study is currently underway to determine the
existence of any in-process research and development. If the study concludes a
charge is necessary, Corning will record the appropriate amount in the period
the transaction closes. Corning expects the transaction to close in mid-May.
Each of these transactions supports Corning's strategic growth initiatives in
the Telecommunications segment.
Operating Segments
Corning groups its products into three operating segments: Telecommunications,
Advanced Materials and Information Display. Corning includes the earnings of
equity affiliates that are closely associated with Corning's operating segments
in segment net income. Information about the performance of Corning's three
operating segments for the first quarter of 2000 and 1999 is presented below.
These amounts do not include revenues, expenses and equity earnings not
specifically identifiable to segments. Corning has changed the performance
measurement of its operating segments to a new metric - net income excluding
amortization of purchased intangibles and goodwill, purchased in-process
research and development, one-time acquisition costs, discontinued operations
and other non-recurring items. Note 1 to the consolidated financial statements
includes a reconciliation of segment results to Corning's net income. The
segment results for 1999 have been restated to conform to the new measure.
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.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Telecommunications Three Months Ended
(In millions) March 31,
2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $893.4 $593.3
Research, development and engineering expenses $ 77.1 $ 56.1
Interest expense $ 15.2 $ 12.4
Segment earnings before minority interest
and equity earnings $107.8 $ 60.4
Minority interest in earnings of subsidiaries 3.0 (4.3)
Equity in earnings (losses) of associated companies (0.4) 4.0
------ ------
Segment net income $110.4 $ 60.1
====== ======
Segment earnings before minority interest and
equity earnings as a percentage of segment sales 12.1% 10.2%
Segment net income as a percentage of segment sales 12.4% 10.1%
- --------------------------------------------------------------------------------
</TABLE>
The Telecommunications Segment produces optical fiber and cable, optical
hardware and equipment and photonic modules and components for the worldwide
telecommunications industry.
First quarter
Sales in the Telecommunications Segment increased 51% over the first quarter of
1999 to approximately $900 million. Excluding acquisitions sales growth for the
same period was 45%. The sales growth in the segment was led primarily by
volume gains in the optical fiber and cable and photonic technologies
businesses. Segment net income rose 84% in 2000 compared to 1999. The
percentage increase in segment net income exceeds the increase in sales,
reflecting an overall increase in segment gross margin percentage and a decrease
in research, development and engineering as a percentage of sales.
Sales in the optical fiber and cable business in 2000 increased 45% over 1999 to
approximately $480 million. The increase in sales resulted primarily from the
impact of acquisitions and strong volume gains. Approximately $30 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 the remaining 50% interest in Siecor GmbH in the first
quarter of 2000
Excluding the impact of these acquisitions, sales in the optical fiber and cable
business increased approximately 35% for the year due to volume gains of more
than 50%, reflecting continued strong demand for Corning's premium fiber
products. Volume of premium fiber and cable products, including Corning's LEAF
- -Registered Trademark- optical fiber, tripled over the same period in 1999.
Price declines ranged between 5% and 15% for Corning's optical fiber and cable
products in comparison with last year's first quarter. The weighted average
optical fiber and cable price in 2000 declined approximately 9% compared to
1999. The rate of price declines for cabled fiber products slowed during the
first quarter of 2000 commensurate with the worldwide tightening of supply of
optical fiber.
As a result of continued strong worldwide demand for optical fiber and cable,
Corning continues to produce at maximum manufacturing capacity. In the first
quarter, Corning announced an approximate $750 million expansion of its Concord
and Wilmington, North Carolina fiber production facilities. The expansions are
expected to come on-line between 2001 and 2002 and increase capacity more than
50%.
Net income from the optical fiber and cable business increased more than 50% in
the first quarter of 2000 compared to the same period in 1999. The percentage
increase in net income is higher than that of sales because increased volume of
higher margin products more than offset price declines.
<PAGE>
Sales in the telecommunications hardware and equipment business, including the
Gilbert Engineering business acquired in the Oak Industries merger, increased
59% in the first quarter of 2000 to approximately $185 million. This increase
resulted primarily from a higher volume of existing products and particularly
strong demand from cable television customers, offset in part by price declines
and the impact of the sale of Republic Wire and Cable in the third quarter of
1999. Overall net income increased more than 75%, primarily due to volume
increases.
The photonic technologies business, including the Lasertron -Registered
Trademark- business acquired in the Oak Industries merger, manufactures photonic
modules and components primarily for the optical amplification market. This
business realized strong volume gains in the first quarter 2000 led by new
product sales. Sales in this business increased approximately 90% in first
quarter 2000 to approximately $175 million compared to 1999 prior period sales
of approximately $90 million. The operating performance in this business
improved in 2000 as a result of strong volume and productivity gains partially
offset by price declines and increased operating expenses. Due to continued
investment in research and development, this business continues to incur a loss,
however, the overall first quarter results improved approximately 50% in
comparison to first quarter 1999. In April, Corning announced the addition of a
second amplifier assembly plant in Benton Park, PA, with startup production
expected in the third quarter of 2000. This expansion will more than double
Corning's module and amplifier manufacturing capacity. Corning also announced a
$45 million expansion of its Corning Lasertron facility in Bedford, MA that will
double its manufacturing capacity in the first quarter of 2001.
The other businesses in this segment are the Frequency Controls and Controls
businesses acquired in the Oak merger. Sales in these businesses increased 8%
in 2000 to approximately $60 million. Net income from these businesses improved
slightly, moving from a loss in the first quarter of 1999 to modest
profitability in 2000, primarily due to volume increases at Frequency Controls.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Advanced Materials Three Months Ended
(In millions) March 31,
2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $264.2 $252.1
Research, development and engineering expenses $ 27.2 $ 21.9
Interest expense $ 5.5 $ 4.3
Segment earnings before minority interest
and equity earnings $ 21.9 $ 20.0
Minority interest in earnings of subsidiaries 0.1
Equity in earnings of associated companies 6.5 4.1
------ ------
Segment net income $ 28.4 $ 24.2
====== ======
Segment earnings before minority interest and
equity earnings as a percentage of segment sales 8.3% 7.9%
Segment net income as a percentage of segment sales 10.7% 9.6%
- --------------------------------------------------------------------------------
</TABLE>
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.
First quarter
Sales in the Advanced Materials Segment increased approximately 5% in comparison
to 1999 to approximately $265 million, primarily due to growth in the
semiconductor materials business and the environmental products business, offset
by the divestiture of the Quanterra business in January 2000. Segment net
income increased 17% in 2000 in comparison to last year. This significant
increase resulted from sales gains, as well as manufacturing efficiencies, in
the semiconductor materials business. Increased equity earnings from Eurokera
and Keraglass, S.N.C. also contributed to segment results.
<PAGE>
Sales in the environmental products business increased 6% over 1999 to
approximately $105 million. The increase in sales resulted from a strong
worldwide automotive market and continued strong demand for Corning's Thinwall
products. Earnings in this business decreased approximately 5%, primarily due
to exchange rate losses, elevated spending for capacity expansion plans in South
Africa and China and increased research and development spending.
Sales in the science products business of approximately $65 million in the first
quarter were down 6% in comparison to 1999 sales as distributors depleted excess
inventories built at year end. Earnings in this business decreased in 2000,
primarily due to lower volume and continued higher research and development
spending on advanced life science products.
Sales in Corning's other Advanced Materials businesses increased 11% from 1999
to approximately $95 million. This increase was led by higher sales of high
purity fused silica products in the semiconductor materials business as the
semiconductor manufacturing equipment industry continues to recover. Earnings
from this business more than doubled over first quarter 1999. Corning's new
manufacturing facility near Charleston, South Carolina is now bringing capacity
on-line to meet increasing market demand.
In January 2000, Corning sold Quanterra Incorporated to Severn Trent
Laboratories for $35 million. Corning recognized a non-operating gain in the
first quarter of 2000 of $6.8 million ($4.2 million after tax), or $0.02 per
share from this transaction. This non-operating gain is not included in the
results of the Advanced Materials Segment.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Information Display Three Months Ended
(In millions) March 31,
2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $187.9 $145.7
Research, development and engineering expenses $ 5.8 $ 5.4
Interest expense $ 3.4 $ 2.6
Segment earnings before minority interest
and equity earnings $ 19.3 $ 9.4
Minority interest in earnings of subsidiaries (5.6) (5.9)
Equity in earnings of associated companies 26.8 12.4
------ ------
Segment net income $ 40.5 $ 15.9
====== ======
Segment earnings before minority interest and
equity earnings as a percentage of segment sales 10.3% 6.5%
Segment net income as a percentage of segment sales 21.6% 10.9%
- --------------------------------------------------------------------------------
</TABLE>
The Information Display Segment manufactures glass panels and funnels for
televisions and CRTs (conventional video components), liquid crystal display
glass for flat panel display (advanced display products) and projection video
lens assemblies.
First quarter
Sales in the Information Display Segment increased 29% in first quarter 2000 to
approximately $190 million in comparison to the prior period in 1999, primarily
due to strong growth in the advanced display products business and the
projection video components business. Segment net income almost tripled,
reflecting strong equity earnings and gains within the advanced display products
business.
Sales in the conventional video components business rose 8% in 2000 to
approximately $85 million, primarily due to increases in volume and an improving
market. Earnings in this business improved due to aggressive cost reduction
programs and the upswing in volume.
<PAGE>
Sales in the advanced display products business in 2000 increased over 45%
compared to 1999 to approximately $60 million. This significant increase was
the result of strong demand for the business' liquid crystal glass for flat
panel displays, led by increased penetration into the desktop display market.
Earnings in this business increased significantly compared to the same quarter
in 1999, reflecting volume gains, stable pricing, and manufacturing
improvements, along with significant equity earnings from Samsung Corning
Precision, a Korean manufacturer of liquid crystal display glass.
As a result of continued strong demand for flat panel displays, Corning
continues to produce at maximum manufacturing capacity. Corning's previously
announced expansion plans to double its worldwide production capabilities by
year end are on schedule with two new tanks in the first quarter, one each in
Japan and Korea.
Sales in the projection video components business increased 62% in 2000 to
approximately $45 million as a result of strong volume growth for projection
televisions driven by demand for larger size televisions in the entertainment
market sector. Earnings in this business doubled in 2000 compared to 1999,
primarily due to volume gains and manufacturing efficiencies.
Taxes on Income
Corning's effective tax rate (ETR), excluding non-recurring items, was 33.0% in
first quarter 2000 and 30.8% in the prior period of 1999. The increase in ETR
over 1999 was due to a greater percentage of Corning's earnings mix resulting
from consolidated entities with higher effective tax rates. Upon the closing
of the NetOptix acquisition, Corning's ETR is expected to increase due to the
significant amount of non-deductible goodwill generated.
Liquidity and Capital Resources
On January 31, 2000, Corning completed an equity offering of 14.95 million
shares of common stock, which generated net proceeds of approximately $2.2
billion. In February 2000, Corning completed an offering of euro denominated
securities, which generated net proceeds of approximately $485 million. The
proceeds were used to finance the previously announced Siemens acquisition of
$1.4 billion, which included approximately $120 million of assumed debt and
contingent consideration of $145 million. In addition to funding the Siemens
acquisition, proceeds from the first quarter 2000 financing transactions were
used to repay $98 million of debt assumed in the merger with Oak Industries and
$372 million of outstanding commercial paper. The remaining proceeds of $1.1
billion will be used for general corporate purposes, including funding
Corning's capital spending program.
Corning's working capital increased from $430.2 million at the end of 1999 to
$2.2 billion at the end of the first quarter. The ratio of current assets to
current liabilities was 2.8 at the end of March, compared to a current ratio of
1.3 at year end 1999. The increase in working capital is due primarily to the
financing transactions and higher accounts receivable and inventory balances
and a reduction in short term debt. Corning's long-term debt as a percentage
of total capital decreased from 35% at year-end 1999 to 28% at the end of the
first quarter. The decrease is primarily due to the equity offering.
Corning believes that its financial condition is strong and that its cash,
marketable securities, operating cash flows, access to equity capital markets
and borrowing capacity, taken together, provide adequate resources to fund
ongoing operating requirements, future capital expenditures related to the
expansion of existing businesses and external growth.
Cash Flows
Cash and short-term investments at the end of the first quarter increased from
December, 1999 by approximately $1 billion. This increase is the result of
financing activities which provided cash of $2.4 billion, offset partially by
operating and investing activities which used cash of $51.7 million and $1.3
billion, respectively.
Net cash provided by operating activities decreased in first quarter 2000
compared to first quarter 1999, primarily due to the payment of a dividend by
Siecor Corporation to its shareholders. Excluding this payment, cash flow
generated from operations would have been $43.3 million compared to cash
provided by operations of $62.8 million in the first quarter of 1999. The
decrease is due mainly to increased cash from operations being offset by
increased working capital.
<PAGE>
Net cash used by investing activities totaled $1.3 billion in the first quarter
of 2000, compared to cash used of $161.2 million in the prior period of 1999.
The increase in cash used was primarily related to the Siemens transaction, the
PTRC acquisition and transaction costs incurred for the Oak Industries merger.
Corning continued to invest significant cash in capital expansions in the first
quarter. Capital spending for the first three months of 2000 totaled $213.1
million compared to $150.0 million in the same period of 1999. Corning
currently expects its capital spending for the full year to be in the range of
$1.4 to $1.5 billion.
Net cash provided by financing activities totaled $2.4 billion in 2000 compared
to $211.8 million in 1999. The substantial increase is due primarily to the
equity offering which generated cash proceeds of $2.2 billion and the Euro-debt
offering which provided an additional $485 million.
Dividends paid to common shareholders in the quarter totaled $49.9 million
compared with $43.6 million in the same period of 1999.
Cash used in discontinued operations totaled $1.2 million and $1.4 million in
first quarter 2000 and 1999, respectively.
Dow Corning Corporation
Corning is a 50% owner of Dow Corning Corporation (Dow Corning), a manufacturer
of silicones. The other 50% of Dow Corning is owned by The Dow Chemical
Company (Dow Chemical).
On May 15, 1995, Dow Corning voluntarily filed for protection under Chapter 11
of the United States Bankruptcy Code as a result of several negative
developments related to the breast implant litigation. At that time, Corning
management believed it was impossible to predict if and when Dow Corning would
successfully emerge from Chapter 11 proceedings. As a result, Corning recorded
an after-tax charge of $365.5 million, or $1.62 per share, to fully reserve its
investment in Dow Corning and discontinued recognition of equity earnings from
Dow Corning in 1995.
On November 30, 1999, the Bankruptcy Court entered an order confirming the Joint
Plan and indicated that certain written opinions would follow. On December 21,
1999, the Bankruptcy Court issued an opinion that approved the principal
elements of the Joint Plan with respect to tort claimants, but construed the
Joint Plan as providing releases for third parties (including Corning and Dow
Chemical as shareholders) only with respect to tort claimants who voted in favor
of the Joint Plan. A number of parties opposing the Joint Plan filed appeals on
a variety of grounds to the United States District Court for the Eastern
District of Michigan. Dow Corning and the Committee of Tort Claimants have
filed a notice of appeal (as well as motions to vacate and for related relief)
seeking review of the ruling limiting the scope of the shareholder releases.
Corning and Dow Chemical filed separate notices of appeal on this issue and each
joined in the motions by the Proponents of the Joint Plan. Some parties,
including the United States of America and the Nevada tort claimants, have filed
motions asking the District Court to dismiss the appeals of Dow Corning, Dow
Chemical and Corning, and the Tort Claimants Committee, as untimely as not taken
within 10 days of the November 30 order of confirmation. These appeals and
motions were argued together before the District Court on April 12-13, 2000.
The District Court reserved judgment. The ruling on the appeals and motions is
expected in the second quarter of 2000. Further appellate review is anticipated
regardless of the outcome in the District Court. After all appeals are
exhausted, if the Joint Plan is upheld but the shareholder releases are
effective only for those voting in favor of the Joint Plan, Corning would expect
to defend any remaining claims against it on the same grounds that led to a
series of orders and judgments dismissing all claims against Corning in the
federal courts and the state courts as described under the heading IMPLANT TORT
LAWSUITS in Part II, Item 1, Legal Proceedings. With respect to the possibility
of additional direct or indirect claims against Corning if the anticipated full
releases are not reinstated in the Joint Plan, management believes that such
claims lack merit and that the breast implant litigation against Corning will be
resolved without material impact on Corning's financial statements.
<PAGE>
Pittsburgh Corning Corporation
The Company owns 50% of the capital stock of Pittsburgh Corning Corporation
(PCC). The other 50% shareholder is PPG Industries, Inc. For over 25 years,
PCC and several other defendants have been named in numerous lawsuits involving
claims alleging personal injury from exposure to asbestos. As of April 16,
2000, PCC had in excess of 140,000 open asbestos claims alleging billions of
dollars in damages. The Company itself is named as a defendant in only a
portion of the cases naming PCC (approximately 10 cases with 12,400 claimants).
In the late 1980s and early 1990s, the Company's motion for summary judgment
dismissing it from cases filed against PCC was granted by a federal district
court in Texas and a state trial court in Pennsylvania on the grounds that PCC
is a genuine and separate corporation. In recent years, as claims against PCC
have been set for trial, the Company was successful in securing dismissals with
prejudice by filing motions for summary judgment since no grounds exist for
disregarding PCC's separate corporate status.
In the first quarter of 2000, PCC incurred adverse verdicts in five trials
involving 19 claimants. The aggregate amount of those verdicts may exceed $30
million, although insurance available to PCC may offset a portion of those
verdicts. On April 16, 2000, PCC filed for Chapter 11 reorganization in the
United States Bankruptcy Court for the Western District of Pennsylvania. In its
filing, PCC indicated that the high costs of defending or settling asbestos
claims, coupled with sharply increasing settlement demands, had threatened its
financial health and left it with no alternative means of resolving the asbestos
claims brought against it. PCC indicated that it has excess insurance policies,
which are shared with PPG, and which have approximately $200 to $300 million of
unexhausted excess products liability coverage. As a result of PCC's filing,
Corning recorded an after tax charge of $36.3 million, or $0.13 per share, to
impair its entire investment in PCC.
At the time of its Chapter 11 filing, PCC sought and obtained a temporary
restraining order and filed a motion for a preliminary injunction against the
prosecution of asbestos actions against its shareholders. A hearing on the
application for an injunction was held on April 26, 2000 and was continued to
June 15, 2000. The Bankruptcy Court has continued the temporary restraining
order through June 30, 2000.
Although the Chapter 11 filing may lead to additional claims against Corning,
management believes that the separate corporate status of PCC will continue to
be upheld and that no grounds exist for direct claims against Corning.
New Accounting Pronouncements
In December, the Securities and Exchange Commission staff released Staff
Accounting Bulletin (SAB) No.101, "Revenue Recognition in Financial Statements,"
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. Management does not expect SAB No.101 to have
a material effect on Corning's financial position or results of operations.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
The statements in this Form 10-Q which are not historical facts or information
are forward-looking statements. These forward-looking statements 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,
. sufficiency of manufacturing capacity and efficiencies,
. realization of cost reductions,
. availability and costs of critical materials,
. new product development and commercialization,
. 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,
. the ability to enforce patents and
. other risks detailed in Corning's Securities and Exchange Commission filings.
<PAGE>
ITEM 3. QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
There has been no significant change in Corning's exposure to market risk during
the first quarter of 2000. For discussion of Corning's exposure to market risk,
refer to Item 7, Market Risk Disclosures, contained in the Annual Report
incorporated by reference in Form 10-K for the year ended December 31, 1999 as
amended on April 7, 2000.
<PAGE>
Part II - Other Information
---------------------------
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
There are no pending legal proceedings to which Corning or any of its
subsidiaries is a party or of which any of their property is the subject which
are material in relation to the consolidated financial statements.
Environmental Litigation. Corning has been named by the Environmental Protection
Agency under the Superfund Act, or by state governments under similar state
laws, as a potentially responsible party at 11 active hazardous waste sites.
Under the Superfund Act, all parties who may have contributed any waste to a
hazardous waste site, identified by such Agency, are jointly and severally
liable for the cost of cleanup unless the Agency agrees otherwise. It is
Corning's policy to accrue for its estimated liability related to Superfund
sites and other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued approximately $20.6 million for its estimated
liability for environmental cleanup and litigation at March 31, 2000. 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.
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. In the period
from December 1996 through February 1998, Dow Corning filed a plan of
reorganization and two amended plans, each of which was opposed by the Tort
Claimants committee and other creditor representatives. In 1998, Dow Corning
and the Tort Claimants Committee engaged in extended negotiations and reached
certain compromises. On November 8, 1998, Dow Corning and the Tort Claimants
Committee jointly filed a revised Plan of Reorganization ("Joint Plan"). The
Joint Plan and related disclosure materials were mailed to claimants for their
approval. Following a favorable vote from all but four classes of creditors, a
hearing to confirm the Joint Plan was held in late June and into July 1999. On
November 30, 1999, the Bankruptcy Court entered an order confirming the Joint
Plan and indicated that certain written opinions would follow. On December 21,
1999, the Bankruptcy Court issued an opinion that approved the principal
elements of the Joint Plan with respect to tort claimants, but construed the
Joint Plan as providing releases for third parties (including Corning and Dow
Chemical as shareholders) only with respect to tort claimants who voted in favor
of the Joint Plan. A number of parties opposing the Joint Plan filed appeals on
a variety of grounds to the United States District Court for the Eastern
District of Michigan. Dow Corning and the Committee of Tort Claimants have
filed a notice of appeal (as well as motions to vacate and for related relief)
seeking review of the ruling limiting the scope of the shareholder releases.
Corning and Dow Chemical filed separate notices of appeal on this issue and each
joined in the motions by the Proponents of the Joint Plan. Some parties,
including the United States of America and the Nevada tort claimants, have filed
motions asking the District Court to dismiss the appeals of Dow Corning, Dow
Chemical and Corning, and the Tort Claimants Committee, as untimely as not taken
within 10 days of the November 30 order of confirmation. These appeals and
motions were argued together before the District Court on April 12-13, 2000.
The District Court reserved judgment. The ruling on the appeals and motions is
expected in the second quarter of 2000. Further appellate review is anticipated
regardless of the outcome in the District Court. After all appeals are
exhausted, if the Joint Plan is upheld but the shareholder releases are
effective only for those voting in favor of the Joint Plan, Corning would expect
to defend any remaining claims against it on the same grounds that led to a
series of orders and judgments dismissing all claims against Corning in the
federal courts and the state courts as described under the heading IMPLANT TORT
LAWSUITS immediately hereafter. With respect to the possibility of additional
direct or indirect claims against Corning if the anticipated full releases are
not reinstated in the Joint Plan, management believes that such claims lack
merit and that the breast implant litigation against Corning will be resolved
without material impact on Corning's financial statements.
<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 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. Corning and Dow
Chemical have each 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.
Implant Tort Lawsuits: In the period from 1991 through December 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 December
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 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, the intermediate appeals court in Louisiana vacated this judgment as
premature. Corning 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 the fourth quarter of 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. The Michigan Federal Court heard Corning's motion for summary
judgment on February 27, 1998, but has deferred its ruling in light of the
proceeding in the Bankruptcy Court. 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 and believes the implant litigation against
Corning will be resolved without material impact on Corning's financial
statements.
<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.
This action is pending in the United States District Court for the Southern
District of New York. 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 Corning's 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.
In 1997 the Court dismissed the individual defendants from the case. In
December 1998, Corning filed a motion for summary judgment requesting that all
claims against it be dismissed. Plaintiffs requested the opportunity 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. In April 2000, the
District Court ordered two additional depositions, one of which would be that of
Dow Corning's former General Counsel. Because it believes the deposition will
necessarily impinge on privileged information, Dow Corning has filed a petition
with the United States Court of Appeals for the Second Circuit seeking immediate
relief. The discovery process is continuing and the Court has set not 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 one or more patents 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. In February 2000, Shin Etsu filed a second suit against
Corning in Japan alleging that Corning's fused silica sold in Japan for use in
the optical components of stepper machines infringed another Shin Etsu patent.
Based upon its investigation to date, management believes there are good
defenses to this second suit as well.
Quest Diagnostics. Government Investigations and Related Claims. On December
31, 1996, Corning completed the spin-off of its health care services businesses
by the distribution to its shareholders of the Common Stock of Quest Diagnostics
Incorporated ("Quest Diagnostics") and Covance Inc. ("Covance"). In connection
with these distributions, Quest Diagnostics assumed financial responsibility for
the liabilities related to the contract research business. Corning agreed to
indemnify Quest Diagnostics against all monetary penalties, fines or settlements
for any governmental claims arising out of alleged violations of applicable
federal fraud and health care statutes and relating to billing practices of
Quest Diagnostics and its predecessors that were pending at December 31, 1996.
Corning also agreed to indemnify Quest Diagnostics for 50% of the aggregate of
all judgment or settlement payments made by Quest Diagnostics that are in excess
of $42.0 million in respect of claims by private parties (i.e., nongovernmental
parties such as private insurers) that relate to indemnified or previously
settled governmental claims and that allege over billings by Quest Diagnostics,
or any existing subsidiaries of Quest Diagnostics, for services provided prior
to December 31, 1996; provided, however, such indemnification is not to exceed
$25.0 million in the aggregate and that all amounts indemnified against by
Corning for the benefit of Quest Diagnostics are to be calculated on a net
after-tax basis. Such share of judgments or settlement payments does not cover
(i) any governmental claims that arise after December 31, 1996 pursuant to
service of subpoena or other notice of such investigation after December 31,
1996, (ii) any nongovernmental claims unrelated to the indemnified governmental
claims or investigations, (iii) any nongovernmental claims not settled prior to
December 31, 2001, (iv) any consequential or incidental damages relating to the
billing claims, including losses of revenues and profits as a consequence of
exclusion for participation in federal or state health care programs or (v) the
fees and expenses of litigation. 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>
Pittsburgh Corning Corporation
The Company owns 50% of the capital stock of Pittsburgh Corning Corporation
(PCC). The other 50% shareholder is PPG Industries, Inc. For over 25 years,
PCC and several other defendants have been named in numerous lawsuits involving
claims alleging personal injury from exposure to asbestos. As of April 16,
2000, PCC had in excess of 140,000 open asbestos claims alleging billions of
dollars in damages. The Company itself is named as a defendant in only a
portion of the cases naming PCC (approximately 10 cases with 12,400 claimants).
In the late 1980s and early 1990s, the Company's motion for summary judgment
dismissing it from cases filed against PCC was granted by a federal district
court in Texas and a state trial court in Pennsylvania on the grounds that PCC
is a genuine and separate corporation. In recent years, as claims against PCC
have been set for trial, the Company was successful in securing dismissals with
prejudice by filing motions for summary judgment since no grounds exist for
disregarding PCC's separate corporate status.
In the first quarter of 2000, PCC incurred adverse verdicts in five trials
involving 19 claimants. The aggregate amount of those verdicts may exceed $30
million, although insurance available to PCC may offset a portion of those
verdicts. On April 16, 2000, PCC filed for Chapter 11 reorganization in the
United States Bankruptcy Court for the Western District of Pennsylvania. In its
filing, PCC indicated that the high costs of defending or settling asbestos
claims, coupled with sharply increasing settlement demands, had threatened its
financial health and left it with no alternative means of resolving the asbestos
claims brought against it. PCC indicated that it has excess insurance policies,
which are shared with PPG, and which have approximately $200 to $300 million of
unexhausted excess products liability coverage. As a result of PCC's filing,
Corning recorded an after tax charge of $36.3 million, or $0.13 per share, to
impair its entire investment in PCC.
At the time of its Chapter 11 filing, PCC sought and obtained a temporary
restraining order and filed a motion for a preliminary injunction against the
prosecution of asbestos actions against its shareholders. A hearing on the
application for an injunction was held on April 26, 2000 and was continued to
June 15, 2000. The Bankruptcy Court has continued the temporary restraining
order through June 30, 2000.
Although the Chapter 11 filing may lead to additional claims against Corning,
management believes that the separate corporate status of PCC will continue to
be upheld and that no grounds exist for direct claims against Corning.
<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 January 11, 2000, was filed in connection
with the Registrant's proposed public offering of common stock.
A report on Form 8-K dated January 24, 2000, was filed in connection
with the Registrant's 1999 results.
A report on Form 8-K dated January 26, 2000, was filed in connection
with the Registrant's proposed public offering of common stock.
A report on Form 8-K dated February 15, 2000, was filed in connection
with the Registrant's agreement to acquire NetOptix Corporation.
A report on Form 8-K dated February 17, 2000, was filed in connection
with the Registrant's acquisition of Siemens AG's Worldwide Optical
Cable and Hardware business and the remaining 50% of its two co-
investments with Siemens.
A report on Form 8-K dated February 22, 2000, was filed in connection
with the Registrant's merger with Oak Industries, Inc.
A report on Form 8-K dated March 29, 2000, was filed in connection
with litigation against the Registrant's equity investment,
Pittsburgh Corning Corporation.
Other items under Part II are not applicable.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNING INCORPORATED
----------------------------------------------------
- --
(Registrant)
May 12, 2000 /s/ JAMES B. FLAWS
------------------- ----------------------------------------------------
Date James B. Flaws
Executive Vice President and Chief Financial Officer
May 12, 2000 /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 28
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 Year Ended
------------------- --------------------------------------------
March 31, March 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2000 1999 1999 1998 1997 1996 1995
--------- --------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before taxes on income $136.8 $121.0 $ 674.9 $482.3 $665.8 $519.1 $356.9
Adjustments:
Share of earnings before
taxes of 50% owned companies 51.1 23.7 167.8 175.2 111.3 129.5 94.7
Gain (loss) before taxes of
greater than 50% owned
unconsolidated subsidiary (0.6) (1.2) 0.7 (3.1)
Distributed income of less than
50% owned companies and share
of loss if debt is guaranteed (1.1)
Amortization of capitalized
interest 2.9 3.8 14.5 14.4 16.6 11.8 9.6
Fixed charges net of capitalized
interest 39.6 36.8 156.9 138.8 154.9 113.8 90.8
------ ------ -------- ------ ------ ------ ------
Earnings before taxes and fixed
charges as adjusted $229.8 $185.3 $1,012.9 $809.6 $948.6 $774.9 $548.9
====== ====== ======== ====== ====== ====== ======
Fixed charges:
Interest incurred $ 32.0 $ 32.7 $ 134.5 $113.6 $107.7 $ 79.4 $ 71.7
Share of interest incurred of 50%
owned companies and interest on
guaranteed debt of less than
50% owned companies 6.6 9.6 33.5 45.4 51.5 38.8 10.2
Interest incurred by greater
than 50% owned unconsolidated
subsidiary 0.7
Portion of rent expense which
represents interest factor 5.9 5.3 21.4 19.4 17.2 13.7 14.6
Share of portion of rent expense
which represents interest
factor for 50% owned companies 1.9 1.4 5.0 5.0 3.8 1.4 2.7
Portion of rent expense which
represents interest factor
for greater than 50% owned
unconsolidated subsidiary
Amortization of debt costs 1.1 0.8 3.9 3.4 1.8 2.6 0.5
------ ------ -------- ------ ------ ------ ------
Total fixed charges 47.5 49.8 198.3 186.8 182.0 135.9 100.4
Capitalized interest (7.9) (13.0) (41.4) (48.0) (27.1) (22.1) (9.6)
------ ------ -------- ------ ------ ------ ------
Total fixed charges net of
capitalized interest $ 39.6 $ 36.8 $ 156.9 $138.8 $154.9 $113.8 $ 90.8
====== ====== ======== ====== ====== ====== ======
Preferred dividends:
Preferred dividend requirements $ 0.2 $ 2.6 $ 3.5 $ 15.3 $ 15.3 $ 15.7 $ 15.7
Ratio of pre-tax income to income
before minority interest
and equity earnings 1.7 1.4 1.4 1.4 1.5 1.5 1.5
------ ------ -------- ------ ------ ------ ------
Pre-tax preferred dividend
requirement 0.3 3.6 4.9 21.4 23.0 23.6 23.6
Total fixed charges 47.5 49.8 198.3 186.8 182.0 135.9 100.4
------ ------ -------- ------ ------ ------ ------
Fixed charges and pre-tax preferred
dividend requirement $ 47.8 $ 53.4 $ 203.2 $208.2 $205.0 $159.5 $124.0
====== ====== ======== ====== ====== ====== ======
Ratio of earnings to combined fixed
charges and preferred dividends 4.8x 3.5x 5.0x 3.9x 4.6x 5.0x 4.4x
====== ====== ======== ====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 68,400
<SECURITIES> 1,244,700
<RECEIVABLES> 1,146,600
<ALLOWANCES> 24,600
<INVENTORY> 787,000
<CURRENT-ASSETS> 3,500,600
<PP&E> 3,629,100
<DEPRECIATION> 2,389,300
<TOTAL-ASSETS> 9,014,300
<CURRENT-LIABILITIES> 1,265,000
<BONDS> 1,987,800
0
10,400
<COMMON> 3,775,800
<OTHER-SE> 1,103,000
<TOTAL-LIABILITY-AND-EQUITY> 9,014,300
<SALES> 1,351,400
<TOTAL-REVENUES> 1,381,700
<CGS> 787,800
<TOTAL-COSTS> 787,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,100
<INTEREST-EXPENSE> 24,200
<INCOME-PRETAX> 136,800
<INCOME-TAX> 54,900
<INCOME-CONTINUING> 76,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,900
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.28
</TABLE>
