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, 2000
------------------
[ ] 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
---------------------------------------- ------------------------------------
(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:
884,186,991 shares of Corning's Common Stock, $0.50 Par Value, were outstanding
as of September 30, 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 nine months and
three months ended September 30, 2000 and 1999 3
Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 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 presentation 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 pursuant to the rules and regulations of the
Securities & Exchange Commission and in accordance with 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.
On August 16, 2000, Corning authorized a three-for-one stock split of its
common stock, effected in the form of a stock dividend, which was distributed
on October 3, 2000, to shareholders of record on September 5, 2000. All of the
share and per share data in these financial statements and footnotes have been
retroactively adjusted to reflect the stock split.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended Sept. 30, Ended Sept. 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Net sales $5,042.8 $3,372.0 $1,915.8 $1,245.3
Royalty, interest, and
dividend income 78.6 30.0 28.2 8.7
Nonoperating gains 6.8 30.0 30.0
-------- -------- -------- --------
5,128.2 3,432.0 1,944.0 1,284.0
Deductions
Cost of sales 2,930.4 2,074.2 1,112.7 767.0
Selling, general and
administrative expenses 713.6 475.4 255.8 172.0
Research, development and
engineering expenses 371.3 272.1 141.1 100.2
Amortization of purchased
intangibles including goodwill 144.2 21.2 81.9 7.3
Interest expense 77.9 66.1 25.2 26.0
Acquisition-related charges 139.7
Provision for impairment and
restructuring 15.5 15.5
Other, net 39.7 32.5 7.0 11.9
-------- -------- -------- --------
Income before taxes 711.4 475.0 320.3 184.1
Taxes on income 303.5 145.3 111.7 55.7
-------- -------- -------- --------
Income before minority interest
and equity earnings 407.9 329.7 208.6 128.4
Minority interest in earnings
of subsidiaries (17.4) (46.1) (7.3) (18.6)
Dividends on convertible preferred
securities of subsidiary (2.3)
Equity in earnings of associated
companies 125.5 84.1 52.3 32.1
Impairment of equity investment (36.3)
-------- -------- -------- --------
Net Income $ 479.7 $ 365.4 $ 253.6 $ 141.9
======== ======== ======== ========
Basic Earnings Per Share $ 0.57 $ 0.48 $ 0.29 $ 0.18
======== ======== ======== ========
Diluted Earnings Per Share $ 0.55 $ 0.47 $ 0.28 $ 0.18
======== ======== ======== ========
Dividends Declared $ 0.18 $ 0.18 $ 0.06 $ 0.06
======== ======== ======== ========
Shares used in computing
earnings per share
Basic earnings per share 844.2 763.2 876.6 772.8
======== ======== ======== ========
Diluted earnings per share 873.0 793.8 906.6 796.8
======== ======== ======== ========
</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,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 104.5 $ 121.8
Short-term investments, at cost, which
approximates market value 1,133.0 158.6
Accounts receivable, net of doubtful accounts and
allowances - $51.6/2000; $19.9/year-end 1999 1,295.4 872.4
Inventories 943.2 602.2
Deferred taxes on income and other current assets 239.6 229.2
--------- --------
Total current assets 3,715.7 1,984.2
--------- --------
Investments
Associated companies, at equity 441.0 421.9
Other, at cost or fair value 108.1 82.5
--------- --------
549.1 504.4
--------- --------
Plant and equipment, at cost, net of accumulated
depreciation $2,585.4/2000; $2,356.9/year-end 1999 4,092.3 3,201.7
Goodwill, net of accumulated amortization
$216.2/2000; $99.5/year-end 1999 3,233.2 463.9
Other intangible assets, net of accumulated
amortization $32.5/2000; $12.8/year-end 1999 348.9 42.8
Other assets 248.9 329.0
--------- --------
Total Assets $12,188.1 $6,526.0
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Loans payable $ 111.4 $ 420.7
Accounts payable 506.8 418.0
Other accrued liabilities 850.9 715.3
--------- --------
Total current liabilities 1,469.1 1,554.0
--------- --------
Other liabilities 772.9 720.6
Loans payable beyond one year 1,946.3 1,490.4
Minority interest in subsidiary companies 138.7 284.8
Convertible preferred stock 8.9 13.5
Common Shareholders' Equity
Common stock, including excess over par value
and other capital - Par value $0.50 per share;
Shares authorized: 1.2 billion; Shares issued:
958.7 million/2000 and 855.6 million/year-end 1999 6,600.0 1,359.3
Retained earnings 2,113.7 1,790.0
Less cost of 75.9 million/2000 and 75.0 million/
year-end 1999 shares of common stock in treasury (746.9) (656.0)
Accumulated other comprehensive loss (114.6) (30.6)
--------- --------
Total common shareholders' equity 7,852.2 2,462.7
--------- --------
Total Liabilities and Shareholders' Equity $12,188.1 $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>
Nine Months Ended
September 30,
---------------------
2000 1999*
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 479.7 $ 365.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 374.2 277.0
Amortization 146.9 25.1
Nonoperating gains (6.8) (30.0)
Acquisition-related charges 139.7
Provision for impairment and restructuring 15.5
Impairment of equity investment 36.3
Employee benefit expense less than cash funding (9.2) (21.2)
Equity in earnings of associated companies
in excess of dividends received (92.8) (61.0)
Minority interest in earnings of subsidiaries
in excess of (less than) dividends paid (83.5) 32.1
Deferred tax (benefit)/expense (99.0) 23.2
Tax benefit on stock options 290.9 33.9
Other 44.3 36.1
Changes in operating assets and liabilities:
Accounts receivable (199.2) (101.7)
Inventory (199.1) (100.9)
Other current assets (33.9) (2.4)
Accounts payable and other current liabilities 87.0 9.8
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 875.5 500.9
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (976.4) (495.5)
Acquisitions of businesses and leased assets,
net of cash acquired (1,260.7) (171.3)
Proceeds from disposition of properties and
investments 56.7 53.2
Decrease (increase) in long-term investments
and other noncurrent assets 32.8 (37.4)
Transaction costs related to pooling of interests (43.9)
Other, net (0.6)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (2,191.5) (651.6)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of loans 786.0 629.9
Repayments of loans (634.3) (264.3)
Proceeds from issuance of common stock 2,343.8 84.5
Repurchases of common stock (86.8)
Redemption of common stock for income tax
withholding (54.5) (16.7)
Dividends paid (156.0) (132.5)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,285.0 214.1
-------- --------
Effect of exchange rates on cash (10.3) (2.6)
-------- --------
Cash used in discontinued operations (1.6) (10.3)
-------- --------
Net increase in cash and cash equivalents 957.1 50.5
Cash and cash equivalents at beginning of year 280.4 59.2
-------- --------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $1,237.5 $ 109.7
======== ========
SUPPLEMENTAL DATA:
Income taxes paid $ 51.4 $ 140.5
======== ========
Interest paid $ 101.8 $ 72.1
======== ========
</TABLE>
*Certain amounts have been reclassified to conform with the 2000 presentation.
The accompanying notes are an integral part of these statements.
<PAGE>
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Information by Operating Segment
Information about the performance of Corning's three operating segments for
the third quarter and nine months of 2000 and 1999 is presented below.
These amounts exclude revenues, expenses and equity earnings not
specifically identifiable to segments. In the first quarter of 2000,
Corning 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 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>
Nine months ended Three months ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Telecommunications
Net sales $3,577.7 $2,089.2 $1,402.1 $ 803.4
Research, development and
engineering expenses $ 264.3 $ 186.9 $ 103.0 $ 71.2
Interest expense $ 50.0 $ 42.5 $ 16.3 $ 17.3
Segment earnings before minority
interest and equity earnings $ 476.5 $ 231.6 $ 194.3 $ 89.8
Minority interest in (earnings)
losses of subsidiaries 3.0 (20.4) (7.4)
Equity in earnings (losses) of
associated companies (3.1) 11.4 0.1 4.8
-------- -------- -------- --------
Segment net income $ 476.4 $ 222.6 $ 194.4 $ 87.2
======== ======== ======== ========
Advanced Materials
Net sales $ 808.0 $ 774.5 $ 271.7 $ 257.7
Research, development and
engineering expenses $ 88.9 $ 68.8 $ 31.6 $ 23.7
Interest expense $ 15.0 $ 15.2 $ 3.8 $ 6.0
Segment earnings before minority
interest and equity earnings $ 74.5 $ 71.6 $ 28.7 $ 23.6
Minority interest in earnings
of subsidiaries (0.1)
Equity in earnings of
associated companies 17.2 13.7 5.4 6.1
-------- -------- -------- --------
Segment net income $ 91.7 $ 85.3 $ 34.1 $ 29.6
======== ======== ======== ========
Information Display
Net sales $ 640.3 $ 490.4 $ 236.8 $ 178.7
Research, development and
engineering expenses $ 18.1 $ 16.4 $ 6.5 $ 5.3
Interest expense $ 12.6 $ 8.0 $ 5.1 $ 2.7
Segment earnings before minority
interest and equity earnings $ 88.0 $ 40.1 $ 35.6 $ 12.9
Minority interest in earnings
of subsidiaries (20.4) (16.2) (7.3) (1.5)
Equity in earnings of
associated companies 107.1 52.9 45.0 18.3
-------- -------- -------- --------
Segment net income $ 174.7 $ 76.8 $ 73.3 $ 29.7
======== ======== ======== ========
Total segments
Net sales $5,026.0 $3,354.1 $1,910.6 $1,239.8
Research, development and
engineering expenses $ 371.3 $ 272.1 $ 141.1 $ 100.2
Interest expense $ 77.6 $ 65.7 $ 25.2 $ 26.0
Segment earnings before minority
interest and equity earnings $ 639.0 $ 343.3 $ 258.6 $ 126.3
Minority interest in earnings
of subsidiaries (17.4) (36.6) (7.3) (9.0)
Equity in earnings of
associated companies 121.2 78.0 50.5 29.2
-------- -------- -------- --------
Segment net income $ 742.8 $ 384.7 $ 301.8 $ 146.5
======== ======== ======== ========
</TABLE>
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,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Total segment net sales $5,026.0 $3,354.1 $1,910.6 $1,239.8
Non-segment net sales (a) 16.8 17.9 5.2 5.5
Royalty, interest and dividend
income 78.6 30.0 28.2 8.7
Nonoperating gain 6.8 30.0 30.0
-------- -------- -------- --------
Total revenues $5,128.2 $3,432.0 $1,944.0 $1,284.0
======== ======== ======== ========
Net income
Total segment income (b) $ 742.8 $ 384.7 $ 301.8 $ 146.5
Unallocated items:
Non-segment loss and other (a) (4.7) (7.7) (1.1) (1.3)
Nonoperating gain 6.8 30.0 30.0
Amortization of purchased
intangibles and goodwill (c) (144.2) (21.2) (81.9) (7.3)
Acquisition-related charges (139.7)
Provision for impairment and
restructuring (15.5) (15.5)
Interest income (d) 53.5 19.3
Interest expense (0.3) (0.4)
Income tax (e) (2.5) 1.2 13.7 (3.9)
Equity in earnings of associated
companies (a) 4.3 6.1 1.8 2.9
Impairment of equity investment (36.3)
Minority interest in nonoperating
gain (9.5) (9.5)
Dividends on convertible preferred
securities of subsidiary (2.3)
-------- -------- -------- --------
Net income $ 479.7 $ 365.4 $ 253.6 $ 141.9
======== ======== ======== ========
</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) Corporate interest income is not allocated to reportable segments.
(e) Includes tax associated with unallocated items.
(2) Business Combinations and Divestitures
Acquisitions
------------
The transactions listed below were all accounted for under the purchase
method of accounting. Management is responsible for estimating the fair
value of the assets and liabilities acquired. Management has made
estimates and assumptions that affect the reported amounts of assets,
liabilities and expenses resulting from such acquisitions.
Amounts allocated to acquired in-process research and development were
established through recognized valuation techniques in the high technology
communications industry. Certain projects were acquired for which
technological feasibility had not been established at the date of
acquisition and for which no alternative future uses existed. In
accordance with Statement of Financial Accounting Standards No. 2,
"Accounting for Research and Development Costs" as interpreted by FASB
Interpretation No. 4, amounts assigned to in-process research and
development meeting the above criteria must be charged to expense at the
date of consummation of the purchase.
<PAGE>
The value allocated to projects for which a charge was recorded was
determined by the traditional income approach which discounts expected
future debt free income to present value. The discount rates used were
specific to each project and were derived from a cost of capital for each
specific acquisition target, adjusted upward for the stage of completion of
each project.
Optical Technologies USA
------------------------
On September 26, 2000, Corning signed a definitive agreement with Pirelli
S.p.A., to acquire its 90% interest in Optical Technologies USA, a
manufacturer of lithium niobate modulators, pump lasers, certain specialty
fibers and fiber gratings used in optical networks for approximately $3.4
billion in cash. In addition, a contingent payment of $180 million may
also be paid upon the achievement of certain product milestones. The
remaining 10% is owned by Cisco Systems Inc. Cisco Systems has tag-along
rights to sell its stake to Corning for a period of thirty business days
beginning on September 26, 2000. If Cisco Systems exercises their right to
sell, the purchase price will increase to approximately $4 billion in
total. The transaction is expected to close in the fourth quarter subject
to the receipt of certain government approvals. Due to the minimal amount
of net tangible assets acquired, the amount allocated to goodwill, patents,
in-process research and development and other intangible assets will
approximate the purchase price. Any purchase price allocated to acquired
in-process research and development will be charged to income in the period
the transaction closes and patents, goodwill and other acquired intangibles
will be amortized over lives ranging from five to seventeen years.
To finance this transaction, on October 18, 2000, Corning announced a dual
tranche offering of convertible debt and common stock under its existing
$4.8 billion universal shelf registration statement. Corning will offer 30
million shares of newly issued common stock, as well as raise $1.2 billion
in proceeds through an offering of zero coupon convertible debentures.
The offering is expected to close in early November.
IntelliSense
------------
On June 12, 2000, Corning completed the acquisition of the remaining 67%
interest in IntelliSense Corporation, a manufacturer of micro-electro-
mechanical devices in exchange for 6,050,259 shares of unregistered Corning
common stock and the assumption of stock options convertible into 1,968,312
shares of Corning common stock. Based upon the average closing price of
Corning stock for a range of days surrounding the announcement adjusted for
a discount commensurate with restrictions on the shares issued and a Black-
Scholes valuation of the options issued, the recorded purchase price
approximated $410 million. An additional 1,019,763 shares may be issued
assuming the achievement of certain product milestones in 2001. This
consideration, if earned, will be valued at the then current fair market
value of Corning common stock. The excess of the purchase price over the
estimated fair value of tangible assets acquired was allocated primarily to
goodwill. Goodwill of approximately $388 million is being amortized on a
straight-line basis over thirteen years. Corning recorded a non-tax
deductible charge of $6.7 million for in-process research and development
in the second quarter of 2000.
NetOptix
--------
On May 12, 2000, Corning completed the acquisition of NetOptix Corporation
for 33,719,067 shares of Corning common stock and the assumption of stock
options convertible into 2,487,240 Corning shares. Based on the average
closing price of Corning stock for a range of days surrounding the
announcement and a Black Scholes valuation of options issued the recorded
purchase price approximated $2.1 billion. NetOptix manufactures thin film
filters for use in dense wavelength division multiplexing components. The
excess of the purchase price over the estimated fair value of tangible
assets acquired was allocated to goodwill. Goodwill of approximately
$2,065 million is being amortized on a straight-line basis over ten years.
<PAGE>
NZ Applied Technologies
-----------------------
On May 5, 2000, Corning completed the acquisition of the remaining 84%
interest in NZ Applied Technologies (NZAT), a developer and manufacturer
of photonic components for optical telecommunications applications
including the optical networks industry, in exchange for Corning common
stock. Corning issued 1,321,749 shares of unregistered common stock at
closing with a fair value of approximately $75 million. In addition,
Corning placed an extra 1,321,749 shares in escrow to be earned over the
next three years contingent upon NZAT achieving certain product
development and sales milestones. The contingent proceeds, if earned,
will be recorded at the then current fair value of Corning common stock.
The excess of the purchase price over the estimated fair value of tangible
assets acquired was allocated to goodwill and in-process research and
development. Goodwill of approximately $30 million is being amortized on
a straight-line basis over ten years. Corning recorded a non-tax
deductible charge of $44 million for in-process research and development
in the second quarter of 2000.
Photonics Technology Research Center
------------------------------------
On February 14, 2000, Corning acquired British Telecommunication's
Photonics Technology Research Center (PTRC) for approximately $66 million
in cash. The excess of the purchase price over the estimated fair value of
tangible assets acquired was allocated to in-process research and
development and purchased intangibles and goodwill. Purchased intangibles
and goodwill of approximately $24 million is being amortized over lives up
to nine years. Corning recorded a charge of $42.0 million ($25.7 million
after tax) for in-process research and development in the first quarter of
2000.
Siemens Transaction
-------------------
On February 2, 2000, Corning acquired the worldwide optical cable and
hardware business of Siemens AG and the remaining 50% 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. At
September 30, 2000, approximately $50 million of this contingent
consideration has been earned. Less significant portions of the
transaction will close at various dates into 2001. At September 30, 2000,
total cash paid to Siemens approximated $1.1 billion. The excess of the
purchase price over the estimated fair value of tangible assets acquired,
pending final determination of certain acquired balances, was allocated
primarily to purchased intangibles and goodwill. Purchased intangibles and
goodwill of approximately $650 million are being amortized over lives of
five to twenty years.
Pro Forma Presentation
----------------------
The foregoing acquisitions have been recorded under the purchase method of
accounting and, accordingly, the results of the acquired businesses are
included in the consolidated financial statements since the date of
acquisition. The following unaudited pro forma financial information
reflects the consolidated results of operations of Corning as if the
NetOptix and Siemens acquisitions took place at the beginning of January
1999. The effects of the other acquisitions on Corning's consolidated
financial statements were not material on either an individual or an
aggregate basis. 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 Siemens 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 acquisition date.
Nine Months Ended Sept. 30,
---------------------------
In millions, except per share amounts 2000 1999
-------------------------------------------------------------------
Sales $5,173.9 $4,020.2
Net income $ 405.3 $ 188.7
Basic earnings per share $ 0.47 $ 0.23
Diluted earnings per share $ 0.46 $ 0.23
<PAGE>
Pooling of Interests
--------------------
On January 28, 2000, Corning merged with Oak Industries, Inc. (Oak
Industries) in a pooling of interests transaction. Corning issued
44,293,491 shares of Corning common stock and 8,137,500 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) 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 approximately $17 million of severance and other termination
benefits for Oak Industries corporate officers and headquarters employees.
As of September 30, 2000, total severance benefits paid out were
approximately $14 million.
Divestitures
------------
On January 31, 2000, Corning sold Quanterra Incorporated to Severn Trent
Laboratories for $35 million. In the first quarter of 2000, Corning
recorded a nonoperating gain of $6.8 million ($4.2 million after tax), as a
result of this transaction.
(3) Impairment of Investment
Corning and PPG Industries, Inc. each own 50% of the capital stock of
Pittsburgh Corning Corporation ("PCC"). PCC and several other defendants
have been named in numerous lawsuits involving claims alleging personal
injury from exposure to asbestos, and as of the bankruptcy filing on April
16, 2000, PCC had in excess of 200,000 open claims. In the first quarter
of 2000, after incurring adverse verdicts in five trials involving 19
claimants, PCC filed for Chapter 11 reorganization in the United States
Bankruptcy Court for the Western District of Pennsylvania. 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 two shareholders. The
preliminary injunction has been extended by stipulation of the parties and
by court order to February 21, 2001 to enable the parties to negotiate a
plan of reorganization for PCC. Upon expiration of the injunction on or
after February 21, 2001, PCC, PPG Industries and Corning will have 90 days
to seek removal and transfer of stayed cases. As a result of PCC's
bankruptcy filing, Corning recorded an after tax charge of $36.3 million in
the first quarter to impair its entire investment in PCC and discontinued
recognition of equity earnings. At the time PCC filed for bankruptcy
protection, there were approximately 12,400 claims pending against Corning
alleging various theories of liability based on exposure to PCC's asbestos
products, all of which are stayed pursuant to the injunction of the
bankruptcy court. Although the Chapter 11 filing may lead to additional
claims against Corning with related costs, charges and expenses and
although the outcome of litigation and bankruptcy is uncertain, management
believes that the separate corporate status of PCC will continue to be
upheld and the risk of a materially adverse impact to Corning's financial
position is remote.
(4) Earnings Per Common Share
A reconciliation of the basic and diluted earnings per share
computations for the third quarter and nine months of 2000 and 1999 are
as follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
For the nine months ended September 30,
----------------------------------------------------
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 $479.7 $365.4
Less: Preferred stock
dividends 0.6 0.9
------ ------
Basic earnings per share 479.1 844.2 $0.57 364.5 763.2 $0.48
===== =====
Effect of Dilutive
Securities
Options 21.0 14.4
Convertible monthly
income preferred
securities 2.3 7.8
Convertible preferred
stock 0.6 1.5 0.9 2.1
Convertible subordinated
notes 2.7 6.3 2.5 6.3
------ ----- ------ -----
Diluted earnings per share $482.4 873.0 $0.55 $370.2 793.8 $0.47
====== ===== ===== ====== ===== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the three months ended September 30,
----------------------------------------------------
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 $253.6 $141.9
Less: Preferred stock
dividends 0.2 0.2
------ ------
Basic earnings per share 253.4 876.6 $0.29 141.7 772.8 $0.18
===== =====
Effect of Dilutive
Securities
Options 22.5 15.6
Convertible preferred
stock 0.2 1.2 0.2 2.1
Convertible subordinated
notes 0.9 6.3 0.8 6.3
------ ----- ------ -----
Diluted earnings per share $254.5 906.6 $0.28 $142.7 796.8 $0.18
====== ===== ===== ====== ===== =====
</TABLE>
During the first quarter of 1999, the convertible monthly income preferred
securities (MIPS) were redeemed and converted into 34.5 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.
Common dividends of $53.2 million and $155.4 million were declared in the
third quarter and first nine months of 2000, respectively, compared with
$44.1 million and $131.6 million for the same periods in 1999. Dividends
per share were comparable between years.
(5) Taxes on Income
Corning's effective income tax rate for the third quarter and nine months
ending September 30, 2000, was 34.9% and 42.7%, respectively, an increase
over 1999 rates of 30.3% and 30.6% in comparable 1999 periods. The
increase in the quarter and nine months was primarily due to the large
amounts of non-tax deductible purchased intangibles and goodwill acquired
in the second quarter along with nondeductible purchased in-process
research and development costs associated with acquisitions and other
acquisition-related items. Excluding the impact of the amortization of
purchased intangibles and goodwill, purchased in-process research and
development costs, one-time acquisition costs and other nonrecurring items,
the effective income tax rate for the quarter and nine months ending
September 30, 2000 was 32.4%, an increase over 1999 rates of 29.3% and
30.0% in the third quarter and nine months ending September 30, 1999.
(6) Supplementary Balance Sheet Data
Inventories shown on the accompanying balance sheets were comprised of the
following (in millions):
September 30, December 31,
2000 1999
------------- ------------
Finished goods $ 278.2 $ 206.1
Work in process 241.5 152.6
Raw materials and accessories 327.4 162.0
Supplies and packing materials 96.1 81.5
------- -------
Total inventories $ 943.2 $ 602.2
======= =======
(7) Supplementary Income Statement Data
Amortization expense included in the accompanying income statements was
comprised of the following (in millions):
For the nine months
ended September 30,
--------------------
2000 1999
------- -------
Amortization of purchased
intangibles including goodwill $ 144.2 $ 21.2
Amortization of other intangible
assets 2.7 3.9
------- ------
Total amortization $ 146.9 $ 25.1
======= ======
<PAGE>
(8) Financing Transactions
On February 18, 2000, Corning completed an offering of Euro-denominated
debt securities, which generated net proceeds of approximately $485
million. The proceeds were used to finance a portion of the Siemens
transaction.
On January 31, 2000, Corning completed an equity offering of 44.85 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 are being used for general corporate purposes,
including funding Corning's capital spending program.
(9) Shareholders' Equity
On April 27, 2000, the shareholders of Corning approved an increase to the
authorized number of shares of common stock from 500 million to 1.2 billion
shares. In August 2000, Corning authorized a three-for-one stock split of
its common stock, effected in the form of a stock dividend, which was
distributed on October 3, 2000, to shareholders of record on September 5,
2000. All of the share and per share data in these financial statements
and footnotes have been retroactively adjusted to reflect the stock split.
In September, 2000, Corning filed and mailed a proxy statement to its
shareholders for a special shareholders' meeting to be held on November 8,
2000, where shareholders will be asked to approve an increase in the number
of authorized shares from 1.2 billion to 3.8 billion. At the same time,
shareholders will also be asked to approve the 2000 Equity Participation
Program designed to enhance and retain employees by increasing the amount
of equity compensation available.
(10) Comprehensive Income
Comprehensive income, net of tax, for the first nine months and third
quarter of 2000 and 1999 is as follows (in millions):
For the Nine For the Three
Months Ended Months Ended
September 30, September 30,
--------------- ---------------
2000 1999 2000 1999
------ ------ ------ ------
Net income $479.7 $365.4 $253.6 $141.9
Other comprehensive income:
Foreign currency translation
adjustment (85.3) (37.3) (29.0) 15.3
Unrealized gain (loss) on
marketable securities 7.9 2.8 (28.1) (0.9)
Realized gains on securities (6.6) (1.7)
------ ------ ------ ------
Total comprehensive income $395.7 $330.9 $194.8 $156.3
====== ====== ====== ======
The after tax components of other comprehensive income accumulated in
shareholders' equity are as follows (in millions):
Foreign Unrealized Accumulated
Currency Gains (Losses) Other
Translation on Marketable Comprehensive
Adjustment Securities Income
----------- -------------- -------------
December 31, 1999 $ (49.6) $ 19.0 $ (30.6)
Foreign currency
translation adjustment (85.3) (85.3)
Unrealized gain on
marketable securities
(net of tax of $5.0) 7.9 7.9
Realized gains on securities
(net of tax of $4.2) (6.6) (6.6)
------- ------ -------
September 30, 2000 $(134.9) $ 20.3 $(114.6)
======= ====== =======
<PAGE>
(11) Dow Corning Corporation
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 fourth 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 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 $1.9 billion for the third quarter of 2000, an increase of 54%
over sales of $1.25 billion for the same period in 1999. Excluding the impact
of acquisitions, net sales increased 37% over the third quarter of 1999. Sales
growth in the third quarter was most pronounced in the Telecommunications
Segment, where the impact of acquisitions and demand for Corning's premium fiber
and cable and photonics products drove quarter over quarter segment sales growth
of 75%. Net sales for the first nine months of 2000 were $5.04 billion, an
increase of almost 50% over the comparable period of 1999. Excluding
acquisitions, net sales for nine months rose 36% over 1999. The
Telecommunications Segment exhibited the largest increase with sales growth of
71% over the prior year.
Corning's net income totaled $253.6 million in the third quarter of 2000, an
increase of 79% from the same period in 1999. Diluted earnings per share
increased 56% to $0.28 per share in the third quarter of 2000 compared to the
same period in 1999. Net income for the first nine months of 2000 increased by
31% to $479.7 million compared to $365.4 for 1999. Diluted earnings per share
for the first nine months of 2000 increased 17% from the prior period of 1999
to $0.55 per share. The percentage of increase in earnings per share is less
than the percentage increase in net income due to the issuance of common stock
for acquisitions and related financing transactions.
Corning's results for the first nine months of 2000 and 1999 were impacted by
several nonrecurring items:
. a non-tax deductible in-process research and development charge of $50.7
million in the second quarter of 2000
. a nonoperating gain of $6.8 million ($4.2 million after tax) in the first
quarter of 2000
. an in-process research and development charge of $42.0 million ($25.7
million after tax) in the first quarter of 2000
. a charge for acquisition costs related to the merger of Oak Industries of
$47.0 million ($43.4 million after tax) in the first quarter of 2000
. an after-tax charge of $36.3 million to impair Corning's investment in
Pittsburgh Corning Corporation in the first quarter of 2000
. an impairment charge of $15.5 million ($10.0 million after tax) in the
third quarter of 1999
. a nonoperating gain of $30.0 million ($9.5 million after tax and minority
interest) in the third quarter of 1999
Corning believes comparing its operating results on a pro forma basis excluding
amortization of purchased intangibles and goodwill and nonrecurring items
provides a better understanding of the changes in its operating results. This
measure is not in accordance with, or an alternative for, GAAP and may not be
consistent with measures used by other companies.
Pro forma net income is calculated from net income as follows (after tax and in
millions):
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- ------------------
2000 1999 2000 1999
------ ------ ------ ------
Net income $479.7 $365.4 $253.6 $141.9
Gain on sale of Quanterra (4.2)
Gain on sale of Republic Wire & Cable (9.5) (9.5)
Impairment of assets 10.0 10.0
Amortization of purchased intangibles
and goodwill 144.8 16.6 63.4 5.7
In-process research and development 76.4
Other acquisition-related charges 43.4
Impairment of equity investment 36.3
------ ------ ------ ------
Pro forma net income $776.4 $382.5 $317.0 $148.1
====== ====== ====== ======
Pro forma diluted earnings per share $ 0.89 $ 0.49 $ 0.35 $ 0.19
<PAGE>
The third quarter and year to date 2000 pro forma results reflect growth in all
three of Corning's operating segments.
Business Combinations
On September 26, 2000, Corning signed a definitive agreement with Pirelli
S.p.A., to acquire its 90% interest in Optical Technologies USA, a manufacturer
of lithium niobate modulators, pump lasers, certain specialty fibers and fiber
gratings used in optical networks for approximately $3.4 billion in cash. In
addition, a contingent payment of $180 million may also be paid upon the
achievement of certain product milestones. The remaining 10% is owned by Cisco
Systems Inc. Cisco Systems has tag-along rights to sell its stake to Corning
for a period of thirty business days beginning on September 26, 2000. If Cisco
Systems exercises their right to sell the purchase price will increase to
approximately $4 billion in total. The transaction is expected to close in the
fourth quarter subject to the receipt of certain government approvals. Due to
the minimal amount of net tangible assets acquired, the amount allocated to
goodwill, patents, in-process research and development and other intangible
assets will approximate the purchase price. The acquisition will be accounted
for as a purchase.
On June 12, 2000, Corning completed the acquisition of the remaining 67%
interest in IntelliSense Corporation, a manufacturer of micro-electro-mechanical
devices in exchange for 6,050,259 shares of Corning common stock and the
assumption of stock options convertible into 1,968,312 shares of Corning common
stock. This consideration was valued at approximately $410 million. An
additional 1,019,763 shares may be issued assuming the achievement of certain
product milestones in 2001. The acquisition was accounted for as a purchase.
On May 12, 2000, Corning completed the acquisition of NetOptix Corporation for
33,719,067 shares of Corning common stock and the assumption of stock options
convertible into 2,487,240 Corning shares in a transaction valued at
approximately $2.1 billion. NetOptix manufactures thin film filters for use in
dense wavelength division multiplexing components. The acquisition was
accounted for as a purchase.
On May 5, 2000, Corning completed the acquisition of the remaining 84% interest
in NZ Applied Technologies (NZAT), a developer and manufacturer of photonic
components for optical telecommunications applications including the optical
networks industry, in exchange for Corning common stock. Corning issued
1,321,749 shares of common stock at closing with a value of approximately $75
million, and placed an additional 1,321,749 shares in escrow to be earned over
the next three years contingent upon NZAT achieving certain product development
and sales milestones. The contingent proceeds, if earned, will be recorded at
the then current fair value of Corning common stock at the time of achievement.
The acquisition was accounted for as a purchase.
On February 14, 2000, Corning 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. The acquisition was accounted for as a purchase.
On February 2, 2000, Corning substantially completed the acquisition of Siemens
AG's worldwide optical fiber and cable systems and equipment business, including
its 50% ownership in Siecor Corporation and Siecor GmbH (Siemens transaction)
for approximately $1.4 billion. The acquisition was accounted for as a
purchase.
On January 28, 2000, Corning completed the merger with Oak Industries. Corning
issued 44,293,491 shares of Corning common stock. 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.
Each of these transactions supports Corning's strategic growth initiatives in
the Telecommunications Segment. Allocation of purchase price resulted in
charges related to acquired in-process research and development in the PTRC,
NZAT and IntelliSense acquisitions. The Optical Technologies USA acquisition
will most likely result in an in-process research and development charge in the
period the transaction closes. Further discussion regarding these charges is
included on page 23.
<PAGE>
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 third quarter and first nine months of 2000 and 1999
is presented below. These amounts do not include revenues, expenses and equity
earnings not specifically identifiable to segments. In the first quarter of
2000, Corning 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, and other nonrecurring 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.
Telecommunications Nine Months Ended Three Months Ended
(In millions) September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------
Net sales $3,577.7 $2,089.2 $1,402.1 $803.4
Research, development and
engineering expenses $ 264.3 $ 186.9 $ 103.0 $ 71.2
Interest expense $ 50.0 $ 42.5 $ 16.3 $ 17.3
Segment earnings before minority
interest and equity earnings $ 476.5 $ 231.6 $ 194.3 $ 89.8
Minority interest in (earnings)
losses of subsidiaries 3.0 (20.4) (7.4)
Equity in earnings (losses) of
associated companies (3.1) 11.4 0.1 4.8
-------- -------- -------- ------
Segment net income $ 476.4 $ 222.6 $ 194.4 $ 87.2
======== ======== ======== ======
Segment earnings before minority
interest and equity earnings as
a percentage of segment sales 13.3% 11.1% 13.9% 11.2%
Segment net income as a percentage
of segment sales 13.3% 10.7% 13.9% 10.9%
----------------------------------------------------------------------------
The Telecommunications Segment produces optical fiber and cable, optical
hardware and equipment and photonic modules and components for the worldwide
telecommunications industry.
Third quarter
Sales in the Telecommunications Segment increased 75% over the third quarter of
1999 to approximately $1.4 billion. Excluding acquisitions, sales growth for
the same period was 49%. 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 123% 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.
<PAGE>
Sales in the optical fiber and cable business improved 67% in the third quarter
of 2000 over 1999 to approximately $795 million. The increase in sales resulted
primarily from the impact of acquisitions and strong volume gains.
Approximately $105 million of the increase in optical fiber and cable sales
resulted from the acquisition of the remaining 50% interest in Siecor GmbH and
the cabling business previously owned by Siemens in the first quarter of 2000.
Excluding the impact of these acquisitions, sales in the optical fiber and cable
business increased 45% for the quarter due to volume gains of more than 40%,
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, increased over 70% over the same period in 1999.
Price declines ranged between 3% and 7% for Corning's optical fiber and cable
products in comparison with last year's third quarter. The weighted average
optical fiber and cable price in 2000 increased compared to 1999 due to the
higher mix of premium products. The rate of price declines for cable and fiber
products has slowed during 2000 commensurate with the worldwide tightening of
supply of optical fiber.
Net income from the optical fiber and cable business increased 65% in the third
quarter of 2000 compared to the same period in 1999.
As a result of continued strong worldwide demand for optical fiber and cable,
Corning continues to produce at maximum manufacturing capacity. In September,
Corning announced plans to upgrade and expand its Deeside, North Wales facility
by investing $50 million. This investment will increase capacity for the
optical fiber manufacturing facility by over 50%.
Sales in the telecommunications hardware and equipment business, including the
Gilbert Connectors business acquired in the Oak Industries merger, increased 87%
in the third quarter of 2000 to approximately $290 million. This increase
resulted primarily from 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 more than doubled, primarily due to increased sales of
cable assemblies and cost reductions.
The photonic technologies business, including the Lasertron -Registered
Trademark- business acquired in the Oak Industries merger, realized strong
volume gains in the third quarter of 2000 led by growth in optical amplifier
sales. Sales in this business increased 113% in the third quarter of 2000 to
approximately $255 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 resulting in a
profit for the quarter and a significant improvement in comparison to 1999.
In August, Corning announced plans to invest $80 million in constructing a new
passive components manufacturing facility in Henrietta, NY. The investment
will double production of fiber-based passive components and is expected to
begin production in early 2001.
During the quarter, the optical networking devices business, which is developing
wavelength management products and optical switch modules, began making
shipments of its wavelength management products to customers. Corning is
investing significant research and development spending in this business. In
August, Corning announced plans to invest $20 million to significantly increase
its capacity in the manufacture of wavelength management products. This
investment will increase capacity of PurePath -TM- products by six times and is
expected to ramp up in the second half of 2001.
The other businesses in this segment are the Controls and Connectors businesses
acquired in the Oak Industries merger. Sales in these businesses increased 20%
in 2000 to approximately $60 million. Net income from these businesses improved
slightly, moving from a break-even position in the third quarter of 1999 to
modest profitability in 2000, primarily due to volume increases.
<PAGE>
Nine Months
Overall trends in the year to date results are consistent with those in the
quarter. Sales in the Telecommunications Segment increased 71% over the first
nine months of 1999 to approximately $3,575 million. Excluding acquisitions,
sales growth for the same period was 49%. The sales growth in the segment was
led primarily by volume gains in the optical fiber and cable business and
photonic technologies businesses. Segment net income more than doubled 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 71% over 1999 to
approximately $1,995 million. The increase in sales resulted primarily from the
impact of acquisitions and strong volume gains. Approximately $315 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 and the
cabling business previously owned by Siemens in the first quarter of 2000
Excluding the impact of these acquisitions, sales in the optical fiber and cable
business increased 44% 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, more than doubled over the same period in 1999. Price
declines ranged between 7% and 10% for Corning's optical fiber and cable
products in comparison with last year's first nine months. The weighted average
optical fiber and cable price in 2000 increased compared to 1999. The rate of
price declines for cabled fiber products slowed during the nine months 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.
Net income from the optical fiber and cable business increased approximately 75%
in the first nine months of 2000 compared to the same period in 1999.
Sales in the telecommunications hardware and equipment business, including the
Gilbert Connectors business acquired in the Oak Industries merger, increased 74%
in the first nine months of 2000 to approximately $750 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 more than doubled, primarily due to volume increases.
The photonic technologies business, including the Lasertron -Registered
Trademark- business acquired in the Oak Industries merger, realized strong
volume gains in the first nine months of 2000 led by new product sales and
growth in amplifier sales. Sales in this business doubled over the first nine
months of 2000 to $650 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 resulting in a profit
for the first nine months of 2000 and a significant improvement in comparison
to 1999.
<PAGE>
In April, Corning announced the addition of a second amplifier assembly plant in
Benton Park, PA. Startup production began in the third quarter with initial
shipments in early October. 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. In June,
Corning stated it will invest $50 million to expand capacity at its Erwin, NY
facility to meet the growing demand for optical-networking devices. In July,
Corning also announced a $225 million expansion of Corning Lasertron in Nashua,
NH that combined with the previously announced $45 million expansion will
increase the existing capacity of Corning Lasertron products by six times over
the next two years.
During the quarter, the optical networking devices business, which is developing
wavelength management products and optical switch modules, began making
shipments of its wavelength management products to customers. Corning is
investing significant research and development spending in this business.
The other businesses in this segment are the Controls and Connectors businesses
acquired in the Oak Industries merger. Sales in these businesses increased 16%
in 2000 to approximately $180 million. Net income from these businesses
improved slightly, moving from a small loss in the first nine months of 1999 to
modest profitability in 2000, primarily due to volume increases.
Advanced Materials Nine Months Ended Three Months Ended
(In millions) September 30, September 30,
2000 1999 2000 1999
------------------------------------------------------------------------------
Net sales $808.0 $774.5 $271.7 $257.7
Research, development and
engineering expenses $ 88.9 $ 68.8 $ 31.6 $ 23.7
Interest expense $ 15.0 $ 15.2 $ 3.8 $ 6.0
Segment earnings before minority
interest and equity earnings $ 74.5 $ 71.6 $ 28.7 $ 23.6
Minority interest in losses of
subsidiaries (0.1)
Equity in earnings of associated
companies 17.2 13.7 5.4 6.1
------ ------ ------ ------
Segment net income $ 91.7 $ 85.3 $ 34.1 $ 29.6
====== ====== ====== ======
Segment earnings before minority
interest and equity earnings as a
percentage of segment sales 9.2% 9.2% 10.6% 9.2%
Segment net income as a percentage
of segment sales 11.3% 11.0% 12.6% 11.5%
------------------------------------------------------------------------------
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 technologies and life
sciences (formerly science products).
Third quarter
Sales in the Advanced Materials Segment increased 5% in comparison to 1999 to
approximately $270 million, primarily due to growth in the semiconductor
materials business, offset by the divestiture of the Quanterra business in
January 2000. Excluding the impact of this divestiture, sales increased 13%.
Segment net income increased 15% in 2000 in comparison to last year as improved
operating performance more than offset an increase in research and development
spending, flat equity earnings and spending to launch new products in life
sciences.
Sales in the environmental technologies business were approximately equal to
1999 sales of $100 million, resulting from continued strong demand for Corning's
thin wall products, offset by the negative impact of the Euro exchange rate.
Earnings in this business decreased 17%, primarily due to start-up costs in
South Africa and China and increased research and development spending.
<PAGE>
Sales in the life sciences business of approximately $65 million in the third
quarter were down 7% in comparison to 1999 as the trend of earlier quarters
continues. Earnings in this business decreased in the quarter from a small
profit in 1999 to a small loss, primarily due to lower volume, an increased
commitment to research and development for advanced life sciences products and
costs associated with the launch of Corning's microarray technology products in
the third quarter.
Sales in Corning's other Advanced Materials businesses increased 17% from 1999
to approximately $105 million. Excluding the divestiture, sales improved over
40%. This increase was led by higher sales of high purity fused silica products
in the semiconductor materials business which more than offset the impact of the
divestiture of Quanterra in January. Earnings from these businesses more than
doubled over third quarter 1999 due mainly to increased volume. Corning's new
manufacturing facility near Charleston, South Carolina is now bringing capacity
on-line to meet increasing market demand.
Nine Months
Sales in the Advanced Materials Segment increased 4% in comparison to 1999 to
approximately $810 million, primarily due to growth in the semiconductor
materials business and the environmental technologies business, offset by the
divestiture of the Quanterra business in January 2000. Excluding the impact of
the divestiture, sales increased 11%. Segment net income increased 8% in 2000
in comparison to last year. Increased equity earnings from Eurokera and
Keraglass, S.N.C. also contributed to segment results. Overall trends impacting
year to date results are consistent with those of the third quarter.
Sales in the environmental technologies business increased 3% over 1999 to
approximately $305 million. The increase in sales resulted from a strong
worldwide automotive market and continued strong demand for Corning's thin-wall
products. Earnings in this business decreased approximately 12%, primarily due
to start-up costs in South Africa and China and increased research and
development spending.
Sales in the life sciences business of approximately $195 million in the first
nine months were down 5% in comparison to 1999 sales as distributors depleted
excess inventories. The business reported a small loss in the first nine months
of 2000 compared to a small profit in the same period of 1999. This was
primarily due to an increased commitment to research and development and costs
related to new product introductions in the third quarter.
Sales in Corning's other Advanced Materials businesses increased 13% from 1999
to approximately $310 million. Excluding the divestiture of Quanterra, sales
improved over 35%. This increase was led by higher sales of high purity fused
silica products in the semiconductor materials business. Earnings from this
business more than doubled over the first nine months of 1999 due mainly to
increased volume.
In January 2000, Corning sold Quanterra Incorporated to Severn Trent
Laboratories for $35 million. Corning recognized a nonoperating gain in the
first quarter of 2000 of $6.8 million ($4.2 million after tax) from this
transaction. This nonoperating gain is not included in the results of the
Advanced Materials Segment.
<PAGE>
Information Display Nine Months Ended Three Months Ended
(In millions) September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------
Net sales $640.3 $490.4 $236.8 $178.7
Research, development and
engineering expenses $ 18.1 $ 16.4 $ 6.5 $ 5.3
Interest expense $ 12.6 $ 8.0 $ 5.1 $ 2.7
Segment earnings before minority
interest and equity earnings $ 88.0 $ 40.1 $ 35.6 $ 12.9
Minority interest in earnings
of subsidiaries (20.4) (16.2) (7.3) (1.5)
Equity in earnings of associated
companies 107.1 52.9 45.0 18.3
------ ------ ------ ------
Segment net income $174.7 $ 76.8 $ 73.3 $ 29.7
====== ====== ====== ======
Segment earnings before minority
interest and equity earnings as a
percentage of segment sales 13.7% 8.2% 15.0% 7.2%
Segment net income as a percentage
of segment sales 27.3% 15.7% 31.0% 16.6%
----------------------------------------------------------------------------
The Information Display Segment manufactures glass panels and funnels for
televisions and CRTs (conventional video components), liquid crystal display
glass for flat panel display (display technologies) and precision lens
assemblies for projection video systems.
Third quarter
Sales in the Information Display Segment increased 33% in third quarter 2000 to
approximately $235 million in comparison to 1999, primarily due to strong growth
in the display technologies and precision lens businesses. Segment net income
more than doubled, reflecting volume gains and strong equity earnings.
Sales in the conventional video components business increased 12% in 2000 in
comparison to 1999 to approximately $95 million. Earnings in this business
improved from a small loss in 1999 to a small profit in the third quarter of
this year as Samsung Corning Company Ltd., a manufacturer of glass panels and
funnels for televisions and display monitors, continued its strong performance.
Sales in the display technologies business in 2000 increased over 89% compared
to 1999 to approximately $85 million. This significant increase was the result
of strong demand for the business' liquid crystal glass for flat panel displays.
Earnings in this business more than doubled 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.
Sales in the precision lens business increased 22% in 2000 to approximately $55
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 improved 32% in 2000 compared to 1999, primarily due to volume
gains, manufacturing efficiencies and the refocusing of product lines.
Manufacturing is currently at maximum capacity. The business is undergoing a
$79 million expansion program that will effectively double capacity beginning
the second half of 2000 and completed in 2002.
Nine Months
Sales in the Information Display Segment increased 31% in the first nine months
of 2000 to approximately $640 million in comparison to the 1999 period,
primarily due to strong growth in the display technologies business and the
precision lens businesses. Segment net income more than doubled, reflecting
increased earnings in each business, but especially within the conventional
video components business and the display technologies business.
<PAGE>
Sales in the conventional video components business increased 6% in 2000 to
approximately $265 million in comparison to 1999, primarily due to increases in
volume and an improving market. Earnings in this business tripled in comparison
to the first nine months of 1999 due primarily to strong performance by Samsung
Corning Company Ltd.
Sales in the display technologies business in 2000 increased 73% over 1999 to
approximately $225 million. This significant increase was the result of strong
demand for the business' liquid crystal glass for flat panel displays. Earnings
in this business more than doubled compared to the same period in 1999,
reflecting volume gains, stable pricing, and manufacturing improvements, along
with significant equity earnings from Samsung Corning Precision.
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 new tanks completed in the second quarter at
Corning's Harrodsburg, Kentucky facilities and at Samsung Corning Precision. In
addition, on August 3, 2000, Corning announced a $250 million expansion of its
production capacity for LCD glass. Coupled with previously announced
expansions, this will allow Corning to significantly increase its worldwide
capacity by 2001.
Sales in the precision lens business increased 36% in 2000 to over $150 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 almost doubled in 2000 primarily due to volume gains,
manufacturing efficiencies and the refocusing of product lines.
Taxes on Income
Corning's effective income tax rate for the third quarter and first nine months
of 2000 was 34.9% and 42.7%, respectively, an increase over 1999 rates of 30.3
and 30.6%, respectively. The increase in the quarter and nine months was
primarily due to the large amounts of nondeductible purchased intangibles and
goodwill acquired in the second quarter along with nondeductible purchased in-
process research and development associated with acquisitions and other
acquisition-related items. Excluding the impact of the amortization of
purchased intangibles and goodwill, purchased in-process research and
development, one-time acquisition costs and other nonrecurring items, the
effective income tax rate for the third quarter and first nine months of 2000
was 32.4%, an increase over 1999 rates of 29.3% and 30.0%, respectively.
Liquidity and Capital Resources
In August of 2000, Corning filed a universal shelf registration statement with
the Securities & Exchange Commission for up to $4 billion and amended the shelf
to increase it to $4.8 billion in October. In October, Corning announced an
offering of 30 million shares, with an option to offer an additional 4.5
million shares, of Corning common stock (valued at approximately $3.6 billion
using the closing market price on October 20, 2000) and zero coupon convertible
debentures in the amount of approximately $1.2 billion. The proceeds of the
two offerings will be used primarily to fund the Pirelli acquisition which is
expected to close in the fourth quarter.
If, for any reason, either or both the common stock and convertible debenture
offerings do not close, Corning will fund the purchase price of the Pirelli
acquisition, with proceeds from a committed $3.6 billion bridge loan facility.
In August of 2000, Corning renegotiated a revolving line of credit totaling $2
billion, which expires August 17, 2005. As of September 30, 2000 there were no
borrowings under this facility.
On January 31, 2000, Corning completed an equity offering of 44.85 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.
<PAGE>
Corning's working capital increased from $430.2 million at the end of 1999 to
$2.2 billion at the end of the third quarter. The ratio of current assets to
current liabilities was 2.5 at the end of September, compared to a current
ratio of 1.3 at year-end 1999. The increase in working capital is due
primarily to the financing transactions, 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
20% at the end of September 2000. The decrease is primarily due to the equity
offering of 44.85 million shares and 33.7 million shares issued in the
acquisition of NetOptix Corporation.
Corning believes that its financial condition is strong and that its cash,
marketable securities, operating cash flows and 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 third quarter increased from
December 31, 1999 by approximately $1.0 billion. This increase is the result of
financing activities which provided cash of $2.3 billion and operating
activities which generated cash of $0.9 billion, offset by investing activities
which used cash of $2.2 billion.
Net cash provided by operating activities increased to $875.5 million in 2000
compared to $500.9 million in 1999, primarily due to increased operating
results, higher depreciation and amortization of purchased intangibles and
goodwill and increased tax benefits related to stock options offset by an
increase in accounts receivable and inventory.
Net cash used by investing activities totaled $2.2 billion in the first nine
months of 2000, compared to cash used of $651.6 million in the prior period of
1999. The increase in cash used was primarily related to the Siemens
transaction, the PTRC acquisition, transaction costs incurred in the Oak
Industries merger and higher capital spending.
Corning continues to invest significant cash in capacity expansions to support
growth in operations. Capital spending for the first nine months of 2000
totaled $1.0 billion compared to $0.5 billion in the same period of 1999.
Corning currently expects its capital spending for the full year to be in the
range of $1.6 to $1.8 billion.
Net cash provided by financing activities totaled $2.3 billion in 2000 compared
to $214.1 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 for the third quarter and nine months
totaled $53.2 million and $155.4 million, respectively compared with $44.1
million and $131.6 million in the same period of 1999. While total dividends
paid increased in all periods compared to 1999, Corning's dividend remained at
$0.06 per share each quarter.
Cash used in discontinued operations totaled $1.6 million and $10.3 million in
the first nine months of 2000 and 1999, respectively.
In-Process Research and Development
Corning completed a number of purchase acquisitions in the first nine months of
2000. Management is responsible for estimating the fair value of the assets and
liabilities acquired. Management has made estimates and assumptions that affect
the reported amounts of assets, liabilities and expenses resulting from such
acquisitions.
Amounts allocated to acquired in-process research and development were
established through recognized valuation techniques in the high technology
communications industry. Certain projects were acquired for which technological
feasibility had not been established at the date of acquisition and for which no
alternative future uses existed. In accordance with Statement of Financial
Accounting Standards No. 2, "Accounting for Research and Development Costs" as
interpreted by FASB Interpretation No. 4, amounts assigned to in-process
research and development meeting the above criteria must be charged to expense
at the date of consummation of the purchase.
<PAGE>
The value allocated to projects for which a charge was recorded was determined
by the traditional income approach which discounts expected future debt free
income to present value. The discount rates used were specific to each project
and were derived from a cost of capital for each specific acquisition target,
adjusted upward for the stage of completion of each project.
Expected future debt free income was derived with the following considerations:
- Revenues were estimated based on relevant market size, growth trends in the
industry and individual product sales cycles.
- Estimated operating expenses included cost of goods sold, selling, general
& administrative expenses, and research and development expenses to maintain
the products once they have been introduced.
- Estimated tax expenses were specific to each acquired entity and its tax
profile.
- For certain projects, as appropriate, a return on core technology was
deducted based upon market standards for licensed existing technology and a
return on assets was deducted based upon industry comparisons.
The nature of the efforts to develop the acquired technology into commercially
viable products consists principally of planning, designing and testing
activities necessary to determine that the product can meet market expectations.
Corning expects that products incorporating the acquired technology from these
projects will be completed and begin to generate cash flows over the next three
years following integration.
Management expects to continue supporting these research and development
efforts. This support is not expected to change Corning's research and
development expense trends. However, the timing and success of development of
these technologies remains a risk due to the remaining effort to achieve
technical viability, rapidly changing customer markets, uncertain standards for
new products, and significant competition in the marketplace.
If none of the projects are successfully completed, Corning may lose an
opportunity to capitalize on emerging markets. Failure of any single project
would not materially impact Corning's financial condition, results of operations
or liquidity.
The following is a more detailed discussion of the valuations associated with
acquisitions for which such charges have been recorded:
Photonics Technology Research Center (PTRC)
-------------------------------------------
At the date of acquisition, the PTRC had extensive research and development
efforts underway and seven projects were determined to meet the criteria for
purchased in-process research and development. These projects are anticipated
to result in the development of new optical and photonics products. Projected
debt free income was determined for each of the projects and initially
discounted using a rate of 35% to reflect the weighted average cost of capital
(entity risk) for PTRC. Each product was also discounted to account for the
research project's stage of development. The completion percentages ranged
from 50%-80%. A total of $42.0 million pretax in-process research and
development expense was recognized and the value of individual projects ranged
from $0.1 million to $16.0 million.
NZ Applied Technologies (NZAT)
------------------------------
NZAT had several research projects underway at the date of acquisition. Of
these projects, four were determined to meet the criteria for purchased in-
process research and development. These research and development projects are
anticipated to result in development of new photonic component products.
Projected debt free income was initially discounted using a rate of 21% to
reflect the weighted average cost of capital (entity risk) for NZAT. Each
product was also discounted to account for the research project's stage of
development. The completion percentages ranged from 10%-80%. A total of $44.0
million pretax in-process research and development expense was recognized and
the value of individual projects ranged from $0.5 million to $29.3 million.
<PAGE>
IntelliSense
------------
IntelliSense had three qualifying research projects underway at the date of
acquisition. These research and development projects are anticipated to result
primarily in the development of new telecommunications products. Projected
debt free income was initially discounted using a rate of 20% to reflect the
weighted average cost of capital (entity risk) for IntelliSense. Each product
was also discounted to account for the research project's stage of development.
The completion percentages ranged from 10%-90%. A total of $6.7 million pretax
in-process research and development expense was recognized with no project
value exceeding $4.5 million.
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 sought protection under the reorganization
provisions of Chapter 11 of the United States Bankruptcy Code. 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 to fully reserve its investment
in Dow Corning and discontinued recognition of equity earnings from Dow Corning
in 1995. 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 fourth 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 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
Corning and PPG Industries, Inc. each own 50% of the capital stock of
Pittsburgh Corning Corporation ("PCC"). PCC and several other defendants have
been named in numerous lawsuits involving claims alleging personal injury from
exposure to asbestos, and as of the bankruptcy filing on April 16, 2000, PCC
had in excess of 200,000 open claims. In the first quarter of 2000, after
incurring adverse verdicts in five trials involving 19 claimants, PCC filed for
Chapter 11 reorganization in the United States Bankruptcy Court for the Western
District of Pennsylvania. 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 two
shareholders. The preliminary injunction has been extended by stipulation of
the parties and by court order to February 21, 2001 to enable the parties to
negotiate a plan of reorganization for PCC. Upon expiration of the injunction
on or after February 21, 2001, PCC, PPG Industries and Corning will have 90
days to seek removal and transfer of stayed cases. As a result of PCC's
bankruptcy filing, Corning recorded an after tax charge of $36.3 million in the
first quarter to impair its entire investment in PCC and discontinued
recognition of equity earnings. At the time PCC filed for bankruptcy
protection, there were approximately 12,400 claims pending against Corning
alleging various theories of liability based on exposure to PCC's asbestos
products, all of which are stayed pursuant to the injunction of the bankruptcy
court. Although the Chapter 11 filing may lead to additional claims against
Corning with related costs, charges and expenses and although the outcome of
litigation and bankruptcy is uncertain, management believes that the separate
corporate status of PCC will continue to be upheld and the risk of a materially
adverse impact to Corning's financial position is remote.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133), which establishes accounting and reporting standards for derivative
instruments and hedging activities. FAS 133 requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June 2000, the FASB
issued Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" (FAS 138), an amendment of FASB Statement No. 133.
These amendments include allowing foreign-currency denominated assets and
liabilities to qualify for hedge accounting, permit the offsetting of certain
inter-entity foreign currency exposures that reduce the need for third party
derivatives, redefines the nature of interest rate risk to avoid sources of
ineffectiveness and excludes from applicability any contract that would
otherwise meet the definition of a derivative but provide for the purchase or
sale of nonfinancial assets that will be delivered in quantities expected to be
used or sold by the reporting entity over a reasonable period in the normal
course of business and/or which physical delivery is probable. Corning
currently enters into derivatives in the form of foreign currency hedge
instruments to reduce its exposure to exchange rate risk on foreign source
income and purchases. Management believes that its current foreign currency
hedge instruments receiving hedge accounting currently qualify as cash flow
hedges under FAS 133 as amended by FAS 138. FAS 133 as amended under FAS 138 is
effective for fiscal years beginning after December 15, 2000. Management does
not expect this statement to impact Corning's net income.
In December 1999, 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. In June of 2000, the implementation of SAB
No.101 was delayed until the end of 2000. Corning is required to adopt SAB No.
101 in the fourth quarter of 2000 (retroactive to January 1, 2000). Management
does not expect SAB No.101 to have a material effect on Corning's financial
position or results of operations.
<PAGE>
"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
. currency fluctuations, legal 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
. availability and costs of activity,
critical materials, . the rate of technology change,
. new product development and . the ability to enforce patents and
commercialization, . other risks detailed in
. facility expansions and new Corning's Securities and Exchange
plant start-up costs, 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 third 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 $19.7 million for its estimated
liability for environmental cleanup and litigation at September 30, 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 fourth 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 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 a 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 September 30, 2000,
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 30, 2000, 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 filed a petition with
the United States Court of Appeals for the Second Circuit seeking immediate
relief. The Second Circuit ruling is expected in the fourth quarter of 2000.
The discovery process is continuing and the Court has set no schedule to address
the still 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 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.
Stanford University and Litton Systems. In October 2000, the Board of Trustees
of Stanford University and Litton Systems filed a patent suit in the U.S.
District Court for the Central District of California against Corning and other
optical amplifier makers for alleged infringement of a patent relating to
optical amplifiers. The suit requests unspecified damages and an injunction
preventing sales of infringing products. Stanford and Litton have voluntarily
withdrawn their complaint against Corning to have discussions. Whether or not
there will be a settlement, or the magnitude of any settlement, is unclear at
this time.
<PAGE>
Quest Diagnostics. Government Investigations and Related Claims. On December
31, 1996, Corning completed the spin-off of its health care services businesses
by the distribution to its shareholders of the Common Stock of Quest Diagnostics
Incorporated ("Quest Diagnostics") and Covance Inc. ("Covance"). In connection
with these distributions, Quest Diagnostics assumed financial responsibility for
the liabilities related to the 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. Management believes that established reserves
for indemnified claims are sufficient.
Pittsburgh Corning Corporation. Corning and PPG Industries, Inc. each own 50%
of the capital stock of Pittsburgh Corning Corporation ("PCC"). PCC and several
other defendants have been named in numerous lawsuits involving claims alleging
personal injury from exposure to asbestos, and as of the bankruptcy filing on
April 16, 2000, PCC had in excess of 200,000 open claims. In the first quarter
of 2000, after incurring adverse verdicts in five trials involving 19 claimants,
PCC filed for Chapter 11 reorganization in the United States Bankruptcy Court
for the Western District of Pennsylvania. 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
two shareholders. The preliminary injunction has been extended by stipulation
of the parties and by court order to February 21, 2001 to enable the parties to
negotiate a plan of reorganization for PCC. Upon expiration of the injunction
on or after February 21, 2001, PCC, PPG Industries and Corning will have 90 days
to seek removal and transfer of stayed cases. As a result of PCC's bankruptcy
filing, Corning recorded an after tax charge of $36.3 million in the first
quarter to impair its entire investment in PCC and discontinued recognition of
equity earnings. At the time PCC filed for bankruptcy protection, the there
were approximately 12,400 claims pending against Corning alleging various
theories of liability based on exposure to PCC's asbestos products, all of which
are stayed pursuant to the injunction of the bankruptcy court. Although the
Chapter 11 filing may lead to additional claims against Corning with related
costs, charges and expenses, and although the outcome of litigation and
bankruptcy is uncertain, management believes that the separate corporate status
of PCC will continue to be upheld and the risk of a materially adverse impact to
Corning's financial position is remote.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
------- --------------------------------
(a) Exhibits
See the Exhibit Index which is located on page 34.
(b) Reports on Form 8-K
A report on Form 8-K dated July 17, 2000, 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)
October 24, 2000 /s/ JAMES B. FLAWS
---------------- ----------------------------------------------------
Date James B. Flaws
Executive Vice President and Chief Financial Officer
October 24, 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 36
27 Financial Data Schedule
