FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________to____________
Commission file number 1-3247
CORNING INCORPORATED
--------------------
(Registrant)
New York 16-0393470
- ---------------------------------------- ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
One Riverfront Plaza, Corning, New York 14831
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-974-9000
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
at least the past 90 days.
Yes X No ____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
930,138,228 shares of Corning's Common Stock, $0.50 Par Value, were outstanding
as of April 1, 2001.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to consolidated financial statements of Corning Incorporated and
Subsidiary Companies filed as part of this report:
Page
----
Consolidated Statements of Income for the three months ended
March 31, 2001 and 2000 3
Consolidated Balance Sheets at March 31, 2001 and
December 31, 2000 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and 2000 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 and 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, 2000.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in millions, except per share amounts)
For the three months ended
March 31,
----------------------------
2001 2000
---------- ----------
Net sales $ 1,921 $ 1,351
Cost of sales 1,112 788
--------- ---------
Gross margin 809 563
Operating Expenses
Selling, general and administrative expenses 261 200
Research, development and engineering expenses 162 110
Amortization of purchased intangibles, including goodwill 156 13
Acquisition-related charges 89
--------- ---------
Operating income 230 151
Interest income 24 16
Interest expense (34) (24)
Other income (expense), net (9) (13)
Nonoperating gains 7
--------- ---------
Income before taxes 211 137
Taxes on income 108 55
--------- ---------
Income before minority interest and equity earnings 103 82
Minority interest in earnings of subsidiaries (5) (3)
Equity in earnings of associated companies 34 34
Impairment of equity investment (36)
--------- ---------
Net Income $ 132 $ 77
========= =========
Basic Earnings Per Share $ 0.14 $ 0.09
========= =========
Diluted Earnings Per Share $ 0.14 $ 0.09
========= =========
Dividends Declared $ 0.06 $ 0.06
========= =========
Shares used in computing per share amounts:
Basic earnings per share 923 811
========= =========
Diluted earnings per share 937 832
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except per share amounts)
March 31, December 31,
ASSETS 2001 2000
------ --------------- ---------------
Current Assets
Cash $ 126 $ 138
Short-term investments, at cost, which approximates market value 1,023 1,656
Accounts receivable, net of doubtful accounts and allowances -
$47/2001; $47/year-end 2000 1,351 1,489
Inventories 1,215 1,040
Deferred taxes on income and other current assets 359 311
---------- ---------
Total current assets 4,074 4,634
---------- ---------
Investments
Associated companies, at equity 469 479
Others, at cost or fair value 137 156
---------- ---------
606 635
---------- ---------
Plant and equipment, at cost, net of accumulated depreciation
$2,785/2001; $2,662/year-end 2000 4,939 4,679
Goodwill, net of accumulated amortization
$445/2001; $303/year-end 2000 6,720 6,779
Other intangible assets, net of accumulated amortization
$62/2001; $52/year-end 2000 566 561
Other assets 268 238
---------- ---------
Total Assets $ 17,173 $ 17,526
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Loans payable $ 197 $ 128
Accounts payable 614 855
Other accrued liabilities 827 966
---------- ---------
Total current liabilities 1,638 1,949
---------- ---------
Long-term debt 3,838 3,966
Postretirement benefits other than pensions 594 588
Deferred taxes on income 9 61
Other liabilities 195 181
Minority interest in subsidiary companies 140 139
Mandatorily redeemable convertible preferred stock 8 9
Common Shareholders' Equity
Common stock, including excess over par value and other capital -
Par value $0.50 per share; Shares authorized: 3.8 billion;
Shares issued: 1.0 billion/2001 and 1.0 billion/year-end 2000 9,685 9,512
Retained earnings 2,077 2,001
Less cost of 76 million/2001 and 76 million/year-end 2000 shares
of common stock in treasury (777) (753)
Accumulated other comprehensive loss (234) (127)
---------- ---------
Total common shareholders' equity 10,751 10,633
---------- ---------
Total Liabilities and Shareholders' Equity $ 17,173 $ 17,526
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
Three Months Ended March 31,
--------------------------------------
2001 2000
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 132 $ 77
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of purchased intangibles, including goodwill 156 13
Depreciation 155 112
Nonoperating gains (7)
Acquisition-related charges 89
Impairment of equity investment 36
Equity in earnings of associated companies in excess of dividends received (36) (15)
Minority interest in earnings of subsidiaries in excess of
(less than) dividends paid 1 (96)
Deferred tax benefit (11) (24)
Tax benefit on stock options 24 127
Changes in certain working capital items (271) (374)
Other 26 10
-------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 176 (52)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (576) (213)
Acquisitions of businesses and leased assets, net of cash acquired (66) (1,144)
Net proceeds from disposition of properties and investments 6 36
Net (increase) decrease in long-term investments and other noncurrent assets (47) 61
Transaction costs related to pooling of interests (39)
-------- -------
NET CASH USED IN INVESTING ACTIVITIES (683) (1,299)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 38 766
Repayments of loans (97) (554)
Proceeds from issuance of common stock 7 2,267
Redemption of common stock for income tax withholding (19) (42)
Dividends paid (56) (50)
--------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (127) 2,387
-------- -------
Effect of exchange rates on cash (2) (2)
-------- -------
Cash used in discontinued operations (9) (1)
-------- -------
Net (decrease) increase in cash and cash equivalents (645) 1,033
Cash and cash equivalents at beginning of year 1,794 280
-------- -------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 1,149 $ 1,313
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
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 first quarter of 2001 and 2000 are presented below. These amounts
exclude revenues, expenses and equity earnings not specifically
identifiable to segments. Segment net income excludes amortization of
purchased intangibles and goodwill, purchased in-process research and
development (IPRD) costs, one-time acquisition costs and other nonrecurring
items. This measure is not in accordance with generally accepted accounting
principles (GAAP) and may not be consistent with measures used by other
companies.
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. During the quarter ended March 31, 2001,
Corning realigned one product line from the Advanced Materials Segment into
the Telecommunications Segment. Segment results for 2000 have been restated
to conform to the current presentation.
Three months ended
March 31,
--------------------------
2001 2000
-------- ---------
Telecommunications
Net sales $ 1,433 $ 905
Research, development and engineering expenses $ 124 $ 78
Interest expense $ 25 $ 15
Segment earnings before minority interest and equity earnings $ 186 $ 112
Minority interest in losses of subsidiaries 3
Equity in earnings of associated companies 3
-------- ---------
Segment net income $ 189 $ 115
======== =========
Advanced Materials
Net sales $ 282 $ 252
Research, development and engineering expenses $ 28 $ 26
Interest expense $ 5 $ 6
Segment earnings before equity earnings $ 26 $ 17
Equity in earnings of associated companies 6 6
-------- ---------
Segment net income $ 32 $ 23
======== =========
Information Display
Net sales $ 201 $ 188
Research, development and engineering expenses $ 10 $ 6
Interest expense $ 4 $ 3
Segment earnings before minority interest and equity earnings $ 21 $ 20
Minority interest in earnings of subsidiaries (5) (6)
Equity in earnings of associated companies 25 27
-------- ---------
Segment net income $ 41 $ 41
======== =========
Total segments
Net sales $ 1,916 $ 1,345
Research, development and engineering expenses $ 162 $ 110
Interest expense $ 34 $ 24
Segment earnings before minority interest and equity earnings $ 233 $ 149
Minority interest in earnings of subsidiaries (5) (3)
Equity in earnings of associated companies 34 33
-------- ---------
Segment net income $ 262 $ 179
======== =========
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as follows:
Three months ended
March 31,
--------------------------
2001 2000
-------- ---------
Net sales
Total segment net sales $ 1,916 $ 1,345
Non-segment net sales (a) 5 6
-------- ---------
Total net sales $ 1,921 $ 1,351
======== =========
Net income
Total segment income (b) $ 262 $ 179
Unallocated items:
Non-segment loss and other (a) (1) (2)
Amortization of purchased intangibles and goodwill (c) (156) (13)
Acquisition-related charges (89)
Interest income (d) 24 15
Nonoperating gain 7
Income tax (e) 3 15
Equity in earnings of associated companies (a) 1
Impairment of equity investment (36)
-------- ---------
Net income $ 132 $ 77
======== =========
(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
The transaction listed below was 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.
Tropel
------
On March 16, 2001, Corning completed the acquisition of Tropel Corporation,
a manufacturer of precision optics and metrology instruments for the
semiconductor and other industries, for approximately $66 million in cash
and 1.95 million shares of Corning common stock. Based upon the average
closing price of Corning common stock for a range of days surrounding the
announcement and adjusted for a discount commensurate with restrictions on
the shares issued, the recorded purchase price approximated $160 million.
The excess of the purchase price over the estimated fair value of tangible
assets acquired was allocated to goodwill. Goodwill of approximately $155
million is being amortized on a straight-line basis over 15 years.
(3) Earnings Per Common Share
A reconciliation of the basic and diluted earnings per share computations
for the first quarter of 2001 and 2000 are as follows (in millions, except
per share amounts):
For the three months ended March 31,
-------------------------------------------------------------------------------
2001 2000
------------------------------------- ------------------------------------
Weighted Per share Weighted Per share
Income Average Shares Amount Income Average Shares Amount
Basic earnings per share $ 132 923 $ 0.14 $ 77 811 $ 0.09
====== ======
Effect of Dilutive Securities
Options 13 21
Mandatorily redeemable
convertible preferred stock 1
------ ------ ----- ------
Diluted earnings per share $ 132 937 $ 0.14 $ 77 832 $ 0.09
====== ====== ====== ===== ====== ======
At March 31, 2001, approximately 29 million convertible shares from the
subordinated notes and the zero coupon convertible debentures were not
included in the calculation of diluted earnings per share due to the
anti-dilutive effect they would have had if converted. Also, the 2001
computation of diluted earnings per share excluded 36 million potential
common shares since the option exercise price was greater than the average
market price of the common shares for the period.
At March 31, 2000, approximately eight million convertible shares from the
preferred stock and the subordinated notes were not included in the
calculation of diluted earnings per share due to the anti-dilutive effect
they would have had if converted.
Common dividends of $56 million were declared in the first quarter of 2001
compared with $50 million for the same period in 2000. Dividends per share
were $0.06 in each period.
(4) Taxes on Income
Corning's effective income tax rate for the first quarter ended March 31,
2001 was 51.1%, an increase over the 2000 rate of 40.1%. The increase was
primarily due to the large amounts of non-tax deductible purchased
intangibles and goodwill acquired from acquisitions arising in 2000.
Excluding the impact of the amortization of purchased intangibles and
goodwill, purchased IPRD costs, one-time acquisition costs and other
nonrecurring items, the effective income tax rate was approximately 32.5%
for the quarters ended March 31, 2001 and 2000.
(5) Supplementary Balance Sheet Data
Inventories shown on the accompanying balance sheets were comprised of the
following (in millions):
March 31, December 31,
2001 2000
----------- ------------
Finished goods $ 418 $ 300
Work in process 290 263
Raw materials and accessories 402 377
Supplies and packing materials 105 100
-------- --------
Total inventories $ 1,215 $ 1,040
======== ========
(6) Supplementary Statement of Cash Flows Data
Supplemental disclosure of cash flow information is as follows:
For the three months ended March 31,
------------------------------------
2001 2000
----------- -----------
Changes in certain working capital items:
Accounts receivable $ 117 $ (56)
Inventories (178) (82)
Other current assets 53 (22)
Accounts payable and other current liabilities (263) (214)
------- -------
Total $ (271) $ (374)
======= =======
Cash paid for interest and income taxes is as follows:
Interest $ 45 $ 37
Income taxes $ 35 $ 10
(7) Comprehensive Income
Comprehensive income, net of tax, for the first quarter of 2001 and 2000 is
as follows (in millions):
For the three months ended March 31,
------------------------------------
2001 2000
----------- -----------
Net income $ 132 $ 77
Other comprehensive income:
Foreign currency translation adjustment (81) (3)
Unrealized (loss) gain on marketable securities (28) 40
Realized gains on securities (5)
Cumulative effect of adoption of FAS 133 3
Unrealized derivative losses on cash flow hedges (3)
Reclassification adjustments on cash flow hedges 2
-------- -------
Total comprehensive income $ 25 $ 109
======== =======
The after-tax components of other comprehensive losses accumulated in
shareholders' equity are as follows (in millions):
Foreign Unrealized Unrealized Accumulated
Currency Gains (Losses) Gains (Losses) Other
Translation on Marketable on Cash Flow Comprehensive
Adjustment Securities Hedges Income (Losses)
---------- ---------- ------ ---------------
December 31, 2000 $ (168) $ 41 $ (127)
Foreign currency translation adjustment (81) (81)
Unrealized loss on marketable securities
(net of tax of $18) (28) (28)
Cumulative effect of adoption of FAS 133 3 3
Unrealized derivative losses on cash flow
hedges (net of tax of $2) (3) (3)
Reclassification adjustments on cash flow
hedges (net of tax of $2) 2 2
-------- -------- ------- --------
March 31, 2001 $ (249) $ 13 $ 2 $ (234)
======== ======== ======= ========
(8) Dow Corning Corporation
Corning and The Dow Chemical Company (Dow Chemical) each own 50% of the
common stock of Dow Corning Corporation (Dow Corning), a manufacturer of
silicones.
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 $366 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 bankruptcy filing
stayed 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
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 mid 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 Tort Claimants Committee filed a notice of appeal seeking review of the
ruling limiting the scope of the shareholder releases. Corning and Dow
Chemical filed separate notices of appeal on this issue. On November 13,
2000, the District Court entered an Order affirming the Bankruptcy Court's
November 30, 1999 Order confirming the Joint Amended Plan and reversing the
Bankruptcy Court's December 21, 1999 Opinion on the release and injunction
provisions. On February 5, 2001, the District Court denied a Motion for
Reconsideration, confirming that the Litigation Facility under the Joint
Plan is the defendant in place of Dow Corning, Corning and Dow Chemical,
and that Corning and Dow Chemical are not named defendants for direct
claims. Approximately 20 appeals from the District Court's Order are
pending in the Sixth Circuit Court of Appeals, which is expected to rule in
late 2001. 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.
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 $3.3 billion, 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. If and
when Dow Corning emerges from bankruptcy, Corning will likely begin to
recognize equity earnings from Dow Corning. Corning does not expect to
receive dividends from Dow Corning in the foreseeable future.
(9) 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. By the first quarter of 2000, PCC incurred
adverse verdicts in five trials involving 19 claimants. On April 16, 2000,
PCC filed for Chapter 11 reorganization in the United States Bankruptcy
Court for the Western District of Pennsylvania. As of the bankruptcy
filing, PCC had in excess of 240,000 open claims. 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. On April 4, 2001, the
Bankruptcy Court extended the period for PCC to file a plan of
reorganization until July 9, 2001. The preliminary injunction has been
extended by court order to August 23, 2001 to enable the parties to
negotiate a plan of reorganization for PCC. Upon expiration of the
injunction, PCC, PPG Industries and Corning will have 90 days to seek
removal and transfer of stayed cases that have not been resolved through a
plan of reorganization. As a result of PCC's bankruptcy filing, Corning
recorded an after tax charge of $36 million in the first quarter of 2000 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. Before
PCC filed for bankruptcy protection, Corning was dismissed from similar
claims as cases against PCC proceeded to trial. The Chapter 11 filing may
lead to additional claims against Corning with related costs of defense,
charges and expenses. Although the outcome of litigation and the bankruptcy
case is uncertain, management believes that the separate corporate status
of PCC will continue to be upheld. Management is continuing to investigate
Corning's options for defending claims against it, which might include
vigorously defending itself on all fronts or exploring a global settlement
through the bankruptcy process. It is probable that there will be intensive
negotiations throughout the second quarter of 2001 concerning terms of
PCC's plan of reorganization, including whether or not Corning may
participate by making a contribution in exchange for a release. Management
cannot estimate the probability that Corning will be able to secure such a
release upon terms and conditions satisfactory to Corning. The range of
cost for these options (net of insurance) cannot be estimated at this time,
although management believes these matters will be resolved without a
materially adverse impact on Corning's financial position.
(10) Adoption of New Accounting Standard - Derivative Financial Instruments -
FAS 133
Effective January 1, 2001, Corning adopted Financial Accounting Standards
Board Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," (FAS 133) as amended by FAS No. 137 and FAS No. 138. FAS 133
requires that all derivative financial instruments be recognized in the
financial statements and measured at fair value regardless of the purpose
or intent for holding them. Changes in the fair value of derivative
financial instruments are either recognized periodically in net earnings or
shareholders' equity, as a component of other comprehensive income,
depending on whether the derivative is being used to hedge changes in fair
value or cash flows. Changes in fair value of ineffective portions of
hedges are recognized in earnings in the current period. The adoption of
FAS 133 as of January 1, 2001, resulted in a cumulative after-tax credit to
comprehensive income of $3 million. For the three months ended March 31,
2001, an after-tax charge of $3 million was recorded in other income
(expense), net for the ineffective portion of cash flow hedges.
Foreign Currency Risk
---------------------
Corning operates and conducts business in many foreign countries. As a
result, there is exposure to potentially adverse movement in foreign
currency rate changes. Corning selectively enters into foreign exchange
forward and option contracts with durations generally 12 months or less to
reduce its exposure to exchange rate risk on foreign source income and
purchases. The objective of these contracts is to neutralize the impact of
foreign currency exchange rate movements on Corning's operating results.
The derivative contracts require Corning to exchange, or give Corning the
option to exchange currencies at rates agreed upon at the inception of the
contract. The hedge contracts reduce the exposure to fluctuations in
exchange rate movements because the gains and losses associated with
foreign currency balances and transactions are generally offset with the
gains and losses of the hedge contracts. Because the impact of movements in
foreign exchange rates on the hedge contracts offsets the related impact on
the underlying items being hedged, these financial instruments help
alleviate the risk that might otherwise result from change in currency
exchange rate fluctuations.
The forward and option contracts are designated as cash flow hedges and
accordingly, when effective, any changes in fair value on these contracts
are reported in other comprehensive income. Realized gains and losses for
the effective portion are recognized in earnings when the underlying hedged
transaction affects earnings.
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 first quarter of 2001, an increase of 42%
over sales of $1.35 billion in the prior year quarter. Excluding the impact of
acquisitions, net sales increased 26% over the first quarter of 2000. Sales
growth in the first quarter was most pronounced in the Telecommunications
Segment, where the impact of acquisitions and demand for Corning's premium fiber
and cable and photonics products drove quarter over quarter segment sales growth
of 58%.
Corning's net income totaled $132 million in the first quarter of 2001, an
increase of 71% from the prior year quarter. Diluted earnings per share
increased 55% to $0.14 per share in the first quarter of 2001 compared to the
prior year quarter. The percentage 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 in 2000.
Corning's results for the first quarter of 2001 did not include any material
nonrecurring items, however 2000's first quarter results were impacted by
several nonrecurring items:
. a nonoperating gain of $7 million ($4 million after tax),
. an in-process research and development (IPRD) charge of $42 million ($26
million after tax),
. a charge for acquisition costs related to the merger of Oak Industries of
$47 million ($43 million after tax), and
. an after-tax charge of $36 million to impair Corning's investment in
Pittsburgh Corning Corporation.
Amortization of purchased intangibles and goodwill totaled $156 million ($145
million after tax) in first quarter 2001 compared to $13 million ($10 million
after tax) in first quarter 2000. This increase primarily relates to purchase
business combinations in the Telecommunications Segment completed in 2000.
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, generally accepted
accounting principles (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):
Three Months Ended
March 31,
--------------------------
2001 2000
--------- --------
Net income $ 132 $ 77
Amortization of purchased intangibles, including goodwill 145 10
In-process research and development charges 26
Other acquisition-related charges 43
Nonoperating gains (4)
Impairment of equity investment 36
-------- -------
Pro forma net income $ 277 $ 188
======== =======
Pro forma diluted earnings per share $ 0.29 $ 0.23
The first quarter 2001 pro forma results reflect double-digit growth in the
Telecommunications and Advanced Materials Segment while the Information Display
Segment remained relatively flat.
Outlook
Over the course of the first quarter, Corning's outlook has declined
significantly due to a substantial reduction in capital spending in the
telecommunications industry and the general softening of the U.S. economy. As a
result of these factors, Corning now expects revenue growth of 9% to 12%
compared to previous expectations of 20% to 25% and expects pro forma earnings
per share to decrease 20% to 25% from 2000. As a result of lower revenue
expectations, Corning has taken the following actions to adjust its cost
structure:
. Through the end of the first quarter, Corning reduced its workforce by
approximately 3,300 permanent and temporary employees, primarily in the
photonic technologies and hardware and equipment businesses. These
workforce reductions comprised mostly hourly production workers and
resulted in minimal severance charges. In April, Corning announced an
additional workforce reduction of approximately 1,000 positions in photonic
technologies, including both hourly and salaried employees.
. Corning is decreasing its capital spending forecast for 2001 from $2.5
billion to approximately $2 billion, delaying some capital expansion to
2002.
. Corning's research and development spending in 2001 will be approximately
$650 million to $675 million, a decrease from an anticipated $700 million,
but substantially over 2000's $540 million.
Corning will continue to review its internal cost structure and monitor the
industry trends throughout 2001, which may result in additional cost improvement
measures and targeted workforce reductions. As a result of actions taken in the
second quarter, Corning may record a restructuring charge in the second quarter.
Corning is still committed to invest in new product development, targeted
capacity expansion and external growth.
Business Combinations
On March 16, 2001, Corning completed the acquisition of Tropel Corporation for
approximately $66 million in cash and 1.95 million shares of Corning common
stock for a total purchase price of approximately $160 million. The acquisition
was accounted for as a purchase and is reported in the semiconductor materials
business in the Advanced Materials Segment.
Operating Segments
Corning groups its products into three operating segments: Telecommunications,
Advanced Materials and Information Display. Corning includes the earnings of
equity affiliates that are closely associated with Corning's operating segments
in segment net income. Information about the performance of Corning's three
operating segments for the first quarter of 2001 and 2000 is presented below.
These amounts do not include revenues, expenses and equity earnings not
specifically identifiable to segments. Segment net income excludes amortization
of purchased intangibles and goodwill, purchased IPRD costs, 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. This measure is not in accordance with GAAP and may not be
consistent with measures used by other companies.
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. During the quarter ended March 31, 2001, Corning realigned one product
line from the Advanced Materials Segment into the Telecommunications Segment.
Segment results for 2000 have been restated to conform to the current
presentation.
- ---------------------------------------------------------------------------------------------------
Telecommunications Three Months Ended
(In millions) March 31,
2001 2000
- ---------------------------------------------------------------------------------------------------
Net sales $ 1,433 $ 905
Research, development and engineering expenses $ 124 $ 78
Interest expense $ 25 $ 15
Segment earnings before minority interest
and equity earnings $ 186 $ 112
Minority interest in losses of subsidiaries 3
Equity in earnings of associated companies 3
--------- ---------
Segment net income $ 189 $ 115
========= =========
- ---------------------------------------------------------------------------------------------------
Segment earnings before minority interest and
equity earnings as a percentage of segment sales 13.0% 12.4%
Segment net income as a percentage of segment sales 13.2% 12.7%
- ---------------------------------------------------------------------------------------------------
The Telecommunications Segment produces optical fiber and cable, optical
hardware and equipment and photonic modules and components for the worldwide
telecommunications industry.
First quarter
Sales in the Telecommunications Segment increased 58% over the first quarter of
2000 to approximately $1.4 billion compared to $905 million in the prior year
quarter. Excluding acquisitions, sales growth for the same period in 2001 was
35%. The sales growth in the segment was led primarily by volume gains in the
optical fiber and cable, hardware and equipment and photonic technologies
businesses. Segment net income rose 64% to $189 million in first quarter 2001
compared to $115 million in first quarter 2000. The increase in segment net
income was primarily due to improved gross margins in the fiber and cable
business that more than offset a margin decline in photonic technologies.
Sales in the fiber and cable business improved 83% in the first quarter of 2001
to $875 million compared with $479 million in the prior year quarter. The
increase in sales resulted primarily from the impact of acquisitions and strong
volume gains. Approximately $143 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 fiber and cable
business increased 53% for the quarter due to volume gains of 30%, reflecting
continued strong demand for Corning's premium fiber products. Volume of premium
fiber and cable products, including Corning's LEAF(R) and MetroCor(TM) optical
fiber, increased almost 50% over the prior year quarter. The average price for
Corning's optical fiber and cable products increased in comparison with last
year's first quarter due to both the mix of customers and a higher mix of
premium products. Corning does not expect this trend to continue throughout 2001
as premium fiber as a percentage of total fiber demand will decrease from
approximately 35% in the first quarter to 25% for the entire year of 2001.
Net income from the fiber and cable business more than doubled in the first
quarter of 2001 compared to the prior year quarter. The strong performance was
due to volume growth in both high-data rate and single mode products and the
continued shift to a higher premium product mix.
Sales in the telecommunications hardware and equipment business increased 35% in
the first quarter of 2001 to approximately $248 million compared with $183
million in the prior year quarter. Excluding acquisitions, first quarter 2001
sales increased 9% compared to the prior year quarter. The modest increase
resulted primarily from higher volume of existing products including cable
assemblies, fiber optic hardware and high speed internet connections, offset in
part by price declines and a 47% decrease in revenues at Gilbert Engineering due
to growing weakness in cable television industry spending. Overall, net income
decreased slightly compared to the prior year quarter, primarily due to the loss
of volume at Gilbert Engineering. The business has reduced its hourly workforce
by approximately 1,175 employees to date.
Sales in the photonic technologies business increased approximately 27% in the
first quarter of 2001 to approximately $236 million compared to approximately
$186 million in the prior year quarter. Excluding acquisitions, sales increased
20% over the prior year quarter. Although sales were up compared to the first
quarter of 2000, sales declined 30% from the fourth quarter of 2000 due to
significant declines in orders from major customers caused by the decrease in
capital spending in the telecommunications segment. The business incurred an
operating loss in the first quarter as a result of excess capacity and a higher
fixed cost structure compared to the first quarter of last year.
Corning now expects revenues in photonic technologies to be about even with 2000
versus original expectations that revenues would increase significantly due to
growth in demand for photonic technology devices. Corning is now making
significant cost and workforce reductions to reflect the lower revenue
expectations. The business reduced its workforce through April 30, 2001 by
approximately 2,500 employees this year which includes hourly, salaried and
temporary positions.
As a result of the sudden decline in orders for this business, photonic
technologies' inventories increased approximately 35% during the quarter.
Management has taken action to significantly curtail production and reduce
inventories over the course of the year. Although management believes inventory
is currently realizable, further changes in anticipated customer order rates
and/or changes in customer specifications could increase Corning's exposure to
obsolescence in the future.
Corning has also significantly reduced its capital expansion plans in this
business. Construction of a new manufacturing facility in Nashua, NH will be
completed and then mothballed until increased demand resumes. Other previously
announced capacity expansions in the business will be delayed, or postponed
until business conditions improve.
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 in the third quarter of 2000. The
business had sales of $14 million in the first quarter of 2001. This business is
also seeing some softening in expected demand for its products. Corning is
investing significant research and development spending in this business.
Sales in the controls and connectors business increased 5% to $60 million in the
first quarter of 2001 compared to $57 million in the prior year quarter. The
modest increase was primarily due to weak customer demand, particularly in U.S.
markets. Net income from these businesses improved slightly, moving from a
break-even position in the first quarter of 2000 to moderate profitability in
the first quarter of 2001. The business reduced its workforce by approximately
525 employees this year in response to current revenue forecasts.
Outlook: Sales in the Telecommunications Segment are now expected to trend
upward by approximately 9% to 12% primarily based upon the continued demand for
Corning's cabled fiber products. Excluding the impact of acquisitions, sales are
expected to increase 5% to 7%.
Segment net income is expected to decrease 25% to 30% for the year primarily due
to decreased volumes of amplifiers in photonic technologies and a lower mix of
premium products in the fiber and cable business.
- -----------------------------------------------------------------------------------------------------------------------
Advanced Materials Three Months Ended
(In millions) March 31,
2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Net sales $ 282 $ 252
Research, development and engineering expenses $ 28 $ 26
Interest expense $ 5 $ 6
Segment earnings before equity earnings $ 26 $ 17
Equity in earnings of associated companies 6 6
--------- ---------
Segment net income $ 32 $ 23
========= =========
- -----------------------------------------------------------------------------------------------------------------------
Segment earnings before equity earnings as a percentage of segment sales 9.2% 6.7%
Segment net income as a percentage of segment sales 11.3% 9.1%
- -----------------------------------------------------------------------------------------------------------------------
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.
First quarter
Sales in the Advanced Materials Segment increased 12% in the first quarter of
2001 to $282 million compared to $252 million in the prior year quarter,
primarily due to strong growth in the semiconductor materials business. Segment
net income increased 39% in the first quarter of 2001 compared to the prior year
quarter 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 for first quarter 2001 of $108
million exceeded first quarter 2000 sales of $103 million by 5%, primarily due
to continued strong demand for Corning's thin wall products, particularly in
Asia. Earnings in this business for the first quarter of 2001 remained
relatively flat compared to the prior year quarter, primarily due to start-up
costs in South Africa and China, lower sales volumes in the U.S. automotive
market and manufacturing inefficiencies related to the introduction of new ultra
thin wall products.
Sales in the life sciences business of $70 million in the first quarter of 2001
increased 11% compared to first quarter 2000 sales of $63 million primarily due
to increased volume of microplates. Earnings in this business were breakeven for
the 2001 quarter and flat compared to first quarter 2000 as the business
continues to incur start-up costs for Corning's microarray technology products
that offset gains achieved from cost structure improvements in the base
business.
Sales in Corning's other Advanced Materials businesses increased 21% from first
quarter 2000 to $104 million in the first quarter of 2001 compared to $86
million in the prior year quarter. Excluding the impact of the divestiture of
Quanterra in the first quarter of 2000, sales improved 30%. This increase was
led by higher sales of high purity fused silica products in the semiconductor
materials business. Earnings from these businesses in first quarter 2001 more
than tripled over first quarter 2000 primarily due to increased volume and
despite a decrease in equity earnings from Eurokera, a French based manufacturer
of glass ceramic cooktops.
Outlook: The 2001 outlook for this operating segment remains relatively
unchanged from that included in Corning's Form 10-K. Corning expects segment
sales in 2001 to increase 8% to 10% despite signs of softness in the
semiconductor market. Life science products, particularly the new microarray
products, are also expected to continue to grow. Segment net income is expected
to increase in 2001 reflecting these sales gains, aggressive cost reduction
initiatives and the wind-down of startup costs in environmental technologies
offset in part by the continued investment in research and development spending
on advanced life science products and diesel substrates.
- ---------------------------------------------------------------------------------------------------
Information Display Three Months Ended
(In millions) March 31,
2001 2000
- ---------------------------------------------------------------------------------------------------
Net sales $ 201 $ 188
Research, development and engineering expenses $ 10 $ 6
Interest expense $ 4 $ 3
Segment earnings before minority interest
and equity earnings $ 21 $ 20
Minority interest in earnings of subsidiaries (5) (6)
Equity in earnings of associated companies 25 27
---------- ---------
Segment net income $ 41 $ 41
========== =========
Segment earnings before minority interest and
equity earnings as a percentage of segment sales 10.4% 10.6%
Segment net income as a percentage of segment sales 20.4% 21.8%
- ---------------------------------------------------------------------------------------------------
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.
First quarter
Sales in the Information Display Segment increased 7% in first quarter 2001 to
$201 million compared to $188 million in first quarter 2000, primarily due to
strong growth in the precision lens business offset by flat performances in
display technologies and the conventional video components businesses. Segment
net income in the first quarter of 2001 also remained flat compared with the
prior year quarter primarily due to lower equity earnings.
Sales in the conventional video components business increased 4% to $86 million
in first quarter 2001 compared to $83 million in first quarter 2000. Earnings in
this business for the quarter improved slightly over first quarter 2000 despite
flat equity earnings from Samsung Corning Company Ltd., a manufacturer of glass
panels and funnels for televisions and display monitors.
Sales in the display technologies business in first quarter 2001 were flat at
$62 million compared to first quarter 2000 sales of $61 million. Volume
increases of 20% were lower than recent quarters due to an inventory correction
in the industry and were offset by the impact of the weak yen on translated
sales. Earnings in this business for the quarter were down slightly compared to
the same quarter in 2000 primarily due to flat sales and lower equity earnings
from Samsung Corning Precision, a Korean manufacturer of liquid crystal display
glass, due to the divestment of Samsung Corning's 40% interest in Samsung
Corning Precision in late 2000.
Sales in the precision lens business increased 21% to $53 million in first
quarter 2001 compared to $44 million in first quarter 2000 as a result of
continued strong volume growth for projection televisions driven by demand for
larger size televisions in the entertainment market sector. Earnings in this
business for the quarter were relatively flat in 2001 compared to first quarter
2000, primarily due to volume gains offset by increased spending for the
expansion expected to come on-line in the second half of 2001.
Outlook: Sales in the Information Display Segment are expected to increase
approximately 10% to 15% in 2001 and segment net income is also expected to grow
10% to 15%. Both sales and net income outlooks are being negatively impacted by
the translation rate of the yen which is offsetting expected sales volume gains.
Taxes on Income
Corning's effective income tax rate for the first quarter ended March 31, 2001
was 51.1%, an increase over the 2000 rate of 40.1%. The increase was primarily
due to the large amounts of non-tax deductible purchased intangibles and
goodwill acquired from acquisitions arising in 2000. Excluding the impact of the
amortization of purchased intangibles and goodwill, purchased IPRD costs,
one-time acquisition costs and other nonrecurring items, the effective income
tax rate for the quarters ended March 31, 2001 and 2000 was approximately 32.5%.
Liquidity and Capital Resources
In March 2001, Corning filed a universal shelf registration statement with the
Securities and Exchange Commission that became effective in the first quarter.
The shelf permits the issuance of up to $5 billion of various debt and equity
securities.
Corning's working capital decreased from $2,685 million at December 31, 2000 to
$2,436 million at March 31, 2001. The ratio of current assets to current
liabilities was 2.5 at March 31, 2001 compared to a current ratio of 2.4 at
December 31, 2000. The decrease in working capital is due primarily to capital
spending, partially offset by a reduction in accounts payable and an increase in
inventories. Corning's long-term debt as a percentage of total capital decreased
slightly from 27% at December 31, 2000 to 26% at March 31, 2001.
Cash Flows
Cash and short-term investments at March 31, 2001 decreased from December 31,
2000 by $645 million. This decrease is the result of investing activities which
used cash of $683 million and financing activities which used cash of $127
million, offset by operating activities which generated cash of $176 million.
Net cash provided by operating activities was $176 million during the three
months ended March 31, 2001 compared with cash used of $52 million for the prior
year period. This trend is primarily due to increased operating results adjusted
for higher depreciation and amortization of purchased intangibles and goodwill.
Cash used in working capital was lower in 2001.
Net cash used in investing activities amounted to $683 million during the three
months ended March 31, 2001 compared with $1,299 million in the prior year
period. The decrease in cash used was primarily related to the high volume of
acquisitions in first quarter 2000 offset in part by higher capital spending in
2001.
Corning continues to invest significant cash in capacity expansions to support
growth in operations. Capital spending for the three months ended March 31, 2001
totaled $576 million compared to $213 million in the prior year period. Corning
revised its capital spending plan due to a decrease in forecasted revenues and
profits for 2001. Corning currently expects its capital spending for the full
year to be in the range of $2 billion.
Net cash used in financing activities was $127 million during the three months
ended March 31, 2001 compared with cash provided of $2,387 million in the prior
year period. The substantial decrease is due primarily to the timing of
financing transactions in 2000 that included the equity offering which generated
cash proceeds of $2.2 billion and the euro-debt offering which provided an
additional $485 million in 2000.
Dividends paid to common shareholders for the first quarter totaled $56 million
compared with $50 million in the same period of 2000.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
The statements in this Form 10-Q which are not historical facts or information
are forward-looking statements. These forward-looking statements involve risks
and uncertainties that may cause the outcome to be materially different. Such
risks and uncertainties include, but are not limited to:
. global economic conditions,
. currency fluctuations,
. product demand and industry capacity,
. competitive products and pricing,
. sufficiency of manufacturing capacity and efficiencies,
. cost reductions,
. availability and costs of critical materials,
. new product development and commercialization,
. attracting and retaining key personnel,
. facility expansions and new plant start-up costs,
. the effect of regulatory and legal developments,
. capital resource and cash flow activities,
. capital spending,
. equity company activities,
. interest costs,
. acquisition and divestiture activity,
. the rate of technology change,
. the ability to enforce patents,
. stock price fluctuations, and
. other risks detailed in Corning's Securities and Exchange Commission filings.
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 $18 million for its estimated
liability for environmental cleanup and litigation at March 31, 2001. 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.
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 bankruptcy filing stayed 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 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 mid 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 Tort Claimants Committee filed a notice of appeal seeking review
of the ruling limiting the scope of the shareholder releases. Corning and Dow
Chemical filed separate notices of appeal on this issue. On November 13, 2000,
the District Court entered an Order affirming the Bankruptcy Court's November
30, 1999 Order confirming the Joint Amended Plan and reversing the Bankruptcy
Court's December 21, 1999 Opinion on the release and injunction provisions. On
February 5, 2001, the District Court denied a Motion for Reconsideration,
confirming that the Litigation Facility under the Joint Plan is the defendant in
place of Dow Corning, Corning and Dow Chemical, and that Corning and Dow
Chemical are not named defendants for direct claims. Approximately 20 appeals
from the District Court's Order are pending in the Sixth Circuit Court of
Appeals, which is expected to rule in late 2001. 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.
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 $3.3 billion, 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. If and when Dow Corning emerges from bankruptcy, Corning will likely
begin to recognize equity earnings from Dow Corning. Corning does not expect to
receive dividends from Dow Corning in the foreseeable future.
Implant Tort Lawsuits. Corning and Dow Chemical, the shareholders of Dow Corning
Corporation, have been 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 March 31, 2001, Corning was 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 implants
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 for summary judgment, which was made
final in April 1995, 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 judgement. The District Court entered several
orders 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 legislation, 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. The Louisiana
cases were transferred to the United States District Court for the Eastern
District of Michigan, Southern District (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. 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 proceedings 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.
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 first half of 2001. 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 and February 2000, Shin Etsu
Quartz Products Company filed two patent suits in Japan against Corning for
alleged patent infringement of two patents relating to the properties of fused
silica materials used in the optical components of stepper machines. The suits
request damages and an injunction preventing sales of infringing products in
Japan. Corning has denied infringement, has argued that the patents are invalid
or unenforceable, and has filed a separate action to invalidate the second of
the two patents. Corning intends to defend these suits vigorously. While
recognizing that litigation is inherently uncertain, based upon the information
developed to date, management believes that Corning has good defenses to Shin
Etsu's claims.
Sumitomo Electric Industries, Inc. In December 2000, Sumitomo Electric
Industries, Inc. served a patent infringement complaint in the U.S. District
Court in North Carolina which asserts that Corning has infringed four Sumitomo
U.S. patents relating to optical fiber. The complaint also asserts that a
Corning patent relating to optical fiber was invalid. The suit seeks damages in
an unspecified amount for the alleged infringement of the Sumitomo patents, an
injunction restraining infringement, and a declaration that the Corning patent
is invalid. Since filing the complaint, Corning has met with Sumitomo. In an
effort to reach an amicable resolution, these discussions continue. Management
believes that the four Sumitomo patents are either not infringed or are invalid
and there is no basis for a holding that the Corning patent is invalid.
Management is prepared to defend this action vigorously and, recognizing that
the outcome of litigation is uncertain, believes it has strong defenses to
Sumitomo's claims.
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. By the first quarter of 2000, PCC
incurred adverse verdicts in five trials involving 19 claimants. On April 16,
2000, PCC filed for Chapter 11 reorganization in the United States Bankruptcy
Court for the Western District of Pennsylvania. As of the bankruptcy filing, PCC
had in excess of 240,000 open claims. 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. On April 4, 2001, the Bankruptcy Court extended the period for
PCC to file a plan of reorganization until July 9, 2001. The preliminary
injunction has been extended by court order to August 23, 2001 to enable the
parties to negotiate a plan of reorganization for PCC. Upon expiration of the
injunction, PCC, PPG Industries and Corning will have 90 days to seek removal
and transfer of stayed cases that have not been resolved through a plan of
reorganization. As a result of PCC's bankruptcy filing, Corning recorded an
after tax charge of $36 million in the first quarter of 2000 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. Before PCC filed for bankruptcy protection, Corning was
dismissed from similar claims as cases against PCC proceeded to trial. The
Chapter 11 filing may lead to additional claims against Corning with related
costs of defense, charges and expenses. Although the outcome of litigation and
the bankruptcy case is uncertain, management believes that the separate
corporate status of PCC will continue to be upheld. Management is continuing to
investigate Corning's options for defending claims against it, which might
include vigorously defending itself on all fronts or exploring a global
settlement through the bankruptcy process. It is probable that there will be
intensive negotiations throughout the second quarter of 2001 concerning terms of
PCC's plan of reorganization, including whether or not Corning may participate
by making a contribution in exchange for a release. Management cannot estimate
the probability that Corning will be able to secure such a release upon terms
and conditions satisfactory to Corning. The range of cost for these options (net
of insurance) cannot be estimated at this time, although management believes
these matters will be resolved without a materially adverse impact on Corning's
financial position.
Astrium. In December of 2000, Astrium, SAS and Astrium, Ltd. filed a complaint
for negligence in the United States District Court for the Central District of
California against TRW, Inc., Pilkington Optronics Inc., Corning NetOptix, Inc.,
OFC Corporation and Optical Filter Corporation claiming damages in excess of
$150 million. The complaint alleges that certain cover glasses for solar arrays
used to generate electricity from solar energy on satellites sold by Astrium's
corporate successor were negligently coated by NetOptix or its subsidiaries
(prior to Corning's acquisition of NetOptix) in such a way that the amount of
electricity the satellite can produce and their effective life were materially
reduced. Corning has denied that the coatings produced by NetOptix or its
subsidiaries caused the damage alleged in the complaint or that it is legally
liable for any damages which Astrium may have experienced. Formal discovery has
just begun, no depositions have been taken, and it is too early to form a
definitive opinion about the outcome of the litigation. Based upon the
information developed to date and recognizing that the outcome of litigation is
uncertain, management believes that there are good defenses to these claims and
believes they will be resolved without material impact on Corning's financial
statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index which is located on page 26.
(b) Reports on Form 8-K
A report on Form 8-K dated January 24, 2001, was filed in
connection with the registrant's 2000 results.
A report on Form 8-K/A dated December 12, 2000, was filed in
connection with the registrant's acquisition of Optical
Technologies USA.
A report on Form 8-K dated March 19, 2001, was filed in
connection with the registrant's 2001 earnings guidance.
Other items under Part II are not applicable.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORNING INCORPORATED
----------------------------------------------------
(Registrant)
May 2, 2001 /s/ JAMES B. FLAWS
- ------------------ ----------------------------------------------------
Date James B. Flaws
Executive Vice President and Chief Financial Officer
May 2, 2001 /s/ KATHERINE A. ASBECK
- ------------------ ----------------------------------------------------
Date Katherine A. Asbeck
Senior Vice President and Controller
CORNING INCORPORATED
EXHIBIT INDEX
This exhibit is numbered in accordance
with Exhibit Table I of Item 601 of Regulation S-K
Page number
in manually
Exhibit # Description signed original
- --------- ----------- ---------------
12 Computation of ratio of earnings to combined
fixed charges and preferred dividends 27
Exhibit #12
CORNING INCORPORATED AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED DIVIDENDS
(Dollars in millions, except ratios)
Three Months Ended
March 31, 2001
------------------
Income before taxes on income $ 211
Adjustments:
Distributed income of equity investees 1
Amortization of capitalized interest 3
Fixed charges net of capitalized interest 39
--------
Earnings before taxes and fixed charges as adjusted $ 254
========
Fixed charges:
Interest incurred $ 48
Portion of rent expense which represents interest factor 4
Amortization of debt costs 1
--------
Total fixed charges 53
Capitalized interest (14)
--------
Total fixed charges net of capitalized interest $ 39
========
Preferred dividends:
Preferred dividend requirements $
Ratio of pre-tax income to income before minority interest and equity earnings 2
--------
Pre-tax preferred dividend requirement
Total fixed charges 53
--------
Fixed charges and pre-tax preferred dividend requirement $ 53
========
Ratio of earnings to combined fixed charges and preferred dividends 4.8x
========