Securities and
Exchange Commission
Washington, D.C. 20549
Form 10-K
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year ended December 31, 1998
Commission file number 1-3247
Corning Incorporated
One Riverfront Plaza, Corning, NY 14831
607-974-9000
New York
(State of incorporation)
16-0393470
(I.R.S. employer identification no.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.50 par value, New York Stock Exchange
with attached Preferred Share
Purchase Right
Securities registered pursuant to Section 12(g) of the Act: None
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 such filing requirements for
the past 90 days. Yes x No
--- ---
Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes x No
--- ---
As of February 3, 1999, shares held by non-affiliates of Corning Incorporated
had an aggregate market value of $10,134,280,933. As of February 3, 1999,
231,577,256 shares of Corning's common stock were outstanding.
Documents incorporated by reference in this annual report:
Part III. Proxy Statement of the Registrant dated March 10, 1999 relating to
the annual meeting of shareholders on April 29, 1999.
PART I
Item 1. Business
General
Corning traces its origins to a glass business established in 1851. The present
corporation was incorporated in the State of New York in December 1936, and its
name was changed from Corning Glass Works to Corning Incorporated on April 28,
1989.
Corning is a global, technology-based corporation which operates in three
broadly based business segments: Telecommunications, Advanced Materials and
Information Display.
The Telecommunications Segment produces optical fiber and cable, optical
hardware and equipment and photonic components for the worldwide
telecommunications industry.
The Advanced Materials Segment manufactures specialized products with unique
properties for customer applications utilizing glass, glass ceramic and polymer
technologies. Businesses within this segment include environmental products,
science products, semiconductor materials and optical and lighting products.
The Information Display Segment manufactures glass panels and funnels for
televisions and CRTs, projection video lens assemblies and liquid-crystal
display glass for flat panel displays.
Corning and its subsidiaries manufacture products at 40 plants in 10 countries.
Additional discussion of Corning and each of its segments is discussed in Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations, appearing on pages 5 through 14, and Note 3 (Information by
Operating Segment) of the Notes to Consolidated Financial Statements appearing
on pages 28 through 32.
Competition
Corning competes across all of its product lines with many large and varied
manufacturers, both domestic and foreign.
Competition within the Telecommunication Segment's primary products is intense
among several significant companies. Corning represents an important market
presence in the segment's principal product lines. Price and new product
innovations are significant competitive factors.
Within the Advanced Materials Segment, Corning's principal products face
competition from a variety of material manufacturers, some of which manufacture
similar products made from materials other than glass and ceramics. Among other
things, innovation, product quality, performance, and service are key
competitive elements.
Competition is also intense in the Information Display Segment. Primary
competitive influences include a worldwide surplus of glass in the conventional
television business and increased competition in the Asian marketplace, which
have recently resulted in a decline in prices.
Corning strives to maintain its market position through technology and product
innovation. For the future, Corning's competitive advantage lies in its
commitment to research and development, its financial resources, and its
commitment to quality.
Raw Materials
Corning's production of specialty glasses and related materials requires
significant quantities of energy and batch materials.
Although energy shortages have not been a problem recently, Corning has achieved
flexibility through important engineering changes to take advantage of the
lowest-cost energy source in most significant processes. Specifically, Corning's
principal manufacturing processes can now be operated with natural gas, propane,
oil or electricity, or a combination of these energy sources.
1
As to resources (ores, minerals, and processed chemicals) required in
manufacturing operations, availability appears to be adequate. Corning's
suppliers from time to time may experience capacity limitations in their own
operations, or may eliminate certain product lines; nevertheless, Corning
believes it has adequate programs to ensure a reliable supply of batch chemicals
and raw materials. For many products, Corning has alternative glass compositions
that would allow operations to continue without interruption in the event of
specific materials shortages.
Patents and Trademarks
Inventions by members of Corning's research and engineering staff have been, and
continue to be, important to the Company's growth. Patents have been granted on
many of these inventions in the United States and other countries. Some of these
patents have been licensed to other manufacturers, including Corning's
associated companies. Many of the earlier patents have now expired.
Most of Corning's products are marketed under the following trademarks: Corning,
Celcor, Costar, Fibergain, HPFS, LEAF, Pyrex, Steuben and Vycor. Subsidiaries
and divisions of Corning frequently use their own trademarks.
Protection of the Environment
Corning has a program to ensure that its facilities are in compliance with
state, federal and foreign pollution-control regulations. This program resulted
in capital and operating expenditures during the past several years. In order to
maintain compliance with such regulations, capital expenditures for pollution
control by continuing operations were approximately $24.2 million in 1998 and
are estimated to be $14.6 million in 1999.
Corning's 1998 operating results from continuing operations were charged with
approximately $29.3 million for depreciation, maintenance, waste disposal, and
other operating expenses associated with pollution control. The level of these
costs is expected to increase slightly in 1999 due to depreciation costs
associated with capital expenditures. Corning believes that its compliance
program will not place it at a competitive disadvantage.
Other
Additional information in response to Item I is found in Note 3 (Information by
Operating Segment) of the Notes to Consolidated Financial Statements appearing
on pages 28 through 32 and Five Years in Review - Historical Comparison
appearing on pages 49 and 50.
Except as otherwise indicated by the context, the terms "Corning" or "Company"
as used herein, mean Corning Incorporated and its consolidated subsidiaries.
Item 2. Properties
Corning operates a total of 40 manufacturing plants and processing facilities,
25 of which are located in the United States. Corning owns substantially all of
its executive and corporate buildings, which are located in Corning, New York.
Corning also owns substantially all of its manufacturing and research and
development facilities and more than half of its sales and administrative
facilities.
During the last five years, Corning has invested $2.6 billion in property,
construction, expansion, and modernization for continuing operations. Of the
$713.6 million spent in 1998, $37.4 million was spent on facilities outside the
United States.
Manufacturing, sales and administrative, and research and development facilities
at consolidated locations have an aggregate floor space of approximately 16.7
million square feet. Distribution of this total area is:
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(million square feet) Total Domestic Foreign
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Manufacturing 11.0 7.6 3.4
Sales and administrative 4.0 1.9 2.1
Research and development 1.7 1.6 0.1
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16.7 11.1 5.6
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2
Some facilities manufacture products included in more than one operating
segment. Total assets and capital expenditures by operating segment are included
in Note 3 (Information by Operating Segment) of the Notes to Consolidated
Financial Statements appearing on pages 28 through 32. Information concerning
lease commitments is included in Note 17 (Commitments, Contingencies, Guarantees
and Hedging Activities) of the Notes to Consolidated Financial Statements
appearing on pages 44 and 45.
In the opinion of management, Corning's facilities are suitable and adequate for
production and distribution of the Company's products. At December 31, 1998
Corning did not own any significant amounts of surplus or idle property.
Item 3. 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 13 active hazardous waste sites.
Under the Superfund Act, all parties who may have contributed any waste to a
hazardous waste site, identified by such Agency, are jointly and severally
liable for the cost of cleanup unless the Agency agrees otherwise. It is
Corning's policy to accrue for its estimated liability related to Superfund
sites and other environmental liabilities related to property owned by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued approximately $24 million for its estimated
liability for environmental cleanup and litigation at December 31, 1998.
Breast-implant Litigation. Dow Corning Bankruptcy: Corning and The Dow Chemical
Company each own 50% of the common stock of Dow Corning Corporation. On May 15,
1995, Dow Corning sought protection under the reorganization provisions of
Chapter 11 of the United States Bankruptcy Code. The bankruptcy proceeding is
pending in the United States Bankruptcy Court for the Eastern District of
Michigan, Northern Division (Bay City, Michigan). The effect of the bankruptcy
is to stay the prosecution against Dow Corning of approximately 19,000
breast-implant product liability lawsuits, including 45 class actions. On
December 2, 1996, Dow Corning filed its first Plan of Reorganization in the
bankruptcy case. On January 10, 1997, the Tort Claimants Committee and the
Commercial Creditors Committee filed a joint motion to modify Dow Corning's
exclusivity with respect to filing a plan of reorganization, requesting the
right to file their own competing plan. The motion was denied by the Bankruptcy
Court in May 1997. Dow Corning filed a First Amended Plan of Reorganization on
August 25, 1997 and a Second Amended Plan of Reorganization on February 17,
1998. The Tort Claimants Committee and other creditor representatives opposed
these Plans. As a result of extended negotiations, Dow Corning and the Tort
Claimants Committee reached certain compromises and on November 8, 1998 jointly
filed a revised Plan of Reorganization. After hearings held in early 1999, the
Federal Bankruptcy Court ruled in February 1999 that the Amended Joint Plan of
Reorganization filed on February 4, 1999 (the "Joint Plan") and related
disclosure materials were adequate. These materials will be mailed to claimants,
who have until May 14, 1999 to return their votes on the Joint Plan. A hearing
to confirm the Joint Plan is scheduled to begin on June 28, 1999. Although the
Tort Claimants Committee has supported the Joint Plan, the timing and eventual
outcome of these proceedings remain uncertain.
Under the terms of the Joint Plan, Dow Corning would be required to establish a
Settlement Trust and a Litigation Facility to provide means for tort claimants
to settle or litigate their claims. Dow Corning would have the obligation to
fund the Trust and the Facility, over a period of up to 16 years, in an amount
up to approximately $3.2 billion (nominal value), subject to the limitations,
terms and in conditions stated the Joint Plan. Dow Corning proposes to provide
the required funding over the 16 year period through a combination of cash,
proceeds from insurance, and cash flow from operations. Each of Corning and Dow
Chemical have agreed to provide a credit facility to Dow Corning of up to $150
million ($300 million in the aggregate) subject to the terms and conditions
stated in the Joint Plan. The Joint Plan also provides for Dow Corning to make
full payment, through cash and the issuance of senior notes, to its commercial
creditors.
In related developments, a Panel of Scientific Experts appointed by Judge Sam C.
Pointer Jr., a United States District Judge in the Northern District of Alabama
who has been serving since 1992 as the coordinating federal judge for all breast
implant matters, was asked to address certain questions pertinent to the disease
causation issues in the cases against Dow Corning or its shareholders. The Panel
held hearings in 1998 and issued its report on November 30, 1998. The report is
generally favorable to the implant manufacturers concerning connective tissue
disease and immunologic dysfunction issues.
3
Implant Tort Lawsuits: In the period from 1991 through 1998, 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 1998, 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 thereafter entered orders in May and June 1997 directing that
Corning be dismissed from each case pending in or later transferred to the
Northern District of Alabama after Dow Corning filed for bankruptcy protection.
In state court litigation, Corning was awarded summary judgment in California,
Connecticut, Illinois, Indiana, Michigan, Mississippi, New Jersey, New York,
Pennsylvania, Tennessee, and Dallas, Harris and Travis Counties in Texas,
thereby dismissing approximately 7,000 state cases. On July 30, 1997, the
judgment in California became final when the Supreme Court of California
dismissed further review as improvidently granted as to Corning. In Louisiana,
Corning was awarded summary judgment dismissing all claims by plaintiffs and a
cross-claim by Dow Chemical on February 21, 1997. On February 11, 1998, this
judgment was vacated as premature by the intermediate appeals court in
Louisiana. Corning has filed notices transferring the Louisiana cases to the
United States District Court for the Eastern District of Michigan, Southern
District (the "Michigan Federal Court") to which substantially all breast
implant cases were transferred in 1997. In the Michigan Federal Court, Corning
is named as a defendant in approximately 60 pending cases (including some cases
with multiple claimants), in addition to the transferred Louisiana cases, but
Corning is not named as a defendant in the Master Complaint, which contains
claims against Dow Chemical only. Corning has moved for summary judgment in the
Michigan Federal Court to dismiss these remaining cases by plaintiffs as well as
the third party complaint and all cross-claims by Dow Chemical. Plaintiffs have
taken no position on such motion. The Michigan Federal Court heard Corning's
motion for summary judgment on February 27, 1998, but has not yet ruled.
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 court in 1997 dismissed the individual defendants from
the case, but has permitted the case to proceed into discovery. In December
1998, Corning filed a motion for summary judgment requesting that all claims
against it be dismissed. Plaintiffs claimed the need to take the depositions of
certain officers and directors of Dow Corning and other individuals before
responding to the motion for summary judgment. Plaintiffs have proposed a
schedule giving them until June 28, 1999 to file papers in opposition to
Corning's motion for summary judgment. Although no written order has been
entered, the Court has indicated that limited additional discovery would be
permitted before Corning's motion is entertained.
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 indemnification 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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
4
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
This information is included in Quarterly Operating Results and Related Market
Data, Five Years in Review - Historical Comparison, and Investor Information,
appearing on pages 48 through 52.
Item 6. Selected Financial Data
This information is included in Five Years in Review - Historical Comparison
appearing on pages 49 and 50.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Corning's strategy is to focus its resources on growth opportunities in its
Telecommunications, Advanced Materials and Information Display Segments. During
1998, this objective was evidenced through facility and capacity expansion and
an increase in research and development spending within Corning's growth
businesses.
Following a record year in 1997, Corning's results were adversely impacted
throughout 1998 by the effects of the Asian economic slowdown, which began in
the fourth quarter of 1997. These effects, which included a substantial
reduction in prices in many businesses and a downward shift in customer demand
for certain Corning products, were most significant in the first half of the
year and caused net income for the first half of 1998 to be down significantly
in comparison to net income for the same period in 1997. During the second half
of the year, Corning benefited from an increase in new premium fiber product
sales and stronger results in many other businesses, due in part to
restructuring and other cost reduction programs. As a result, comparisons in the
second half were better than the first; however, net income for the year was
down from 1997.
Looking forward, Corning is optimistic that it will resume overall earnings
growth in 1999, and is committed to continued investment in the development of
new products in all three operating segments.
Results of Continuing Operations
Consolidated sales in 1998 were $3.48 billion, down slightly from 1997.
Significant pricing pressures in many key businesses accelerated by the
continued volatility in the Asian marketplace were mostly offset by volume gains
primarily in the Telecommunications Segment. Strong demand for optical fiber and
cable products in 1997 drove consolidated sales to a 16% increase over 1996.
Income from continuing operations totaled $327.5 million, or $1.39 per share, in
1998 compared with income from the same operations of $408.9 million, or $1.72
per share, in 1997, and $323.3 million, or $1.40 per share, in 1996. Net income
and earnings per share in 1998 include a restructuring charge of $84.6 million
($49.2 million after tax and minority interest), or $0.21 per share, and
non-operating gains totaling $39.7 million ($22.9 million after tax), or $0.10
per share, from the merger between Molecular Simulations, Inc. and Pharmacopeia,
Inc. and the divestiture of several small science products businesses.
Excluding the restructuring charge and the non-operating gains, Corning's income
and earnings per share from continuing operations were $353.8 million, or $1.50
per share, a decline of 13% from results of the same operations in 1997. The
decrease in earnings primarily reflects a significant decline in the performance
of the Telecommunications Segment, a modest decline in the results of the
Advanced Materials Segment and improved operating performance of the
Information Display Segment.
In 1997, Corning's income and earnings per share from continuing operations
increased 26% and 23%, respectively, over results from the same operations in
1996. Earnings in 1997 reflect strong performance in the Telecommunications
Segment, increased earnings from the Advanced Materials Segment and improved
results in the Information Display Segment.
5
Operating Segments
Corning's products and services are grouped into three operating segments:
Telecommunications, Advanced Materials and Information Display. The earnings of
equity affiliates, which are closely associated with Corning's operating
segments, are included in segment net income. Additional information on the
acquisitions and divestitures discussed in the segment analysis is included in
Note 2 of the Notes to Consolidated Financial Statements.
The financial results for Corning's three operating segments have been prepared
on a basis that is consistent with the manner in which Corning management
internally disaggregates financial information for the purpose of assisting in
making internal operating decisions. In this regard, certain common expenses
have been allocated among segments differently than would be required for stand
alone financial information prepared in accordance with generally accepted
accounting principles.
Telecommunications
(In millions) 1998 1997 1996
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Net sales $ 1,791.7 $ 1,795.3 $ 1,397.7
Segment earnings before minority interest
and equity earnings $ 221.9 $ 307.3 $ 247.6
Minority interest (37.3) (46.0) (38.1)
Equity in earnings of associated companies 20.7 36.2 44.9
Segment net income $ 205.3 $ 297.5 $ 254.4
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Sales in the Telecommunications Segment were flat in 1998 compared to 1997, as
significant declines in the optical fiber and cable businesses offset gains in
the photonic technologies and hardware and equipment businesses. Segment net
income decreased significantly in 1998 primarily due to a decline in the
profitability of optical fiber and cable, higher research and development
spending and lower equity earnings.
Optical fiber and cable sales decreased substantially in 1998, as strong volume
growth in the domestic fiber markets was more than offset by pricing declines,
particularly within the international fiber markets. Domestic volume growth
continues to be driven by regional, local and long-haul telephone companies and
cable television operators who are installing optical fiber to increase network
capacity, reducing operating costs and adding new services. Volume was also
driven by the introduction of high data rate premium fibers, particularly in the
second half of the year. The continued reduction in optical fiber prices is the
result of overcapacity in the worldwide optical fiber market, which was
exacerbated in 1998 by the economic events occurring throughout the Asian
marketplace. Earnings in the optical fiber and cable businesses in 1998 declined
significantly in comparison to 1997, reflecting the lower margin on fiber and
cable sales and decreased equity earnings in Corning's international optical
fiber equity companies. Equity earnings declined primarily due to a reduction in
prices, weak volume and a restructuring charge recorded in the third quarter.
Due to the overcapacity in the global fiber market throughout 1998, Corning
slowed the construction of its new $400 million optical fiber production
facility in Concord, North Carolina. Corning currently expects to begin
production at this facility in late 1999 or early 2000, depending on market
conditions.
In December 1998, Corning acquired the 50% holdings in Optical Fibres previously
owned by BICC plc for consideration of $47 million in cash and assumption of
$27 million of debt. As a result, Corning now owns 100% of this subsidiary and
began consolidating its results in December 1998.
Sales and earnings of Corning's optical fiber and optical cable businesses
increased significantly in 1997 compared to 1996 as a result of strong worldwide
demand for information transmission products, reflecting the need for increased
capacity within domestic fiber markets and the upgrade of existing
telecommunication infrastructures by China and other developing countries.
Equity earnings decreased in comparison to 1996, as volume increases in European
equity companies were offset by price declines and reduced volume in Australian
and Southeast Asian markets. In response to the dramatic increase in worldwide
demand for optical fiber starting in 1996 and continuing in 1997, Corning
increased capacity during 1997 with the completion of an approximately $250
million expansion of its optical fiber production facility in Wilmington, North
Carolina and began construction on the new production facility in Concord, North
Carolina.
6
In 1997, Corning formed Samara Optical Cable Company, located in Samara, Russia,
which is owned by Corning and Samara Cable Company. This investment is expected
to improve geographic market access for optical fiber produced in Corning's
domestic production facilities. Sales and earnings of this business were not
significant in 1998 and 1997.
The photonic technologies business experienced sales growth of more than 30% in
1998 following growth of 150% in 1997. This growth reflects a substantial
increase in volume of fiber gain modules and the introduction of new products.
Sales in 1997 also reflected increased volume and the second quarter acquisition
of Optical Corporation of America, a worldwide supplier of opto-electronic
components. The growth in sales over the last three years has been more than
offset by costs related to expanding production facilities and by substantial
research and development spending, which more than doubled in 1998 and resulted
in the business incurring a loss in all three years. In 1997, Corning
substantially completed construction of a $40 million production facility near
Corning, New York.
Sales and earnings in Corning's telecommunications hardware and equipment
business increased slightly in 1998 as volume gains and cost reduction efforts
offset price declines. In 1997, sales and earnings in the business increased as
volume gains offset costs associated with the consolidation of certain plant
operations.
Outlook: Sales in the Telecommunications Segment are expected to increase
significantly in 1999, primarily due to stronger demand for fiber, cable and
photonic technology products throughout the global marketplace, offset somewhat
by continued pricing pressures. Segment sales will also be favorably impacted by
the consolidation of Optical Fibres, which had sales of approximately $100
million in 1998. Segment net income is expected to resume double-digit growth in
1999 as sales gains in the fiber, cable and photonic businesses will more than
offset increased research and development spending in photonics and the costs
associated with the completion of the Concord plant. Equity earnings from the
optical fiber equity companies will be lower in 1999 due primarily to the
consolidation of Optical Fibres.
Advanced Materials
(In millions) 1998 1997 1996
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Net sales $ 1,020.1 $ 1,030.4 $ 1,031.4
Segment earnings before minority interest
and equity earnings $ 75.9 $ 89.8 $ 63.5
Minority interest 0.3 0.7 3.0
Equity in earnings of associated companies 17.6 13.1 8.8
Segment net income $ 93.8 $ 103.6 $ 75.3
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Sales in the Advanced Materials Segment in 1998 decreased slightly in comparison
to 1997, as volume gains in the science products business were offset by a
decline in volume in the semiconductor materials and optical products
businesses. Segment net income decreased in 1998, primarily due to higher
research and development spending within the science products business and
expansion related costs in the semiconductor materials business. Segment sales
were flat in 1997 in comparison to 1996, as significant growth from the
semiconductor materials business was offset by a decline in the optical products
business and relatively flat sales in the other businesses of this segment.
Segment net income increased significantly in 1997 from the sales gains in the
semiconductor materials business and performance improvements in the science
products business and at Quanterra Incorporated, an environmental testing
business.
Sales in the environmental products business in 1998 were comparable to 1997, as
strong volume growth in Europe and modest growth in North America was offset by
a substantial decline in demand within the Asian market. Earnings increased
significantly in 1998, reflecting manufacturing efficiencies, which were offset
somewhat by unfavorable exchange rates. In 1998, Corning announced its plans to
build a new, $80 million wholly-owned manufacturing facility in China to meet
anticipated demands for emission-control products throughout Asia. Construction
is expected to begin in 1999. Sales and earnings in this business were flat in
1997 compared to 1996, reflecting steady volume levels in North America and an
increase in volume in Europe, which were offset by the impact of employee
strikes at Korean automobile manufacturers during the year and from unfavorable
exchange rates. Earnings in 1997 also reflect higher development spending for
new products.
7
Sales in the semiconductor materials business were down slightly while earnings
decreased significantly in 1998, as the slowdown in the semiconductor
manufacturing equipment industry impacted demand and pricing for high purity
fused silica products. As a result of the decline in demand for these products,
the start-up of Corning's new manufacturing facility near Charleston, South
Carolina has been delayed until at least the second half of 1999. In 1997, sales
and earnings in this business increased substantially in comparison to 1996 due
to the strong demand for high purity fused silica products and isolator
polarizers for the telecommunications industry.
Sales in the science products business increased slightly in 1998, reflecting
volume gains in plastic products driven mainly by international growth and in
products used in the advanced life science market. Earnings in this business
decreased in 1998 in comparison with 1997, as volume growth and manufacturing
efficiencies were more than offset by higher research and development spending
on new products for advanced life science applications. Sales and earnings in
the science products business in 1997 were comparable to 1996, with gains in
plastic products primarily from international markets and in new products being
offset by declines in glass products. Sales in 1997 were also impacted by
inventory reductions in the distribution channels for the plastics business and
unfavorable exchange rates. Earnings increased in 1997 due to a favorable sales
mix and cost reduction efforts.
Sales and earnings of Corning's other Advanced Materials businesses, consisting
of optical and lighting products, decreased in 1998 and 1997 due to a decline in
the optical products business as consumer demand continued to shift from glass
to plastic lenses. The demand for optical products was also impacted by weakened
economies within the Asian, European and Latin American markets. Earnings in
1998 were impacted by development and promotional spending for new photochromic
plastic products in the optical products business. Earnings increased in 1997
primarily due to performance improvements in the lighting products business,
which were partially offset by development spending in the optical products
business.
Segment earnings also include equity earnings from Eurokera and Keraglass,
S.N.C., a French-based manufacturer of glass ceramic cooktops. Earnings of this
business increased in 1998 and 1997, as a result of the growing demand for glass
ceramic cooktops both in Europe and the United States, offset somewhat by
expansion costs and development spending on new products. Eurokera has begun an
expansion of their facility in France that will increase its production capacity
by 2000.
Outlook: Segment sales in 1999 are expected to be up slightly in comparison with
1998 levels, as volume gains from advanced life science products within the
science products business, increased demand for high purity fused silica
products from the semiconductor materials business, modest growth in the
environmental products business, and the introduction of new photochromic
plastic lens products from the optical products business offset continued
softness in the demand for glass lens products. Segment net income is expected
to increase in 1999, reflecting anticipated growth in the semiconductor
materials and optical products businesses and planned manufacturing efficiencies
within all segment businesses, offset in part by higher research and development
spending in the science and optical products businesses.
Information Display
(In millions) 1998 1997 1996
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Net sales $ 644.7 $ 664.2 $ 565.5
Segment earnings before minority interest
and equity earnings $ 39.2 $ 16.4 $ (10.0)
Minority interest (27.6) (31.0) (17.4)
Equity in earnings of associated companies 44.9 21.7 22.6
Segment net income (loss) $ 56.5 $ 7.1 $ (4.8)
- -------------------------------------------------------------------------------------------------------------------------
Sales in the Information Display Segment decreased in 1998 primarily due to
lower prices in the conventional video components and advanced display products
businesses offset in part by volume gains in the projection video business.
Prices were impacted by a worldwide surplus of glass in the conventional
television business and increased competition within the Asian marketplace.
Sales in this segment increased in 1997 primarily due to volume growth in the
conventional video components and advanced display products businesses.
Segment net income in 1998 improved substantially as a result of increased
equity earnings, primarily from Samsung Corning Company, Ltd., improved
performance within the projection video business and reduced research and
development spending. Segment net income in 1997 improved in comparison to 1996
as the impact on earnings from volume growth and equity earnings was partially
offset by expansion related costs and research and development spending.
8
Sales and earnings in the conventional video components business decreased in
1998 primarily due to price reductions caused by a worldwide surplus of
television glass. Earnings in this business were further impacted by a scheduled
glass furnace repair during the first half of the year, but improved in the
second half due to the implementation of cost reduction programs. In 1998,
Corning completed the final phase of the $200 million expansion at its State
College, Pennsylvania, television glass plant, which substantially increased
Corning's capacity to make large size video components. Sales in this business
increased in 1997 primarily due to volume gains, while earnings increased
significantly over 1996 levels, which were impacted by costs associated with
glass furnace repairs and expansion related activities.
Sales in the projection video components business increased in 1998 primarily
due to renewed growth of projection televisions in the consumer market sector
driven by demand for larger sizes, partially offset by softness in the
institutional market sector. Earnings in this business increased significantly
in 1998 primarily due to the increase in sales and continued manufacturing
efficiencies. In 1997, sales in this business increased modestly due to gains
achieved from a stronger institutional market, offsetting volume declines in the
consumer market. Earnings increased in 1997 due to this increase in volume and
certain manufacturing cost efficiencies.
Sales in the advanced display products business, which produces precision flat
glass for flat panel liquid crystal displays, decreased in 1998 as volume gains
were offset by price declines and unfavorable exchange rates. Sales of glass
into Korea declined as Samsung Corning Precision Glass Company, Ltd., an equity
affiliate, increased its penetration in that marketplace. The 1998 loss from
this business was significantly less than 1997, primarily due to reduced
research and development spending, manufacturing efficiencies and increased
equity earnings. Equity earnings growth resulted from Samsung Corning Precision,
which began producing liquid crystal display glass in Korea in 1996 and
experienced strong volume growth in the Korean market and favorable exchange
rates. In 1997, sales in the advanced display products business were comparable
to 1996 as substantial volume gains were offset by price declines and the impact
of unfavorable exchange rates. This business incurred a loss in 1997 as a result
of heavy spending on new product development, which more than offset improved
operating performance. Samsung Corning Precision achieved break-even operating
results in 1997, as currency translation losses negatively impacted earnings.
Equity earnings within segment net income primarily reflect the results of
Samsung Corning Company, Ltd., a manufacturer based in South Korea that produces
glass pannels and funnels for television and display monitors. Equity earnings
in this business increased in 1998 in comparison to 1997, particularly during
the first half of the year, as the impact of a worldwide oversupply of glass and
a tank repair in the fourth quarter were more than offset by significant
restructuring and cost control measures implemented during the year. Earnings
from Samsung Corning increased in 1997 as a direct result of the acquisition and
building of manufacturing and sales facilities in Germany and Malaysia as part
of a global expansion plan. Samsung Corning's results were also favorably
impacted by additional volume received while a competitor incurred an employee
strike, which offset price declines driven by a competitive Asian market.
In 1997, Corning participated in the creation of two other equity ventures: The
American Video Glass Company and Video Monitores de Mexico, S.A. de C.V. (Video
Monitores). American Video Glass Company is a partnership between Sony
Electronics, Inc., Asahi Glass of America and Corning, and manufactures and
supplies television glass components to Sony's North American operations. Video
Monitores is an equity venture between Corning, Asahi Glass Company of America,
Inc. and Samsung Video Glass America, Inc., which is in the process of building
a manufacturing facility in Mexico to finish glass funnels and panels for color
television tubes for the North American market. Equity earnings of these
businesses were not significant in 1998 or 1997.
Outlook: Sales in the Information Display Segment are expected to increase in
1999, primarily driven by increased volume in the projection video components
and advanced display products businesses, partially offset by reduced volume and
pricing pressures within the conventional video components business. Segment net
income is expected to be comparable with 1998, as favorable comparisons from the
conventional video components business, the projection video business and the
advanced display products business will likely offset lower equity earnings at
Samsung Corning.
Non-Segment Results
Corning's non-segment results include the operations of Steuben Glass, a crystal
manufacturer, and equity earnings from Pittsburgh Corning Corporation,
Pittsburgh Corning Europe N.V. and other small strategic investments that are
not aligned with Corning's three operating segments. In addition, the results of
operating segments do not include non-operating gains and restructuring charges.
9
Non-operating gains
In 1998, Corning recorded a second quarter non-operating gain of $20.5 million
($13.2 million after tax), or $0.06 per share, as a result of the merger between
Molecular Simulations, Inc. and Pharmacopeia, Inc. The 1998 results also include
a fourth quarter non-operating gain of $19.2 million ($9.7 million after tax),
or $0.04 per share, related to the divestiture of several small science products
businesses.
Restructuring charge
In 1998, Corning recorded a restructuring charge of $84.6 million ($49.2 million
after tax and minority interest), or $0.21 per share, for early retirement
incentives and severance costs. The restructuring charge relates to
approximately 650 employees, of which 610 have been terminated or notified of
their termination at December 31, 1998. Management believes that the workforce
reductions will significantly reduce operating costs and will be substantially
completed in the first half of 1999. Management believes that the costs of
restructuring will be financed through operating cash flows and the proceeds
from the sale of the consumer housewares business, and does not anticipate any
significant impact on its liquidity as a result of the restructuring plan.
Taxes
Corning's effective tax rate for continuing operations before consideration of
non-operating gains and the provision for restructuring was 30.5% in 1998, 33.3%
in 1997 and 33.2% in 1996. The lower 1998 rate was due to a higher percentage of
Corning's earnings resulting from consolidated entities with lower effective tax
rates. Note 6 of the Notes to Consolidated Financial Statements reconciles the
effective tax rate to the statutory tax rate.
Results of Discontinued Operations
On April 1, 1998, Corning completed the recapitalization and sale of a
controlling interest in its consumer housewares business (the Consumer
transaction). Corning continues to retain an eight percent interest in the
Corning Consumer Products Company. On December 31, 1996, Corning distributed
shares of Quest Diagnostics Incorporated and Covance Inc., which collectively
comprised Corning's Health Care Services Segment, to its shareholders on a pro
rata basis (the Distributions). Prior to the Distributions, Corning received a
ruling from the Internal Revenue Service that the Distributions were tax-free to
Corning and its shareholders. As a result of the Distributions, Quest
Diagnostics and Covance became independent, publicly traded companies. Corning's
Consolidated Financial Statements report the consumer housewares business, Quest
Diagnostics and Covance as discontinued operations.
Results of discontinued operations in 1998 and 1997 pertain to the consumer
housewares business and only include operating results through March 31, 1998.
Income from discontinued operations in 1998 totaled $66.5 million, or $0.28 per
share, and included an after-tax gain from the transaction of $67.1 million, or
$0.29 per share, recognized in the second quarter. Income from discontinued
operations in 1997 totaled $30.9 million, or $0.13 per share.
The loss from discontinued operations in 1996 included a loss related to the
Health Care Services Segment of $167.3 million, or $0.70 per share, offset by
income from the consumer housewares business of $19.6 million, or $0.08 per
share. The loss from the Health Care Services Segment in 1996 includes a
provision for loss on the Distributions of $176.5 million, or $0.74 per share,
offset by income from discontinued operations totaling $9.2 million, or $0.04
per share, recognized in the first quarter of 1996, prior to Corning's decision
to complete the Distributions. The $176.5 million provision for loss on
Distributions included a $142 million after-tax charge to increase reserves for
government claims and an after-tax charge for transaction costs offset by the
results of operations of the distributed businesses from April 1, 1996 through
December 31, 1996, the Distribution date.
Results of discontinued operations include allocations of consolidated interest
expense totaling $2.7 million, $13.0 million and $63.5 million in 1998, 1997 and
1996, respectively. The allocations were based on the ratio of net assets of
discontinued operations to consolidated net assets.
Corning has agreed to indemnify Quest Diagnostics on an after-tax basis for the
settlement of certain government claims and against certain other claims that
were pending at December 31, 1996. Coincident with the Distributions, Corning
recorded a payable to Quest Diagnostics of approximately $25 million, which was
equal to management's best estimate of amounts which were probable of being paid
by Corning to Quest Diagnostics to satisfy the remaining indemnified claims on
an after-tax basis.
10
Although management believes that recorded reserves for indemnified claims are
sufficient, it is possible that additional information may become available to
Quest Diagnostics' management, which may cause the final resolution of these
matters to exceed established reserves by an amount which could be material to
Corning's results of operations and cash flow in the period in which such claims
are settled. Management does not believe that these issues will have a material
adverse impact on Corning's overall financial condition.
Liquidity and Capital Resources
Corning's working capital decreased from $241.4 million at the end of 1997 to
$235.6 million at the end of 1998. The ratio of current assets to current
liabilities was 1.2 at the end of 1998 compared with 1.3 at year end 1997.
Corning's long-term debt as a percentage of total capital was 31% at the end of
1998, compared with 36% at the end of 1997. The decrease in the long-term debt
percentage is primarily due to the increase in shareholders' equity.
In 1998, Corning used a portion of the proceeds from the sale of the consumer
housewares business to repay approximately $343 million of short-term
borrowings.
During the fourth quarter of 1996, Quest Diagnostics and Covance borrowed
approximately $650 million from third-party lenders and repaid intercompany debt
to Corning prior to the Distributions. Corning used the proceeds from the
repayment of intercompany debt to repay approximately $375 million of short-term
borrowings and $75 million of long-term debt.
On February 16, 1999, Corning Delaware L.P., a special purpose limited
partnership in which Corning is the sole general partner, called for the
redemption of all Convertible Monthly Income Preferred Securities (MIPS). The
MIPS were guaranteed by Corning and convertible into Corning common stock at the
rate of 1.534 shares of Corning common stock for each MIPS. Holders of the MIPS
have the option of either receiving $51.80 in cash for each share, or converting
them into Corning common stock, which had a fair market value after conversion
of $74.88 per share on February 16, 1999. Management expects a majority of the
MIPS holders to convert their preferred securities into Corning common stock.
Corning's working capital position is reinforced by available bank credit lines
totaling $825 million and the ability to issue up to $375 million of medium and
long-term debt under existing shelf-registration statements filed with the
Securities and Exchange Commission. Corning's management believes the Company
has sufficient financial flexibility and ready access to funds to meet seasonal
working capital requirements, capital expenditures, acquisitions and other
long-term growth opportunities.
Cash Flows
Cash and short-term investments at the end of 1998 decreased from 1997 by $51.6
million, as cash provided by operating activities of $637.6 million was more
than offset by cash used in investing and financing activities of $125.7 million
and $396.6 million, respectively, as well as cash used in discontinued
operations of $172.0 million. Cash and short-term investments at the end of 1997
decreased from 1996 by $118.1 million due to operating activities and
discontinued operations which provided cash of $654.1 million and $22.0 million,
respectively, offset by investing and financing activities which used cash of
$713.4 million and $83.9 million, respectively.
Net cash provided by operating activities decreased in 1998 from 1997 as lower
cash from operations and equity affiliates was offset somewhat by less cash used
for working capital. Cash flows from operating activities in 1997 increased
compared with 1996 due primarily to increased earnings.
Net cash used by investing activities in 1998 totaled $125.7 million, a
reduction from $713.4 million in 1997. This decrease reflects the proceeds
received from the Consumer transaction. In 1996, Corning generated cash from
investing activities as proceeds from the repayment of intercompany debt by
Quest Diagnostics and Covance, prior to the Distributions, were greater than
capital spending.
Corning invested significant cash in capital expansions in the last three years.
Capital spending amounted to $713.6 million, $745.6 million and $560.2 million
in 1998, 1997 and 1996, respectively. Corning anticipates capital spending will
approximate $650 million in 1999. The high level of capital spending since 1996
relates primarily to capacity expansions in Corning's growth businesses and
expanded research and development facilities.
11
Corning used a portion of the proceeds from the Consumer transaction to repay
short-term debt causing an increase in cash used in financing activities over
1997. Corning used cash in financing activities in 1997 as dividend payments and
repurchases of common stock more than offset net borrowings. The level of cash
used in financing activities in 1997 was lower than in 1996, which reflected a
high level of net loan repayments with the proceeds from the Distributions.
Corning repurchased $59.7 million, $50.1 million and $83.9 million of its common
stock in 1998, 1997 and 1996, respectively. All of the 1998, 1997 and
approximately $50 million of the 1996 amount were repurchased pursuant to a
systematic plan authorized by the Board of Directors. Corning's systematic plan
is designed to provide shares for Corning's various employee benefit programs.
The remainder of the 1996 stock repurchases were from employees to satisfy tax
withholding requirements on shares issued under employee benefit plans.
Dividends paid to common shareholders in 1998 totaled $166.8 million compared
with $166.2 million in 1997 and $165.3 million in 1996.
Cash used in discontinued operations totaled $172.0 million and $141.9 million
in 1998 and 1996, respectively. Discontinued operations provided cash of $22.0
million in 1997. The high level of cash used in discontinued operations in 1998
is primarily a result of transaction costs and tax payments related to the
Consumer transaction. Cash used in discontinued operations in 1996 primarily
related to the payment of government claims settlements related to Quest
Diagnostics.
Dow Corning Corporation
Corning is a 50% owner of Dow Corning Corporation (Dow Corning), a manufacturer
of silicones. The other 50% of Dow Corning is owned by The Dow Chemical Company
(Dow Chemical).
On May 15, 1995, Dow Corning voluntarily filed for protection under Chapter 11
of the United States Bankruptcy Code as a result of several negative
developments related to the breast implant litigation. At that time, Corning
management believed it was impossible to predict if and when Dow Corning would
successfully emerge from Chapter 11 proceedings. As a result, Corning recorded
an after-tax charge of $365.5 million, or $1.62 per share, to fully reserve its
investment in Dow Corning and discontinued recognition of equity earnings from
Dow Corning in 1995. Note 4 of the Notes to Consolidated Financial Statements
includes additional financial information related to this investment.
Dow Corning and the Committee of Tort Claimants, one of Dow Corning's Chapter 11
creditor committees, filed with the United States Bankruptcy Court (the
Bankruptcy Court) a joint plan of reorganization on November 9, 1998 (the Joint
Plan). After hearings held in early 1999, the Bankruptcy Court ruled in early
February 1999 that the disclosure statement related to the Joint Plan was
adequate to send to Dow Corning's creditors for consideration. In that ruling,
the Bankruptcy Court indicated that the period for voting will extend through
May 14, 1999 and hearings to confirm the Joint Plan are scheduled to begin on
June 28, 1999. To become effective, the Joint Plan will require a favorable vote
by many classes of creditors and final Bankruptcy Court approval after
confirmation hearings. In addition, appeals of the Bankruptcy Court's
confirmation order are possible. The recent developments, including the support
of the Committee of Tort Claimants, tend to increase the probability that Dow
Corning will successfully emerge from Chapter 11 proceedings, but the timing and
eventual outcome of these proceedings is uncertain.
Environment
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 for 13 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 and operated by Corning
based on expert analysis and continual monitoring by both internal and external
consultants. Corning has accrued approximately $24 million for its estimated
liability for environmental cleanup and related litigation at December 31, 1998.
12
Effects of Inflation
Amounts reflected in the financial statements do not provide for the effect of
inflation on operations or financial position. The expenses and asset values,
specifically those related to long-lived assets, reflect historical cost and do
not necessarily represent replacement cost or charges to operations based on
replacement cost. Corning's operations provide funds from operations which,
along with other sources, are sufficient to replace fixed assets as necessary.
Net income would be lower than reported if the effects of inflation were
reflected by charging operations for replacement costs.
Year 2000 Readiness Disclosure
Corning has completed an assessment of required modifications or replacement of
its key internal software to become Year 2000 compliant. The assessment involved
all known areas of concern, including business applications, manufacturing,
engineering, research, facilities systems, third party suppliers and service
providers.
Implementation, including testing, of required changes to key applications was
substantially completed at December 31, 1998, with the remainder to be completed
by the middle of 1999. In addition, an external study team is assisting
management in evaluating its processes surrounding the Year 2000 project.
Progress is monitored and reported to management and to the Audit Committee of
the Board of Directors on a regular basis.
In 1995, Corning initiated a significant project to upgrade and improve access
to business information with integrated enterprise-wide corporate applications
that were Year 2000 compliant. This initiative has mitigated to some extent the
amount of Year 2000 costs incurred to date. Corning's current estimate of the
total cost for Year 2000 compliance is approximately $25 million, of which
approximately $15 million has been spent to date. This estimate includes
incremental costs of approximately $12 million comprised primarily of contractor
costs to modify existing systems, of which approximately 55% has been spent to
date.
Corning has initiated formal communications with all of its significant
customers, suppliers and other third parties to determine the extent to which
Corning is vulnerable to third parties' failures to remediate their own
potential problems related to the Year 2000. Risk assessments, readiness
evaluation and contingency plans to protect Corning's business from Year 2000
related interruptions from these third parties and from key customers are
expected to be completed before December 31, 1999. Contingency plans will
include, for example, stocking of additional inventory and identifying
alternative suppliers.
Corning's risk management program includes emergency backup and recovery
procedures to be followed in the event of a failure of a key application. This
program is being expanded to include specific procedures for potential Year 2000
issues. Corning is taking what it considers to be reasonable steps to prevent
major interruptions in its business due to Year 2000 issues. The inability of
Corning or significant third parties to adequately address Year 2000 issues
could cause inefficiencies in Corning's business operations. The extent to which
Corning's operating results may be impacted by customers or suppliers who are
not fully Year 2000 compliant is not readily determinable. Corning's operating
results and ability to conduct business is dependent upon the infrastructure of
the geographic regions in which its operations and customers are located. A
breakdown in the infrastructure of a particular region could adversely impact
the operating results of the Company. Corning continues to monitor closely the
information about infrastructure preparedness for the Year 2000, especially in
the Asian regions.
Market Risk Disclosures
Corning operates and conducts business in many foreign countries and as a result
is exposed to movements in foreign currency exchange rates. More specifically,
Corning's earnings are exposed to the effects of exchange rate movements on
financial instruments and transactions denominated in foreign currencies.
Additionally, Corning's net equity is impacted by the conversion of the net
assets of foreign subsidiaries for which the functional currency is not the U.S.
Dollar for U.S. reporting purposes. Corning's most significant foreign currency
exposures relate to Japan, Korea, and Western European countries. Corning
selectively enters into foreign exchange forward contracts with durations
generally less than 12 months to hedge its exposure to exchange rate risk on
foreign source income and purchases. The hedges are scheduled to mature
coincident with the timing of the underlying foreign currency commitments and
transactions. The objective of these contracts is to neutralize the impact of
exchange rate movements on Corning's operating results. Corning does not hold
any derivative contracts that hedge its foreign currency denominated net asset
exposures. In addition, one of Corning's subsidiaries enters into revenue sales
contracts for certain of its revenues generated in foreign currencies. Such
contracts are not subject to foreign currency gains or losses. Corning does not
hold or issue derivative financial instruments for trading purposes.
13
Equity in earnings of associated companies represented 29% of Corning's income
from continuing operations in 1998. Foreign-based affiliates comprised 91% of
this amount. Exchange rate fluctuations and actions taken by management of these
entities to reduce this risk can affect the earnings of these companies.
Corning uses sensitivity analysis to assess the market risk associated with its
foreign currency exchange risk. Market risk is defined as the potential change
in fair value of assets and liabilities resulting from an adverse movement in
foreign currency exchange rates. At December 31, 1998, Corning and its
consolidated subsidiaries had open forward contracts, foreign denominated debt
and foreign cash and cash equivalent holdings with values exposed to exchange
rate movements. A 10% adverse movement in quoted foreign currency exchange rates
could result in a loss in fair value of these instruments of $10.2 million. The
effect of a change in exchange rates on the revenue sales contracts is excluded
from this analysis as any movement will be offset by a corresponding effect on
the underlying revenues.
Corning's market risk exposures have not changed materially from December 31,
1997.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board 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. 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 qualify as hedges under FAS
133. FAS 133 is effective for fiscal years beginning after June 15, 1999, and is
not expected to have a material effect on Corning's financial position or
results of operations.
Item 8. Financial Statements
See Item 14 (a) 1.
Item 9. Disagreements on Accounting and Financial Disclosures
None.
14
PART III
Item 10. Directors and Executive Officers
A list of Directors of the Company, appearing under the captions "Nominees for
Election" and "Directors Continuing in Office" in the Proxy Statement relating
to the annual meeting of shareholders to be held on April 29, 1999, is
incorporated by reference in this Annual Report on Form 10-K.
Executive Officers of the Registrant *
Roger G. Ackerman (60) Chairman and Chief Executive Officer
Mr. Ackerman joined Corning in 1962. In 1972 he was appointed president of
Corhart Refractories Co. He was elected senior vice president and general
manager of Corning Ceramics in 1975, a senior vice president in 1980, director
of the Manufacturing and Engineering Division in 1981, and president and chief
executive officer of MetPath Inc. (now Quest Diagnostics Incorporated) in 1983.
In 1985, he was elected group president and a director. In 1990 Mr. Ackerman was
elected president and in 1996 was elected to his present position.
Van C. Campbell (60) Vice Chairman
Mr. Campbell joined Corning in 1964. He was elected assistant treasurer in 1971,
treasurer in 1972, a vice president in 1973, financial vice president in 1975
and senior vice president for finance in 1980. He became general manager of the
Consumer Products Division in 1981. Mr. Campbell was elected vice chairman and a
director in 1983.
Norman E. Garrity (57) Sector President and Co-Chief Operating Officer
Mr. Garrity joined Corning in 1966 and subsequently served in a variety of
manufacturing and engineering management positions. In 1979 he was appointed
sales and marketing manager for Corning Electronics. In 1984 he was appointed
general manager of the Electrical Products Division and subsequently appointed
vice president. He was elected senior vice president in 1987 and executive vice
president in 1990, responsible for the Specialty Materials Group and the
manufacturing and engineering function. In 1996 he was elected to his present
position of President, Corning Technologies.
John W. Loose (56) Sector President and Co-Chief Operating Officer
Mr. Loose joined Corning in 1964 and subsequently held a variety of sales and
marketing positions in the Consumer Products Division. In 1986 he was appointed
vice president and general manager for the Asia-Pacific area. In 1988 he was
appointed vice president for Corning International Corporation and president and
chief executive officer of Corning Asahi Video Products Company and subsequently
senior vice president, International. In April 1990 he was elected executive
vice president responsible for the Information Display Group. In 1993, Mr. Loose
became responsible for the consumer business and was elected president and chief
executive officer of Corning Consumer Products Company. In 1996 he was elected
to his present position of President, Corning Communications.
Katherine A. Asbeck (42) Vice President and Controller
Ms. Asbeck joined Corning in 1991 as director of accounting. She was appointed
assistant controller in 1993, designated chief accounting officer in 1994 and
elected vice president and controller effective as of May 16, 1997. Prior to
joining Corning, Ms. Asbeck was a senior audit manager of PricewaterhouseCoopers
LLP.
Peter Booth (59) Senior Vice President
Mr. Booth joined Corning in 1974 as international counsel and was elected a vice
president of Corning International Corporation in 1975. He became corporate
counsel in 1980. In 1983 he was appointed director of Corporate Plans and
elected vice president and secretary. He became executive vice president of
Corning Japan K.K. in 1986. In 1991, Mr. Booth was named senior vice president
responsible for Strategy and Development.
Charles W. Deneka (54) Senior Vice President
Mr. Deneka joined Corning in 1972 and subsequently held manufacturing,
engineering and development positions in several divisions. In 1990, he was
named vice president and director of Development responsible for new product
development activities. In January 1995, he was appointed senior vice president
and chief technical officer.
15
Robert L. Ecklin (60) Executive Vice President
Mr. Ecklin joined Corning in 1961 and served in a variety of U.S. and
international manufacturing and engineering managerial positions. For Corning
Engineering he served as its vice president in 1982 and was appointed its
president in 1983. In 1986 he became vice president of Business Development. Mr.
Ecklin was appointed general manager of the Industrial Products Division in 1989
and senior vice president in 1990. Effective January 1, 1999, he was appointed
executive vice president of the Environmental Products Division.
William D. Eggers (54) Senior Vice President and General Counsel
Mr. Eggers joined Corning in 1997 as vice president and deputy general counsel.
He was elected senior vice president and general counsel in February of 1998.
Mr. Eggers was a Partner with the Rochester firm of Nixon, Hargrave, Devans &
Doyle, LLP, before joining Corning, and was outside litigation counsel for
Corning in a number of commercial matters.
James B. Flaws (50) Senior Vice President, Treasurer and Chief Financial Officer
Mr. Flaws joined Corning in 1973 and has held a variety of positions within
Corning's Consumer Products group and in 1991 was appointed vice president and
chief financial officer. Mr. Flaws was elected assistant treasurer of Corning
Incorporated in 1993, vice president and controller effective as of February 1,
1997 and vice president-finance and treasurer effective as of May 16, 1997. He
was elected senior vice president and chief financial officer in December, 1997.
Kirk P. Gregg (39) Senior Vice President
Mr. Gregg joined Corning in 1993 as director of Executive Compensation, was
named vice president of Executive Resources and Employee Benefits in December
1994. He was named to his current position in December 1997. Prior to joining
Corning, Mr. Gregg was with General Dynamics Corporation as corporate director,
Key Management Programs, and was responsible for executive compensation and
benefits, executive development and recruiting.
A. John Peck, Jr. (59) Vice President and Secretary
Mr. Peck joined Corning in 1972. He has served as assistant counsel and as
associate counsel in the Legal Department. He was appointed assistant secretary
in 1981, elected secretary in 1988, and elected vice president in 1998.
Randall D. Price (51) Executive Vice President
Mr. Price joined Corning in 1977 and subsequently held various sales, marketing
and development positions at several divisions. In 1995, he was appointed
division vice president for the Advanced Materials and Process Technology
Groups. In April 1996, he was named vice president and general manager of the
Advanced Materials Division. Effective January 1, 1999, he was appointed
executive vice president of the Advanced Materials Division.
Peter Volanakis (43) Executive Vice President
Mr. Volanakis joined Corning in 1982 and subsequently held various marketing,
development and commercial positions in several divisions. In 1991, he was
appointed director of corporate marketing. In 1995, he was named executive vice
president of Siecor Corporation. He was named senior vice president of Advanced
Display Products in October 1997. Effective January 1, 1999, he was appointed
executive vice president of the Advanced Display and Science Products Divisions.
Wendell P. Weeks (39) Executive Vice President
Mr. Weeks joined Corning in 1983 and has served in various accounting, business
development, and business manager positions. In 1992, he was named general
manager and director of external development, Opto-Electronics Components
Business, division vice president in July 1994, and deputy general manager in
June 1995. He was appointed vice president and general manager of the
Telecommunications Products Division in March 1996 and senior vice president
effective November 1, 1997. Effective January 1, 1999, he was appointed
executive vice president of Opto-Electronics.
*as of January 1, 1999
16
Item 11. Management Remuneration and Transactions
Information covering Management Remuneration and Transactions, appearing under
the captions "Report of the Compensation Committee of the Board of Directors on
Executive Compensation" and "Other Matters" in the Proxy Statement relating to
the annual meeting of shareholders to be held on April 29, 1999, is incorporated
by reference in this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to Security Ownership of Certain Beneficial Owners,
appearing under the caption "Security Ownership of Certain Beneficial Owners" in
the Proxy Statement relating to the annual meeting of shareholders to be held on
April 29, 1999, is incorporated by reference in this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions
A description of transactions with management and others and certain business
relationships, appearing under the captions "Directors' Compensation and Other
Matters Relating to Directors" and "Other Matters" in the Proxy Statement
relating to the annual meeting of shareholders to be held on April 29, 1999, is
incorporated by reference in this Annual Report on Form 10-K.
17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
1. Index to financial statements and financial statement schedules,
filed as part of this report:
Page
Report of Independent Accountants 21
Consolidated Statements of Income 22
Consolidated Balance Sheets 23
Consolidated Statements of Cash Flows 24
Consolidated Statements of Changes in Shareholders' Equity 25
Notes to Consolidated Financial Statements 26-46
Financial Statement Schedule:
II Valuation Accounts and Reserves 47
2. Supplementary Data:
Quarterly Operating Results and Related Market Data 48
Five Years in Review - Historical Comparison 49-50
Investor Information 51-52
3. Exhibits filed as part of this report: see (c) below.
(b) Reports on Form 8-K filed during the last quarter of fiscal 1998:
A report on Form 8-K dated October 19, 1998, filed in connection with
the registrant's medium-term note facility, includes Corning's third
quarter earnings press release of October 19, 1998.
(c) Exhibits filed as part of this report:
#3 (i) Articles of Incorporation of the Registrant:
Restated Certificate of Incorporation, dated April 24, 1997,
filed with the Secretary of State of the State of New York on
November 19, 1998.
#3 (ii) By-laws of the Registrant as amended to and effective as of
October 6, 1998, which appear as Exhibit 3(ii) to the
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998 is incorporated herein by reference in this
Annual Report on Form 10-K.
#4 Rights Agreement dated June 5, 1996, that defines the
preferred share purchase rights which trade with the
Registrant's common stock, which appears as Exhibit 1 to Form
8-K, dated July 10, 1996, is incorporated herein by reference
in this Annual Report on Form 10-K.
#12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Dividends
#21 Subsidiaries of the Registrant at December 31, 1998
#23 Consent of Independent Accountants
#24 Powers of Attorney
#27 Financial Data Schedule
18
Signatures
Pursuant to the requirements of Sections 13 or 15(d) of the Securities 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
/s/ Roger G. Ackerman Chairman and
By Chief Executive Officer February 24, 1999
----------------------------------------
(Roger G. Ackerman)
/s/ James B. Flaws
By Senior Vice President, Treasurer February 24, 1999
---------------------------------------- and Chief Financial Officer
(James B. Flaws)
/s/ Katherine A. Asbeck
By Vice President and Controller February 24, 1999
----------------------------------------
(Katherine A. Asbeck)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
on the date indicated.
Capacity Date
*
----------------------------------------
Chairman and February 24, 1999
(Roger G. Ackerman) Chief Executive Officer
*
----------------------------------------
Director February 24, 1999
(Robert Barker)
*
----------------------------------------
Director February 24, 1999
(John Seely Brown)
*
----------------------------------------
Director February 24, 1999
(Van C. Campbell)
*
----------------------------------------
Director February 24, 1999
(John H. Foster)
*
----------------------------------------
Director February 24, 1999
(Norman E. Garrity)
*
----------------------------------------
Director February 24, 1999
(Gordon Gund)
19
*
----------------------------------------
Director February 24, 1999
(John M. Hennessy)
*
----------------------------------------
Director February 24, 1999
(James R. Houghton)
*
----------------------------------------
Director February 24, 1999
(James W. Kinnear)
*
----------------------------------------
Director February 24, 1999
(John W. Loose)
*
----------------------------------------
Director February 24, 1999
(James J. O'Connor)
*
----------------------------------------
Director February 24, 1999
(Catherine A. Rein)
*
----------------------------------------
Director February 24, 1999
(Henry Rosovsky)
*
----------------------------------------
Director February 24, 1999
(H. Onno Ruding)
*
----------------------------------------
Director February 24, 1999
(William D. Smithburg)
/s/ William D. Eggers
*By ----------------------------------------
(William D. Eggers, Attorney-in-fact)
20
REPORT OF INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
To the Board of Directors and Shareholders of Corning Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)(1) on page 18 present fairly, in all material
respects, the financial position of Corning Incorporated and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations, cash flows and
changes in shareholders' equity for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, New York 10019
January 25, 1999, except for Note 4 and Note 11,
which are as of February 16, 1999
21
CONSOLIDATED STATEMENTS OF INCOME Corning Incorporated and Subsidiary Companies
- --------------------------------------------------------------------------------
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues
Net sales $ 3,484.0 $ 3,516.8 $ 3,024.0
Royalty, interest and dividend income 48.4 37.5 29.7
Non-operating gains 39.7
- ----------------------------------------------------------------------------------------------------------------------------------
3,572.1 3,554.3 3,053.7
- ------------------------------------------------------------------------------------------------------------------------------------
Deductions
Cost of sales 2,153.9 2,042.3 1,830.1
Selling, general and administrative expenses 487.7 541.6 499.4
Provision for restructuring 84.6
Research, development and engineering expenses 293.9 250.3 189.2
Interest expense, net 56.7 72.0 57.2
Other, net 55.7 18.9 22.0
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before taxes on income 439.6 629.2 455.8
Taxes on income from continuing operations 132.8 209.5 151.4
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before minority interest
and equity earnings 306.8 419.7 304.4
Minority interest in earnings of subsidiaries (60.9) (76.3) (52.5)
Dividends on convertible preferred securities of subsidiary (13.7) (13.7) (13.7)
Equity in earnings of associated companies 95.3 79.2 85.1
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 327.5 408.9 323.3
Income (loss) from discontinued operations, net of income taxes
Life science businesses (167.3)
Consumer housewares business 66.5 30.9 19.6
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 394.0 $ 439.8 $ 175.6
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Continuing operations $ 1.42 $ 1.79 $ 1.42
Discontinued operations 0.29 0.13 (0.66)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1.71 $ 1.92 $ 0.76
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Continuing operations $ 1.39 $ 1.72 $ 1.40
Discontinued operations 0.28 0.13 (0.62)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1.67 $ 1.85 $ 0.78
- ------------------------------------------------------------------------------------------------------------------------------------
Shares used in Computing Earnings Per Share
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share 229.6 228.1 227.1
Diluted earnings per share 243.9 245.4 239.5
The accompanying notes are an integral part of these statements.
22
CONSOLIDATED BALANCE SHEETS Corning Incorporated and Subsidiary Companies
- --------------------------------------------------------------------------------
December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
(In millions, except share amounts) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 12.2 $ 61.0
Short-term investments, at cost, which approximates market value 33.2 36.0
Accounts receivable, net of doubtful accounts and
allowances - $15.2/1998; $10.7/1997 636.0 559.7
Inventories 458.7 428.3
Deferred taxes on income and other current assets 170.2 114.1
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 1,310.3 1,199.1
- ----------------------------------------------------------------------------------------------------------------------------------
Investments
Associated companies, at equity 313.1 292.9
Others, at cost or fair value 53.1 17.1
Plant and equipment, at cost, net of accumulated depreciation 2,684.9 2,267.9
Goodwill and other intangible assets, net of accumulated
amortization - $66.7/1998; $51.5/1997 309.7 294.2
Other assets 310.8 263.1
Net assets of discontinued operations 357.6
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 4,981.9 $ 4,691.9
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Loans payable $ 204.6 $ 213.0
Accounts payable 291.7 300.0
Other accrued liabilities 578.4 444.7
- ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,074.7 957.7
- ----------------------------------------------------------------------------------------------------------------------------------
Other liabilities 674.1 627.5
Loans payable beyond one year 998.3 1,125.8
Minority interest in subsidiary companies 346.1 349.3
Convertible preferred securities of subsidiary 365.2 365.3
Convertible preferred stock 17.9 19.8
Common shareholders' equity
Common stock, including excess over par value
and other capital - par value $0.50 per share;
Shares authorized: 500 million;
Shares issued: 265.9 million/1998; 264.3 million/1997 766.0 707.2
Retained earnings 1,521.7 1,296.0
Less cost of 34.4 million/1998 and 32.7 million/1997
shares of common stock in treasury (790.0) (724.5)
Accumulated other comprehensive income 7.9 (32.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Total common shareholders' equity 1,505.6 1,246.5
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 4,981.9 $ 4,691.9
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
Corning Incorporated and Subsidiary Companies
- --------------------------------------------------------------------------------
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
(In millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 394.0 $ 439.8 $ 175.6
Adjustments to reconcile net income to net cash
provided by operating activities of continuing operations:
(Income) loss from discontinued operations (66.5) (30.9) 147.7
Depreciation and amortization 298.0 285.9 252.3
Non-operating gains (39.7)
Provision for restructuring, net of cash spent 61.3
Employee benefit expense in excess of cash funding 40.6 35.2 11.2
Equity in earnings of associated companies, less than
(in excess of) dividends received (32.0) (13.9) 2.9
Minority interest in earnings of subsidiaries in excess of dividends paid 8.7 40.8 18.8
(Gains) losses on disposition of properties and investments 9.3 (6.2) 5.1
Deferred tax provision (benefit) (4.0) (10.3) 17.7
Other non-cash items 34.4 3.8 (6.8)
Changes in operating assets and liabilities:
Accounts receivable (56.1) (69.9) (92.1)
Inventories (7.3) (69.5) (64.5)
Other current assets (14.0) (8.4) (21.1)
Accounts payable and other current liabilities 10.9 57.7 74.3
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities of Continuing Operations 637.6 654.1 521.1
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Additions to plant and equipment (713.6) (745.6) (560.2)
Acquisitions of businesses, net (43.5) (32.0) (15.1)
Net proceeds from disposition of properties and investments 140.3 56.2 35.9
Proceeds from divestiture of consumer housewares business 593.1
Proceeds from Distributions of subsidiaries 650.0
Net increase in long-term investments (102.1) (8.8) (12.7)
Other, net 0.1 16.8 19.7
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities of Continuing Operations (125.7) (713.4) 117.6
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of loans 300.4 129.8 415.4
Repayments of loans (148.4) (33.0) (205.0)
Repayments of loans with proceeds from divestiture of consumer
housewares business in 1998 and Distributions of subsidiaries in 1996 (343.0) (450.0)
Increase in minority interest due to capital contributions 8.6
Proceeds from issuance of common stock 22.4 37.2 43.4
Repurchases of common stock (59.7) (50.1) (83.9)
Dividends paid (168.3) (167.8) (167.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities of Continuing Operations (396.6) (83.9) (438.7)
- ----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash 5.1 3.1 (2.2)
Effect of accounting calendar change on cash (17.5)
Cash provided by (used in) discontinued operations (172.0) 22.0 (141.9)
- ----------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (51.6) (118.1) 38.4
Cash and cash equivalents at beginning of year 97.0 215.1 176.7
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 45.4 $ 97.0 $ 215.1
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
24
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Corning Incorporated and Subsidiary Companies
- --------------------------------------------------------------------------------
(In millions, except per share amounts)
Accumulated
Capital in other Total
Common excess of Unearned Retained Treasury comprehensive shareholders'
stock par value compensation earnings stock income equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $129.3 $1,116.7 $(133.0) $1,496.5 $(563.0) $56.5 $2,103.0
Net income 175.6 175.6
Foreign currency translation adjustment (12.9) (12.9)
--------
Total comprehensive income 162.7
Shares issued 1.2 45.6 46.8
Corning Stock Ownership Trust (19.7) (19.7)
Distributions of subsidiaries (653.5) (473.2) (1,126.7)
Repurchases of shares (50.5) (50.5)
Dividends on stock ($0.72 per share) (167.2) (167.2)
Other, net 53.5 25.9 (7.7) (59.0) 12.7
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 130.5 562.3 (126.8) 1,024.0 (672.5) 43.6 961.1
Net income 439.8 439.8
Foreign currency translation adjustment (75.8) (75.8)
--------
Total comprehensive income 364.0
Shares issued 1.7 111.0 112.7
Corning Stock Ownership Trust 14.5 14.5
Repurchases of shares (50.1) (50.1)
Dividends on stock ($0.72 per share) (167.8) (167.8)
Other, net 19.6 (5.6) (1.9) 12.1
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 132.2 692.9 (117.9) 1,296.0 (724.5) (32.2) 1,246.5
Net income 394.0 394.0
Foreign currency translation adjustment 41.1 41.1
Unrealized loss on marketable
securities, net of tax (1.0) (1.0)
--------
Total comprehensive income 434.1
Shares issued 0.8 42.7 43.5
Corning Stock Ownership Trust (3.1) (3.1)
Repurchases of shares (59.7) (59.7)
Dividends on stock ($0.72 per share) (168.3) (168.3)
Other, net 28.5 (10.1) (5.8) 12.6
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $133.0 $764.1 $(131.1) $1,521.7 $(790.0) $7.9 $1,505.6
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Corning Incorporated and Subsidiary Companies
(In millions, except share and per share amounts)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of all entities
controlled by Corning. All significant intercompany accounts and transactions
are eliminated.
The equity method of accounting is used for investments in associated companies
which are not controlled by Corning and in which Corning's interest is generally
between 20% and 50%.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and to disclose contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
On April 1, 1998, Corning completed the recapitalization and sale of a
controlling interest in its consumer housewares business. On December 31, 1996,
Corning distributed all of the shares of its Health Care Services Segment (Quest
Diagnostics Incorporated and Covance Inc.), to its shareholders on a pro rata
basis. Corning's consolidated financial statements and notes to consolidated
financial statements report the consumer housewares business, Quest Diagnostics
and Covance as discontinued operations.
Foreign Currencies
Balance sheet accounts of foreign subsidiaries are translated at current
exchange rates and income statement accounts are translated at average exchange
rates for the year. Translation gains and losses are accumulated in a separate
component of common shareholders' equity. Foreign currency transaction gains and
losses affecting cash flows are included in current earnings.
Corning enters into foreign exchange contracts primarily as hedges against
identifiable foreign currency commitments. Gains and losses on contracts
identified as hedges are deferred and included in the measurement of the related
foreign currency transactions. Gains and losses on foreign currency contracts
which are not designated as hedges of foreign currency commitments are included
in current earnings.
In addition to the foreign exchange contracts described in the preceding
paragraph, Corning enters into revenue sales contracts for certain of its
revenues generated in foreign currencies. Such contracts, because of their
terms, are not subject to foreign currency gains and losses.
Cash and Cash Equivalents
Short-term investments, comprised of repurchase agreements and debt instruments
with original maturities of three months or less, are considered cash
equivalents.
Marketable Securities
Corning's marketable securities consist of equity securities classified as
available-for-sale which are stated at estimated fair value based primarily upon
market quotes. Unrealized gains and losses, net of tax, are computed on the
basis of specific identification, and are reported as a separate component of
accumulated other comprehensive income in shareholders' equity until realized. A
decline in the value of any marketable security below cost that is deemed other
than temporary is charged to earnings, resulting in a new cost basis for the
security.
26
1. Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost or market. Approximately 54% and 57%
of Corning's inventories at December 31, 1998, and 1997, respectively, are
valued using the first-in, first-out (FIFO) method. The last-in, first-out
(LIFO) method is used to value the remaining inventories, which are principally
at domestic plant locations.
Property and Depreciation
Land, buildings and equipment are recorded at cost. Depreciation is based on
estimated useful lives of properties using straight-line and accelerated
methods.
Goodwill and Other Intangible Assets
Investment costs in excess of the fair value of net assets acquired are
amortized over appropriate periods not exceeding 40 years. Other intangible
assets are recorded at cost and amortized over periods generally not exceeding
15 years.
Taxes on Income
Corning uses the asset and liability approach to account for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the expected
future tax consequences of differences between the carrying amounts of assets
and liabilities and their respective tax bases using enacted tax rates in effect
for the year in which the differences are expected to reverse. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period when the change is enacted.
2. Business Combination and Divestitures
Purchases
On December 1, 1998, Corning acquired the 50% interest in Optical Fibres
previously owned by BICC plc. The consideration was comprised of approximately
$47 million in cash and the assumption of $27 million in debt. The acquisition
was recorded using the purchase method of accounting. The excess cost over the
fair value of the net tangible assets acquired was approximately $38 million and
is being amortized over periods of up to 20 years. Optical Fibres became a
wholly owned subsidiary as a result of this transaction and the results of its
operations are included in the consolidated financial statements from the date
of the transaction.
In April 1997, Corning acquired 100% of the stock of Optical Corporation of
America (OCA) for a total purchase price of approximately $70 million. The
consideration was comprised of approximately 950,000 shares of Corning
restricted stock, options and $32 million of cash. The acquisition was recorded
using the purchase method of accounting. The results of operations of OCA are
included in the consolidated financial statements from the date of acquisition.
The excess cost over the fair value of the net tangible assets acquired was
approximately $52 million and is being amortized over periods of up to 20 years.
Divestitures
In the fourth quarter of 1998, Corning recorded a non-operating gain of $19.2
million ($9.7 million after tax), or $0.04 per share, related to the divestiture
of several small businesses within the science products division.
In February 1997, Corning sold its Serengeti eyewear business to Solar-Mates,
Inc. for approximately $28 million. In March 1996, Corning sold its equity
investment in CALP S.p.A. for approximately $30 million. The gains recognized on
these transactions were not material.
Other
In June 1998, Molecular Simulations, Inc. (MSI) merged with Pharmacopeia, Inc.,
a publicly traded company. Corning previously owned 35% of MSI and owns
approximately 15% of the combined entity. Corning realized a non-operating gain
of $20.5 million ($13.2 million after tax), or $0.06 per share, from this
transaction.
27
2. Business Combination and Divestitures (continued)
In January 1996, Corning and International Technology (IT) completed a
transaction whereby Corning increased its ownership in Quanterra Incorporated
(Quanterra), a jointly owned company between Corning and IT, from 50% to 81% in
exchange for an investment of approximately $20 million. As a result of this
transaction, Corning began consolidating Quanterra's results beginning in 1996.
In June 1998, Quanterra redeemed IT's remaining 19% interest for $5.7 million
and became a 100% owned subsidiary of Corning.
3. Information by Operating Segment
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. Corning's chief operating
decision making group is comprised of the Chief Executive Officer and the
officers who report to him directly.
Corning's reportable segments include Telecommunications, Advanced Materials and
Information Display. The Telecommunications Segment produces optical fiber and
cable, optical hardware and equipment and photonic components for the worldwide
telecommunications industry. The Advanced Materials Segment manufactures
specialized products with unique properties for customer applications utilizing
glass, glass ceramic and polymer technologies. Businesses within this segment
include environmental products, science products, semiconductor materials and
optical and lighting products. The Information Display Segment manufactures
glass panels and funnels for televisions and CRTs, and projection video lens
assemblies and liquid crystal display glass for flat panel displays.
Corning evaluates performance based on an after tax profit measure, which is
identified as segment net income. The accounting policies of the operating
segments are the same as those described in the summary of significant
accounting policies. The financial results for Corning's three operating
segments have been prepared on a basis which is consistent with the manner in
which Corning management internally disaggregates financial information for the
purposes of assisting in making internal operating decisions. In this regard,
certain common expenses have been allocated among segments less precisely than
would be required for stand alone financial information prepared in accordance
with generally accepted accounting principles. Revenue attributed to geographic
areas is based on the location of the customer.
28
3. Information by Operating Segment (continued)
Operating Segments Advanced Information Total
Telecommunications Materials Display Segments
- ----------------------------------------------------------------------------------------------------------------------------------
1998
Net sales $1,791.7 $1,020.1 $644.7 $3,456.5
Depreciation and amortization (1) 143.5 78.8 74.5 296.8
Research, development and engineering expenses (2) 190.2 80.0 23.7 293.9
Interest income (3) 9.5 3.2 1.1 13.8
Interest expense (4) 29.7 16.7 10.0 56.4
Income tax expense 101.4 38.4 8.2 148.0
Segments earnings before minority interest and equity earnings (5) 221.9 75.9 39.2 337.0
Minority interest in earnings of subsidiaries (37.3) 0.3 (27.6) (64.6)
Equity in earnings of associated companies 20.7 17.6 44.9 83.2
Segment net income 205.3 93.8 56.5 355.6
Investment in associated companies, at equity 25.8 42.0 190.4 258.2
Segment assets (6) 1,887.1 837.7 915.1 3,639.9
Capital expenditures 260.0 131.0 53.0 444.0
- ----------------------------------------------------------------------------------------------------------------------------------
1997
Net sales $1,795.3 $1,030.4 $664.2 $3,489.9
Depreciation and amortization (1) 130.7 82.0 71.8 284.5
Research, development and engineering expenses (2) 117.1 63.6 69.6 250.3
Interest income (3) 3.6 2.5 1.0 7.1
Interest expense (4) 34.3 23.5 13.8 71.6
Income tax expense 163.9 50.8 (8.6) 206.1
Segments earnings before minority interest and equity earnings (5) 307.3 89.8 16.4 413.5
Minority interest in earnings of subsidiaries (46.0) 0.7 (31.0) (76.3)
Equity in earnings of associated companies 36.2 13.1 21.7 71.0
Segment net income 297.5 103.6 7.1 408.2
Investment in associated companies, at equity 62.8 35.3 142.2 240.3
Segment assets (6) 1,599.2 762.6 841.4 3,203.2
Capital expenditures 336.0 117.0 119.0 572.0
- ----------------------------------------------------------------------------------------------------------------------------------
1996
Net sales $1,397.7 $1,031.4 $565.5 $2,994.6
Depreciation and amortization (1) 104.7 65.0 81.0 250.7
Research, development and engineering expenses (2) 83.2 52.3 53.7 189.2
Interest income (3) 2.6 2.5 1.8 6.9
Interest expense (4) 24.4 21.8 10.6 56.8
Income tax expense 130.6 33.0 (13.8) 149.8
Segments earnings before minority interest and equity earnings (5) 247.6 63.5 (10.0) 301.1
Minority interest in earnings of subsidiaries (38.1) 3.0 (17.4) (52.5)
Equity in earnings of associated companies 44.9 8.8 22.6 76.3
Segment net income 254.4 75.3 (4.8) 324.9
Investment in associated companies, at equity 53.4 27.7 163.0 244.1
Segment assets (6) 1,227.9 631.5 789.4 2,648.8
Capital expenditures 209.0 85.6 170.0 464.6
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes an allocation of depreciation of corporate property, plant and
equipment not specifically identifiable to a segment. Related depreciable
assets are not allocated to segment assets.
(2) Non-direct research, development and engineering expenses are allocated
based upon direct project spending for each segment.
(3) Interest income is allocated to segments based on a percentage of segment
net operating assets.
(4) Interest expense is allocated to segments based on a percentage of segment
net operating assets. Consolidated subsidiaries with independent capital
structures do not receive additional allocations of interest expense.
(5) Many of Corning's administrative and staff functions are performed on a
centralized basis. Where practicable, Corning charges these expenses to
segments based upon the extent to which each business uses a centralized
function. Other staff functions, such as corporate finance, human
resources and legal, are allocated to segments, primarily as a percentage
of sales.
(6) Includes inventory, accounts receivable, plant, property and equipment,
investments in associated equity companies and goodwill specifically
identifiable to segments.
29
3. Information by Operating Segment (continued)
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as follows:
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues
Total segment net sales $ 3,456.5 $ 3,489.9 $ 2,994.6
Non-segment net sales (1) 27.5 26.9 29.4
Royalty, interest and dividend income 48.4 37.5 29.7
Non-operating gains 39.7
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,572.1 $ 3,554.3 $ 3,053.7
Net income
Total segment net income (2) $ 355.6 $ 408.2 $ 324.9
Unallocated items:
Non-segment income (1) 39.5 10.0 5.3
Provision for restructuring (3) (84.6)
Minority interest 3.7
Interest expense (0.3) (0.4) (0.4)
Income tax 15.2 (3.4) (1.6)
Equity in earnings of associated companies (1) 12.1 8.2 8.8
Dividends on convertible preferred securities of subsidiary (13.7) (13.7) (13.7)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income from continuing operations $ 327.5 $ 408.9 $ 323.3
Assets
Total segment assets $ 3,639.9 $ 3,203.2 $ 2,648.8
Non-segment assets:
Net assets of discontinued operations 357.6 364.0
Property, plant and equipment (4) 624.7 523.2 442.4
Investments (5) 108.1 69.7 93.1
Other current assets (6) 310.7 263.1 380.6
Remaining corporate assets (7) 298.5 275.1 254.5
- ----------------------------------------------------------------------------------------------------------------------------------
Total consolidated assets $ 4,981.9 $ 4,691.9 $ 4,183.4
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes amounts derived from corporate investments. Non-segment net
income includes non-operating gains in 1998.
(2) Includes royalty, interest and dividend income.
(3) See Footnote 8 to the consolidated financial statements for further
discussion of this charge. The portion of this charge related to
Telecommunications, Advanced Materials and Information Display Segments
was $8.3 million, $26.9 million, and $16.3 million, respectively. The
remainder pertains to corporate functions.
(4) Represents corporate property, plant and equipment not specifically
identifiable to a segment.
(5) Represents corporate investments in associated companies, at equity.
(6) Includes current corporate assets, primarily cash, short-term investments
and deferred taxes.
(7) Includes non-current corporate assets, primarily pension assets and
deferred taxes.
30
3. Information by Operating Segment (continued)
Other Significant Items Segment Reconciling Consolidated
Total Adjustments Total
- ----------------------------------------------------------------------------------------------------------------------------------
1998
Depreciation and amortization $ 296.8 $ 1.2 $ 298.0
Interest expense 56.4 0.3 56.7
Income taxes 148.0 (15.2) 132.8
Equity in earnings of associated companies 83.2 12.1 95.3
Minority interest (64.6) 3.7 (60.9)
Investment in associated companies, at equity 258.2 54.9 313.1
Capital expenditures 444.0 269.6 (1) 713.6
- ----------------------------------------------------------------------------------------------------------------------------------
1997
Depreciation and amortization $ 284.5 $ 1.4 $ 285.9
Interest expense 71.6 0.4 72.0
Income taxes 206.1 3.4 209.5
Equity in earnings of associated companies 71.0 8.2 79.2
Investment in associated companies, at equity 240.3 52.6 292.9
Capital expenditures 572.0 173.6 (1) 745.6
- ----------------------------------------------------------------------------------------------------------------------------------
1996
Depreciation and amortization $ 250.7 $ 1.6 $ 252.3
Interest expense 56.8 0.4 57.2
Income taxes 149.8 1.6 151.4
Equity in earnings of associated companies 76.3 8.8 85.1
Investment in associated companies, at equity 244.1 69.7 313.8
Capital expenditures 464.6 95.6 (1) 560.2
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes capital spending on shared research facilities of $166.0 million,
$82.4 million and $19.0 million in 1998, 1997 and 1996, respectively.
31
3. Information by Operating Segment (continued)
Information concerning principal geographic areas is as follows:
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Net Non-current Net Non-current Net Non-current
Sales Assets (1) Sales Assets (1) Sales Assets (1)
- -----------------------------------------------------------------------------------------------------------------------------
North America
United States $2,257.4 $2,877.5 $2,206.8 $2,436.8 $2,020.8 $1,950.2
Canada 301.7 89.9 246.8 90.8 120.7 96.6
Other 37.0 43.3 37.9 25.9 46.1 15.9
- -----------------------------------------------------------------------------------------------------------------------------
Total North America 2,596.1 3,010.7 2,491.5 2,553.5 2,187.6 2,062.7
Asia Pacific
Japan 308.8 109.6 360.4 103.4 271.6 118.7
China 74.6 0.9 119.6 1.0 53.4 0.5
Korea 24.0 195.2 29.5 135.9 31.7 159.3
Other 35.5 15.1 42.0 16.0 39.0 14.8
- -----------------------------------------------------------------------------------------------------------------------------
Total Asia Pacific 442.9 320.8 551.5 256.3 395.7 293.3
Europe
Germany 117.6 49.0 101.8 45.9 88.7 53.4
France 72.6 75.8 85.0 58.8 76.5 50.4
United Kingdom 73.8 76.0 66.0 60.0 72.9 55.4
Other 109.3 22.5 100.3 26.8 106.0 22.2
- -----------------------------------------------------------------------------------------------------------------------------
Total Europe 373.3 223.3 353.1 191.5 344.1 181.4
Latin America
Brazil 29.9 10.4 74.1 11.7 41.3 12.1
Other 10.9 18.4 0.4 11.7 0.4
- -----------------------------------------------------------------------------------------------------------------------------
Total Latin America 40.8 10.4 92.5 12.1 53.0 12.5
All Other 30.9 22.0 28.2 8.5 43.6 8.5
- -----------------------------------------------------------------------------------------------------------------------------
Total $3,484.0 $3,587.2 $3,516.8 $3,021.9 $3,024.0 $2,558.4
- -----------------------------------------------------------------------------------------------------------------------------
(1) Excludes net assets of discontinued operations of $357.6 million and $364.0
million in 1997 and 1996, respectively, and deferred taxes of $84.4
million, $113.3 million and $83.6 million in 1998, 1997 and 1996,
respectively.
32
4. Investments
Associated Companies at Equity, other than Dow Corning Corporation
Samsung Corning Company Ltd., a 50% owned South Korea-based manufacturer of
glass panels and funnels for television and display monitors, represented $174.4
million and $134.1 million of Corning's investments accounted for by the equity
method at year end 1998 and 1997, respectively.
The financial position and results of operations of Samsung Corning and
Corning's other equity companies are summarized as follows:
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Samsung Total Samsung Total Samsung Total
Corning Equity Corning Equity Corning Equity
Co. Ltd. Companies Co. Ltd. Companies Co. Ltd. Companies
- -------------------------------------------------------------------------------------------------------------------------
Net sales $ 884.1 $ 1,652.9 $ 997.4 $ 1,808.1 $ 794.9 $ 1,593.3
Gross profit 239.6 571.7 265.8 637.9 192.8 554.7
Net income 77.8 224.8 63.6 177.7 54.6 208.3
- -------------------------------------------------------------------------------------------------------------------------
Corning's equity in net income (1) $ 38.4 $ 95.3 $ 31.1 $ 79.2 $ 26.4 $ 85.1
- -------------------------------------------------------------------------------------------------------------------------
Current assets $ 362.6 $ 647.8 $ 371.9 $ 775.4 $ 328.1 $ 661.3
Non-current assets 1,022.7 1,320.2 934.4 1,311.9 1,415.0 1,826.3
- -------------------------------------------------------------------------------------------------------------------------
Current liabilities $ 369.7 $ 532.9 $ 291.0 $ 537.0 $ 446.3 $ 647.6
Non-current liabilities 657.3 757.3 717.1 884.5 979.1 1,132.8
- -------------------------------------------------------------------------------------------------------------------------
(1) Equity in earnings shown above and in the Consolidated Statements of
Income are net of amounts recorded for income tax.
Dividends received from Samsung Corning and Corning's other equity companies
totaled $63.3 million, $65.3 million and $88.2 million in 1998, 1997 and 1996,
respectively. At December 31, 1998, approximately $262.4 million of equity in
undistributed earnings of equity companies were included in Corning's retained
earnings.
Dow Corning Corporation
Corning is a 50% owner of Dow Corning Corporation (Dow Corning), a manufacturer
of silicones. The other 50% of Dow Corning is owned by The Dow Chemical Company
(Dow Chemical).
On May 15, 1995, Dow Corning voluntarily filed for protection under Chapter 11
of the United States Bankruptcy Code as a result of several negative
developments related to the breast implant litigation. At that time, Corning
management believed it was impossible to predict if and when Dow Corning would
successfully emerge from Chapter 11 proceedings. As a result, Corning recorded
an after-tax charge of $365.5 million to fully reserve its investment in Dow
Corning and discontinued recognition of equity earnings from Dow Corning in
1995.
Dow Corning and the Committee of Tort Claimants, one of Dow Corning's Chapter 11
creditor committees, filed with the United States Bankruptcy Court (the
Bankruptcy Court) a joint plan of reorganization on November 9, 1998 (the Joint
Plan). After hearings held in early 1999, the Bankruptcy Court ruled in early
February 1999 that the disclosure statement related to the Joint Plan was
adequate to send to Dow Corning's creditors for consideration. In that ruling,
the Bankruptcy Court indicated that the period for voting will extend through
May 14, 1999 and hearings to confirm the Joint Plan are scheduled to begin on
June 28, 1999. To become effective, the Joint Plan will require a favorable vote
by many classes of creditors and final Bankruptcy Court approval after
confirmation hearings. In addition, appeals of the Bankruptcy Court's
confirmation order are possible. The recent developments, including the support
of the Committee of Tort Claimants, tend to increase the probability that Dow
Corning will successfully emerge from Chapter 11 proceedings, but the timing and
eventual outcome of these proceedings is uncertain.
33
4. Investments (continued)
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. As part of the Joint Plan,
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 financial position and results of operations of Dow Corning are summarized
in the table below. The 1998 amounts are derived from Dow Corning's unaudited
financial information and do not include the impact of charges, if any, which
Dow Corning may take currently or in the future to reflect any additional
financial impact of the Joint Plan. The amount of any such charge could have a
material effect on Dow Corning's financial position and results of operations in
the period or periods recorded.
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Net sales $ 2,568.0 $ 2,643.5 $ 2,532.3
Gross profit 796.1 847.6 858.3
Net income 206.7 237.6 221.7
- -------------------------------------------------------------------------------------------------------------------------
Current assets $ 1,355.2 $ 1,378.8 $ 1,524.7
Non-current assets 4,294.0 3,939.9 3,589.4
- -------------------------------------------------------------------------------------------------------------------------
Current liabilities $ 527.3 $ 489.8 $ 480.5
Non-current liabilities 391.3 361.5 343.2
Liabilities subject to compromise (1) 3,492.6 3,441.1 3,452.1
Shareholders' equity 1,238.0 1,026.3 838.3
- -------------------------------------------------------------------------------------------------------------------------
(1) Dow Corning's financial statements for 1998, 1997 and 1996 have been
prepared in conformity with the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting by Entities
in Reorganization under the Bankruptcy Code," (SOP 90-7). SOP 90-7
requires a segregation of liabilities subject to compromise by the
Bankruptcy Court as of the filing date (May 15, 1995) and identification
of all transactions and events that are directly associated with the
reorganization.
Dow Corning's 1998, 1997 and 1996 results have also been impacted by the
suspension of interest payments and reorganization costs resulting from the
Chapter 11 proceedings.
Other Investments
Corning's other investments include equity securities, which are classified as
available-for-sale. At December 31, 1998, the fair value and cost of Corning's
equity securities was $53.1 million and $54.7 million, respectively. The
difference includes gross unrealized gains of $0.3 million and gross unrealized
losses of $1.9 million. The fair value of Corning's equity securities was $17.1
million at December 31, 1997 and approximated cost.
Proceeds from sales of marketable securities were $5.0 million and $17.4 million
in 1998 and 1997, respectively, and related net realized gains included in
income were $0.3 million and $11.4 million in 1998 and 1997, respectively. The
net change in the unrealized loss on marketable securities classified as
available-for-sale included as a component of accumulated other comprehensive
income was $1.6 million for the year ended December 31, 1998.
5. Employee Retirement Plans
Corning has defined benefit pension plans covering certain domestic employees
and employees in foreign countries. Corning's funding policy has been to
contribute as necessary an amount determined jointly by Corning and its
consulting actuaries, which provides for the current cost and amortization of
prior service cost. Corning and certain of its domestic subsidiaries also offer
defined benefit postretirement plans that provide health care and life insurance
benefits for retirees and eligible dependents. Certain employees may become
eligible for such postretirement benefits upon reaching retirement age.
Corning's principal retiree medical plans require retiree contributions each
year equal to the excess of medical cost increases over general inflation rates.
34
5. Employee Retirement Plans (continued)
The change in benefit obligation and funded status of Corning's employee
retirement plans are as follows:
- -------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
---------------- -----------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $(1,246.0) $(1,213.8) $(520.7) $(521.1)
Service cost (22.4) (19.1) (9.6) (8.4)
Interest cost (95.0) (88.1) (40.2) (37.0)
Plan participants' contribution (2.5) (2.0) (1.5) (1.4)
Amendments (17.7) (2.7) (1.3)
Curtailments (21.9) (8.7)
Gain/(loss) from changes in actuarial assumptions (166.9) (16.9) (44.1) 17.2
Experience loss (43.2) (42.0)
Benefits paid 98.4 96.6 35.8 30.0
- -------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $(1,517.2) $(1,246.0) $(632.3) $(520.7)
- -------------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 1,443.4 $ 1,332.2 $ - $ -
Actual return on plan assets 125.0 183.3
Employer contribution 23.7 22.5 34.3 28.6
Plan participants' contributions 2.5 2.0 1.5 1.4
Benefits paid (98.4) (96.6) (35.8) (30.0)
- -------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 1,496.2 $ 1,443.4 $ - $ -
- -------------------------------------------------------------------------------------------------------------------------
Funded status $ (21.0) $ 197.4 $(632.3) $(520.7)
Unrecognized transition amount (3.1) (10.0)
Unrecognized prior service cost 109.8 121.4 (4.7) (10.9)
Unrecognized net (gains)/losses from changes
in actuarial assumptions 5.7 (203.3) 39.1 (33.2)
- -------------------------------------------------------------------------------------------------------------------------
Recognized asset (liability) $ 91.4 $ 105.5 $(597.9) $(564.8)
- -------------------------------------------------------------------------------------------------------------------------
Less current portion 38.1 31.0
- -------------------------------------------------------------------------------------------------------------------------
Accrued postretirement liability $(559.8) $(533.8)
- -------------------------------------------------------------------------------------------------------------------------
Defined benefit pension plan assets are comprised principally of publicly traded
debt and equity securities. Corning common stock represented 3.5% and 3.1% of
plan assets at year end 1998 and 1997, respectively. Corning has not funded its
postretirement obligations.
35
5. Employee Retirement Plans (continued)
The weighted-average assumptions for Corning's employee retirement plans are as
follows:
- -------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
---------------- -----------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Discount rate 6.5% 7.5% 6.5% 7.5%
Expected return on plan assets 9.0% 9.0%
Rate of compensation increase 4.0% 4.5%
- -------------------------------------------------------------------------------------------------------------------------
Corning's consolidated postretirement benefit obligation is determined by
application of the terms of health care and life insurance plans, together with
relevant actuarial assumptions and health care cost trend rates. The health care
cost trend rate for Corning's principal plan is assumed to be 8% in 1998 for
covered individuals under age 65 decreasing gradually to 4.5% in 2010 and
thereafter. For covered individuals over 65, the rate is assumed to be 7% in
1998 decreasing gradually to 4.5% in 2010 and thereafter.
Assumed health care trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in 1998
assumed health care trend rates would have the following effects:
- -------------------------------------------------------------------------------------------------------------------------
1-Percentage-Point
Increase Decrease
- -------------------------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 3.7 $ (3.4)
Effect on postretirement benefit obligation 47.8 (43.7)
- -------------------------------------------------------------------------------------------------------------------------
The components of net periodic benefit cost for Corning's employee retirement
plans are as follows:
- --------------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
---------------- -----------------------
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Service cost $ 22.4 $ 19.1 $ 17.4 $ 9.6 $ 8.4 $ 8.5
Interest cost 95.0 88.1 84.2 40.2 37.0 37.0
Expected return on plan assets (118.3) (107.7) (99.8)
Amortization of transition asset (0.6) (0.7) (0.8) (0.2) 0.2
Amortization of net gain 1.8 3.8 1.7
Amortization of prior service cost 13.1 11.7 10.5 (1.1) (1.6) (1.4)
- --------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost 13.4 14.3 13.2 48.7 43.6 44.3
Recognition of curtailment and settlement (1) 14.2 0.5
Recognition of special termination benefits (2) 7.5
Total cost $ 35.1 $ 14.3 $ 13.2 $49.2 $43.6 $44.3
- --------------------------------------------------------------------------------------------------------------------------
(1) Included in the gain on sale of the consumer housewares business, which is
recorded in income from discontinued operations.
(2) Included in the provision for restructuring.
Measurement of postretirement benefit expense is based on assumptions used to
value the postretirement liability at the beginning of the year. Total
consolidated pension expense, including defined contribution pension plans, was
$49.3 million in 1998, $44.9 million in 1997 and $41.7 million in 1996.
36
6. Taxes on Income
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before taxes on income:
U.S. companies $ 340.1 $ 545.1 $ 381.7
Non-U.S. companies 99.5 84.1 74.1
- ----------------------------------------------------------------------------------------------------------------------------------
Income before taxes on income $ 439.6 $ 629.2 $ 455.8
- ----------------------------------------------------------------------------------------------------------------------------------
Taxes on income from continuing operations $ 132.8 $ 209.5 $ 151.4
- ----------------------------------------------------------------------------------------------------------------------------------
Effective tax rate reconciliation:
Statutory U.S. tax rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 0.7 1.6 1.3
Foreign and other tax credits (0.8) (0.6) (0.5)
Lower taxes on subsidiary earnings (6.1) (2.7) (2.6)
Other 1.4
- ----------------------------------------------------------------------------------------------------------------------------------
Effective tax rate 30.2% 33.3% 33.2%
- ----------------------------------------------------------------------------------------------------------------------------------
Components of net tax expense:
Taxes on income from continuing operations $ 132.8 $ 209.5 $ 151.4
Taxes on equity in earnings 19.3 13.8 15.1
Tax benefits included in common shareholders' equity (21.4) (18.8) (17.0)
- ----------------------------------------------------------------------------------------------------------------------------------
Net tax expense before discontinued operations 130.7 204.5 149.5
Income tax expense from discontinued operations 76.6 17.7 19.6
- ----------------------------------------------------------------------------------------------------------------------------------
Net tax expense $ 207.3 $ 222.2 $ 169.1
- ----------------------------------------------------------------------------------------------------------------------------------
Current and deferred tax expense (benefit) before discontinued operations:
Current:
U.S. $ 69.7 $ 139.1 $ 64.1
State and municipal 8.0 20.1 11.0
Foreign 57.0 55.6 49.3
Deferred:
U.S. (4.1) (11.2) 14.3
State and municipal (1.3) (4.2) 6.9
Foreign 1.4 5.1 3.9
- ----------------------------------------------------------------------------------------------------------------------------------
Net tax expense before discontinued operations $ 130.7 $ 204.5 $ 149.5
- ----------------------------------------------------------------------------------------------------------------------------------
37
6. Taxes on Income (continued)
The tax effects of temporary differences and carryforwards that gave rise to
significant portions of the deferred tax assets and liabilities as of year end
are comprised of the following:
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Postretirement medical and life benefits $ 235.0 $ 230.1
Other employee benefits 46.0 49.0
Other accrued liabilities 27.6 11.5
Restructuring reserves 25.2
Loss and tax credit carryforwards 50.6 44.5
Other 31.4 36.3
- ----------------------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 415.8 371.4
Deferred tax assets valuation allowance (33.8) (22.0)
- ----------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets 382.0 349.4
- ----------------------------------------------------------------------------------------------------------------------------------
Fixed assets (136.7) (107.3)
Pensions (35.3) (40.5)
Other (19.4) (20.9)
- ----------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities (191.4) (168.7)
- ----------------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 190.6 $ 180.7
- ----------------------------------------------------------------------------------------------------------------------------------
The net change in the total valuation allowance for the years ended December 31,
1998, and 1997, was an increase of $11.8 million and $9.5 million, respectively.
Corning currently provides income taxes on the earnings of foreign subsidiaries
and associated companies to the extent they are currently taxable or expected to
be remitted. Taxes have not been provided on $494.5 million of accumulated
foreign unremitted earnings which are expected to remain invested indefinitely.
It is not practicable to estimate the amount of additional tax that might be
payable on the foreign earnings; however, if these earnings were remitted,
income taxes payable would be provided at a rate which is significantly lower
than the effective tax rate.
Corning, as required, provided for tax on undistributed earnings of its domestic
subsidiaries and affiliated companies beginning in 1993 even though these
earnings have been and will continue to be reinvested indefinitely. Corning
estimates that $34.9 million of tax would be payable on pre-1993 undistributed
earnings of its domestic subsidiaries and affiliated companies should the
unremitted earnings reverse and become taxable to Corning. Corning expects these
earnings to be reinvested indefinitely.
Total payments for taxes on income were $184.3 million, $209.4 million and
$120.1 million during 1998, 1997 and 1996, respectively. Deferred income tax
benefits totaling $106.2 million and $67.4 million were included in other
current assets at year end 1998 and 1997, respectively. At December 31, 1998,
Corning had tax benefits attributable to loss carryforwards and credits
aggregating $50.6 million that expire at various dates through 2013.
38
7. Supplemental Income Statement Data
- ----------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Depreciation expense $ 278.2 $ 265.4 $ 235.4
Amortization of goodwill and other intangible assets 19.8 20.5 16.9
- ----------------------------------------------------------------------------------------------------------
Depreciation and amortization expense $ 298.0 $ 285.9 $ 252.3
Rental expense $ 54.0 $ 47.6 $ 36.5
- ----------------------------------------------------------------------------------------------------------
Interest expense incurred $ 103.5 $ 96.7 $ 73.6
Interest capitalized (46.8) (24.7) (16.4)
Interest expense, net $ 56.7 $ 72.0 $ 57.2
- ----------------------------------------------------------------------------------------------------------
Interest paid $ 103.8 $ 111.1 $ 113.6
- ----------------------------------------------------------------------------------------------------------
Consolidated interest expense allocated to discontinued operations totaled $2.7
million, $13.0 million and $63.5 million in 1998, 1997 and 1996, respectively.
The allocations were based on the ratio of net assets of discontinued operations
to consolidated net assets.
8. Provision for Restructuring
In the second quarter of 1998, Corning recorded a restructuring charge of $84.6
million ($49.2 million after tax and minority interest). The charge is comprised
of early retirement incentives and severance costs. The restructuring charge
relates to approximately 650 employees, of which 610 have been terminated or
notified of their termination at December 31, 1998. Corning anticipates that the
workforce reductions will be substantially completed in the first half of 1999.
As of December 31, 1998, $23.3 million of the restructuring and severance
related costs have been paid.
9. Supplemental Balance Sheet Data
- -------------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Inventories
Finished goods $ 205.6 $ 193.5
Work in process 104.9 107.3
Raw materials and accessories 96.7 84.3
Supplies and packing materials 70.6 64.0
- -------------------------------------------------------------------------------------------------------------------------
Total inventories valued at current cost 477.8 449.1
Reduction to LIFO valuation (19.1) (20.8)
- -------------------------------------------------------------------------------------------------------------------------
Inventories $ 458.7 $ 428.3
- -------------------------------------------------------------------------------------------------------------------------
Plant and Equipment
Land $ 57.3 $ 51.4
Buildings 944.1 842.6
Equipment 3,677.4 3,107.2
- -------------------------------------------------------------------------------------------------------------------------
4,678.8 4,001.2
Accumulated depreciation (1,993.9) (1,733.3)
- -------------------------------------------------------------------------------------------------------------------------
Plant and equipment, net $ 2,684.9 $ 2,267.9
- -------------------------------------------------------------------------------------------------------------------------
Other Accrued Liabilities
Taxes on income $ 159.7 $ 112.9
Restructuring reserves 61.3
Wages and employee benefits 157.0 180.0
Other liabilities 200.4 151.8
- -------------------------------------------------------------------------------------------------------------------------
Other accrued liabilities $ 578.4 $ 444.7
- -------------------------------------------------------------------------------------------------------------------------
39
10. Loans Payable
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Loans Payable
Current maturities of loans payable beyond one year $ 134.8 $ 45.8
Other short-term borrowings 69.8 167.2
- -------------------------------------------------------------------------------------------------------------------------
$ 204.6 $ 213.0
- -------------------------------------------------------------------------------------------------------------------------
Loans Payable Beyond One Year
Notes, 7.78%, due 1998 $ 6.9
Notes, 8.75%, due 1999 $ 100.0 99.9
Series A senior notes, 7.99%, due 1999 12.0 24.0
Series B senior notes, 8.4%, due 2002 28.5 35.7
Debentures, 8.25%, due 2002 75.0 75.0
Debentures, 6%, due 2003 99.6 99.5
Debentures, 7% due 2007, net of unamortized discount of
$37.1 million in 1998 and $39.3 million in 1997 62.9 60.7
Notes, 6.73%, due 2008 36.4 40.0
Notes, 6.83%, due 2009 30.0 30.0
Debentures, 6.75%, due 2013 99.6 99.5
Debentures, 8.875%, due 2016 74.5 74.5
Debentures, 8.875%, due 2021 74.9 74.9
Debentures, 7.625%, putable in 2004, due 2024 99.7 99.7
Medium-term notes, average rate 7.8%, due through 2025 265.0 265.0
Other, average rate 5.0%, due through 2031 75.0 86.3
- -------------------------------------------------------------------------------------------------------------------------
1,133.1 1,171.6
Less current maturities 134.8 45.8
- -------------------------------------------------------------------------------------------------------------------------
$ 998.3 $ 1,125.8
- -------------------------------------------------------------------------------------------------------------------------
At December 31, 1998 and 1997, the weighted-average interest rate on short-term
borrowings was 5.2% and 6.6%, respectively.
At December 31, 1998, loans payable beyond one year become payable:
- -------------------------------------------------------------------------------
2000 2001 2002 2003 2004-2025
- -------------------------------------------------------------------------------
$31.7 $43.8 $94.1 $181.9 $646.8
- -------------------------------------------------------------------------------
Based on borrowing rates currently available to Corning for loans with similar
terms and maturities, the fair value of loans payable beyond one year was $1.3
billion at year end 1998.
Unused bank revolving credit agreements in effect at December 31, 1998 provide
for Corning to borrow up to $825 million. The revolving credit agreements
provide for borrowing of U.S. dollars and Eurocurrency at various rates. Corning
also has the ability to issue up to $375 million of medium and long-term debt
through public offerings under existing shelf-registration statements filed with
the Securities and Exchange Commission.
40
11. Convertible Monthly Income Preferred Securities
In July 1994, Corning and Corning Delaware L.P., a special purpose limited
partnership in which Corning is the sole general partner, completed a public
offering of 7.5 million shares of Convertible Monthly Income Preferred
Securities (MIPS). The MIPS were guaranteed by Corning and convertible into
Corning common stock at the rate of 1.534 shares of Corning common stock for
each MIPS. On February 16, 1999, Corning Delaware issued a notice to all MIPS
holders calling for the redemption of all MIPS. Holders of the MIPS have
the option of either receiving $51.80 in cash for each share, or converting
them into Corning common stock, which had a fair market value after conversion
of $74.88 per share on February 16, 1999. Management expects that a majority of
the MIPS holders will convert their preferred securities into Corning common
stock.
Based on quoted market prices at December 31, 1998, the fair value of the
preferred securities approximated $523 million.
12. Convertible Preferred Stock
Corning has 10 million authorized shares of Series Preferred Stock, par value
$100 per share. Of the authorized shares, 2.4 million shares have been
designated Series A Junior Participating Preferred Stock of which no shares have
been issued.
At year end 1998, 1997 and 1996, 178,700, 198,100 and 222,000 shares of Series B
Convertible Preferred Stock were outstanding, respectively. Each Series B share
is convertible into 4.79 shares of Corning common stock and has voting rights
equivalent to four common shares. The Series B shares were sold exclusively to
the trustee of Corning's existing employee investment plans, based upon
directions from plan participants. Participants may cause Corning to redeem the
shares at 100% of par upon reaching age 55 or later, retirement, termination of
employment or in certain cases of financial hardship. The Series B shares are
redeemable by Corning at $100 per share.
13. Common Shareholders' Equity
Corning has established the Corning Stock Ownership Trust (CSOT) to fund future
employee purchases of common stock through its contributions to Corning's
Investment and Employee Stock Purchase Plans (the Plans). Corning sold 4 million
treasury shares to the CSOT. At December 31, 1998, 1.9 million shares remained
in the CSOT. Shares held by the CSOT are not considered outstanding for earnings
per common share calculations until released to the Plans. Corning and the
trustee of the CSOT reached an agreement whereby the trustee waived its right to
receive the Distribution of Quest Diagnostics and Covance and, in lieu thereof,
received 400,000 additional shares of Corning common stock.
Corning repurchased approximately 2.0 million, 1.1 million and 2.2 million
shares of its common stock in 1998, 1997 and 1996, respectively. All of the
1998, 1997 and approximately 1.3 million of the 1996 shares were repurchased
pursuant to a systematic plan authorized by the Board of Directors. Corning's
systematic plan is designed to provide shares for Corning's various employee
benefit programs. The remainder of the 1996 stock repurchases were from
employees to satisfy tax withholding requirements on shares issued under
employee benefit plans.
In June 1996, the Board of Directors approved the renewal of the Preferred Share
Purchase Right Plan which entitles shareholders to purchase one-hundredth of a
share of Series A Junior Participating Preferred Stock upon the occurrence of
certain events. In addition, the rights entitle shareholders to purchase shares
of common stock at a 50 percent discount in the event a person or group acquires
20 percent or more of Corning's outstanding common stock. The preferred share
purchase rights became effective July 15, 1996 and expire July 15, 2006.
Accumulated other comprehensive income at December 31, 1998 included unrealized
losses on marketable securities of $1.0 million, net of tax of $0.6 million, and
foreign currency translation adjustments of $8.9 million. At December 31, 1996
and 1997, accumulated other comprehensive income included foreign currency
translation adjustments of $43.6 million and $32.2 million, respectively.
41
14. Earnings Per Common Share
Basic earnings per share is computed by dividing net income, less dividends on
Series B convertible preferred stock, by the weighted-average number of common
shares outstanding during each period. Diluted earnings per share is computed by
dividing net income, plus dividends on convertible preferred securities of
subsidiary, by the weighted-average number of common shares outstanding during
the period after giving effect to dilutive stock options and adjusted for
dilutive common shares assumed to be issued on conversion of Corning's
convertible securities.
A reconciliation of the basic and diluted earnings per share from continuing
operations computations for 1998, 1997 and 1996 are as follows:
For the years ended December 31,
-------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ----------------------------- -----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Per Share Shares Per Share Shares Per Share
Income (in millions) Amount Income (in millions) Amount Income (in millions) Amount
------ ------------ ------ ------ ------------ ------ ------ ------------- ------
Net income from continuing
operations $327.5 $408.9 $323.3
Less: Preferred stock
dividends (1.5) (1.6) (1.9)
----------------------------- ---------------------------- ----------------------------
Basic Earnings per Share 326.0 229.6 $1.42 407.3 228.1 $1.79 321.4 227.1 $1.42
===== ===== =====
Effect of Dilutive Securities
Options 2.8 4.8 2.8
Convertible preferred
securities of subsidiary 13.7 11.5 13.7 11.5 13.7 9.6
Convertible preferred stock 1.6 1.0
---------------------------- ---------------------------- ----------------------------
Diluted Earnings per Share $339.7 243.9 $1.39 $422.6 245.4 $1.72 $335.1 239.5 $1.40
============================ ============================ ============================
In January 1997, the conversion rate of the convertible monthly income preferred
shares was increased to recognize the effect of the Distributions of Quest
Diagnostics and Covance.
At December 31, 1998 and December 31, 1996, 178,700 and 222,000 shares of Series
B Convertible Preferred Stock were outstanding, respectively. Each Series B
share is convertible into 4.79 shares of Corning common stock. These shares were
not included in the calculation of diluted earnings per share due to the
anti-dilutive effect they would have had on earnings per share if converted.
15. Stock Compensation Plans
At December 31, 1998, Corning's stock compensation plan includes the 1998
Employee Equity Participation Program, which covers 8.0 million shares. The 1998
Program and predecessor plans provide the authorization for Corning's common
stock plans discussed below. No future awards or grants may be made under the
predecessor plans except for currently outstanding rights. At December 31, 1998,
5.9 million shares were available for sale or grant under the 1998 Program.
Proceeds from the sale of stock under the 1998 Program and predecessor plans are
added to capital stock accounts.
In October 1995, the Financial Accounting Standards Board issued Statement No.
123 "Accounting for Stock-Based Compensation" (FAS 123). This statement defines
a fair value-based method of accounting for employee stock options and similar
equity investments and encourages adoption of that method of accounting for
employee stock compensation plans. However, it also allows entities to continue
to measure compensation cost for employee stock compensation plans using the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25).
Corning applies APB 25 accounting for its stock-based compensation plans.
Compensation expense is recorded for awards of shares or share rights over the
period earned. This plan resulted in compensation expense of $4.6 million in
1998, $29.2 million in 1997 and $27.6 million in 1996.
42
15. Stock Compensation Plans (continued)
Corning has adopted the disclosure-only provisions of FAS 123. If Corning had
elected to recognize compensation expense under FAS 123, Corning's net income in
1998, 1997 and 1996 would have decreased by $9.0 million, $5.3 million and $2.0
million, respectively. Corning's diluted earnings per share amounts would have
decreased by $0.04 in 1998 and $0.02 in 1997. Earnings per share amounts in 1996
would not have been affected.
The pro forma effect on net income for 1997 and 1996 may not be representative
of the pro forma effect on net income of future years because the FAS 123 method
of accounting for pro forma compensation expense has not been applied to options
granted prior to January 1, 1995.
Stock Option Plan
Non-qualified and incentive stock options to purchase unissued or treasury
shares at the market price on the grant date generally become exercisable in
installments from one to five years from the grant date. The maximum term of
non-qualified and incentive stock options is 10 years from the grant date.
Transactions for the three years ended December 31, 1998 were:
- -------------------------------------------------------------------------------------------------------------------------
Number Weighted-
of Shares Average
in Thousands Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
Options outstanding January 1, 1996 11,777 $27.90
Options granted under Plan 763 34.54
Options exercised (1,147) 13.52
Options terminated (1,022) 31.40
Adjustment due to Distributions 908
- -------------------------------------------------------------------------------------------------------------------------
Options outstanding January 1, 1997 11,279 $24.26
Options granted under Plan 929 41.10
Options exercised (2,114) 15.82
Options terminated (152) 25.93
- -------------------------------------------------------------------------------------------------------------------------
Options outstanding January 1, 1998 9,942 $26.83
Options granted under Plan 2,745 30.66
Options exercised (888) 19.30
Options terminated (112) 32.67
- -------------------------------------------------------------------------------------------------------------------------
Options outstanding December 31, 1998 11,687 $28.25
- -------------------------------------------------------------------------------------------------------------------------
At the end of 1996, the number and exercise price of all options outstanding
were adjusted for the Distributions of Quest Diagnostics and Covance. This
adjustment increased the number of options outstanding by approximately 908,000
and decreased the exercise price of the options by approximately 18%.
For purposes of FAS 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1998, 1997 and 1996,
respectively: risk-free interest rate of 4.4%, 6.4% and 6.6%; dividend yield of
1.7%, 1.6% and 2.3%; expected volatility of 29.0%, 25.0% and 24.5% and expected
life of 6, 6 and 7 years.
The number of options exercisable and the corresponding weighted-average
exercise price was 5.8 million and $26.83 in 1998, 5.3 million and $24.73 in
1997 and 6.5 million and $23.11 in 1996. The weighted-average fair value of
options granted was $9.31 in 1998, $14.45 in 1997 and $10.77 in 1996.
43
15. Stock Compensation Plans (continued)
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------
Number Number
Outstanding at Remaining Weighted- Exercisable at Weighted-
Range of December 31, 1998 Contractual Life Average December 31, 1998 Average
Exercise Prices in Thousands in Years Exercise Price in Thousands Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
$ 3.49 to 25.28 2,119 3.5 $19.69 2,119 $19.69
$26.04 to 26.87 3,494 6.6 $26.15 921 $26.33
$28.02 to 32.14 3,284 8.4 $28.54 1,064 $29.37
$32.30 to 64.38 2,790 5.9 $37.03 1,647 $34.65
- ---------------------------------------------------------------------------------------------------------------------------
11,687 6.4 $28.25 5,751 $26.83
- ---------------------------------------------------------------------------------------------------------------------------
Incentive Stock Plans
The Incentive Stock Plan permits stock grants, either determined by specific
performance goals or issued directly, in most instances, subject to the
possibility of forfeiture and without cash consideration.
In 1998, 1997 and 1996, grants of 698,000, 999,000 and 340,000 shares,
respectively, were made under this plan. In connection with the 1996
Distributions, approximately 280,000 additional shares were issued to employees
in lieu of receiving the Distributions and approximately 180,000 shares were
forfeited by employees of the Distributed companies. At December 31, 1998, there
were no outstanding incentive rights. The weighted-average exercise price of the
grants was $33.52 in 1998, $40.07 in 1997 and $32.61 in 1996, respectively. A
total of 2.8 million shares issued in prior years remain subject to forfeiture
at December 31, 1998.
Worldwide Employee Share Purchase Plan
In addition to the Stock Option Plan and Incentive Stock Plans, Corning has a
Worldwide Employee Share Purchase Plan (WESPP). Under the WESPP, substantially
all employees can elect to have up to 10% of their annual wages withheld to
purchase Corning common stock. The purchase price of the stock is 85% of the
lower of the beginning-of-quarter or end-of-quarter market price. The Corning
Stock Ownership Trust is utilized to fund employee purchases of common stock
under the WESPP.
16. Employee Stock Ownership Plan
Corning has established the Employee Stock Ownership Plan (ESOP) within its
existing employee investment plans. At inception of the plan, Corning borrowed
$50 million and loaned the proceeds to the ESOP. The ESOP used the proceeds to
purchase 4 million treasury shares. In 1998, Corning paid the remaining balance
of the ESOP loan. Corning's receivable from the ESOP was $2.9 million at the end
of 1997 and is classified as unearned compensation in common shareholders'
equity.
Contributions to the ESOP were $3.0 million in 1998, $7.0 million in 1997 and
$6.7 million in 1996. Dividends on unallocated shares reduced contribution
requirements by $0.2 million in 1997 and $0.5 million in 1996. There were no
dividends on unallocated shares in 1998. Interest costs amounted to $0.1 million
in 1998, $0.8 million in 1997 and $1.2 million in 1996. Shares held by the ESOP
are included in weighted-average shares outstanding for earnings per share
calculations. The trustee of the ESOP sold the shares of Quest Diagnostics and
Covance that it received from the Distributions. The proceeds from the sale of
these shares were used to purchase shares of Corning common stock.
17. Commitments, Contingencies, Guarantees and Hedging Activities
Minimum rental commitments under leases outstanding at December 31, 1998 are:
- -------------------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004-2019
- -------------------------------------------------------------------------------------------------------------------------
$43.2 $37.5 $29.8 $23.5 $20.2 $117.2
- -------------------------------------------------------------------------------------------------------------------------
44
17. Commitments, Contingencies, Guarantees and Hedging Activities (continued)
In January 1998, Corning completed a sale leaseback transaction related to
certain equipment assets and resulted in gross proceeds of approximately $95
million. Approximately $80 million of the proceeds were invested with the
counterparty to the lease. There was no material change to total long-term
assets as a result of this transaction.
Payments pursuant to the operating lease are included above.
At December 31, 1998, future minimum lease payments to be received under a
noncancelable sublease to Quest Diagnostics totaled $67.4 million. Quest
Diagnostics, in turn, has a noncancelable sublease covering approximately $44.3
million of the minimum lease payments due to Corning. Corning has agreed to
indemnify Quest Diagnostics should Quest Diagnostics' subleasee default on the
minimum lease payments. Additionally, Corning continues to guarantee certain
obligations of Quest Diagnostics totaling $14.8 million.
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 enters into foreign exchange forward contracts with durations
generally less than 12 months 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 forward contracts require Corning 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 forward 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.
At December 31, 1998, Corning had foreign currency contracts to purchase
approximately $145.5 million U.S. dollars with a fair value of $16.0 million. Of
this amount, $11.4 million is included in other current liabilities at December
31, 1998. These contracts are held by Corning and its subsidiaries and will
mature at varying dates in 1999.
In December 1998, one of Corning's subsidiaries entered into financing
agreements which provide for the sale of certain future yen based revenues,
beginning in February 1999 and expiring in December 2001. These contracts
require the counterparty to advance U.S. dollars in amounts up to $10.1 million
each month and Corning to repay the notes only to the extent of future yen
denominated revenues. The obligations under these contracts are not cancelable
by either party. Borrowings under the agreements bear interest at a premium to
the Eurodollar rate. Transaction gains or losses related to these contracts are
deferred and recognized as an adjustment to the revenue securing the note
repayments. Borrowings are recorded on the balance sheet only to the extent they
are outstanding. The cumulative borrowings anticipated between February 1999 and
December 1999 approximate $100 million with cumulative repayments approximating
1.1 billion yen. At December 31, 1998, the contracted value of these contracts
was approximately $3 million less than fair value.
The ability of certain subsidiaries and associated companies to transfer funds
is limited by provisions of certain loan agreements and foreign government
regulations. At December 31, 1998, the amount of equity subject to such
restrictions for consolidated subsidiaries totaled $43.8 million. While this
amount is legally restricted, it does not result in operational difficulties
since Corning has generally permitted subsidiaries to retain a majority of
equity to support their growth programs. At December 31, 1998, loans of equity
affiliates guaranteed by Corning totaled $6.5 million.
Corning has agreed to indemnify Quest Diagnostics, on an after-tax basis, for
the settlement of certain governmental claims pending at December 31, 1996. In
addition, Corning, Quest Diagnostics and Covance have entered into tax
indemnification and tax sharing agreements. Additional information on these
indemnification agreements is presented in Note 18 of the Notes to Consolidated
Financial Statements.
18. Discontinued Operations
On April 1, 1998, Corning completed the recapitalization and sale of a
controlling interest in its consumer housewares business to an affiliate of
Borden, Inc. Corning received cash proceeds of $593 million and continues to
retain an eight percent interest in the Corning Consumer Products Company. In
addition, Corning could receive an additional payment of up to $15 million if
certain financial targets are met by Corning Consumer Products Company for the
three year period 1998 - 2000.
45
18. Discontinued Operations (continued)
On December 31, 1996, Corning distributed all of the shares of Quest Diagnostics
Incorporated (formerly Corning Clinical Laboratories Inc.) and Covance Inc.
(formerly Corning Pharmaceutical Services Inc.) (the Distributions)
(collectively, the Health Care Services Segment) to its shareholders on a pro
rata basis. Prior to the Distributions, Corning received a ruling from the
Internal Revenue Service that the Distributions were tax-free to Corning and its
shareholders. As a result of the Distributions, Quest Diagnostics and Covance
became independent, publicly traded companies.
Corning's shareholders' equity was reduced by $1.1 billion, which represented
Corning's investment in equity and intercompany debt of Quest Diagnostics and
Covance on the date of the Distributions. Prior to the Distributions, Quest
Diagnostics and Covance borrowed $650 million from third-party lenders and
repaid intercompany debt to Corning. Corning used the proceeds from the
repayment of intercompany debt to repay approximately $375 million of short-term
borrowings and $75 million of long-term debt.
Summarized results of Corning's discontinued operations are as follows:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Sales $ 116.8 $ 574.8 $ 1,145.8
Income (loss) before income taxes $ (0.9) $ 49.0 $ 52.0
Income tax provision (benefit) (0.3) 17.7 23.1
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations, net of income taxes (0.6) 31.3 28.9
Gain on sale of consumer housewares business, net of tax of $75.8 million 67.1
Provision for loss on Distribution, including income tax benefit of $3.5 million (176.5)
Minority interest in earnings of subsidiaries (0.4) (0.1)
- ---------------------------------------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes $ 66.5 $ 30.9 $ (147.7)
- ---------------------------------------------------------------------------------------------------------------------------
The results of operations from the consumer housewares business are for the
period through March 31, 1998. Discontinued operations in 1996 also include
sales of $515.0 million and income from operations of $9.2 million for the
Health Care Services Segment. Results of the discontinued businesses include
allocations of consolidated interest expense totaling $2.7 million, $13.0
million and $63.5 million in 1998, 1997 and 1996, respectively. The allocations
were based on the ratio of net assets of discontinued operations to consolidated
net assets.
The $176.5 million provision for loss on Distributions includes after-tax
charges of $142.0 million recorded by Quest Diagnostics related to certain
government investigations of billing practices of certain clinical laboratories.
Corning has agreed to indemnify Quest Diagnostics on an after-tax basis for the
settlement of certain claims that were pending at December 31, 1996. Coincident
with the Distributions, Corning recorded a reserve accrual of approximately $25
million which is equal to management's best estimate of amounts, which are
probable of being paid by Corning to Quest Diagnostics to satisfy the remaining
indemnified claims on an after-tax basis.
Although management believes that established reserves for indemnified claims
are sufficient, it is possible that additional information may become available
to Quest Diagnostics' management, which may cause the final resolution of these
matters to exceed established reserves by an amount which could be material to
Corning's results of operations and cash flow in the period in which such claims
are settled. Corning does not believe that these issues will have a material
adverse impact on Corning's overall financial condition.
46
Corning Incorporated and Subsidiary Companies
Schedule II - Valuation Accounts and Reserves
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year Ended December 31, 1998 12-31-97 Additions and Other 12-31-98
- ----------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 10.7 $ 19.5 $ 15.0 $ 15.2
LIFO valuation $ 20.8 $ 5.2 $ 6.9 $ 19.1
Deferred tax assets valuation allowance $ 22.0 $ 11.8 $ 33.8
Accumulated amortization of goodwill
and other intangible assets $ 51.5 $ 19.8 $ 4.6 $ 66.7
Reserves for accrued costs of
business restructuring $ 84.6 $ 23.3 $ 61.3
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year Ended December 31, 1997 12-31-96 Additions and Other 12-31-97
- ----------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 14.2 $ 17.5 $ 21.0 $ 10.7
LIFO valuation $ 27.4 $ 1.0 $ 7.6 $ 20.8
Deferred tax assets valuation allowance $ 12.5 $ 9.5 $ 22.0
Accumulated amortization of goodwill
and other intangible assets $ 35.0 $ 20.4 $ 3.9 $ 51.5
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Net Deductions Balance at
Year Ended December 31, 1996 12-31-95 Additions and Other 12-31-96
- ----------------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances $ 11.5 $ 18.0 $ 15.3 $ 14.2
LIFO valuation $ 31.2 $ 2.0 $ 5.8 $ 27.4
Deferred tax assets valuation allowance $ 17.2 $ 4.7 $ 12.5
Accumulated amortization of goodwill
and other intangible assets $ 24.5 $ 16.5 $ 6.0 $ 35.0
Reserves for accrued costs of
business restructuring $ 26.5 $ 26.5
- ----------------------------------------------------------------------------------------------------------------------------------
47
QUARTERLY OPERATING RESULTS AND RELATED MARKET DATA
(unaudited)
(In millions, except per share amounts)
Corning Incorporated and Subsidiary Companies
- --------------------------------------------------------------------------------
First Second Third Fourth Total
1998 Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------------------------------------------------
Revenues $ 803.9 $ 888.4 $ 918.3 $ 961.5 $ 3,572.1
Gross profit 280.1 325.5 356.4 368.1 1,330.1
Income from continuing operations before income
taxes, minority interest and equity earnings 64.5 54.2 162.0 158.9 439.6
Taxes on income from continuing operations (21.0) (13.9) (49.2) (48.7) (132.8)
Minority interest in earnings of subsidiaries (5.5) (12.8) (20.3) (22.3) (60.9)
Dividends on convertible preferred securities
of subsidiary (3.4) (3.5) (3.4) (3.4) (13.7)
Equity in earnings of associated companies 27.5 32.7 15.3 19.8 95.3
Income from continuing operations $ 62.1 $ 56.7 $ 104.4 $ 104.3 $ 327.5
Income (loss) from discontinued operations,
net of income taxes (1) (0.6) 67.1 66.5
Net income $ 61.5 $ 123.8 $ 104.4 $ 104.3 $ 394.0
- -------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Continuing operations $ 0.27 $ 0.24 $ 0.45 $ 0.45 $ 1.42
Discontinued operations (1) 0.30 0.29
Net income $ 0.27 $ 0.54 $ 0.45 $ 0.45 $ 1.71
Diluted Earnings Per Share
Continuing operations $ 0.27 $ 0.24 $ 0.44 $ 0.44 $ 1.39
Discontinued operations (1) (0.01) 0.29 0.28
Net income $ 0.26 $ 0.53 $ 0.44 $ 0.44 $ 1.67
Dividend declared $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.72
Price range
High $ 44 1/4 $ 43 1/2 $ 35 1/4 $ 45 -
Low 32 3/8 34 23 1/2 27 3/4 -
- -------------------------------------------------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------------------------------------------------
Revenues $ 827.0 $ 914.6 $ 901.3 $ 911.4 $ 3,554.3
Gross profit 341.4 390.2 367.0 375.9 1,474.5
Income from continuing operations before income
taxes, minority interest and equity earnings 143.5 189.3 150.1 146.3 629.2
Taxes on income from continuing operations (49.0) (64.2) (48.0) (48.3) (209.5)
Minority interest in earnings of subsidiaries (12.5) (20.8) (22.9) (20.1) (76.3)
Dividends on convertible preferred securities
of subsidiary (3.4) (3.5) (3.4) (3.4) (13.7)
Equity in earnings of associated companies 6.8 24.2 31.0 17.2 79.2
Income from continuing operations $ 85.4 $ 125.0 $ 106.8 $ 91.7 $ 408.9
Income from discontinued operations,
net of income taxes (1) 6.6 2.0 5.5 16.8 30.9
Net income $ 92.0 $ 127.0 $ 112.3 $ 108.5 $ 439.8
- -------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Continuing operations $ 0.37 $ 0.55 $ 0.47 $ 0.40 $ 1.79
Discontinued operations (1) 0.03 0.01 0.02 0.07 0.13
Net income $ 0.40 $ 0.56 $ 0.49 $ 0.47 $ 1.92
Diluted Earnings Per Share
Continuing operations $ 0.36 $ 0.52 $ 0.45 $ 0.39 $ 1.72
Discontinued operations (1) 0.03 0.01 0.02 0.07 0.13
Net income $ 0.39 $ 0.53 $ 0.47 $ 0.46 $ 1.85
Dividend declared $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.72
Price range
High $ 46 $ 56 $ 65 $ 49 1/4 -
Low 34 43 1/2 41 35 3/4 -
- -------------------------------------------------------------------------------------------------------------------------
(1) Discontinued operations are described in Note 18 of the Notes to
Consolidated Financial Statements.
48
FIVE YEARS IN REVIEW - HISTORICAL COMPARISON
(In millions, except per share amounts)
Corning Incorporated and Subsidiary Companies
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income (loss) from continuing operations $ 1.42 $ 1.79 $ 1.42 $ (0.35) $ 0.89
Income (loss) from discontinued operations,
net of income taxes 0.29 0.13 (0.66) 0.12 0.43
Net income (loss) $ 1.71 $ 1.92 $ 0.76 $ (0.23) $ 1.32
Diluted Earnings Per Share
Continuing operations $ 1.39 $ 1.72 $ 1.40 $ (0.35) $ 0.88
Discontinued operations 0.28 0.13 (0.62) 0.12 0.42
Net income (loss) $ 1.67 $ 1.85 $ 0.78 $ (0.23) $ 1.30
Dividends declared $ 0.72 $ 0.72 $ 0.72 $ 0.72 $ 0.69
Shares used in computing earnings per share
Basic earnings per share 229.6 228.1 227.1 226.6 211.8
Diluted earnings per share 243.9 245.4 239.5 226.6 214.2
- ----------------------------------------------------------------------------------------------------------------------------------
Operations
Net sales $ 3,484.0 $ 3,516.8 $ 3,024.0 $ 2,644.7 $ 2,367.5
Non-operating gains 39.7
Research, development and engineering expenses 293.9 250.3 189.2 172.2 169.7
Provision for restructuring 84.6 26.5
Taxes on income from continuing operations 132.8 209.5 151.4 107.3 86.6
Minority interest in earnings of subsidiaries 60.9 76.3 52.5 64.3 48.7
Dividends on convertible preferred securities
of subsidiary 13.7 13.7 13.7 13.7 6.1
Equity in earnings (losses) of associated companies:
Other than Dow Corning Corporation 95.3 79.2 85.1 66.6 48.5
Dow Corning Corporation (348.0) (2.8)
Income (loss) from continuing operations $ 327.5 $ 408.9 $ 323.3 $ (77.3) $ 190.6
Income (loss) from discontinued operations,
net of income taxes 66.5 30.9 (147.7) 26.5 90.7
Net Income (Loss) $ 394.0 $ 439.8 $ 175.6 $ (50.8) $ 281.3
- ----------------------------------------------------------------------------------------------------------------------------------
Financial Position
Assets
Working capital $ 235.6 $ 241.4 $ 445.2 $ 276.5 $ 281.3
Investments:
Other than Dow Corning Corporation 366.2 310.0 337.2 364.9 339.5
Dow Corning Corporation 341.8
Plant and equipment, net 2,684.9 2,267.9 1,808.6 1,438.7 1,334.9
Goodwill and other intangible assets, net 309.7 294.2 259.9 258.1 255.7
Net assets of discontinued operations 357.6 364.0 2,056.0 1,972.4
Total assets $ 4,981.9 $ 4,691.9 $ 4,183.4 $ 5,334.5 $ 5,365.5
- ----------------------------------------------------------------------------------------------------------------------------------
Capitalization
Loans payable beyond one year $ 998.3 $ 1,125.8 $ 1,195.1 $ 1,326.0 $ 1,330.5
Other liabilities 674.1 627.5 597.8 587.4 564.5
Minority interest in
subsidiary companies 346.1 349.3 309.9 269.2 244.5
Convertible preferred securities
of subsidiary 365.2 365.3 365.1 364.7 364.4
Convertible preferred stock 17.9 19.8 22.2 23.9 24.9
Common shareholders' equity 1,505.6 1,246.5 961.1 2,103.0 2,263.0
Total capitalization $ 3,907.2 $ 3,734.2 $ 3,451.2 $ 4,674.2 $ 4,791.8
- ----------------------------------------------------------------------------------------------------------------------------------
49
FIVE YEARS IN REVIEW - HISTORICAL COMPARISON (continued)
(In millions, except number of employees and shareholders)
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Data
Common dividends declared $ 166.8 $ 166.2 $ 165.3 $ 165.2 $ 150.1
Preferred dividends declared $ 1.5 $ 1.6 $ 1.9 $ 2.0 $ 2.1
Additions to plant and equipment $ 713.6 $ 745.6 $ 560.2 $ 337.1 $ 248.8
Depreciation and amortization $ 298.0 $ 285.9 $ 252.3 $ 221.1 $ 210.1
Number of employees (1) 15,400 16,100 15,300 12,800 17,000
Number of common shareholders 17,550 17,900 18,000 18,800 21,600
- -------------------------------------------------------------------------------------------------------------------------
(1) Amounts do not include employees of discontinued operations.
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INVESTOR INFORMATION
Annual Meeting
The annual meeting of shareholders will be held on Thursday, April 29, 1999, in
Corning, NY. A formal notice of the meeting together with a proxy statement will
be mailed to shareholders on or about March 18, 1999. A summary report of the
proceedings at the annual meeting will be available without charge upon written
request to Mr. A. John Peck Jr., vice president and secretary, Corning
Incorporated, HQ-E2-A10, Corning, NY 14831.
Additional Information
A copy of Corning's 1998 Annual Report on Form 10-K filed with the Securities
and Exchange Commission is available upon written request to Mr. A. John Peck
Jr., vice president and secretary, Corning Incorporated, HQ-E2-A10, Corning, NY
14831. The Annual Report on Form 10-K can also be accessed electronically
through the Corning home page on the internet at http://www.corning.com.
Investor Information
Investment analysts who need additional information may contact Ms. Katherine M.
Dietz, director of Investor Relations, Corning Incorporated, HQ-E2-20, Corning,
NY 14831; Telephone (607) 974-9000.
Common Stock
Corning Incorporated common stock is listed on the New York Stock Exchange and
the Zurich Stock Exchange. In addition, it is traded on the Boston, Midwest,
Pacific and Philadelphia stock exchanges. Common stock options are traded on the
Chicago Board Options Exchange. The abbreviated ticker symbol for Corning
Incorporated is "GLW."
Convertible Monthly Income Preferred Securities
Corning Delaware L.P. convertible monthly income preferred securities (MIPS) are
listed on the New York Stock Exchange. The abbreviated ticker symbol for the
Corning MIPS is "GLW pfM."
Dividend Reinvestment
Corning's Dividend Reinvestment Plan allows shareholders to reinvest dividends
in Corning Incorporated common stock automatically, regularly and conveniently.
In addition, participating shareholders may supplement the amount invested with
voluntary cash investments. Plan participation is voluntary and shareholders may
join or withdraw at any time.
Full details of the plan are available by writing to the Secretary of the
company or to Harris Trust and Savings Bank at the address listed below. Be
certain to include a reference to Corning Incorporated.
Transfer Agent, Registrar and Dividend Disbursing Agent
Harris Trust and Savings Bank
Shareholder Services Division
P.O. Box 755
Chicago, IL 60690-0755
Telephone: (800) 255-0461
http://www.harrisbank.com
For people with hearing impairments, Harris Bank has a Telecommunication Device
for the Deaf (TDD) telephone. The listing is Harris Bank, Hearing Impaired
Telephone, TDD (312) 461-5633 or TDD (312) 461-5637.
Change of Address
Report change of address to Harris Trust and Savings Bank at the above address.
Independent Accountants
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, NY 10019
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INVESTOR INFORMATION
(Continued)
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
The statements in this Annual Report which are not historical facts or
information are forward-looking statements. These forward-looking statements
involve risks and uncertainties that could cause the outcome to be materially
different. Such risks and uncertainties include, but are not limited to, global
economic conditions, currency fluctuations, product demand and industry
capacity, competitive products and pricing, manufacturing efficiencies, cost
reductions, availability and costs of critical materials, new product
development and commercialization, manufacturing capacity, facility expansions
and new plant start-up costs, the effect of regulatory and legal developments,
capital resource and cash flow activities, capital spending, equity company
activities, interest costs, acquisition and divestiture activity, the rate of
technology change, ability to enforce patents and other risks detailed in
Corning's Securities and Exchange Commission filings.
52